Agri valuation techniques need thought

Agricultural businesses hoping to attract institution investment and improve their production need to look beyond traditional valuation methods, such as price comparisons with neighbouring farms, to give themselves the best possible opportunity of securing a long term investor, writes David Krause, lead partner for food & agribusiness at BDO in Australia.

Consider this situation. An agricultural producer wants to attract institutional investment. Understandably this producer is primarily focused on making a capital gain on the transaction; they want to receive more than what they paid for the assets initially.

On the other side of the transaction is an institutional investor that needs to demonstrate the ability to deliver positive returns, so it is more focused on the ability to generate a regular income stream.

This situation highlights the disconnect that can often exist between traditional methods of valuation and those more commonly associated with sectors such as infrastructure or commercial property.

The challenge with the current comparison valuation technique is that it can be difficult to obtain a direct comparison of similar assets because there has often not been a sale in the region for many years. This method also doesn’t consider whether an asset is profitable or not.

Institutional investors understand valuation methods based on earnings and discounted cash flows, not what a neighbour achieved in a sale a few years ago.

But what does a shift in valuation method mean for an agricultural entity? Is there a tangible impact or it is just a matter of getting the accountant to change a few numbers?

Put simply, it can have a big impact because it means that an asset’s value may change due to the fact that the institutional investor’s valuation will be based on the income derived, not what someone is necessarily willing to pay for it. Importantly, this change may not always lead to a higher valuation.

A change in valuation technique will require a change in the mindset of farm owners. They must no longer consider themselves purely farmers that “live off the land”; they must they must recognise themselves as asset managers in their own right who are seeking to demonstrate the income potential of the land they have worked so hard to cultivate.

Many agriculture entities have already embraced this transition and are reaping the rewards. Let’s hope the trend continues and that Australia’s agricultural sector plays a key role in filling the gap between global food supply and demand in the future.

David Krause is a partner in the corporate finance division of BDO and BDO’s leader of the food and agribusiness sector in Australia. BDO is a global audit, tax and advisory firm.