Where will we find future ag sector funds?

But bank debt cannot, and should not, be relied upon to fund this investment by itself.

Australian farmers are resilient and innovative – by necessity.

They are part of a proud and historic industry has always been one of Australia’s major export earners, and one of its greatest employers.

But for all of agriculture’s past achievements, its future in Australia appears even stronger.

Exponential global population growth means rapidly increasing demand for food and fibre.

Experts are forecasting unprecedented growth and demand from our Asian trading partners.

If Australian farmers are to take advantage of this opportunity, we will need to invest heavily in infrastructure, people and systems to help farmers respond to the growing need. 

So where should the investment come from? 

Historically, Australian banks have provided most of the capital for expansion of the agricultural sector.

Bank debt to the farming sector has risen from $10 billion to more than $60 billion during the past 25 years.

While this figure appears alarming, the recent deprecation of the Australian dollar, better commodity prices and seasonal conditions means that the debt servicing ratio (i.e. the proportion of farm income required to pay debt) has remained relatively constant at less than 10-cents in the dollar of income over this period.

However, an Australian Farm Institute’s (AFI) research report A Review of Farm Funding Models and Business Structures in Australia outlined last week, the sector will need a broader source of capital pools to supplement this growth in bank debt. 

Some estimates show that agriculture will require an additional $600 billion in investment between now and 2050 to take advantage of our opportunities in the sector.

Even if you believe this figure is optimistic, it is clear that bank debt cannot, and should not, fill this void exclusively.

By definition, bank debt is ill-equipped to exclusively meet the needs of a sector that deals with extreme volatility and limited cash-flows.

The requirement for regular interest and principle repayments (for instance) does not necessarily meet the needs of a farmer who is re-stocking after drought, investing in a long-term infrastructure project, investing in a new export opportunity or contemplating lengthy, complex succession planning.

But, there are sources of capital that do value the long-term fundamentals of the agriculture sector and have an investment horizon that can deal with short term volatility.

These pools of capital understand the value created by family-owned farming businesses, and the value of agricultural land.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) earlier this year said that large family farms generated higher returns than corporate counterparts, at an average of five per cent a year.

Rural Bank’s own Australian Farmland Values report shows the annual increase in value for Australian farmland is 4.6pc over a 20-year period, which exceeds many popular asset classes.

Despite this, a report from accounting firm BDO in 2015 showed only 0.3pc of superannuation funds were invested in agriculture.

The challenge and opportunity for us all – including for organisations such as Rural Bank – is to facilitate a broad, deep and varied pool of funds to invest in Australian agriculture.

This will allow us to lower our overall cost of capital, ensure efficient transfer of wealth and value, and to manage the complexities and volatility inherent in one of our most important industry sectors.