November 29, 2020

Farm funding models and business structures in Australia – Richard Heath

work that supports a lot of the researchthat you're going to see in this presentation was a project that wasfunded internally by the Australian Farm Institute so farm funding models andbusiness structures in Australia My talk is going to be more about the environment around farm financing and business structures I'm not going to talk in a lot of lot of detail about particular farm level finances it's going to be more about the headwinds the tail winds the side winds the things that areaffecting what might be influencing the way that people in institutions want tofinance farm businesses and the sorts of business structures that might need to be there to take advantage of those different financing options that arecoming forward So why the focus? why did the farm institude think that we needed to do some work on farm finance models of business structures it's a relatively continual cycle in the media I must say about the farm debt crisis you don't go too long without some sort of sorry coming up about the amount of debt thatthere is in agriculture in Australia every now and then there's bigflurry of attention about it and political initiatives and things that try to address the issue so how much of an issue is it What is this debt crisis? What does it look like? Why does it keep coming up in the media? that's a pretty scary graph! when you look at the total amount offarm debt in Australia in the last couple of decades midway through the graph it's gone exponential from about 10 billiondollars up to about 60 billion dollars in the last few years it seems to have a plateaued it doesn't seem to be increasing at quite the same rate the blue is bank debt finance so it's almost all just debt-financed from banks and it's an enormous amount look at that graph and you think, WOW! this is a really big issue farm debt as a percentage of gross farm output back in the seventies total farm debt was about 40% of the total gross farm output it reached 160% at the end of the 2000's and it's come back a little bit now back to about 120% look at that you and think there is a fairly significant issue with debt in Australian agriculture we'll go a bit further and look at some of the the other factors around farm debt and around it in general debt is not a problem that's unique to agriculture which seems fairly obvious agriculture is the blue line total business debt and the rest of the Australian economy is the grey line there are different scales from left and right so agriculture from 10 billion on the left to about 60 billion it's about asix-fold increase over the same period the rest of the Australin economy has gone from 100 billion to about 800 billion an eight-fold increase the whole Australian economy is obviously got this issue with debt at the moment agriculture in terms of proportion of increase its actually not that the rest of the economy is worse than agriculture what's this debt being spent on? because obviously not all debt is equal we all understand that we need debt to dovarious things and some debt is good debt some debt is bad the different colors there the bottom two which is the main proportion the average farm business debt per farm which has gone from about $200, 000 in the mid-nineties up to about $500, 000 per farm these days the vast majority of that in the bottom two bars is in working capital which is notnecessarily great but it's also in land purchase farms have been taking on bank debt to buy other farms, to expand you can see that in terms of the number of farms a number farm businesses by enterprise type over the last ten years in all sectors except beef, there's been a significant decrease the blue is 2001 the oranges 2011 if youlook at crops there you know it's been about a 10, 000 farm business drop in 10years farms have been getting bigger than buying smaller farms the interesting thing with beef the only one that's gone the other way about 19, 000 beef only businesses in Australia 17, 500 of those have less thanfive hundred thousand dollars turnover so beef now the increasing that hobbyfarms the increases is people that just have a few cattle on a tree change blockso it's not really representative of commercial production as such and it'sreally you know the reason why that's the only sector that's gone up but ineverywhere every other sector increasing productivity is being driven by farmsgetting bigger smaller fans disappearing and that debts been going into thefunding that so that sort of translates into where the debts being held that little bit of a busy graph but you basically got four different lines whichis the different farm size categories and that they represent the the thepercentage of debt outstanding so if you look at side the orange line which is farm turnovers between a hundred thousand five hundred thousand back inthe early nineties that was the most amount of debt outstanding was held byfarms in that category as farms have got bigger and those size farms have disappeared that's obviously come way back down same with the blue line which is thevery small farms under $100, 000 but the yellow line which is thebigger farms with $2, 000, 000 and over turn over they're now holding all the debt because they've been borrowing to buy the small farm so they've beengoing up the whole time the result of all that consolidation now farms getting be doing more is the trend in production and output has been following the increasing debt the yellow line is the volume of total production in the volume of production in agriculture totally and the red oneis the gross value of farm production debt has in fact been funding productivity increase in Australian agriculture it hasn't just been get tokeep everyone doing the same thing and not growing which would be obviouslyreally bad debt has been funding increase in productivity that we're seeing inAustralian agriculture and again i'll just remind you that this when I talkabout all these figures i'm talking the whole of Agriculture These are industry-wide statistics individual businesses are obviously going to haveexperienced different stories to this this is the average of all ofagriculture what that looks like in terms of one of the most important things about debt which is the ability to service debt whether it is sustainabledebt or not it's quite interesting so this line is the proportion of grossincome per hectare that has been required to service interest on debt in agriculture this is all of debt across all of agriculture in Australia again total industry statistics and its been relatively stable so at the beginning ofthe nineties ten cents or 10% of every gross income every dollar grossincome per hectare was required to pay interest that declined down to about 5% at the beginning of the 2000s withinhead the Millennium drought went back up to ten percent again and since the endof the millennium drought and coinciding with lower interest rates and higherproduction it's being tailing back down again to about 7% , so 7 cents in gross income per every dollar per hectare is required to service debt if you think back to that initial graph at first glance think there is a huge issue with debt it potentially suggest another story thatin fact agriculture has been pretty good at using debt at being able to service that debt to fund productivity and profitability increase and another sort of backup to that is equity ratios again relatively stable over time sowhen you look at crops running round about 80% whole of Industry whole, ofAgriculture obviously individual businesses are going to have experienceddifferent stories quite different to that Is it an issue at all, what is this debt crisis should we just be keeping Carolyn carrying on what's all the fuss about well there is obviously a is a reason why people keep talking about their debt crisis variousopportunities and there's a couple of big factors that are behind that at themoment so debts funded productivity increase and it's been tailing off a little bit in the last few years as it showed in a couple of those earlier graphs but are we as productive as we're gonna be now of course not we're gonna have tokeep getting more productive the rest of the world has been getting moreproductive and in a lot of cases the rest of the world has been better atgetting more productive than Australia has our competitiveness internationallyin a lot of their export markets are competing against South American beef into Asia you're competing gets black sea grain into Asia are really good what we thought were secure safetraditional markets are getting harder and harder and harder to to compete withso you know that productivity increase story it's not finished not by a longshot it's going to have to keep going we'regoing to have to keep funding productivity increase some way oranother we've got an aging farm population we continually hear the issues around funding succession so this need to have capital coming intoagriculture to keep funding productivity improvements and fund successionit's never going to go why it's always gonna be there the ANZ bank had a stab acoupleyears ago at trying to quantify that in the greener pastures report their statement was that agricultural growth cannot be achieved without thesupport of both domestic and foreign investors between now and 2050 aroundsix hundred billion dollars in additional capital will be needed to generate growth andprofitability in Australian agriculture based on current valuations and afurther four hundred billion dollars will be needed to support farm turnoversuccession that's a lot of billions that's an enormous amount there's various opinions on the validity of that ANZ report they have used some fairly well put it inflated assumptions inthere about various things that are gonna happen the reality is about farm succession isthat figure is based on every farm that the fulltransactional value or cost of every farm happening every time there's asuccession story that's not really the way it works in reality but even if it'shalf that figure you know we still talking about significant billions ofdollars over the next 30 years that are going to be required to maintain theseproductivity increases and to fund succession if we go back to thatincreasing in debt over the last 20 years it was about six fold if we look at half that you know we got a 500 billion from sixty billion we are now that's another ten fold over the next 30 years there's a lot of people including myself saying well those debt sustainability figures thedebt servicing industry averages they've painted a picture thatdebts been relatively sustainable increasing of the amount of time it has over the last 20 years but I just can't imagine thatthis sort of increase that we're going to need of those figures are even closeto being right out the next 30 years that the same level of capital asdebt funding is going to be as sustainable the productivity increasesthat we would need to be able to do that would just be absolutely amazing there is this desire to look at othersources of capital if debt funding is unsustainable but weneed more capital of to fund productivity increase the fan successioncan we get it elsewhere how do we get this other capitalinto agriculture one of the other really big contributing factors to talk around getting our capital in about dealing with the debt crisis is there is amazing interest in agriculture as an investment sector at the momentinterest coming from everywhere interest coming from non-traditional investorsinto agriculture the super funds get prodded quite a bit bypoliticians to do more about agriculture but they they actually do make noisesabout we want to invest in agriculture we just don't know how you know we thinkit's a really good investment class that's a really small snapshot of thenumbers of smaller funds investment groups out there that aresetting up schemes around being able to invest in agriculture and that's notonly are deliberately didn't put the better well-known ones the Westchesterthe pairwise those sorts of people on there as well AG take financing and venture capitalnow starting to come into agriculture this is a report from Agfunder thatlooks at the investment in agtech in particular just gone berserk over thelast few years so the scales to speed off the bottom but that last year's 2015gone from around you know half the and that's in billions as well its gone from half a billion a year to 4.

6 billion dollars in ag techventure capital funding in 2015 now Ag tech venture capital funding is really going to be irrelevant to a farm business down the road but what itis a really good indicator of is the investment appetite for agriculture more generally about the more general acceptance that agriculture is alegitimate investment class and that it's driving capital into AG if there's all this interestin investing in agriculture if there's this free capital floating aroundlooking for home and if there is the demand to get into agriculture becausethe continual need to find productivity increase why are'nt we saying more debt financing from banks still by far and away the mostused source of capital in agriculture if we look at the superannuation fundsagain because obviously they're the biggest investor the biggest holderof funds in Australia this is from a report that was done byvideo last year into superannuation investment into agriculture in Australiathere's 1.

2 trillion dollars in superannuation in Australia 364 billiondollars of that is invested in my super products the reason I concentrated onthat is because they have very good transparent reporting on what they'reinvesting in only .

3% of those my super funds are invested in the AG sector and the most that any one of those funds had was 1% sothe most highly geared into agriculture had 1% the other fans that thenon my super funds there are obviously lots of self-managed superfunds and things are probably going to be a little bit higher in a Ag particularly self-managed super funds but that's still a really informative figure about the lack of Australian investment and the lack of Australian super funds going into Ag so why is it in the same report they asked other questions of the fund managers why don't you invest in agriculture when you talk to people about this is that superannuation funds a toofocused on the quarterly returns there's so much pressure about having todemonstrate every quarter that you're delivering five six seven percent morereturn that they just don't think they can get that out of Agriculture, so a low number means that they don't agree with the statement so that superannuation funds takes a short-term return focus while agriculture investments require long term return focus that was actually the lowest they disagreed with that more than anything else which wasinteresting however the statement they most agreed with was lack of investable products at 5.

7 counteracts the fact that they think that agriculture is not an issue that it doesn't provide short-term return because what they meanby there's a lack of investable products is something i can get out of reallyquickly something that they can get in and out when it's not returning and thenthe other one to agriculture returns to volatile again ranks really highly I think it is still an issue that theythat they're just not prepared to take they might say that the short-term focus is not an issue but the sorts of products thatthey're looking for commenting on the volatility indicatesto me that they still just can't quite grapple with that he's a 20-year investment and we are prepared to put patientcapital in there and wait for 20 years / 25 years the foreign superannuation funds on other hand and that's why your seeingsuch a big play from the likes of Westchester and their TIAA-CREF fund in Australia say its a 30-year investment and they're prepared to sit their capital dayfor 30 years and wait it out couple of other interesting things in there theagricultural investments disproportionately increased managementexpense ratio very strongly agreed with that the other issuessuperannuation funds anything less than about 200 million dollar investment isdifficult for them they're really looking for big deals really really bigdeals that's again when they talk about the management expense ratio you knowwhen you got one guy in office in Sydney looking after a 200 milliondollar equities portfolio compared to having to have highly skilled managementand a team of them to look after a 20 million dollar farm for the same sort ofreturn possibly less it's hard to compete against that andthat's a significant issue for them there's a whole lot of reasonswhy they're giving you know what what the barriers are two investment from superfunds into agriculture I'll focus a little bit more now onthe investable products about the business structures that exist inagriculture that makes it difficult for them to invest in so if we look at the the sort of business structures that invest in agricultureand i'm sure you know this is pretty obvious to all of you agriculture is really heavily skewedtowards partnerships compared to the rest of the Australian economy and verylight on in company structures so Australia is mostly starting theirculture most individual businesses and partnerships now what are other countries doing so ifthis is an issue in Australia in terms of getting outside capital into AG interms of business structures that capitals there but it's just not coming in, are other countries doing it better what can we learn from other countriesin their ability to get different financing models in so we are looking at New Zealand to start with again it's pretty much I know operator focused on bank financing its relatively similar to us it's not too different but whatthey do have that's quite different to us they have a really good dairy which is the biggest industry because the Ag industry by far they have a great scheme for entry for young people in particular without much capital with share milking which is basically where you had the land owned by one entity and the cows owned by another approximately thirty-six percent of the dairy herd in New Zealand is owned by shared milkers great avenue for the new entrants to get into AG it's a lot easier obviously to get enough capital to buy a couple hundred cows than it is to buy the land that there going to be milked on the other one they have is they have farmore equity partnerships so similar sorts of things where you know an equity partnership is where you'll have a managing partner involved in the day-to-day farmoperations and then equity partners who contribute capital might be cash it might be dairy cows it might be farmland but they not actively involved in the day-to-day farm and operations one of the things that makes it work in New Zealand is that you they don't have capital gains tax when landis sold so you can buy in and sell out of equitypartnerships really easily so again this thing about entry and exit the things that the superannuation fund says difficult here in Australia the other thing though, and this is really important that New Zealand has look at it you know they're productive certainty compared to Australia I know it looks like that around here now but it looks like that around here every yearin New Zealand (crowd laughs) it's just the the ability to set up businesses that you know are gonna just turn over , you're just turning the handle and just perform year after yeargives that stability and particularly for pretty hard on for new entrants willbe really hard that it might not be as much but still be really highly geared if they're coming into a shared milking operation or something like that to do their sums and and make it work Brazil has quite a few alternative farmfinancing products and some quite entrepreneurial ones as well, I'll just focus on one because it's quite illustrative of the way that things workover there, the CPR firm product bond allows farmers to access capital byfinancing intended production or produce already stored so these are bonds that farmer might take out as he's planting a crop or even pre planting a crop and he'll sell off a certain portion then that bond is actually a tradable commodity so these bonds tend to get accumulatedand packaged up so the co-op that the farmer is a member of might accumulate bonds to begin with and then i might get accumulated a big package and then I gettraded in in great big packages it's a bit like the mortgage securities that whether you know the reason for the north part of the reasonfor the global financial crisis actually similar sort of theory but the bigdifference in Brazil you've got such a massive agricultural industry over thereyou've got risk mitigation insurance from the producers that the amount ofinsurance products have to deliver on this you can'tdefault so the insurance to back up there is some reason that you don't isreally important to make it work and the acceptance of those bonds andthe trade-ability of them is really important and really well accepted inin Brazil because agriculture is just a really big sector of theeconomy it's a really well understood and well valued investment class inBrazil but then again also like New Zealand its Brazil you know you'regrowing so after corn twice a year it's just turning the handle again it'sjust a really safe secure productive environment until very recently these CPR bonds were promoted as one of the safest investments you could have not massive returns but you knew you would get your money back they were just really really really reliable now quite interestingly i was reading this morning about how they have the reputation of the CPR's havesuffered a little bit just recently because it's been a few high-profile failures but there come down to the South American attitude towardsrecord keeping because the reason is being failures has just been asystematic issue around the ability to keep track of the bonds and wherethey're coming from and some farms have sold accumulators have accumulated more than there has actually been produced the production that is backing the CPR is still being there but theres just being some failures around that systems that support the CPR's but they're still highly regarded financial instrument in Brazil, USA, again quite different to Australia with a lot of variation in the sort offinancial products that are available and one of the main things that drivesthat is a really deep in liquid land leasing market it again a fundamental difference intaxation to hear in that the reason that land remains we know in sort of smallparcels owned by individuals and then leased out to the farmers who might haveyou know that might work with 15 20 30 40 landlords in small parcels is becausethis really hefty taxes involved with selling land and so unless theytransferred within families or intergenerational or gifted andpeople tend to keep the land and then leased it out so you havea lot of absentee landlords continually leasing what makes this that workagain is that the people doing the farming that are paying the leases theyhave security by the government In New Zealand and Brazil we had security in terms of productive environment in the US we've got security by the government interms of the insurance products a crop revenue coverage revenue assuranceinsurance income protection livestock risk protection all the subsidies andsupport systems that provide farmers with the security that they can go inlease these lands at actually really quite high rates I will play a video to demonstrate this one that just really caught me i was in the state's a couple of weeks ago the missouri republican primaries were on the weekend I was there and the television was just fullof political advertising and there's one that just really struck me about howinfluential the agricultural lobby is and how important agriculture is in terms ofthe overall political environment just illustrating that how these sorts ofthings are not going to go away so you think we have some major aboutforeign ownership from time to time its nothing compared with what they haveover there it just blew me away agriculture politics is main stream over there and all those sorts of subsidies systems and farm bills and things that provide that security to farm production that then inturn provides an environment where there's a bit more I guessentrepreneurship around the possibilities for farm finance models and products and things that support a bit of variation the bank debtfinancing it makes it work so what we got in Australia well massiveclimate variability seems like it's either one or the other of those andnothing to mitigate it maybe not quite that bad but it's certainly a lot closer to that than it is to USA brazil or new zealandso it's no wonder that the sorts of Finance products and business structuresthat have evolved over time are pretty conservative they are conservative by nature because we have to deal with that and we really arehaving the other support external support to help us in dealing with that so understanding the sort of things that Simon was talking about in terms of justnailing down a business system that works that works the averages over timethat you can financially sustained through debt funding through I goodreliable business structure there's a reason a very sensible reason thatAustralian agriculture looks like that that's not say that we still aren'tinterested in other models that agricultural industry isn't looking totake advantage of the capital that's out there and wanting to get away from debt financing as much as we can so what are some of the alternatives you what are some of the differences that arecoming up that we might not be able to take advantage of the crowdfunding obviously is something that in recent years has taken the globe by storm withall sorts of opportunities more traditionally associated with techproducts or entertainment in a reward based models so crowdfunding, so you give some money to someone to build an app or record a songor something like that and you might get an app back or song back or somethinglike that some sort of gift recently, , equity crowdfunding and crown funding for lending have actually started to take off so equity crowdfunding over the last five years has had a compound annual growth rate of somethinglike hundred and fifteen percent which is basically going out there andoffering a part of your business crowdsourcing for a party business ofpeople will invest and have some sort of equity in your business and blendingcrowdfunding where you put an opportunity out there people invest andjust expect a greater return just like would know with any other loan that you put out so you think what an opportunity, the whole point of crowdfunding is your putting yourself out there to the world it's easy to get a dollar from a millionpeople is that it is to get a million dollars from one person so is this a great opportunity foragriculture this girl here Madeline Scott near Melbourne crowd funded a pasture laid organicegg production on her own I think she was 16 or 17 something like that on the pozzible crowdfunding platform equity crowdfunding has grown about 114% and lending based crowdfunding is grown about 78% and nowunfortunately the australian government as tends to happen when new thingscoming along and is no regulations well we better have some regulations for itso the end of 2015 the Australian government-regulated equity-based crowdfunding and it makes it pretty difficult now for large-scale broad-acre farms you have to have less than 5 million dollars in assets to be able to participate in equity based funding and you have to be a public company the reason you have to be a public company is because every investor has to be treated as a separate share holder you can't have any more than 50 shareholders as a private company There's not much point having less than 50 shareholders if you're going to go crowd funding that's why you have to be public company for small niesche agribusinesses pasture laid organic chickens berries horticulture I thinkcrowdfunding is definitely something that is a potential source of revenuefor a 5, 000 hectare wheat farm probably not so much who remembers the managedinvestment scheme disasters of the 2, 000 some of you might have lost moneybut look at that sort of vigorous response so particularly in timber plantations around Esperance and and southern Australia a lot of people lost a enormous amount of money they were based on an instrument called Australian real estate investment trusts the vehicle to give investors access to property and they provide a regular income to theinvestors through the drive from the asset as a rental or lease as well asa long-term capital gain they did they were quite attractive and still are attractive because I provide access to assets that might otherwise be out ofreach for individual investors they got a terrible reputation obviouslythrough those MIS failures back in the 2000's but they're back in vogue now because some good regulation this time the failed one's great southern etc were what was called unstapled which means that the business associated with the land and land were treated separately and the investors were only investing in the business and not in the land and the business model was based on some really favorable tax concessions that was really the only thing that we're making a profitable and the fundamental businessmodel behind I mean growth right timber and that sort of thing I just didn'twork what's all that sort of fill out thefact that they were unstable from the capital growth in the land just madethem completely unsustainable unstapled REIT's are no longer layout so real estate investment trust now if you invest in them you'reinvesting in the business and the land so you get the capital growth as wellnow there are some really long term quite successful real estate investmenttrusts in agriculture such as the rural funds management which has significant investments in almonds amongst other things they're one of the only products out there that are really attractive to both retail andinstitutional investors because you can invest $10, 000 you can invest $10, 000, 000 in them and so they quite attractive there's a lot of people looking at REIT's again as potential models to to get outside capital into agriculture collaborative farming who's heard” John Gladigo” speak John Gladigo Nuffield scholar ten years he did his Nuffiel scholarship on business models in farming he came back and formed acollaborative farming partnership with his neighbor which basically means that they were both sort of at a scale where they had a planting unit a sprayer each but when I looked at it like they're just efficiency ofthat operating that gear at the farm sizes that they had just just wasn'tworking and so they got it together and I said well let's form one business willstill on their farms individually but we'll find them with one business weonly need one farming unit to run across the two farms and so they formed a business that we can become employees of that business so that derived income byas employees the business but also as that the business that was farming their farms paid a rent that back to them and they optimized as much as they could the efficiency of the business and theoperations and everything farming those farms since doing that they're now goingto a second unit second farming unit so they bought more land and they're runningtwo planters two sprayers all that sort of stuff so collaborative farming model farming businesses combined to form a single optimum efficiencybusiness receiving income from both being an employee and and from the profits of the businessit's really a joint venture in a lot of way's apart from the fact that boththe joint venture farmers both the joint venture partners their interest is in farming directly they are bringing to the table their farming businesses where is a traditional joint-venture you combined operations or resources from multiple businesses are investorsbut one of the other partners by only be contributing land and not actually working in a business or not have as much as their hands onoperation in the business John Gladigo now gets asked to go aroundthe world speaking about collaborative farming its getting a lot of interest from people and groups around the world wrapping it up now I wasn't gonna talk too much about the actual types of individual business models that there are out there that are available it was more about trying to give you apicture of the bigger picture things that are influencing the way that bankscorporations investment funds are thinking about financing and thinkingabout the sort of business structures that you need to attract outside capitalto so as a summary Australian farm businesses they are predominantly partnerships are single owners funded by bank debt finance you know we're all probably pretty aware of that there's a reason why they like that theconservative business structures and financing options because it suitedvariability of the productive environment in Australia and that's going to be really hard thing to get over in terms of the potential for moreentrepreneurial sorts of financing arrangements total debt has been growing and that's what drives a lot of the talk a lot of the media around the debtcrisis there's absolutely no doubt is enormous amount of total debt inagriculture now, however at an industry level at an average the serviceability of debt has remained manageable there is though a need for more external capital and that the interest in agriculture is an investment sector both those thingsare keeping a focus on alternative funding models and and businessstructures so people are continuing to look things will keep popping up I think they wont 'be revolutionary it's not gonna happen overnight but there will be a continuinginvolvement of the sort of products that are out there and the sorts ofopportunities that are going to present themselves the countries that are doing it a bit more than we are in terms of alternative things they all have other factors of Australia doesn't have they have are the more stable production ormore stable business environments that gives the security and the confidence todevelop these alternative financial products the ability to attract Equity Partners requires easy exit structures no matter how much hype there is about agriculture being a goodinvestment class the reality is that investors are always going to be nervousand I'm going to want to be able to have exit options they're going to be wanting toput their money but they're going to want to know how to get their money out equity partnerships, leasing, crowdfunding, REIT's, collaborative funding joint ventures stock leasing there arealternative products out there they're going to continue to grow you just gotta keep your eye out as Simon and Mark were both saying in their presentations every business is going to have a different risk attitude a different set of family circumstances a different set of business circumstancesthat may or may not make any one of those more attractive I guess the onlything that I'd you know leave you with I do believe that there are going to continue to be more opportunities and different financing alternatives present themselves so just keep your eye out finally just like to thank the outer thighs corporate supporters and sponsors thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *