SOME very significant farmland investment issues were bought to the foreground in the excellent August 12 article by John Elgin
Why PrimeAg and Futures Fund don’t fit.
There are fundamental reasons why family farms have been consistently identified by ABARES as the most efficient management structure in farming and why historically and currently large scale farming ventures, such as PrimeAg, consistently underperform.
In large scale farming ventures, the management structures are too complex and therefore expensive. There is a tendency to over-capitalise in machinery and fixtures, and there is difficulty in training and retaining the large workforce required.
With the large scale of operations there is difficulty in the timeliness of farming operations, like planting and harvesting. Lack of timeliness is a major form of capital leakage in agriculture.
Without this clearer understanding of appropriate structure in farming it can be difficult to explain why corporates, like PrimeAg, have significantly underperformed against industry best practice in a time of above average seasons and bull markets in farmland and soft commodities.
As in the past it is unlikely that large scale corporate styles of farm structure will persist as they do not provide the appropriate structure for farming in Australia.
While foreign and domestic investors may seek portfolio diversification in farmland, their capital has been proved to be insecure with corporate approaches to farming.
New more efficient farmland investment approaches are evolving that rely on strong partnership with family farming operations. This is the focus of the investment approach adopted by FIMA that provides very high capital security and low cost.
The real threat to the family farm structure in Australia is state based foreign investment. This kind of investment is not based on conventional investment incentives.
Certain property rights including the national strategic negotiating capacity and the economic multiplier effects of the produce of farmland are not priced in the farmland market.
The loss of these property rights only occurs with foreign state based capital and therefore this style of investment needs to be considered separately.
It must be recognised that a policy that allows significant state-based foreign investment is a policy that is giving away future Australian negotiating capacity at no cost to the foreign state investor. This is the current policy in Australian farmland.
This policy is additionally giving away the economic multiplier impacts - including things such as transport and handling, marketing, downstream processing, taxation and R&D levies - of farmland produce to foreign states.
These economic multipliers are estimated to be up to ten times the value of farmland produce.
This reduces the size of agriculture’s contribution to the GDP and therefore reduces the size of the national economy.
Australia needs a farmland investment strategy that can continue to encourage foreign investment but not erode Australia’s future negotiating capacity and shrink the economy.
It can be very difficult at times to distinguish state based and private foreign investment.
The financial industry has shown significant capacity to evolve structures to meet ownership requirements.
The kind of policy approach that tries to distinguish private from public foreign investment in farmland is messy and difficult to regulate.
Future policy approaches need to consider how agricultural products are traded domestically. This needs to be our focus to address issues in state based foreign investment.
The price of the farmland is not really all that relevant to foreign state investors as the value is concern for strategic access to resources.
The intention is not profit but food security, therefore the rate of return on investment is a minor consideration in the transaction.
For every acre sold this way Australia has given away its strategic negotiating capacity on an acre of land and lost the rights to the economic multiplier effects.
Prices paid by state based foreign investors have been reported in the media as being up to ten times the last farmland sale price.
The sale of farmland to foreign states represents a largely irreversible loss to Australia.
As the availability of arable land declines globally the value of strategic farmland ownership will increase dramatically.
High levels of foreign state based ownership of farmland has significant negative implications for Australia’s agricultural sector, our future regional negotiating capacity in Asia and our National economy.
Private foreign investment has a different impact primarily because the produce of farmland is traded within Australia in an effort to maximise profit. This allows the significant economic multiplier effects of primary production agriculture to take effect.
Both these economic multipliers and strategic negotiating capacity are given away in the current policy on state foreign investment in farmland.
This is the real threat to family farming and the economy in Australia. There is a need to consider what rights are being traded in the sale of farmland to foreign state investors ‘before the horse has bolted’.
* Dr Tony Meppem is a primary producer and director of Farmland Investment Management Australia FIMA.
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