REGARDLESS of whether an individual cattle industry stakeholder is directly engaged with the market or not, China will increasingly exert an influence over the entire Australian red meat and livestock supply chain, a leading pastoral and live export identity told a Beef 2015 audience.
Consolidated Pastoral Co chief executive Troy Setter spoke to a packed Queensland Rural Press Club audience at Beef 2015 on Thursday morning.
In a frank and open exchange, he said CPC’s first attempt at doing business in China last year had been less than successful, but the experience had certainly not deterred the company from exploring further opportunities.
His comments came as more than 400 Chinese international delegates attended the Beef 2015 event in Rockhampton – many focussed on doing business in Australian beef/livestock, or investing in the Australian supply chain.
While CPC’s initial foray into China last year ‘did not go so well’, the company had learned a lot from that experience, in terms of picking the right joint venture partner for beef export, Mr Setter told the audience.
Beef Central reported last year that CPC had started exporting bone-in carcase beef, quarter-beef and some smaller cuts into the rapidly expanding China market.
“Trust with a JV partner in China is so important, so for the timebeing we’ve stopped sending meat to China. As the meat trade knows better than I do, you have to maximise the value of every cut, and the challenge in sending whole carcase beef to China was that some of the more valuable primal loin cuts were being devalued down – effectively, commoditised – as part of the whole carcase,” he said.
“The low labour attribute (in boning the beef in China) was certainly worthwhile, but it was at a difficult time when China was stepping in-and-out of frozen and chilled, protocols were changing, and some Australian export plants were losing their export accreditation to the market, for confusing reasons.”
“The learning for us from our initial China experience was: Right partner, right reasons, right time,” Mr Setter said.
“But it’s a huge market – more like a collection of countries, rather than a single entity. If you’re strategy is to conquer China with your beef product, you need to be as big as Apple or Coca Cola.”
He said in hindsight, CPC’s first experience in beef trade with China was perhaps “too broad.”
However Mr Setter said the entire Australian meat and livestock supply chain – regardless of whether the participant was directly engaged with the market or not – would be influenced by China trade in future.
“It’s a massive market for all Australian beef and livestock commodities, all products and all brands,” he said.
While there remained a lot of ‘hype’ and media speculation around prospects for live cattle exports into China, nobody knew at this stage what form that might take, or exactly when it might occur.
What was known was that there were a lot of feedlots and meat processing plants built already; and current live cattle prices in China were ‘extremely strong.’
“In CPC’s case, we have not yet formed a strategy about how as a company we engage with China, but we are not afraid to go there again, despite our earlier experience. But at the same time it has to create additional value for us. If it increases risk, while decreasing margin, there is not a lot of point in us being a part of it,” Mr Setter said.
Mr Setter covered a broad range of topics during his Press Club breakfast presentation, partly driven by the fact it was in conversational Q&A format, a move which was well-received by the Beef 2015 audience.
Expectations over cattle prices
Not surprisingly, given the optimistic atmosphere that pervaded the Beef 2015 event, cattle price expectations was a topic of considerable interest.
Mr Setter referenced Rabobank’s US analyst Don Close, who had told an earlier Beef 2015 audience that breeding cows in the US were now worth A$4100.
“We’re all excited about the current prices we’re receiving, and where things might go. There’s reports of huge prices for cattle in the US, and in Asia, live cattle are selling for $5/kg in southern China, and well above $4/kg in countries south of China,” he said.
“To see the gap that currently exists between prices here and in Asia, it looks exciting, but the stark reality is that in real (adjusted for inflation) terms, Australian cattle price are not that great.”
One of the challenges all beef producers faced was to ensure that their productivity increase was greater than the cost of inflation, to offset the real-term flattening of cattle prices.
“Frequently over the past five to ten years we’ve all heard about the booming Asian population and economy, and how it was going to have a big impact on Australian beef. Well, now it’s here. That’s really exciting, but while people (like Beef Central columnist Ross Ainsworth) have been throwing out forecast figures like 400c/kg liveweight for live export cattle ex Darwin, we may still need to temper that enthusiasm,” Mr Setter said.
“If you’d gone back three years ago and said northern boat steers were going to be 275c/kg in February this year, people would have laughed at you. So you just don’t know – but we are certainly in unchartered waters.”
Pressed on how high they might go, he said with the Eastern Young Cattle Indicator breaking 450c/kg last week, a 500c/kg EYCI figure now looked a distinct reality.
Regardless of how far the market goes, the Australian meat and livestock industry was in the midst of exciting times. “We’re in the box seat, if we want to take advantage of it.” Mr Setter said.
Speaking from the perspective of CPC’s joint-venture ownership of feedlot infrastructure in Indonesia, he said if northern live export cattle prices should go to $4/kg, the price of meat in Indonesia would have to rise significantly.
“At $4/kg, it would be very hard, more like impossible, to import cattle to feed at a loss. However the opportunity for higher meat prices throughout the world, with global herd decline and increased demand will represent some challenges for existing markets – Indonesian live exports included.”
“With an Australian beef herd in the +25 million range, herd declines in the US, Asia and elsewhere, there is a processor challenge ahead – they still have to purchase those cattle and turn them into meat. So they are going to be very focussed on efficiency.”
“But will we see higher prices for cattle in Australia? I believe we will.”
Live export outlook strong
Simple math suggested that if every Indonesian ate just another beef meal or two each year, there was still a lot of potential growth in the Indonesian market for Australian live cattle and beef exports, Mr Setter told the Press Club audience.
However there was also substantial growth occurring in markets that Australia never thought would develop the way they have.
“Look at Thailand. It used to be the country that dumped cheap cattle into Malaysia, and made life difficult for Australian traders. Today there are Australian live cattle flowing into Thailand, in numbers.
“I remember sitting with a group four or five years ago trying to forecast where live export growth markets would come from for Australia. At that time, we did not think Vietnam would have the financial capacity to buy live export cattle from Australia. But there’s been this growth in income and consumer spending.”
“Once somebody in Vietnam has bought a mobile phone, and possibly a motorbike, the next thing they want is some beef. It’s an aspirational product for many Vietnamese, and it is really exciting to see such markets grow the way it has.”
Battle between live export and processing?
Asked whether there was a battle emerging between live exporters and processors, given the current herd size and international demand for both beef and live cattle, Mr Setter said one thing that was learned from the (live export closure) events 2011 was that the sectors circled the wagons and shot at each other.
“We, as an industry, shot inwards rather than outwards at our real competitors, and we never want to do that again,” he said.
“Is there healthy competition today between live export and processing? Yes there is. Is there space for all of us? Yes there is.”
Mr Setter suggested, that there were solutions to such tight competition for cattle on the supply side of the equation.
“The productivity of the Australian beef herd can still increase by a very big figure. The recent Northern Beef Situation Analysis report revealed that northern Australia currently achieves a weaning rate of 60pc. Take that to 80pc, and we will need new live export markets and new processors, or at least processing plants,” he said.
“Will there be healthy competition between processors and live exporters of the next two years, given the herd outlook? Yes, there will. But Australia has a substantial productivity challenge for all parts of the beef industry, both for processing and live export. It is exceptionally expensive to ship live cattle from Australia, compared with other potential competitors.”
Most of the live export transport ships that plied their trade around the world could not come to Australia, because of our extremely high regulatory standards. That made shipping out of Australia very expensive, using only those vessels meeting Australia’s high standards.
“We’ve seen some really good reforms occurring with AQIS and DAFF, but there is a whole lot more that can be done in the regulatory framework around live export,” Mr Setter said.
On the meat processing side, JBS had said earlier in the Beef 2015 event that Australia was now three times more expensive than Brazil for meat processing, and twice that of the US.
“In short, that’s not sustainable, we need to continue to drive efficiencies through both processing and live export,” Mr Setter said.
“We have a challenge to find ways to work together to get our meat processing, our production and entire supply chains more efficient to compete.”
Live export’s social license to operate
“Has the live export industry regained its social license to operate since the events of 2011?” Mr Setter was asked.
“I think we’ve just got it back, but only with one hand,” was his response.
“But I prefer the term, ‘community’ license, rather that ‘social’ license to operate – the coin termed by then minister, Joe Ludwig. When we talk about social license, most people think of social media, and in my mind it is much more than that.
“It is our license with the broader community. Some might not like this being said, but our industry does not have a right to exist – we have a responsibility as participants in the beef industry to ensure that we have a prosperous and viable industry – and it is a responsibility of all of us to be talking-up our industry, whether that be through social media, or getting more engaged with industry organisations.”
“When the chips are down, we need the people who aren’t in the industry to be standing with us saying, ‘This beef industry is important to Australia’.”
“We want all Australians to appreciate that meat processing is a really important part of the Australian economy – at both a regional and national level. It’s a bigger employer now than the coal industry.”
Mr Setter said the beef industry did not have access to the ‘shock and awe’ type marketing budgets that animal welfare groups enjoyed. The industry needed to work out how to fund social media and broader advocacy, but equally, the non-cash component of advocacy, in mustering stakeholder engagement in social media, or simply writing a letter to politicians.
Strong, outcomes-driven leadership
Providing a response to a question from the floor on the need to cultivate leadership across the industry, Mr Setter referenced the current cycle of industry scrutiny through internal and Government-driven inquiries into industry operations.
“Without trying to offend anybody who might have put a lot of work into the grassfed restructure issue, for example, I don’t know how many years I have been sitting through such discussions about industry restructure. We’ve gone round and around in circles, for so long, that I’m tired of it.
“We still need to put more energy into getting it done, but as an industry we have to get things done – we can’t just continually have new meetings. If we say we are going to restructure something for a better future, then let’s do it.”
“If our industry representative groups are seen as getting things done, grassroots members will sign up to be a part of it. Parts of the industry that have flourishing membership, some in the high 90s percent, enjoy that support because they get things done.”
“As members, our organisations are only as good as what we let them be.”
About Troy Setter and Consolidated Pastoral Co
CPC is primarily owned by Terra Firma, one of Europe’s largest private equity firms, with wide ranging investments in garden centres, heathcare, renewable energy, housing, hotels and service stations, and cinemas. Terra Firma holds $21 billion worth of global assets, backed by $15 billion worth of equity.
The parent company thinks and acts long-term – perhaps partly explaining its investment five years ago in CPC. Terra Firma was well ahead of the current overseas investment momentum curve, when it saw the inherent value in CPC and the potential for increasing demand for protein from Australia’s near neighbours.
CPC is Australia’s largest private cattle owner, managing 375,000 head of cattle on 20 stations across three states, and including two vertically-integrated feedlots in Indonesia with joint venture partners.