Foreign investment in agriculture? How about a plan for profitability

Perhaps talking about investment could lead Australia to a brighter farming future. Michael Lloyd

Large parts of Australian agriculture are economically and financially unsustainable. Returns are inadequate and unbalanced; assets are depleted; risks are needlessly high. To date, governments have largely relied on the market to address problems, but problems have worsened.

Mainstream political thinking has essentially ignored issues of foreign investment in farming and food processing (where no significant wholly Australian processor remains). Popular opinion has been turning against such investments, but it was only on Wednesday evening, at the Rooty Hill leaders debate, that prime minister Kevin Rudd finally stated his anxiety about our “open slather approach” and expressed the need for change.

Responding, opposition leader Tony Abbot was reassuring. He would lower the threshold for review of foreign investment from A$220 million to A$15 million - a meaningless gesture when approvals are automatic and asset overpricing pressures remain unchecked. Understandably he did not wish to open up an issue that still divides those in the Coalition and, now openly, Labor.

Headline reactions were splendid: Rudd “retreats on foreign investment” (AFR), “risks foreign investment” (The Australian), “takes hard line on foreign investment” (The Land, The Conversation), “cautious on foreign investment” and makes “reckless flub on foreign investment” (both Business Spectator). Tidying up after this explosive “thought bubble” preoccupied most. All in all, it was a marvellous media moment for reporting, little analysis and much opinioneering.

How important is foreign investment to our farming future, and indeed our nation? Briefly, the historical record is mixed. There are no clear connections between GDP growth and foreign investment, and indeed some contrary examples (relatively slow GDP growth with high foreign investment).

The really important issue is how investors use production assets (such as farmland) and who profits where and when. Serious problems arise in markets when:

  • income streams and profit are inadequate for needs
  • distorting opportunistic strategies are not curbed or countered
  • assets from stressed enterprises are dumped on markets
  • investments are made with mixed motivations
  • funding availability and power are asymmetric
  • financing is unevenly based and biased and
  • perceptions are distorted by misinformation.

Any one of these conditions can corrupt asset markets. As all seven are evident in the Australian farmland and product markets, outcomes are likely to be perverse. Relying on a market solution in such circumstances would be foolish, something that the current prime minister seems to be realising, finally.

Not business as usual

While our politicians and, particularly, their advisers might prefer “Plan A: business as usual”, prudence dictates planning for realities. Here the Australian people are ahead, with now clearly expressed preferences for controls on farm land purchases, supply chain reform, robust national interest evaluations and the like.

This year has witnessed many collapses in rural businesses across all manner of size and form, with many more likely. Governments need to agree on an adequate “Plan B: Stabilisation” as a debt-deflation spiral builds in rural land assets.

In our open economy, the build-up in foreign investment necessitates “Plan C: asset return enhancement”. Foreign investment, be it direct or portfolio, can add significantly to the progress of regions and a nation when it adds something “new” or “better” that realises decent returns for both its domestic hosts and external investors.

Foreign capture of assets, however, is different. There, not only do the bulk of returns accrue preferentially to external parties. Control of assets also enables wider strategies, be these corporate or national.

For example, a grain handler (headquartered in the USA, China, Middle East or elsewhere) may acquire assets in Australia not so much for the earnings from a well-run business based on them but as a means of global supply chain consolidation and targeted preferencing of some suppliers (and discrimination against others).

Plan C should then minimally include a robust national benefit demonstration and measures to preclude opportunistic actions. Under some circumstances (such as current high domestic finance costs and limited rural liquidity) the only real national solution appears to be to ban foreign investment until local investors can obtain comparable finance. Currently cheap foreign money is maintaining unserviceably high asset values and privileged asset access, pushing prices above those local investors can sensibly afford.

The critical strategic question is how to manage foreign investments so that excessive domestic production earnings do not leave the country (as already happens in some Australian sectors and many parts of the world). This is central to plan “D: Restoring national incomes”.

Ownership transfer, income losses

Further ownership transfers of farm, processing, product handling and marketing assets to external parties would see increasingly serious national income losses and Balance of Payment deterioration. Australia is an increasingly indebted nation. It needs to earn its way in the world, not sell off the assets which could support such earnings. External crises can be expected soon enough if our annual net outflows of around A$50 billion continue to go unaddressed.

The usefulness of current financing arrangements could be the focus of “Plan E: sustainable finance”. Currently banks are providing what are essentially home loans to businesses with the high income volatility of agriculture. Others have structured finance in unsustainable ways.

All have been asking for trouble, and it has now arrived. High interest rates (especially the growing margin claimed by financiers for rural funds and the use of unilaterally-imposed penalty rates) need attention, as do the situations of larger debt holders. A well-constituted Rural Reconstruction and Development Bank is part of a viable solution.

Next come “F: supply chain operation”. This does not just mean the problems laid at the door of Woolworths and Coles. The real issue is one of supply chain closures, globally and nationally, as countries and corporations set up their own exclusive supply chains. Markets are increasingly bypassed as corporations tie up chains for a variety of reasons.

Such chains are tailored to preferentially serve certain parties at select parts of the chain. As this runs from farmers through transport and processing to end users anywhere in the world, there are many options for predatory, security or other actions. Recall that high prices only five years ago saw more than 30 nations enact food export controls to ensure their domestic populations were fed.

Insightful action needed

Ultimately, solutions combine in “Plan P: restoring enterprise profitability”. Suitably profitable enterprises have futures. Opportunities to develop can then be sensibly taken up. Much distress and needless destruction of wealth can be avoided if we act insightfully, now.

In all, new policy directions that canvas a range of possibilities for these uncertain times are needed. Solving serious problems in rural Australia requires focused, informed and creative responses by involved stakeholders. Unfortunately, current policy proposals are out by an order of magnitude - and many are not even on the right track.

Prompt, effective interventions can halt the deteriorating situation of Australian farm assets, and the national slide. Complementary actions can restore profitability. Such is the challenge to those who would lead us.