10/12/2009 - 00:00

Bright future for agriculture as changing demand, innovation reshape the market

10/12/2009 - 00:00

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Agriculture has an air of gloom about it, but key players reckon there is plenty to be positive about.

Bright future for agriculture as changing demand, innovation reshape the market

A FEW years ago, at a WA Business News breakfast function, mining entrepreneur Andrew Forrest ran some video footage of a surfer at the base of a giant wave. It was clearly the ride of a lifetime.

For Mr Forrest the analogy was clear, that China was developing at breakneck speed and its new middle class would need Western Australia’s metals faster than we could dig them up.

It was a call that was echoed throughout the mining world and investors rushed to fund the growth that was needed.

Yet long before the average Chinese or Indian can afford a car or a microwave, they are going to develop an appetite for better and more wholesome food, a far more essential part of life than even the fridge used to store it in.

WA’s agribusiness leaders have recognised that the world’s expected population growth, let alone its increased wealth, is going to drive massive demand for food over the next few decades.

AACL managing direct Andrew McBain conservatively estimates the world will need 30 per cent more food in 2020 than it produces today – done on much the same land area as we do now.

“And that is not including bio-energy,” Mr McBain said.

The predictions of more food demand plus relatively little potential to increase arable land puts farmers in as strong a position as the miners.

Yet despite this expected demand, surely a certain cause for optimism, the rural sector is viewed very differently to mining. From within and without, when you think about farming, it is too often negative.

News of drought, flood, financial assistance and family break-ups are all-too common, as if the huge opportunity created by billions of new mouths to feed simply doesn’t exist.

In contrast, the mining community, led by some of the best promoters around, has pushed the line that the biggest issue we have is getting our resources out of the ground.

For the next generation of workers one industry offers excitement, the other doom and gloom.

University of WA dean of Natural and Agricultural Sciences, Tony O’Donnell, faces this issue when it comes to recruiting students for his courses, in a faculty that is regarded as cutting edge and close to its market.

“We must move away from saying agriculture is flat or dying industry,” Professor O’Donnell said.

Farm consultant Geoff Fosbery agrees that it does make business harder than it should be.

“We are very good at producing food, that is the bottom line,” Mr Fosbery said.

“We need to put that word out there.

“One of my biggest hassles is we don’t have enough positive people coming into the industry because they only hear of drought and pestilence.”

There is no doubt that a function of this gloomy outlook is the fact that WA’s agricultural sector, already among the most efficient in the world, has been in a state of constant rationalisation, cutting the number of farmers on the land and causing rural communities to dwindle.

But many in agribusiness believe this trend needs to continue to ensure agriculture remains competitive, taking advantage of the economies of scale that bigger, more corporately run farms have to offer.

This is particularly the case in grains where the deregulation of the wheat industry is putting a lot more responsibility back into farmers’ laps, forcing them to become far more sophisticated in terms of understanding pricing, employing risk mitigation, investing in on-farm storage and, importantly, financing their activities.

Innovators

Of course agribusiness is more than just farmers and WA has some of the most innovative players in the business.

Three successful businesses in this sector representing very different strategies are: crop financing, grain marketing, land acquisition and carbon sequestration player AACL; diversified farmer, food producer and feed supplier Milne AgriGroup; and diversified food processing and logistics company Craig Mostyn Group.

These players are all at the cutting edge of agriculture, investing significant sums that defy the doom and gloom pervading the sector.

Take Milne, for example. Managing director Graham Laitt said the company had spent up to $12 million developing a feed range from crop residues, which are presented in a cube format for cattle and sheep.

Mr Laitt said the feed development came from the company’s endeavour to escape from the climatic constraints in WA, where five months of annual drought had a significant impact on a farm management.

“Our first thrust was to try to change the rules,” Mr Laitt said regarding the technically difficult feed solution, which uses stubble, a cropping by-product, to allow farmers to maintain their herds and flocks over the summer months.

But Milne’s innovation is far more high profile than its business-to-business products. Mr Laitt’s history as the chief of dairy producer Peters & Brownes gave him an insight into brands and the value to a business in presenting a premium product to consumers.

Milne’s biggest success in that area is Mt Barker Free Range Chicken, a brand of poultry products that commands a significant price differential.

While Milne is very much an integrated model from the farm to the consumer, AACL wants nothing to do with running a farm. It leaves that to the experts, instead offering a series of peripheral products that seek to reduce the risk for farmers and maximise their returns on assets.

AACL started out with an MIS product that provided up-front capital for farmers’ operational needs in return for a share of the profits, and the losses. It refers to the concept as a form of sharecropping.

It also markets the grain grown and has branched out into carbon sequestration.

AACL managing director Andre McBain is very bullish on the outlook for grain and is seeking to expand from funding more than 400,000 tonnes of grain production to 10 per cent of the national crop, a total of between 2 million and 3 million tonnes, depending on the season.

AACL is also considering a listing on the ASX with a $15 million IPO expected soon to sell somewhere between 40-50 per cent of the company, depending on post listing performance hurdles.

That will provide capital to expand its operations, which include plans to own the land farmed and lease it back to farmers, and sell inputs. AACL is also looking to generate significant offshore investment into Australian farm assets having found very little interest from local super funds, which have relatively little exposure to the sector.

Mr McBain believes AACL offers farmers opportunities to capitalise on areas that have an increasing bearing on profits, in part due to deregulation.

“Farmers have to get better at pricing and they have to get their costs down, they are missing opportunities,” he said.

“Sometimes that extra $10 a tonne makes a difference between making a profit or not making a profit.”

One of the key selling messages AACL has is the long-term relationship, smoothing the volatility of farming where the feast or famine from season to season can create significant financial pressures.

Mr McBain clearly wants to extend this longer-term thinking, believing that contracts to buy inputs over multiple seasons, and even having mining-style off-take agreements for crops, will have benefits in the future.

One issue confronting AACL is the trouble surrounding managed investment schemes, where it started and through which it is still reliant for retail investors. Mr McBain would like to see changes to cement MIS in place, including at least 80 per cent or even 90 per cent of money raised spent on agriculture.

Directors ought to be held accountable for this and the spending should be audited, he said.

“It would be great to get some certainty,” Mr McBain said regarding the future of MIS.

Craig Mosytn Group is possibly the most traditional of these three. Like Milne, it has brands and has long been involved in food processing and distribution. The company moved headquarters to Fremantle from the east coast earlier this decade, recognising its future was in WA.

More recently, Craig Mostyn has invested in food production, buying piggeries to stabilise supplies which tended to be too volatile to underpin the processing plant, such as its Linley Valley pork operation near Northam.

Craig Mostyn managing director David Lock said the company had restructured to get away from areas where there was no choice but to be a price taker.

Two years ago, it sold its Westar Lobster to Geraldton Fishermen’s Cooperative, a surprise move to exit a long-standing business line.

“Lobster is an industry that every day I wake up grateful that I am not in that any more,” Mr Lock said. “Beach prices were bid up because of the testosterone level of buyers.”

Mr Lock told WA Business News there was an over supply of processing capacity.

“The pork industry has also been like that, farmers were not making money. Our aim is to get into a supply chain where all the sectors can make money,” he said.

Consumers’ market

Mr Lock said the public increasingly wanted reassurance about what the animals were fed, their origins, and the conditions in which they were raised.

“Consumer tastes are changing,” he said.

“Farmers markets around WA and Australia and the rest of the world are indicative that consumers care about what they are eating and what is in it.

“Labelling is less than perfect. That needs a fair bit of work [done].”

Mr Laitt’s experience with consumer brands, including export success selling ice cream to Japan, has proved successful with Mt Barker chicken, a formula he intends to replicate in other lines.

“Throughout the GFC our consumers did not go away,” Mr Laitt said.

“One mistake the food industry made was that big companies were not being trusted. We are trying to develop agribusiness models that get around that [problem].

“Consumer expectations have moved. It is no longer about ‘give us some food we are hungry’.

“Building a trusting relationship is an important part of agribusiness; in some respect we are more important than their doctor.”

But in WA, public taste has also caused problems for producers.

A good example is genetically modified crops, which are banned in WA.

Many in the agribusiness sector believe this is city-based consumers dictating what farmers grow, even when the bulk of the production would be exported to markets that welcome GM food.

In some ways, it is the reverse of the shopping hours debate in Perth, which has been hijacked by the regional voters fearful of what it may do to local producers.

Consultant Geoff Fosbery warns that places such as the US are putting significant resources into GM technology that will reap big efficiencies for them.

“We are very good but the other guys are catching up to us around the world,” Mr Fosbery said.

“Some political decisions need to be made very soon as far the GM debate is concerned.

“There is a lot of emotion around it.”

Professor O’Donnell argues there is a broad range of issues around GM that the public in WA is ignoring by focusing on the negatives. He points out that the reduced use of energy in farming because crops are easier to manage and the need for less pesticide usage is not just good for the environment but is also good for farm workers.

“Those are facts that need to get out,” he said. “Out of Europe we are seeing the amount of energy into on farm systems has reduced significantly because of GM. It will only be a matter of time in WA that we move in that direction.”

Go north young man

While GM crops and more corporate-style farming practices are seen as drivers for greater production in WA’s vast Wheatbelt, which produces more than half the nation’s grain in an average year, the big greenfield opportunity is viewed by many as the Kimberley.

The tropical north has shrugged off efforts to tame it in the past century, either through its own harsh environment or political influence, most recently from environmentalists.

These days, apart from cattle grazing, only the Ord River area running north from Kununurra has any significant agriculture.

Yet there are strong beliefs that the region’s natural heritage may have been overstated and that it could be a food bowl.

Mr Laitt’s Milne AgriGroup is already operating in the region via the Liveringa pastoral station, but he believes cropping should become more common in the Kimberley.

“The north has to look at broadacre [farming],” he said. “These are things we know how to do and we are good at doing it.”

Because Milne owns freehold land in the region it has been able to experiment with cropping where other pastoralists are not allowed to due to their restrictive leases. He is also dismissive of previous attempts to grow crops decades ago.

“I have been able to get some good croppers from Geraldton to go up there, they are smart broadacre croppers, they are not the cowboys who were there before,” Mr Laitt said.

“These guys understand what you need to do. We are getting very good yields.”

Mr Laitt believes the lure of the north will get stronger as young farmers seek cheaper land to get their start.

“I think the prices are reasonable,” he said.

“It could be the nursery area for growing our young families; capital costs are shutting them out of the south.”

The Milne boss believes the Ord River scheme has been too focused on niche crops and the farm sizes are not big enough to provide the scale needed.

Climate change

While Australia’s response to the climate change debate is now up in the air due to the opposition’s decision to remove support for an emissions trading scheme, there is no doubt that the issue remains a big one for farmers.

Even with agriculture excluded indefinitely under the scheme proposed by Kevin Rudd’s federal government, there are views that ultimately farms would be included.

That is not only due to the significant role of livestock in contributing the greenhouse gas methane to the atmosphere, and the clearing of land but, in a more positive sense, the possibility of carbon sequestration via soil and trees.

Geoff Hall, a partner at RSM Bird Cameron, which has a heavy exposure to the rural sector through its accounting services, believes that agribusiness will need to understand this issue better.

“There will be costs to contemplate for agriculture and those on the land in the future,” Mr Hall said. “There are also enormous opportunities.

“It may be something that does drive land values and does drive agriculture itself in the future.”

Beyond AACL’s tree planting carbon sequestration business, Mr McBain sees an opportunity in the climate change debate for the farm sector to contribute positively and reduce the volatility of cropping.

For instance, he believes that we should have a mandatory ethanol level in vehicle fuels – as is done in Brazil – which would create a large and sustainable domestic market for WA grains which are currently at the whim of export markets and foreign currency fluctuations.

“Imagine if a third of the grain has a locally mandated buyer, the ethanol producers?” Mr McBain said.

“I don’t see what is wrong with that.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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