‘Not for the faint-hearted’: inside VicSuper’s Future Farms project

Chief executive Michael Dundon tells Agri Investor why the superannuation fund is still interested in agri opportunities, but wouldn’t find more room for building up a greenfield project.

Chief executive Michael Dundon tells Agri Investor why the superannuation fund is still interested in agri opportunities, but wouldn’t find more room for building up a greenfield project.

“I still think that [agricultural investments] are pretty high risk,” VicSuper Fund chief executive Michael Dundon told me last week, in our first conversation since I visited his fund’s aggregated water and farmland asset in June.

The Future Farms Landscape project, created by aggregating about 8,000 hectares of arable land and rights to about 50 gigalitres of high-reliability water, is impressive. Surrounded by lakes and interspersed with wildlife corridors, I saw some of the latest in drip and flood irrigation technology. The farms’ management is even experimenting with rotating the high-yielding tomato crop with cotton, a practice often seen in the US, but new to Australia. About a third of the farmland has yet to be fully developed.

Because the farm is doing well, Dundon’s statement on risk might seem surprising, particularly to investors in the US, who see farmland investment as a hedge, as it doesn’t correlate with many other investments. But many LPs in Australia rate investing in farmland differently, and VicSuper’s strategy of plunging into a single, large-scale greenfield project for its first agri investment hasn’t proven that easy.

Dundon said that although the asset is looking successful now, aggregating land has been particularly challenging. “It took longer than people expected and … to be honest, it wasn’t overly clear how that [commercial return] was going to come.”

VicSuper has invested $175 million in the asset since 2007, with most of that money being released between 2009 and 2010. Another $10 million of investment is planned in the next 12 months for more farmland and irrigation development.

On the farmland side, accumulated returns are likely to be around 5 to 6 percent instead of their expected 8 percent. Dundon said this was “ok in the current environment”, but getting there had involved a lot of work. However, the water side of the investment is doing better with less effort, yielding around 9 percent as a lease income through a purchase and leaseback strategy, and capital appreciation on titles in the last two years in the “high double digits”.

This has been driven on the demand side by high value producers growing almonds, walnuts and cotton, connected to farmland development. But the deciding factor in growth, said Dundon, has been the federal government’s push to reduce water availability in the market by undertaking buy-backs.

Development hurdles aside, the Future Farms Landscape project also had to deal with a change of leadership at VicSuper itself.

Bob Welsh, Dundon’s predecessor, was a keen proponent of the investment, seeing it as a way to show how “a new way of farming”, as he told one newspaper, could give back to the environment and be profitable. Dundon himself was new to the asset class when he joined VicSuper in 2011 and did not necessarily take on the job as enthusiastically. “I think it is true I also had to do some learning,” he said of a project that he visits twice a year and whose board meetings he attends at least six times a year.

Dundon says he does not regret ploughing on with the investment, which he also sees as an example of innovative farming. But he says that aggregating farmland will be a one-off in VicSuper’s portfolio, and that if it invests in agri again, the fund will target an agribusiness with good management and provisions like offtake agreements in place.

Aggregation has taught Dundon a lot, he says, but it is “not for the faint-hearted”.

What do you think about farmland investment’s risk profile? Email clare.p@peimedia.com