The chief executive of AustOn Corporation, the Australian subsidiary of Ontario Teachers’ Pension Plan, has “always preferred” the own-and-operate model over sale-and-leaseback arrangements because it aligns better with the drivers of high profitability in Australian agriculture.
David Goodfellow, chief executive of AustOn, told the Agri Investor Forum in Melbourne: “Personally, I’ve been a much stronger fan of the own-and-operate model because, particularly in livestock and horticulture, the way to maximize profits is to invest in the thing that drives profits, which is greater efficiency.”
In livestock, he said investors could spend money to upgrade efficiency on items such as pasture improvements, access to water, and better fencing and livestock handling facilities. In horticulture, efficiency improvements could be gained by investing in better tree varieties, irrigation technology and in-ground sensors.
“Unfortunately, those are the things that get left behind at the end of a five-year [or 10-year] lease, when it’s time to find someone else to operate the business. The motivation for tenants isn’t to invest their profits into infrastructure, and that’s what really drives increased efficiency,” Goodfellow said.
He added that it was “horses for courses” on the situations where leasing models could work. Annual cropping was more suitable, he said, because of efficiencies being gained through machinery and crop varieties used, as well as the agronomic decisions operators take – all issues that can be more easily carried over to a new lease on a different property, or with a new operator.
But he still cautioned that landlords were taking the “ultimate production risk” when using sale-and-leaseback models with annual cropping, even though the motivation behind many such arrangements is to reduce investors’ exposure to production risk.
“In a brilliant year, when all the other farmers are making a fortune, the best you’re going to get is your rental payment,” Goodfellow said.
“The incidence of tenant default in Australia is higher than anywhere around the world, simply because we have a much more volatile rainfall pattern than anywhere else in the world. So in a really tough year, you’re going to get paid – but with three or four tough years in a row, the chances of losing your tenant are really quite high.”
He also argued that a tenant, which goes not own land, would find it harder to borrow money to give itself the liquidity to get to the end of the cycle than if it did own land, so landowners have a “much better chance” of surviving difficult periods.
AustOn was founded by OTPP in 2015 to manage its agricultural investments in Australia and oversee the expansion of its interests in the country.
Goodfellow told Agri Investor last year that the C$191.1 billion ($144.8 billion; €127.2 billion) pension was looking to invest up to A$1 billion ($695.1 billion; €610.7 million) in Australian agriculture.
He told the Agri Investor Forum that AustOn now has more than 2,600 hectares of almond plantings and produces approximately 7,000 tonnes of almonds each year, equivalent to around 8 percent of Australia’s national almond crop.
The firm also produces 7,500 tonnes of avocados each year, or around 10 percent of the country’s national avocado crop, and is in the process of expanding that area of the business further.
Goodfellow added that AustOn is considering opportunities away from the riverlands and Margaret River regions where those horticulture assets are located.
“In time, we want to diversify ourselves laterally, into some other forms of farming. We haven’t yet decided exactly what they might be, but principally we’re looking to also spread our risks geographically,” he said.
On what AustOn searches for in agricultural assets generally, Goodfellow said: “We’re looking for those sectors that have the opportunity to become more efficient at a faster rate than their competitors.
“One of the things we love about investing in horticulture is we think it has the capacity to take up new technology and new science at a faster rate than perhaps some of the other industries right now.”