When the government starts monitoring investment activity in a particular asset class, it’s time for investors to sit up and pay attention.
The Deputy Prime Minister Barnaby Joyce has a sizeable bone to pick with the superannuation industry – it’s reluctance to invest in Australia’s agricultural industry.
At a time when super funds have a collective $2.1 trillion in funds under management, a paltry 0.3% finds its way into rural investment. The anomaly is even starker when it’s considered offshore interests are queuing up to invest and super funds (especially self-managed super funds) are desperate for yield and reliable investment against a backdrop of ongoing share market volatility in 2016.
The reasons for this lack of investment interest have been regularly canvassed. The family-owned farming structure makes investment difficult, there is a lack of products to invest in, and the absence of knowledge about the sector and asset managers who have the expertise to advise on it.
The family-owned structure is an issue. But the other reasons cited are hard to excuse when measured against the sheer size of the industry: 12 per cent of GDP, generating revenue of $145 billion annually, and exporting, on average, more than $30 billion worth of commodities annually. Add to this the growing demand in Asia for our agri products, and the lack of investment interest is even harder to understand. It seems Barnaby might have a point. But it is not missed on foreign investors who are lining up for what is becoming the world’s biggest garage sale.
What’s rarely mentioned in the ongoing national debate is what agricultural assets have to offer. Although the value of rural land obviously fluctuates in line with market demand for agri commodities, the value of the dollar, and climatic events (think drought and flood), it attracts reasonable yields of between four and six per cent and enjoys solid capital gain.
It’s important to distinguish here between the failed tax-driven managed investment schemes of yesteryear with the genuine agricultural and animal production industries that have been integral to Australia’s economic landscape for more than 200 years.
In our opinion, domestic investment into agricultural assets has the potential to be a significant game changer in the rural sector as the replacement of debt with long-term investment equity not only provides stability to rural enterprises, but can substantially reduce the debt servicing load for the operating business.
This has many benefits, including more robust business structures by reducing debt servicing, the ability to reinvest by the operator into operating assets such as cattle, feed expansion, equipment for improvement, thus enhancing the outcome of greater revenue to increase equity or for further expansion.
And that is why the government is talking about agriculture.
Written by: Warren Gibson