Why Australian agri is vulnerable to short-seller attacks

Rural Funds Management MD David Bryant told Agri Investor last week that short-sellers were playing by different rules to firms listed on the Australian Securities Exchange.

He was responding to a document published by US-based short-seller Bonitas Research, which accused RFM of a variety of misdeeds. These were swiftly disputed by the firm and backed up by a detailed report from consultancy EY, which RFM’s lawyers had commissioned on its behalf.

RFM followed the standard playbook for dealing with short attacks: get on the front foot, provide a clear update to the market with a transparent explanation of your financial records, and hope that solid trading and results do the rest.

Bryant also highlighted the difficulty of acting against Bonitas. “We’re obligated to provide responses via ASX releases,” he said. “And we’re subject to the Corporations Act and listing rules, which maintain integrity and a standard of behaviour, whereas the short seller can write anything they wish and exist beyond the reach of the law. That’s a very unfair basis with which to have a debate.”

This saga is not the only example of a recent short-selling attack on an Australian agricultural stock, and encapsulates why Australia’s agricultural sector is being targeted.

Glaucus, a firm co-founded by the founder of Bonitas, has had the most high-profile successes in this regard. It played a key role as sandalwood grower Quintis fell into administration in 2018 and as Blue Sky Alternative Investments landed in the lap of receivers earlier this year.

Other attacks, like the ones on RFG and wine producer Treasury Wine Estates, have been less successful.

Transparency is key to batting away short-seller claims. And although some agricultural business models can thrive as listed entities, there is a legitimate question about whether those that have more opaque business arrangements or that are managing private funds are appropriate for these platforms.

Private equity deals are, by their nature, private in many ways, and it is often not in investors’ or fund managers’ interest to publicly disclose ongoing asset valuations (the most obvious reason being if the asset was going to be sold at some point). But public shareholders need to know the facts and figures if they are to have informed views about the value of a company and what its share price should be. There is an inherent tension here that is hard to resolve.

This is what left Blue Sky open to attack, even if the underlying assets in its agricultural and water funds were solid. An inability to provide clear enough responses to several of Glaucus’s specific claims, combined with the lack of public knowledge and relatively low level of understanding from the market about what these kinds of investments entail, left a vacuum into which a short-seller could play its hand.

Rural Funds Group seemingly has a simpler business, which entails buying properties to lease them out and only a couple of smaller unlisted funds. However, there was still enough that was unclear for the attack to find initial success before the firm responded and the stock quickly rallied.

Bryant added that he believed short-sellers had a legitimate role to play in the market – for example, if they were shorting an agri stock because they believed drought would lead to reduced earnings in future, as we have seen in recent weeks with chicken producer Inghams.

Agriculture is in a particularly vulnerable spot when it comes to these attacks on Australian listed firms, thanks to a lack of understanding from many in the market about the volatility of agriculture and how to fairly assess factors such as farm property values. This has led to a reliance on what the targeted firms themselves tells the market.

This is a risk that fund managers and investors should be more aware of, considering the recent travails experienced by some firms – especially if the exit strategy for a private fund or investment platform is a listing down the track.

Write to the author at daniel.k@peimedia.com