In this Insight, we provide updates on the meat and livestock, wine, aquaculture, and dairy sectors. We also examine the current skills shortage and the likely impact of the carbon tax on Australian agribusinesses. Our In Focus article highlights the importance of succession planning for farming enterprises.
Meat and livestock
Brazil cattle processing 50% cheaper than Australia
Insight:
PPB Advisory believes that the key to Australian cattle producers becoming more globally competitive is to link labour costs and productivity.
According to the Chief Executive of JBS Australia, Mr Mars, Australian beef processing costs are almost double that of Brazil. Given that approximately 30% of an abattoirs’ costs are operational (70% is livestock), this is a significant advantage for Brazilian exporters.
Typically, operational costs can be broken down as follows:
- 70% labour
- 15% packaging and consumables
- 10% repairs and maintenance
- 4% energy
- 1% other.
Based on the above, any proposed reduction in costs should clearly focus on labour. Rather than attempting to simply reduce labour costs (which is normally very difficult), PPB Advisory believes that any future increase in wages needs to be very closely linked to productivity gains. Comparing Brazil to Australia – a typical skilled boner in Brazil earns $760 per month, compared to $4,250 here.
Eight percent rise in beef exports for September
Despite continuing tough conditions for Australian beef exporters,due largely to the high Australian dollar, sluggish global economy and increased competition from US beef in Japan, Australian beef exports in September were up 8% on the same time last year, to 82,000 tonnes.
Total exports in the first nine months of 2011 are up 1% on 2010, at 3,570 tonnes. This increase is mainly due to exports to Korea (20% increase on last year) and Russia (30% increase on last year). The Japanese and US markets remain challenging (down 6% YTD and 9% in September, respectively).
CRF loses Coles contract
Following the acquisition of CRF by EC Agribusiness, Coles has advised CRF that it will no longer be using the facility to process its sheep and lamb. Coles accounted for approximately 90%of the CRF’s business. Coles has allocated its contract to JBS Swift, ending the 10-year relationship with CRF. The Coles contract comprises approximately one million lambs annually.
Wine
Chinese investment in wine assets ramping up
Insight:
Increased Chinese interest and investment in the Australian wine industry may help alleviate our continuing over-supply of grapes and downward pressure on prices.
Chinese investment in the wine industry is seen as a possible solution to Australia’s grape glut for some time. There are indications that activity between the two countries is increasing.
Australia is now the second largest exporter of wine to China, with a 20% market share (following France who controls 39% of the market). In the 12 months to July 2011, Australia exported $187 million worth of wine to China, an increase of $39 million over the same period in 2010. Chinese corporations which benefit from low-cost loans from large state-owned banks are taking an increasing interest in Australian vineyards and wineries. Deals in this space are driven by both a desire from Chinese investors to gain security over supply and by Australian winemakers motivated by potential long-term supply contracts and access to growing markets.
The Chinese domestic wine industry has grown dramatically over the last decade and now produces as much wine as Australia. Sub-optimal growing conditions, plus restrictions over land ownership have acted as a handbrake on their domestic industry and enhanced Chinese interest in international wine assets.
The maturing Chinese consumer market is shaping many transactions. Chinese interest in Australian wine has historically come from their wineries buying bulk wine to supplement supply. In 2006/07, purchases of this nature made up 65% of total wine exports to China. Recent trends show a shift towards a lower proportion of bulk sales and an increasing appetite for branded wine.
China’s DeRouge Fund which targets fine red wine assets, has announced its intentions to raise $AUD156 million. Preliminary intelligence suggests that this investment will be directed towards vineyards and wineries in France’s Burgundy and Bordeaux regions.
On the Australian front, Dynasty Wines in China has recently announced that it has a budget of $AUD220 million to supplement its domestic operations with international supply lines. It has expressed interest in investing in Australia and New Zealand. Chinese investors are motivated principally towards securing processing capacity, meaning that they predominantly target wineries for investment.
Challenging times continue for wine growers
Insight:
Despite potential new markets, PPB Advisory expects business advisers will be applying further pressure on managers who are still failing to redress the industry’s supply and demand imbalance.
While over 17,000ha of vines have been removed in the past three years, according to Wine Australia’s (WA’s) Chief Executive, Andrew Cheeseman, too many managers have, “…unrealistic expectations, non-commercial motives and short-term opportunism” and are resisting the need for change.
WA’s latest 12-month operational plan aims to expunge attitudes that are impeding the industry’s ability to grow sales at higher price points, eroding margins and profitability, and reducing the diversity of quality offerings.
The bottom line of a grape growers’ study in South Australia’s Clare Valley should also make business advisers sit up and take notice – “Any vineyard not linked to a product, needs immediately to assess its sustainability and viability”.
Other considerations for the industry:
- There is uncertainty about whether the federal government will restore some of the recently suspended exceptional circumstances exit grants, in response to increasing demands from growers. PPB Advisory believes that these grants could assist with the industry’s restructuring and enable growers facing financial difficulty to leave the industry and embark on more productive enterprises.
- Wine Australia is placing a lot of faith in its newly-announced education program, together with a range of consumer and trade events being held over the next 12 months. It is hoping these activities will revive interest in top quality, premium-priced local wines.
- In regions that have had good winter rains and are experiencing a mild spring, a question remains whether Metrafenone, a new fungicide registered in Australia for use on wine grapes, will be able to check the re-occurrence and spread of powdery mildew infection that devastated so many vines last season.
Dairy
Update -good news and bad news
The mild spring weather has allowed dairy farmers to assess and repair the damage caused by the winter months.
The silage season in Victoria was delayed due to the weather, but this has not expected to affect quality or quantity. This is not good news for the cereal hay growers in Queensland who generally cover any shortfall in supply.
Farmer confidence is generally pretty good in Victoria, Tasmania and South Australia with many now increasing their herd numbers which in turn isplacing pressure on cattle prices.
Dairy farmers in Queensland, northern NSW and Western Australia are bracing themselves for the expected decline in farm gate milk prices due to the unsustainable supermarket price war. A significant sales shift towards home brand milk will erode any profit margin on the milk and may result in many leaving the industry.
Aquaculture
Insight:
The Great Australian Bight sardine fishery, the nation’s largest by weight, is likely to attract investor interest following a seven-year, $2.5m scientific study that shows fishing actually increases the rate of the stock’s replacement.
Currently, the annual sardine catch in the Bight exceeds 34,000 tonnes. Allowing for the consumption rate of 47 different varieties of predator, around 60,000 tonnes of sardines could be caught each year without threatening the sustainability of the species.
Source: South Australian Research and Development Institute.
This is good news given that the Bight’s present sardine stock is estimated at 200,000, and although most of the catch is used as food for farmed tuna, human consumption is growing. In 18 years the sardine catch has gone from nothing to eclipse that of all other Australian fisheries.
Gill net fishing at risk
Insight:
Already facing the threat of a 27,000 square kms proposed extension of marine parks and a network of no-catch zones (See our May Insight); Australian fishers now face the possibility of a total ban on gill nets. The challenge for the industry is to develop more environmentally-friendly practices and still remain cost-effective.
Following Members’ complaints in federal parliament on “the totally unacceptable reported increase” of dolphin deaths in gill nets, the Australian Fishing Management Authority has imposed an indefinite ban on use of the nets – already under criticism for decimating shark and sea lion populations.
The increased numbers of recorded deaths are due to more efficient monitoring of fishing vessels equipped with gill nets. The vessels will now all be under constant surveillance by independent camera-operating observers.
Even if this intensified surveillance doesn’t lead to further reports of gill net deaths of protected dolphin species, five of the nation’s leading conservation groups claim that the current fatality rate justifies making the indefinite ban a permanent one.
Other
Skilled labour shortage - local knowledge going down the mine
Insight:
Improved conditions and harvests for Australian famers may be undermined by their inability to source skilled labour due to competition from the resources sector.
Throughout rural Australia, farmers and contractors are having trouble sourcing experienced skilled labour. Harvesting contractors
in Queensland and New South Wales (NSW) have been forced to use unskilled labourers and backpackers for cane harvesting which has been underway since June/July.
As we approach the nation-wide grain harvest, contractors claim that there is very little chance of securing local staff as most are pursuing the high salaries on offer in the mining and gas-related industries.
Unskilled workers can earn upwards of $1500 per week in the mining sector, which is nearly twice that of a station hand or tractor driver (with award wages around $550 per week) or casual farm contractors who earn around $120 to $150 per day plus GST.
The mining and resources sector has grown three-fold over the last 30 years, contributing $76b in GDP to the economy with an additional 10% of this being in services. Employment in the rural sector has fallen 15% over the last 10 years to 325,000, whereas employment in the mining sector over the same period has more than doubled to 173,000 employed. Source: ABARES Australian Commodity Statistics 2010.
This transition of labour resources from the rural sector is resulting in the transfer of industry skills from the primary agricultural and food industries to the energy and resources sectors.
Government and agricultural organisations have spent years running rural training programs to retain staff within the industry (currently worth around $31b in GDP. Source: ABARES 2009-10). At the same time, the resources sector faces a critical shortage of skilled labour and is working with regional councils around the country to help set up training programs to support the demand for workers in this sector.
The carbon tax and Australian agriculture
Insight:
In a time when Australian agriculture should be looking to increase production and efficiency to meet the ever-growing demand of the domestic and world population, the introduction of a carbon tax is likely to make things harder for our farmers in what is already a tough industry.
Australian farmers have reacted with caution and concern to the introduction of the carbon tax on 1 July 2012. While the direct emissions from the agricultural sector are exempt from the scheme, PPB Advisory believes that agribusinesses are far from immune to the effects of rising costs that the carbon tax will bring.
Farmers are “price takers”, and with the costs of inputs such as electricity, fuel (and transport) and fertiliser expected to soar under the carbon scheme, they have limited ability to pass on these costs. This will have a direct negative impact on farmers – lowering margins and reducing their ability to be competitive in domestic and international markets. As stated by the National Famers’ Federation President, Jock Laurie, “Australian agriculture has a high level of trade exposure, and any additional costs imposed on farm businesses make it extremely difficult for our farmers to compete in the global marketplace.
In Focus
The critical need for rural succession planning
Insight:
Effective succession planning is critical to ensure the continuance of farming businesses and to avoid disputes among family members and other stakeholders. PPB Advisory strongly recommends that rural advisers and bankers drive this imperative with their clients.
PPB Advisory has been involved in numerous formal rural appointments in cases where there is substantial family dispute over a farm – which is the most substantial, or the sole asset in an estate.
In the matter of Ide v Ide, failure to effectively plan for a successor led to a bitter family feud with tragic consequences.
The dispute came about when Mervyn Ide Senior (Snr) was admitted to a nursing home suffering severe dementia. He had not documented his wishes about what was to happen with the farm, a medium-sized cattle operation in northern New South Wales. His son, Mervyn Ide Jnr (Jnr), was the only one of six siblings who lived on the property.
He proceeded to take over the property and began farming in his own name, with his own bank account. Assets were being dissipated and there was no money available for Snr’s ongoing care.
After some months trying to resolve the issue, Mervyn Jnr’s siblings applied to the Court for a receiver to be appointed to sell the assets, investigate Jnr’s behaviour and distribute the funds in a manner that allowed for Snr’s ongoing care and equity amongst family members. PPB Advisory was appointed.
Jnr took every step possible to hinder and frustrate the process, including hiding assets and making threats. The situation led to a bitter feud which tragically resulted in the death of one of the family members.
While this is an extreme example of a family dispute over assets and property, bitter arguments over farms and related assets or funds are not uncommon.
Had Mr Ide Senior’s affairs been in order, including a workable succession plan, it is probably more likely that this dispute would not have escalated to the point of violence. This is particularly pertinent given Mr Ide’s health had been deteriorating for some time, and the family had the opportunity to undertake the necessary arrangements.
Many people do not have time to plan, or are reluctant to deal with the possibility of their own, or a loved one’s death or disability. It is extremely important for rural advisers and bankers to have these conversations with their clients and ensure adequate plans are in place.
As to how an individual’s affairs may be structured – this is a case by case scenario. In recent times, PPB Advisory has seen some very innovative and successful approaches, with all parties appearing to be satisfied with the outcome. Some planning, even if it’s not entirely perfect, is better than the prospect of leaving behind a bitter family feud.
Contacts
Melbourne
Joe Dicks
t: +61 3 9269 4209
e: jdicks@ppbadvisory.com
Rod Slattery
t: +61 3 9269 4204
e: rslattery@ppbadvisory.com
Sydney
Alan Hayes
t: +61 2 8116 3206
e: ahayes@ppbadvisory.com
Greg Quinn
t: +61 2 8116 3278
e: gquinn@ppbadvisory.com
Brisbane
David Leigh
t: +61 7 3222 6822
e: dleigh@ppbadvisory.com
Andrew Jamieson
t:+61 7 3222 6800
e: ajamieson@ppbadvisory.com
Perth
Simon Theobald
t: +61 8 9216 7601
e: stheobald@ppbadvisory.com
Adelaide
Peter Macks
t: +61 8 8211 7800
e: pmacks@ppbsa.com.au
Auckland
David Webb
t: +64 09 304 1301
e: dwebb@ppbadvisory.com
