PPB Australia: Recovery, Forensics, Advisory

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Agribusiness Newsletter February 2010

Contents

Meat Industry

Abattoirs tough outlook

The following have all been contributing factors to a spate of recent abattoir closures:
- continuing demand for live cattle exports;
- high Australian dollar;
- sluggish export markets, especially Japan;
- increasing USA exports into Korea and Japan; and
- high domestic prices for livestock.
The closure of several abattoirs in recent weeks, including Burrangong Meat Processors in Young NSW and Leitch Pastoral Group on Queensland’s Darling Downs, has resulted in the loss of 540 blue-collar jobs in the small regional towns affected.
With all of the ducks currently lined up against meat processors, including the impact of continued drought conditions, operations have been winding down to limit production and preserve jobs. This has seen a dramatic fall in hours of operation with many sites reducing to a five day, one shift per day roster in comparison to the standard two shift rotations.
The impact on financial institutions will be the continued pressure placed on cash flow forecasts as a result of lower outputs and the ability for debt levels to be serviced. This may lead to concerns in covenant requirements being met and resulting underlying value of securities.

Revised strategy in retail meat space impacting processors

It is evident that large retailers, including Coles and Woolworths, are staking their claim in the retail meat market industry which may have ramifications on processors and ultimately farmers. It appears the marketing strategy includes selling certain meat products, as loss leaders, within key stores to match the lower end of the market against key rivals such as Aldi and IGA Metcash. Should the trend continue there will be pressure on prices as the large retailers will leverage their buying powers at market.

National flock numbers

Continued demand for Australian lamb, both domestically and internationally, has resulted in inflationary pressure to prices during a time when the national sheep flock remains at its lowest level since federation, at 71.6 million head as at December 2009.

Wine Industry

Tough times ahead for Sunraysia

The wine industry continues to be hampered by a chronic oversupply of grapes, which threatens to bring the Murray Valley region to its knees.
Vintage prices are expected to fall a further 20-30 per cent on the back of a 30 per cent average yield price in 2008. With Mildura’s Sunraysia area being hardest hit. According to Mildura Rural City Mayor Glen Milne, the region “are going to lose a whole lot of really good farmers, families with a 50-60 year history of farming and they’re just going to walk away”.
Throughout the Riverland and Riverina region, growers are being offered as little as $1 a tonne for their ‘above-contract’ fruit this vintage. Contracted prices of as low as $150 per tonne are expected to hit growers hard, and a long way from the peak prices obtained in the early 1990’s where growers received as much as $1,400 per tonne.
There have been calls to the Victorian Governments to lift its 4 per cent cap on water trade. Most irrigators in the region see the sale of water as their only chance to pay off debts. The Victorian Government Is firmly against raising the current cap, but remains committed to working together with growers with a series of initiatives and programs during this difficult period of restructuring.

Chardonnay not the people’s choice

Further falls in the price of grapes in the world market has grape growers feeling more concerns than previously. With the cost of chardonnay grapes falling from $900 per tonne 5 years ago to $150-$200 per tonne today, grape prices could very well be a reflection of evolving consumer tastes.
At these prices, growers are finding it difficult to meet their costs of production and with hundreds of growers still waiting for payments on last seasons’ crops it will surely be a tough year for grape growers.

Bulk wine leading the way

Exports surged 9% last year by volume, as price-conscious drinkers took advantage of our oversupply problem to consume bulk wine at fire sale prices.
Australian Wine and Brandy Corporation (‘AWBC’) says exports reached 764m litres (up from 698 in 2008), but the gains were all at the bottom end of the market. Bulk wine exports were up 119m litres, while higher-value wine shipments were down by 53m litres.
- Last year’s bulk wine shipments were 39% of the total (26% in 2008).
- The AWBC says that the shift to lower priced wines attributed to the recent grape glut, was aggravated by the dollar’s strength which has undermined competitiveness of our wines overseas.

History justifies the faith of the industry’s family companies

Back in the 90’s, investors in publicly listed wine companies were lauding them as the industry’s future, but the mighty have since fallen, as fourth and fifth generation wine families have reasserted themselves.
The large corporations pursuing uncontrolled expansion for more than a decade with easily accessed capital, lacked the flexibility that family-owned companies had for them to react to a rapid economic downturn last year that accordingly saw them collapse or come very close.
Big operators believing they could corner markets they assumed were ever-growing, found themselves trapped in over-priced grape contracts (some for up to 15 years) unable to switch focus to profitable niche markets.
John Angove, a fifth generation member of a major Riverland wine family, sees 2010 as the start of an upturn for the area’s wineries, and next year as the one for growers. As the situation gradually balances, he believes the Riverland will be a prime inland source of wines that can be competitive overseas in the face of the industry’s oversupply of cool-climate grapes.
He says his family company has survived in good shape because he refused to allow its labels to be featured as “loss leaders in full page retailers’ advertisements, and would walk away from any deal that sought to use an Angove product to boost their
corporate image”.
Wine consultant Neil MacKenzie says there’s no perfect size for a wine company, but all too often the wrong-sized company is seen operating in the wrong sector. “For, a small to mid-sized company to be selling commercial table wines in the under $10 sector, is a recipe for failure. It’s incapable of generating sufficient margin to cover overheads that may include funding for vineyard and stock. The company can’t compete with large brand owners nor can it afford to create a niche for premium wines because its infrastructure is too big.”
Foster’s Group market share has dropped from 28.5% five years ago to 21.2%, while Constellation wines Australia has fallen from 22% to 13.5%.
During one of the sector’s worst downturns, the biggest winners in the reversal have been family companies, such as Yalumba, Angove, Grant Burge, d’Arenberg and Taylor, while others that have also done well include Peter Lehmann, Bleasdale, McWilliams, Brown Brothers, De Bortoli and Casella.
- The major companies have also lost out to a plethora of cleanskins, many produced by supermarket giants and the continuing rise of New Zealand’s sauvignon blanc offerings.
- According to AC Nielsen, Australia’s top 10 wine companies are: Foster’s Group 21.2% market share, Constellation Wines 13.5%, Pernod Ricard 10.2%, small manufacturers 10%, supermarkets’ private labels 5.6%, Yalumba and De Bortoli 4.6%, McWilliams 3.8%, Brown Brothers 3.4%, Fine Wine Partners (Lion Nathan) 2.9%.

A Frenchman’s leap of faith to Kangaroo Island

Bordeaux native and world renowned winemaker Jacques Burton, having fallen in love with Kangaroo Island (‘KI’) while on his honeymoon, has established a strong presence east of Parndana with vineyards of cabernet, malbec, shiraz, grenache, viognier, semillion and sangiovese.
His presence has heightened KI’s credibility as a wine region which he says has “great potential”, one of its foremost attractions being a long, slow ripening period ideal for Bordeaux varieties.
- Mr Burton’s company, The Islander Estate Vineyards, produce a range that includes a semillion viognier, a red mix called Bark Hut Road (combining cabernet with a pre-blended shiraz viognier) and a flagship product with the unusual meld of cabernet franc and sangiovese, called Yakka Jack.
- While costs and water supply are seen as formidable challenges to the island’s rapid growth as a major wine producer, M Lurton says its unrivalled maritime environment ensures it will always retain all the attractions of a distinctive boutique region.

Cockatoo Ridge is in voluntary administration

Shortly before we went to press with this newsletter, it was announced that this Adelaide-based wine company was placed in administration owing an estimated $16.7m to its banker.
The directors’ decision was taken on the basis that Cockatoo Ridge and its subsidiaries were likely to become insolvent in the third quarter of the current financial year.
The company is continuing to operate while the administrator makes a thorough assessment of its financial position.

Fishing Industry

‘Australia’s seafood capital’ faces a critical three-pronged threat

Civic and fishing industry leaders claim a combination of the world economy, international cuts to fishing quotas and the SA Government’s decision to allow iron ore exports from Port Lincoln is disastrous.
Tuna prices have halved during the global downturn, and this, combined with an international commission’s decision to cut allowable tuna catches by 2,500 tonnes in the next two years at a $62.5m cost to the port’s $200m a year fishing industry, is expected to send many local companies bankrupt.
Port Lincoln mayor Peter Davis says: “The decision to compromise an industry employing 2,000 people by allowing Centrex to export a miserable 1.6m tonnes of iron ore a year, when the company states it’s undertaking to employ only nine to 10 of the town’s 14,000 residents, is just barmy.”.
SA tuna fishermen are angry about the international decision to savagely cut their quotas because, while they’ve adhered to regulations for the past 20 years, Japan has admitted overcatching the species by more than 200,000 tonnes during that period.
Furthermore Australia argues its quota cut was politically motivated - based on science related to 1940s stock. The current observations of fishermen indicate the species in southern waters is in good shape.
There is also widespread concern in Eyre Peninsula about the likely effect on the prawn fishing industry should BHP Billiton be allowed to build its proposed desalination plant in the upper Spencer Gulf. It is believed the hyper-saline discharge from the plant could upset the area’s marine ecology.

Fishing nets are pushing sea lions to the brink of extinction

So says a SA Research and Development Institute report to the Federal Government. The report says only 14,000 Australian sea lions – 85% of which live in SA – remain. Their numbers having been savagely reduced mainly by fishing nets, lines and lobster pots.
The Wilderness Society is campaigning against nets used to trap sharks by their gills because they also trap and drown about 300 sea lions annually, many of them pups.
Marine campaigner Shen Dyer says sea lion feeding grounds and areas fished using gillnets “almost completely overlap in SA”.

Dairy Industry

Speculation continues about WCB takeover

Murray Goulburn (‘MG’) chairman Grant Davies has confirmed that it is planning to make an offer for Warrnambool Cheese and Butter (‘WCB’) “in the near future”. This comes a month after MG announced to its shareholders and suppliers that it was behind one of the previous failed takeover bids for WCB late last year.
Industry sources suggest that it is not a matter of if WCB will be taken over, but when. However, WCB CEO, John McLean, has dismissed industry talk about a takeover as “pub-talk”, and says the company has no price in mind and is not for sale.
While other industry players have remained relatively silent on the issue specifically, a Fonterra spokesperson has said that the company is always looking at opportunities to expand. Meanwhile Barry Irvin, Chairman of Bega Cheese, which owns Tatura Industries, said the business was very keen to see what happens with WCB and MG, but would remain an interested observer for the time being.

Milk powder prices fall slightly

Whole-milk powder prices have dipped slightly on last month’s levels, but remain relatively stable at levels far above last year.
After a solid start to the month, prices for whole-milk powder are averaging $US3309/tonne, 7.1% lower than the previous month. That said, Norman Repacholi from Dairy Australia notes that prices are almost double what they were last year, with February 2009 auction price averaging just $US1851/tonne.
Mr Repacholi attributes the relative stability in average prices to a number of factors, including buyers having sufficient stock cover, and a lack of new information in the market place to send the price in one direction or another.
Industry analysts suggest that the month’s result is within the range of expected price movements.

Grain Industry

Grain sellers hold for better deals

Grain prices continue to hold some strength due to the lack of grain supplied to the market in southeast Australia.
Growers are searching for higher prices as they continue to hold stock in warehouses and on the farm. This is reflected in the prices for general purpose wheat delivered to Melbourne up $6 per tonne to $207 per tonne.
Despite this, buyers continue to be patient as they see large quantities of grain in storage at prices which are currently over those that are internationally competitive. The expectation is that growers will need to sell soon as cash flow is set to become important in the following months.

Water Industry

Darling River flows

36,000 gigalitres of water has again been released from the Medindee Lakes into the Darling River. The flows are set to boost NSW Murray Irrigation and South Australian irrigators’ allocations.
Victorian Irrigators however will not gain from this release, with the NSW Government accused of exploiting a loophole in the Murray Darling Basin agreement that excludes Victoria from gaining any benefit from Darling River flows if the Menindee Lakes remain at less than 640,000 megalitres of capacity.

Controversial north-south pipeline flows

Water from the controversial north-south pipeline has started flowing into Melbourne’s reservoirs as Victorian Premier, John Brumby, and Water Minister, Tim Holding, turned on the pipeline. The 70km pipeline sends water from the Goulburn River in Victoria’s north, to Melbourne’s Sugarloaf Reservoir.
The pipeline has encountered strong opposition with many seeing this as an “act of betrayal” against drought-stricken farmers in northern Victoria.
The Victorian Premier has argued that northern Victoria will benefit from the project as it mean a $900m upgrade of the region’s ageing irrigation infrastructure.

Other

Mango mania

Higher mango production caused by the increase in hobby farmers in far north QLD is causing the price of mangoes to drop thus eating into growers’ profits. With mangoes being sold for as little as 50cents each, some larger growers have allowed their crops to rot or passersby to pick them for free. Steps are being taken by the Australian Mango Industry Association in the coming months to address commercial growers concerns.

Three month weather outlook a mixed bag

The Bureau of Meteorology’s (‘BOM’) latest three month forecast to March, expects Northern Australia to experience a hotter and drier February to March, whilst the south can expect a cooler and wetter period.
Southern QLD and NSW have a 50 per cent chance of exceeding median rainfall, however further south in Victoria, the chance rises to 55 per cent.
BOM Seasonal Rainfall odds have been produced using Pacific and Indian Ocean temperatures, with the warm Pacific creating the persisting El Nino effect. However, El Nino’s affect on Australian rainfall patterns often weakens in the second half of summer.

Contacts

Adelaide

Peter Macks

t +61 8 8211 7800
e pmacks@ppbsa.com.au

Level 10
26 Flinders Street
Adelaide SA 5000

t +61 8 8211 7800
f +61 8 8211 8922

Brisbane

Grant Sparks

t +61 7 3222 6807
e gsparks@ppb.com.au

Level 3
167 Eagle Street
Brisbane Qld 4000

t +61 7 3222 6800
f +61 7 3222 6899

Melbourne

Joe Dicks

t +61 3 9269 4209
e jdicks@ppb.com.au

Rod Slattery

t +61 3 9269 4204
e rslattery@ppb.com.au

Level 21
181 William Street
Melbourne Vic 3000

t +61 3 9269 4000
f +61 3 9269 4099

Perth

Simon Theobald

t +61 8 9382 8933
e stheobald@ppb.com.au

Level 21
140 St Georges Terrace
Perth WA 6000

t +61 8 9382 8933
f +61 8 9481 5554

Sydney

Steve Parbery

t +61 2 8116 3000
e sparbery@ppb.com.au

Andrew Smith

t +61 2 8116 3060
e asmith@ppb.com.au

Level 46
MLC Centre
19 Martin Place
Sydney NSW 2000

t +61 2 8116 3000
f +61 2 8116 3111