20/10/2016 - 11:06

Billionaires like beef but will they make money?

20/10/2016 - 11:06

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ANALYSIS: Andrew Forrest and Gina Rinehart, who are leading the herd into cattle farming, face a tough market for meat exports.

Billionaires like beef but will they make money?
CHALLENGE: There has been a revival in demand from China, but it also sourcing meat imports from other countries, including Brazil and Argentina.

ANALYSIS: Andrew Forrest and Gina Rinehart, who are leading the herd into cattle farming, face a tough market for meat exports.

Drought-proofing is a farming practice designed to cope with Australia’s erratic rainfall, which involves moving livestock from one water source to another, but drought-proofing is also a corporate concept at work in a number of recent deals involving rich miners and their cattle.

Gina Rinehart and Andrew Forrest, people normally associated with iron ore mines in Western Australia’s Pilbara region, are playing a game of “double-drought-proofing”, buying cattle stations in different locations while also shifting a part of their fortunes out of mining into agriculture.

Whether seen as a way of protecting a herd, or as a way of protecting capital from a repeat of the iron ore price crash, which hit the industry three years ago, drought-proofing makes sense – though whether it will be highly profitable is another question.

The reason cattle and drought-proofing are in the news more than 100 years after the idea was developed by cattle industry leaders such as Sir Sidney Kidman is that beef in particular, and protein in general, has become the latest hot Australian commodity enjoying strong demand in Asia.

The trend, as so often happens when a new business idea surfaces (or enjoys a fresh airing) is to boil it down into a snappy epithet.

In the latest craze it is summed up as switching from “mining to dining”.

As with most simplistic labels it is only partly, and possibly only briefly, accurate – much like the famous “stronger for longer” tag applied to the iron ore boom (remember that?), or the creation of the BRIC acronym out of the names of the next generation of global economic leaders – Brazil, Russia, India and China.

Brazil’s economy has melted under the weight of lower commodity prices and political corruption. Russia has blackballed itself after invading Ukraine. India is struggling to deliver on its promise, and China is burdened with a mountain of debt.

Whether Australia’s embrace of a claim that there is a switch under way from mining to dining goes the same way as stronger for longer and its close associate “this time it will be different” finds its way into the trash heap of meaningless sayings will be interesting to watch.

Right now there are very few critics of the mining to dining claim because there is evidence of a significant change in Chinese eating habits, which are becoming more Western with demand rising rapidly for prime cuts of beef, fine wine, and other delicacies.

That’s one reason why Andrew Forrest has been acquiring cattle properties in the north and south of WA, with a holding now measured at more than one million hectares under the trading names of Minderoo Beef and Harvey Beef, which is on the menu at the exclusive Rockpool restaurants.

But another reason Mr Forrest is building his beef interests is that his family has been involved in remote pastoral stations for generations and he is keen to recreate what once was, even if it is highly unlikely that he will ever generate profits from farming to rival those from iron ore mining.

It’s same with Gina Rinehart, who has reacted to the call of a family tradition that goes back to a time when her father, the late Lang Hancock, eked out a living as the owner of Wittenoom station in the Pilbara while developing more significant money-making interests mining asbestos and exploring for bauxite in the hills north-east of Perth, and iron ore in the Hamersley Ranges of the Pilbara – where he hit the jackpot.

Both Mr Forrest and Mrs Rinehart see farming as a family calling and as a way of redirecting some of their spare cash into a business which is subjected to different market forces to iron ore and one that could be handsomely profitable under the right conditions.

The key question, as everyone involved in farming knows, the right conditions do not always last for long. If it’s not the seasons it’s the activity of competitors over-filling the market and driving prices down.

More on the markets later because the development of immediate interest is Mrs Rinehart’s bid to buy, with a Chinese joint venture partner, a large part of the cattle empire started by Kidman in 1895, growing until he controlled more than 3 per cent of Australia in the form of 100 cattle stations covering 220,000 square kilometres, roughly the size of Great Britain.

Size, however, was not the key to what drove Mr Kidman and his cattle. The reason he was able to succeed when other pastoralists failed was that he successfully drought-proofed his business during the worst of Australia’s never-ending cycle of droughts and floods.

By acquiring a string of stations from the far north of WA, Queensland the Northern Territory through the Channel Country of central Australia he was able to breed cattle in the north and move them safely to the south and the markets of Sydney and Melbourne.

Remarkable as his achievements were, it is sobering to realise that the empire now trading as S. Kidman & Co, with 185,000 cattle on stations covering 101,000 square kilometres, is on the verge of being sold for a reported $365 million.

Whether the sale proceeds to a joint venture called Australian Outback Beef, which is 70 per cent-owned by Mrs Rinehart and 30 per cent by a Chinese company, Shanghai CRED, might not be known for some time as there are reports of a potential rival bid and with approval required from the Federal Treasurer Scott Morrison.

Future ownership of S.Kidman & Co is important, but from a business perspective the more important point is the price, because if $365 million is correct, it means that a huge amount of the Australian Outback, and a vast cattle herd, is being traded at a value which is less than 5 per cent of the value of Mrs Rinehart’s newly completed Roy Hill iron ore mine.

That value comparison is not meant to downplay the significance of the Kidman legacy, or the importance of what Mrs Rinehart and Mr Forrest are doing in growing their cattle interests.

It is, however, a reality check because while agriculture is enjoying a renaissance in Australia, and Chinese demand is undoubtedly strong, there will be limits to how far the revival can go simply because of the factors of supply and demand which drive mining also drive farming, with a couple of extra issues, such as weather risk and the lower barriers to entry for competitors.

China, for example, is not shopping exclusively for beef in Australia. It is sourcing its dining requirements from a number of countries, including Argentina and Brazil.

A warning shot across the bows of the mining-to-dining mantra was fired last month by the federal Department of Agriculture in the latest edition of its quarterly, Agricultural Commodities.

The beef section of that document noted that “Australian exports face increasing competition”, with beef and veal shipments forecast to fall by around 12 per cent to 1.03 million tonnes in the current financial year, a decline reflecting lower beef production.

“Average export unit values are also expected to decline because increasing competition in major markets is expected to reduce demand for Australian exports,” the quarterly noted.

“As a result the value of Australian beef and veal exports is forecast to decline by 12.5 per cent to $7.3 billion.”

To put that value of beef and veal exports into perspective, it is roughly 15 per cent of the value of iron ore exports, which are running at more than $50 billion, even at the currently depressed price.

It might not get much easier for beef exporters because while Chinese demand is unquestionably rising Australia’s share of the overall market is falling.

The department’s quarterly update acknowledges the strong rise in China’s beef imports, and the equally sharp fall in Australia share of the market.

“Chinese beef imports grew by 80 per cent in 2015-16 to 585,702 tonnes, as consumption growth continued to outpace local production,” according to the Agricultural Commodities report.

“Despite this, Chinese demand for Australian imports has weakened in recent years as a result of increased competition in that market, particularly from Brazil.

“The market share of Australian beef in China declined to 25 per cent in 2015-16, half that of 2013-14.

“In 2016-17 Australian beef and veal exports to China are forecast to fall by 22 per cent to 100,000 tonnes. The forecast decline reflects lower exportable beef supplies from Australia and continued competition in China from South American beef.”

China is not the only market for Australian beef. Japan, Korea and other Asia markets are important while Indonesia and Vietnam are key markets for live cattle exports.

However, what the Department of Agriculture has done is put the mining to dining slogan into perspective because no matter what spin is applied to the story, beef and iron ore are just commodities, subjected to the same economic forces – with the weather tossed in as a wild card for farmers.


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