Ag punished by super-sized liquidity rules

Canberra's super laws help starve ag of capital needs


Business
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Australian superannuation funds are effectively discouraged from investing in long-term farm sector projects by our superannuation regulators

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It might seem logical to divert some of Australia’s $2.4 trillion of superannuation wealth into much-needed agricultural investments, but farmers pleading for a modest share of the national pension pool are mostly likely to be politely ignored.

While overseas pension funds are increasingly active in the ag sector, Australian funds are effectively discouraged from investing in long-term farming industry projects by our superannuation regulators.

By law, super funds must keep a vast portion of their funds relatively “liquid” to comply with rules allowing fund members to shift assets between different providers at short notice.

They need money on hand to make payments in just three days of receiving a transfer request.

This has left the pension industry reluctant to commit to the farm sector’s long-term and “patient” funding needs.

To get more money and super fund involvement in agriculture you need to modify the legislation around portability of superannuation investments - Kim Morison, Blue Sky Water Partners

Research by accounting group BDO last year showed an average of just 0.3 per cent of superannuation was invested in agriculture and both industries were missing chances offered up by long-term growth in food and fibre demand from Asia's burgeoning middle class.

“Some funds we work with are managing up to $85 billion in investments, but 70 per cent of that capital has to be liquid enough to move in 12 months,” said farm sector investment specialist, Kim Morison.

“So they aren’t allocating it to agriculture.”

Mr Morison is managing director of Blue Sky Water Partners which has been developing and managing investment projects for the farm sector since 2007.

Blue Sky group’s $3.4b-plus portfolio now includes water entitlements, water infrastructure, agribusiness supply chain assets and private equity farmland ventures.   

“To get more money and super fund involvement in agriculture you need to modify the legislation around portability of superannuation investments – it’s as simple as that,” Mr Morrison said.

Capital liquidity challenge

“Liquidity is one of the big challenges for our super funds and the reason for a big difference in attitude between Australian funds and the American, Canadian, Danish and Dutch pension groups who are keen to put money into agriculture here.

“The investment story could be quite different if Canberra pollies, and Treasury, realised they need to fix the portability pressures our funds are under from APRA (Australian Prudential Regulation Authority) if they want more capital flowing to agriculture.”

Analysis of the Australian farm sector’s funding requirements by ANZ Banking Group suggests a capital booster of up to $160b will be needed in the next seven years alone.

Agriculture needs to find up to $160 billion by 2025 to fund market growth opportunities now opening up.

Agriculture needs to find up to $160 billion by 2025 to fund market growth opportunities now opening up.

At the same time, the pool of funds being handled by Australia’s superannuation industry will explode to more than $4t by 2025 and $12t by 2035 according to Blue Sky’s estimates.

Mr Morison told the Australian Farm Institute’s recent Roundtable conference without having much incentive to put money into 15- to 25-year agribusiness projects the local superannuation sector was left to primarily focus on real estate and infrastructure targets or the stock market.

Those markets were easier to anticipate and funds could be moved in and out relatively quickly, if necessary.

They were also relatively transparent to monitor month by month and free from the sort of weather and market volatility which made farming more prudent as a long-term play.

But even the capital value of the Australian Securities Exchange ($1.8t) was already much smaller than our compulsory superannuation stockpile and the ASX would struggle to absorb funds available from the world’s fifth largest pool of capital.

Ag’s impressive results

Interestingly, the top 20pc of Australian farmers in the past decade achieved annual rates of return on their investment above 6pc.

Blue Sky Water Partners managing director, Kim Morison.

Blue Sky Water Partners managing director, Kim Morison.

That’s about the same as the top three performing superannuation growth funds, REST Core (6.2pc), QSuper Balanced and CareSuper Balanced (6pc).

In 2016-17 the top three performing growth funds (Hostplus Balanced, Australian SuperBalanced and Sunsuper Balanced) had returns between 12.3pc and 13.2pc, while the Australian Farmland Index showed agricultural asset operators it monitored enjoyed a boom year, averaging 18.16pc annual return.

“Unfortunately not all years will be as good for agriculture as last season, but the figures show what is being achieved with the right management,” Mr Morison said.

Risk management bites

Apart from the limited liquidity associated with farming investments, he said other challenges often weighing against agriculture included the lack of a robust track record of investment activity and the many commodity choices to invest in (and anticipating which performs best).

He said superannuation funds were extremely risk averse.

Apart from seasonal impacts on financial returns, fund managers could be spooked by political debates around rural sector issues, livestock management themes, or simply the fact that other funds were not investing.

“If others aren’t investing in the sector, the attitude is often `why should I risk going alone?’”

However he said the steady flow of overseas capital into the market, the performance of some star ASX agribusiness stocks such as Costa and Bega Cheese and private investments had helped arouse strengthening interest from super funds.

More comparative data such as the Australian Farmland Index was also improving the transparency of farm sector businesses.

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