Myf and Al attended the 2017 Investment in Agriculture Forum held in Toowoomba on the 21st of February. This forum was a great follow up from their China trip in late 2016 and another good opportunity to hear what sort of opportunities are presenting themselves from an international and domestic “silent” investor position. As previously seen in other developed countries, in particular the US, investors are continually looking to increase their exposure to agriculture and real benefits exist for farmers and graziers to consider arm’s length investors to assist them to go from a family enterprise to a more corporate operation.
This process will not appeal to everyone. However, over the last decade or so the discussion around the future of the family farm has attracted considerable attention. The big investors in agriculture seem to have solid margins (due to economies of scale) that the smaller primary producers simply can’t match. When these margins become significant for the bigger players, three things happen;
1. They reinvest surplus cash flow and profit back into the business making it more efficient.
2. They are happy to take a lower sales price per unit, there by dragging the market down and making slim margins even slimmer for smaller operators,
3. Returning surplus cash flow to investors (in the form of dividends to shareholders).
This is not to say that there is an impending disaster for smaller primary producers. Bigger corporations have been around for years and have expensive structures as well as potentially higher costs of running their operations (ie with complexity comes cost).
The seminar highlighted some points which primary producers who are considering the move towards arm’s length investors should consider. Broadly these are as follows;
1. You need to look at your current business and find opportunities in your industry that require more capital and will provide increased opportunities in profitability.
2. Know how much funding is required to take advantage of these opportunities and know how and where the investor’s money will be spent.
3. Put yourself in the investors shoes. What are they wanting out of their investment and what sort of questions will they be asking you (return on capital invested, payback period, re-investment of surplus funds or dividends and likely timeframe or investment horizon), and be prepared with well thought-out answers and information.
Quite often investors will come from existing businesses who may be already part of the vertical production chain and may be wanting to fill a gap or sure up supply in order to reduce the risk of supply into their existing business. Others may be purchasing market knowledge, contacts and systems where by these are difficult to establish organically.
It is important to realise that your existing structure will almost certainly be inappropriate for a future investor and therefore positioning yourself in order to take on investors is not a short process and can incur things such as Capital Gains Cost and Transfer (stamp) Duty along the way.
Professor Julie Cotter from the University of Southern Queensland stated that current activity in this area mainly related to investors wanting to invest greater than $5,000,000. Their return expectation was between 6% and 12%. This was broken up as 2% to 6% being operating revenue and the balance being capital gain. These rates of return were adjusted for accelerated depreciation and other tax deductions. She also stated that the investment timeframe was approximately 10 years. Some superannuation funds may have a 20 year view. She also stated that it was important to hand over control and recognise that this was one of the biggest stumbling blocks with regards to having the transaction succeed. She said a lead time for private investors can be as long as 5 years with a significant amount of due diligence from both parties.
The recurring message that came from the seminar from a total of 10 speakers, was that knowing the investor and ensuring that personalities and objectives were well aligned was the underlying number one criteria to get right.
Lorraine Gordon, Program Director of the Farming Together program provided some Australian Government incentives, being approximately 50 million dollars, to assist new collaborations and collective groups in the areas of capital raising, marketing, product scoping and R and D, export, packaging, logistics and other consultancies.
She stated that it was important to make sure that the development of transferrable knowledge can be accessed by others, was an important component in the application criteria. Please find more information on their website, www.farmingtogether.com.au
By: Allan Vickers