Upsizing Oz

Australia is known for its potent, high-quality coffee. The brew’s global appeal may help explain why the keynote interview of our Agri Investor Forum, held in Melbourne last week, saw more than 200 delegates fill up every available space bright and early. But the question addressed by Stephen Anthony, Industry Super Australia’s chief economist, was reason enough to wake up in the first place: what is holding superfunds back from investing in their own backyard?

Later panels also provided clues. On one of them, First State Super’s Brent Snow highlighted scale as a key constraint: an asset needs to be worth at least A$50 million ($37 million; €32 million) to emerge on their radar, he said – and that’s only if there is a visible pipeline to grow it to A$200m over time. That was echoed by VicSuper’s Michael Dundon, who told us that Australia’s largest superfunds, who manage between A$50 billion and A$80 billion, can hardly consider agriculture without being able to allocate at least A$500 million.

In agri, as in other asset classes, size matters on two levels. First, in that it allows for the deployment of efficiency improvements, boosting a farm’s productivity and its bottom line. Second, scale across an entire portfolio is necessary for a program to make a meaningful contribution to total superfund returns. “This sector needs to be less apologetic about the impact of moving smaller holdings and sub-scale operations into large-scale operations,” Macquarie’s Liz O’Leary said.

David Goodfellow, the boss of AustOn, Ontario Teachers’ Pension Plan’s Australian ag business, offered detail on the various tipping points at which scale typically starts to pay off. An asset first needs to recoup the cost of technology – requiring minimum revenues of $3 million. Further efficiency can be gained at the farm level on labor and management costs – provided the asset generates at least $4 million. Overhead costs – such as complex, robust compliance systems – are then shared at the corporate level. And the bigger the portfolio, the easier that is to do. “At $250 million, that allows you to get pretty good returns. At $500 million, they’re very good indeed, and the rest is just upside from there.”

Goodfellow’s view is that scale is hard to find at the moment, but that more players will soon choose to “come in cheap” and do the aggregation work. Troy Setter, chief executive of the Consolidated Pastoral Company, which is owned (and up for sale) by UK buyout firm Terra Firma, provided an idea of how that could be done – with a pointed warning. “We’ve bought a couple of neighboring properties. But each time, we think long and hard about it.” There comes a point, he said, when growing an asset brings “diseconomies of scale.”

For one, greater size is not a solution to every issue. If a farm operates on low margins in the first place, acquiring a neighbor could just end up doubling up your problems, Setter said. Assets can also become so big that it becomes harder to control them. Driving a tractor along a 100-kilometer-long, 50-kilometer-wide property can be somewhat dispiriting for a farm manager. For Goodfellow, this is what makes a difference between size and scale. “You need to focus on getting efficiencies right. Otherwise you end up having a dysfunctional mess.”

The good news is that there probably are more assets in that sweet size spot than ever before: Danny Thomas of CBRE thinks a A$2 billion-plus pipeline of farms worth more than A$60 million is on its way. The bad news is that scale is not the only thing holding supers back. At the Forum last week, delegates mentioned a number of other bottlenecks that need addressing (read more about them on our Twitter feed). In fact, supers themselves are looking to join forces to augment their capabilities. There are definitely some good things brewing Down Under.

Write to the editor at matthieu.f@peimedia.com