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Agribusiness Newsletter July 2009

Contents

Meat Industry

Product differentiation has its rewards

Meat Standards Australia (‘MSA’) graded cattle, now receive premiums of up to 30 cents/kg and guarantees meat eating quality.
Cattle graded through the MSA system rose 16.75% in 2007/2008, with the number of brands differentiating product, based on eating quality, expecting to increase.
Nippon Meat packers recently launched its ‘Eco Beef’ brand. This initiative is in addition to the company’s individual animal traceability and food safety system, thought to be one of the most advanced in the world.
Nippon’s latest brand allows consumers to assess data on CO2 emissions associated with beef production. CO2 calculations are based on four stages in the production cycle namely, cattle production, lotfeeding, processing and transportation. CO2 emission and energy performance for each sector is provided in graph and numeric form. Additional information is also provided on associated initiatives, such as feedlot penshade, and pen waste composition programs that add to the overall ‘green’ claim.
Nippon is not expecting customers in Japan to pay significantly higher prices for its latest brand, it is yet another way of attracting and building consumer loyalty for its product.

Overseas demand for premium primal cuts impact domestic market

The first three months of 2009 saw overall beef production increase by 6.5% to 522,079 tonnes. Of this, 218,469 tonnes were exported, theoretically leaving 304,000 tonnes of beef on the domestic market, approximately 4,000 tonnes more than the same time last year.
When the exports are further dissected, it is apparent, that although the overall beef exports for January, February and March were up 15% on last year, manufactured beef exports increased by 26%. By comparison, there has been a decrease in the exports of many premium primal cuts, such as short-rib. As a consequence, many exporters are now dumping these premium cuts on the domestic market, resulting in top quality cuts such as Porterhouse now selling for $12-$15/kg, compared to $20 last year.
This has placed significant pressure on domestic abattoirs who have to compete against this latest trend. For example, it is now cheaper to buy boxed meat out of Queensland and transport the meat to Victoria, than it is to buy the same quality product from local processors.
The domestic trend towards boxed meat has further complicated this situation. Over the past 10 years, the use of boxed beef amongst Melbourne based retailers has increased by about 20% to 25%. This trend has placed more pressure on those local processors who do not have boning rooms and are therefore not able to sell boxed product on the local market.

Australian Agricultural Company’s possible move into meat processing

Australian Agricultural Company’s (‘AA Co’) largest shareholder, IFFCo has flagged its interest in purchasing the Kilcoy export abattoir, currently owned by the Harmony Group, based in Singapore. If the sale proceeds, IFFCo would effectively act as a custodial owner of Kilcoy until AA Co’s own strategic review of operations is complete. That would then allow a later transfer of ownership of the assets to AA Co.
A successful acquisition of Kilcoy would provide AA Co with longterm processing security and would further tighten the company’s food safety and product integrity credentials through the control of all stages of the supply chain.
Currently, the company utilises a service kill provided through Stanbroke Beef in Grantham. In its last financial year, AA Co turned off about 200,000 slaughtered cattle, with an increasing proportion of those retained within the company’s rapidly growing branded beef program. The Kilcoy plant has a current kill capacity of about 570 head per day, in a single shift seven day operation.
Kilcoy currently specialises in the slaughter of high end grained fed cattle, destined for the overseas market. The transfer of AA Co cattle to Kilcoy would erode Kilcoy’s competitive advantage in this area. An alternative would be to expand the killing operations at Kilcoy thus maintaining its competitive advantage in the high-end grain fed market.

Harmony Capital moves to full ownership of Harvey Beef

Private equity fund, Harmony Capital has recently moved to full ownership of Western Australia’s largest meat works, Harvey Beef, after buying out partners Elders and Stark Investments.
Under an agreement, Elders said it sold its 20% interest in Harvey Beef for $700,000. Elders, formally Futuris, has been recently offloading some of its assets, including the sale of shares in Australian Agriculture Company, Webster, Amcon, as well as in its citrus and fodder operations.
Elders is also in the process of selling its 20% interest in Kilcoy pastoral company, located in Queensland.

AQIS export inspection fee break through

The Federal Government is expected to announce details of a special $40m package for rural exporters to compensate for the scrapping of the Australian Quarantine and Inspection Service (‘AQIS’) inspection subsidies.
The Government previously subsidised 40% of the cost of AQIS’ inspection fees paid by exporters, but as recommended by the Beal review, there was no provision for the subsidy to continue in this year’s Federal Budget.
It is understood, as result of discussions with agricultural exporters, ways to specifically reduce paperwork costs associated with export measures such as electronic lodging of forms, will be looked into.

Swift invests a further $22m at its Dinmore meatworks

A $22m hide processing plant is to be built this year at Swift Dinmore Meatworks. The facility is planned to process 1.5 million salted hides a year for the export leather market, creating about 18 jobs.
Hides, which are currently processed by another company, will come from Swift’s other meatworks at Townsville, Rockhampton, Toowoomba, as well as Dinmore.

Wine Industry

“The industry is going through the adjustment it had to have”...

So said Winemaker Federation of Australia (‘WFA’) chief executive Stephen Strachan referring to the 7% fewer grapes cut this year (1.71m tonnes) and the need to cut the annual national intake to 1.5m tonnes if the industry’s to be sustainable.
He believes a reduction of about 20% over the next three years is necessary if the industry is to cease undermining brands by discounting:
- According to WFA, wineries processed 125,400 fewer tonnes of grapes this year, well below the five-year average of 1.79m tonnes.
- Red wine grapes accounted for 52% of the intake, shiraz regaining top popularity in overtaking chardonnay.

Clouds can have silver linings

Despite a tough financial year, consumption of premium bottled wine has risen 3.5% on average to 194ml (whites were up 4.4%, reds 2.6%), and overall, Australian wine sales rose by 2.9% to 492ml, up from 478ml last year.
Cask wine consumption fell 4.9% to 159.7ml, down from last year’s 168ml but largely because increasing percentages of consumers have forsaken cask wines for better quality wines.
- In 1988-1989 cask wine consumption was 162.5ml compared with only 117ml for premium bottled wines, and similarly, fortified wine consumption has continued to drop since then from 23.9ml to only 16.3ml in the financial year just ended.
- Sparkling wines have more than held their own among consumers for the past decade – annual sales are now 36.8ml compared with 32.6ml a decade ago, but importers have been the big winners (imports jumping from 24.2ml to 61.7ml).

Some spectacular silver linings on far-flung horizons

While total exports for the 2008-2009 financial year were down 14% to $2.4bn, those to mainland China were up 60% to $90m, and in Hong Kong up 29% to $42.6m.
As the Chinese economy begins to surge once more, along with interest in Western lifestyles, expectation is that Australia’s exports there will top $100m for the first time next year.
As Australia has moved from sixth to China’s second most favoured country for wine imports (bettered only by France), the US ($721m) has overtaken the UK ($715m) as our most important wine export market.
- The Australian Wine and Brandy Corporation points out the exciting figures from China should nonetheless be considered in context, namely that Asia represents just 7% of Australia’s wine exports, although its potential is huge. For example, so far most of China’s buying has been confined to its east coast, half of total purchases being made in Shanghai.

Here’s something to encourage wine writers to lighten up – lighter bottles

Wine writers have often criticised the industry for using too many heavy bottles, but O-I, the world’s largest maker of glass containers seems certain to curb this angst by way of its Adelaide plant.
It's invested in equipment and trials that produce from 18% to 28% lighter and more environmentally friendly 750ml French green claret and burgundy wine bottles.
This is achieved with new narrow-neck-press-and-blow (‘NNPB’) technology that ensures more consistent and precise glass wall thicknesses to reduce weight yet deliver a more sustainable product.
- O-I, claiming this as one of the largest breakthroughs in wine bottle making in Australia and says it “will also keep the Adelaide plant at the forefront of wine bottle making facilities globally, responding to industry demands for more water and energy-efficient manufacture of lighter weight bottles”.

Decisions being made to cut grape growers’ contracts

Both Fosters and Constellation have told some Riverland growers their contracts will not be renewed.
Pressure on the grape growing sector is expected to worsen as the industry progressively rejects contract growing for what wine producers believe will be cheaper buying by way of annual bargaining.
Constellation has said it will cut in-take from contracted growers in warm inland regions by 25% this year, next year and in 2011.
- Why? Probably for similar reasons to those stated by Foster’s SA communications manager Sue Rana…“There’s not only the matter of over-supply to consider, but we’re undergoing a restructure to ensure our business is aligned to the current market environment.”
- Indeed Foster’s restructuring will mean 300 jobs cut, and will cost about $1.1bn (including a $730m write-down of assets). Constellation Wines plans to cut 350 jobs and a third of its product lines.
- As the value of the wineries, vineyards and branded labels of Australian Vintage (formerly McGuigan Simeon Wines) was reduced by $174.4m, the company lost $127.8m in the first half of the financial year just ended, yet expects to announce “a small profit” for the full year on 26 August. This was driven largely by exports, with full-year net sales up more than 10% on the previous financial year. Lion Nathan which has seen the value of its wine assets fall $121m since 2001, suffered a 58% drop in profit to $3.5m to the December half of 2008-2009.

Fishing Industry

SA’s coastline will emerge over the next decade as a world-leading fish farming area

So says the latest SA Food Scorecard report, which values the State’s aquaculture sector at $245m for 2007-2008, and notes that this is growing more rapidly than similar sectors in any of the other Australian mainland States.
The industry (minus tuna) grew from $22m in 2001-2002 to $70m in 2006-2007, while in the same time, the Tasmanian industry (minus salmon) grew from $12m to $23m. None of the other States’ industries grew in this period.

Clean Seas hogs the industry limelight with innovation and a $100m investment plan

Clean Seas plans to raise this money in the next four years to develop its tuna farming business, with the expectation it will be selling tuna worth $200m annually by 2015.
It’s estimated a newly established tuna-breeding program will produce 25,000 tuna fingerlings next year, and 10,000 tonnes of tuna within six years.
Juvenile tuna from this year’s trials have already reached 20cm and weigh up to 80g at 72 days and are expected to tip the scales at up to 10kg each within a year, then 40kg in three years.
- Clean Seas largest shareholder is the Stehr family with 49%, followed by Macquarie, GIC and Simplot. The top 20 shareholders own 80% of the company.

Feed station for farming Kingfish

Designed and built by Clean Seas, the 52m x 12m fully automated barge can carry a month’s supply of up to 600 tonnes of dry feeding, thus greatly increasing farming efficiency.
The feed which previously had to be transported daily to sea cages by vessels, is now sprayed successively into the middle of 30 pens (two at a time) in strictly controlled allocations, all with no loss of pellets needed to feed some 3,000 tonnes of caged fish.
The barge, manned 24 hours a day, not only increases efficiency, but stores feed to a level of bio-security that, according to directors, reinforces Clean Seas’ competitive advantage as a world leader in finfish quality control.

How tags help monitor a global resource worth more than $1.27bn annually

Tags on Bluefin Tuna that annually swim up to 8,000km during return journeys to The Great Australian Bight, are helping CSIRO scientists determine a sustainable level of catch for the resource.
The tags record rising stomach temperatures caused by metabolic energy generated as the fish digest food, so that the scientists can tell how often, when and where the tuna are eating.
- Fishermen are given $250 for each tag they return to the CSIRO, but they know the worth of information they’ll eventually get from scientists to ensure the future of the tuna industry, will be far greater than that.

Dairy Industry

Revolutionary cows milking themselves

Cows could soon be left to their own devices and choose when and how often they come in for milking based on new research currently on trial by Dairy Australia.
Voluntary milking is an automated milking system where cows wander into the milking shed on their own accord and stand in specially built milking units where milking cups are applied by a robotic arm driven by laser pin pointers.
Mr Coats of Dairy Australia recently presented an exhibition to 150 producers and said “It’s a system in which cows submit to the dairy of their own accord. Some cows will milk themselves twice a day, some cows will milk themselves five times a day. On average they milk themselves just over twice a day.”
The system requires minimal human involvement, boosting efficiency and solves the problem of a shortage of labor.

Low expectations for new season prices

Tatura Milk was one of the first milk processors to announce its new season price, which is just $0.28c per litre. The new price represents a significant reduction on last season’s opening price of $0.40c and is considered to be unsustainable for producers supplying Tatura Milk.

Grain Industry

Queensland grain growers insure against yield loss caused by water stress

In a world first for a non-subsidised agricultural insurance market, Queensland grain growers can now insure against the losses incurred due to water stress such as too little or too much rain.
This ground breaking insurance cover has been developed over a three year period in a joint effort of Australia’s leading researchers and crop modellers at Toowoomba’s Agricultural Production Systems Research Unit (‘APSRU’).
The insurance package is based on rigorous shire based crop forecasts models and provides growers with another risk management tool when crops fail to reach their potential.
Queensland growers have a limited opportunity to take out the insurance and is only available until 17 July 2009. Crops qualify for cover once they have reached a certain maturity and simulated yields are based on the assumption planting occurred in fallowed ground.

Are Genetically Modified crops the way forward?

The long and much debated issue of the use of Genetically Modified (‘GM’) crops in human food sources continues as Dr Shiv Chopra, a former Canadian senior health regulator, visited Australia and weighed into the argument.
Dr Chopra spoke in front of a forum in Federal Parliament and argued that GM crops are far from being the answer to higher yields and drought proofing options, and that genetically modified organisms posed a serious threat to public health. He also believes they are responsible for the huge increases in cancer rates, neurological and reproductive disorders, and breakdowns in immune systems.
However, these claims come on the back of figures released by Monsanto showing a four-fold increase in the area being planted to GM Canola in Australia this year.
In stark contrast to Dr Chopra’s claims, Australia’s leading scientist from 2006-2008, Dr Jim Peacock, has said… “I’m honestly convinced that the time for argument about the need, safety and benefits of GM crops, including benefits to the environment, farmer and consumer – that time is gone. It’s just not an argument any more”.
Monsanto continues to push its research and commercialisation of new products as it signs a five year collaboration deal with Dole Fresh Vegetables of the United States.
The collaboration is aimed at improving the nutrition, flavour, colour, texture, taste, and aroma of selected common vegetable groups.

Other

End of an era: cheap fuel in QLD gone

Queensland’s 9.2c per litre subsidy will be scrapped at the start of the new financial year by Premier Anna Bligh. The move will cut $2.4 billion from the budget in savings over four years.
The move has raised concerns about the impact this will have on rural and regional communities in terms of cost of living and business viability.
Additionally, the cost of freight of produce being shipped from those communities will increase and will be passed on directly to consumers.

ATO to crackdown on MIS

The Australian Financial Review reported a submission to a parliamentary inquiry into the agribusiness schemes, where the ATO confirmed it is close to issuing a draft ruling on the tax consequences for investors who lost money in the recent collapse of Timbercorp and Great Southern.
The ATO revealed in the submission that it is investigating whether the promoter penalty laws, developed to deter the promotion of tax rorts, have been breached in several cases relating to MIS arrangements.
This report comes in the wake of the winding up this week of 40 companies within the Timbercorp group of companies as they had no money and could not continue to trade.

Contacts

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

Brisbane

Grant Sparks

t +61 7 3371 7244
e gsparks@ppb.com.au

Level 3
167 Eagle Street
Brisbane Qld 4000

t +61 7 3831 2700
f +61 7 3831 2799

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

Melbourne

Joe Dicks

t +61 3 9653 6209
e jdicks@ppb.com.au

Rod Slattery

t +61 3 9653 6204
e rslattery@ppb.com.au

Level 10
90 Collins Street
Melbourne Vic 3000

t +61 3 9654 1517
f +61 3 9654 1515

Perth

Simon Theobald

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

Level 10, Parmelia House
191 St Georges Terrace
Perth WA 6000

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

Port Macquarie

David Leigh

t +61 2 6580 0400
e dleigh@ppbport.com.au

Level 2
75�C77 Clarence Street
Port Macquarie NSW 2444

t +61 2 6580 0400
f +61 2 6580 0410