Investors (retail and institutional) have had limited opportunities in recent times to invest in the agribusiness sector, as operators have struggled to raise equity, in part due to the volatility of earnings and the sector’s exposure to risks beyond the control of the operator.
In this article we look at the story of Rural Funds Management (RFM) as an example of an experienced fund and asset manager (specialising in Australian agriculture) that has adapted its business to meet the challenging environment it operates within.
RURAL FUNDS MANAGEMENT (RFM)
David Bryant founded the RFM business in 1992, while working in the financial planning industry. He conceived the idea of offering well-managed and large-scale agricultural investment opportunities to retail and institutional investors.
The focus of RFM is to identify high quality agricultural assets and engage the best managers to produce competitive returns to investors. The stable of investments offered to retail and institutional investors over the 16 years that RFM has operated includes cotton, vineyards, poultry, almonds, cattle, sheep and water allocations.
RFM has now grown into an agricultural fund manager operating ten investment trusts with assets across most Australian states.
INITIAL GROWTH STAGE
RFM commenced its investment offerings with cotton and vineyards, where funds were successfully raised from predominately retail investors in a range of registered managed investment trusts.
In late 2003, RFM had the opportunity to purchase 10 poultry growing farms in Griffith NSW from Baiada. The acquisition price for the farms was $35.2 million with $22 million of this comprising equity. To acquire the farms RFM established the RFM Chicken Income Fund and raised the necessary $22 million.
Subsequently, RFM established an additional seven farms in Lethbridge in Victoria. The RFM Chicken Income Fund now has 17 farms consisting of 154 sheds, valued at over $100 million. The growing fee received by the RFM Chicken Income Fund was a predominately fixed fee as a percentage of the purchase price of the farms rather than being referenced to throughout.
After operating the cotton growing business for a number of years with ongoing drought and sustained water supply issues, RFM identified that the cotton growing land was also suited to the cultivation of almonds which required significantly less water. RFM, with the assistance of further investment by retail investors, progressively converted the cotton farms to almond orchards.
THE CONSOLIDATION STAGE
RFM set about developing ways to reduce the operating risk of the funds. The vineyards were all leased (long term – ending 30 June 2022) to Treasury Wine Estates Limited (ASX: TWE). The 1,814 hectares of almond orchards divided between two properties located at Yilgah 20 km north of Hillston and Mooral located 25 km south west of Hillston were leased to Select Harvests Limited (ASX: SHV) under a 20-year lease arrangement expiring in May 2030.
RFM also established a new fund called RFM StockBank to raise capital to purchase livestock (both cattle and sheep) for breeding, fattening and finishing on the properties of existing graziers to take advantage of the under utilised land and infrastructure and escalating livestock prices.
RFM StockBank was structured so that the fund receives a fixed return (based as a percentage of the purchase price of the cattle or sheep) on their sale, thereby removing significant operating risk.
The advantage for the grazier is that cattle and sheep (not paid for by the grazier) use their property to graze and the grazier receives a portion of the sale price.
RFM had therefore removed the significant agricultural operating risk from the almond and wine funds.
THE WAY FORWARD
Whilst the agricultural operating risk had been removed or reduced from the almond, chicken and wine funds, the funds are unlisted, and there remains no readily available market for the sale of units in the funds.
The challenge for RFM was to reconfigure the funds, to provide investment liquidity for investors. The options considered included:
- listing each fund on ASX or a similar exchange
- selling assets to provide withdrawal offer, or
- winding up all the funds.
After extensive consultation with investors, RFM decided to merge the almonds, wine and chicken funds into one economic entity and list it on the ASX. The chicken growing operations were demerged from the RFM Chicken Income Fund (to remove the agricultural operating risk) and listed on the NSX.
After a series of investor meetings and a complicated legal process, the combined diversified group was listed on ASX on 14 February 2014 as the Rural Funds Group with a net asset value of approximately $120 million.
By structuring an investment that is more akin to a property trust, investors can receive stable income from quality agricultural operators without being directly exposed to agricultural operating risks. The agricultural operators can access the investment funds thereby reducing their capital requirements.
Ultimately it is a win-win for all parties.