Australian ag needs better risk-management tools

A new report from the Australian Farm Institute argues that institutional – rather than price or production – risk poses the greatest challenge to the sector today.

“We’re in the business of taking risk and coming up with the right structure and gearing options.”

This is how one Australian LP, with significant interests in domestic agriculture, defined their role at the most basic level to us earlier this year.

It goes without saying that all investments inherently carry risks and effectively managing and mitigating them is how investors generate a return.

A new report published by the Australian Farm Institute has taken a closer look at the risks present in Australia’s farming sector and has concluded that it is an “increasingly risky business,” to take the report’s title at face value.

In particular, the report argues that while production and price risk have existed for a long time and won’t go away, it is broader, institutional risk that poses the greatest challenge to the sector today.

These risks are more insidious and more likely to creep up on producers unannounced – such as increasing supply chain consolidation, or disruptive regulatory change brought about by social pressure (an issue we have discussed before). And crucially, the AFI argues, Australia lacks some of the more tailored risk-mitigation tools to help deal with these that are available in other places.

“We’re trying to emphasize that risk remains a massive factor in Australian farming but there is very little support when compared with other regions and countries,” AFI executive director Richard Heath told Agri Investor.

The report points out that farm business management is still the most effective way of managing a wide range of risks – something you would expect corporate farmers and institutional-grade investment strategies to be on top of – but that more could be done to develop more effective and sophisticated risk-management products like insurance and derivatives.

A telling example can be found in Long-Term Asset Partners’ just-dropped takeover bid for GrainCorp.

While LTAP has now pulled out, its efforts to secure a reinsurer (reportedly Allianz) to guarantee Australia’s east coast grain production for the next 25 years, smoothing out the peaks and troughs, caught the market’s attention.

GrainCorp itself had responded by devising a very similar-sounding scheme that it said it would move forward with in the event LTAP did not complete its takeover, as has now happened.

“I think every boardroom in the country will have looked at that [deal] and wondered why they didn’t think of it already,” Heath says.

In the absence of any existing options, the market is creating these new structures itself, opening up a potential avenue of new opportunities.

As the AFI report says: “The fact that large parts of the supply chain now appear to have the capacity to minimize risk through a form of commercial revenue insurance adds weight to the argument that farm businesses are disadvantaged in globally competitive markets and now in domestic supply chains by not having access to a mature market for equivalent products.”

Heath added that government support might be needed to help establish a more mature insurance market for ag that would help producers of all shapes and sizes – but that support would need to be temporary and not lead to the propping up of unsustainable or inefficient businesses.

On top of all this, the AFI recommends that industry bodies and advocacy groups should “coordinate to monitor sector-specific and cross-sectoral institutional risks” and develop responses to them.

More importantly for the asset class, Heath says that private equity and finance “absolutely” needs to be involved in that process too. Sounds like an invitation to be seized.

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