AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

Mobilising Capital into Agribusiness – Suren Kumar and Jamie Lord Associate Director – Corporate Finance, Food, Fibre, Beverages & Agribusiness Section, National Australia Bank and Associate Director, Corporate Agribusiness, National Australia Bank

In recent years, agribusiness has attracted an immense interest at regional and global levels. The definition of agribusiness includes the entire value chain of businesses related to food production – from farm inputs, on farm production, processing, distribution and sales of the end-product. A number of themes have taken the centre stage and intensified the debates.

Every year there are 80 million new mouths to feed[1]. The United Nations estimates that by the year 2030, demand for agricultural products will be around 60% higher than 2002 levels. The soaring global population, with projections of 9.3 billion people by year 2050 from 6.3 billion in 2004, predominantly driven by population growth in Asia, Africa and Latin America, combined with the rising income levels in major developing economies of China, India and Brazil which in turn is creating an increase in annual protein intake, is expected to put further pressure on resources such as land, water, energy and biological assets to feed the world’s population. Contemporaneous with the aforementioned, the world now has only half the arable land per capita that was available around 40 years ago[2] whist global warming is causing extreme temperatures and adverse weather patterns compounding the food supply constraints.

In recent years food security issues in multiple regions across the globe has mobilised capital into various parts of the globe. For instance, the African continent has experienced a surge in lease and outright purchase of arable land for a variety of crops from Tea Gardens to Sugar cane for ethanol production.  Substantial capital flows from both larger developing economies of China and India is prominent and to some extent from the Middle East region. As the last frontier in terms of (un)/der-developed agricultural industries, this trend of capital flows is expected to continue as the economics justify the investment.

Australian agribusiness industries are more developed when compared to the agricultural industries of the emerging economies. The geographical proximity of Australia to the surging demand for food and food products, emanating from the wider Asia region places Australian agriculture in an advantageous position. However, the issues confronting agribusiness in Australia will need to be addressed if Australia were to benefit fully from the overarching themes. Inter alia, the trend of decreasing numbers of farmers (across a number of soft commodities), the increasing average age of farmers, the challenges of a natural succession to the next generation and the lack of liquidity to provide for that generational transition, are real issues facing the nations farming community.

As farms are consolidated and aggregated, farmers are exiting the industry either choosing to retire or move into a completely new industry. The total pool of active farmers is on a downward trend and, when combined with the average age of farmers, these two factors are expected to present challenges for the agribusiness industry over the next couple of decades.

One of the issues facing the agricultural sector is the availability of equity capital to facilitate the transition.  Traditionally, the finance for the sector has been provided by the farmers themselves and banking institutions. Each party has a clear understanding that there is need for long-term commitment, as is evident by the long-term presence of the finance institutions in the capital structure of the sector. This is an essential ingredient in the success of the individual farms and collectively for the industry.

Agriculture requires capital that is patient and sticky due to the very nature of the industry. It is a long-term play and the private equity or venture capital philosophy typically applied to traditional operating businesses (for example an exit or liquidity requirement within 3 to 5 year timeframe) is unlikely to be achieved. A timeframe of seven to ten years for a profitable exit is more realistic given there are a multitude of factors that could prevent an earlier exit, such as for example adverse weather patterns reducing yield and production to diminish impacting on cash returns.

The matching of assets and liabilities for specific institutional, sovereign and superannuation capital holders presents an interesting opportunity for both the capital holders and the agricultural sector. The long-term nature of the liability profile of the capital holders and the long-term maturity profile of the agricultural investment provides a palatable investment opportunity. In recent times, this philosophy has been applied by a number of international equity investors including the sovereign wealth funds, for potential investments into the Australian agriculture industry. The mobilisation of the domestic equity capital into the agricultural sector is expected to provide the added benefit of retaining the profit distributions within the Australian economy thereby creating a multiplier effect.

The consolidation and aggregation of farms in some sectors has attracted equity capital from outside of the traditional investors into the farming community. This trend (and opportunity) is positive for the Australian agriculture in order to meet the demands on the production outputs and is expected to continue in the immediate to medium term. Some investors are attracted to the economies of scale and synergies that are available with a corporate structure. Others see an opportunity to add value with improved farming technologies and yield improvements.

Transitioning the farms to the next generation is becoming increasingly difficult. The next generation is not always interested in farming and have moved into the urban areas and taken up entirely different occupations. The increasing asset values combined with changed attitudes regarding succession has also made it more challenging for the next generation who do choose to stay on the farm where the farm may simply not be large enough to sustain the next generation where two to three, or more, children may be involved. A proportion of the interested “next generation” are forced to move into an entirely new industry as a consequence.

The lack of correlation of the agricultural industry when compared to other asset classes is another attraction for the equity holders. This feature may be particularly beneficial for the superannuation and sovereign funds due to the maturity profile of the investments which could align to the asset and liability profiles of the superannuation and sovereign funds.

The above issues are a subset of a number of challenges that an industry typically faces. The bias towards capital and succession challenges faced by the Australian agricultural community is unintentional, however real. The global issues on the supply and demand for food and food products has placed Australian agricultural producers in an advantageous position. Absent the mobilisation of capital, the full economic benefit of the external demands may not be achieved. Long-term industries require long term capital and Australian agribusiness is one such industry.

About the authors

Suren Kumar, B. Com, GDAFI, PG.Dip, F Fin, CFIP, MAICD, is an Associate Director – Corporate Finance in the Food/Fibre/ Beverages/ Agribusiness segment of the National Australia Bank (“NAB”) based in Sydney. He has significant experiences in the areas of acquisition, divestment, mergers, valuation, structuring of debt and equity finance in the Agribusiness and non-agribusiness industries.  Suren has held a variety of senior management roles in large financial services organisations within Australia and Internationally.

With the NAB, he is currently engaged in providing balance sheet and capital structure solutions to the corporate businesses and Equity Funds operating in the wider Food/ Fibre/ Beverage/ Agribusiness industries.

Jamie Lord, B. Bus, DFS (FP), SA Fin, JP is an Associate Director, Corporate Agribusiness, National Australia Bank (“NAB”) based in Sydney. He has significant experience in the agribusiness finance sector having worked for over 15 years in both regional and metropolitan area’s in Australia, providing financial service solutions to a multitude of corporate and non-corporate agribusiness clients of the NAB.

[1] Population Reference Bureau (PRB) World population Clock 2006 Datasheet

[2] United Nations Food and Agricultural Division: Dimensions of need: An atlas of food and Agriculture, Rome, FAO, 1995,  pp16-98.