Ahead of the Harvest: 2020 – 2022

Creating value from capital flow

A study in conjunction with Contents

Introduction and overview 3

Methodology 3

At a glance 4

Australia’s agribusiness: 5 betting on the farm

Cultivating confidence 8

Australia’s challenges 13

Leading the rebound 15

Opportunity sectors 19

M&A overview: bountiful harvest 21

Financing 24

Foreign and local interest 25

Conclusion 29

MinterEllison Ahead of the Harvest 2020 – 2022 2 Introduction and overview Methodology

MinterEllison commissioned Acuris Studios, the publishing division of Acuris Despite a perfect storm of challenges during 2020, Australia’s agribusiness sector to research agribusiness investors. continues to grow. They canvased 100 agribusiness While there are challenges, we It’s easy to see why. Australia We found that while there are investors to gauge their opinions on remain optimistic about the future. produces what the world significant growth opportunities, the investment opportunities, trends We believe agribusiness will prove increasingly wants – safe and there will also be challenges ahead. and challenges in Australia. to be one of the country’s more healthy food and farmed goods. resilient sectors. Our proximity to key growth Climate change and natural 60% were based markets in Asia Pacific means we disasters continue to put pressure outside Australia. Agricultural producers and are ideally placed to meet growing on the industry. The spread of farmers in Australia are leading demand from middle classes in coronavirus, growing protectionism 40% were domestic the way in technology adoption emerging markets. and geopolitical tensions pose Australian firms. and innovation. The longer-term unparalleled uncertainty. Several prognosis for the sector points to Equally important, Australia’s robust mega trends – including an ageing All respondents had completed at positive signs for growth. and ever-expanding infrastructure farming population and imminent least one investment in the Australian network is making it easier than tech disruption – are adding to agribusiness sector in the past 12-24 There’s no doubt global and ever for agricultural providers to these pressures. months. domestic sources of capital view get their produce from farm to the the sector favourably long-term. In family dinner table. This, matched In the long run, however, Australia’s Most of these investments were in 2019 almost AU$1.2bn of Australian with many free trade agreements, overall market advantages and agribusiness deals were made is allowing Australian agribusiness resilient agribusiness sector will help the USD$100m to USD$500m range. by Canadian pension funds. In exports to expand handsomely. it weather these storms if partnered addition, domestic and international with continued investment and Within the graphed survey results, investment firms seem optimistic In terms of opportunities, medicinal improvement in productivity. percentages may not add up to of significant growth for decades cannabis in particular is catching 100% due to rounding, or when to come. This is a key driver for investors’ attention, with many respondents were allowed to choose Australia’s economic prosperity. noting the huge potential. Stuart Johnson, more than one answer. Managing Partner, In 2020, the country’s agribusiness In this report we combine Capital Markets All quoted data is proprietary sector is valued at AU$60bn. insights from 100 investors in the Corporate Mergermarket (an Acuris company) The Australian Department agribusiness sector, coupled with of Agriculture, Water and the our own expertise, to examine the data unless otherwise stated. Environment projects that it will future investment potential of the grow to AU$100bn by 2030. agribusiness sector in Australia.

MinterEllison Ahead of the Harvest 2020 – 2022 3 Note: Present market conditions lead us to believe some figures At a glance would be different if we conducted the research again today.

65%

65% of investors intended to Australia’s Investment opportunities: Greatest impact: 52% say agribusiness increase their investment in advantages: has not seen any significant Australian agribusiness assets 74% say Viticulture 69% say Ageing technological disruption 72% say Free Trade farmer population to date. However 100% 65% say Grains, Agreements expect an increase in seeds and oils 68% say 85% of respondents disruption over the next 65% say Good infrastructure Agtech said government policy 52% say Beef and two years. would support growth 63% say Political and livestock 67% say there will legal stability 81% expect investment Most active increasing competition 166% Increase in deal 85% say medicinal cannabis from North Asia to increase. in agribusiness: for Australian agribusiness values since 2018 is the top opportunity sector. Followed by 76% for North assets in the year ahead Only 1% say it is risky. America and 63% for Europe. 89% say Domestic funds AU$2.58bn the amount 72% say Australia has 80% say green energy will invested through greater medicinal cannabis help agribusiness grow 85% say Agribusiness 22 deals since 2018 opportunities than other and develop. Only 30% corporations markets say farmers and operators 66% say 53% expected financing for have been successful at International 82% believe variable climate harnessing the potential of agribusiness deals and natural disasters will funds to increase renewables and sustainable be the top challenge facing solutions. 45% say MNCs investors

MinterEllison Ahead of the Harvest 2020 – 2022 4 Australia’s agribusiness: betting on the farm

The COVID-19 pandemic Growing potential approximately AU$60bn in 2020, despite For these reasons, among others, has reshaped industries Australian agribusiness holds huge the drought and bushfires that were most agribusiness investors in our across the world. As we look potential. The industry stands to benefit prevalent in the summer of 2019-2020. research (65%) say they intended to from developing demographic trends grow their holdings in Australia over towards economic recovery, Australian farmers have seen an increase the agribusiness sector offers across Asia Pacific. This includes rapid the next 12 months (Figure 1). A further urbanisation, a growing middle class in the value of the industry of 34% over 18% say these investments will remain important opportunities for the last two decades. The Australian economic rebound. and corresponding desire for higher unchanged from current levels. While protein and sugar intake. We also have Bureau of Agricultural and Resource this question was answered pre-global Appetite for Australian the advent of new technologies, for Economics and Sciences (ABARES) lock downs, we believe there is still agribusiness assets prior to example, AI and robotics. attributes this growth to improved a positive sentiment for Australian the coronavirus was strong productivity and the adoption of new agribusiness in the next 12 months as investors set their sights on In early 2020, the sector’s contribution technology that is transforming the and beyond. the country’s abundant food to the Australian economy remained agribusiness sector. and farming opportunities. strong with a gross value of And while the economic impact of the coronavirus is severe, the agricultural sector is well placed to rebound quickly. Figure 1*. Are you planning to Even the most stable of increase, decrease industries are facing or not change your current level disruption and uncertainty. of investment Yet agribusiness’s resilience into Australian – built up over years of agribusiness in the uncertainty around seasons next 12 months? and variable climate events *Survey results as – puts it in a strong position at December 2019 to lead Australia’s recovery.

MinterEllison Ahead of the Harvest 2020 – 2022 5 Australia’s agribusiness: betting on the farm (cont’d)

A preferred destination Another respondent praises Australia for This respondent also notes growing Explaining their desire to invest, its resilience in turbulent economic times. demand for Australian food products due 75% of respondents paint a picture of Australia “... Australia has demonstrated that they to their “... clean and hygienic methods Australian as a preferred destination for their capital. are a stable economy and can sustain for harvesting, transport and packaging” According to one respondent, “We invest tougher conditions. ... we plan to direct compared to other markets in the region. respondents in agribusiness companies that have funding to regions that can provide good potential to support growth on a global returns over the next few years.” are intent on level and Australia has targets that are A strong future increasing suitable for this purpose.” Indeed, with the entire world facing Looking at the various investor groups, significant economic fallout as a result sentiment is strongest among domestic their Another says that the “... number of of COVID-19, Australia’s stable political firms: 75% of Australian respondents are opportunities in Australia’s agribusiness environment and history of economic intent on increasing their investments. investments has increased over the past decade on resilience make this focus more the heels of improved infrastructure.” important than ever. Interest among foreign investors also shows promise. Respondents from Many respondents recognise the Asia Pacific were the most positive on Secure and stable agribusiness opportunity here, Australian agribusiness (69% noting they The response to the COVID-19 pandemic highlighting growth in the industry will increase investments), followed by and subsequent lockdowns have over the past decade. their North American and European highlighted the importance of this sector counterparts (both 55% intent on to Australia. Many more are pointing to the future, furthering investments). with one respondent saying that: “... due A focus on national food security in the to extensive R&D within the agribusiness While the onset of COVID-19 may have wake of short-term product shortages sector, Australia can look forward to slowed foreign investment, the overall as a result of ‘panic buying’ meant that faster growth in this space in the years long-term interest is likely to continue Australian agribusiness has thrived; even ahead.” due to the strength and resilience of though the balance between overseas this sector. and domestic consumption shifted.

MinterEllison Ahead of the Harvest 2020 – 2022 6 Australian agribusiness has always“ been appealing due to efficient farming practices, negligible sovereign risk and a keen focus on agtech. Now more than ever, investors will take confidence in the sector’s resilience and long-term prospects.”

Matthew Cunningham, Partner

MinterEllison Ahead of the Harvest 2020 – 2022 7 Cultivating confidence

Our research points to While further investments are needed There are other indicators that point The federal for greater efficiencies and cost to improved infrastructure: State several factors that emphasise government’s Australia’s attractiveness savings, some projects are already Governments have also committed to “ in development. The Australian fast-track infrastructure projects and announcement to agribusiness investors. Government has invested millions to Australian superannuation funds have an that it will fast-track The sector’s recent resilience establish Northern Australia infrastructure appetite for investing in infrastructure. in the face of a broader and agricultural opportunities. Growth in infrastructure support for approval for 15 major economic downturn due to agribusiness is likely to be greater and infrastructure projects An inland rail project is underway. When COVID-19 has emphasised faster than anticipated, providing investor valued at over AU$72 completed it will connect Melbourne confidence in the sector’s resilience. that appeal. and Brisbane ports with shipments billion in investment, – taking an estimated 24 hours to In particular, infrastructure investment, Several key factors are driving under a bilateral reach their final destinations. Other ranging from stable and reliable internet model between the confidence among investors initiatives like the Western Sydney Airport access to modern transportation to pursue agribusiness Agribusiness Precinct and the Wellcamp corridors, will create further Commonwealth, investments in the long-term. Airport Agricultural Precinct are being transformation by creating efficient states and territories, These include: developed to enable paddock to plate IoT-enabled smart farms through to is important news for in overseas destinations within 24 hours. quickening routes to international Together these two initiatives alone will markets. However, even before those agribusiness investors, Infrastructure transform fresh food production, supply factors came into play, the infrastructure as infrastructure is key 65% of respondents say established chain and marketing in Australia. that is currently in place was considered to the sector’s growth and improving infrastructure make more than adequate by respondents, it a key reason to invest. The opportunities in infrastructure with 65% nominating it as a reason and appeal.” have increased since this research was to invest. Australia boasts modern and established conducted. The federal government has infrastructure for the relatively efficient identified infrastructure as a key focus One respondent says that agribusiness flow of produce from farm gate to the area for economic growth, and has opportunities have increased and Kate Koidl, customer. announced a $1 billion COVID-19 Relief “positive returns can be expected from Partner and Recovery Fund to support regions, these businesses in the year ahead” communities and industry sectors that as a result. have been disproportionately affected by the Coronavirus crisis. Agriculture is one of the sectors identified. MinterEllison Ahead of the Harvest 2020 – 2022 8 Cultivating confidence (cont’d)

Water regulation “Australia is one of the most sophisticated Australia’s strong foundations, sound The Australian Australia’s water policy and infrastructure nations when it comes to managing its governance and transparency make it one government is funding frameworks are constantly water resources. Its regulatory systems of the safest places in the world to do “ adapting to help the agribusiness sector enable governments to account for business and with the politically bipartisan committed to meet the challenges of climate change varying demands on the resource, approach to infrastructure investment, developing water and extreme weather events and to and provide for competing needs to this is unlikely to change in the near term. realise efficiencies in rural water use and be prioritised according to settled, infrastructure to management. transparent parameters, even when Indeed, one respondent said, “The stable support agriculture times are tough,” says Brendan Clark, political climate is one of the main and the communities Australia has well-established rules for MinterEllison partner. reasons Australia has remained attractive managing water resources. Relatively to investors domestically and across the that support the uniform State-based laws provide globe. It generates trust in the economy sector.” for the allocation of available water Political stability and legal certainty and also the regulatory practices can be between commercially productive uses, 63% of respondents say governance, relied on.” community needs and the environment. stability and transparency make Australia The federal and state governments’ Brendan Clark, In that sense, Australia has a highly attractive for agribusiness investment. Partner advanced water regulatory framework cohesive response to COVID-19 relative to most of the developed world. through its national cabinet has further emphasised Australia’s political stability In addition, the Council of Australian during a time of crisis. Governments is committed to an ongoing program of water reform, which includes a renewed focus on the interaction between water policy and agriculture, the need for reliable rural water services and sustainable economic development in Figure 2*. What makes the regions (i.e. particularly through water Australia attractive infrastructure investment decisions). for investments into agribusiness? (Select all that apply)

*Survey results as at December 2019

MinterEllison Ahead of the Harvest 2020 – 2022 9 Cultivating confidence (cont’d)

Government support However, policy changes could be likely Australia has also signed and concluded Foreign Investment Review Board (FIRB) 85% of respondents say government as digital technologies come into play, but not yet put in force the PACER Plus – threshold to zero policy would remain favourable for with one respondent noting that “... in FTA between New Zealand and eight Temporary changes to the FIRB regime agribusiness (Figure 3). the next 12 months, though, things are Pacific Island countries (Cook Islands, were announced on 29 March 2020. likely to change as agribusiness and Kiribati, Nauru, Niue, Samoa, Solomon These were implemented by the Foreign According to one respondent, ecommerce activities come together, Islands, Tonga and Tuvalu). Acquisitions and Takeovers Amendment “Moderately supportive government requiring some fresh perspectives from (Threshold Test) Regulations 2020 (Cth). policies have created effective trading the government.” So critical are these FTAs that the relations with countries such as Japan, Australian government is pursuing a As a result, the acquisition by ‘foreign US, Singapore, Indonesia and (until further six (United Kingdom, European persons’ of interests in an Australian recently) China. Slowly, but steadily, Free Trade Agreements Union, India, the Gulf Cooperation agribusiness may require prior FIRB Australian companies are entering 72% say FTAs are Australia’s top Council, Pacific Alliance and the Regional approval, regardless of value. the global trading stage, facilitated by advantage when discussing agribusiness Comprehensive Economic Partnership) mutually-agreeable terms.” investment that will open Australian agribusiness The position for ‘foreign government to export opportunities. investors’ is unchanged. Respondents attribute this to the view Australia is a globally-integrated market, that agribusiness is a cornerstone of the ranking among the top 20 trading Short term, some of these opportunities Changes to Australia’s FIRB regime are economy and a segment where growth nations. Crucial to Australia’s international have been paused as global economies proposed to be implemented from and further investment needs to be competitiveness is its 14 free trade suffer the consequences of the COVID-19 1 January 2021. The impact of these encouraged. The federal government’s agreements (FTA) currently in force. These pandemic. proposed changes on the sector is increased focus on infrastructure and take in key markets across the Asia Pacific not yet clear, though it is expected increasing interest in food security points (including China, Japan and Korea among However, longer term, Australia’s drive that agribusiness (and agricultural land) to that. these) and the United States. to enter into negotiations to open more will remain a sensitive sector for FIRB markets in the Asia Pacific region will be purposes. good news for agribusiness investors. Respondents listed it as an area of growth and potential for the industry.

MinterEllison Ahead of the Harvest 2020 – 2022 10 Foreign investors must consider whether“ prior clearance from FIRB is required before undertaking any transaction in Australia or transactions that involve downstream Australian companies and businesses.

If prior FIRB clearance is required, we recommend investors seek to engage with FIRB as soon as possible in the transaction process to avoid unanticipated delays to the deal timeline. Agribusiness is a sensitive sector, and agricultural land is screened carefully, particularly if there is a potential change of use.”

David Moore and Mellissa Lai, Foreign Investment & Trade Centre for Excellence

MinterEllison Ahead of the Harvest 2020 – 2022 11 Cultivating confidence (cont’d)

Figure 3*. How supportive are Australian government policies The food and (specifically the FIRB regarding foreign agribusiness investment) toward the agribusiness “ sector at present? How supportive will they be in 12 months’ time? sector has

*Survey results as at December 2019 long been a priority area for

Other factors (refer Figure 2) industry is reflected in the attention it While domestically the sector is supported the Australian Other key factors influencing the growth receives from regulators, including the by strong governance, Australia faces Competition of Australian agribusiness include sound Australian Competition & Consumer an uncertain future with agricultural food and safety standards (51% of Commission (ACCC). exports to China as reflected by recent and Consumer respondents say) and Australia’s clean developments including trade restrictions. and green initiative (46% say). Significant resources are dedicated by Commission the ACCC to agribusiness to identify, Lower numbers praising Australia as a Food and safety standards have been in understand and remedy a broad range clean and green hub could be due to and strong the spotlight during COVID-19. Among of competition and consumer issues, the renewables trend only starting to scrutiny of the regional markets, Australia stands out and consult with the sector. These take off. But many recognise the huge for its safe and premium products, resources include a nominated Agriculture potential clean energy offers Australia as sector is likely which have seen a demand swell from Commissioner, an Agriculture Unit, an a standalone industry, and one that could to continue.” consumers across the Asia Pacific. Agricultural Consultative Committee and directly benefit agribusiness. a ‘hotline’ for agricultural complaints. A survey respondent says “Higher This theme is discussed further in food and safety standards have also The ACCC is also called upon by the A greener farm: Renewable energy made Australia attractive, especially to federal government to conduct deep on page 17 of this report. Miranda Noble, developed countries, where this criterion dive inquiries into concerns in agricultural Partner is given higher importance.” industries, including a newly announced inquiry into bargaining power in supply The importance of agribusiness and chains for perishable agricultural products maintenance of high standards in the in Australia.

MinterEllison Ahead of the Harvest 2020 – 2022 12 Australia’s challenges

Ageing farmer population Another respondent points out that the provision of upskilling and training Climate change and natural disasters Australian farmers are getting older. “since this business requires skilled is a solution that needs to be embraced The top challenge is variable climate personnel, it will cause local pressure” and encouraged. By the same token, and natural disasters, noted by 82% of Research from the Australian Bureau of if agribusiness talent is not replaced. helping the younger generation realise respondents (Figure 4). Statistics (ABS) finds the average age for the value in knowledge transfer from agriculture workers to be 56 years old. Australian agribusiness also faces a an experienced farmer is important for This is relatively unsurprising given recent That same research shows that this is 17 real challenge of adapting workplaces the continued growth of the industry”, events in Australia. 2019 is reported to years older than the average Australian and work practices to meet the needs says MinterEllison Partner, Kristy Edser. have been the hottest and driest year worker, at 39 years. and interests of an older demographic. on record with much of Australia According to a 2019 report released by Another skills factor which may have experiencing drought. One respondent What may be more pressing is that the The Centre of Excellence in Population short-term challenges is the sector’s says: “When considering Australian industry faces a retention problem. Ageing and Research (CEPAR), 39% of reliance on temporary workers from agribusiness investments, most risks Younger generations are reluctant to take workers aged 55-64 reported that they overseas for many manual tasks such are attached to climatic change and over the family farm or seek employment are not given training to maintain/ as horticultural picking. With COVID-19 natural disasters. Heavy damage to crops within the industry. upgrade their skills. closing borders for the immediate future, and further production, disruption to farmers, consumers and reliant adjacent infrastructure models, financial losses For these reasons, 69% of respondents “Ensuring the continued support of industries and communities will face and more can be expected due to say this issue will be the top trend facing ageing farmers with pressure around supply. environmental changes” - sentiments the industry in the years ahead. that were echoed by many others.

Figure 4*. Which of the following will be the most significant barrier/challenge to investment in Australian agribusiness in the next 12 months? (Select all that apply)

*Survey results as at December 2019

MinterEllison Ahead of the Harvest 2020 – 2022 13 Australia’s challenges (cont’d)

They also spoke about the impact of a In addition, overseas drier environment and water scarcity, adding it had the potential to put a brake “ investors are broadening on production. Globally, consumers and investors are increasingly interested in the their focus beyond carbon footprint of food production.

Respondents believe there may be a climate risk governance national push for action on climate change that will flow through with policy to those associated changes. Whether this will happen remains to be seen. with the financial risks Respondents also said they’re likely to of biodiversity loss. respond to the challenge by adopting renewable energy and incorporating it Regardless of the policy into existing operations. response, investors are Sarah Barker, MinterEllison Head of Climate Risk Governance says that starting to price these investor expectations on climate risk governance and disclosure is building risks, and the agribusiness from overseas – particularly Europe. This, combined with active commitments sector will need to from major players in the Australian market to achieve a net zero portfolio respond accordingly.” (or in the case of lenders, financed) emissions, will put pressure on Australian investors, lenders and borrowers to accelerate their integration of climate risk Sarah Barker, governance into strategy and portfolio Head of Climate Risk Governance risk management.

MinterEllison Ahead of the Harvest 2020 – 2022 14 Leading the rebound

Agricultural technology (Agtech) “Technology is key to Australian Indeed, the size of the Australian farm respondents were asked to nominate the Agtech is a worldwide opportunity but farmers’ ability to make do with scarce is growing. ABARES reports sector technologies they felt would have the one that is having a profound impact resources,” says MinterEllison Partner, performance is driven by the largest and greatest impact on Australian agribusiness on Australia. New technologies are Matthew Cunningham. “Countries like most productive farms. in the next 12 months. The top three making it easier to meet changing food the Netherlands illustrate the importance technologies chosen included: demands while also emphasising cost of innovation and agtech. Such a ABARES also reports the structure of efficiencies – particularly regarding energy geographically small country is the Australian farms reflect the market with 64% biotech consumption – so that farmers can second largest producer of fruit and farms consolidating and getting larger. big data and analytics produce more with fewer resources. vegetables in the world – all led by their 55% innovative approaches. For Australia, The changing face of farming: sustainability initiatives This could prove hugely beneficial as this model illustrates to us the incredible % an ageing, diminishing a decreasing Innovation and disruption 54 potential of agtech and thinking outside The comments of one respondent seem workforce puts pressure on the industry of the square.” Advanced sensor technology (41%) to find ways to optimise operations and to sum up the advantages of Australia’s was also tapped to play its part in the production. However, in recent times, with the existing agtech edge and the need for evolution of the agribusiness space. digitisation of society accelerating so future tech: “Innovation allows farmers 68% of respondents say agtech will be rapidly as a result of COVID-19, the power to do more with less: less land, fewer This suggests that respondents are the second-greatest opportunity shaping of technological change is magnified. employees, and less water.” looking at innovation not just to raise the industry. farming efficiency and output, but also to The Australian Trade Commission Due to its diverse climate, Australia has adapt to changes in climate. Agtech and innovation have been describes Australia’s agricultural sector as historically been quite innovative when priorities for Australian farmers for a a research leader with state and federal looking at water supply as well, and has Organisations like SparkLabs Cultiv8 long time. governments along with the private always sought ways to move and capture are at the leading edge of innovation. sector undertaking R&D. water for improved use and sustainability Sparlabs Cultiv8 provides an invaluable to account for climatic variations. role in enabling early and late stage Agtech will be crucial as farms and agtech and foodtech start-ups to agricultural producers transition from Innovation and technology was a experience world class growth globally smaller, family-run land holdings to much theme in the respondent commentary. through its accelerator programs. larger and expansive operations. It was further elaborated when these

MinterEllison Ahead of the Harvest 2020 – 2022 15 Agtech is driving the greatest“ change within the Australian agribusiness sector. Use of artificial intelligence, sensor technology and robotics are changing the entire landscape.”

Survey respondent

MinterEllison Ahead of the Harvest 2020 – 2022 16 Leading the rebound (cont’d)

Population growth in Asia Pacific Today, food security carries a premium Figure 5*. Which three innovations will have price. Food demand continues to the greatest impact on expand. Populations across Asia Pacific Australian agribusiness in – specifically growing affluent middle the next 12 months? classes keen on safer, healthier and more sustainable food options – present a profitable opportunity for Australian agribusiness.

As such, 61% of respondents see this as a trend that will drive the greatest change within the industry. Figure 6*. Which of the In the decade ahead, spending on food following mega trends and global/local pressures among Asian populations is set to double, are driving the greatest increasing to AU$12tn (US$8tn) by 2030 change within the (according to research from PwC). This Australian agribusiness sector? will happen as population growth adds an additional 250 million mouths to feed to already swelling demographics.

Adding to this, South East Asian countries largely rely on imports to meet their food Figure 7*. What kind of needs. There is also a growing shift in impact will the increasing Asian middle class diets to include more use of renewable energy have in helping the proteins like beef. Australian agribusiness grow and develop? Given its proximity to emerging Asian markets, Australia is well-positioned to rise *Survey results as to the challenge of meeting this demand at December 2019 and ensuring food security across the region.

MinterEllison Ahead of the Harvest 2020 – 2022 17 The agribusiness sector A greener farm: is“ exploring a number Renewable energy in agribusiness Key Finding: 80% of respondents say that increasing use of renewable energy of renewables will have a positive impact on the industry’s opportunities. For example, growth – of which 39% say renewable energy will have a transformative effect. farms with large amounts of Renewable energy will undoubtedly play a role in helping land are introducing onsite solar farms become more sustainable. energy options to reduce their Research in our global Renewable Energy report Australian own carbon footprint and lower renewable energy investment trends and outlook shows that Australia has a supportive renewable energy investment their electricity costs. Others environment. Government frameworks and adequate financing will help the industry move forward – progress are looking at creating biofuel that, in time, will have a direct benefit to the country’s out of agricultural waste such farming and agriculture space. as sugarcane offsets. Key to the Respondents agree that the future of agribusiness will need to have a green component. Other respondents say success of these initiatives is a renewables will play a vital role in the fight against climate regulatory environment that is change and shift to sustainability. To date, however, the application of renewables in supportive and straightforward.” agribusiness has not reached a point of widespread impact.

Simon Scott, Partner

MinterEllison Ahead of the Harvest 2020 – 2022 18 Opportunity sectors

Medicinal Medicinal cannabis: the next big thing? Only in its fourth year of legalisation, Australia has the fourth Respondents see significant upside the industry is still establishing itself. largest medicinal cannabis is high in Australia’s medicinal cannabis However, respondents are eager to opportunity with 85% saying it presents participate, with 40% saying they are “ cannabis market on the list of the greatest investment potential by actively looking to enter the Australian in the world and sub-sector (Figure 8). medicinal cannabis space within sectors where the year. there continue to be Equally important, these same significant opportunities investors are respondents see incredibly limited risks Regardless of investment intentions, as growth sweeps this emerging industry. respondents overwhelmingly agree that for further growth. most eager to Australia’s cannabis opportunity ranks invest. However, among the highest in the world. Regulatory changes more traditional are boosting Australia’s Figure 8*. Which sub-sectors of agribusiness have the most opportunities and which have the most ambitious cannabis agriculture risks in Australia? industry and Australia businesses is emerging as a leader may also hold in the APAC region, potential. emulating Canada’s position in North America.

Con Boulougouris, Partner Most risks Most opportunities / Most attractive

*Survey results as at December 2019

MinterEllison Ahead of the Harvest 2020 – 2022 19 Opportunity sectors (cont’d)

Viticulture Grain, seeds and oil Dairy and timber Finding, training and retaining a quality Viticulture is another opportunity area, The grain, seeds and oil sub-sector is an Dairy has experienced difficult times workforce is another matter, as reflected according to 74% of respondents. important contributor to the Australian recently with commodity prices falling among the list of mega trends hitting economy. below production costs, the ongoing Australian agribusiness. In 2019, Australian growers produced 1.73 drought impacting productivity and million tonnes of wine grapes, according According to ABARES, in 2017-18 cost of production, and high profile However, the dairy industry is to Australian Government authorities. production of grains, oilseeds and pulse transactions in the sector challenged. recalibrating, with smaller and nimble crops contributed AU$12.8bn to the total This could explain investors’ aversion to players picking up milk supply. This was slightly less than the average gross value of farm production (around 1.75 million tonnes produced each year. the industry, although more than half Furthermore, deals in the sector over 21%) and almost a quarter (23%) of the (52%) still say it is a sub-sector of interest. However, growers were able to take total value of farm export income. the last couple of years have been by advantage of higher prices with the crush Some respondents highlighted Chinese acquirers. However, the recent valued at AU$1.17bn – up 6% on the As such, 65% of respondents said challenges associated with investing in preliminary decision by the Australian previous year. China is by-far Australia’s there is opportunity to be found in forest, timber and dairy sub sectors. For Treasurer that the proposed acquisition most lucrative wine export market, worth this sub-sector, though the sentiment example drought and fires of summer by China Mengniu Dairy Co Limited AU$1.3bn in 2019. However, at the time will no doubt change with the recent 2020 were cited as concerns. However, (Mengniu) of Lion Dairy & Drinks Pty of writing, China’s anti-dumping and implementation of an 80% tariff on we believe the outlook for forest and Ltd would be “contrary to the national countervailing-duties investigation into Australian barley coming into China. timber is positive and demand will interest”, and the subsequent withdrawal subsidies have producers and exporters of the application by Mengniu, may continue to increase accordingly. concerned. This is primarily due to ongoing supply reflect further potential challenges Beef and livestock around sources of future investment Like the grains industry, Australia’s beef side constraints generating increased competition for plantation assets. and ascertaining value of future dairy and livestock industry has been badly investments. impacted by the prolonged drought Among dairy producers, risks are also and the recent bushfires. Perhaps for abundant. Facing critical issues regarding this reason, 27% of respondents say water (access to and efficient use of) and the sub-sector is too risky. carbon impact, climate change will also pose a challenge here.

MinterEllison Ahead of the Harvest 2020 – 2022 20 M&A overview: bountiful harvest

Australia’s strong fundamentals Aside from being a year of records, was a domestic transaction involving European buyers were also present in matched with the positive 2019 saw noticeable participation from GrainCorp Limited’s demerger of its the market in 2019, although far fewer investor sentiment have no foreign buyers. International firms were international malt business for AU$915m. in number. One of the notable deals involved in 50% of deals, up from 41% involved German-based Nordzucker doubt contributed to the in 2018. More impressive is the 82% of Among foreign buyers, Canadian AG’s AU$226m acquisition of Mackay agribusiness boom in M&A deal dollars (AU$2.12bn) in 2019 that investors have led this trend over the Sugar. in recent years. Following came from foreign-funded transactions, past 24 months, contributing heavily to several years of sustained a major increase from 48% (AU$461m) both deal volumes and values. Profile Regarding broader Australian M&A, in 2018. deals included the AU$837m acquisition deals slumped in the first quarter of deal-making, agriculture M&A of agri-firm Webster Limited by Canadian 2020, dropping to 93 deals valued at has seen a noticeable uptick Clearly 2020 and 2021 are going to be Public Sector Pension, notable for being AU$4.3bn. In 2019, Q1 deals totalled in both volumes and values very challenging years for the sector. We one of the highest deals over the past 137 deals valued at AU$18bn, while (Figure 9). believe there will be marked declines two years, completed in Q1 2020. 2018 had 153 at AU$30bn. across the board in 2021. 2019 was a bountiful year in the sector Other recent Canadian interests were Likewise, M&A globally has fallen where dealmakers completed 22 At the halfway mark of 2020, there were also involved in deals involving Australian precipitously, although M&A markets transactions valued at AU$2.58bn. five completed agribusiness deals and cotton producer Midkin Aggregation were already showing declines ahead two ongoing. It’s interesting to note that (AU$308m) and Ruralco (AU$632m), of the virus spreading. The full impact While this was the same deal volume the largest deal in Q1 2020 both completed in September 2019. on deals may not show for some time as 2018, it marked a 166% year-on-year as M&A transactions take months to increase in deal value (AU$967m in 2018). come together. Hitting the highest level seen since 2010, when AU$5.9bn in deals were recorded, Figure 9 25 22 22 $5,000.00 according to Mergermarket data. Australian agriculture 20 17 $4,000.00 M&A trends 15 14 15 12 12 $3,000.00 11 10 11 10 $2,000.00

*Survey results 5 $1,000.00 as at December 2019 0 $- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Deal volume Deal value (AU$m)

MinterEllison Ahead of the Harvest 2020 – 2022 21 Some things don’t change much“ in agriculture. For the most part it remains a scale game with, wherever feasible, vertical integration protecting your margin and improving distribution. The exchange rate has a significant impact of course. The trend for consolidation and aggregation will continue in the short to medium term across the sector.”

Tim Watkin, Partner

MinterEllison Ahead of the Harvest 2020 – 2022 22 M&A overview: bountiful harvest (cont’d)

Agribusiness and Tax Consideration should be given to In addition to the thin capitalisation The constantly evolving Australian tax the investors and their tax profile to regime, the Australian Taxation Office has regime has had a significant impact on determine the most efficient structure increased their activity on the potential M&A activity across various industries in when making investments in the application of general anti-avoidance Australia. agribusiness industry in the future. provisions to debt-push-down structures (even where the thin capitalisation regime Historically, stapled structures (i.e. It is common for investors to fund is not breached). The impact of these a structure where an asset-holding investments using a mixture of both developments on the appropriate debt/ entity holds land assets, and leases equity and debt. The thin capitalisation equity funding ratio should be monitored. the land assets to the operating entity regime limits tax deductions claimed undertaking the operations) have been on interest payments made on debt As one of the measures to combat the commonly used by foreign investors interests, where the total amount of debt economic downturn arising from the making investments in the agribusiness exceeds the safe harbour debt amount outbreak of COVID-19, the Government industry. This allows them to access the (i.e. 60% of the value of the total assets). has increased the instant asset write concessional managed investment trust off threshold from AU$30,000 to withholding tax regime. On the basis that the safe harbour debt AU$150,000 for all businesses with amount is determined by the value of the aggregated turnover of less than $500 As a result of recent reform on stapled total assets of an entity, the safe harbour million until 30 June 2020. structures (which limits the application of debt amount could be breached where the concessional managed investment asset values are decreased as a result of Accordingly, there could be an increase trust withholding tax on agribusiness economic downturn. in investments made in plant and stapled structures) it is unlikely that equipment assets that are under the stapled structures would be used by increased instant-write threshold. foreign investors going forward. Existing stapled structures would need to be restructured (noting that the concession for existing structures is available until 2026).

MinterEllison Ahead of the Harvest 2020 – 2022 23

Financing

The availability of finance has been a powerful catalyst behind the M&A drive in recent years. It will Figure 10*. Over the next be critical to future investments in agribusiness. 12 months, do you expect the availability of financing With an increased demand from consumers for for M&A/investment in local products off the back of COVID-19 comes the Australian agribusiness to change compared to the need for debt to fund the sector’s growth. Farming previous 12 months? is capex intensive. To meet new demand – for example, by planting additional crops and hiring more workers – organisations need investment. Investors and financiers will be looking long-term to see meaningful returns. Figure 11*. Where do you At the time of the survey, just over half of see the main source of respondents were expecting availability to expand: funding to agribusiness to come from in the next 12 46% are expecting a moderate increase, and 7% are months? (Rank top 5 only expecting a significant increase over the next 12 where 1 = most likely) months (Figure 10).

Overwhelmingly, respondents said foreign *Survey results as at December 2019 investment would be one of the top sources of financing in that time, a trend that has so far developed with international capital playing a significant role in the market (Figure 11). Given current conditions, expectations that foreign investors will continue onward and upward will be dampened, at least in the near term.

However, at the moment, it seems that domestic banks, funds and investors are filling in that hole.

MinterEllison Ahead of the Harvest 2020 – 2022 24 Foreign and local interest

Domestic investors are tapped While agribusiness investment is largely Going forward, most respondents Multinational corporates to lead agribusiness M&A and expected to be domestic driven, there in our research expect international are repatriating capital to investment in the short term, is significant room for foreign investors capital to play a significant role in the “ to join the pecking order – and many market post COVD-19. This will be their home jurisdiction although foreign funds and already have. driven by a search among advanced and to weather the COVID corporations will also be key emerging market investors for reputable players as competition in agricultural products and strong market storm. So we’re seeing the market heats up in the fundamentals, all of which Australia has more activity and interest coming years. to offer. from Australian-based producers.”

Andrew Corletto, Partner

MinterEllison Ahead of the Harvest 2020 – 2022 25 Foreign and local interest (cont’d)

Asia Pacific Prior to COVID-19, investors from Figure 12*. What do you Asia Pacific were actively seeking out expect will happen to the agribusiness deals in 2020. level of investment into the Australian agribusiness sector from the following Respondents say North Asia (China, international investor Japan, South Korea and Hong Kong) groups in the next 12 will be the top group of foreign buyers months? in 2020 (Figure 12). 81% say North Asian investments will increase in the year ahead (50% of which say increases will be significant). Given the current FIRB restrictions and contraction of markets, this is unlikely in the near future. Figure 13. Australian Overall, even prior to COVID-19 and agriculture inbound M&A: modified FIRB restrictions, Asian investors Bidder geography (Deal volume) had been relatively absent from the market in recent years (Figure 13).

In 2019, only two Asian sourced deals were completed worth AU$146m, eclipsed by inbound deals from North America, although ahead of European totals. While this was an improvement on Figure 14. Australian values from 2018 (when only AU$30m in agriculture inbound M&A: deals where completed) it was a far cry Bidder geography (Deal value AU$m) from the AU$271m in 2017 (Figure 14). What respondent expectations may be

saying about future investment is that it *Survey results as has nowhere to go but up. at December 2019

MinterEllison Ahead of the Harvest 2020 – 2022 26 Europe and the Middle East Corporate and financial sponsors Foreign and European investors have been active in As previously highlighted, in 2019 almost the market in recent years, although to a AU$1.2bn of Australian agribusiness local interest much lesser extent than their Asian and deals were made by Canadian pension (cont’d) North American counterparts. funds, followed by both domestic and Agribusiness assets have unique international investment firms. In 2019, inbound M&A from European qualities which are attractive buyers contributed just two deals valued It is funds and investment vehicles “to longer term investors with at AU$288m. like these that have the resources and more patient capital. Canadian North America the patience to ride out Australian When looking at the M&A actuals, pension funds have a long- Respondents were hopeful that a pickup agriculture’s peaks and troughs with a North American investors have far and standing interest and expertise in European investment will unfold in long-term view on investment returns. away led M&A trends. These investors 2020. 63% of respondents say such in agribusiness investments, completed five deals valued at AU$1.8bn investment will increase, and the bulk While the economic recovery from the realising value both from in 2019. of this will involve investors from the UK impacts of COVID-19 will be multi-paced a commodity/operating and Germany. based on jurisdiction, the historically Respondents anticipated that investors business perspective and also stronger investors – like Canadian from the United States (92%) would play from capital growth of the Dealmakers from the Middle East could pension funds – are likely to come back the greatest role. also join the investor mix in the coming first. underlying agricultural land.” years. M&A actuals, however, show that In 2020 and beyond, respondents – while there is potential for such While only 48% of respondents expect believe investment will largely be driven investment to come from US-based this investment to increase anytime by domestic investors as they look for investors – in recent years deal-making Glen Sauer, soon, already buyers from the Middle industries where they can put their among North American investors has East are making moves into Australian capital to work (Figure 15). However, they Partner been almost exclusively a Canadian agribusiness. 55% of respondents say do not believe international interest will endeavour. Saudi Arabia will be the most active drop, with 66% expecting foreign funds participant from the Middle East in Not only have Canadian investors been to also be active. pursuit of agribusiness deals. involved in the most deals of any foreign investor group, their deals rank among some of the highest valued since 2018. Figure 21. Which of the following Based on these trends, it is somewhat corporate/financial sponsor groups surprising that only 42% of respondents do you expect to be most active in the expect Canadian investors to be the lead Australian agribusiness market in the inbound group from North American year ahead? (Select all that apply) in 2020. *Survey results as at December 2019

MinterEllison Ahead of the Harvest 2020 – 2022 27 Due to extensive research “and development being conducted within the agribusiness sector, we are looking forward to faster growth patterns. There is also higher demand for Australian food products, due to their use of clean and hygienic methods for harvest, transport and packaging.”

Survey respondent

MinterEllison Ahead of the Harvest 2020 – 2022 28

Conclusion

There is no doubt that whether investors choose to participate With investors intent on ramping up COVID-19 has put a pause or not, will continue to grow. their exposure in the agribusiness space, on the world’s focus on this rising interest in the country and Australia is creating and deploying sector will see increased competition new M&A transactions. agtech solutions and innovative from a variety of domestic and While it’s clear there will be practices to help farmers and international sources of capital. significantly-reduced volumes agribusiness operators raise their of activity for the remainder efficiency, allowing them to produce Likewise, investors need to recognise more while using fewer, scarcer that there are certain risks associated of 2020, our expectation is resources. with agribusiness assets that need that there will be a modest to be evaluated with a ground-level recovery in 2021 and 2022. These advances are also enabling food perspective. producers to meet growing demand for Australia’s agribusiness sector has food that is safer, greener and healthier With this in mind, investors must ask: demonstrated it has built in resilience and a higher quality. to what extent will overwhelmingly to withstand the most egregious of positive expectations and increased crises; drought, floods, bushfires and a Equally, Australia’s agtech edge and competition change the nature of global pandemic. The sector remains the adoption of new technologies will investing in Australian agribusiness? And a significant contributor to Australia’s allow agribusinesses to get ahead of and what kind of strategy must investors – economic prosperity. COVID-19 has mitigate the impact of climate change especially those offshore – use to find highlighted the strength of the industry and extreme weather events. the best opportunities, maximise their in Australia and the global demand for It’s ideal position within growing global investments and extract the most value high quality produce, both domestically markets – and rising demand from in a post COVD-19 environment? and internationally. Governments and emerging consumer classes in Asia market participants are increasingly These are the questions that will prove – is another advantage that will drive aware that sufficiency and quality of most valuable in the future for investors, industry growth. Free trade agreements supply are just as important as efficiency and MinterEllison is committed to and its connection to established trade in supply chains. finding the answers to help its clients channels, matched with significant navigate the Australian market and find All of these factors lead us to conclude government support and funding value in the future of farming. that the agribusiness opportunity - environment, add to these market positives.

MinterEllison Ahead of the Harvest 2020 – 2022 29

Get in touch To email any of the contacts below: [email protected]

Adelaide Melbourne Sydney Andrew Corletto, Partner Sarah Barker, Head of Climate Risk Governance Con Boulougouris, Partner P +61 8 8233 5420 P +61 3 8608 2928 P +61 2 9921 4368

– Scott Chesterman, Partner Matthew Cunningham, Partner P +61 3 8608 2614 P +61 2 9921 4230 Brisbane Brendan Clark, Partner Carla Deluca, Partner Kristy Edser, Partner P +61 7 3119 6455 P +61 3 8608 2397 P +61 2 9921 4281

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– Ben Liu, Partner James Momsen, Partner P +61 3 8608 2898 P +61 2 9921 8542 Canberra Mellissa Lai, Senior Associate Miranda Noble, Partner Glen Sauer, Partner P +61 2 6225 3287 P +61 3 8608 2489 P +61 2 9921 4540

David Moore, Partner Anthony Poynton, Partner Andrew Wright, Special Counsel P +61 2 6225 3044 +61 3 8608 2014 P +61 2 9921 4558

Tim Watkin, Partner – P +61 3 8608 2192 International – Jeremy Blackshaw, Managing Partner - International P +61 3 8608 2922 Perth Natalie Casale, Special Counsel Bi Chen, Partner, China P +61 8 6189 7877 P +86 10 6535 3477

Adam Handley, Partner Nicola Marley, Partner, United Kingdom and Europe P +61 8 6189 7864 P +44 20 7429 2786

Silvana Schenone, Partner, New Zealand P +64 9 353 9986

A study in conjunction with