Agri Investor Australia Forum: Six key takeaways

The sixth Agri Investor Australia Forum was held in Melbourne this month – our first in-person event Down Under since the pandemic began, and our second event this year following our inaugural Tokyo Summit in September.

It was a day full of discussion and debate, with the potential merits of natural capital as an asset class a clear theme that ran throughout most of our panels. But there was plenty more besides – here is a round-up of all the main talking points.

CEFC prepares farmland push

Clean Energy Finance Corporation head of natural capital Heechung Sung spoke on a panel discussing Australian investors’ perspective on agriculture investing, and made it clear the CEFC is preparing to significantly expand its exposure to the asset class after establishing its portfolio in the last couple of years.

Sung said the CEFC has invested around A$900 million ($564 million; €582 million) into natural capital assets to date and when asked how large its ambitions were, she replied that it would look to be “more aggressive” in its approach to deploying capital and working with fund managers: “We’re very ambitious. I won’t tell you my strategy but it’s a lot of money.

“In all seriousness, in order to create the impact, you need to deploy a lot of capital into the sector. Fifty-five per cent of Australia’s land mass is agricultural land. You just can’t ignore that fact. So you have to work out how to de-risk your returns [and create impact].”

The CEFC most recently invested A$75 million in the open-end fund managed by Macquarie Asset Management that owns Paraway Pastoral Company, building on a prior commitment of A$100 million to the closed-end fund behind MAM’s Viridis Ag platform.

Institutional investment in the environment is evolving

There was a clear sense among many of our speakers that the way institutional investors think about farmland and forestry investments has shifted, with many hoping that reconsidering these assets under the collective banner of natural capital (and all the possibilities that offers) can unlock further commitments.

This was summed up by Nick Ping, deputy chief investment officer, timberland, at Manulife Investment Management, who said there had been a “very deliberate and noticeable evolution” among investors in recent years.

“Around three to five years ago and prior to that, we were having conversations with institutions about timberland and farmland, and it would really be around the core tents of strong risk-adjusted returns, low correlation with traditional asset classes, and some moderate inflation-hedging capabilities,” he said.

“With the emergence of things like the Principles for Responsible Investment and the UN Sustainable Development Goals, it’s really shifted the focus of what institutional investors are looking for. In certainly the last two to three years, we’ve seen an increase in focus on climate and nature-related thematics as key drivers for why they are interested in the asset class.”

Carbon projects financing

Our morning keynote panel discussed the present and future of natural capital, considering how to define this nascent class and what macroeconomic trends are shaping it.

Merricks Capital executive chairman and chief investment officer Adrian Redlich was bullish about the prospects for carbon markets in particular, saying it was clear that almost all major corporations are now on a trajectory towards net-zero carbon emissions – and that offsetting would inevitably have to play a role in them achieving those goals.

“You can’t get to a zero-carbon footprint in a Woolworths store – maybe the consumer believes that, but we all know they’re buying carbon credits and offsetting […] to get there,” he said, adding that a “dramatic shift” towards no-till farming in Australia now had the potential to pay dividends to farmers who were sequestering carbon in their soils.

And he added that non-bank finance, which of course Merricks provides through its Agriculture Credit Fund, was more willing to step into this market than traditional lenders.

“Where there’s uncertainty and volatility, there is dislocation, and that means there is an opportunity to make returns. A lot of the people we are partnering with and lending money to are out seeking these opportunities [but] the traditional forms of capital don’t necessarily want to fund them,” he said.

“The banks, for instance, don’t want to fund them [and] the traditional mandates that have sat within wealth platforms and superfunds haven’t got their minds around [carbon] pricing.”

Family office strategies

It isn’t just the large institutional investors who are looking at the potential on offer from carbon projects – family offices are getting in on the action too.

Our family office panel featured Alasdair MacLeod of Macdoch Group, Ben Krasnostein of Kilara Capital and Campbell Andrews of First Exar Family Office – MacLeod was the most effusive about the potential on offer from carbon farming. He talked the audience through Macdoch’s involvement in the transaction to sell approximately A$500,000 worth of carbon credits to Microsoft in 2021 (a deal that also involved asset manager Impact Ag Partners).

“The sequestration rate for that deal varied between 0.8 tons and 3.5 tons of carbon per hectare per annum. And we worked out that if you took the lower rate of sequestration of 0.8, and did that across 10 percent of Australia’s grazing country, you could sequester somewhere in the region of 120 million tons of CO2 per annum,” he said.

“That is equal to about 20 percent of Australia’s annual emissions. That’s a pretty significant amount of carbon – and I believe it’s possible.”

It was a striking statistic that really highlighted the scale of the potential opportunity, especially if carbon can be sequestered at a rate higher than MacLeod’s lower-end estimate.

Agtech business models

Sarah Nolet, co-founder of agtech venture capital firm Tenacious Ventures, spoke on a panel about agtech and suggested that some of the early agtech investor focus has been on the wrong areas.

“It’s a question of business models – when we’re talking about selling hardware and software to farmers, it’s a pretty tough game. And I’m not sure why we [as an industry] are spending time there,” she said.

“Whereas when you think of farmers as the users of technology and the whole value chain as beneficiaries of those farmers using that technology to add more data and efficiency, you unlock entirely new possibilities. I think we really got the business wrong in early agtech.”

Nolet talked about skills shortages in agriculture, pointing out that increased automation on farms can help farmers who don’t currently have the labor they need – after all, you can’t displace workers that aren’t there.

She also pointed out that a lot of the companies Tenacious Ventures invests in still require these ‘traditional’ forms of labour: “Our companies are not all in software – they need fitters, or mechanics, say. So, there are real opportunities for hi-tech businesses to employ these people that I think will have a role in agriculture that is different from how it was in the past.”

Positive outlook for water values

Our panel on Australian water markets was our final discussion of the day, with a full room showing the keen interest among our attendees in this topic.

The two asset managers on the panel, Guy Kingwill of Agriculture Capital and Rob Brooks of goFARM Australia, were both upbeat about the value of Australian water and how careful management of it can be beneficial to Australian communities.

Kingwill said: “The consumptive pool of water [in the Murray-Darling Basin] is the investable pool, and it’s not going to get any bigger. Supply of water isn’t going to increase while everything on the other side shows signs of increased environmental demand, while there will be increased natural capital demand for water. So I struggle to find anything that will impact value on a negative basis over the long term.”

He also pointed out that water entitlement prices have not fallen as they have during previous wet periods, agreeing with Agri Investor’s view that this is a sign of increasing market sophistication and maturity.