Agribusiness Newsletter December 2008
Contents
Meat Industry
Wine Industry
Fishing Industry
Grain Industry
Wool Industry
Meat Industry
Lamb on the rise
- Rising lamb prices are driving a flood of new season lambs into saleyards across Australia. According to the National Livestock Reporting Service, saleyard numbers nationally were up 11% on a year ago and by 18% in Victoria.
- With the recent significant fall in the Australian dollar, national lamb price averages have increased to prices which are now 40% higher than this time last year. Experts in the industry are predicting prices could reach 500 cents/kg next year on the back of tight supplies and the low Australian dollar.
- The increase in prices, propelled by failed crops, availability of stubble feeds, diminishing national flock and the falling Australian dollar, have made some processors concerned about securing supply next season.
- In order to entice producers to retain lambs, thus ensuring supply next season and not be tempted to offload lamb in the current market, processors are offering forward contracts to producers. For example, winter delivery contracts for lamb delivered to Tatiara Meat Company in Border Town for 440 to 450 cents/kg is a good incentive for producers to hold onto lamb until then.
- According to Meat and Livestock Australia (‘MLA’), reduced lamb supply from New Zealand and a low Australian dollar will offset lower global demand and help maintain prices in the coming 12 months. In New Zealand, flock numbers have fallen by 15% in the last year, with the number of lamb forecast to be processed for export markets projected to fall by 23%.
- A further concern to processors is the bleak outlook for co-products such as skins, which have recently dropped to $2 per skin. Some Chinese tanneries have stopped ordering Australian skins.
Finally, a reprieve for local pig producers
- After some of the toughest years on record, local pig producers are finally benefitting from a resurgence in demand, with prices lifting by up to $1/kg. A falling Australian dollar, Christmas demand and tight local supply have combined to push farmgate pork prices to record levels.
- Victorian Farmers Federation Pig Group chairman, Aegar Kingma, said that current pig prices were now at high enough levels to make rearing pigs profitable.
Smallgoods company calls in Administrator
-
- One of Australia’s largest smallgoods processors, the Hans Group, has gone into voluntary administration. The Hans Group includes Hans Continental Smallgoods and the Swickery’s Kingaroy Bacon factory, which in total employs about 1,400 people.
- Severe drought conditions and low priced subsidised import products were the primary reasons for the failure of the Group.
- Prior to the Hans Group being placed into voluntary administration, the smallgoods industry was dominated by:
- Primo Meats – currently 30% of the market;
- Hans – 27% of the market; and
- George Weston Foods (who own Don Smallgoods and KR Castlemaine) – 33% of the market.
- The Administrators are currently continuing to trade the business in order to achieve a going concern sale, possibly to buyers with related interests. The Group is owned by Japan Tobacco, which last month cancelled a deal to sell to a British private equity firm, Anchorage Capital Partners. Anchorage also has a stake in another Queensland brand, Golden Circle, which is likely to be sold to global food processor Heinz.
- Financially, the Hans Group had been losing money for the past three years, as is demonstrated in the table below:
|
|
Net Sales
$ millions
|
Net Profit/(Loss)
$ millions
|
|
2006
|
364
|
(9)
|
|
2007
|
396
|
2
|
|
2008
|
390
|
(10)
|
Wine Industry
Exporter's joy in dollar's descent, is replaced by rising Tesco-driven angst
- Tesco, the UK’s supermarket and the world’s biggest buyer of Australian wine, has inflicted price freezes on suppliers while demanding a greater share of profits and threatening dissenters with delisting.
- Punished savagely by the new trading terms, as they try to divest themselves of already unprofitable vineyards and wineries, are the Foster’s Group and Constellation Brands (owner of the former Australian wine business, Hardy Wine Company).
- Tesco sells 25% of all wine sold in the UK and that’s the same percentage of Australian wines represented in Britain’s total wine market.
- Tesco has told suppliers that because of the severe economic downturn its customers are buying less wine, most of it at the lower end of the price scale. As a result of losing customers to discount retailers such as Aldi and Lidl, Tesco says it has no alternative, if it’s to retain profitability, but to cull about 15% from its range of wines during the next six months.
- Although Australia’s wine exports to the UK (worth $822 million) had dropped 16% for the year ended 31 October it was still substantially ahead of sales to the US in the same period which realised $714 million.
- Fortunately, there is no sign as yet of a Tesco-type problem in the US, where, despite America’s imploding economy, Australia continues to make robust export sales.
On the home front a price war has broken out
- The price war has been triggered by the larger-than-expected 2008 vintage, the accompanying economic downturn and the ‘twitchy’ international market. The Tesco example (see above) is creating some concern in the domestic market.
- Total sales of Australian wine has dropped 3% in the past 12 months. Sales of premium bottled wine was down 4% in the same period and to make matters worse for producers, discounting, specials and a variety of price-cutting promotions are dominating the industry.
- Furthermore, according to Australian Wine and Brandy Corporation (‘AWBC’) Information and Analysis Manager, Mr Lawrie Stanford, the credit crisis had started to bite in the past quarter.
- Mr Stanford further commented, “Consumer behaviour in an economic crisis was always hard to pick because people responded in different ways, although there was strengthening evidence that increasing numbers of them were ‘heading south’ in their quest for prices”.
- Adding to the confusion, was that many independent retailers were starting to stock labels that weren’t mainstream. This was due to the larger companies attacking the market with advertising campaigns of well known brands in cycles, resulting in a significant reduction of prices.
- While consumers were benefitting, producers were facing rising costs.
Where there's smoke there's... big trouble for the global wine industry
- The multi-billion dollar threat of fire smoke taint to vine grapes is growing internationally, so University of Adelaide scientists and those at the Australian Wine Research Institute (‘AWRI’) in Adelaide are combining to tackle the problem.
- University Oenology Lecturer, Dr Kerry Wilkinson, is leading the $500,000 research project which is one of the first to be undertaken at the newly opened Wine Innovation Cluster at Waite Campus.
- He says “Bush fire smoke is becoming an increasing threat to wine quality as vineyards in many countries, and certainly throughout much of Australia, encroach more on bush lands and forests”.
- Cluster chairman Stuart McNab, who is a Foster’s Group director of wine production, says, “The organisation brings together expertise from the university, AWRI, CSIRO Plant Industry, privately-owned engineering consultancy Provisor and the SA Research and Development Institute”. He adds, “Collaboration will create scientific breakthroughs not possible by independent research.”
- He says “Bush fire smoke is becoming an increasing threat to wine quality as vineyards in many countries, and certainly throughout much of Australia, encroach more on bush lands and forests”.
Denial of the urgent need to curb over-supply is proving catastrophic
- The wine industry faces its most significant challenge since expansion of the 1990s, because of failure to respond collectively to curb oversupply.
- One in four rows of grape vines growing throughout the nation is surplus to a balanced industry requirement, representing an imminent oversupply of 500,000 tonnes. This is roughly equivalent to the entire grape harvest of Australia’s premier wine region, the Barossa Valley.
- Winemakers’ Federation of Australia (‘WFA’) executives have stated repeatedly, ”That the industry needs no more than 1.6 million tonnes of wine grapes annually to meet current market demand and projected growth for the next two years”. Yet despite drought and water restrictions the harvest this year was 1.83 million tonnes.
- But plantings over the past four years which are still continuing, mean the industry can expect to produce at least 2.2 million tonnes of grapes annually in the immediate future.
- Wine Grape Council SA chairman Paul Clancy, says “No agricultural industry can be expected to prosper with an imbalance of such magnitude”. Indeed, Credit Suisse analyst Larry Gandler insists the situation as a whole for the next two years will in fact, be much worse than many in the industry believe.
- He says better than expected 2008 vintages have blown out stock inventories, to an estimated 250 million cases when total export and domestic demand is running at about 125 million cases a year. But conventional wisdom has it that an ideal inventory should be 1.5 times future sales (that’s about 195 million cases).
- According to Mr Gandler, this means that given current inventory, the industry will only need about 1.2 million tonnes of grapes for the next two years. He thinks it unlikely that drought and water restrictions would lower vintages to this level.
The industry is stuck in a place it doesn't want to be
- Oversupply means many growers are forced into a position where they are selling fruit at prices that are unsustainable if they want to stay in business.
- Instead of being able to graduate into increasingly popular and profitable premium sectors of the market, wine producers are not merely stuck with cheap fruit, making cheap low-profit wines, they are also busy putting each out of business in the battle for market share. Paul Clancy describes the situation as “catastrophic”. He likens it to a game where the object seems to be “try to see who can sell the most dollar notes for 50 cents”.
- There has been approbation for the Federal Government’s announcement of packages (up to $150,000 plus $20,000 for vine and infrastructure removal) to assist financially strapped smaller Murray Darling Basin irrigators. However, the worrying big-picture downside for the industry generally, is that the plan will exacerbate a structural imbalance arising from disproportionate growing of warm and cool-climate fruit.
- This problem lies in the often quoted figures, that cool-climate regions produce 40% of Australia’s wine grapes for a demand that’s only half that.
- Substantial contributors to this imbalance were large wine companies that signed up to three-year contracts with cool climate growers before the 2008 vintage, wrongly believing drought-affected, warm-climate yields would be down significantly. The contracts for more expensive varieties of fruit are less likely to be renewed, as inland growing conditions are improved now, especially by increasing efficient water use.
- Thus warm-climate growers, who have suffered the most pain in recent years from over-supplying the market, will see discomfort more evenly spread as the origin of the problem is properly understood and dealt with.
- Flagged production cutbacks by dominant wine companies aren’t helping the growers’ situation.
The global financial crisis isn't all bad news for the wine industry
- Earlier in the year, our exports were declining markedly and as the Australian dollar rose towards near-parity with the $US, sales estimates for the year were going from bad to worse.
- In the past few weeks the Australian dollar has been traded for as little as US60 cents.
- As we go to press, Australian wine producers are trying to get as many of their products on the shelves of global retailers as they possibly can.
- Indeed it’s hoped that as economies slow, particularly in the US, consumers may gravitate to cheaper wines that have been increasingly difficult to clear from Australia’s over-stocked cellars.
Fishing Industry
Australia's first aquaculture fund goes fishing for money
- Australian Bight Abalone (‘ABA’) plans to raise $15 million (US$10.4 million) through its newly marketed Australian Aquaculture Fund No. 1.
- ABA’s CEO, Mr Andrew Ferguson, says “The new unit trust represents a reversal of the way in which the company offered product”.
- Previously, ABA has owned infrastructure, and investors owned the abalone growing in the company’s cages. Investors are now being invited to own cages on which ABA grow abalone.
- Mr Ferguson says abalone grown at ABA’s SA farm, will also be included in the new fund as part of the tenancy agreement. This, he says, “Is a way of testing the market to determine whether there is demand for unlisted trusts”, adding “If there is, then we will launch more trusts that could be extended to other areas of agriculture”.
- Returns for Australian Aquaculture Fund No. 1 are forecast at 13%, with income distributions every six months.
- Despite the global economic downturn, there is no sign of Asia’s demand for abalone lessening.
- Average price for landed whole abalone in Tokyo is Y4,500 (US$44) a kilo, and in Hong Kong the meat-only price is around US$120 a kilo.
World aquaculture needs to grow
- The UN Food and Agriculture Organisation (‘FAO’) claims the annual 6% growth rate is too slow to counterbalance the decline in capture fisheries.
- In 2006, the world’s population consumed 110.4 million tonnes of fish (51.7 million tonnes from aquaculture). But to meet demands of a growing population, aquaculture will need, by 2030, to be producing 28.8 million tonnes more each year than now just to maintain current consumption rates.
- FAO warns that concurrent with the demand challenges, will be those of ensuring consumer protection, maintaining environmental integrity and achieving social responsibility.
- Fishfeed could be a major problem. Most of the developing world’s farmed fish also eat fish, namely carp and tilapia. These are herbivores and omnivores but species such as salmon and shrimp also farmed in developing countries, are almost exclusively exported and must be fed on other fish (in such forms as meal and oil).
- In 2006, aquaculture consumed 3.06 million tonnes (56%) of world fishmeal production and 780,000 tonnes (87%) of total fish oil production, half of this fish oil being used on salmon farms. But for the decade to 2006, fishmeal and fish oil production was stagnant while their use in formulated fish feed tripled. This was made possible only because the poultry industry’s reliance on fishmeal continued to decrease in favour of other protein food supplements.
- However, aquaculture in more affluent countries can’t expect to benefit from this trend because increasing quantities of fish-formulated food are being fed to non-filter-feeding omnivorous fish like carp.
- Aquaculturists who can therefore develop more efficient ways of feeding product and are able to develop new types of effective protein-based feed for their fish, will not merely be the industry’s main hope for much needed growth. They will make enormous amounts of money for themselves and for investors in their companies.
Grain Industry
Season closes with more uncertainty
- As Australian growers began harvesting their crops, further uncertainty has beset the grain industry, both in terms of prevailing weather and price fluctuations across the grain markets.
- In many areas that suffered below average rainfall during the growing season, heavy rain fell and presented a real risk that the crops would be ‘rain damaged’ and downgraded to feed grade. This development was particularly galling to growers in Northern areas, who were enjoying their first reasonable yields in many years. The large amount of feed grain now anticipated by market has led to a widening of the price gap with milling/malting grades.
- In addition to the ongoing climatic issues facing the industry, the uncertainty that has gripped world equity and credit markets has now spilled over into the commodity markets and the grain markets are no exception. This uncertainty has resulted in reportedly large falls in the spot prices being offered to growers delivering grain to silos and a reduction in the number of buyers active in the market.
- Reports are being received from across Australia of growers refusing to accept the prices on offer and are instead warehousing their grain, in the hope that some normality will return to the markets and prices will improve in the New Year.
Grain handling consolidation
- Many industry commentators have predicted, that further rationalisation of the grain handling sector in Australia was inevitable. These predictions appear well founded, with the recent announcement that AWB and ABB have been in discussions regarding a possible merger.
- This news has been greeted enthusiastically by stock market analysts who follow the sector and has resulted in gains in the share price of both companies. This development may set off a round of consolidation in the sector. Such suggestions were heightened, when Grain Corp recently announced a loss of $19.9 million for the year to September 2008.
Drought options
- While the jury may still be out regarding the underlying cause of the lower than average rainfall across much of the Australian grain belt, growers are adapting to the new climatic conditions.
- In many areas, low levels of rainfall have resulted in it becoming unviable to use traditional cultivation methods to establish grain crops. As a result, farmers are adopting a range of measures to improve yields under the low rainfall conditions. These measures include more widespread use of no-till planting, controlled traffic planting and harvesting regimes, maximizing the retention of post harvest stubble and trialling new combinations of row spacing and fertiliser applications.
Wool Industry
Threat to 2010 mulesing bans
- Politically, nothing is easy in wool, as the new Board of Australian Wool Innovation (‘AWI’) is about to discover.
- The industry’s commitment to end the controversial practise of mulesing by the end of 2010 is under serious threat, after a change of guard at the top of the wool growers’ industry body. A large number of wool growers were dissatisfied with the commitment to end surgical mulesing.
- AWI Chairman, Mr Brian van Rooyen, at the recent Annual General Meeting told growers that they did not have to adhere to the mulesing phase-out but said, “The world’s retailers expected it”. Mr van Rooyen further said, “Retailers are not prepared to fight the People for the Ethical Treatment of Animals (‘PETA’)".
- AWI has struggled to find a viable alternative, with most growers continuing to mules animals with the aid of pain relief. It is interesting to note that the inventor of the pain relief product, known as Tri-Solfen, is now a newly elected AWI director.
Contacts
SydneySteve Parbery t +61 2 8116 3000 Andrew Smith t +61 2 8116 3060 Level 46 t +61 2 8116 3000 BrisbaneGrant Sparks t +61 7 3371 7244 Level 3 t +61 7 3831 2700 AdelaidePeter Macks t +61 8 8211 7800 Level 10 t +61 8 8211 7800 | MelbourneJoe Dicks t +61 3 9653 6209 Rod Slattery t +61 3 9653 6204 Level 10 t +61 3 9654 1517 PerthSimon Theobald t +61 8 9382 8933 Level 10, Parmelia House t +61 8 9382 8933 Port MacquarieDavid Leigh t +61 2 6580 0400 Level 2 t +61 2 6580 0400 |
