CommStream – Helping Bridge the A$9B Capital Gap in Australian Agriculture
January 20, 2017
Australia’s first agricultural streaming company, CommStream Capital, is in a strong position to benefit from the increasing demand from Australian farmers actively seeking growth-orientated finance models to fund expansion, on-farm infrastructure, new technologies, and innovation.
Until recently, banks and traditional debt funding have been the only sources of financial support for Australian farmers struggling to raise capital to grow their business. CommStream COO and co-founder Simon Skerrett, posits that his company can offer an alternative, innovative source of sustainable growth capital to help farmers boost productivity to help meet increasing global food demand.
Mr. Skerrett shared his views on commodity streaming with GAI News, describing the concept as a proven, scalable, high-return business model through which upfront cash is paid to a producer of a commodity to secure a long-term supply of future commodity production.
“Australian bank, ANZ, estimates that up to A$160 billion in additional capital may be required between now and 2025 to fund the production and export growth,” Skerrett said. “To put this into perspective, total debt in Australian agriculture currently stands at about A$60 billion. ANZ suggests that traditional sources of farm finance (debt and retained earnings) will be insufficient to meet this massive capital requirement and Australian agriculture must find innovative ways of attracting growth-oriented finance.”
“Through streaming, CommStream plans to accumulate a portfolio of high-quality and diversified agricultural production streams without the need for capital-intensive infrastructure or land purchases,” noted Skerrett. “Such a portfolio will allow us to position the company as a key partner for global commodity traders and major Asian consumer enterprises looking to secure food supply.”
To help turn this vision into a reality, the company plans to capitalize on the in-depth knowledge of two of its shareholders who also happen to be leading streaming experts; CommStream Director Peter Barnes who founded Silver Wheaton, the world’s largest precious metals streaming company, and Brad Farquhar, co-founder of Canadian canola streaming company, Input Capital. Credit Suisse Australia former CEO David Trude is also a CommStream investor and chairs the company’s Board of Directors.
Complementing the shareholders’ expert streaming knowledge is CommStream Executive Director Charlie Blomfield, who has a wealth of operational farm knowhow, having operated many large primary production businesses with Agricultural Management Company (AMC). It is this grassroots understanding of agriculture that sets CommStream apart from traditional financiers, according to Skerrett.
“With Charlie and AMC as CommStream cornerstone shareholders, we have a grassroots understanding of farming and how certain investments can transform an operation in terms of efficiency and/or productivity,” he said. “This is a major advantage over more traditional financiers, who tend to focus on what is there today, not the productivity and production potential of a farm business.”
“Another point of difference is that CommStream is not seeking to replace debt completely, but rather sit alongside it. In many cases, a streaming agreement may be a more suitable form of financing for the intended productivity or profitability initiatives.”
While streaming can be applied across a range of agricultural commodities, CommStream is primarily focused on the major Australian export crops with increasing demand profiles, and plans to initially target Australian wheat, which is widely sought after, due to its quality and high protein. In the longer term, the company also will look to secure supply streams of cotton, chickpeas, canola, barley, and sorghum, as well as other opportunities such as beef.
The average term of a streaming contract is five to seven years, through which farmers would be paid an upfront cash payment as well as a low pre-determined delivery payment for a fixed tonnage of future commodity production over the term of the contract (limited to 10 to 15 percent of long-term average production), as well as a share in the farmer’s surplus production above a pre-determined level. The 10 to 15 percent limit on production ensures the company’s low exposure to an individual production system, while also ensuring the farmer is not overcommitted.
When asked what main attributes the company considers when evaluating potential streaming opportunities, Skerrett said CommStream targets farms with high quality management and operations, particularly those that require additional capital to maximize yield and/or expand their production operations.
“We target family operated farms, which the streaming model is best suited to and that dominate the Australian agriculture sector,” he said. “We take a very close look at manager performance, financial performance, default risk, and the quality of the farm’s natural resources. Following initial due diligence, we ensure that a streaming agreement positively adds to the farm business’s net financial position and cash flow, often enhancing the farm’s debt serviceability.”
“CommStream favours simplicity over complexity, allowing farmers to be farmers and investors to be investors.”
“The streaming agreement is designed to reflect the partnership and ongoing relationship CommStream is seeking to have with the farmer, ensuring we satisfy each farmer’s expectations while at the same time achieving investor returns. It’s about getting this balance right, and going by our first farmer agreement in 2016, who has already requested a second stream to assist with the purchase of more agriculture land, the repeat business clearly suggests we have the balance right and are meeting expectations.”
Why Invest in Australian Agriculture?
Describing the outlook for investment in Australian agriculture as ‘very positive’, Skerrett is confident that the sector will continue to offer an alternative investment option for growth and yield.
“2016 was an amazing year for Australian agriculture with record farmgate prices for sheep and cattle, rising wool prices, and a magnificent season yielding record grain and pulse crops, while the current cotton season is looking very promising too,” he said.
“The average age of Australian farmers has dropped in recent years as more and more young people can see the long-term opportunity agriculture presents and are therefore returning to run family farms. While in the past, agriculture has been regarded as a tough, isolated, low-tech industry that offers little financial reward, today, new technologies mean farmers are better connected than ever before and thanks to the boom in agtech investment, are at the forefront of much of the world’s latest innovation.”
Future CommStream Funding Opportunities
CommStream currently has a A$2 million funding round open to deploy capital toward streaming contracts in the existing deal pipeline, ahead of a planned A$15 million round in Q1 2017 being led by a top Australian financial services firm. There are future plans for an IPO to create liquidity for early investors and to take advantage of the access to listed capital, although the exact timing will depend on the rate of the company’s growth over the next 18 months.
While extending its services to farmers globally may be a possibility in the long-term, Skerrett said at this stage, CommStream is focused on taking advantage of the ability to deploy funds in Australia at scale. By scale, Skerrett used the example of A$300 million deployed into wheat streaming contracts representing only two percent of the total annual Australian wheat market, not including other target agricultural commodities.
– Melissa Lawrence
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