Agribusiness Newsletter October 2008
Contents
Meat Industry
Wine Industry
Dairy
Other
Meat Industry
Meat substitution – is this a concern for the meat industry?
The Senate Rural and Regional Affairs and Transportation Committees’ interim report in meat marketing said “that meat substitution in the $1.2 billion sheep and meat industry is a legitimate concern, though not widespread”.The Committee found that mutton is being sold as lamb by some unscrupulous abattoirs. For meat to be recognised as lamb in Australia, the lamb must be of an age which none of its adult teeth has broken through the gum. Mutton is either deliberately being sold as lamb, or inexperienced workers may muddle the meat varieties.
It is proposed to use a similar template as in WA, where meat inspectors check that all sheep have been ‘mouthed’ before they are slaughtered. There is a strict sanction regime in place and offenders have been sent to jail.
Depreciating $A brings relief to meat producers and processors
The recent slump in the $A compared to the $US (0.96 cents to 0.70 cents – 27% decrease), is welcome relief for meat producers and processors.The benchmark Eastern Young Cattle Indicator (‘EYCI’) has smashed a two year high. According to Meat and Livestock Australia, this increase in cattle prices is partly due to the depreciation Australian dollar.
The good news also extends to processors who, although may be paying more for their cattle, have locked in long term contracts, that have been written in $US.
Furthermore, there is still a growing demand for protein globally, despite recent turmoil on financial markets, particularly, from the merging middle class income earners. Demand for manufactured beef, used in hamburgers and mince, continues to filter through to Australia where demand for cows is at an all time high.
Furthermore, drought conditions throughout much of the Riverina and other parts of Australia is forcing farmers to sell off cattle, thus generating plentiful supply of cattle to meat processors.
Wine Industry
Some of the big players are finding this industry’s not all beer and skittles
Three major beer stakeholders in the wine industry are learning about the industry the hard way. Foster’s Group, Lion Nathan and Constellations Brands (the world’s biggest alcohol company based in New York, but with a significant Australian connection) have between them, just shredded more than $2bn in write-downs.A combination of poor returns on investment and increasing global competition is causing these companies to review their wine industry assets.
Constellation having written off about half of the value of the disastrous $1.9bn purchase of BRL Hardy five years ago, intends selling three of 10 Australian wineries and more than 20 vineyards (www.wineryforsale.com.au). The plan appears to be to quit the low-margin commercial wine business by dismembering Hardy’s operations.
It seems Fosters is steering a similar course. Industry scuttlebutt suggests that having exited many of its lower end wine operations, there will be a de-merge from the remaining wine business so that the Group’s shareholders will have the option of retaining an interest in both a wine business and beer business, one or the other, or neither.
The reality for Australian wine producers is that it’s uneconomic to produce anything that will be sold for less than $7 a bottle. Costs are rising, water is an increasing problem, and the Australian dollar worth US50c in the earlier part of the decade when the industry was booming, will never be that low again.
An extra 150 companies entered the industry in the past financial year, many boutique producers seeking to trade in the upper end of the market (where everyone’s headed), so that Australia’s total number of wine companies is now 2,300 and still increasing.
The big players don’t like the look of this, which is why they’re reassessing their positions and they’re liking it even less, because exports for the 12 months to July were down 12% to $2.65bn, representing a 13% drop in volume to 703m litres.
Murray Valley wineries are favouring winery-owned grapes
An analysis of the area’s crushings this year shows wineries have reduced grape quantities bought from outside growers to increase the percentage crush from winery-owned grapes.The analysis shows that in an estimated Valley harvest of 365,000 tonnes, up about 2.5% on last year, the crush included some 40% of winery-grown fruit, while wine producers took substantially less from growers than last year, about 10,000 tonnes less, down to 298,000 tonnes.
Biggest growth in grape production in the Valley was white variety pinot gris, up 193% and sauvignon, up 74%.
Mike Stone, Murray Valley Winegrowers’ CEO, said the analysis revealed some ‘solid’ price increases, “The red grape varieties, particularly shiraz, cabernet sauvignon and merlot, each increased by $200 a tonne,” he said. However, Mr Stone added:
“On paper that looks very good, but you’ve got to remember that growers have spent about $200 a tonne buying supplementary water so that many of them were only marginally better off
than they were last year.
Expanding water market for growers
Geographically, the size of the water market in the Murray Darling Basin is further expanded. Temporary water can now be traded up and down the Murray, lower Darling, Murrumbidgee and parts of the Goulburn rivers.The Lower Darling River in NSW has opened temporary water trading to interstate growers this season for the first time.
Freeing of restrictions against trading has now increased the market’s size enormously.
Water could not be traded from the Lower Darling while Menindee Lakes were under NSW Government control, which meant the Lakes’ water was tradable only if they held enough
water to supply Broken Hill for more
than 21 months.
The Murray Darling Basin Commission (‘MDBC’) was allowed to assume control of the Lakes only after Broken Hill’s supply was guaranteed, but this year the rules have been relaxed to provide water to irrigators and industries facing shortages.
From a situation where water licences could only be traded within State borders, to one in 1998 where NSW, Victoria and SA allowed restricted cross-border permanent trading, there is now also temporary trading across increasing areas of the Basin under increasingly flexible rules.
SA water allocations have risen from two to six percent, with 100% of pre-approved carryover water now available. Victoria’s allocations were last reported at zero percent and under review. Murrumbidgee was recently at 40% and Murray Valley (NSW) at 25%. For up to date details go to
www.percat.com.au
However, some unequivocally good news for water-users downstream as we go to press, the Queensland Government has approved release of some 10.6bn litres of water into the system that would have otherwise have been auctioned for irrigation.
Dairy
Increased milk prices flow into FMD’s
The amount of money held in Victorian Farm Management Deposits (‘FMD’) reached a record of approximately $700 million as at 30 June 2008. FMD’s are used by primary producers to manage their tax obligations from year-to-year, by quarantining profits received in good years from income tax, thus allowing the funds to be used in later years, when returns may be lower.It is considered likely that the majority of the increase is accounted for by dairy farmers who have enjoyed large increases in the price received for milk.
ABARE highlights income rise
A recent report released by ABARE highlights that following a marked decline in farm cash income in 2006/07, dairy farmers have enjoyed a marked rebound during 2007/08.While dryer than normal conditions have persisted in many dairy production areas, which has resulted in depressed production levels and increased
feed costs.
The more favourable financial environment is also being reflected in the results of processors. An example, Warrnambool Cheese and Butter recently reported that its profit has increased by 155% to $25.5 million.
Other
Toorale Station sale to Government
Toorale Station in the Bourke Shire has been sold to the NSW and Federal Governments for $23.7 million.The 91,000ha property is proposed to be turned into a national park as part of the NSW and Federal Government’s plan to save the Murray–Darling Basin. The purchase of Toorale Station will return about 20,000 megalitres of water a year to the environment.
Approximately 2,000ha of the 91,000ha property was developed for growing irrigated crops, with the balance of the land used to run sheep and cattle.
It has been reported that over 100 jobs will be directly lost as a result of the purchase of Toorale Station, sparking calls for the security of local jobs and ongoing management considerations during the sale of Toorale Station, not just environmental issues.
Pressure is being mounted on the Government to look at combining grazing and eco-tourism and not taking Toorale Station entirely out of agricultural production.
Locals are worried that after withstanding years of drought and environmental cuts to irrigation water allocations, they may suffer further social and economic impacts should Toorale Station be turned into a
national park.
US sticks to its guns with regards to mulesing
US clothing retailers are adamant that Australian wool growers should honour their commitment to stop mulesing by the end of 2010.Mr Erik Autor, Vice President of the National Retail Federation (‘NRF’) recently advised that it was the Federation’s understanding that the Australian wool industry would end mulesing by 2010 and replace it with alternatives such as clips.
Mr Autor also stated that “in the meantime, analgesics should be administered to animals that must be mulesed until the alternatives are in place”.
For the longer term the genetics program will proceed with a goal to produce bare-breech animals.
On farm grain storage increases
A new marketing era, following deregulation of the export wheat market and concerns about transport and storage problems are driving demand for on farm silos.Demand for on farm storage has been driven by the increasing uncertainty in the soft commodity market coming into harvest, without AWB pools effectively maintaining a floor price.
High fuel costs, chain-of-responsibility loading regulations and new fatigue rules, have added to the cost of harvest road transport, however recent increases in steel prices will continue to impact the costs of on farm storage given the recent decrease in the Australian dollar.
Increased on farm storage will give growers the ability to market their crop throughout the year providing them with the ability to even out cashflow.
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 2, QV 1 Building t +61 8 9382 8933 Port MacquarieDavid Leigh t +61 2 6580 0400 Level 2 t +61 2 6580 0400 |
