Year-End Strategies - Seeing the wood from the trees

In recent years, there has been no shortage of agricultural schemes, usually with generous tax breaks, to tempt investors. Birds, trees, fruits and plants have all been offered. Many of these types of investments have failed very quickly, losing investors millions of dollars. Several emu and ostrich schemes, together with tea trees and alpacas have disappeared, with horror investor tales as the only evidence they actually existed.

For the adviser, this area is a nightmare when it comes to picki

In recent years, there has been no shortage of agricultural schemes, usually with generous tax breaks, to tempt investors. Birds, trees, fruits and plants have all been offered. Many of these types of investments have failed very quickly, losing investors millions of dollars. Several emu and ostrich schemes, together with tea trees and alpacas have disappeared, with horror investor tales as the only evidence they actually existed.

For the adviser, this area is a nightmare when it comes to picking the good schemes from the bad. Van Eyk Capital has been looking at the area recently for a number of clients, including AMP and National Mutual. Out of the 42 projects it has researched, the final report will recommend only about eight, says van Eyk Capital managing director David Marshall.

He says many of these schemes manage to raise millions of dollars despite the promoters having no background in the particular industry and no market for the end product.

Assetware research director David Wright says some of the research in the agri-culture sector has been flawed. It has tended to focus just on the financial figures and not on whether the scheme is physically viable, he says.

"I think that a certain amount of research into this area is not working because a judgement is made on whether the valuation is any good," he says.

There have been tales of so-called independent research reports undertaken by principals involved with the project, or genuine independent reports not being released because the findings were unfavourable.

However, there have been some success stories and the growing popularity of the sector means the major research houses like van Eyk have become involved, pro-ducing qualitative research.

Melbourne-based Austock is also looking to enter the research market with re-ports on agricultural investments. It has produced six papers on investments, including a timber project, according to consultant Vic Cottren.

"We are trying to produce a one-page summary of the risks involved with any par-ticular investment scheme," he says.

Cottren agrees that a lot of previous research has simply looked at the finan-cial aspect of a scheme. To get a true picture, a specialist view must be taken, which can be expensive.

"To undertake this type of research properly, it takes about a week," he says.

Wright concurs, arguing the research must look beyond the scheme and take into account the potential market for the end product and how robust that demand is.

"We will start with the promoter's generous forecasts, adjust them down 10 per cent and then see if the project stands up financially."

Data taken from sources like Australian Bureau of Statistics can give some indi-cation of oversupply in a particular area, he says.

"But in the end it comes down to applying a worst-case scenario to the pro-moter's optimistic forecasts for demand."

Marshall has developed a series of questions to apply to these schemes to see if they stack up. The key factors he looks for are:

* the expertise of the promoter and manager in the industry of the investment;

* the track record of the promoter with investment schemes;

* the manager's fee structure in the investment;

* establishment costs for the project;

* does the project have a positive product ruling?;

* the strength of the market for the products being produced and the marketing skills of the producer;

* the mechanism for ensuring the funds are properly applied to the project;

* the existence of independent third-party as well as non-executive directors to ensure the interest of the investors are protected;

* any additional liabilities for the investors after the initial funds are com-mitted.

"Our research is comparative and very objective," Marshall adds.

Assetware's David Wright applies similar criteria to assessing a project.

"I look at the quality of the management and the structure of the project," he says.

A scenario that could be revealed under scrutiny could be where the project man-ager owns the land and the investor is paying for the acquisition costs, Wright says.

"We would also want to see that the experts hired to advise the project stay around and are not just hired for the issue of a prospectus," he says.

Cottren says his reports also look at ownership and the tax compliance issues of an investment scheme.

"The best indication of a project is the track record of the management who are going to be running it," he says.

The marketing costs of the project also need to be scrutinised, says Cottren.

"We have found some schemes are paying 10 per cent commission to the manager for the marketing of the end product," he says.

"We also look for any contracts to on-sell the product to a major producer, such as grapes being sold to one of the big wine producers."

The physical aspects of agricultural investment projects also need to be checked and often specialists in a particular field are bought in.

Marshall uses experts to check site suitability with a particular focus on soils, climate, rainfall and infrastructure; together with the skills and re-sources of the project manager, including their staff and a report on growth and yield projections.

Wright says a site visit is essential, He uses experts to assess areas like the climatic conditions for growing crops.

"There is financial pain for the research manager going in for this type of analysis," he says.

Marshall agrees. "Assessing such investments is very specialised, expensive and time-consuming," he says. "Unfortunately, many investors put up their money be-lieving what the promoters in the scheme tell them."

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