Presentation to Victorian Farmers Federation Conference
Inflection Point Capital Management
Delivered 12 June 2014
Today I will focus on the role that Australian superannuation funds can play investing in agriculture. But before I do that I will briefly talk about why I am here today and the perspective that I bring.
Inflection Point Capital Management is a new boutique investment firm that has its operations in London and Paris. We have established a joint venture with a French fund management group La Francais which is in turn owned by a French cooperative bank.
Our focus is the impact that environmental, social and governance issues can have on investment returns. We have established our own five factor model which analyses the innovation and agility of companies that we invest in based on our strategically aware investment methodology.
Basically what we believe is that the companies to invest in are those that understand the world we live in and actively seek to respond to change.
One of the things that we pay very close attention to is mega trends.
In terms of the farm sector the megatrends that are of particular focus are:
• Food security
• Rise of developing world
• Obesity in developed world
• Climate change
Each of these megatrends will shape agriculture investment in the coming decades and are already influencing investments of major pension funds globally.
Food Security: the global food security crisis in 2007-2008 has left the developing world focused on food security. As global population increases from 7 billion where it is today to 9 billion by 2050 there will simply be more people to feed. The demand for food commodities will encourage investment but we are also likely to see more regulation of trading to prevent speculation.
Urbanisation: Over the next 15 years alone an additional 1.4 billion people will move to urban centres. One of the positives of urbanisation is that it supports development of super markets and more sophisticated transport logistics for food.
Rise of the Developing World: The rise of China, Africa and Latin America will create a new middle class that will consume more protein. Much protein production will be domestically focused but will require massive amounts of feed that provide growing market opportunities.
Obesity in the developed world: Whilst the developing world is focused on feeding itself and protein we will see much more focus on health in the developed world. It is estimated that there are 400 million obese people in the world. The health cost of obesity will lead to changes in the way we all eat which will in turn support new markets.
Climate change: From an investment perspective climate change will lead to a focus on diversity of investment from a geographical and crop perspective. It will also encourage greater investment in infrastructure such as irrigation and dams. Investors when assessing farmland investments will look for established infrastructure that will reduce volatility of returns.
In terms of investment in farmland there is no shortage of capital that is looking to invest.
The global understanding of the megatrends I have described has led pension funds to allocate investment to farmland. Funds that are investing include US TIAA-CREF, Swedish AP2 and AP3, Netherlands APG, Canada Pension Plan Investment Board and NZ Super.
We are already seeing some of the largest pension funds in the world look to Australia for investment in farmland attracted by our diversified climate, strong infrastructure and rule of law.
There are a small number of Australian superannuation funds that have invested in farmland but they have generally found it a difficult investment.
I would like to talk about why it is that Australian super funds find it difficult to invest in farmland, whilst pension funds around the world are increasingly interested in investing.
The answer relates to the superannuation system that we have created. Whilst you can’t get access to your superannuation until you retire, which may be 20 or 30 years away, we have established a system where we must manage investments on a short term basis.
The reason for this is choice of fund. We have the right to move our super from fund to fund, and to different investment choices within days. This has meant that the industry’s regulators have had to regulate the liquidity of superannuation fund investments.
Whilst superannuation funds are able to invest in illiquid assets they can only invest a small proportion of their total assets.
The challenge for farmland is that from the perspective of the way superannuation funds are regulated farmland is an illiquid asset.
Over the next couple of decades we will see superannuation system increase from $1.7 trillion to around $6 trillion. Over this time we will see the emergence of very large funds that will have capacity to invest in illiquid assets. The megatrends – which won’t go away – will provide strong incentives to invest in agribusiness. So the future conditions should favour farmland investment by superannuation funds. However we cannot take this for granted.
To encourage superannuation investment in farmland then there needs to be a focus on removing the impediments to investment – the chief of which is liquidity. The Prime Minister’s White Paper on Agriculture and the Financial System Inquiry may offer some options that can form a basis for future reform.
To conclude long term investors such as pension funds and superannuation funds are potentially great partners to invest in farmland. Long term investors are not looking to flip out of an investment to make a short term return. They are here for the long run and therefore have an interest in ensuring that farming is sustainable for generations to come.