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Advancing the Securitisation of Australian Agriculture: Hybrid Equity by Dr T M Dwyer, R K H Lim, Thomas Murphy
April 2004
RIRDC Publication No 04/055 RIRDC Project No BLC-4A
Unlike other faster growing sectors of the Australian economy agriculture has not enjoyed the benefits of sophisticated financial techniques, most particularly securitisation, which now characterise the financial sector in Australia and developed capital markets abroad.
Agriculture needs to “catch up” with other sectors of the Australian economy and become more fully integrated with Australia’s sophisticated financial sector and world capital markets.
Securitisation is the key to lifting Australian agriculture’s profile in the financial sector.
Securitisation could reduce the cost of finance, increase farmers’ wealth, facilitate intergenerational transfers, and raise international competitiveness.
Agriculture, and agribusiness value chains more broadly, would with securitisation assume the status of an identifiable new investment class for fund managers and institutional investors comparable with other major asset classes presently being traded in financial markets.
Securitisation of agriculture would open up a new domestic investment channel for the expanding superannuation and managed funds sector.
Securitisation
Securitisation is a rapidly expanding state-of-the-art
financing technique in Australia and in world capital markets. It has,
for example, revolutionised housing finance in Australia leading to lower
interest rates and significant wealth creation for investors in Australia’s
housing and property sector.
Securitisation is a financing technique where individual streams of cash flow are bundled and onsold in capital markets to investors – chiefly superannuation and managed funds, financial intermediaries and the public.
The benefit to major institutional investors, like superannuation funds, is that higher returns can be achieved by access to a new class of public securities in agriculture, which presently is an unlisted and diffused asset class. The benefit to borrowers – like farmers – is increased availability of capital, greater professional investor interest in agriculture, diversity of choice in financial instruments and lower borrowing costs.
Solving the farmer “equity gap” – which limits the ability of farms to expand – and overcoming the intergeneration family farm transfer problem are some of the additional benefits which securitisation can bring to Australian agriculture.
Financial Engineering Challenges
Securitisation typically requires considerable developmental
effort by financial institutions.
Financial, legal, accounting, regulatory and other design issues need to be considered and resolved before going to market. The financial sector also needs better information and confidence about the farm sector to progress securitisation in agriculture.
These issues were first explored in an earlier RIRDC Research Report Efficient Equity and Credit Financing for the Rural Sector: New directions in rural and agribusiness finance and discussed at a CEDA sponsored Conference in Sydney in June 2001.
This research Report takes forward that earlier RIRDC research on securitisation of Australian agriculture with more in-depth analysis of technical issues, discussions and testing. The Report refines and details a securitisation model for commercialisation.
The Hybrid Equity Contract model detailed in this Report is tailored to the special needs and characteristics of the farm sector while balancing the needs and prudential requirements of the financial sector.
Next Steps
This Report concludes the ground-breaking stage. The
next step to making securitisation a reality for Australian agriculture
is to take it to market. That, of course, is a task for interested financial
institutions to consider and to take the lead in collaboration with farm
organisations and farmers.
Given the positive benefits for economic efficiency, wealth creation and international competitiveness of Australia’s rural sector, governments both Commonwealth and State might be expected to play a supportive role in the commercialisation phase.
Wider dissemination of the benefits of securitisation to the farm sector – and facilitation of effective discussion and technical problem solving – are areas where additional funding, through RIRDC, or other rural programs, could assist in successful up-take.
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