The industry is largely focused on the plantation forestry and horticulture sectors with some involvement of the livestock, grains and aquaculture sectors. Investment in the 2007-08 financial year totalled more than $1.1 billion and included approximately 60 projects from managers such as FEA, Great Southern, Gunns, ITC, and Timbercorp. Unitised trust structures.
These products can be considered to fall between the tax-effective MIS and mainstream managed fund products, and offer a simplified unitised trust structure that is used to invest directly in farmland, forestry land and operations. Investors participate as unit-holders, with limited liquidity available. In addition, the vehicles are generally not considered to be tax-effective. The funds are generally managed by boutique fund managers with specialised skills in their particular sub-sector exposure for which the fund is designed, such as Warakirri, Macro Funds, and Challenger.
Managed fund products As mentioned above, a number of agriculture and related global thematic equity and commodity funds have appeared within the retail investment space over the last few years. Deutsche (DWS), Colonial First State (CFS) and Barclays Capital are amongst the fund managers that are currently or prospectively in this space. The Global Equity funds are built around the core discipline of equities analysis or bottom-up stock picking. The pool of securities (or universe) may be defined by a set of rules (or filters) that match the theme that the fund is trying to target.
By comparison, the commodities funds, which include agricultural (soft) commodities exposure, may invest directly in commodities future contracts. These contracts will vary according to a long-or short-term view, based on the fund’s outlook on price. It is within the context of these diversified sectors and vehicles for investment that the Australian agribusiness and forestry sector continues to build its investment case.
For retail investors, the opportunity is to reshape a portfolio using a strategic rather than tactical view of agribusiness and forestry. The proliferation of managed funds and continuation of the MIS industry will provide the products, and further research on portfolio diversification and correlation benefits will re-define the strategy. For institutional investors, the barriers to growth of new investment in agribusiness and forestry are less clear. International investors, including large pension fund and sovereign funds from the US and Middle East, have made significant investments in Australian agribusiness and forestry.
Meanwhile, the domestic institutions remain largely on the sidelines. Some speculate that our domestic institutions are constrained by the historic comparison to high double-digit returns from equities and property investments. By comparison, the consistent but less spectacular returns from agriculture just don’t look all that attractive. What pervades these considerations is a number of important global trends.
Firstly, there is the significant shortage of new arable land to feed an increasing world population, and to provide key resources such as paper and timber products. In addition, the consumption patterns of this increasing population are changing towards a Westernised diet of high-quality protein and carbohydrates, and increasing consumption of high quality fibre. It is these underlying trends, combined with the analysis of agricultural and forestry performance in a volatile financial market environment, which should provide the strategic pathway for new investment.
Jim Blackburn is head of agribusiness research for Lonsec.
