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Why Australia’s rural sector is ripe for financial reform

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One of the implications of the Covid crisis is that there is likely to be much more focus on economic nationalism in the future. Many of the weaknesses of globalisation have been exposed, especially the dangers of cross-border supply chains and what it means to have part of your economy dependent on other countries. 

If Australia does draw back from globalisation — as opposed to trade, which will continue — then there should be more focus on our primary sector and how it could be better financed. Australia’s long history as a primary producer constitutes what economists call a ‘comparative advantage’: an economic area in which a country does best while giving up the least.

There are two massive problems in the way the rural sector is funded in Australia. First, farming in a country subject to severe weather fluctuations is cyclical and uncertain. Yet mostly farm funding is in the form of loans from banks on which regular interest payments have to be paid. In good times, that is fine. But if there is sustained drought or other poor weather, then income will fall and the interest burden will accumulate, sometimes eventually becoming unpayable.

What would better suit the industry is equity capital. With equity (share capital), income is paid out to shareholders in dividends. In good times, dividends will be high (dividend payout ratio agreements would need to ensure that); in bad times they will be low. It would mean that the type of finance being used would match the activity. There would be fewer farmers having to endure heartbreak as the banks foreclose on them. 

The second problem is that there are few opportunities in Australia to diversify primary industry investment, either in terms of geographical spread or product type. If investments could be located across the continent, then downturns because of weather in one area are less likely to result in overall underperformance, reducing investor risk. If there is diversification in product types then fluctuations in international prices may also be evened out: if wheat prices were down, beef prices might be up, for example. If there is one cast-iron rule in investing, it is that diversification reduces risk without harming returns significantly. There is no reason to think that Australia’s rural industry would be an exception.

Low interest rates have meant the sector is under less pressure than usual, allowing farmers to reduce debt and build up notional equity in their businesses. But there is a very large pool of local capital that could be invested in the sector to boost an industry at which Australia should be a world leader. It is in the super funds, which at the moment have accumulated about $3 trillion. That is about one and a half times the value of the Australian stock market, which is why approximately a quarter of superannuation assets are now invested off shore.


'Using more equity and less debt will produce better outcomes because it allows farmers to manage timing better; finding ways to diversify investment in the sector will reduce risks.' 


Why can’t more of that capital be invested onshore in a diversified portfolio for the rural sector in the form of equity? There is routinely a great deal of concern about foreign investment in the sector, but that is because too little has been done within Australia. 

The main reason is political. Superannuation funds were developed by the Labor Party, and rural voters tend to vote the other way. The formation of compulsory superannuation was also heavily associated with the union movement, which is why industry funds often skew their investment to favour the industry sector of the superannuants they serve. There is not a lot of unionisation in the farming sector. The National Party has also been sitting on its hands. 

The reason for looking closer at the sector is that it makes sound financial sense. Using more equity and less debt will produce better outcomes because it allows farmers to manage timing better; finding ways to diversify investment in the sector will reduce risks. 

Few would argue that Australia’s primary sector is faring well. If any doubt that, look across that Tasman at New Zealand’s Fonterra, which is one of the top two dairy players in the world. Fonterra is a co-operative, which means its initial capital was equity (it is now publicly traded, which is also equity capital). The cooperative structure also provides some diversification away from individual enterprises. Australia can only dream of being that successful, but the opportunity exists to change it.



David JamesDavid James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image:  Combine harvesting wheat field in Nyngan, NSW. (Neil W Zoglauer / Getty Images)

Topic tags: David James, rural sector, superannuation, finance, agriculture



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Existing comments

A very good article- focusing on the financial side of agribusiness. There is another way of mitigating business risk and this is by geographical diversification; the Mulgowrie Farms model is one I know. This large business has farms situated along the east coast of Australia; so that when one area is subject to drought or flood, the business continues to operate with support from the other farms.

European farmers have also expanded on a co-operative basis; with diversification, the risks are reduced.

Your example of Fonterra is well known in the dairy industry; and is one of the reasons why the Australian dairy industry has shrunk in size and its ability to compete on the world market.

However, the Australian dairy industry can blame the Federal Government for its failure to provide any support to it since 2011, when the Coles supermarket chain introduced below farm gate pricing on its purchases of milk from Australian farmers.

So there are several factors which need attention in our support of Australian agribusiness.

JOHN WILLIS | 08 December 2021  

Just make sure it doesn't go rotten.

Daniel O'CONNELL | 09 December 2021  

Lets all of us ensure that NO chinese property investors are permitted to buy into any Australian properties, We know that almost all homes sold in Australia are purchased by Chinese "property investors". What most of you don't know is that they get interest free loans from Chinese government banks and when they are successful in out-bidding young Australian couples looking for their first homes, the interest free Chinese loans are reduced by at least 15%.
Those Chinese buyers also set up companies or firms that pay no tax to the Australian Government because they ensure that their repayments are increased to make sure that there is no tax payable as they've arranged to reduce their gross income! Source: This was confirmed to me by several real estate agents and three Chinese buyers. No wonder young Australian couples can't compete and buy their first home - this is why so many young Australians are still living with their parents in the family home. This situation must be thoroughly investigated by the appropriate Federal and State authorities. Regards, John B. Wilson.

John B. Wilson | 10 December 2021  

David, your articles are always incredibly sane and insightful. I put you in the class of Satyajit Das, that's how good I think you are. Sadly, I think the Tweedle Dum(b)s and Tweedle Dumbers of politics do not read you. They should! This is a wonderful country. We hold it in trust for the coming generations. John B Wilson is on the ball. We need to be careful of overseas Chinese interests buying property here and depriving our coming generation. Perhaps the solution they use in the Channel Islands, where certain properties cannot be purchased by those who do not have the right of residence may be appropriate? We need to be careful this does not spill over into prejudice against Chinese-Australians. John B W is innocent of this, I hasten to add.

Edward Fido | 11 December 2021