QIC: Finding opportunity through a ‘fundamental shift’ in the food supply chain

Phillip Cummins, QIC’s global private equity principal, explains how the Australian investment manager is rethinking agribusiness, how it mitigates weather and commodity risk and why it would consider investing in water.

Phillip Cummins, QIC’s global private equity principal, explains how the Australian investment manager is rethinking agribusiness, how it mitigates weather and commodity risk and why it would consider investing in water

Agriculture is viewed as a relatively new and fragmented asset class. What is QIC’s approach to the sector?

In our view, agriculture, from an institutional investor perspective, is a bit like infrastructure 20 years ago or even private equity 30 years ago. Both of those areas have developed substantially in terms of the level of sophistication and the opportunities within each space.

So, there is no doubt that with regards to agriculture in its historic sense, in a purely land play sense, it fits pretty neatly as a real estate or a subset of real estate within an alternative portfolio.

What we’re doing is rethinking agribusiness. The trend we’re playing to is the opportunity arising from a fundamental shift in the way food supply chains are evolving. That’s where we think the opportunity lies.

To be more specific, supply chains are highly fragmented. An interesting trend we’re seeing is working to gain a lot more control through the supply chain in order to address such issues as supply, food security, food safety and traceability. We think that’s a source of disruption. So, in rethinking agribusiness, it’s more about investing through the supply chain as opposed to addressing just one piece of it.

Your first investment in the agricultural sector, the 80 percent acquisition of the North Australian Pastoral Company (NAPCO) last year, sits within your private equity portfolio. Can you elaborate on the rationale behind this strategy?

In terms of our private equity practice, we have a very thematic approach to the way we invest: in terms of the sectors we invest in and trends that affect [our] investing globally. One of those pertains to Asia. There is an inter-relationship between growth in Asia, changing diets there and the effect those trends are having on the supply chain.

We’ve been looking at companies and industries that are being affected by that. There are factors that are particularly interesting in the beef industry. Beef is a product that enjoys global demand, and changing diets and increasing incomes in Asia are driving that demand. However, we’re also seeing a fundamental shift in the way certain food types, including beef and protein, are being consumed in the developed world. Consumers are becoming much more aware of what they’re eating, and they’re becoming more interested in sustainability, traceability and providence in the foods they eat.

We’ve invested in other food companies over time but in the case of NAPCO, we’re taking more of a whole supply chain perspective.

Would you consider investing in timberland or water rights?

Timberland is not an area of focus for us. There are plenty of people who are, but I don’t see that we have any particular competitive or comparative advantage in that space so it’s not something we’re thinking about. Water, on the other hand, is a very interesting investment on its own, and, it is a fundamental factor in a lot of these agribusinesses. So, water is very much a consideration for us.

Those opposed to investment in agriculture often cite weather and commodity risk. How do you respond to that?

With beef in particular, as well as certain farm-related activities in other areas, the sector is highly fragmented. The family farm is still predominant in the way the industry is structured. And so, I think people have the perception that if you’re investing in beef or something like that, you’re going to get wiped out by weather or prices at some point. These are factors and risks that you need to consider, but what we like about NAPCO is that because of its scale and size, we actually have diversity in our portfolio and in our locations geographically.

If you have the right mix of assets and the right access to water, you can mitigate a lot of those issues as opposed to having a single farm, single-risk type of asset. There are risks, there’s no doubt about it, but it’s about how you mitigate those risks and how you factor them into your thinking.

In terms of commodity risk, our view is that we’re building a food business, not a commodity business. And in a way, we’re shifting away from the commodity market towards offering more of an identifiable product with discreet value.