3.1
As previously identified, specific regulatory barriers to superannuation fund investment in agriculture are minimal. However, there are a number of other contributors to low superannuation investment:
Agricultural performance and investment data either does not exist, or is not catered to investment profiling that superannuation fund managers either understand or will access in preference to market data that they are already familiar with.
The simple nature of superannuation in Australia–funds must have access to quick-turnaround liquid assets that can be sold easily and still have easily understood high-yield returns.
The few successful domestic investments that can be identified (such as FirstState Super’s investment in Select Harvests) are due to a number of cumulative factors which cannot be easily replicated:
specialised agribusiness ventures where superannuation funds invest in land leaseback arrangements with proven return;
direct education of fund managers to understand the business being invested in; and
dedication of ‘patient capital’ within a fund’s overall investment profile.
Moves to improve agricultural data by government are not focussed toward financial or investment relevant detail.
The promotion of the associated high-risk profile for agricultural investment is abundant throughout the market, even perpetuated by regulators such as ASIC.
Extensive overseas investment from state-owned pension funds and other hedge fund style investments has led to a conception that domestic regulation discourages investment, or is hampered by the ‘cherry-picking’ of the assets available by those overseas funds.
Infrastructure quality and ownership to support the ‘paddock to plate’ supply chain is not confidently understood or seen as a priority for private or government investment.
Certain policies regarding foreign investment discourage co-investment by domestic and foreign funds, increasing the risk profile that may encourage domestic superannuation investment.
State land taxes and duties can discourage investment in agriculture, where annualised returns are a priority.
3.2
The Committee also acknowledges that a number of other issues hamper greater investment in the agricultural market. While these concerns are valid and undoubtedly impact their profitability and ability to harness market forces, the narrow scope of this inquiry regarding superannuation investment in agriculture did not allow for full consideration of these issues.
3.3
Regardless of this restriction, the Committee believes that the discussion in this chapter, and the associated recommendations, will help in improving investment in the sector in a broader sense, outside of that from just superannuation funds.
3.4
Given that there are no easily identifiable discrete regulatory barriers to superannuation investment, the Committee considers that the areas below are the best ways forward to help educate investors and stimulate growth and potential within the sector.
Asset and investment data opening
3.5
Multiple submitters and witnesses to the inquiry provided insight into the disparate and confused nature of data relevant to the agricultural sector, its financial performance and investment suitability.
3.6
While the current Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) survey and the resultant data is valuable, it is not specifically designed for use by potential investors.
3.7
Investment managers and advisors require specific types of data in order to accurately assess the worth of investment options. In many cases, this information is inadequate or simply non-existent for the agricultural sector. Compared to other investment categories, where such data is easily available, superannuation funds may find agriculture an unappealing, or hard to understand, sector in which to invest. This creates a barrier to further investment, since superannuation funds need to analyse longitudinal and cross-sectional performance and investment data to inform decisions.
3.8
Warakirri Asset Management described the existing level of agricultural data as ‘not readily accessible or centralised’ and noted that ‘the available information is fragmented and difficult to access’.
3.9
Examples of the types of data necessary, but difficult to source, include:
financial data–markets, supply and demand trends and values; and
physical data– information on soils, climate, river flows, ground water, dam levels.
3.10
ABARES surveys, one of the main sources of information about the Australian agricultural sector, draw heavily on voluntary surveys, and therefore are considered problematic. Additionally, the granularity of this and other data for meaningful investment analysis is problematic.
3.11
Across the breadth of the evidence received, data accessibility, relevance or granularity, was the most recurring issue raised.
3.12
The potential impact of data improvement was captured best by the National Farmers’ Federation (NFF):
NFF considers superannuation fund investment in Australian farm businesses could be increased if risks and likely returns could be more accurately calculated through the provision of better data. This includes more detailed and timely data on the physical (eg. Water availability, soils, climate impact) and financial (eg. market fluctuations, demand and supply data) factors impacting farm profitability. Australia has traditionally lacked relevant benchmark indexes which allow for performance to be measured and compared. Improved data enabling comparisons with other investments, such as long-term income and returns data, is also likely to increase superannuation fund consideration of agricultural assets as investment targets.
3.13
A re-focussed and redirected ABARES and Australian Bureau of Statistics (ABS) collection of data would prove more useful in this regard.
3.14
The current agricultural statistics system supported and produced by ABARES has served the sector well for many years. However, the aggregated data reported by ABARES, reflecting cross-sections of agriculture, does not attract much scrutiny from investors. The Department of Agriculture and Water Resources (DAWR) acknowledged that they receive requests for custom data sets from potential investors. More robust investment-relevant data could cater for such requests automatically.
3.15
The lack of a national performance benchmark for agriculture means that fund managers, not just in superannuation, lack an investment target.
3.16
More specifically, some stakeholders referenced stock exchange indexes in countries like the USA, for potential adaptation to the Australian market. However, it was clarified that these indexes are generally for agricultural commodities and futures and given the lack of listed agriculture companies on Australian stock exchanges, were not applicable guides for adaptation.
3.17
Ultimately, the consensus appeared to be that a next-generation collaborative dataset needs to be developed to allow for all sectors to inform each other about investment opportunities and benefits.
3.18
Similarly, the contested nature of the potential investment returns from the agricultural sector, or specific producers (beef, dairy etc.), leads to confusion for potential investment.
3.19
Prime Super tendered adjusted return figures for all agriculture industries income and capital return of 3.6 per cent for the period 2010–2016, whereas the long-term return promoted by Industry Super Australia was 9.7 per cent (1980–2016). Prime Super points out that this is artificially inflated by returns during the boom-period from 1980 until 1989.
3.20
Whether the return figures are accurate or not, dispute shows that the lack of centrally aggregated data regarding performance and asset value leads to a perception of instability and vagary around return from the sector and its liquidity.
3.21
This perception is then challenged further by the lack of internal capacity within superannuation funds to understand the data they can access, or know where to get the support to get access to that information if they are so inclined.
Government data transformation
3.22
The National Agricultural Statistics Review conducted in 2015 found that:
…the existing agricultural data ecosystem relies heavily on a range of voluntary and compulsory surveys, undertaken by industry and government. A lack of coordination and collaboration between these collection bodies regularly results in respondents receiving multiple requests to provide similar information. The escalating cost of collection activities, rising compliance burden, and increasing frustration of survey respondents has resulted in a narrowing of survey coverage and falling response rates, reducing data quality and utility.
3.23
Out of this review, a transformation strategy has been developed by the ABS and ABARES, known as the Roadmap to Improve the Agricultural Statistics System (the Roadmap).
3.24
DAWR outlined the consultation process underway to capture the practical ways forward to achieving the goals of the Roadmap, identifying the following actions underway to progress the transformation:
developing work programs and project proposals to undertake future transformation activities;
identifying and assessing existing agricultural datasets, held by government and industry, for use in the production of statistics;
engaging with industry groups to identify opportunities to collaborate on collection activities, develop common standards and share data;
engaging with state and territory government agencies to improve data sharing protocols and mechanisms; and
communicating with stakeholders about the Roadmap for improving agricultural statistics, transformation and statistics collection activities and seeking feedback on value propositions and stakeholder engagement strategies more broadly.
3.25
Implementation of the Roadmap would lead to potential improvement in agricultural data for superannuation fund investment including:
more detailed and timely data delivery to aid supply chain businesses (and by association, any investors in those businesses);
insights for marketing strategies to enable promotion of Australian agriculture as a quality product;
improved data for insurance purposes;
better decision making and tools to increase efficiency and profitability; and
better government use of disparate data sources, with improved policy development and investment and assistance programs.
3.26
Most importantly, DAWR identifies that ‘the availability of detailed, reliable and timely data will reduce uncertainty and encourage third-party investment’. Additionally, ‘expenditure that improves the efficiency of the sector and opens links to new or under serviced markets will result in increased returns to farms and industry more broadly’.
3.27
DAWR highlighted that even though a need for transformation of existing data has been identified and prioritised as part of the Roadmap, the collaboration required between government and industry is crucial:
…the diversity of Australian agriculture has meant that past efforts have been uncoordinated and lacked the resources and impetus to address whole of system issues. To overcome this, a significant collaborative funding and resourcing effort will be required to support the development of a next generation data and knowledgebase for agriculture and related industries.
Committee comment
3.28
Expansion of agricultural asset and investment data is crucial to the future success of larger-scale investment, superannuation or otherwise, in Australian agriculture.
3.29
However, the current state of government data (ABARES and ABS) and its relevance to commercial and industry interests was highlighted by its inadequacy, coupled with the lack of understanding of the sector more generally. The result is a disconnect between datasets and any potentially interested superannuation investment managers or other investment sources.
3.30
The Committee agrees that the Roadmap priorities identified are the next step in building the appropriate datasets and indexes that investors can use. However, the funding and resourcing issue requires a delicate approach to enable the Commonwealth to come up with a cooperative funding model with industry, which allows agility and change to be prioritised as industry data needs evolve.
3.31
The Committee recommends that the Australian Government prioritise implementing the Roadmap to Improve the Agricultural Statistics System. This should focus on achieving the identified outputs, including appropriate levels of detail and timeliness for agricultural data. The funding to allow for industry cooperative development and maintenance of a flexible future data environment should be part of these prioritised outcomes.
Foreign investment and tax impacts
3.32
The level of investment in Australian agriculture by overseas pension funds and similar defined benefits retirement investment managers, especially from Europe, the USA and Canada, is significant.
3.33
According to ISA, global pension funds are now allocating more than 1 per cent of total assets to agriculture, internationally and here in Australia.
3.34
This increased investment is seen as an indication that these funds see benefit in long-term investment in the sector. However, the inherent difference between these funds and those in Australia alters the investment risk profile that they face when locking into longer-term investment in agriculture.
3.35
Stakeholders that run local investment management or agriculture operations for these overseas investors pointed out that this increased investment builds confidence in the market and shows that successful investment can lead to aggregated operations for local investment to build on.
3.36
However, restrictions on foreign investment into agriculture, or requirements that are seen as burdensome, can impact on this direct investment stream and on those foreign funds co-investing with domestic investors, including superannuation funds.
3.37
These concerns fell mainly to the two issues outlined in Chapter 2:
30-day advertising requirement for agricultural acquisitions by foreign persons; and
managed investment trust tax rates.
3.38
Changes to foreign investment and taxation rules can impact on a foreign pension fund, foreign investor, or their agent in Australia, easily acquiring assets, or encouraging investment (either solo or in partnership with local investors) due to tax impacts.
3.39
Additionally, submitters identified that land tax and stamp duty was a significant value offset consideration for the expected returns of an asset in its first year, so could discourage any investment in either the short or long term.
Committee comment
3.40
While the issues regarding foreign investment and tax impacts outlined above impact on the business models that certain submitters identified, they do not directly affect the direct topic of this inquiry, except if a local fund is planning to co-invest with an overseas fund.
3.41
The scale of foreign pension and equity fund investment in Australian agriculture is significant and increasing. For the market to mature in ways that encourage growth, modernisation, efficiency and aggregation of assets, and attract domestic investment, the contribution of overseas investors needs to be realistically acknowledged and supported. Investments that build capacity in the agricultural sector to grow and improve are important.
3.42
Any improvement in asset profile and management of agriculture as an attractive investment will lead to more investment in the sector itself, as well as the associated supply chain infrastructure.
3.43
Accordingly, there is merit in revisiting the rules regarding foreign investment advertising requirements and managed investment trust tax rates when applied to investment in agriculture by locally owned companies co-investing with foreign funds.
3.44
These considerations should not be a blanket exemption or a similar removal of these rules, but should consider whether these rules are having an unintended impact by creating barriers for domestic investors.
3.45
Additionally, the Australian Government should engage with states and territories through the Trade and Investment Ministers’ Meeting and other appropriate Council of Australian Governments (COAG) councils to discuss the impact of stamp duty and land tax on agricultural asset investment.
3.46
Land taxes and stamp duties are state and territory issues, however, the potential for some offset relief for investors could encourage funds to look past that initial value offset. For that reason, the Australian Government should investigate the potential for taxation offsets at the Commonwealth level to alleviate the initial impact of stamp duty and land tax on select agriculture investments.
3.47
The Committee recommends that the Australian Government investigate the following to reduce the impact of foreign investment and taxation rules on agricultural investment:
Reviewing the rules regarding foreign investment advertising requirements and managed investment trust tax rates, and consider any unintended consequences when applied to investment in agriculture by companies investing on behalf of foreign interests or in tandem with domestic investors; and
Engaging with state and territory governments regarding the impact of stamp duty and land tax on agricultural investment, while investigating options for taxation offset relief at the Commonwealth level in appropriate circumstances.
Understanding, education and promotion of agricultural investment
3.48
The low level of understanding and education of investment managers in agriculture is a chief contributor to the low level of superannuation investment in the sector. The limited investment by general superannuation funds into agricultural assets creates a vicious circle amongst the investment manager cohort: limited understanding of the sector leads to limited investment in the sector, which in turn results in less interest in or knowledge of the sector.
3.49
This is complicated further by the publicly stated risk profiles associated with the sector, as discussed in the previous chapter.
3.50
The regulator, APRA, noted regarding the current lack of expertise:
In many other asset classes you have a well-established grouping of investment managers who operate in this space. With agriculture that is not the case. There are not as many investment managers already operating in the sector. So there isn't the same what I would call ecosystem of investment managers operating in this space so it makes it a harder sector for them to get exposure to.
3.51
LBPC agrees that agriculture ‘is not widely covered in the asset consulting sector’ and that this lack of knowledge is off-putting to interested investors. This creates a further circular effect whereby the lack of investor demand does not warrant consultant investment in increasing their competency in the asset class.
3.52
Warakirri Asset Management agrees that the existing low levels of investment by superannuation funds ‘means there is a lack of knowledge and understanding of the agricultural sector within the investment community and its advisors’.
3.53
The CPC also identified this as one of the primary barriers to greater superannuation fund investment in the sector.
3.54
This lack of ‘ecosystem’ of investment managers within superannuation is not limited purely to agriculture either. The lack of understanding is underpinned by the fact that the majority of agriculture businesses in Australia are still privately owned, and it is rare for superannuation funds to invest directly into any private businesses. Therefore, the ‘ecosystem’ of the sector itself (of majority family-owned or small-scale operations) does not lend itself to superannuation investment at the foundation level.
3.55
Additionally, the lack of understanding of the sector means that there is little analysis of agriculture as a potential investment within the finance sector. Mr Richard Heath of the Australian Farm Institute commented:
I think it's true that if it's not in the first few pages of the Financial Review—the financial sector itself tends to drive a lot of this sort of stuff. You can have all the promotion coming from industry, but unless the financial sector internally is talking about it, promoting it and realising that it has real value, I think it will be difficult.
Committee comment
3.56
The Committee is acutely aware of the cumulative effect of all of these factors–the lack of data on agriculture as an investment, the nature of superannuation investment and prudential requirements of funds, the increasing element of foreign ownership of agricultural assets, and the impact of taxation and duties–has on investment prospects.
3.57
However, the lack of understanding in the superannuation industry, and the financial sector more generally, of the investment potential of agriculture is arguably the number one barrier to investment.
3.58
The decision-makers within investment management frameworks within superannuation funds do not understand the agriculture sector and there is currently no incentive for them to investigate further. No easily accessible performance data can be analysed for potential returns, and higher returns with easier liquidity can be accessed in equities, commercial real estate, and major infrastructure.
3.59
Accordingly, unless fund manager understanding and knowledge increases, superannuation investment in agriculture will remain at low levels.
3.60
To resolve this, there needs to be a coordinated and concerted education effort from both government and the agriculture sector to promote and inform potential investors about the reality of investing in agriculture. This could include information about the technology and techniques being used to counter failures of the past and the unknowns of climate and the market, as well as the potential returns that are being seen through smarter farming and consolidated investment in supply chain logistics.
3.61
This education program will need sector support and for the Australian Government to work with the COAG Industry and Skills and Transport and Infrastructure Councils in a coordinated effort to engage with individual producers and relevant agriculture peak bodies.
3.62
This effort can then be promoted to the superannuation and wider financial sector, both domestically and internationally through broader mechanisms that Austrade already has in place, both in the form of industry capability reporting, and investment promotion.
3.63
The Committee recommends that the Australian Government engage with Council of Australian Governments councils and agricultural peak bodies to develop an information and promotional platform on the benefits of investing in Australian agriculture.
This platform could then be promoted to the superannuation and investment sector, both domestically and internationally, to supplement the existing international promotion undertaken by Austrade.
Support for existing agribusiness to increase investment
3.64
Even without the barriers discussed above, superannuation funds would struggle to invest in Australian agriculture for the simple reason that there are not many suitable investment options within the sector.
3.65
Prime Super noted that funds do not typically invest in private businesses, because:
…it is not possible to get a “real value” of the business from an equity or debt point of view. A “real value” is only evident at the time of sale, and in periods of stress on markets this value can be significantly different to the carrying value as there is no ready pool of buyers for the business. In contrast, the listed environment provides a ready buyer at the right price, therefore it is almost always possible to exit an investment.
3.66
The rarity of agricultural businesses as listed companies on the stock exchange removes a potential direct investment avenue for superannuation, especially when funds are reluctant to invest in assets that cannot be liquidated easily.
3.67
Prime Super identified the current limitations in Australian agriculture in this domain:
Agriculture does not have an established path for the growth of a business through to an ultimate public listing (like through private equity funds). This is a key limitation for the sector, there are some listed agriculture companies, but not many. The limitations that exist include:
the need for large scale multi industry multi geographic exposures in one entity;
the high risk of climatic and economic impacts on the return; and
the volatility of those returns due to the above factors.
3.68
Additionally, Mr Stephen Anthony, Chief Economist at ISA, argued that:
…the listing question is one of ease of access to capital and desire to scale up quickly. So where operations are in family hands and they've been run quite profitably and that family business operation is still running quite effectively, it may be that that group chooses direct control over every aspect of the operation and that the private company form, or whatever arrangement they have in place, is more suitable to them. You want to list when you want to scale up your operations—to take it to that next level and then that next level again.
3.69
Mr Craig Roodt of APRA also commented on how the sector’s lack of a listed market hinders investment at the scale relevant to superannuation funds:
…in the absence of a listed market, if we think of something like private equity, for example, one of the considerations, especially where a business is going through its formative stages, is, 'What's the eventual exit process?' Often that is by listing. With the absence of a diverse listed sector it is less clear. If someone wanted to pursue a roll-up strategy where they buy many small farms, amalgamate them and then achieve the scale benefits, one of the issues is the absence of an exit path. That one path of exit down the track to realise value simply isn't there. In my opinion for those two reasons it would serve as a discouragement.
3.70
This narrow scope for either investment in current listed companies, or the ability for existing ventures to scale-up and list, is currently limiting the attractiveness of the agriculture sector for potential superannuation investment.
3.71
The investment covenants in subsection 52(6) of the Superannuation Industry (Supervision) Act 1993 require trustees to analyse risk and likely return, diversification and liquidity of investments. Without an increase in listed agricultural companies that can allow for superannuation funds to invest via the equity market, an increase in investment in line with these covenants is unlikely to eventuate.
3.72
However, without aggregation of assets, expansion or integration of traditional farming models and informed understanding of the requirement of Australian Stock Exchange listing rules, most agricultural businesses will not be able to attract investment through these means.
3.73
Warakirri Asset Management pointed to the fragmented nature of the sector as a disincentive, since it ‘takes time and patience to build a large-scale agricultural investment’.
3.74
Mr Timothy McGavin of the LBPC also described scale as an issue of concern:
We need scale. Our minimum investment size is around $30 million, otherwise we will just lose money, and our investors want us to keep focused on getting scale.
3.75
The Investor Group on Climate Change recommended that there is a role for the government to work with superannuation funds and the agricultural sector to ‘support the scaling up of institutional investment in the sector…[including through] the creation of suitable investment products’.
3.76
The impact of overseas investors purchasing key agricultural assets within Australia also acts as a disincentive for domestic investment in the supply chain, as overseas pension funds or ‘state’ investors are seen to be ‘cherry picking’ quality assets out of the overall supply chain.
Committee comment
3.77
As a final area for focus to increase the potential for superannuation investment in agriculture, the Committee agrees with a number of stakeholders that aggregation of existing operations, integration of supply chain flows into existing businesses, and the consideration of public listing of larger companies on the stock exchange will lead to increased interest and investment.
3.78
To this end, there is merit in the creation of a ‘toolkit’ to support existing agriculture businesses in understanding the elements discussed in attracting investment, if that is their future desired business model.
3.79
The ideal factors that would contribute to increased domestic superannuation investment could ideally be captured by bringing together representatives of superannuation funds and the agriculture peak bodies to discuss improvements in practice and corporate structure to attract and boost investment.
3.80
This same forum could also be used to discuss data and performance measurement requirements, as identified earlier in this chapter.
3.81
The Committee recommends that an initial superannuation and agricultural industry investment working group be convened, facilitated by the Australian Government in the first instance, to identify and promote improved business process, structure and corporate nature, that would attract increased investment.
Concluding comments
3.82
As identified throughout this report, the cause of low superannuation investment in Australian agriculture is complex and contested. No one single barrier—regulatory or otherwise—is to blame.
3.83
The simple nature of superannuation fund investment logic and the requirement for funds to act in the best interests of their members, while also meeting the liquidity and return profit basis for investment, puts agriculture and that part of the investment market at odds.
3.84
The Committee does not believe that the issues identified and the recommendations outlined in this report will solve this issue overnight. However, there is room for incremental improvement in data capture and analysis, unintended taxation impacts and sector understanding. The recommendations outlined in this report will hopefully lead to change in both the superannuation and financial sector and the agricultural sector, to bring about mutually-beneficial relationships going forward.