Beef up your exposure to agriculture

Alexandra Cain

By

09/11/2017

SPONSORED CONTENT | Global investors are set to profit from Australia’s rise as the food bowl for Asia, while many local funds are set to miss out. Vertically integrated agribusinesses offer a more diversified exposure to the sector.

Demand from Asia for Australian food products is set to continue booming over the coming decades, piquing the interest of global investors in domestic agriculture. Yet many local investors remain shy. It is time to take a fresh look at different ways to access this thematic that is set to drive strong returns.

Changing demographics and tastes in developing Asian markets are fuelling growing demand for Australian food.

“Growth in Asian markets is a sustainable trend; there’s little doubt in 10 years there are going to be more people with more money eating better in Asia,” says QIC principal of global private capital, Phillip Cummins.

Food providence is an emerging issue for consumers driving activity in the farm sector. This is a competitive advantage for Australian producers, with the benefit of geographic isolation and a reputation for being ‘clean and green’.

“People are increasingly looking for animals to be raised in a sustainable way. Consumers are becoming increasingly conscious of issues such as the use of antibiotics, environment, animal handling and other inputs…in raising animals,” Cummins says.

“We’re seeing this play out in North America and Australia, but developing markets in Asia are also picking it up. That’s an advantage for Australia because we’re well placed to produce food in a very sustainable way.”

A challenge for super funds

But farming is a tough business, highly exposed to the forces of nature and global price volatility. It can also be difficult for institutional investors to find opportunities of appropriate scale. According to the National Farmers’ Federation’s 2016 statistics, just 4.3 per cent of domestic agribusinesses have annual revenues in excess of $2 million.

Many investment chiefs also struggle to understand where agribusiness should fit into their portfolio. Is it real estate?
Is it infrastructure? Is it private equity?

Historically, these factors have made it challenging for the $2.3 trillion local superannuation industry to tap the agribusiness sector’s huge potential. If a fund buys farmland, it might take a passive interest in the management of the asset and lease it to a producer, or own the asset and the production facilities.

Business models are emerging where one entity will focus on operations and another will own the asset, with a lease agreement that defines the relationship between the two.

Another way to take a position in agribusiness is to buy into large infrastructure assets, such as ports and railways used to send products for export and domestic markets.

QIC’s vision

The global private capital team at QIC has spent much time in recent years rethinking its approach to agribusiness. Where they have landed is something Cummins describes as akin to private equity investing. Central to the investment strategy is a controlling 80 per cent stake in North Australian Pastoral Company (NAPCO), acquired in 2016.

QIC’s vision is to make NAPCO a demand-driven, vertically integrated beef business. NAPCO already has a degree of supply-chain integration, being a breeder and grower of beef across 13 strategically located properties and owner of a feedlot on the Darling Downs in South-east Queensland.

This offers better risk management, compared with other agribusinesses that focus on only one part of what is a very long supply chain in beef, by producing a diversified income stream.

Diversification also helps the business manage price volatility. That is attractive, given agribusinesses are typically price takers, forced to accept the prevailing price depending on market forces.

“Having a better handle on the supply chain reduces price volatility, and allows us to build better relationships with other parties along it, which also gives us a better idea of demand,” Cummins says. “This ultimately leads to higher earnings, more stable margins and the ability to invest in the business with a longer-term time horizon.”

With more than $500 million in assets and 180 staff, NAPCO is already one of the largest agribusinesses in the country.

“We’re probably a bit early to the space but it’s one in which we want to gain exposure. NAPCO is a company we can grow and that’s what we like doing,” Cummins says.

While the QIC team is focused on investing in animal protein right now, it is also eying opportunities in other agribusiness subsectors.

“Irrigated cropping is one area we’re exploring. Nuts, cotton, dairy, water and horticulture are also interesting,” Cummins says. He admits it is difficult to identify investment-grade agribusiness assets in Australia, although he sees evidence that is changing as the sector matures.

Cummins predicts the global interest in Australian agribusinesses will only continue to rise as the sector consolidates, producing a bigger pipeline of assets that are attractive to institutional investors.

This report is sponsored by QIC.