Australia’s agriculture sector has growth ambitions, but significant capital investment will be required to turn those ambitions into reality.
The Agribusiness Bulletin
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In 2019 the National Farmers’ Federation (NFF) outlined a roadmap to grow the current value of Australian agriculture from around $60 billion to $100 billion by 2030.1,2 This target is particularly ambitious given it would require industry growth of around 4.5% a year — nearly three times the 1.7% rate averaged over the last decade.2
Achieving this ambitious target will, among other things, require significant investment. For some context, one recent report3 estimates around $8 billion per year will be required just to support existing farm turnover. And under a scenario with similar growth targets as that set by the NFF, around $250 billion would need to be invested between 2020 and 2030 (Figure 1), a third of which would be needed just to support farm turnover and replace depreciating assets.
This edition of our Agribusiness Bulletin explores major sources of investment that could support Australia achieving this ambitious target. We look at farm-sourced investment, as well as domestic institutional and foreign investors, and outline the reasons why more needs to be done to diversify the sources of capital supporting Australian agriculture, with a particular need to attract international investors.
Figure 1 Australian agriculture capital requirements and sources, 2020 to 2030
Source: Port Jackson Partners and ANZ (2012)
Investment from owner-operators
Historically, the primary source of capital investment in Australian agriculture has been debt and retained earnings from farm operators, and they will remain important because Australia’s farms are held in very large majority (around 95%) by owner-operator families.4
However, at around $35 billion (in 2018-19 dollars), Australian farm debt has remained relatively unchanged over the last decade, while profits (excluding capital appreciation) have averaged just 2% of opening capital.5 This suggests these sources of investment will have limited capacity to drive significant growth in industry production.
Estimates by Port Jackson Partners and ANZ (2012)3 found debt and retained earnings could provide for around half of the sector’s $250 billion capital needs between 2020 and 2030, but this would leave a ‘gap’ of around $125 billion in the task of meeting the NFF’s target for growth.
Foreign direct investment
Australia has historically relied on foreign capital to finance the gap between national investment and national savings. In 2018, and across all industry sectors, the country attracted around $90 billion in direct foreign investment. This was up 40% increase on the previous year, and placed Australia in the top 10 destinations for global investment.6
So Australia is an attractive country in which to invest, and this is true in general of Australian agribusiness, with has drawn significant foreign investment, both up and downstream. For example, four of our six major marketing and grain handling companies are foreign-owned and collectively account for nearly 60% of wheat exports.7 And it’s a similar story for red meat and dairy, where foreign investors have a significant stake in Australian processing capacity.8,9
However foreign investment in the primary production stage of Australian agriculture remains limited. In the five years to 2018, annual Foreign Direct Investment (FDI) inflows to agriculture averaged just $260 million – just 0.6% of total Australian inflows (Figure 2).10 Needless to say, this is a far cry from the annual $12.5 billion estimated to be required between 2020 and 20303, suggesting if Australia is to achieve the NFF growth targets, much more FDI will have to be facilitated, and sources diversified.
Figure 2 Annual FDI inflows to Australian agriculture, historical and required investment
Source: Department of Foreign Affairs and Trade 201914
Much of the current international investment is sourced from institutional investors in developed countries such as the United States, Canada and the United Kingdom. To them, Australian agriculture provides relatively low sovereign risk, common cultural values and institutions, opposing seasonal production systems, and globally integrated supply chains that are in close proximity to rapidly growing markets in developing Asia.11
More recently, there has been growing interest in Australian agriculture from outside these developed markets. In the past decade, direct foreign investment by developed countries has remained largely stagnant, while flows from developing countries have increased by around 4% per year so that today, developing country foreign direct investment accounts for 43% of global capital outflows, compared to just 16% ten years ago.12
Recent policy and regulatory changes, including the 2015 decision by the Australian government to lower the Foreign Investment Review Board’s screening thresholds15, have reduced the ability for foreign investors to direct capital into agriculture. This is demonstrated by the OECD’s FDI Restrictiveness Index16 (Figure 3), which shows that investing in Australian agriculture is considerably more challenging than investing in the agricultural sectors of other OECD member states, and the Australian economy more generally.17 Among OECD member states, Australia ranked as fourth most restrictive for FDI in agriculture in 2018, behind only the Republic of Korea, France and Mexico, and comparable to non-OECD members such as Brazil, Russia and Saudi Arabia.
Figure 3 FDI Restrictiveness Index for agriculture, selected countries 2018
Source: Organisation for Economic Co-operation and Development17
Domestic institutional investment
Agriculture has to become more attractive to domestic institutional investors if there is to be any chance of meeting the NFF target. Yet it remains the last major sector of the Australian economy yet to attract significant domestic interest. According to Industry SuperFunds Australia (ISA)18, there is little to no investment in Australian agriculture by retail super funds. And although industry fund investment has emerged in recent years, it remains small compared to other sectors, at just $1.6 billion in 2017.
In 2018, the House of Representatives Standing Committee on Agriculture and Water identified a range of barriers, including:
None of these barriers should be insurmountable, and agricultural investment funds that can manage the risk and volatility which have traditionally turned institutional investors away are bridging this gap by continuing to develop both diversified and specialised investment options for super funds and other institutional investors.
Making it happen
Encouraging further capital investment in Australian agriculture, and diversifying its sources away from debt, will not only help to expand production, but could strengthen links with global markets and drive productivity growth through technology spill-overs.
If Australian agriculture is to achieve the NFF’s ambitious $100 billion target, there will need to be greater roles for both foreign and domestic capital investment. And farmers, industry bodies and governments will have to work together to create an environment which welcomes investment. Without it, Australian agriculture is unlikely to reach its full potential.
1. National Farmers Federation, Talking 2030 (2019)
2. ABARES, Agricultural Commodities (2019)
3. Port Jackson Partners and ANZ, Greener Pastures (2012)
4. Martin, P, Levantis, C, Shafron, W, Phillips, P & Frilay, J, Farm performance: broadacre and dairy farms, 2015–16 to 2017–18, in Agricultural commodities: March quarter 2018 (2018)
5. ABARES, Farm Survey database (2019)
6. Austrade, FDI inflows to Australia buck global trends (2019)
7. AEGIC, Australia’s grain supply chains (2018)
8. ACCC, Cattle and beef market study (2016)
9. IBISworld Butter and Dairy product manufacturing (2019)
10. DFAT Trade, investment and economic factsheets (2019)
11. Weekly Times, Foreign investment in Australia’s agricultural land hits 79 billion
12. UNTAD, World Investment Report Annex Tables (2018)
15. FIRB, FIRB reform overview fact sheet (2015)
16. The FDI Restrictiveness Index gauges the stringency of a country’s FDI rules by looking at the four main types of restrictions on FDI:
It is important to note that the FDI Restrictiveness Index does not provide a complete picture of an investment climate as many other factors can influence the regulatory environment.