Agribusiness Newsletter September 08 - PPB Australia: Recovery, Forensics, Advisory

Agribusiness Newsletter March 2009

Contents

Meat Industry

Australia’s beef herd heads north

Australia’s northern herd is expected to climb to 17 million, while the southern herd is expected to fall to 11.5 million (includes 2.5 million dairy herd).
A fall in southern Australia’s herd is due to stock liquidation caused by continuing drought conditions, particularly in Victoria. Victoria’s herd is now at a 15 year low. These numbers are not good news for processors, who are likely to have difficulties sourcing future supply, when the drought breaks and the farmers begin to rebuild herd numbers.

Change in consumer behaviour leads to increased demand for manufactured beef

Continuing tough economic conditions throughout the world, have forced many consumers to eat cheaper cuts of beef, such as hamburgers. Fast food giant, McDonalds, recently announced it would spend US$2.1 billion to open another 1,000 stores in the US, after its recent earnings were better than expected (up 5% in the past three months).
As a consequence, Meat and Livestock Australia (‘MLA’) are forecasting beef shipments to the USA may rise by 38% this year to 325,000 tonnes.
On the other hand, according to a survey conducted by MLA, for the food service industry, the amount of meat consumed at food service outlets (restaurants and pubs) during November fell by 17% on the previous year. Many experts believe the market for top end meat cuts in Australia has become very tough in recent months.
The impacts are apparent, for example, Harvey Beef, West Australia’s largest meat processor, recently took the drastic action of shutting down for a period of 10 days. The company said it was finding it difficult to forge overseas deals for beef, due mainly to the credit crunch affecting importers. As a result, many export processors now have large stockpiles of beef that need to be reduced.

The Future of Australia’s Red Meat Exports to the US in the balance

New US country-of-origin labelling laws to come into effect next month, could turn American consumers away from imported beef. Under the new laws, all muscle cuts and ground meat must be labelled with their country-of-origin at retail level.
In relation to ground beef, there is flexibility in the regulation which allows a grinder to keep the country-of-origin label the same day to day, even if he uses beef from different countries, provided the countries listed have been in his inventory for 60 days.

Lower A$ saves the day for lamb

A weaker Australian dollar and reduced competition from New Zealand are set to boost lamb prices this year. According to MLA forecasts, the 20% reduction in the US$/A$ exchange rate would translate into 50 cents/kg, or a 12%, rise in lamb prices.
Lamb prospects in Australia are also buoyed by a 23% fall in New Zealand’s export lamb slaughterings for 2008/2009.
According to MLA:
- The US is tipped to remain Australia’s largest export market accounting for 24.5% of exports. Exports are expected to increase by 11%.
- In the Middle East, Australia’s second largest export market, exports are expected to increase by 10% to 28,000 tonnes.
- Supply of mutton is expected to fall sharply from 235,000 to 198,000 tonnes due to forecast sheep slaughterings falling from 12 million to 9.4 million.
However, recent data suggests that MLA’s predictions may not eventuate due to the fact that higher priced products such as lamb were not being sold as importers sought cheaper manufacturing grade products. This is borne out by January’s export figures, which fell by 26% compared to last year.
Shipments to the US led the charge with a fall of 28%, compared to the European market where exports fell 35% and in China 30%.

Extreme heat in Southern Australia and floods in QLD adversely impact livestock prices

The latest heat wave across southern Australia produced a 37 cent/kg drop in the eastern Young Cattle Indicator, its lowest level since 2007. This dropin price has also been affected by the fact that 60% of Queensland (Australia’s leading beef state), is currently under flood with thousands of breeding cows lost.
These challenging conditions have shattered re-stocker confidence. Prices have also been affected by ongoing negative consumer sentiment due to the global economic crisis, which is hampering domestic sales and exports.
Fires and heat in southern Australia have also forced more than the expected number of cattle onto the market and although processors are doing their best to lift cattle kill rates, demand for product has not been encouraging, which have resulted in significant stock build up of processed meat.

Wine Industry

There’s something of an upside to heat damage’s obvious downside

It was all too apparent that last month’s heat wave across all southern grape-growing regions of Australia would do unprecedented damage.
If it was a savage hot spell we had to have, then this was probably the better year to have it.
Crop losses were staggering with reports in South Australian regions soon escalating past 30% to 50%, and in some instances up to as high as 70%. However, the wine industry’s serious existing problems of oversupply has to be considered. Certain to have been exacerbated by the fact that before the heat’s onslaught, there was simply no market for every fourth row of grapes being grown throughout Australia.
Concurrent with an alarming drop in exports, the imminent vintage was likely to produce a national oversupply of grapes of some 500,000 tonnes, and now it’s widely estimated that grape losses this summer will be ‘at least’ 300,000 tonnes.
- Clearly it’s implied these losses may yet go even closer to cancelling out potential over-supply and exports could also further decline.
- But while there may be an upside brought about by February’s heat for the wine industry as a whole, it doesn’t ease the pain for individual grape-growers facing financial ruin, even if prolonged drought hadn’t already virtually sealed their fate.

Top end education program

The industry is investing much of its future in producing top-end wines. Many of these are still sitting on shelves because export figures are down due to angst about the global financial crisis rises. It’s a serious problem. Solution: an international program to educate wine drinkers around the world about what they’re missing if they’re not drinking Australia’s top end wines.
Wine Australia has therefore launched such a program through the British-based Wine and Spirit Education Trust in conjunction with a new graduate scholarship scheme involving the US, Canada, Ireland and Asia. These initiatives follow last year’s 11% decline in exports to 698m litres, representing an 18% drop in value to $2.46bn; the first drop in Australia’s wine exports in 14 years.
Also this year, Wine Australia funded by grower levies and the Australian Wine and Brandy Corporation, will inaugurate Landmark Australia Tutorial. Twelve of the world’s top sommeliers will be flown to South Australia’s Barossa Valley for a week of master classes and lectures from industry experts Max Allen, James Halliday and Peter Gago. Barossa Grape and Wine Association chief executive Sam Holmes says, “The tutorial is important in helping Australia establish the high end of its wine marketing internationally”. “Each of these sommeliers will be influencing at least 20 major buyers of Australian wines on selections they’ll make for the next 20 years”.

Individual education drives can be successful

Angove Family Winemakers (a Renmark-based winery) have exported to Japan for eight years and have recorded double-digit growth there in the past year.
Export manager Nick Yap says they have done this by appointing Japanese distributor Toa Shoji (also a highly regarded family company) and educating restaurant owners, sommeliers, hoteliers and wine pundits to link appreciation of the compatibility of Angove wines with Japanese food.
- “Because Japanese like their food pure and elegant, they don’t like overpowering flavours. Our wines aren’t over-extracted or over-ripe; they’re quite elegant and refined and therefore appealing to the Japanese palate,”says Mr Yap.
- Angove exports to more than 15 other Asian countries, and throughout the region they are conducting master and mentoring classes for prominent buyers of wine, leaders in hospitality industries and wine industry writers. The company is also marketing its ability and willingness to tailor wines to populations’ specific tastes and requirements.

Events could have overtaken what follows by the time you read this report: however…

We understand that in the Yarra Valley, Victoria’s prime wine region, about 30 vineyards have been damaged or destroyed, and at least 150ha of grapes burnt. Among wineries reduced to ashes by the fires are Yarra Yarra and Calders, as well as the boutique winery Roundstone.
It is reported that smoke has ruined the entire crop of wine grapes in Victoria’s Murrindindi region.
- The Yarra Valley Wine Growers Association estimates that so far, only about 5% of the area’s grapes have been lost in the fires but it’s expected this percentage could increase substantially following ever-widening reports of smoke damage.
- While winery managers are saying their harvests will be down between 20% and 60% on last year, these are only current expectations. As we go to press, fires that have been burning for weeks are still burning, others thought to have been extinguished have flared again, new outbreaks are being reported and billowing smoke continues to be blown across Victoria as winds changes in strength and direction.

Fishing Industry

Australia sets a fine example in the face of dire global threat to all seafood sources

Australia, Norway, US, Canada, Iceland and Namibia are the only nations to score a compliance rate exceeding 60% for UN-sponsored global fishing standards.
The UN’s Food and Agriculture Organisation developed the standards in 1995 as a 12-part voluntary code that most nations are not upholding.
This is despite two recent studies, one that concludes oceans are “in a dreadful mess and severely over-fished” and another that says virtually all seafood sources face collapse by 2048 if current rates of pollution and over-fishing continue.
UN authorities are reportedly surprised and pleased that Namibia is doing so well, and that Malaysia, not yet up with the top performers under the code, is nonetheless making such good progress.

Port Lincoln’s performance this season is a strong argument in favour of the code

Port Lincoln’s fishermen are having their best season for two decades in the Southern Ocean. So far this year, the average weight of Southern Bluefin Tuna caught is some 20% heavier than last year and numbers have also increased substantially.
Fishermen attribute the increase to dramatic recovery of the ocean’s stocks since it was revealed in 2006 that the Japanese had been illegally taking 40,000 tonnes of tuna from Australia’s southern waters each year for the past 20 years.
- Australian Tuna Association chief executive Brian Jeffries reported that in just one weekend last month, one company, Sekol Ranched Tuna, transferred 2,200 fish weighing an average of 16kg into holding cages about 15km from Port Lincoln where they’ll continue to grow for another five months.
- Mr Jeffries said “Although this year’s tuna season would finish shortly, current value to South Australia’s economy was difficult to predict in the on-going instability of the global economy”. Port Lincoln fishermen caught 8,000 tonnes of tuna worth $190m last year.

Extra consultation and support for marine parks

Those affected by the State Government’s decision to create 19 marine parks in State waters can get help from a newly appointed Industry Liaison Officer, former SA Rock Lobster Advisory Council executive officer, Roger Edwards.
A seafood industry taskforce and commercial fishing working group has also been appointed for each of the parks to protect habitats and biodiversity.

Dairy Industry

Erratic milk prices

The recent widespread falls in milk prices has increased the number of dairy cows being placed on the market, as farmers move to rationalise their herds and adjust to lower prices. At present, prices are somewhat erratic, but appear to be holding firm as expectations of a flood of cattle on the market, following recent extremely hot weather have not eventuated.
Dairy industry advisors are encouraging their clients to critically assess the various offers they may receive from milk processors. Those familiar with the industry advise that the structure and content of milk supply contracts varies considerably, thus making it difficult to compare ‘apples with apples’. Further, it is reported that many farmers tend to not critically analyse the differences when prices are buoyant, however, in times of lower prices such an examination is time well spent.
Dairy industry observers are also predicting that we are approaching a period of transition and consolidation in the dairy sector. Older producers are taking the opportunity to exit the industry after a number of recent good years and members of younger generations remain enthusiastic, despite the current low price levels.

Grain Industry

Producers closely watching the weather

With a series of challenging seasons being experienced across the wheat growing areas of Australia in recent years, grain producers will be closely watching weather forecasts for the coming season. In particular, attention will be paid to changes in the Indian Ocean Dipole (‘IOD’), which is a measure of the sea surface temperature in the eastern and western regions of the Indian Ocean.
For a number of years now, Japanese scientists have provided rainfall guidance for southern Australia, based on the state of the IOD. Recently, Australian scientists have announced research findings that indicate a correlation between previous severe Australian droughts and fluctuations in the IOD.
Producers will also be keeping a close eye on the prices of inputs such as fertiliser and diesel in coming months. While the international price of fertilisers such as DAP have dropped, as a result of the global economic downturn, the local prices have not moved significantly. Industry commentators attribute this situation to local suppliers holding stock purchased at previous high prices and being unwilling to absorb the cost of selling at prevailing world prices. This situation provides an opportunity for investors and speculators to opportunistically import fertiliser and capitalise on the arbitrage.

Other

Global Financial Crisis impact on Agribusiness

Farmers, about to source an estimated $4 billion of short term funding to plant their winter crops, may be considering whether there is enough short term finance available and at what risk. In the circumstances, some farmers may be reconsidering their regular, full cropping program as a way of offsetting their financial risks.
The Global Financial Crisis (‘GFC’) may be impacting the agribusiness supply chain with Australian Bankers Association director and rural banking spokesman Stephen Carroll. Mr Carroll says “while credit to farmers was still flowing well because of the assets they could use as security, further up the chain there were concerns.”
“The area where there is a problem with accessing credit is more in terms of those people that farmers are selling-on to including feedlotters, abattoirs and dairy processors,” Mr Carroll said.
Mr Carroll advised that those sectors have had to come to the banking industry and look to access funds different circumstances to what they were dealing with prior to the global financial crisis.
Westpac and CSU Agribusiness Index survey co-ordinator and CEO of CSU’s Western Research Institute, Tom Murphy, noted agribusinesses were responding to the challenging economic conditions by focusing on managing costs and diversifying their business risk where possible.
Saul Eslake, from the ANZ Bank, says news that Japan’s gross domestic product has shrunk to its smallest level in 35 years is indeed a cause for concern. But he says Japan will still need to import agricultural commodities such as beef, seafood and dairy, which will remain relatively strong. “I’m not sure that the agricultural sector will be hit nearly as hard as the resources sector, and of course that’s against the background of the agricultural sector not having benefited to anything like the same extent as the resources sector did during the upside,” Mr Eslake says.

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
75–77 Clarence Street
Port Macquarie NSW 2444

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