By Graham Turley*
Agri-business is New Zealand’s most productive and successful business sector yet it struggles to attract investor capital.
It seem counter-intuitive, particularly with all the talk of food bowls for Asia, that a sector which represents more than 25 per cent of New Zealand’s economy is widely perceived as difficult and inaccessible for investment – whether those investors are retail, large fund managers or overseas looking to invest in New Zealand’s agricultural success story.
Few successful agriculture-based businesses are listed on the NZX, especially when you consider how significant a contributor agriculture is to the economy.
Many successful agri-businesses are co-operatives or highly successful, family-based operations and therefore not readily available to outside investors.
But even our most successful agri-businesses find it difficult to shore up capital positions and ensure access to funds for future business development.
So where is the investment coming from that will drive growth and productivity gains in New Zealand?
New Zealand’s regulations around overseas investment rank it a lowly 48th of 53 OECD countries for ease of access for foreign investment. Yet despite that ranking and the political anti-foreign investment rhetoric that seems to rise to prominence in election years, there is ample overseas interest in investing in our agricultural sector.
That money is coming from around the world from investment funds and businesses that understand the prospects of long-term investment horizons matched to growing demand. These investors understand New Zealand’s production and processing capabilities as well as its potential for further growth.
We need more foreign investment as there is an obvious gap between national savings - what we can finance domestically - and the levels of investment actually required in the sector.
However one of the looming opportunities and a rapidly growing source of capital in the sector is equity partnerships. In essence, equity partnerships bring external investment funds, sometimes pooled, sometimes from single entities or investors, into a business sector which has historically – and riskily – relied more on debt.
If the benefits of an equity partnership (i.e. scale, different skillsets) can be unleashed, then returns may well be higher than those of the average farmer. Anecdotally the majority of returns from equity partnerships have been in the form of capital appreciation rather than periodic cash dividends.
Such new approaches to agri investment in New Zealand are critical. ANZ’s insight report Greener pastures identified the potential for New Zealand’s agri-business sector to capture another $NZ0.5 – 1.3 trillion in exports by 2050. But to achieve those goals the report also identified a need for up to $NZ340 billion in international and domestic investment to enable production growth ($NZ210 billion) and support farm turnover ($NZ130 billion).
At ANZ we have access to a local and international pool of around $NZ160 million looking for equity investment opportunities. Other operators in the field are also experiencing increasing demand with some set up to give access to retail investors and others working with large family holdings, high net worth investors and trusts to pool capital and find opportunities.
Equity partnerships bring a mix of skills and capital that supports growth and expansion and they are a rapidly emerging pathway to farm ownership. They spread the risk of investing in the sector, can release equity for succession planning, and unlock the benefits of investing in the sector without having to own a farm.
In our latest ANZ Research Agri Focus report we note some critical success factors in an equity partnership:
- a robust, achievable strategy for value creation
- appropriate due diligence
- good relationships and common objectives and motivations between shareholders
- an appropriate business structure
- robust business processes and systems
- clear communication with regular meetings
- agreed procedures for entry/exit of shareholders and for resolving any disputes.
At this stage of evolution of such partnerships it is difficult to quantify their returns but in ANZ’s Agri report we note logic would suggest returns are similar over the long run to the average farmer which is 3-7 per cent return on assets plus 5 - 10 per cent capital gain per annum depending on the sector.
Opportunity to pool capital to overcome high capital requirements and in some cases low cash rates of return (i.e. sheep & beef).
Today the average economic size of a farm unit is considerably higher than back in the 1970s and 80s. The capital required to purchase an average-sized dairy farm is nearly $NZ6.5 million (when Fonterra was formed it was a tad over $NZ2 million) and $NZ5 million for sheep and beef. But the targets of equity investors are often large scale operations. To get one’s hands on a new dairy conversion, which today averages between 600 to 800 cows, the capital requirement is likely to be well in excess of $NZ10 million.
So the pooling of capital is one way for a number of different investors to gain entry, expand an existing investment in agricultural assets, and minimise the risks associated with outright ownership.
However capital gains in the future seem less certain and are tied to productivity improvements.
At ANZ a major focus for our agri-business team is creating “investable businesses”.
That means helping owners address and improve areas such as productivity, governance and management of these businesses. The overall goal is to enhance returns through consistent improvements in productivity driven by research, innovation and good management.
Creating clear separation between governance, management and operational matters helps address several issues for owners and potential investor sand overcomes investor concerns around transparency of revenue streams and liquidity of their investment.
That separation shows potential investors where the business is heading, how it is performing in terms of reaching its production targets, where in the business their investment is going, and how their investment is performing financially.
Seeing how well a business performs helps address the liquidity concerns some investors have about getting their money out of an involvement in the sector- strongly performing businesses or holdings will sell more readily when it’s time to exit.
Productivity gains are also readily recognised and this again helps investor confidence. It’s generally accepted that investments in agri-business return about 3 to 7 per cent but top performing operations are achieving returns in high single figures and even low double figures.
Raising more businesses to that level of performance – a task for private, government and industry based organisations - again makes the sector more attractive to new investment.
Making the sector more attractive will also help solve another problem - farm succession. Our research shows more than 70 per cent of farmers want a family member to succeed them in the business but only 47 per cent have family members working in the business. Just 10 per cent of farmers even have a succession plan.
Farm succession is also under pressure as fewer graduates are emerging from agri-based university courses.
Further constraining interest in investing in the agri-sector are the long-term investment horizons, and short-term volatility in earnings and fluctuating commodity prices that spook investors.
However, we see a long-term positive trend.
Investors and fund managers used to looking at quarterly or at most yearly returns need to develop an understanding that the long-term trend in commodity prices is rising. There is always a degree of caution required in predicting a continuation of that long-run pattern but the fundamentals are sound.
Emerging middle classes in massive markets such as China, India and Indonesia are driving a sustainable upswing in demand for protein.
Greener Pastures forecast demand for agricultural output could grow by as much as 60 per cent by 2050. Link that demand to ongoing worldwide population growth and the opportunities for both New Zealand and Australia to become a food bowl for the wider region are significant.
But the challenges, particularly in attracting capital, are significant.
Graham Turley is ANZ New Zealand Managing Director Commercial and Agri. This article was first published here