Allens explores how to turn interest into investment

The Australian law firm conducted a survey of global investment professionals alongside Mergermarket to discover what attracts and deters investment into the country's agri sector.

Australia’s proximity to Asian markets, the quality of its infrastructure and its surplus agricultural production for export are the three main attractions to the country’s agriculture sector, according to a survey of 75 global investment professionals conducted by Australian law firm Allens and intelligence provider Mergermarket.

“Its closeness to markets like China, India and Japan is a big advantage for Australia in leading food exports to these countries. Also the infrastructure in Australia is very advanced and reliable and this will attract foreign investors,” said a partner at a private equity firm in Singapore.

Proximity to the markets took the most votes at 76 percent, while good infrastructure appealed to 67 percent, surplus production to 61 percent and the country’s free trade agreements, including its most recent FTA with China, made Australia attractive to just 53 percent of respondents. Allens expects this to “increase over time as the benefits of the agreements made by the Australian Government during 2014 come into effect”, reads the report.

But despite a lot of “warm interest” in the country’s agri sector, a few barriers are keeping interest from turning into capital investment. The variability of the country’s climate and its impact on the volatility of returns is the main deterrent, according to the survey. Depending on the type of respondent, the reasons for worrying about climate differ.

“Funds, in our experience, place far greater emphasis on returns,” reads the report. “They are often constrained by investment mandates and guidelines which are in large part premised on rates of return. Trade buyers, on the other hand, tend to measure the attractiveness of their investment not only by reference to rates of return but also by operational and financial synergies obtained through investment and supply diversification strategies.”

“Like many industries, agriculture on a global scale is aided by vertical integration and these other synergistic benefits may, in many respects, outweigh concerns about yield volatility. In addition, global agricultural businesses can manage yield volatility better by spreading risk across a range of continents and business lines,” continued the report.

Uncertainty surrounding tax was another concern along with rising wages, the high cost of technology and machinery, and government decisions.

“Some Government decisions, such as blocking ADM’s acquisition of GrainCorp, have disappointed many potential investors and this will have a negative impact on Australia’s attractiveness as a place to invest,” said a Malaysian respondent.

While the lack of opportunities was the least cited concern, Allens believes that the size of the investment opportunities compared to the resources needed to execute them puts some investors off, particularly those with experience of the infrastructure and mining sectors.

Nearly half of respondents showed support for the family farming model and a similar number expressed an interest in pursuing joint ventures with farm operators. Several of these respondents were open to holding a minority stake in any JV and most would want financial incentives for the farm operator. But 53 percent were against the family farming model mostly down to the lack of scale because of capital and manpower constraints.

The survey respondents were professionals from agribusiness corporations, funds management including private equity firms, sovereign wealth funds, banks and other lenders and service providers. Agribusiness corporations and fund managers accounted for over 60 percent of respondents.

Australians accounted for 36 percent of respondents whereas the remainder spanned the US, parts of Europe and much of Asia.