The free ride is over. From July 1 there will be no new tax windfalls for agribusiness investors.
The Howard Government's announcement in February 2007 that tax breaks on non-forestry MIS would be axed because of a reinterpretation of tax law has left producers preparing for a fundamental shift in the way they can raise money.
The ruling, still in draft form, will stop investors from using the investments as if they were running a business, registering for GST and claiming back 10 per cent of their investment as a GST credit in their business activity statement.
The sector has slowed as a result of the tax uncertainty. New investment schemes coming to market dropped to 48 in 2006/07, compared to 56 the previous financial year. Cash flows dropped by $2 million to $1.1 billion.
"It always has been tax driven and the changes to tax has clearly hurt and reduced the demand," Standard and Poor's fund ratings director Mark Hoven says.
A test case on the status of MIS product rulings is about to be heard in the Federal Court between listed horticultural giant Timbercorp and the Australian Taxation Office (ATO) to seek to understand the tax office's position.
The ATO had apparently told Timbercorp it will begin to issue MIS product rulings on by the end of the year if the agribusiness sector won its test case. The Rudd Government has not indicated its position.
Whatever happens, the peak sales time for these products is fast approaching and the race is on to get in before the door slams shut.
Agribusiness shrugs off market turmoil
Despite the problems afflicting the retail MIS sector, the doom and gloom on global equity markets during the early part of 2008 failed to dent the agribusiness sector anywhere near as badly.
According to the Commonwealth Bank of Australia's (CBA) January Agri Indicators Report, the agribusinesses sector outperformed the wider market by 13.5 per cent to deliver a 3.2 per cent return.
The All Ordinaries has dropped 8.51 per cent since January, but the Australian Agribusiness Group (AAG) Agri-Index declined around half that amount.
Food and energy demands from emerging markets in Asia were the key driver of returns. Soaring agricultural prices during 2007 contributed to a 20 per cent increase in global food prices for the year, according to World Bank data.
"Overall, the January Commonwealth Bank Agri Indicators Report shows that the outlook for listed agribusinesses is overwhelmingly positive and the stellar performance we have been seeing over recent months is set to continue throughout 2008," CBA agribusiness executive general manager Jon Sutton says.
However, Sutton says market volatility could hamper future returns.
AAG managing director Marcus Elgin says agribusiness assets are weathering volatility better.
"Investors are holding onto their agricultural stocks. The crops in the ground do not care about sub-prime exposure and market jitters," Elgin says.
Agribusiness investors spent more over the past financial year, with the average project investment of $55,000 per investor for 2006/07, compared to $44,000 for 2005/06.
Timber investments received $672 million and non-forestry gained $237 million.
Adviser Edge says in 2008 non-forestry project investment could surpass forestry investment for the first time.
Managing director Shane Kelly says managers may be gearing up for one final burst at the non-forestry market before it is closed by the ATO.
Producers branch out
Timbercorp has applied to ASIC for a dealer's licence to fast track the establishment of a funds management business in response to the MIS regulatory uncertainty.
Products could include thematic retail and wholesale investments, such as carbon, water and renewable energy - as well as agribusiness - both domestically and offshore.
"We've tended to focus on the tax-affected MIS market, which has been pure retail across a much narrower universe of agriculture," Timbercorp deputy chief executive Sol Rabinowic said in December when he announced the plan.
"But with the regulatory uncertainty and other changes, we have accelerated plans."
Meanwhile, Great Southern also announced in December that it would provide a new menu of managed funds, a first for the company in venturing outside of its agribusiness products.
Adam Smith Asset Management will manage the GSFM All Caps Australian Share Fund, while the GSFM Blended Domestic and Global Property Securities Fund will be managed by SG Hiscock and Company and Perennial Investment Partners.
It is a major shift in both business models to evolve into broad-based investment managers.
Meanwhile, other smaller agribusiness companies popular with boutique advisers are using the June 30 deadline to their advantage.
An interesting example is the Arafura Pearl Project 2008, which will close to investment on April 11. Payment is required by June 13.
For a minimum of $12,500, investors get 2000 units in the project pearl farm in the Northern Territory's remote north-west, while licensees receive up to 8 per cent of the investment application cost and up to 4 per cent for marketing costs.
Arafura commercial director Dan Hewitt and authorised representative Mike Hendriks were in Sydney this month to promote the Adviser Edge four-star-rated project.
Hewitt concedes now "could be the last opportunity" before the June 30 cut-off for MIS tax breaks, but says the loss of future retail investor funds will not have an impact on the company's earnings.
"It's just a way of financing. Traditionally, agribusiness has been used for tax planning purposes but the whole sector is now beginning to look behind that and ask 'what is the commercial outcome'? People want to see performance," he says.
Arafura is on a solid footing. Second to the rock lobster, south sea pearls are Australia's second biggest aquaculture export.
Retail prices for one pearl range from $3000 to $4000 and demand for the luxury goods is booming from emerging economies, such as China, beyond traditional markets, such as the United States and Japan.
Arafura is supply constrained with a strict quota for the number of pearls it can sell, and it shares the market with only one other competitor.
Hewitt says market turmoil is good for the agribusiness sector.
"With volatility in the market, it's gaining a lot more acceptance," he says.
Its product may also prove to be more attractive to female investors.
"I have heard the comment before that this is the first time that a bloke's wife has taken an interest in the investment," Hewitt says.
Emerging market boom
Both thematic and non-thematic managed funds have come to market over the past year to capitalise on emerging markets' insatiable desire for food and energy.
Deutsche Asset Management and Credit Suisse Asset Management are among the locally-based shops giving Australian investors access to listed global agribusiness companies in the production-to-consumption value chain.
Deutsche's DWS Global Equity Agribusiness Fund scours the globe for stocks that add alpha from rising agricultural prices from population growth.
"Most of the growth has come from advisers who realise that this is a mega trend and say 'I want to have some of it'," Deutsche investment specialist Bill Barbour says.
"It had never been looked at by investors. We started to look at it in 2005 and we just thought it was so overwhelming."
A DWS report into the structural changes reshaping global agribusiness markets found the advance in agricultural commodity and food prices could stumble as global economic growth slows and commodity producers increase supply.
"However, any obstacles to price gains are likely to be transient," it concluded.
High on the commission trail
Back on home soil, managed agricultural schemes are still a niche part of the retail investment market. Wealth accumulators and pre-retirees are more likely to seek them out and they tend to be more popular with dealer groups with a high number of accountants as licensees.
High up-front adviser commissions with no trails are also the norm. The investment is specialised, projects are long and it can be many years before harvests can be reaped.
Advisers need to be aware their clients' money is at the whim of the drought, new strains of pestilence, the vagaries of export markets and the rising Australian dollar.
It is common for tree producers to give 10 per cent commissions and wheat producers to give 4 per cent with a mix of base commissions topped up with additional marketing and volume bonuses.
While some dealers groups agree to take the commissions for the work done with the client, others cap the commissions, rebate them back to the client or to the producer and limit the number of agricultural products their authorised representatives can advise on.
Australian Unity Financial Planning is one of them.
"One of the things we get concerned about is the large up-front commissions," Australian Unity dealer head Ross Johnston says.
"We're not a big believer in it. There are dealer groups that really do flog them, but if you did away with the tax benefit, would you invest in it?"
Count Financial is another.
Count caps licensee commissions on the managed agribusiness schemes they can recommend at 4 per cent. It also puts an undisclosed limit on the amount of agribusiness their 800-plus members can write.
The dealer group rebates the rest back to the product provider because the product fee schedule prevents Count from giving the commissions to investors, Count company secretary Rachel Griffith says.
"You can't rebate the clients directly," Griffith says, adding the business currently does not have any agribusiness products on its approved list as the offerings are seasonal.
"We don't have a lot of demand for it.
"We are very conservative with what we offer. It needs to be suitable for the client. It's not a significant part of the business by any stretch."
Advisers cautious on MIS schemes
A number of advisers IFA spoke to expressed their reservations about the sector.
APT Strategies principal Paul Gerard says he is wary of schemes from small companies with large overheads, as well as those that lock investors into restrictive licence agreements, while exposing them to all the risks primary producers face.
"Anyone who gets into these things has to understand the risks primary producers take. A lot of investors don't realise how difficult it is," Gerard says.
While he says the products can add diversity to a portfolio, investors should not go into something thinking it is conservative when it is really not.
"To have exposure to agriculture isn't silly but you have to look beyond the tax incentive [and ask] is there an exit strategy? It isn't just hypothetical, it does happen," he says.
"People need to do the paperwork ... a lot of investors aren't ready for that degree of volatility. When you see people being stitched up for large sums, you've got to question would you really go into this business?"
Hood Sweeney principal Matthew Rowe says his practice's view is that "we don't believe they are a great investment for clients" because a lot of the products are purely tax driven.
"People realise they don't have their tax affairs in order and they go out and buy some blue gums," Rowe says.
"Why wouldn't you put $100,000 into your super instead?"
He says he has not heard of many people making money on the investments.
"I don't think these clients are aware of what they're getting into," he says.
As July 1 gets nearer, clients may be looking at their investments in a whole new light.
