Once spruiked almost exclusively for their tax benefits, agribusiness investments are moving towards mainstream investment credibility. Simon Hoyle reports.
In years gone by, hundreds of millions of dollars of clients’ funds were channelled into agricultural investment schemes, just about on the strength of the available tax deduction alone. Today, it’s possible to discuss investment in agribusiness and have tax make up a very small part of the conversation. Increasingly, though by no means always, agribusiness schemes are being assessed on their investment merits. Some planning firms continue to pump money into agribusiness as part of aggressive end-of-financial-year tax “planning”. But Dug Higgins, senior investment analyst for Zenith partners, says this is a myopic view of the sector. “Planners generally would be savvy enough [to know] that if you’re just investing in these things on the basis of tax, you’re not really seeing the big picture,” Higgins says.
“Historically, a lot of people who have been burnt in these things invested in them purely on the merits of tax, and when they didn’t deliver at the back-end, despite the fact they had really ignored that when they invested, they got a bit shirty. I think that’s a fairly shortsighted view to take. “We would hope that planners are saying, you do it on its merits and you have the added advantage of tax, rather than the other way around. As to whether or not that actually happens, it would be very difficult to tell.”
Higgins says the investment case for agribusiness is relatively straightforward: done properly, it can reduce portfolio volatility, generate attractive investment returns, and provide a tax benefit along the way. “Agriculture generally – and in talking about agriculture on a general basis I’m lumping in anything from agribusiness stocks to managed investment schemes to actually owning farms [directly] – it’s to a greater or lesser extent going to have a reasonable level of negative correlation to the broader markets,”
Higgins says. “Certainly a bit of work has been done in looking at how farms fit in a portfolio. Granted, most people don’t have the wherewithal to buy a whole farm, but theoretically arguing that if you did, and you chose those farms that sit in the top quartile performance-wise, they do have a very positive impact on ironing out volatility in a portfolio.” Kim Cowie, technical services manager for agribusiness group ITC, says a correctly-structured agribusiness investment can reduce portfolio volatility and provide a hedge against inflation.
Cowie says agribusiness assets are not positively correlated to investment markets. She says that rising commodity prices tend to fuel inflation, so when inflation rises it’s because commodity prices are rising – good news for agribusiness investors. However, rising inflation tends to have a dampening effect on the sharemarket. Rising inflation generally leads to higher interest rates, raising the cost of debt for companies and reducing consumer confidence. Cowie says all of these factors tend to reduce corporate profitability, leading to lower dividend expectations and, as a consequence, lower share prices.
Some agribusiness holdings may be appropriate for some client portfolios, but Higgins says investors and planners need to remember that an agribusiness investment can be highly illiquid. “It’s rare for an agribusiness scheme to have a timeframe, say, of less than about 10 years. There are one or two that would be under five years, but generally, you’d be in for at least 10 to 12 years, and at the top end you might be in for as long as about 25.
“That said, there are recent rules on secondary trading in forestry schemes which should make it easier for people who evidence a need to get out to do that; but even so, you have to be in for the first four years for that to apply.” When it comes to assessing specific opportunities, Higgins says the research required is intensive. “The list would run along the lines of what level of experience does the manager have in that area of agriculture or horticulture the project is involved in? Do they have any track record? Have they actually begun harvesting?
Are they getting the prices that they’re after? Can they manage the thing on the ground?” he says. “Some of these guys have been around long enough that they are starting to work up a fairly credible track record. Others have not been around so long and perhaps there’s still, if not a question mark, then a level of unknown about their ability to go through a full cycle. “Some of these projects run on very long timeframes before you get a harvest, particularly the long-rotation forestry projects.
So while you can run along for, say, perhaps the first 10 or 15 years where things broadly are looking OK, it can get a little bit difficult to tell just how good is the ultimate harvest going to be? “It’s really to a certain extent a bit of an unknown until the day it happens. That adds to the complexity of it.” Higgins says it’s also critical that planners are satisfied that statements or claims that managers are making about specific projects are true. “But that really goes for all asset classes, because you do see a lot of people who go blindly into things, and let other people go blindly into them on their behalf,” Higgins says.