In the last few years there has a been an upsurge in ‘disruptive’ business models revolutionising the way we live. The biggest examples of this disruption has been in the taxi industry (Uber), travel accommodation (Airbnb) and project financing (crowd funding).
In this article we are going to look at three alternative financing models emerging in agriculture which may disrupt the traditional avenues for revenue raising in the coming years. It is regularly pronounced that Australia is going from the ‘mining boom’ to ‘dining boom’. However, the opportunities for small scale investors have been limited; will new models solve this?
Many will be aware of crowdfunding which to a large extent has been used for funding creative ventures and causes, which in return for funding will provide the ‘donor’ with something considered valuable. This reward provided can be varied from acknowledgement on website to discounts on future purchases.
A number of recent examples of these “cause driven” crowdfunds related to agriculture in Australia are for hay and grain donations to farmers in need.
A method of crowdfunding which is rapidly increasing in popularity as an option for new enterprises is equity crowdfunding. The difference between standard and equity crowdfunding is that instead of receiving a reward for a donation, participants receive equity (shares) in the business. This model of crowdfunding gives access to a wide range of market participants from large wholesale participants to ‘mum and dad’ investors.
The biggest examples of equity crowdfunding thus far in agriculture has unsurprisingly been in the technology sector of the industry ranging from autonomous tractors to precision ag in viticulture. In Australia the law is restrictive for equity crowdfunding. However, this is expected to change in the coming year.
In the future we can foresee opportunities for equity crowdfunds for locally designed products and farm purchase/expansion. The opportunity to set up an equity crowdfunded business or section of an existing business may open revenue raising which may not be available through traditional banking debt.
Peer-to-peer (P2P) lending
A large benefit the internet has provided is the ability to connect people together. The use of the peer-to-peer model is a prime example of connecting people for mutual benefit.
A P2P lending arrangement is where a lender and a borrower are connected directly through an online platform. Due to the online nature of the model lower overheads are achieved. This enables the lender and borrower to receive better interest rates than traditional methods.
The major focus of P2P lending has been in the residential property market. However, in Australia there is the ability to enter into a P2P agreement for livestock loans. The only company to currently offer this service is SocietyOne. In these P2P livestock loans, a local livestock agent provides the first 10% of the loan to a livestock buyer, which gives investors surety that risks are minimised. The loan is repaid back to the investor at the point of sale of the livestock.
The use of P2P is still in relatively early stages. However, the potential for this lending model has great promise especially when backed against an asset such as wool, grain or livestock. In addition, it gives investors an opportunity to gain exposure to agricultural asset classes, which for many retail investors can be difficult to achieve.
Fractional land investment
There would be very few people in Australia who would be unaware of the Kidman station, and its long history. In recent times the Kidman station has been on the market, and has yet to find an Australian buyer nor overseas interest which can reach agreement with the foreign investment review board.
In December an ambitious scheme was formulated to purchase the Kidman station, and retain Australian ownership through a combination of crowdfunding for a proposed fractional land investment. The crowdfund has been successful and the company (Domacom) have received over 4000 expressions of interest, earmarking a potential investment pot of $60m. The expressions of interest have come from one-third of small investors and the remaining two-thirds from larger investors, such as industry and corporate superfunds.
This particular fund appears to be too late into the game for the Kidman property. However, the company plans to examine the opportunity to purchase other properties through a fractional purchase model adapted from their previous experience in residential and commercial properties.
In this fractional investment model investors are able to invest in specific buildings by purchasing units which will then provide an annual rent. In the future it may be possible for existing farmers to put their farm forward to investors in order to reduce debt.
An example would be a farmer with 60% equity, finding investors to buy 40% equity and removing any debts. The farmer would then effectively lease the land from the investors at an agreed lease rate. In principle the fund would also operate with a secondary market allowing the farmer to buy back equity from investors, if/when cash flow allowed.
The ability for small investors to hold a stake in multiple properties across a diverse business type and geography is something that has previously been limited to large scale land investment firms.