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Scheme promoters jump back in the saddle

Much maligned in recent times, tax-effective schemes in the agriculture sector appear set to make a comeback, although in a streamlined form, as Mark Beyer reports on pages 6, 7 & 8.

AFTER a horror run during 2001, promoters of tax-effective agricultural investment schemes are quietly confident that investor interest will be revived this year.

The amount invested in agricultural investment schemes, including timber plantations, olive groves and vineyards, plunged from $1.5 billion in 1999 to $550 million in 2001.

The extent to which the industry recovers from the Tax Office-driven downturn will become clear over the next three months.

Investors assessing agricultural investment schemes need to recognise that the industry has gone through major changes.

“Projects currently on offer barely resemble the projects targeted by the Tax Office crackdown last year,” managing director of Melbourne-based Agribusiness Research, Shane Kelly, said.

“Gone are round-robin financing, non-recourse loans and unregistered prospectuses. Gone too are ti trees and ostriches, two of the most spectacular failures in the industry.”

Agribusiness Research expects about 60 projects will be offered this year, down from 80 last year (see table next page).

The promoters of these projects cover a wide variety of organisations, from small managers to very substantial companies with a long track record.

These include Perth-based companies Integrated Tree Cropping and Great Southern Plantations, Melbourne-based Timbercorp and Tasmania-based Gunns Plantations.

This year, for the first time, investors are being offered opportunities to invest in a mix of commodities.

For instance, Timbercorp’s MultiChoice product allows investors to spread their money across its eucalypt, almond and olive projects.

Another variation is Yates’ Forestry Bond 2002 project, which combines teak with eucalypts in one investment.

Peter Stewart, Principal of Australian Financial Services, Kalamunda, said agricultural investment schemes should be seen as an alternative to mainstream assets such as shares, property and cash.

“They provide an excellent opportunity to diversify an investment portfolio, with potentially high returns, manageable risks and tax benefits,” he said.

The tax benefit arises because most of the initial investment (80-100 per cent in most cases) represents pre-paid expenses and can be claimed as a tax deduction.

Mr Stewart said investors needed to ensure that projects had a Tax Office product ruling, which provides certainty on the availability of tax deductions.

He said product rulings indicated nothing about the financial viability of the investment or the standing of the project manager.

“Investors need to be extremely careful with this kind of investment,” Mr Stewart said.

“There is usually a high risk involved because money is required up-front, returns are usually long term and the level of return may depend on unknown factors, such as the price of paper in 10 years.”

Inscorp Financial Services’ John Goldie said the amount that investors put into agricultural schemes depended on an assessment of their circumstances and risk tolerance.

“Typically it’s a small percentage of their portfolio that goes into these projects,” he said.

Mr Goldie said the diversification and tax benefits were key selling points for agricultural investment schemes.

“But it doesn’t matter how good the tax breaks are if the underlying investment is no good,” he said

Mr Kelly of Agribusiness Research said the industry’s positives included the wide range of projects available and “in some cases, good long term returns”.

On the downside, he points to the illiquid nature of these investment schemes, and the significant market and agricultural risks.

“In many cases returns are no greater than could be gained through investment in other asset classes with inherently lower risk and greater liquidity,” Mr Kelly said.

Agribusiness Research, along with van Eyk Capital and PIR Agribusiness, undertake in-depth analysis of agricultural investment projects.

Their analysis relates to both the underlying industries and the specific schemes, and assesses potential returns relative to the expected risk.

For instance, eucalypt projects are inherently lower risk compared with some other projects, for several reasons.

They are in a mature industry with a track record of successful production, there is an established, growing market for eucalypt woodchips, in the form of Asian paper manufacturers, and the scaling back of native forest logging reduces competing supplies.

Another consideration is whether project managers have an assured market, in the form of sales agreements. This has become a key issue for many smaller grape producers, who are struggling to negotiate firm sales contracts for their output.

The experience and financial strength of the project manager is another important consideration.

The next critical step is assessing the assumptions in each prospectus (production costs, yields, sale prices and so on) and crunching the numbers to calculate the anticipated rate of return.

Based on this analysis, the research groups produce a recommended list of ‘investment grade’ projects.

van Eyk Capital is renowned for recommending only a handful of projects each year. It recommended only three projects in 2001, and Associate Director Harry Sookias said he expected a similar number this year.

Mr Sookias said many other projects were fundamentally sound but the anticipated returns were simply not high enough to justify the risks.

As a rule of thumb, he said investors should seek returns that were between two and 3 per cent above the return from small cap stocks on the ASX.

Tim Bennett of PIR Agribusiness said that, on his criteria, about 25-30 per cent of projects were regarded as investment grade.

Of all the projects rated to date, Gunns Plantations’ Woodlot Project 2002 has the best rating. PIR Agribusiness gave it the highest possible AAA rating (for geared investors) while Agribusiness Research gave it 4.5 stars out of a possible five stars.

The key attraction of the Gunns’ project, according to PIR Agribusines, is that fees to growers are up to half of those for comparable projects.

PIR Agribusiness said the structure of the project reflected the strategic importance of developing a plantation resource to supply Gunns core processing and sales business in Tasmania.

“Gunns has taken advantage of its economies of scale and passed these on to growers in the form of lower charges,” it said. “Our ratings reflect the fact that the fees represent exceptional value based on the expected returns.”

Shane Kelly of Agribusiness Research echoed this view, saying that the Gunns group had adopted a ‘loss leader’ approach for the project.

(van Eyk Capital’s sole income is from subscribers and therefore its research is not publicly available. PIR Agribusiness and Agribusiness Research both receive income from scheme promoters and they release selected research results publicly.)

p See Investor, page 36

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