Australia agriculture: Fruitful endeavors

When ADM Capital acquired an almond orchard in Australia earlier this month, the firm had its sights on far more than nuts. ADM regards the investment as a bet on the country’s overall agriculture sector, which it believes has both a strong niche in the global market and the proven ability to weather external shocks.

“I think Australia is unique,” says Frank Barillaro, an investment director at ADM, who led the almond investment. “We’re counter-cyclical in production to the US, so that gives us a natural advantage. We have access to a well-regulated water system – at the moment California is grappling with water issues that we had to deal with 10 years ago. That provides an ideal basis for growing a crop, when you have a high degree of confidence in what your input cost and output are going to be.”

ADM is not alone in this assessment: other firms have marked the potential of Australian agriculture and made their own investments. However, managing farmland presents unique challenges for which private equity players need to be prepared. 

Attractive target

By raw numbers, Australia’s agriculture sector is respectable but far outclassed by larger competitors. The World Bank ranked the country as the eighth-largest global agricultural exporter in 2015 with $36 billion in exports. By contrast, the EU and US, which ranked first and second on the list, recorded exports of $158 billion (to non-EU countries) and $163 billion respectively. 

On the other hand, both the EU and US imported nearly as much as they exported, while Australia’s imports were around a third of the value of its exports. The country’s relatively small population of 21 million, compared to 508 million for the EU and 321 million for the US, means domestic supply goes farther toward meeting domestic demand and Australian agricultural producers can target the global market more easily.

“There are bigger farming nations, like the US, and Western Europe is also a huge agriculture producer,” says Simon Hopkins, CEO of farmland investor Milltrust International Group, which pursues assets in Asia, Latin America and Africa. “But most of their production is consumed in the US or Western Europe, whereas Australia is growing for export, and very squarely focused on the opportunity that China presents.”

China’s booming demand for quality food and the inability of its own agriculture sector to meet it have led the country to source ever more agricultural products from Australia. According to the Department of Agriculture, the share of food exports bought by China grew from 3% in 2003 to 10% in 2013. Shipments include materials intended for human consumption such as fruits, vegetables, meat and dairy, in addition to animal fodder such as soybeans and alfalfa.

Despite this strong potential, Australia agriculture plays have been few and far between for private equity firms. Wariness about the sector is far from unfounded – hard experience has shown the difficulty of realizing returns from investments. 

The Sustainable Agriculture Fund, for instance, was set up in 2009 with the goal of aggregating cropping, livestock and dairy assets. It received backing of seven foundation investors, five of them superannuation funds. But the fund has struggled to manage the short-term volatility of its assets. AgCap, which manages the SAF, has begun to sell its assets piecemeal after failing to find a buyer for the entire portfolio, and has chosen not to raise a second vehicle.

Know your operator

For seasoned participants in agriculture, this history highlights the difficulty of achieving good returns through the traditional private equity model. Investors must be willing to trust the operators of their assets and accept the inevitability of volatility arising from short-term factors such as weather that are beyond their control. Finding an experienced operator is extremely important, given the highly specialized nature of the sector in which each crop has its own requirements. 

“Value is created by changing use, increasing productivity and output, but the real value with agriculture is usually gained via buying the right assets at the right price with the right operator, something that very few have managed to achieve over time,” says Tim McGavin, CEO of agriculture-focused asset manager Laguna Bay Pastoral Company. “Mistakes have been made by focusing on the cash yield and not the long-term nature of the asset.”

This is not to say it’s impossible for investors to make improvements to their assets. For example, ADM regularly conducts research at its agricultural properties, including an olive grove in Spain and a US-based vertical farming business with a view to applying the knowledge to its other assets. It expects to do the same with the almond purchase. However, a manager’s ability to add value in this way depends heavily on previous agriculture experience.

Given the short-term volatility of the sector, there is skepticism as to whether PE players will ever feel comfortable investing at scale. Even if long-term prospects are positive overall, the risk of an unforeseen weather event undermining a trade sale process might be too much to bear.

More activity may come from other private market participants. Ontario Teachers’ Pension Plan, which recently purchased avocado producer Jasper Farms, is seen as an example of an investor that would be comfortable holding an asset for longer than the traditional private equity fund allows. TIAA-CREF has also been active lately, buying a large part of the SAF portfolio last year. 

Nevertheless, it is still too early to say what role these investors will play in the market long-term, and consequently the drivers of agriculture investments are likely to remain the same for the foreseeable future.

“There are always pockets of value and good opportunity,” says Laguna Bay’s McGavin. “But with commodity markets, it pays to be counter-cyclical and opportunistic. Commodities have a habit of reverting to the mean, so you need to ensure you have an entry price with a margin of safety and an asset and operator in the lowest decile cost of production.”  

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• Topics
• Australasia
• Buyouts
• Investments
• GPs
• Australia
• Agriculture
• ADM Capital