The case for investing in the northern Australian cattle industry
The Australian beef industry has been an attractive investment proposition for sophisticated investors for well over a century. The industry and the men and women behind its success are iconic symbols of Australia, but its attraction for past and present-day investors is far more than sentimental.
The lasting competitiveness and appeal of Australian beef in global markets has been proven over many years and through many industry cycles. With its initial success in markets in the UK and Europe, then Japan and the USA, and more recently throughout North East and South East Asia, beef has grown to become Australia’s number one agricultural export by some margin, with this trade valued at over AUD13 billion in 2019-20.
In this article we outline some of the fundamental considerations that underpin the case for investing in a high-quality cattle operation in northern Australia in 2021 and beyond.
Continued growth in global demand for beef
According to the combined view of the Organisation for Economic Co-operation and Development (OECD) and the United Nations Food & Agriculture Organisation (FAO), global population growth and rising incomes in developing countries are expected to underpin growth in global demand for beef over the coming decade (OECD/FAO, 2020).
It is widely accepted that per capita demand for animal proteins, and especially for higher value alternatives such as beef, is closely related to per capita income levels. At one extreme, growth in consumption of beef in some developed countries is beginning to slow with lower levels of population growth and already high per capita consumption. Elsewhere, however, the significant growth in population and upward trend in per capita incomes being observed in many parts of Africa, and particularly Asia, is expected to continue to drive overall world beef consumption higher as illustrated in Figure One.
Figure 1: Change in world beef and veal consumption 2019-2029
Source: OECD and FAO 2020.
Over the coming 10-year period to 2029, beef and veal consumption is still expected to grow, albeit more modestly in important developed markets for Australian beef such as the USA, Korea and Australia. But it is in developing Asia and nearby markets such as Indonesia and Vietnam where world beef consumption is expected to grow most strongly over the coming decade. What’s more, the lack of production potential across the Asian region means that this growth will directly translate into a significant increase in global import demand.
Australian beef’s strong competitive positioning in global markets
Australia’s north, home to almost half of the national beef cattle herd, plays a pivotal role in meeting rising global demand for good quality, safe and responsibly produced beef in global markets. Australia is the world’s largest exporter of live cattle, as well as the world’s third largest exporter of processed beef. The Australian beef sector’s strong global competitiveness that underpins this prominent position in world trade is determined by a range of factors, of which the relatively low cost of cow-calf production plays a critical part.
Australian beef producers rank among the lowest average cost cow-calf producers of any of the world’s major beef exporting nations as illustrated in Figure Two (MLA, 2020). While production models vary across the country, the strong reliance on cost-effective pasture-based farming systems owing to a relative abundance of wide-open grazing land, combined with a strong track record of productivity growth are vital components of the cost competitiveness of Australian cow-calf producers.
Naturally, there are factors outside the control of local producers that also impact their global cost competitiveness from year-to-year. These include variables such as relative currency movements, prevailing seasonal conditions across the globe, and downstream processing and logistics costs.
Figure 2: Average costs of cow-calf farms in 2019
Source: agri benchmark and MLA, 2020
A high level of coordination both at a regional and national level is critical to the Australian beef industry’s ability to stimulate farm productivity growth. Together with Australia’s relatively low level of sovereign risk, it also gives investors a high degree of comfort in the ability of the industry to manage its future development and sustainability. This is demonstrated by the long-term commitment by producers to form and resource industry bodies such as Meat & Livestock Australia that are capable of proactively identifying issues affecting their farm performance, and then addressing these needs through sustained investment in well targeted research and development (R&D) as well as advocacy work through pan-industry groups such as the Australian Red Meat Advisory Council (RMAC).
This degree of coordination also extends to government levels which is critical to maintaining the open market access enjoyed by Australian beef producers for their products. Negotiating and executing on the wide range of Free Trade Agreements that cover most of the world’s major import markets depends on close collaboration between industry and government. Critically, none of this would be possible without the industry’s proven ability to maintain high animal health and product quality standards through the development of strictly enforced supply chain traceability and biosecurity practices and procedures.
The African Swine Fever Outbreak that has decimated the Chinese pork industry since its detection in 2018 has once again illustrated the importance of industry biosecurity controls and animal husbandry, especially in high intensity farming models. Demand for Australian beef has benefited over the years as other beef producing nations, and other animal proteins sectors, have experienced reduced supply and market access owing to critical biosecurity lapses.
A leader in sustainability, planning and action
There is no hiding from the fact that livestock industries have a significant environmental impact. Far from ignoring these challenges, the Australian beef industry is recognised as a leader in the Australian agriculture sector for its efforts to date in confronting and addressing its environmental and broader socio-economic responsibilities to the community (Agribusiness Australia, 2021).
The Australian Beef Sustainability Framework developed and coordinated by RMAC in 2017 is at the forefront of sustainability planning and action in Australian agriculture today. With a particular focus on promoting better outcomes in animal husbandry, biodiversity, water conservation, greenhouse gas (GHG) emissions and climate change, employee health and safety and product safety, the plan acts as a compass for directing vital R&D investment and innovation.
From a GHG perspective, these research efforts are beginning to show potential in significantly reducing and offsetting livestock digestive emissions. Current examples include research into carbon sequestration, improved pasture mixes incorporating beneficial legumes, and new seaweed-derived feed supplements such as FutureFeed developed in conjunction with Australia’s leading scientific research organisation CSIRO that has been shown to reduce digestive methane emissions by more than 80 per cent (CSIRO, 2021).
Scale is key to profitability
Across all agriculture, achieving scale is typically key to achieving stronger and more resilient levels of profitability. This relationship is especially strong in beef production which is estimated to have the highest levels of industry concentration in Australian agriculture. Industry benchmarking projects show that the largest 10 per cent of Australian beef farms contributed over 60 per cent of industry revenue over the three-year period to 2019-20, while this dynamic is even more pronounced for operations in northern Australia (ABARES, 2021). Amongst northern Australian beef farms, the graph below illustrates the relationship between business scale and profit, averaged over the three-year period to 2019-20.
Figure 3: Beef farms in northern Australia, average profit by business size 2017-18 to 2019-20Source: ABARES, 2020.
The scope and scale of capital investment in public infrastructure assets and communities is also an important determinant of the future profitability and resilience of Australian beef operations. This is especially the case in the more remote and expansive northern regions of Australia where the condition and capacity of roads, ports, water storage, energy and telecommunications infrastructure, as well as the availability of housing, social amenity, education and training for local communities is critical to the ability of business to operate efficiently and grow.
This is where the Australian government’s strategic commitment to developing Australia’s north is of critical importance, along with its accompanying $5 billion Northern Australia Infrastructure Facility (NAIF) aimed at developing and maintaining regional infrastructure and communities in partnership with local governments and industry. Now entering its fifth year, to date the NAIF has committed AUD2.1 billion to projects spanning the development of roads, ports, mineral deposits, beef processing facilities, universities, sporting stadiums, accommodation and hydroelectric projects (NAIF, 2020).
Favourable seasonal outlook
Seasonal conditions naturally have a large bearing on the growth and performance of Australian beef cattle producers. This is no more clearly demonstrated than by the fall in the beef cattle herd in southern regions in conjunction with the recent drought across southern Australia. In the two-year period between June 2017 and June 2019, the southern beef cattle herd fell by over 10 per cent. By contrast, the northern beef cattle herd increased by one per cent over the same period on the back of still challenging yet relatively more favourable seasonal conditions (MLA and ABARES, 2020).
The end of the drought in 2020 and a much more favourable seasonal outlook is expected to herald an extended rebuilding phase after the national beef cattle herd fell to its lowest point in decades in 2019-20. However, the need to continue planning for changing weather patterns is clear. Average temperatures continue to rise, and recent climate records and future projections point to a trend of lower and more variable rainfall over the winter months in southern parts of Australia. Across northern Australia the rainfall outlook is much more positive, albeit with the expectation of more variable weather patterns and fewer but more intense weather events (CSIRO and BOM, 2020).
Figure 4: 20-year Average summer period (October to April) and winter period (April to October) rainfall versus long-term average.
Source: CSIRO and Bureau of Meteorology, State of the Climate 2020 report.
Prices for Australian beef in global markets are expected to moderate from their historically high levels observed over recent years as the national herd rebuilds, foreign competition in global markets picks up, and as impacts associated with the African Swine Fever Outbreak begin to subside (MLA & ABARES, 2021). This is not altogether unwelcome by Australian beef cattle producers who have begun to encounter resistance in markets as some price-sensitive customers have recoiled from high prices and sought to explore alternative avenues of supply.
Looking ahead, more sustainable yet still profitable price levels are an opportunity to reinforce existing customer relationships and explore new opportunities to market Australian beef to the world.
Article written by Marc Soccio, AgInfinity for Elders.