Turning crops into cash
Agribusiness investment is an emerging asset class in Australia and a well recognised and established asset class in the United States. According to the Australian Agribusiness Group, $1,024 million was raised in the agribusiness Managed Investment Scheme during 2004/05 – an increase of 54% on the previous year1.
Agribusiness is simply the business side of agriculture – growing crops for human consumption or use. The dominant areas are timber projects and horticultural projects, which include products such as mangoes, avocados and almonds. Australia has a long history as a leading producer and exporter of agricultural products. It is one of the largest sectors of the Australian economy, worth $160 billion (27% of our Industry Gross Value) and represents 46% of all retail spending each year1.
Over the past 15 years primary production has been transformed from a mostly privately-owned industry, to an industry now open to outside investors.
Why invest in agribusiness?
Attractive long term returns
Australia is recognised as having one of the most sophisticated agribusiness industries in the world with extensive trade and investment alliances. For investors in Australia, this provides opportunities to tap into global networks and generate healthy and sustainable returns. Agribusiness investments may also generate higher after-tax returns than traditional asset classes, such as cash, fixed interest, property and shares.
It is important to understand that agribusiness projects are mainly long-term investments. For example, forestry projects may offer a one-off lump sum in approximately 10 years; horticultural projects can take three to four years to produce an income, and may continue to pay income for up to 20 years.
Tax effective
Agribusiness investments can be very tax effective. Investors can receive up-front tax deductions for some, or all, of the initial and ongoing cost of the investment. The Australian Tax Office introduced the Product Ruling system in 1998 to provide certainty on available tax deductions for investors. These tax benefits offer investors more flexibility in cash flow, debt management and taxation planning.
Diversification
One of the golden rules of investing is not to ‘put all your eggs in one basket’. Investing in agribusiness adds another level of diversification to your investment portfolio, as it is not affected by the share market, property market or interest rates. A well diversified portfolio can smooth out market fluctuations, increase returns and reduce risk.
What are the risks?
Agribusiness projects have the following risks:
- Agricultural risk – eg. drought, storms, floods, fire, frost, wind, disease, pests.
- Management risk – eg. mistakes in crop preparation, weed control, planting techniques, fertilizer application, processing management.
- Financial risk – the price of a particular commodity will be influenced by global economic conditions, other suppliers, the exchange rate of the Australian dollar, changes in taxation, regulatory or legal regimes.
With these risks in mind investors should limit their exposure to a small part of their portfolio. It is also recommended that you research the area thoroughly or see your financial adviser for further information.
Is it a suitable investment for me?
Agribusiness projects are suitable for investors on a high marginal tax rate, who would like to make a high quality investment while reducing their tax liability.
They are also best suited to investors with a long-term outlook, as access to funds is generally restricted until the end of the project term, which can be anywhere between 10 to 25 years, depending on the project. Investors with long-term savings objectives, such as funding a child’s education may find these types of investments ideal.
If you have a significant capital gains tax that you would like to reduce, investing in agribusiness can provide this and many other taxation benefits.
If you would like to learn more about agribusiness investments, please call Ian or Bert to make an appointment.
Article prepared by Timbercorp Securities Limited
1. Source: The Australian Agribusiness Group Fourth End of Year Round-up
Report, July 2005