Farm funding models and business structures in Australia Richard Heath Australian Farm Institute
Farm debt in Australia by source. (Source RBA)
Debt as a percentage of gross production 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Farm debt as a percentage of gross farm output. (Source ABS)
Dec-1993 Aug-1994 Apr-1995 Dec-1995 Aug-1996 Apr-1997 Dec-1997 Aug-1998 Apr-1999 Dec-1999 Aug-2000 Apr-2001 Dec-2001 Aug-2002 Apr-2003 Dec-2003 Aug-2004 Apr-2005 Dec-2005 Aug-2006 Apr-2007 Dec-2007 Aug-2008 Apr-2009 Dec-2009 Aug-2010 Apr-2011 Dec-2011 Aug-2012 Apr-2013 Dec-2013 Aug-2014 Apr-2015 $A billions $A billions $70 $900 $60 $800 $700 $50 $600 $40 $500 $30 $400 $20 $10 $300 $200 $100 $0 $0 Agriculture (LHS) Total Business (RHS) Trends in levels of business debt by sector. (Source RBA)
Composition of farm business debt, average per broadacre farm. (Source ABARES)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Nursery & vegetable Fruit & nuts Sheep Beef Crops Dairy Poultry Pigs Mixed livestock 2001 2011 Changes in numbers of farms by enterprise type, 2001-2011. (Source ABS)
Dec-1993 Dec-1994 Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Total credit outstanding by loan size and sector - Agriculture Under $100,000 $100,000 to less than $500,000 $500,000 to less than $2 million $2 million and over 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% (Source RBA)
Proportion of gross income required for interest (per hectare) The proportion of gross income per hectare required to service debt. 0.12 0.1 0.08 0.06 0.04 0.02 0 Year (Source ABARES)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EQUITY RATIO 95% 90% 85% 80% 75% 70% 65% All broadacre Crops Sheep Beef Equity ratios - broadacre farms. (Source ABARES)
Agricultural growth cannot be achieved without the support of both domestic and foreign investors. Between now and 2050, around A$600 billion in additional capital will be needed to generate growth and profitability in Australian agriculture, based on current capital valuations. A further A$400 billion will be needed to support farm turnover, as ageing farmers make way for the next generation. ANZ Greener Pastures Report
AgTech Financing US$ billions. (Source AgFunder)
Source BDO
Source BDO
(Source ATO taxation statistics 2012-2013)
New Zealand Owner Operator Bank Finance Sharemilking 36% of dairy herd owned by sharemilkers Land owned by one entity cows owned by another Equity Partnerships Managing partner involved in day-to-day farm operations and equity partners who contribute capital such as cash, dairy cows and farm land Farm land in New Zealand does not attract capital gains tax when it is sold, allowing stakeholders in farm land ownership to buy-in and sell-out of equity partnerships relatively easily
Brazil The CPR farm product bond allows farmers to access capital by financing intended production or produce already stored. Farmers sell a bond specifying a volume of product they will deliver on a certain date with no option to default on the delivery commitment. In the hands of the buyer the bond is tradeable on commodity and financial markets with liquidity in these markets arising from various parties such as farm input suppliers, machinery dealers, commodity trading houses and investment funding organisations. Huge agricultural industry Risk mitigation insurance Agriculture a significant investment sector in Brazil
USA Deep and liquid land leasing market To avoid hefty taxes, farm land assets in the US are generally transferred to a spouse or charity, or gifted to an individual. These arrangements have generally led to an increasing number of absentee landlords who continuously lease their land rather than farm it themselves. Access to a wide variety of insurance products including crop revenue coverage, revenue assurance, income protection, livestock risk protection and livestock gross margin insurance (all subsidised by the government).
Crowdfunding Equity based crowdfunding which results in investors owning a share of a business or participating in an alternative profit sharing arrangement, increased at a CAGR of 114% from 2009 to 2012. Lending based crowdfunding which provides investors with a fixed rate of interest on the principle invested, experienced a CAGR of 78% over the same period. Australian Government new equity based crowdfunding regulations December 2015 Less than $5million assets Public company (unlisted) Every investor separate shareholder
Australian real estate investment trusts (A-REIT) Vehicles that give investors access to property assets. A-REITs provide a regular income stream through income derived from the asset (most often as a rental or lease) as well as the longer term capital gain. The major benefit of A-REITs is that they can provide access to assets that may otherwise be out of reach for individual investors, such as large-scale commercial properties. Failed REIT s (Great Southern etc) were unstapled i.e. investors were only investing in the business and not the land. Unstapled REIT s no longer allowed. Long term successful REIT s such as Rural Funds Management. Retail and Institutional investors.
Collaborative Farming Multiple farming businesses combined to form a single optimum efficiency business. Receive income both as employees of the created joint venture farming business as well as dividends from the profits of the business. Joint Venture As with collaborative farming combines operations or resources from multiple businesses or investors. Joint Venture partners may not necessarily have farming operations however.
Summary Australian farm businesses are predominantly partnerships or single owners funded by bank debt finance. Conservative business structures and financing options have suited variability of the production environment in Australia. Total debt has been growing however serviceability of debt has remained manageable at a whole of industry level. Need for more capital and interest in agriculture as investment sector keeping focus on alternative funding models and business structures. Countries with more entrepreneurial and varied finance and business options have more stable production or business environments. Ability to attract equity partners requires nimble (easy exit) structures. Equity partnerships, leasing, crowdfunding, REIT s, collaborative funding, joint ventures, stock leasing, www.farminstitute.org.au GRDC Farm Business Updates 2016