The Victorian Government has a goal of doubling the state’s agricultural production over 20 years. Achieving that will require substantial new investment.
A recent report, for example, estimates that Australian agriculture as a whole needs A$600 billion in new capital to realise the “global soft commodity opportunity”. Where could this money come from, and does the source matter?
Beyond debt finance
Last week Rob Goudswaard, CEO of Rural Finance launched the Victorian Farmland Values Index, a substantial new piece of research tracking broad patterns in the value of agricultural land across the state. It covers four agricultural industries - mixed farming, cropping, grazing and dairy - and reflects 44,000 land sale transactions over a 23-year period to mid-2013.
Rural Finance, which is 100% owned by the Victorian Government, provides commercial loans to farms and other rural businesses much like other banks, but also has a mission to provide “services that build business capability and resilience”.
Commenting on the Victorian Government’s growth goal, Goudswaard said:
Over the last 20 years Victoria’s production did double, but in the process the level of farm debt increased from $2 billion to $12 billion. We don’t think an increase in bank debt of this order is a feasible model for achieving the next doubling.
In part this is because of the particular operational risks of bank debt for farm businesses. Banks these days are acutely focused on the security of their loan books. Heavily geared farmers whose land values drop can find themselves rapidly in trouble, as happened to a number of south-west Victorian dairy farmers just last year.
Taking the long-term view
Due to their dependence on natural biological and physical processes, farm businesses have long development and life cycles. Their returns are also highly variable from year to year due to both natural factors (such as weather) and high volatility in the prices of both inputs and products.
For these reasons the claim is often made that agriculture needs “patient investors”, willing to expose themselves to more of the business’ risks, and with an eye on the medium and long term. This would be equity investment rather than debt, which of course has its own particular pros and cons.
Damian Murphy, a 2012 Nuffield Australia Farm Scholar, also spoke at the Rural Finance launch. He has personal experience of the difficulties young farmers face in raising capital, and has concerns about equity investors too. Institutional investment managers with no knowledge of, or interest in, agriculture may also lack the long-term view, and equity investment comes with some loss of autonomy for the business operator. He says that in his experience “those words, patience and investor, they don’t equate at all.”
The view from the kitchen table
But there are many ways that equity investment arrangements can be organised. Here’s one example. Four co-investors I know have recently bought a dairy farm in north-east Victoria. We’ll call them Angus, Chris, Angie and Bob.
They’ve employed a young couple – Glen and Lorraine - to manage the farm operations on a day-to-day basis, while the owners focus on developing the property and planning and managing the business. Farm management is the logical next career step for Glen and Lorraine, and the plan is to offer them the opportunity to buy into the business down the track.
Angus is himself a recently retired 4th generation family farmer. He told me recently “it’s so great not to be doing this stuff on my own!” Chris, who has had an executive career further along the dairy supply chain said: “I sit at our management meetings and look at the range of skills sitting around the kitchen table, from agronomy to investment structures, employment law and grain futures and I think: how do we expect farmers to know all of this?”
This is a one-off based in personal relationships. Damian Murphy has a proposal to institutionalise this idea of “ag investing in ag”, and thinks it could be structured to meet the “patient investor” test. The core of his proposal is providing an institutional vehicle for retiring farmers’ superannuation funds, and also current farmers’ Farm Management Deposits, to be available as an investment pool.
In my own research I’ve started to explore the implications of different investment and farm business models – for farmers and the communities they belong to. There are opportunities, and risks. But clearly there is a need to move beyond thinking about “family farming” and “corporate farming” as the only two, mutually exclusive options.