According to the Australian Agribusiness Group (AAG), a total of $665 million was raised by schemes in the 2003-04 financial year — a 93 per cent increase on 2002-03.
Adviser Edge Investment Research managing director Shane Kelly predicts between $900 million and $950 million will be raised this year, up 25 to 30 per cent on the 2003-04 financial year.
It is expected there will be about 50 projects coming to market this year, Kelly says, compared to a final total of 45 last year.
Even so, these may not be enough to satisfy growing demand.
“This [financial] year’s capital raisings are likely to be constrained by the supply of projects,” he says.
“The supply of projects will be the only limiting factor this year.”
Kelly says this shows the agribusiness managed investments sector is consolidating, as it is now dominated by a few major fund managers such as Great Southern Managers, Gunns and Timbercorp.
He says the cost of meeting the Australian Securities and Investments Comission’s (ASIC) requirements and distribution are significant hurdles for new players entering the sector.
“The 2005 offerings are mainly new products from established players in the sector,” he says.
“There are some new offerings, such as a Western Australian grain project, but most projects are in the mainstream segments.”
These segments are dominated by timber projects and horticultural projects, which include products such as mangoes, table grapes, almonds, olives and citrus fruits.
Tropical fruits, such as mangoes, have become a fast-developing segment of the industry, while the number of olive schemes has declined this year compared to a few years ago. But there is a new olive scheme this year backed by Italian money that adds a new dynamic to the olive-growing segment.
AAG research manager Tim Lee agrees that most of the projects being offered this year are in the traditional segments.
“We are seeing much of the same type of product and demand will increase in 2005,” he says. “But supply of quality products won’t match that demand and the good projects sell out early.”
Lee says the substantial cost to achieve distribution among advisers and accountants has become a significant barrier for new players to enter the market. ASIC’s enforcement of the regulations has also cleaned up the industry.
“The shocker products have almost disappeared and this has meant we are seeing a good standard of product this year,” Lee says.
Lonsec senior investment analyst agribusiness Jim Blackburn is a little more conservative and estimates between $800 million and $850 million will be raised in 2005. This estimate is based on what has been achieved in the first half of this financial year.
“While we don’t have the same volume of projects this year, we are seeing the industry expanding in line with the run of equity markets,” he says.
“However, there are some issues with timber schemes having to deal with land price issues.”
Blackburn says many schemes are now incorporating the whole operation in the project, rather than just growing plants.
“Wine schemes are now more integrated between growing and marketing and we are looking at schemes for the way they add value,” he says.
“We are seeing more tie-in with marketing and sales into schemes and this is our preferred model.”
Many dealer groups include one or more agribusiness schemes on their approved list and the researchers grow their client base as interest in the sector grows. Lee says advisers want to see value in the sector before putting the products on approved lists.
“They want to see if a project has credibility before adding it to their lists,” he says.
“A lot more financial planning groups are now calling for research, but they are really looking for products with 10-star ratings and no risk, which, of course, don’t exist. But most planners have a more realistic approach to the sector.”
Lee says the planners want to see good-quality management in the projects with experienced people, an established market for the products and good returns.
“In all of the schemes on offer, the key to them achieving distribution is good management,” he says.
In past years a dealer group may put one or two projects on an approved list, but in many cases this involved projects in identical sectors. Lee says dealer groups are now looking for diversification on their approved lists.
“But the timber sector still attracts most dollars, with horticulture and viticulture getting the remaining funds,” he says.
“This will mean some timber schemes will close early while others will take the big dollars.”
The agribusiness research business has boiled down to three main players — Adviser Edge, AAG and Lonsec — with each producing a list of recommended products.
Adviser Edge will review about 75 per cent of projects that are available, while AAG will produce reports on about 30 projects.
Lonsec has taken a different approach this year, Blackburn says.
“We have decided to look at the entire industry this year which will be an evolution in our research process,” he says.
“Stage one will see us looking at projects regardless of whether the managers have canvassed us to produce a report.”
Blackburn says if the managers then want a full report Lonsec will create one, and he expects the researcher will produce a list of between 10 and 12 recommended products for the year. Agribusiness managers will often get a couple of reports on their projects and use the most favourable.
Recently, AAG declined to research three projects as the manager would not sign the engagement letter, which included a clause that the researcher would release the report regardless of the rating. The researcher points out most agribusiness managers accept this clause in the engagement letter.
Blackburn admits there are disputes sometimes between managers and the researchers.
“We haven’t recommended Great Southern for a number of years, but we still talk to them about the issues,” he says.
“By talking to all managers it gives us a good perspective of the agribusiness sector.”
