By Sarah Day Levesque

 

Blue Sky Alternative Investments has established the Blue Sky Agriculture Fund II and made an initial investment in a citrus redevelopment project in New South Wales, Australia. The Brisbane, Australia-based firm specializes in alternative investments and has most recently been in the news for its successful water fund and the launch of its Blue Sky Strategic Australian Agriculture Fundin early 2015.

 

The firm’s latest real asset investment is backed by both water and land entitlements for 750 acres of irrigated citrus for domestic juice markets. Consistent with Blue Sky’s overall strategy to invest across critical and scarce resources, ag infrastructure and to provide expansion capital to agribusinesses, the investment will focus on “a step change in earnings from a lower returning crop to a higher returning crop,” Michael Blakeney, Investment Director for Blue Sky Real Assets, told Global AgInvesting News.

 

Significant competition from South America and South Africa in frozen juice because of the lower costs of land and labor in those regions makes it difficult for Australia to make a significant premium on citrus destined for juicing or processing. Meanwhile, demand out of Asia for fresh, safe, healthy food continues to grow. Blue Sky identified in these trends an opportunity to improve earnings on the New South Wales asset through redevelopment and repositioning of production to fresh fruit for export to northern Asian markets.

 

Australia is particularly well positioned to capitalize on these trends as the rapidly growing Asian middle class views the Australian brand favorably. In addition, Australian citrus is counter seasonal to northern Hemisphere citrus, creating immense opportunities in these markets for fresh citrus, and Australia’s recent free trade agreements and close proximity to Asia further facilitate this. 

 

China will account for approximately 25% of the target market but Blue Sky also intends to reach markets in Hong Kong, Malaysia, Indonesia, Singapore, Thailand, and even into the Middle East. Blakeney explains, “If it was purely based on the Chinese market, we wouldn’t be as bullish but the fact that we have this deep and sustained and quite competitive market advantage makes us keen to invest in this sector.”

 

Redevelopment and expansion

 

The asset will spend three to four years in redevelopment, which will include a change in the crop produced and an expansion. The asset and irrigation infrastructure will allow for an expansion of area planted of up to 15%, while the change in citrus crop will be expedited by a process referred to as top working. This technique, which involves removing approximately a quarter of the tree and then grafting fresh citrus varieties, such as naval and mandarin, to the tops of these trees, will shorten the time frame to cash flow production, while decreasing the costs by avoiding replanting new trees.

 

The redevelopment process should take three to four years, followed by three years in operation, with an exit in year seven. Blakeney explains this is likely be to an international food company seeking to backward integrate a processing and distribution network into production or to one of the larger funds looking to aggregate out.

 

Management

 

Joining Blue Sky in this redevelopment and expansion investment is Southern Cross Farm, a Mildura based leading professional manager of horticultural assets. This strategic partner will contribute both marketing and day-to-day operations management with proven citrus redevelopment experience and the ability to consistently produce for export market specificationsand marketing. Blue Sky will be responsible for finance capital, strategic direction, knowledge of Australian water markets, and exit opportunity analysis. An advisory board, on which both parties will participate, will ensure the investment capitalizes on the strengths of each.