‘Capital drought’ threatens Australia’s A$100bn ag production target

Hurdles remain, but opportunities in ESG investment, private credit and from foreign investors point to enormous potential in Australian agriculture.

With news that Australia’s winter crop harvest is set to be the second-largest on record, it’s evident that the drought is well and truly over for most grain producers on the east coast.

But research undertaken by Natural Capital Economics for AgriFutures, published this week, argued there is still another type of drought to be concerned about in the country: a capital one.

The report said Australia “must find answers to questions about how much capital is needed and where it will come from” if it is to fulfill a government-backed roadmap set out by the National Farmers’ Federation to grow the value of Australia’s agriculture, fishing and forestry sector to A$100 billion ($79 billion; €65 billion) by 2030.

It is estimated that A$8.7 billion of investment will be needed each year to reach this goal, but the average annual net investment in productive capital in the sector has been just A$1.2 billion over the past 30 years.

This is obviously quite a large gap, which the report found exists for several reasons.

One factor is the familiar refrain about limited long-term, high-quality data, with a lack of performance benchmarks for investors to get their head around. This is improving all the time with data sets such as the Australian Farmland Index playing a role, but there is still further work to be done.

Meanwhile, some international investors cited the Foreign Investment Review Board as “the single most significant issue blocking capital investment in Australia” (although not all agreed). Whether or not the problem is as significant as some say, the report argued that further work is required to clarify the process for investors, as well as to streamline approvals for investments of A$100 million or less, for example.

This echoes points made to Agri Investor earlier this year by Lachlan Molesworth, director at Foreign Investment Advisory Australia.

“If you’re looking to invest in the major agribusiness and agricultural asset space then there is no doubt that greater expectations are being placed on investors, in order for those investments to be approved,” Molesworth said.

And on the regime more broadly, he added: “In terms of the level of scrutiny applied across the gamut of investment asset classes, I think [Australia is] the most thorough and places the greatest onus on inbound investors to satisfy our regulators.”

That does not dovetail neatly with a desire to attract more capital, so it is another puzzle for the industry to solve, although it’s by no means an insurmountable one.

Also of note in the report was an acknowledgement that investment structures that offer returns from environmental financing such as carbon trading are emerging, something Agri Investor has written about extensively in recent months.

These new structures will open up a wider of pool of capital as they mature, with investors’ focus on ESG only increasing.

Another theme to emerge is the opportunity afforded by private credit. NFF chief executive Tony Mahar said in commenting on the report: “Agriculture is one of Australia’s leading exporting industries, a feat it has achieved with little to no institutional investment. It’s difficult to think of any other industry that has achieved such scale through bank debt alone.”

Oxley Capital Partners and Thera Capital Management, among others, discussed this opportunity with us last year, so expect interest in this area to grow too.

Mahar described the report as a “wake-up call” for the sector in its need to attract capital. It’s clear that potential abounds if barriers to investment are removed.