Agribusiness is just a term used to describe investments in agriculture such as production of wood for building, and food production.
There are currently large tax incentives offered for investment in this sector. Coupled with the recent increase in stockmarket volatility, many investors have looked to agribusiness products as an alternative investment, allowing them to diversify from stockmarket investments.
With the increase in demand for building materials and the food products, prices of agribusiness products such as wood and wheat have risen dramatically in the last few years. With demand outstripping supply, investing directly in agricultural schemes can be an excellent way of accessing returns in this sector.
Why include Agribusiness in a portfolio?
Agribusiness represents a dynamic investment opportunity and is fast becoming an established asset class. Agribusiness investments have the potential to produce an income or growth on your original amount invested and has historically had little, or no correlation to traditional investments such as the stockmarket. i.e. investment returns don’t follow the stockmarket up and down
What are the benefits of Agribusiness products?
Diversification – Negative correlation with the stockmarket is a good way of ensuring the value of your portfolio doesn’t go through the floor
Alternative asset classes – Agribusiness schemes can be a good alternative to investing in traditional assets such as direct shares or stock market based managed funds.
Tax benefits – To encourage investment into Agribusiness, the ATO have introduced a series of tax incentives. Investments in qualifying Agri schemes and ongoing expenses are tax deductible.
What are the risks?
Agribusiness are long term investments that, like most investments involve some degree of risk. Risks can include general investment risks such as a fall market price of the product produced and specific agricultural/environmental risks such as drought, fire, harvest yield and produce quality.
Points to consider in choosing an investment
Investments are less fluid than typical equity based managed funds – Unlike managed funds, investments in this sector are a lot less fluid. It is unlikely that you would be able to sell your investment tomorrow if you decided you needed to access your money. And although new rules were passed in 2007 to allow investors to trade these schemes, as of yet, there still isn’t an established market..
Have the products already been grown on a commercial basis in Australia? – There are a number of newer schemes that boast significant returns. Whilst this can provide an exciting opportunity to invest in products with a huge upside, the higher potential return naturally has a higher risk.
Compare antipated returns – All investments will publish their anticipated returns, however, this is only really relevant when your comparing apples with apples.
For example, investing in Pine Trees, a lower risk and established market in Australia versus investing in Almonds, a relatively higher risk and new investment opportunity, is like comparing investing in Australian shares versus investing in shares in China. ie the anticipated higher returns carry a higher risk of a less established market.
More land equals more yield – When considering similar schemes, a factor to consider is the land your trees / almonds / grapevines etc are being grown on since less land typically equals a lower yield. There is always going to be an optimum number of plants / trees / shrubs you can grow on a unit of land, simply planting more within the same area is not necessarily going to give you a greater crop, it can in many cases reduce your yield and has cost more to plant.
Income streams & Plant thinnings – In an effort to reduce risk and increase investor returns, some schemes have combined a variety of plant species in their offerings taking advantage of earlier thinnings (harvests) of some species to produce an income stream to investors. This has the combined effect of reducing the risk inherent with only one species and provides investors with an early income stream.