20 Apr All About Agri

SOURCE: The Advisor Magazine, March 2022. Written by Annie Kane

After years of drought and bushfires – coupled with a shortage of hands due to lockdown borders – 2021 breathed some welcome relief to Australian farmers. Annie Kane explores what’s been happening in the agri space.

 

Australian farmers are well accustomed to managing booms and busts, with the harvest cycle and seasonal changes constantly dictating how they run their businesses. But the past two years have seen these swing to even greater extremes.

After a brutal few years of drought, bushfires and pestilence, COVID-19 hit, slamming shut borders and strangling the inflow of seasonal workers to help harvest.

But rather than going bust, the agricultural sector was one of the economic success stories for the nation.

According to RaboResearch senior commodities analyst Cheryl Kalisch Gordon, 2021 was a “once in a blue moon” year for Australia’s agri sector, with very strong prices resulting from “hardship globally”, which coincided with “favourable to very favourable Australian production conditions again”.

Indeed, last year saw high to record-high agricultural commodity prices, while production volumes also reached record levels in some Australian commodities – which all aided farmers to recover from the crippling 2017-19 drought.

“There was a combination of drought and adverse weather in key cropping regions around the world, strong stockpiling demand in the face of potential food shortages along with Covid-induced labour shortages which impacted intensively-produced agri products and transport,” Dr Kalisch Gordon explained while releasing Rabobank’s Australian Agribusiness Outlook for 2022.

“This delivered clouds to agriculture sectors in many regions of the world and a silver lining for Australian agriculture.”

Lenders across the board saw huge demand for agri loans. While lenders had been very supportive of the farming industry over the past few years – providing relief and emergency funds where necessary – the trends now are a complete reversal on what they were. Instead of calls flooding in for relief, there is record demand for borrowings.

For example, non-bank lender Semper reported a record quarter of agricultural transactions between July and September 2021, with $72 million of applicants in assessment and settlement across Queensland, NSW, Victoria and South Australia.

The non-bank noted that there had been inquiry for a wide range of loan purposes, using farming properties

as security. “Businesses transitioning back to full capacity after years of dormancy [have been] particularly needy of capital,” Andrew Way, director of Semper, said late last year.

Andrew Moulds, head of asset finance at business lending platform Lend, echoed these sentiments, adding: “The agricultural sector is booming with fantastic weather conditions contributing to record harvests, record yields and higher commodity prices boosted by supply- demand imbalances, compounded by lower offshore competition.

“There’s subsequently a huge level of confidence, and with the outlook so positive, many farmers are looking at spending money now.”

The 2021 harvest period saw sky-high demand for asset finance in particular, which was needed to fund the equipment needed to not only support harvest bust also manufacture the produce. Trucks, trailers, motor vehicles, light commercial equipment and specialised agricultural equipment were selling like hot cakes.

Government incentives, including the instant asset write-off and SME recovery loan schemes also continued to drive additional investment in upgrading or replacing machinery.

According to the Commonwealth Bank of Australia (CBA), financing for agri machinery rose 25 per cent between July and October 2021 compared to the same time last year, with wine-making equipment up 152 per cent, headers up 101 per cent, ag bins up 64 per cent and all-terrain vehicles up 46 per cent.

The Northern Territory led the investment in agri machinery, up 138 per cent since this time last year, followed by Victoria up 60 per cent and Queensland up 49 per cent.

“We’re seeing agribusinesses take the opportunities that have come from the past year and examine their operations, implement new ideas and innovative solutions to support their business goals,” CBA’s executive general manager of regional and agribusiness, Paul Fowler, said.

“Although there have been challenges getting new assets into the country due to global shipping delays, businesses have remained optimistic and we expect the high confidence to continue into 2022 and beyond.”

But it’s not just farming itself that is proving lucrative for farmers; the rising value of land and attraction in regional areas from “tree-changers” is fuelling a trend for micro developments, whereby owners of large parcels of land are carving them up into small subdivisions for housing development.

Brokers are also seeing new trends arise in the agricultural space.

Speaking to The Adviser’s Elite Broker podcast, agri broker and Robinson Sewell Partners co-founder Ian Robinson highlighted that there are more and more opportunities coming online for farmers looking to expand into new areas, too.

Mr Robinson gave the example of a farmer client who has syndicated with another third party to buy land so they can explore carbon abatement opportunities. This involves securing carbon and credits to help other corporates satisfy their ESG and their carbon footprints.

“That’s going to be a part of their revenue stream and opportunity to satisfy their own social governance in agriculture, but also it’s an opportunity in new revenue strands coming through for agri (AG),” Mr Robinson said.

“That deal was for around $18 million, so quite sizeable… When you need scale and scale in AG, it requires a lot of capital.”

 

The view for 2022

The country’s agricultural sector is set for another profitable year ahead, with the gross value of agricultural production on track for a fourth

consecutive year of growth in 2021/22, according to Rabobank’s Australian Agribusiness Outlook for 2022.

Likewise, Mr Robinson said that the fact that lenders are providing “good liquidity” at the moment (and are likely to do so for another couple of years), all while interest rates remain at record-low levels, is an added bonus for farmers looking to borrow.

However, headwinds are on the horizon. Aside from managing the ongoing impacts of COVID (including managing the shortage of hands/qualified farmers to deal with the bumper crops) and escalating inflation, longer-term challenges include the impact of climate change and managing an increase in margin pressures.

“We start 2022 with the Australian food supply chain under unprecedented pressure, supply chain disruption and bottlenecks being felt across the board – from access to inputs at the farm level through to consumers accessing food on supermarket shelves,” Dr Kalisch Gordon said. The impacts on supply chains are expected to linger at least through the first quarter of the year too, she said.

“We also expect some of the heat to come out of prices for a number of commodities in 2022 as supplies are renewed globally, stock levels are increased and demand tempers,” she said. “However, we expect prices to remain at levels above the five-year average for our main agricultural commodities.”

“Australia’s second year of great pricing and mostly exceptional production conditions in 2021 means the Australian agriculture industry is well placed to take on the challenges of 2022,” the report read, suggesting that the agri sector should be starting to prepare for future times when “the sun is not shining so brightly in its favour”.

As such, there is a real market opportunity for brokers to tap into the agribusiness sector and provide holistic debt structure solutions, particularly given the dwindling presence of regional bank branches and their experienced branch managers.

Robinson Sewell broker Mr Robinson commented: “There’s a dislocat[ion] in the relationship between a borrower and a bank, so we can step in and be their constant. Then it doesn’t really matter if bank managers come or go because we can deal with the bank on the [client’s] behalf and keep educating the clientele within the banking organisation on the borrower side,” he said.

Mr Robinson added, however, that agri clients generally prefer to work with brokers as they’re time poor and may not necessarily have the financial capability to understand changing credit and submission processes.

“Or it could be just a case that they want to improve the customer experience and service that they’re getting out of a bank,” he concluded.