Agribusiness Bulletin – Deloitte Touche Tohmatsu – 27 August 2012

Agribusiness Bulletin

27 August 2012

Good morning everyone

Following on from our previous discussion around productivity improvements in agribusiness, our interest was piqued by a speech from Dr Ken Henry at the Australian Chambers Business Congress entitled ‘Australia in the Asian Century’ (Dr Ken Henry – Australia in the Asian Century – 17 August 2012). Dr Henry, as Special Advisor to the Prime Minister and responsible for leading the development of the White Paper on Australia’s role in the new normal, where population growth and purchasing power shifts the balance of power to the Asian region, provides a unique insight into the economic and social settings needed to make the most of the opportunity at our doorstep. And while most of Dr Henry’s comments focus on the current mining and energy boom, we can also apply his comments to agribusiness given their commonality as trade-exposed industries. Here are some of the comments we found worth discussing:

“High export prices, and a surge in mining investment, have put pressure on labour and material costs. Coupled with a high exchange rate, this has created what is often referred to as a loss of international competitiveness.”

• The high exchange rate has also impacted the prices received for soft commodities, reducing the competitiveness
  of Australian produce relative to our international competitors, many of whom “benefit” from weaker currencies – beef from Argentina, sugar from Brazil, wheat from Russia, cotton from India
• Competition from the mining and energy sector has driven up labour costs in regional areas and consequently the cost
  of attracting and retaining employees in agribusiness
• Global supply and demand factors drive prices for Australian export produce so that we are price takers, rather than
  price setters, in the export market

“Looking at the size of the economic shock facing Australia, there is simply no feasible increase in multifactor productivity growth that would reverse all, or even a large proportion, of the loss of international competitiveness that is currently being experienced by Australia’s trade exposed non-resource industries.”

• Productivity growth – yield improvements and more efficient use of inputs (capital, water, land, chemical, labour etc) –   has been a key success of many agribusiness sectors in recent decades, as discussed in our most recent Agribusiness Bulletin
• But where are the next major leaps forward in agribusiness productivity going to come from, and are they as large
  as those of the last 50 years?
• Perhaps the answer lies in the projected imbalance between supply and demand for food over the coming decades, with
  simple economics indicating that prices for soft commodities will increase. But this is potentially years away, so in the meantime the productivity and cost-control challenges are likely to remain first and foremost for Australian
  agribusinesses

“The $A price of what you sell is two-thirds of what it would be with the exchange rate at its post-float average. To compensate, you would need a 50 per cent increase in productivity. That’s about 25 years’ worth of average productivity growth, packed into just a few years.”

• We must look beyond pure productivity growth going forward, indeed our whole approach to market. We must take an
  industry-wide view of what Asian customers want and how we can best fill that demand

“It would be prudent to assume that an elevated exchange rate could be with us for quite some time, and it would be sensible to start thinking about how all of us might adjust to that possibility.”

• What would a persistently high AUD mean for agribusiness? Strategies to mitigate the impact, and yet retain enough
  flexibility to benefit should the currency move favourably, need to be developed as part of year in, year out activities, not just an “anomaly” event that dissipates in the short-term. These strategies may include financial hedges, international diversification of operations, markets and currencies, improved forward price risk management tools and innovative integration into global supply chains
• Success at managing the high currency will be measured by annual reports that no longer point to the high AUD as a
  key driver of reduced short-term profitability
• Direct foreign interest in Australian assets may be dampened, or we may see increased focus and importance on global
  agribusiness investment strategies
• If foreign capital is less inclined to flow to Australia, competition for capital by a range of projects (not just in
  agribusiness or mining) will intensify, and some projects will be delayed, modified or cancelled; agribusiness investment returns will be measured relative to other asset classes in order to secure the capital it needs to survive and thrive
• Deloitte Access Economics has a slightly different view on the foreign exchange horizon, as outlined in the
  July 2012 Business Outlook (www.deloitte.com/au/weeklyeconomicbriefing), which is that the Aussie dollar could be expected to stay reasonably strong over the next couple of years but gradually declining over time.
  Certainly, retaining flexibility and agility in relation to currency movements could be an important differentiating factor for more successful Australian agribusinesses

“There is a strong, and growing, need for Australians to possess what we have decided to label ‘Asia-relevant capabilities’. These are the skills and abilities that will enable the Australian economy to flourish as a consequence of doing business with, and in, Asia…We can’t think of ourselves standing apart from Asia, selling product into it…we don’t need to compete in the way
some people think – through lower wages, inferior working conditions, or lower quality products.”

• Developing relationships with consumers in Asia and Asian food businesses with a view to maximising market access and
  developing supply chains that are responsive and allow for fast, efficient consumer feedback
• Our agribusiness products needs to be attractive to Asian consumers, and changing consumer preferences – increasing
  focus on quality attributes, food safety, geographical proximity for improved freshness
• Improved access to Asian markets be it through bilateral trade agreements, joint investment and joint ventures or
  establishment of regional offices, could strengthen the relationship ahead of other nations seeking to access Asian markets

Dr Henry’s speech pointed very much to the opportunity for Australia and has a clearly optimistic view of our future relationship, summed up in his closing remarks – “…this is a time for optimism. A time for Australia to embrace its geography; to jettison the dismal thinking of the past about the tyranny of distance. The prospects for success are strong.”  Well said, and we look forward to the release of the White Paper.

Corporate activity

Elders

• Further simplification of the business has been flagged, with the proposed sale of the automotive parts business, to
  create a “pure play” in agribusiness.

Ruralco

• Ruralco has accumulated more than 12% of shares in Elders (see above) as part of its stated strategy to “strengthen
  its participation in the agribusiness sector”.

Cubbie

• Chinese interests are interested in the Cubbie cotton assets and have reportedly submitted an application to FIRB. The
  investors have stated their desire to take a value-chain approach to commodities, with Australian cotton having particular interest for Chinese mills in terms of quality, scale of farming operations and cost to produce (due to a high degree of expertise and technology)
• The Chairman of the Cubbie Group is on the record as being supportive of Chinese ownership of the cotton asset
  providing local management and employees are retained.
• Wayne Swan approved this transaction with some conditions on Friday afternoon

PrimeAg

• At a recent industry function Peter Corish (CEO of PrimeAg) outlined the key areas in which Australian agriculture
  needs to do more in order to attract and inspire the next generation of farmers and the broader community:
• Improving productivity – both the cost base and yield improvements
• Investing in human resources – graduate skills in particular, but also the range of industry skills needed in regional
  areas
• Promoting the role of farmers in managing natural resources – using technology to reduce the impact of farm
  operations on the natural environment
• Making the most of marketing and supply chain opportunities – especially our geographical proximity to Asian markets
• Further, Peter challenged industry participants increase productivity by 4% per annum, and then look for further
  gains.

Murray Goulburn

• The agenda for change has been articulated by the Managing Director; Murray Goulburn are seeking to become
  simpler and leaner in its core business which will require a cleaner organisation structure, lower cost base, divestment of under-performing and non-core assets. Upgraded skills in the core business would then be used to expand and extend market footprint in growing markets, particularly export markets, and more specifically Asia.

Teys

• With two meat processing facilities above the carbon dioxide equivalents emissions threshold Teys have announced
  plans to limit emissions and save $1.5million per annum in direct carbon tax liabilities. Initiatives will focus on waste water management by capturing methane and either flaring it or using it as a power source for the processing facility at which it was produced
• Indirect costs of the carbon tax in the first year for Teys are reportedly expected to be $3.5 million.

Other news

More than two thirds of the US mid-west is officially in “moderate” or “exceptional” drought and corn prices have increased proportionally in the last couple of months – US drought

The US government will purchase up to USD$170 million worth of meat with two goals in mind – supporting the US domestic beef price as ranchers continue to sell down herds, and boosting food supplies for welfare and assistance programs – US drought

The latest round of government job cuts will see more than 200 non-frontline roles in the newly formed Queensland Department of Agriculture Fishing and Forestry go – cutting overheads, not services

Live cattle exported to Indonesia will now be subject to “certificates of pedigree” in order to distinguish between breeder cattle and slaughter cattle, the latter now subject to the newly introduced 5% tariff. The dispute has already affected 4,000 cattle – closing the tariff loop-hole

A former Queensland Labour treasurer has come out publically in favour of Chinese investment in agribusiness assets where local management is retained, citing cultural differences, technical expertise and tyranny of distance as the key benefits of local expertise for distant owners – foreign investment

A diet including whole cottonseed has been shown, according to a recent university study, to increase milk production by 16%, milk fat by 19% and protein by 12%. And methane emissions were significantly reduced – carbon-friendly milk

A roundtable, hosted by the Federal Treasurer, will focus on the level and availability of rural debt – rural debt

Cotton Australia has welcomed Barb Grey – former director of Cotton Catchments Co-operative Research Centre and runner up in last year’s Rural Woman of the Year – to its board – women in ag

This season’s northern cane crush has hit the quarter-way mark after a wet start with expectations that the final volume will be more than 31 million tonnes, and with good CCS levels – quality cane

Two new rural investment trusts, with assets reportedly totalling $100 million, intend to operate under 10-year lease arrangements – ag funds

Despite the significant inflows into the Murray Darling Basin over the last two (wet) years, salinity levels in the lower Murray continue to remain too high for stock and irrigation use, forcing farmers to truck in fresh water – flushing the Murray Darling

Unlike UK retailer Tesco, Coles has confirmed that they do not intend to place closed circuit televisions on farms in order to demonstrate farming practices to its customers – customer assurance strategies

Animal welfare standards are likely to become enshrined in New Zealand law, with possible changes including a 500% increase in fines for animal mistreatment and banning of all live exports – animal welfare

Live export of cattle and sheep to Saudi Arabia will halt from next week until the new Export Supply Chain Assurance System requirements are met. Japanese importers have also indicated they may not be ready in time and are weighing up the cost of compliance with alternate sources of cattle – compliance with export requirements

A New South Wales abattoir has reported a $70,000 increase in the annual water bill – rising costs

Rural debt levels in New Zealand have increased by over 12% since 2008. At the same time land values have fallen by a quarter – rural debt

A prominent international retailer has teamed up with a global animal welfare group to petition against the live export trade, with 69% of respondents to a recent survey by the welfare group indicating they were opposed to the industry – animal welfare

Despite being out of operation for three decades, the Tennant Creek abattoir has been put to market – northern meat processing

The ever-present danger of “rogue operators” (those operating outside best practice and accepted community expectations) is a key industry risk facing the cattle industry, according to the Northern Territory Cattleman’s Association – beef production practices

Southern New South Wales cotton gins are struggling to process the record cotton crop, delaying income for growers and stretching working capital reserves as the summer crop planting window approaches – managing working capital

30,000 cattle have now been held up in Egypt over concerns around the hormone status of the shipments – hormone use in cattle

Reports are emerging that irrigation allocations in Central Queensland are being purchased by mining interests, either as an investment or for use in future mining operations – interest in water assets

Mapping the cotton genome could lead to the development of waterproof cotton, according to CSIRO scientists – cotton innovation

What does the diet of a dairy cow have to do with kids snack food? According to a New Zealand dairy expert the quality of a cow’s diet can be measured by the consistency of the cow pat, which should resemble Yogo – dessert anyone?

Cheers

Richard, Rob, Tim and Jackie