Investment regulatory barriers
2.1
From the inquiry’s outset, the Committee established that no distinct financial regulatory barriers to superannuation fund investment in agriculture exist in Australia. This was identified by both investors and the regulators themselves.
2.2
The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC) indicated that no regulatory barriers existed in their fields of responsibility.
2.3
APRA, responsible for establishing and enforcing prudential standards in the superannuation industry, said that it:
…does not impose any specific regulatory requirements on superannuation funds in relation to investment in Australian agriculture.
Superannuation trustees must comply with legislative and prudential requirements including the requirement to have an investment strategy and an investment governance framework in place. These requirements do not proscribe, nor prevent, particular types of investments.
2.4
Additionally, when questioned specifically as to whether there is a legislative barrier to agriculture investment, APRA representatives noted that:
[C]ertainly not in the APRA legislation. The APRA legislation effectively opens up to invest in what the trustee has the expertise and the access to invest in. We don’t say you can or you can’t do any particular type of investment.
2.5
While its role is to regulate and enforce companies and financial services businesses to protect consumers, investors and creditors, ASIC highlighted that it:
…does not impose regulatory requirements on superannuation funds in relation to any particular investments, including in relation to agriculture.
The laws ASIC administers are concerned with the investment activities of superannuation funds to the extent that the activities relate to the funds’ conduct and disclosure with respect to fund members.
2.6
ASIC explained that the form of disclosure requirements may vary depending on the nature of the investment, but ‘does not consider that these requirements are acting as barriers to investment in agriculture’.
Financial regulation barriers for overseas investors
2.7
While this inquiry’s focus was on investment by Australian-based superannuation funds, the rules surrounding foreign investors (including overseas pension funds) are also relevant. This is because investment funds often pool Australian and overseas investors, and the rules applicable to overseas investors therefore can apply to Australian ones as well.
2.8
In accordance with the Foreign Acquisitions and Takeovers Regulation Act 2015, administered and enforced by the Foreign Investment Review Board (FIRB), foreign investment in the agricultural sector (including the procurement of agricultural land) must undergo an approval process. Foreign investments (excluding foreign government investors) in agribusiness with a value greater than $57 million, or in agricultural land, where the investors’ accumulative land holdings exceed $15 million, require the Australian Treasurer’s approval. Exemptions apply for trade agreement partners, but a $0 threshold applies to foreign government investors.
2.9
Additionally, the Australian Taxation Office Register of Foreign Ownership must be notified of all land acquisitions by foreign investors, regardless of their value and the need for the Treasurer’s approval.
2.10
The approval process is aimed at ensuring that the sale of assets or land is open and transparent, with considerations pertaining to:
‘the timetable and scale of the sales process,’ including mandatory 30‑day public marketing campaign within the six months period prior to the sales agreement; and
‘the number of interested parties,’ including participation and/or opportunities for Australian investors.
2.11
Laguna Bay Pastoral Company (LBPC) noted these requirements are impediments to foreign investment in the agricultural sector. Areas of concerns and hindrance highlighted included:
inconsistent and arbitrary regulation of foreign investment in agricultural land and an uncompetitive tax regime;
approval from the Treasurer…to acquire more than a cumulative $15m in total of agricultural land;
foreign buyers [to] demonstrate that the land has been advertised to a wide domestic audience for 30 days.
2.12
Mr Timothy McGavin, Chief Executive Office of LBPC, stressed that their major barrier is the 30‑day marketing rule, saying ‘it has to go and it has to go urgently’.
2.13
Mr McGavin is also concerned that under current FIRB regulations LBPC, although ‘a wholly owned Australian company’, is treated in the same way as a foreign‑owned investment firm because they have ‘a mix of offshore investors’. The impact of having foreign investors co-investing with locally owned funds is that the relevant Managed Investment Trust (MIT) tax rate increases from 15 per cent to 30 per cent. Mr McGavin stated that:
We're getting treated the same as a Chinese investment corporation, and we're very different to them. We're not a trade buyer. We're not a sovereign fund that's government owned. We've got pensions that are deemed government but we're all put in the same bucket. Split them out; work out who's a pension fund and who's a sovereign. There's a big difference.
2.14
The Consolidated Pastoral Company (CPC) agrees that the current regulatory regime is a deterrent to foreign investment in agriculture due to its complexity.
2.15
In highlighting these concerns, CPC noted that the complexities of foreign investment have flow-on effects to domestic investment:
It is not only CPC’s view but also CPCs’ experience that the complexities and inconsistencies in the current foreign investment regime have the potential to stifle foreign investment in Australian agriculture and damage the Government’s broader policy agenda.
Secondly, reforming the domestic regulatory environment has limited value if the foreign investment regulatory regime is complex and deters potential investors.
Thirdly, a complex and inconsistent foreign investment regime can also deter domestic institutional investors who are concerned the regime will limit the size of the market when they wish to exit.
Other regulatory barriers
2.16
While there may not be specific financial regulatory barriers to superannuation investment in agriculture, other regulatory barriers exist. Dr Jason West from the University of Queensland’s School of Agriculture and Food Sciences identified some of these:
There are regulatory impediments against superannuation funds imposed by a range of authorities acting as a barrier to superannuation fund investment in Australian agriculture. The compliance framework confronting agricultural investors concerning land use, chemical control, livestock treatment and crop management is substantial. This prevents interest from private investors directing funds into anything beyond farmland itself.
2.17
Dr West acknowledged that while these regulatory requirements (such as environmental protection and land use) are not unique to the agricultural sector, the regulatory burden to meet these requirements may act as a deterrent to investment.
2.18
Other submitters identified certain regulatory or reporting requirements that may also act as a deterrent to investment in agriculture, from the perspective of either superannuation investors or individuals acting as trustees for self‑managed superannuation funds.
2.19
Ms Jo-Anne Bloomfield outlined a number of regulatory impediments to investment in agricultural enterprises by self-managed superannuation funds (SMSFs), operated under the Australian Superannuation Industry (Supervision) Act 1993.
2.20
Whilst these regulatory impediments do not act as barriers to major superannuation investment, the requirement for SMSF trustees to comply with extra regulation may prevent investment or expansion of operations managed by SMSFs in the sector.
The perception of risk as a barrier
2.21
ASIC’s SmartMoney website illustrates another type of barrier, describing agribusiness investments generally (not just those from superannuation funds) as ‘very risky’:
Agribusiness schemes may offer attractive tax benefits, but they are very risky. Many things can go wrong, for example:
plants and animals can lose value;
market prices will fluctuate over time, making investment returns difficult to predict;
the scheme manager may collapse; and
it is virtually impossible to on-sell your investment.
For these reasons, agribusiness schemes are not appropriate for most people.
2.22
The webpage also highlights ‘the unpredictable nature of agribusiness schemes’, that ‘your money may be locked up for many years and exposed to high risk over that time’ and notes that investors ‘should avoid investing more than a small portion of [their] money in agribusiness schemes’.
2.23
The advice concludes:
The high risk of agricultural schemes means you may lose some or all of your money, or make a worse return than a less risky investment. Of course, some schemes will succeed - but be very cautious and always seek professional financial advice.
2.24
This risk-adverse profiling of agricultural investment was a point made by a number of stakeholders, highlighting that the financial perception of agricultural enterprise in Australia is a significant hurdle to overcome if attitudes are to change.
2.25
As Industry Super Australia (ISA) noted, some high-profile failed investments in the past have ‘skewed perceptions amongst current superannuation fund trustees and fund advisers’. Amongst other things, ISA pointed to the ‘tougher and less predictable’ nature of Australian agricultural conditions compared to international farming areas.
2.26
Prime Super pointed to the environment of superannuation investment and noted that, while long-term performance of investment in agriculture may be strong, short-term risk causes problems for investment funds:
Both the Government and APRA are regularly quoted on the need to remove the bottom quartile of underperforming funds. Any one year of underperformance contributes to the risk of longer term underperformance, therefore the investment focus of superannuation funds is always on delivering a strong return over the short term, which then roles out to provide strong long term performance. An asset class that provides a risk to short term performance is therefore one to be avoided.
2.27
Ultimately, the risk-return profile of agricultural investment, in any suitably large scale, is unacceptable to superannuation funds in Australia, especially as the data and market understandings identified in this chapter contribute to investment scepticism.
Sector-specific barriers
2.28
The nature of agriculture as a sector presents unique barriers, beyond those discussed above. These barriers include:
environmental and related risks;
international markets; and
Liquidity
2.29
Investments in agriculture need long-term commitments, whereas the majority of investors generally prefer or even require liquidity options. Superannuation investors in particular need access to liquid assets due to the requirement to be able to access funds to pay for rollover requests and lump sum option benefits.
2.30
This lack of liquidity is often cited as a benefit of investing in agriculture, where ‘patient capital’ can be utilised to fund long-term investments, without the constant flux of market volatility. This point was made, for instance, by Dr West:
Agriculture assets require access to patient capital; that is, capital that does not need to generate returns year-on-year, but returns over the natural business cycle. The need for long-term asset returns to fund long-term liabilities would suggest agriculture is a well-matched investment to fund the retirement needs of Australians.
2.31
However, Prime Super argued that it is misleading to consider superannuation fund investments as long-term:
As a superannuation fund invests for a large pool of members there is a need to:
be able to provide liquidity to those members that are nearing retirement, to allow them to withdraw all or part of their superannuation account;
be able to provide liquidity for those that are in retirement, through the payment of an income stream;
meet ongoing benefit payments to those members that transfer to other funds or are in receipt of death or disability payments; and
provide the best outcome for all members over every economic cycles.
The above apply every year, as in every year there are a number of new members joining the Fund and beginning their long term investment in superannuation as well as a number of members that have reached retirement age and are therefore withdrawing their account to fund their retirement.
Whilst superannuation is a long term investment it is also necessary to deliver a strong short term return each and every year.
2.32
As such, Prime Super described liquidity as ‘probably the key risk associated with investing in agriculture’.
2.33
This point was also recognised by Warakirri Asset Management, who noted that larger funds might find agricultural assets more suitable than would other fund types:
From a structural perspective, not all superannuation funds are necessarily suited to an investment in an illiquid asset like Agriculture. Large scale defined pension funds or defined contribution funds, backed by a large member base and consistent net inflows, have the necessary asset size and investment time frame, driven by certainty around funds under management that may warrant an investment in such an asset.
2.34
CPC identified the illiquidity of agricultural investments as one of the main barriers to greater superannuation fund investment in the sector.
2.35
APRA outlined that the distinction between a liquid and illiquid asset is not ‘black and white’, but the ‘working definition will tend to be: something that can be liquidated without a significant loss in value within about 30 days’.
2.36
This definition highlights the dilemma that superannuation investment faces with potential agricultural assets, as the ability to liquidate an agricultural asset within 30 days without loss will not necessarily align with their rollover requirements and liquidity considerations.
2.37
Industry Super Australia diverts from this opinion of liquidity as a risk or barrier to investment, directly rejecting the issue of liquidity of these assets for larger superannuation funds. Whether this is a matter of opinion, or a scale issue regarding the ability for larger funds to absorb asset flexibility in their overall investment pool, is unclear as no other witnesses or submitters rejected liquidity as a barrier.
Environmental and climatic risk
2.38
For some prospective investors, especially superannuation funds looking for secure and stable prospects, the impact on the agricultural sector from external or environmental influences poses too great a risk. Of specific note is the sector’s vulnerability to environmental and climatic variability.
2.39
Prime Super highlighted, as one of the main reasons for their own unsatisfactory outcomes investing directly in agriculture, that ‘climatic events (the drought during the 2000s) had a significant impact on the business, from the cost of running the business and the reduced quantity of crop’.
2.40
While acknowledging that the economy as a whole is affected by environmental factors, Prime Super noted that the agricultural sector is ‘fundamentally impacted’. Whereas other sectors can ameliorate impacts by changing practices or sources of materials, agriculture is generally bound to the land, water and climate of the region it is located in.
2.41
Australian Ethical Investment Ltd argued that the nature of much of the animal agricultural sector rules it out as an investment choice for ethical investors:
…environmental, human rights and animal welfare considerations mean we rule out large-scale commercial animal agriculture companies and invest selectively in other forms of food agriculture.
2.42
Agriculture as a sector poses concerns for investment–both superannuation and otherwise–that has ethical factors to consider. Several significant factors have been identified:
greenhouse gas emissions;
deforestation and biodiversity loss;
water scarcity and water use;
waste and water pollution;
sustainable proteins; and
2.43
For example, Australian Ethical Investment Ltd decided to divest from a salmon farming company due to concerns about the sustainability of the company’s practices.
2.44
The scale of this type of investment, and its consideration for superannuation funds, should not be underestimated:
As of 2018, 81% of the largest super funds have embedded a formal commitment to responsible investment (up from 70% in 2016). We expect this trend to continue, driven largely by consumer demand. Consumer research conducted in 2017 revealed that nine in ten Australians expect their super or other investments to be invested responsibly and ethically.
2.45
To respond to these concerns, Australian Ethical Investment Ltd suggested that greater recognition within the sector of this barrier and moving to address the perceived business risk that it brings would be necessary:
Australian agricultural businesses need to do more to disclose how they are managing environmental, human rights and animal welfare risks. This is crucial to allow investors to properly assess the risks and returns of investment in the sector.
2.46
CPC highlighted that the agriculture sector must invest in ‘world’s best practice animal welfare and environmental management standards’ to attract investment.
Commodity market and currency risk
2.47
An inherent risk to the agriculture sector, and relevant to investment considerations, is the impact that cycles in commodity markets can have on the commodity outputs that most agribusinesses produce.
2.48
Performance assessments of the sector by potential investors will always assess commodity cycles as part of their risk profile.
2.49
Select Harvests identified that their success in attracting superannuation investment into their almond interests have required ‘shareholders who have been willing to ‘ride thru’ the almond commodity price cycle’.
2.50
As a natural consequence of this commodity risk, the fluctuations in currency value has a related risk, as any commodity exported and traded in overseas markets will be affected by the value of the Australian dollar.
2.51
This risk was noted by Prime Super, whereby the value of export-quality crops was ‘significantly impacted’ by fluctuations–including a period of above-US Dollar parity–of the Australian Dollar.
2.52
Select Harvests acknowledged this impact as well, with the majority of their almond crop being traded in US dollars.
Regulatory uncertainty risk
2.53
More than most sectors in the Australian economy, agriculture exists in a permanent state of flux. The inherent uncertainty faced by those in the sector, including as a consequence of the points mentioned above, leads to further uncertainty in the regulatory environment.
2.54
ISA identified the absence of a strategic national policy as a barrier to agricultural investment, arguing that efforts since the 1980s to deregulate the sector have led to decreased competition, the ‘locking up’ of supply-chain infrastructure and the power of the two grocery giants to dictate prices.
2.55
The Investor Group on Climate Change (IGCC) also highlighted the need for policy consistency, noting that ‘there is a need for policy certainty and political consensus … to underpin the development of long-term risk assessments … and to provide certainty to investors’.
2.56
CPC Chief Executive Officer, Mr Troy Setter, believes consistency is the key to increasing investment:
That’s some of the feedback we’ve had from both domestic investors and international investors…Consistent policy on foreign investment and consistent policy on tax, the environment, workplace health and safety and labour…as many of those things that can be consistent from government help balance out the inconsistencies of the season, market and commodity cycles.
Committee comment
2.57
Stakeholders, including the regulators themselves, noted that there are no specific regulatory barriers for superannuation funds seeking to invest in agriculture in Australia. Equally evident, however, is the existence of other issues which create disincentives to increased investment by superannuation funds in the sector.
2.58
Most particularly, foreign investment rules may deter Australian managed funds with foreign co-investors from investing in local agriculture since they are considered in the same tax category as foreign investment firms.
2.59
The sector, in part because it is not well understood, has a reputation for being high-risk. The volatility of agriculture in general means that investors will need to be well informed and committed to longer term investments.
2.60
Another key concern for investors is the uncertainty and volatility of the sector as a whole.
2.61
Further practical barriers are discussed in the next chapter.