Investing In Aussie Agriculture

Taylor Scott International News

28 AUG 2013 Matt Woodington It may have been a pretty dull spectacle in general but for those in the business of agriculture, the first election debate between Kevin Rudd and Tony Abbott was exciting for the mere mention of their industry. For Australian agribusinesses, Asia’s rising middle classes and their growing appetite for better, or simply different, foods is a tantalising opportunity but investment in the sector is needed. Indonesia is currently the biggest importer of Australian agricultural products, with Japan, South Korea and parts of the Middle East not far behind, but demand is on the increase throughout Asia, as more wealth leads to a taste for the kind of grains and proteins Australia produces in droves. Meanwhile, as the mining boom subsides, plenty of questions linger around how the hole it leaves behind in the Australian economy will be filled. Just like Australia can’t feed Asia by itself, agriculture won’t replace mining but it could certainly play its part. “It’s coming back into focus, I think the fact that it even gets a mention in the first debate between the leader of the opposition and the prime minister, shows the rejuvenation and increasing interest in agriculture and agribusinesses generally,” says Tim Burrow, a director at the Agribusiness Association of Australia. Australia’s export pedigree Although it’s a relatively small food producer on a global scale, Australia punches above its weight as an exporter, because it only uses roughly a third of its produce. “We export a lot of protein, whether it be animal protein in the form of beef or vegetable protein in the form of good quality wheat,” says Burrow. “There will be particular types of grain, meat or sugar that Asian people wish to have, just like we import quite a lot of food because it’s what we want and other countries or farmers are better at producing it.” Chinese demand for wheat and dairy products is growing fastest, as its middle class expands and mistrust of local food sources remains an issue. According to CBA analysts, China has contributed 33% to the growth of global fresh milk consumption since 2010 and 80% to whole milk powder growth, often used for infant formula. However, Chinese dairy demand still lags that of comparable developed-Asian countries. “For example, Chinese per capita cheese consumption grows as incomes grow. If China’s rate of per capita dairy consumption matched the developed-Asia average, Chinese cheese consumption would surge 8.4 times to 3 million tonnes, equivalent to a 16% uplift in global demand,” according to a CBA analyst note. “Despite Chinese investment in dairy genetics and infrastructure, recent local feed shortages – evidenced by swelling imports for corn, wheat and soybeans – supports CBA Commodities’ view that future growth in Chinese dairy consumption will be largely satisfied by imports. “The New Zealand and Australian dairy sectors have an opportunity to satisfy Chinese demand.” Agricultural consolidation New Zealand has stepped ahead of Australia with its free trade agreement with China, but CBA believes demand will continue to outstrip supply. New Zealand is the lowest cost dairy producer in the world, with Victoria in second place. Costs are much higher even in places like North America where farmers rely more on grain fed cattle yards, rather than good old fashioned grass. The world’s biggest dairy exporter, Fonterra of New Zealand, was recently forced to assure China and other importers over the safety of its milk following a botulism scare after bacteria was found in whey powder used in its infant formula. One of Australia’s biggest infant formula producers is Bega Cheese, which derives around half its earnings from exports. Bega, whose earnings increased 13% in the 2013 financial year, also owns around 18% of Warrnambool Cheese and Butter Factory, in which Murray Goulburn also has a 14.5% stake. Reports suggest the two shareholders could be positioning themselves for a takeover approach and while another domestic tie-up could stem from Ruralco’s interest in Elders, what’s causing more of a stir at the moment is the continuing trend of overseas buyers picking off Australia’s biggest agribusinesses. ABB Grain was bought by Canada’s Viterra in 2009, which is now part of Glencore, while AWB was sold to another Canadian company Agrium a year later. The major deal currently on the table is a $3.4bn offer for GrainCorp from US company Archer Daniels Midlands, which would see another of Australia’s biggest grain companies fall into foreign hands. The proposed deal, which is due to be resolved by November, has caused controversy and frustration among those that fear Australia is losing control of too much of its agricultural real estate. “What we haven’t really seen in the agricultural sector unfortunately is a merger of two big Australian companies to become a global player,” said Burrow. “We simply don’t have enough investors in Australia to grow the agricultural sector fast enough to meet the opportunity demand out there. So we need international investors, whether it comes from the UK, US, China, the Middle East or wherever it might be. “At a corporate level they are very open to international investment, at an individual personal level, we all get a bit concerned about who’s going to own our own food chain.” Understanding the investment challenges One of the big challenges for individual investors is getting to grips with the short-term volatility of agribusiness, which is considered a highly cyclical sector due to its pronounced ups and downs. Weather plays an important part and not just the weather in Australia either. Dairy farmers were hit hard by the periods of drought between 2001 and 2009, particularly in Northern Victoria. The struggles of Australian farmers may have helped their northern hemisphere counterparts, however, as demand for their goods would have gone up due to the fall in global supply. Likewise, if conditions for growing wheat are perfect everywhere in the world at any given time, then the lavish supply would cause prices and therefore the earnings of producers to fall. With those variations at play, keeping costs to a minimum is a priority for agribusinesses, which is why some have moved to mechanical harvesting, used for grapes for example, and more dairy farmers are employing robots in the milking shed. Agribusinesses will have been relieved to see the value of the Australian dollar fall, which should have a broadly positive impact on the industry. A lower dollar makes Australian goods cheaper for overseas buyers and gives the companies a chance to increase margins. Tasmanian Salmon farmer Tassal is one company to have put its export business on hold until the dollar reached a more palatable level, although it has done rather well from its domestic operations. Burrow believes that agribusinesses are best suited to long term investors, while the possibility of more takeover activity in the sector could be an attraction. The offer for GrainCorp represented a 49% mark up on its closing share price the previous day. The broader industry faces plenty of other challenges; the need for more investment in infrastructure to access remote regions and facilitate more export traffic, and fixing the shortage of qualified agricultural people coming through Australia’s universities are among them. “Agriculture needs focus, it needs a political statement on it because it requires the space to develop rapidly to meet the demands,” said Burrow. “I just think it’s good that the political platform at the moment is recognising the importance of agriculture.” Taylor Scott International

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