Investment in agribuisness provides welcome opportunities to enhance clients’ portfolios. Jim Blackburn examines the changing landscape of this diverse sector.
The landscape for investment in the Australian farming and forestry sector continues to change significantly. Drought, climate change and a global financial crisis have proved to be significant factors in moulding the way we now view investment risk, time horizons and the comparative performance of these sectors against the different asset classes such as equities, property and fixed interest. Through both the listed and unlisted markets, and at the retail, wholesale and institutional level of investment, there is a renewed focus on core investment themes in food and fibre production, food security and the scarcity of natural resources such as land and water. In addition, there is broader discussion around the specific technical aspects of the risk-return, diversification and correlation characteristics that agribusiness and forestry investment may provide to an investment portfolio at both the fund and individual level.
In 2008, the combined gross value of production across the agribusiness and forestry sector equated to $47.5 billion. These industries provide a broad range of investment opportunities through listed equities, managed investment schemes, and managed fund products for retail, wholesale and institutional investors. At the industry level, the broader sector is divided into a number of specific sub-sectors: Agriculture.
This is perhaps the largest sector of farm production in Australia and is dominated by the meat and livestock industry, grains and oilseed production, cotton, dairy, and a vast array of broad-acre mixed farming interests. The sector is characterised by a continued divergence between individual family-run operations and larger scale corporate or consolidated holdings. At all levels, production efficiency and cost management (including access to water) are determining factors in economic sustainability.
The global market for agricultural commodities such as wheat and beef is deep, with increasing competition, and has evolved with new technologies such as biofuels that significantly alter supply and demand dynamics. Forestry Forestry in Australia is structured around native and plantation based estates which supply the domestic and international pulpwood and construction timber industries. Native forest resources continue to be a major contributor (8.5 million cubic metres per annum compared to 4 million cubic metres from plantations) but this is expected to decline with increased limitation on native forest exploitation.
Whilst the sector is dominated in production volume by the Eucalyptus (hardwood) and Radiata Pine (softwood) species (1.9 million hectares under plantations), there is a significant high value sub-sector that has been developing in Australia around species such as mahogany, teak and sandalwood. The Managed Investment Scheme (MIS) industry has been a key player in new investment and plantation development in the forestry industry. Viticulture The challenges facing the Australian wine and wine grape industry are well known to most Australians.
The oversupply of some varieties from specific regions has given rise to great debate within the industry, particularly around the topic of new investment and new vineyard developments. Furthermore, the impact of the continuing drought, which comes with mixed blessings at a time of over-production, and the more recent impacts of the global financial crisis on wine consumption, are cause for significant uncertainty in the short to medium term. Horticulture The Australian horticultural industry covers a very wide range of products including stone fruit (apricots, nectarines, and the like), apples, pears, citrus, nuts, berries, olives and olive oil to name a few.
Access to key high-value export markets has provided significant stimulus for growth together with increasing intensity and scale of production. The availability of water, development of new genetics, and the potential impact of climate change are key drivers being discussed in recent industry forums. Fisheries and aquaculture The production of seafood from wild capture fisheries and aquaculture has had a mixed year under challenging conditions. Key domestic sub-sectors include the northern prawn fishery, southern rock lobsters, southern bluefin tuna, oysters, pearls and salmon farming based in Tasmania.
Australia participates in key global markets, which are currently being affected by significant changes in exchange rates, company debt structures and availability of new capital, and reductions in discretionary incomes (affecting demand and price). Whilst there will continue to be some changes (ones we can see in our relatively small market here include the switch to lower value seafood imports) there is an expectation of durability for the domestic industry in some of the mature markets for well established Australian seafood products.
TYPES OF INVESTMENT VEHICLES
Listed equities The Australian Securities Exchange includes approximately 50 listed agricultural stocks, which cover seven global industry classification standards (GICS) sub-sector classifications. The description of agricultural stocks is inherently broad and covers few very large stocks – the largest by market capitalisation being Incitec Pivot ($3.4 billion) – and many more small to micro cap companies such as AWB ($523 million) and PrimeAg ($142 million).
As a consequence, the agricultural indexes that are based on the ASX listed companies are heavily weighted toward a small number of stocks, which makes them inherently more volatile than global indexes across similar sectors. Interestingly, the appearance in Australia of global equities funds that include in their portfolio a number of ASX listed stocks underlines the fact that these companies participate in their respective markets at a global level.
Managed investment schemes Tax-effective MIS investment products have had a long and interesting history in the retail investment landscape for Australian accountants and financial advisers. Early problems with poorly planned and managed schemes have thankfully given way to more sophisticated products that employ skilled and well resourced operational management teams. Regulatory uncertainty, particularly regarding to taxation provisions, has hampered the industry. However, recent resolutions by the Australian Taxation Office (ATO) have hopefully brought some greater certainty.