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Why isn't our super money going into Australian agriculture?

14 Dec 2021 5 month(s) ago

Australia's farmers need more equity capital in this harsh environment, but super funds are not stepping up.

With $3 trillion accumulated in superannuation funds it would seem obvious that some of it should go into Australia’s agriculture sector, where Australia enjoys a significant comparative advantage. But little of it does. Why?

There are two massive problems in the way the rural sector is funded in Australia. First, farming in a country subject to severe weather fluctuations is cyclical and uncertain. Yet mostly farm funding is in the form of loans from banks on which regular interest payments have to be paid. In good times, that is fine. But if there is sustained drought or other poor weather, then income will fall and the interest burden will accumulate, sometimes eventually becoming unpayable.

What would better suit the industry is equity capital. With equity (share capital), income is paid out to shareholders in dividends. In good times, dividends will be high (dividend payout ratio agreements would need to ensure that); in bad times they will be low. It would mean that the type of finance being used would match the activity. There would be fewer farmers having to endure heartbreak as the banks foreclose on them. 

The second problem is that there are few opportunities in Australia to diversify primary industry investment, either in terms of geographical spread or product type. If investments could be located across the continent, then downturns because of weather in one area are less likely to result in overall underperformance, reducing investor risk. If there is diversification in product types then fluctuations in international prices may also be evened out: if wheat prices were down, beef prices might be up, for example. If there is one cast-iron rule in investing, it is that diversification reduces risk without harming returns significantly. There is no reason to think that Australia’s rural industry would be an exception.

Low interest rates have meant the sector is under less pressure than usual, allowing farmers to reduce debt and build up notional equity in their businesses. But there is a very large pool of local capital that could be invested in the sector to boost an industry at which Australia should be a world leader. It is in the super funds, which at the moment have accumulated about $3 trillion. That is about one and a half times the value of the Australian stock market, which is why approximately a quarter of superannuation assets are now invested off shore.

Why can’t more of that capital be invested onshore in a diversified portfolio for the rural sector in the form of equity? There is routinely a great deal of concern about foreign investment in the sector, but that is because too little has been done within Australia. 

The main reason is political. Superannuation funds were developed by the Labor Party and rural voters tend to vote the other way. The formation of compulsory superannuation was also heavily associated with the union movement, which is why industry funds often skew their investment to favour the industry sector of the superannuants they serve. There is not a lot of unionisation in the farming sector. The National Party has also been sitting on its hands. 

The reason for looking closer at the sector is that it makes sound financial sense. Using more equity and less debt will produce better outcomes because it allows farmers to manage timing better; finding ways to diversify investment in the sector will reduce risks. 

Few would argue that Australia’s primary sector is faring well. If any doubt that, look across that Tasman at New Zealand’s Fonterra, which is one of the top two dairy players in the world. Fonterra is a co-operative, which means its initial capital was equity (it is now publicly traded, which is also equity capital). The cooperative structure also provides some diversification away from individual enterprises. Australia can only dream of being that successful, but the opportunity exists to change it.



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