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Sourcing investment for the Sustainable Agriculture Fund

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Getting investment for the Sustainable Agriculture Fund is getting difficult. DIVERSITY is a key factor to the fortunes of Sustainable Agriculture Fund.

When prices of one commodity fall, it is usually offset by an upturn in another. Beef prices have been good for the past two years, milk prices bottomed out a year ago and wheat and barley prices fell this past year but pulse crop prices and canola held their own.

Northern Australia may be suffering a drought but the south can simultaneously be experiencing good pasture growth in Tasmania. A cool, wet winter last year did wonders for grain crops but set back pasture growth in southeast Australia.

It’s a good argument for not putting all your eggs in one basket. And that’s exactly what the Sustainable Agriculture Fund has done.

SAF was set up as a portfolio of dryland and irrigated farming operations in three states covering dairy, beef, grain and cotton crops. And if it had more money to spend, it might have bought a sheep operation in South Australia to spread the risk even further.

SAF was founded in 2007 by property industry figure Arthur Apted and Wimmera farmer and consultant Frank Delahunty to create a product for Australian financial institutions to invest in agriculture. It took about two years to gain funding from superannuation funds and capital investment companies and buy the first property.

Field play: AgCap chief executive Martin Newnham and board chair Skirley Harlock on SAF’s Lake Bolac property.

About $145 million was raised from AustralianSuper, AMP Capital Investors, AusCoal Super, the Australian Catholic Superannuation and Retirement Fund, Christian Super and the University of Melbourne Fund.

The funds were used to buy five farming aggregations:

◆ Five farms covering 9710ha at North Star in northern NSW growing dryland wheat, barley, chick pea, cotton and sorghum.

◆ Four beef properties over 6786ha on King Island, Tasmania.

◆ Two irrigated and rain-fed properties at Darlington Point in the NSW Riverina covering 4926ha and growing cereal, maize, cotton, sunflower, vegetable and seed crops.

◆ Four irrigated and dryland dairy farms comprising 1145ha in northern Tasmania.

◆ 1261ha of dryland cropping land at Lake Bolac, Victoria, mostly growing wheat, barley and canola but during this past year, some faba beans were sown. For the past three years, another 4151ha of cropping land at Berrybank and Derrinallum in Victoria’s Western District has been leased from US capital fund Westchester. These farms have been aggregated into the Lake Bolac operation.

All the owned properties are held by the Sustainable Agriculture Land Trust. The farming operations are held by a separate entity, the Sustainable Agriculture Operating Trust.

Overarching this structure is the management company AgCap, 80 per cent owned by former Rhodes Scholar, Carlton Football Club captain and Australian Football League chairman Mike Fitzpatrick. The remaining 20 per cent of AgCap is owned by former and current managers of the company.

Having grown up on the family farm in Western Australia, Mr Fitzpatrick has a strong interest in the management of AgCap and SAF. He is also an investor in his own right in SAF through his investment fund, Log Creek.

AgCap’s board is chaired by Warrnambool dairy farmer, former Australian Dairy Farmers director and former United Dairyfarmers of Victoria vice-president Shirley Harlock. Other board members include Select Harvests director and Fawkner Capital director Fred Grimwade and Mungindi farmer and former Namoi Cotton Co-operative vice-chairman Fred Barlow. The fourth director is Cameron Griffin, who heads the private investment office of Hastings Funds Management, a superannuation fund set up by Mr Fitzpatrick in 1994 and now 51 per cent owned by Westpac Bank.

AgCap chief executive officer, Martin Newnham, took up the role after spending six years as chief financial officer of Riordan Grain at Lara, near Geelong, and prior to that at Midfield Meats and ICM Agribusiness.

Newnham says Australian industry super funds have traditionally underinvested in agriculture. He says SAF was set up to attract some of the $2 trillion of super fund capital into farming properties.

“The idea was that it would be a diversified fund around geography, water source and commodity. This past year is a classic example, where dairy is quite subdued, beef quite strong, wheat prices are subdued but chick pea prices are quite good. Combine that in the investment portfolio and we still achieve our investment hurdles and benchmarks.”

Those benchmark targets include being in the Australian Bureau of Agricultural and Resource Economics and Sciences’ top 25 per cent of farming operations in its annual Australian farms survey.

Newnham says another of the AgCap’s benchmarks is maintaining a Consumer Price Index increase on the original capital. “Land values and the CPI track very closely to each other historically,” he says.

The other target is a return of the CPI plus 4 per cent on income derived from the farming operations, net of fees. “For the past few years, we have been achieving all our targets. Last year, it was just about 8 per cent. And this year looks like another good year,” he says. “In the early years of the fund, we had some difficult years and we had some quite good seasons. As the maturity of the management and maturity of the productive potential of the assets progressed, we started to get nice, steady returns.”

Flexibility is also a key. While dairy farms will always be dairying operations, the cropping mix can be switched. Newnham says the Darlington Point farms were converted from rice to cotton operations as the latter was more profitable.

“We have got to be sensible agronomically,” Newnham says. “And we have got to be mindful of the weather.”

AgCap does not have large amounts of capital tied up in machinery. It uses machinery contractors for major work, such as sowing, spraying and harvesting of crops, and outsources the management of some properties in some instances.

The North Star property is managed by Customised Farm Management, a small company based in Moree. The same company also oversees the Lake Bolac aggregation. The remainder of the properties are directly managed by AgCap.

The company employs about 18 full-time staff, with the King Island beef aggregation employing the most.

Newnham says the plan for SAF was to attract $250-$300 million in capital and grow from there. But getting the investment has been difficult.

“Scale would have delivered not only operational benefits but some overhead benefits as well,” he says. “We could have grown to $300 million quite sensibly around those existing farm aggregations. Then we could have leveraged off our existing management. It might have meant introducing a prime lamb operation or something like that, but essentially we wouldn’t have strayed too far from that core agriculture.

“If the fund had grown beyond $300 million, then maybe you would look at extending the investment to Western Australia.”

Mr Newnham says SAF’s portfolio is a safe investment, as it is basically land-based. As land has historically shown steady valuation increases, even if the agricultural fund is wound up, its original investors should still get a healthy return.

And a buyer will get well-run assets.

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