Forum: Family farmer on expansion and family offices

Mark Greenshields is partner and general manager of Monta Flora Agriculture, a sixth-generation family farming business based in South Australia. The business produces wheat, barley, canola, fava beans and chickpeas and is also establishing a sheep and beef cattle enterprise. Agri Investor interviewed Greenshields at the PEI Alternative Investment Forum for Family Offices and Private Investors in Melbourne last week.

You are looking for capital investment to expand your operations. Is that common among family farmers in Australia and why?

This is very common but many farmers do not know how to do it outside of the conventional banking sector. During the 1980s and 1990s, the catch cry was “get big or get out” so debt was used. This, along with some tough years, means that the farming sector in Australia is now highly geared. The problem with debt is that the banks want collateral to loan against and they usually want it at a ratio of 2:1 so that they will only lend 50 percent of the value of the land wanting to be purchased. This has resulted in an agricultural sector which is now severely restricted in its ability to capitalise on the current opportunities available. It has been said that there is a $400 billion to $500 billion funding gap in Australia’s agriculture sector.

There are parts of Australia that have been described as receivership route due to poor yields and high amounts of debt. Do distressed farming businesses present a potential investment opportunity for you?

We would look at each case on its merit. Is the reason for a distressed sale due to geographic location or poor management? Personally I would be cautious about a distressed sale because there is a reason for that distress – it is within our control to deal with it or not? Sometimes causes of distress can be hidden or not well understood.

What types of investor would suit your projects?

With regard to cropping, we live in a region that is not targeted by big investment funds because our land prices are higher than the eastern states and they can’t come in and spend A$20 million in one transaction. The properties are relatively small and tightly-held. Large properties come onto the market only rarely so there needs to be an accumulative approach to land acquisition which funds don’t like. Funds also make a trade-off between climatic variability and land size and price. We live in an area where we don’t see climatic volatility that other parts of the country do. Our last crop failure occurred in 1967. So investments could range between A$500,000 to A$5 million, which would not suit the institutional investor but might be suitable for a family office or individual.

For the production of prime organic lamb, we have a strongly scalable model which could comfortably absorb an investment of A$20 million.

On the more social side, working within a family business is working for a cause rather than just an employer. This sense of identity, family heritage and legacy, sense of belonging and strong commitment to the prosperity of the family creates a different work and social culture to a conventional workplace. Family offices could fit well into this culture and they think generationally which is ideal for an investment in agriculture. Multi-generational accumulated wisdom is present in the human capital of a family business.

Family offices are also able to be nimble in their approach which is a major aspect of farmland investing. If you are in the market for a A$30 million property, then you will have time to plan, but if you’re looking at smaller investments then you will often only have six weeks to make the purchase after it comes to the market.

What strategy/model would you use to ensure incentivisation/alignment with investors?

We use three models now. Land ownership, which is straight-forward. Land leasing, which is debt is disguise and places a strain on cashflow as well as concentrating risk on the lessee. A share farming model which frees up cashflow, spreads risk, and shares the costs and profits with the investor and operator. The best for an investor would probably be a combination of lease and share farming where some income is guaranteed through the rent but the investor gets to participate in potential production gains and the risk is spread.

What sort of time frame do you think suits a family office investment in farmland?

A minimum of seven years although I would view it as more long-term. The beauty of family offices is that they think generationally, which is what farmers do.

What types of returns are you targeting?

We target an average cropping gross margin (how we measure income from grain less related expenses) of 6 percent of the land value per hectare across our properties and cropping rotation. This equates to around $500 per hectare gross margin for us. The long term capital appreciation of pastoral country is around 9 percent compounded annually and around 6 percent for cropping country.

What top three bits of advice would you give to family offices considering getting into agri for the first time?

1. Agricultural production is suited to patient money and a long term view. Don’t go into it with a 3-year time horizon.

2. Some 99 percent of Australian farms are owned by families so you will have to deal with a family business to some extent. So ask what the family’s vision is. Ask if they are prepared to accept outside advice and use a board structure.

3. There is a need to be nimble if not investing in a fund structure. You will only get six weeks’ notice of an upcoming sale.