The Australian M&A Outlook: Agriculture Industry Insights

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Despite weather fluctuations, geo-political tension and economic crosswinds, more capital will be ploughed into Australia’s agribusinesses in 2023. Investors are looking for businesses that can pass on costs, protect margins, demonstrate ESG credentials, and harness tech to achieve efficiencies.

Overview: A seller’s market for those who can pass on costs and protect margins

Australia’s agribusiness sector continued to have a field day in 2H2022, with strong valuations and sustained activity across most commodities. True, prices have eased slightly, and input costs are up (especially across the four ‘f’s’: fuel, fertiliser, funding and feed). But in 2023, gross value of production is set to remain at near-record levels ($81.8 billion in 2022-23, down just 4% from the record), and farming exports are forecast to reach an all-time high of $70.3 billion.

So this year, agribusiness continues to be a seller’s market.

Whether you’re looking to attract capital in the form of a sale, or you’re funding for growth or planning for succession, the biggest theme we’re seeing in agribusiness right now is the appeal of businesses that can pass on costs while protecting profit margins.

In this report, we offer proven tips to bolster your ability to attract capital and ensure you’re ‘investor ready’. But first, let’s look at the sector right now, as well as what’s coming.

Current landscape: Demand holding up despite geopolitical uncertainty

Agribusiness weathered 2022 better than most industries. This year, demand is holding up thanks mostly to the usual suspects (private equity (PE), pension and agricultural funds, and trade players).

Of course, weather conditions in certain regions, and geopolitical uncertainty have hit hard. As any protein agribusiness will tell you, the war in the Ukraine delivered a major shock to global food markets and feed costs. Global supply shortages are keeping grain prices high despite Australia’s bumper crop (potentially the fourth-largest recorded). At the same time, we’re seeing more inbound interest from overseas, with Chinese trade tensions easing and other overseas players seeking food security (e.g. sovereign funds in Asia and the Middle East).

Businesses that can pass on costs to customers will make hay in the coming years.

Market outlook 2023: Making hay in sunshine (and in rain)

The World Bank has forecast high global food prices until late 2024, with further supply chain woes and higher input costs also on the cards. Meanwhile, labour constraints may ease as international visa holders return to Australian shores, and interest rates are expected to plateau in mid-2023. There’s still plenty of capital available and all signs point to the international appetite for Australian produce continuing.

So, those businesses that can pass on costs to customers will make hay in the coming years. And this will increasingly be a core focus of due diligence.

Given more than two-thirds (69%) of Australian family and private businesses – including agribusinesses – plan to sell or pass the business on to the next generation within five years, this ability to pass on costs will be crucial for many businesses in the immediate term.

Just as essential will be a commitment to environmental, social and governance (ESG) matters. ESG has rocketed up the agenda for investors, and agribusiness is no exception. From environmental management (including greenhouse gas emissions, water use, biodiversity impacts, and land use) and climate risk – to animal welfare and wage trust compliance, stakeholders want to see your business taking clear steps towards achieving ESG best practice. Organisations that embed ESG into their strategies will achieve superior valuations.

Likewise, retailers are proactively looking to differentiate themselves from an ESG perspective, with flow-on impact to primary producers who are expected to take steps to contribute to retailers’ growing ESG ambitions. (For instance, legislation to phase out battery-farmed eggs is set to take effect in Australia by 2036, however, major supermarkets have imposed their own deadline of 2025). And there’s a fresh drive for ‘own brand’ products to be net zero and to phase out single-use plastics. Legislation may not demand these changes yet, but the market increasingly does.

Linked to ESG is another potential differentiator for agribusiness vendors: technology. Australia’s AgTech has an international reputation for achieving efficiencies while at the same time minimising environmental impact (e.g. reducing chemical application to protect our waterways).

So vendors who embrace these trends and get ahead of the curve and invest, have an opportunity to differentiate themselves.

Organisations that embed ESG into their strategies will achieve superior valuations.

Next steps for dealmakers

5 steps to get ‘investor ready’

Whether you’re seeking a PE or strategic investor, or an outright sale, there’s plenty your business can do to boost its appeal. As our Once in a Lifetime report explained, buyers are showing plenty of interest in Australian agribusinesses, with robust valuations driven by strong performances, increasing land values, and the sector’s positive long-term outlook.

Experience tells us that five factors can ensure your business is ‘investor ready’:

Farm for the future. Investors and consumers increasingly reward companies that exhibit robust ESG practices. This presents opportunities for a more financially prosperous, decarbonising and climate-resilient agricultural sector. Set yourself up for success by familiarising yourself with sustainable farming practices and plan for rising expectations (and scrutiny) from potential investors and other stakeholders.
Time your run on major capex. Innovations in precision agriculture and automated downstream processing (such as robotics) are transforming Australian agriculture and vendors are realising the benefits. Such productivity measures not only safeguard, but also improve returns and valuations. Vendors should consider their exit horizon prior to committing to major automation programs to ensure no value is left on the table from an underutilised or unproven investment.
Know who your prospective buyer groups are. Australian agriculture is experiencing favourable market dynamics and strong pricing for its commodities, with continued inbound investment from a range of different investor groups (e.g. pension and superannuation funds, agri-focused investment funds, and global and domestic strategic players). Each investor group has differing investment horizons, value drivers and objectives. Tailor your approach to them, covering everything from potential synergies to timing of transaction.

Manage your customer and supplier concentration. Do not be the ‘last mover’ in a competitive global system; concentrated risk positions impact investor interest and purchase price. Investors are cautious when assessing companies with a concentrated supply chain. So, before going to market, build a more resilient and marketable business by reducing your concentration on any single counterparty.

Minimise your key person risk. Vendors considering divesting should take active steps to remove any key person risk. Beef up the strength of your business and delegate all responsibilities to an independent management team. Making yourself and other involved family members effectively redundant will support a ‘clean’ exit at completion of the transaction.