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Limited Credit Funding Competition in Growing Agricultural Sector
There has been significant growth in agribusiness funding over the last decade. The number of food and agriculture funds with headquarters in Australia and New Zealand has grown from 2 in 2000 to 52 in 2019 with the ten largest having an aggregate AG AUM of $10.96 billion, (High Quest Partners-Global Aginvesting Rankings and Trend Report 2019). That report also estimated that the aggregated capital investment from the top 689 agricultural investors was USD $131 billion, with Australia and New Zealand highlighted as a geographic focus for the majority of the largest 30.
The reasons for the trend in investment growth are extensive. Beyond low correlation to broader macro-economic markets and diversification benefits agriculture brings to the investment portfolio, the current strength of the Australian and New Zealand agricultural sectors has attracted global interest. The Australia Farmland Index provides financial performance of 42 different properties of market value over $1.07 billion in farmland. In Q4 2020, the Index returned 11.69% on a 12-month rolling basis, a competitive performance compared to equity markets, listed property and commercial property.
Looking ahead, agriculture conditions should continue to attract investment. ABARES has forecast record production of $65.6 billion for the Australian Agriculture, Forestry and Fisheries (AFF) sector this financial year and production growth of 8% is expected, driven by Australia’s second largest winter crop on record of 55.2 million tonnes. While investment growth has been substantial, the source of funding for the agriculture sector has remained narrow. At 30 June 2019, the RBA estimated that 95% of the $80.2 billion of debt was provided by traditional banks. The New Zealand agricultural sector has a similar strong dependence on traditional banks to finance its total debt of NZ$62.8bn (as at February 2020).
Over the next decade, alternatives to traditional financing arrangements will be required to diversify the current AFF lending landscape and fund the necessary growth in the sector. Non-traditional funding and capital arrangements are making inroads into the sector, but competition for credit financing is limited.
The limited competitive landscape and increased focus on non-traditional capital and financing arrangements is providing a unique opportunity for Merricks Capital to provide capital to a growing and attractive sector and gain exposure to the strong long-term supply and demand fundamentals of Australian food and fibre production.
Merricks Capital is one of Australia’s largest non-bank lenders with approximately $700m invested in agricultural credit. The Partners Fund currently has ~35% invested across the agricultural supply chain and the investment fundamentals in the sector remain compelling. With continued growth in attractive investment opportunities in the sector, we will be launching the Merricks Capital Agriculture Credit Fund in May 2021.