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Agribusiness Newsletter October 2009

Contents

Meat Industry

Australian exports of grinding beef to the US takes a dive

A recent decision by the US organisation, Cooperatives Working Together, has recently resulted in the culling of 225,000 cows and 5,000 heifers from the US dairy herd. This has in turn flooded the US domestic grinding beef market at the expense of exporters into the US, such as Australia.
Australian shipments to the US in September will be about 19,000 tonnes, down 13.7% on the same time last year and 28.5% lower than the average for 2004 to 2009.
Besides the US dairy herd cull, the impact of the high Australian dollar has also adversely affected exports to the US. Since March, the Australian dollar has increased in value by over 40%.
According to Meat and Livestock Australia (‘MLA’) economist, Tim McRae, the impact of the dairy herd cull in the US will be temporary, as this meat would eventually have to be sourced from export markets such as Australia.

Korean beef market remains unsettled

Although Australian exporters of beef to Korea still hold approximately 60% share of the South Korean imported beef market, Australian beef sales to South Korea have fallen 12% compared to the same eight month period last year.
The Korean market has changed considerably since the global financial crisis, with large numbers of importers having gone broke as a result of being caught with product they could not sell. Currently, there are now only approximately 100 big meat importers still operating in South Korea.
Another factor that is impacting on Australia’s competitiveness, is the increasing Australian dollar against the US dollar.
The above is being compounded by the fact that there are currently significant volumes of US beef held in cold storage. US beef has been stockpiling in South Korea due to Korean consumers not embracing the US product as was initially thought. Accordingly, the US authorities will now need to consider selling the stockpiled beef at low prices before the expiry date, thus causing further instability in the market.
Fortunately, Korean consumers are still making a choice based on food safety and if this continues, Australian beef exports will remain highly sought after compared to US products. The problem is that the US is now starting to copy some of Australia’s marketing strategies for beef, in particular, its focus on how red meat could benefit the health and learning ability of young Korean children.

Collapse in co-product prices for beef cattle

Driven primarily by significant decreases in the price of hides and other high value edible offal products, the average return from by-product sales on a per head basis has fallen by $50.
With regards to cattle hides, prices in June were approximately 60% lower than a year ago. This was caused predominantly by a lack of consumer demand for luxury leather items, as well as the downturn in the automobile industry, a large user of cow hides for seats.
Demand for high end edible offals such as tails, swiss cut tongues etc have decreased by approximately 39% compared to last year. These products were traditionally sold to top end markets such as Asia and Russia, which have no longer being buying as much product due to the global financial crisis. Product is now dumped on cheaper markets such as Africa and Jamaica.
In contrast to the above, meat and bone meal values have surged in the past 12 months caused by a switch to this product as a result of the high cost of soy meal. Tallow prices have also increased due to the biofuel industry taking advantage of this product.

Ever decreasing flock numbers appear to have no impact on slaughter numbers

Since the collapse of the Wool Reserve Price Scheme in 1991, sheep numbers have more than halved from 170 million to 77 million. In contrast, the annual disposal of sheep and lambs has remained relatively constant. Disposal is made up of live export and sheep and lamb kill.
Back in 1991/92, the combined lamb and sheep slaughtering and live exports was 39 million head, which included about 16 million lambs. Since then, lamb kill numbers have edged up to more than 20 million, while sheep for mutton and live sheep trade have fallen to less than 15 million.
The Sheep/Meat Council has acknowledged that this trend is unsustainable, and soon there will be insufficient sheep to satisfy the increasing demand for lamb. This is of serious concern to lamb processors such as Castricums and Wellards in WA.

Sheep measles on the rise

Sheep producers are being reminded to worm their working dogs after new research from the Department of WA Agriculture revealed they were responsible for transferring an alarming level of sheep measles otherwise known as C. Ovis.
Outbreaks of sheep measles usually occur in the spring months and have been identified as a significant source of unexpected financial loss for sheep producers. Identification of sheep measles at the point of slaughter results in the waste of part or the whole of the infected carcass.
While sheep measles doesn’t impact on human health, it does leave calcified cysts in the sheep meat, which is unpleasant for human consumption.
A Sheep Measles Working Group (‘SMWG’) has been formed to educate producers of the risks, impact on their income and measures to reduce the incidence of the problem.

Wine Industry

Will vineyard workers’ penalty rates cause harvest turmoil?

Winegrape Growers Association’s Nick McKenzie says it will unless Employment and Workplace Relations Minister Julia Gillard heeds growers’ pleas to reverse an Industrial Relations Commission wage ruling that increases workers’ penalty rates by as much as 250%.
He says that unless she overturns the ruling as she did after recent changes to the Horticulture Industry Award, many growers already suffering because of a price plunge and cancelled contracts in the wake of the industry’s over-supply, will have no option but to abandon grape production.
Growers were previously exempt from wage loadings because like other primary producers, they’re unable to pass on costs. White wine grapes, for example, have to be harvested when it’s cool, which often means overnight. But irrespective of the variety, the timing of grape picking tends to be more at the behest of winery owners than grape growers.
- From 1 January 2010, loadings of between 150% and 250% will apply to work done outside ordinary working hours and during weekends and public holidays (ordinary hours between November and April being regarded as 5am to 6pm).
- Night work attracts a 150% loading for the first two hours, 200% for all work done after that, and on public holidays a 250% loading will apply.
- Murray Valley Winegrowers CEO Mike Safe says that about 100 Mildura district vineyards have ceased production in the past 12 months, vineyard numbers there having fallen from 1300 to about 900 in recent years. He says that many of the remaining growers will see the new wage ruling as “the last straw”.

Twelve Australian wine families unite to take a stand against ‘critters’

The companies they founded have become publicly listed and they say so-called critter brands (wines named after birds and a variety of Australian animals, and with illustrations of these critters on bottles) are harming international perceptions about Australian wine.
A cheap wine with a stylised Wallaby on the bottle is the most popular wine sold in the US and around the world most Australian wine is being sold below $11.95 a bottle (or its equivalent).
The twelve families are d’Arenberg, Henschke, Jim Barry, Taylor and Yalumba (all from SA), Brown Brothers, Campbell Tahbilk (Victoria), De Bortoli, McWilliams and Tyrell (NSW), and Howard Park (WA). Members believe Australia’s long term future success as a wine exporter will depend very much on its international recognition as a producer of quality wines.
- Dane Hudson, chief executive of Australian Vintage, which is listed on the Australian Securities Exchange, said that while he fully supported what “the first families” were doing, most Australian wine sold abroad was in “the commercial category” and the industry could take pride in providing excellent value for money.
- However, the families group will brand their wines under a special logo and market it highlighting quality backed by generations of family tradition.

Fishing Industry

Port Lincoln tuna industry looks to benefit from a European decision

The European Commission is expected to support suspension of international trade in Atlantic and Mediterranean bluefin tuna when member states next March vote at the Convention on International Trade in Endangered Species.
Clean Seas Tuna chairman Hagen Stehr says he expects the ban would be linked to a minimum two-year moratorium on the wild catching of northern bluefin tuna in the Mediterranean.
- While it’s been known for many years that over-fishing there and in the Atlantic has pushed the species to the edge of extinction – some marine biologists fear it may never recover – Australia by contrast has enforced a quota system. This has been done so effectively that, according to Mr Stehr, “Australia has the only sustainable tuna fishery in the world”.
- Meanwhile, Clean Seas are well on the way to farming tuna commercially, achieving a 90% increase in revenue to $30.4m in 2008-9. This was recorded against a loss of $18.3m when it wound down its mulloway operations and cut its kingfish inventories.

World first trial of formulated feed for farmed tuna

Produced by Ridley Corp in partnership with Clean Seas Tuna at Port Lincoln, the new fish food enriched with vitamins E and C outperforms traditional pilchard fish feed in weight gain, condition and food conversion ratio.
Reports following the marketing in Japan of 2,000 tuna fed exclusively on the new product show consumers believe the fish have higher flesh quality and superior taste. A system has been developed at Port Lincoln to deliver the formulated feed to penned fish 30% more efficiently than pilchards can be fed to them, with less risk of disease. Farmers regard the successful trial as an important step towards total sustainability and commercialisation of fish farming.

Rock lobster catch limits cut by 98 tonnes for the 2009-10 season

The Northern Zone Total Allowable Commercial Catch (‘TACC’) has been set at 310 tonnes, down from last year’s quota of 402 tonnes, while the corresponding figures for the Southern Zone are 1406 and 1400.
SA Fisheries Minister Paul Caica says the Northern Zone has been over-fished to be left in its weakest position since records were first kept.
PIRSA Fisheries and SARDI Aquatic Sciences have told the Minister they believe the annual TACC quota for this Zone should be reduced progressively to 250 tonnes over the next two years.

Dairy Industry

Sentiment best in the West

Dairy Australia has recently completed a survey of producers, which included a measure of dairy farmer expectations for the future of the industry. Not surprisingly, levels of optimism were down on prior periods, following substantial falls in the prices offered by dairy processors and the drought affecting many areas.
Of the areas surveyed, producers in Western Victoria were reported as having the highest level of optimism about the future of the industry, which is in line with popular perception that this area has enjoyed the best start to Spring of all the dairy regions. It is expected that sentiment in North East Victoria will have improved since the survey was completed, following recent increases in irrigation allocations for that region.
At the other end of the scale, both Tasmania and South Australia reported high levels of pessimism about the industry. The number of dairy farmers who are considering leaving the industry has increased markedly in both states to be 32% in South Australia and 18% in Tasmania.
While recent seasonal improvements have increased the general level of optimism amongst many producers, a number of factors are perceived as ongoing issues for the industry, amongst them the continuing climb of the Australian dollar and the prospect of American producers increasing exports in response to improvements in world prices and the deteriorating value of the US dollar.

Grain Industry

Harvest gets started and yields patchy

Harvest has now begun across a number of Australia’s grain producing regions, with varying reports of crop yield and quality. Estimates being received from Western Australia indicate that it is unlikely that growers in that state will match last year’s harvest of 12.3 million tonnes. The reduced tonnage is attributed to a lack of finishing rains in a number of areas across the state.
Reports from Queensland and NSW are that yields will be patchy. Some areas that received significant late rain from thunderstorms are reporting good prospects for their grain crops, while less fortunate areas are anticipating considerably lower yields. Producers in both Victoria and South Australia are anticipating good crops following the best Spring rainfall to be experienced in many years.
The latest estimates of the total Australian wheat crop are around 22 million tonnes, with an estimated 700,000 tonnes of unsold wheat from the current harvest being carried over.
It is reported that many growers are unwilling to commit to forward sales of their crop, at what they perceive to be low prevailing prices, however, it is unclear how far prices are likely to rise in the short term given expectations that the Australian dollar will continue to strengthen.

Other

Regional lender alert

Over the last two months, we have observed an increase in the level of conversion by borrowers of financed assets. These have included, livestock subject to stock mortgages, leased plant and equipment, sale of water rights and conversion of goods bailed. Funds have been used to meet working capital, crop funding, other financier’s commitments or personal obligations. All have been to the detriment of the financier of the converted assets.
Desperate times equate to desperate measures and the continuing drought on top of pressures of the general financial market seem to be giving rise to a spate of adverse activities. Our investigations also suggest, you can never under estimate the lengths a desperate borrower will go to cover up such actions including falsifying documents, false declarations etc.
Following the end of the financial year, it is timely to seek verification on the existence of loan security including independent audit certificates for larger clients or inspections by bank officers of charged assets in the course of general client relationship dealings.
Better to be safe than sorry and we have been quite surprised at the lengths borrowers have gone to in seeking to hide the conversions.
The genetic makeup of the Swine Flu strain H1N1, enables the virus to be carried in birds. However the genetic combination of Bird Flu and Swine Flu whilst theoretically possible, has not yet been documented.
The Bird Flu strain H5N1 isn’t easily transmitted amongst people, however, it has killed 61% of the 423 people infected since 2003. Whilst the Swine Flu is not as deadly to humans, it has reached more than 170 countries and territories in the four months from being identified. The combination of these two attributes is concerning for officials and the general public.

Russian Government concerned with contamination in Kangaroo meat

Until recently, Russia took 60% of Australia’s Kangaroo meat exports.
In August 2009, the Russian government suspended imports, citing food safety concerns.
Australia’s kangaroo industry is worth an estimated $270 million a year.
The Russian government agency that oversees hygiene standards for meat imports, says the suspension was imposed because of contamination concerns.
John Kelly, the executive officer of the Kangaroo Industries Association of Australia, says the industry has been forced to shed about 2,500 jobs across the country.
QLD Premier Anna Bligh will visit Russia during an overseas trade mission this month to discuss a ban on roo meat imports. The majority of shooters and meat processors are located in QLD.

Mining versus Agriculture

September saw the opening of the senate inquiry into food production in Australia where Mitchell Hooke, CEO of Minerals Australia, was given the opportunity to address the interaction between two of Australia’s important industry sectors, agriculture and mining.
In his address, Mr Hooke outlined the co-existence of the two industries already within Australia and focused on the need for co-operation not confrontation. These areas include the Hunter Valley, where underground coal mining occurs beneath highly productive Vineyards above; in Victoria where cattle graze on land once mined for brown coal adjacent to operating mines; old sand operations are used for beef and dairy production in WA.
However tensions are increasing between the two groups over the suitable land use and the protection of resource-rich agricultural land. Queensland’s highly productive Darling Downs region, is currently at the focus point of the debate where farmers and community groups are opposing submission for coal mining in the area.

Weather conditions in Eastern Australia

Over the last decade, we have seen an increased focus on looking for explanations to the adverse weather conditions that have been impacting our farmers. Our media often refers to seasonal outlooks usually with comments on global warming, climatic conditions such as ‘El Nino’ or ‘La Nina’, rising sea levels, unforeseen weather events etc. Our weather patterns have spanned hundreds of millions of years however our analysis of weather condition outlooks in regional areas considers a data sample of 80 to 100 odd years.
Various weather forecasting bodies around the world have pursued scientific analysis and explanation for weather phenomena. Australia’s own Bureau of Meteorology (‘BoM’) has expanded its analysis and the services available to users such as farmers. However the BoM is often criticised for its predictions and outlooks.
‘El Nino’ climate conditions are referred to as the foundation of drought conditions in eastern Australia. In summary ‘El Nino’ weather conditions are associated with below average rainfall conditions in the second half of the year in South Eastern Australia. On the other hand ‘La Nina’ conditions are associated with above average rainfall.
Once again, winter cropping in Eastern Australia has been hampered by intermittent and below average rainfall. This year’s winter was the warmest on record for NSW, Victoria and South Australia whilst August was the hottest recorded nationally. Record levels of live stock are being offered in ‘special’ sales in addition to the regular prime or store sales.
Attention has again turned to our Weather Forecasters in the hope of positive outlooks. A common indicator considered in eastern and northern Australia is Southern Oscillation Index (‘SOI’) which refers to monthly or seasonal fluctuations in the air pressure difference between Tahiti and Darwin.
Sustained negative SOI often indicates El Nino or drier episodes with sustained warming of the central and eastern tropical Pacific Ocean, a decrease in the strength of Pacific Trade Winds and a reduction in rainfall over eastern and northern Australia.
Positive SOI is associated with stronger Pacific Trade Winds, warmer sea temperatures to the north of Australia and increased cloudiness over Northern Australia, Papua New Guinea and Indonesia. This indicates a La Nina episode with waters in central and eastern tropical Pacific Ocean being cooler and provides a higher probability of increased rainfall in Eastern and Northern Australia.
Currently climate indicators are in the majority suggesting a lower probability for rainfall out to March 2010 when the ‘El Nino’ is expected to fade.
On the positive side this suggests a strong start for 2010 winter cropping season. We can only hope!

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 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

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 10, Parmelia House
191 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