Get big or get out – Australian farms are about to become corporatised

  • 95% of Australian farms are family owned, but most don’t have succession plans
  • 72% of U.S. farms are owned by corporates, a shift that’s likely to happen here
  • New Harvest will not just invest in farms, but all components supply chain to logistics
  • Average returns of 5% to 6% are expected, but New Market thinks they can hit 11% to 13%

New Harvest Investment Management is a new fund focused on the agricultural sector with a strategy of owning and running farms and other agricultural assets.

Mark McConnell is the Executive Director and Co-Founder and he says the average age of an Australian farmer is sixty -plus and most farms don’t have a succession plan. So roll up of family farms in the future is likely and an attractive proposition.

For New Harvest, all options are open, from ag tech to modes of transport, anywhere where a bit of tweaking could improve productivity and returns.

Mark McConnell tells Alan Kohler there’s a lot of interest from foreign pension funds for investment in Australian agriculture.

New Harvest is a new wholesale agricultural investment vehicle. Tell us what you’re proposing to do with it.

Yeah. I guess we saw a gap in the market where we felt that there were a number of real estate investment trusts out there that were passively holding assets, and we felt that if we brought some investment banking and science perspectives to the marketplace, we could run more of an active asset approach.

You’re not just going to invest in agriculture as a real estate investment, are you? You’re going to run the farms, as well?

Absolutely. We’ve already begun deploying a lot of experienced agronomists and scientists and farm managers into our pastoral division. We’ll be looking at a range of assets that are perhaps unloved or unproductive, and could do with a bit of a tweak to their efficiency. I guess part of our thematic is pushing up the supply chain, so not just looking at being a price-taker at the farm gate but looking at taking on contracts of supply right through some of those extended agricultural supply chains.

You’d better tell me what that means. Does that mean you’re not going to just invest in farms, you’re going to invest in the buyers of farm products?

We’re looking at a range of ag tech side bets as well, so we can improve efficiency in farming operations. You would have seen there’s been large investment in things like drone technology and data analytics and the like, and we plan on having a significant part of the alpha of the fund investing in ag tech, so drinking our own cordial, I guess. If we make investments in agricultural technology businesses, then we’d use those products and services over our own assets. Moving up that supply chain is things like looking at the transport nodes, thinking about abattoirs, looking at shipping contracts, looking at brands and distribution into foreign markets. Obviously with the advent of a number of regional free trade agreements, it opens up quite a number of opportunities to source direct contracts rather than having to sell into the large wholesalers here domestically.

Are you also going to invest at the other end of the vertical integration scale, such as water?

Yeah. Water is a particularly key theme for us. It’s interesting that Australia has the most regulated water trading environment in the world, but the processes around it are still fairly underdone. I guess our fund takes the view that water has been largely undervalued and unloved for a long time, and there’s an opportunity around that, both here and overseas. We’ve been in discussions with some large institutional funds overseas that are very keen to use us to develop some water aggregations here in Australia.

Tell us broadly, what do you think the opportunities are in investing in agriculture in Australia, both at the water end, the farm end, and the technology, I guess. It’s very interesting that Australia is a resources place with a lot of investing in banking, but we’re a big agricultural country and there’s not a lot of opportunities to invest in it.

It’s interesting when you look at it from a number of different perspectives. The global population is increasing. There’s a growing and affluent middle class in southeast Asia that want a lot of the things that Australia is producing, but the amount of decent farmland is shrinking. You add all those dynamics up, and it tells you that on any measure, productive Australian farmland is cheap on a global scale. I don’t think we appreciate it as much as we should, but the really interesting thing here demographically is that there’s no succession plan in agricultural Australia. I think the Family Business Institute of Australia estimates that over 70% of farms don’t have a succession plan, and that the average age of Australian farmers now is around the early 60s, so 17 years older than the average Australian employee. Australian farming as an industry has got some issues, lack of succession and an ageing population are growing demand drivers.

Then you overlay that with some really interesting data that’s coming out of Europe and the States. That is that in Australia, 95% of farms are held by families. In the U.S., 72% of farms are owned by corporates. I guess what that tells us, instructively, is that there’s a little bit of get big or get out. A lot of the small farms in Australia deny themselves the opportunity to obtain synergy, balance sheet reconstructions and the efficiencies that come with that, and obviously the buying power to be able to reduce their own costs in moving to other markets. I think it might have been John F. Kennedy who once said, “Farming is the only industry that buys retail, sells wholesale, and pays the transport both ways.” It’s an interesting irony and indictment on the way Australian agriculture is run. Suffice to say there’s a lot of small players that deny themselves the opportunities and benefits up the supply chain.

What’s the return on investment of those small players at the moment, and what sort of return on investment do you think you can achieve?

Yeah, good question. A lot of small farmers are at the margin, and that’s quite well publicised. Even though at the moment you’re seeing record-high prices across a number of verticals – beef cattle, sheep, grain – a lot of these small farmers are still struggling to make a decent living out of it. It’s not until you get large and get diverse, both in terms of your geographic spread and your product spread, that you can start to normalise some of the highs and lows that you’re going to get by being constrained to any one particular vertical. A lot of these small farms, typically 2% or 3% is a running yield average on those properties. When you start to look at the better REITs out there, some of these funds are generating 6% plus.

It’s important to break that down, because you’ve got running yield versus the revaluation of the assets. We’re coming off a two to three year period of very high capital growth in agricultural Australia, and that’s clearly not going to be sustainable at the high double-digit level forever. Over any longer period of time, farming assets tend to have capital growth in the order of 8% to 10%. The skill or the trick or the experience is getting a high commensurate running yield from your operations. Traditionally, that’s been really hard to do, but via aggregation and by the use of agricultural technology, and I guess by some sustainable leverage, we’re certainly hoping and all of our conservative modelling indicates that we should be able to generate running yields of around 5% to 6% on those assets.

If you start to marry out a reasonable running yield with reasonable historical capital growth, then you’re looking at having funds targeting return on equity in the order of 11% to 13%. We feel that that’s pretty attractive to the types of clients that we’re seeking at this stage.

Would you only get the 5% or 6% yield if you’re running the farm, or do you think you can get that by getting other people to run them?

Sale and leaseback is running at about 3%, so if you look at the traditional REIT structure and you look at their asset base, typically you’re on the order of 3% to 4% for sale and leaseback. Predominantly, we’ll be actively managing our assets, and in doing so hope to achieve something slightly better than that.

What crops and livestock will you be running?

Our targeted geography is really prioritising New South Wales, but we’re hoping for opportunities down into northern Victoria and potentially into southern Queensland. The areas that we’re looking at lend themselves to cattle breeding, cattle fattening, sheep, wool, a variety of different soft commodities, and grains. They’re cotton and wheat, canola, sorghum, etc. There’s a number of opportunities across that space. We’re actually in the process of recruiting a number of grain traders so we can work in that grain trading environment. We think there’s some good opportunities there. Again, because of the demand drivers coming out of southeast Asia, we’re seeing free trade agreements opening up a number of opportunities and, as I say, to catch that middle class who I think are very interested in both food security and food quality.

What’s your minimum investment?

That’s still being determined, but our sense is it’s going to be around $20,000.

It’s for sophisticated wholesale investors only?

Yeah, that’s right. Initially, it’s going to be targeting wholesale institutional funds, and through those networks we suspect they will in turn position the product to sophisticated investors.

What sort of fees are you going to take?

The MER at the moment, and this is unlikely to change, is 1.5%. I guess a big differentiator here from other funds is that there’s no bonus to the manager paid on capital revaluation. There will only be bonuses paid on capital uplift at sale or realisation. If in a closed fund we hold those assets for seven to nine years, then potentially the manager will be paid no bonus through the life of that fund.

There will be some sort of performance fee regime?

That’s right. As I said, not on an annual basis, not on the revaluing of the assets, only on the realised profit on the sale of an asset. As I say, we think that’s a big differentiator. The people who are behind this fund, who have all done well in various investment banking careers, are not setting this up to drain fees on a quarterly or annual basis. They’re doing this to build a serious aggregation of Australian assets.

What sort of size of fund are you looking for?

The feedback we had from a number of focus groups and working with the banks suggested there’s comfortable appetite in the range of $250 to $300 million, but certainly a very well-developed pipeline of potential assets has been interesting to watch. If you tried to fund something like this 12 months ago, you would have struggled to put a work pipeline together. Now, if you look at our mandate and we look at the types of assets available in the market, we can see line of sight to about $1 billion to $1.2 billion worth of assets that would fit our mandate, so we’re quite confident that we would be able to deploy the capital within the first 12 months.

I was going to say, if what, 92% of Australia’s farms are owned by families and the average age is 60 plus, there’s a bit of an opportunity for roll-up in the future, isn’t there?

Absolutely. We’re by no means the only ones who are thinking that way. There are a number of other startup funds in the market who are thinking about that same thesis. There are a number of natural sellers and natural buyers in the market at the moment, so I suspect you really are going to see a once in a decade if not once in a lifetime change of ownership of a lot of Australian assets. A lot of that will go to corporates and funds because there simply aren’t replacement families queuing up to take over historically family-owned assets.

Do you think it’ll be more funds than corporates, or the other way around?

Hard to tell. We’re seeing a lot of strong interest from foreign pension funds. If you look at the amount of Australian assets that are held by foreign investors, approximately 14% of agricultural assets are held by a variety of corporates and foreign entities, but the most active buyers have been large pension funds out of Canada, out of the U.S., out of the UK [who] have been very active in recent years. Interestingly, our own superannuation industry hasn’t been too keen on Australian agriculture, but a lot of long-term pension funds have been very active over the last few years, particularly Canada.

Right. What sort of advice would you give to a small investor who is interested in getting exposure to agriculture in Australia, apart from investing in your fund, of course?

Yeah. Be it our fund or a range of other very good agricultural funds, it’s hard to deny the statistics, Alan, that global population is increasing. We have free trade agreements on our doorstep. There are cashed-up middle-class consumers that place a high level of value on food security and food quality, and Australia is perfectly placed at the right time to do this. I think we can present a better front to these investors by aggregating and collectivising a lot of the assets that have been managed by families to date.

Great to talk to you, Mark. Thanks a lot.

No worries, Alan. Thanks for your time.