Challenge in driving supply chain profitability, says AA Co chair

Jon Condon, 20/03/2012


AA Co board chairman, Don McGauchie addresses Friday's shareholder meetingAustralian Agricultural Co chair Don McGauchie used his address at Friday’s company annual general meeting to send a warning to government, regulators and other stakeholders over the damaging impact that external factors are having on Australian beef’s international competitiveness.

“There’s a number of areas outside of the company’s control that are playing a significant role in the productivity – and profitability – of our industry,” he told shareholders.

“Firstly let me put our concerns around productivity into context by outlining the cost of one of the activities that lies at the heart of our industry – slaughter and meat processing.”

“At present it costs around A$340 to process a grainfed beast passing through an Australian processing facility. Australia ranks as the most expensive of beef producing nations on this measure, and costs here are more than double the comparable figure in the US – the next most expensive nation – where the average is around US$150,” Mr McGauchie said.

“Don’t forget that, very largely, we are supplying a global market and increased supply chain costs are ultimately borne by the primary producer.”

Fair Work regime

He said while there was  a range of factors contributing to Australia’s high processing facility costs, one key issue was the ‘relaxed approach’ to controlling absenteeism, that was an unfortunate by-product of the Fair Work regime.

The problem generated headlines earlier this year when Max Yasuda, president and chief executive of Toyota Australia spoke out on the issue – noting that as many as 30pc of employees in some parts of a manufacturing plant would take a ‘sickie’ if a Friday work-day followed a Thursday public holiday.

“From an employer’s perspective, this is an impossible situation. And it is just as bad in meat processing as it is in vehicle manufacturing. The Fair Work regime – with its allowance for absenteeism without notice or explanation – only seeks to entrench the ‘sickie’ as an Australian tradition,” Mr McGauchie said.

“And seeing as nobody likes going fishing or shopping by themselves, far too often groups of workers from the same part of the factory will take the day off together.”

“This is but one of the problems with Fair Work. There are many others, but they can mostly be summed-up by saying that there is now a lack of flexibility in the industrial relations regime which makes it hard for Australian industries that have to compete in export markets,” he said.

On a more positive note, Mr McGauchie said it was heartening to see Craig Emerson pick up a newly-formed Federal Government portfolio as minister for trade and competitiveness in the Cabinet reshuffle last month.

“Hopefully he will move quickly to grapple with the ‘competitiveness’ aspects of his portfolio – considering employee absenteeism alongside other pressing issues including the impact of the combined impost of taxes on roads, rail and ports on Australian export businesses.”

Carbon tax cruelling competitiveness

The second ‘external’ issue touched on by Mr McGauchie was the Clean Energy Future legislative package, including the Carbon Tax, passed by Government last year.

Agriculture produced around 16pc of Australia’s direct emissions and these emissions are initially exempt from the Carbon Tax. Despite this, AA Co would face significant cost pressures along its supply chain, he said, particularly in relation to carbon emitted during processing, where the additional cost will be passed back to producers, and when the freight exemption expires in 2015.

Research published by the Australian Farm Institute suggested that a carbon price of $20/t would translate to a 1.7pc rise in annual business costs for beef producers, Mr McGauchie told shareholders.

“While AA Co management is investigating opportunities for various carbon abatement and storage initiatives to mitigate the impact of these costs, it is too early to know what economic impact these will have,” he said.

Trading impact of high A$

Another external issue that shareholders needed to be mindful of was the impact of the high Australian dollar on agriculture-based businesses.

“Australia exports approximately two thirds of all its domestic agricultural production. An appreciating currency makes our agricultural exports more expensive on world markets while at the same time making imported food and fibre cheaper. Currently the A$/US$ exchange rate is around 1/1.06 and the A$ has dropped below parity only briefly over the past 12 months. Five years ago the A$ was trading around US80c,” Mr McGauchie said.

“While a stronger dollar reduces the cost of imported farm inputs like fuel, fertiliser, tractors and machinery, the net balance of the stronger currency is very much in the negative for most Australian farmers. NFF estimates the net impact on farm incomes of a 1pc appreciation in the A$ to be in the region of $190 million,” he said.

The strength of A$ was a function of many things, including Australia’s high relative interest rates; the boom in global demand for Australian agricultural and mineral commodities driven by growth in Asia, particularly China; and Australia’s resilience in the face of the global financial crisis.

“The challenge that Australia now faces is to build longer-term prosperity that outlives the current boom. History shows that we have a poor track record of capitalising on the benefits of previous commodity booms due to an unwillingness to tackle the inflationary pressures that go hand-in-hand with high demand for our commodities,” he said.

“Once again, we face the risk that fallout from the current boom will outweigh the benefits that Australia is currently enjoying. One of the keys to avoiding this is take action now to keep inflation in check and maintain competitiveness of Australian industry.”

“Government has a substantial role to play. It is a time for fiscal discipline – reducing Government costs across the board to keep inflationary pressure to a minimum, and yet facilitating investment in production capacity and infrastructure across a range of industries where Australia has a long-term competitive advantage.”

Mr McGauchie said the stimulus spending by government in 2008 did precious little to assist in meeting this challenge. Too much money was spent too quickly on non-productive projects.

With the money spent, it seemed that government might now be shy of committing to the efficient nation-building infrastructure projects that could assist the nation’s export industries to compete for decades to come.

Foreign investment

Mr McGauchie also touched on the intense scrutiny applied recently on the role and level of foreign investment in Australian agriculture – particularly due to a popular perception that Asian investment in the sector had significantly increased.

AA Co provided a submission and appeared before a Federal Parliamentary inquiry to highlight the importance of foreign investment both directly in your Company and the broader agribusiness sector.

“It is important to recognise that AA Co started with foreign investment and we have continued to use foreign capital. Foreign investment is an essential constant in our past, our present and our future. It is an inescapable fact that agricultural production is a capital-intensive business, and that sufficient local capital has never been available to properly develop Australia’s potential.”

Further, partnering with foreign investors assisted Australian agricultural producers to access new and higher value markets. This was in the interests of the sector, and the nation, he said.

However, one area where Australia could do better related to monitoring the nature and extent of foreign ownership of agricultural assets. Better monitoring would assist in identifying whether a policy response might be required, and would help quell some of the less-informed and emotionally driven commentary.

“Also at a national level, we could do more to recognise that achieving regional food security is a shared responsibility. The best way to ensure food security is to increase agricultural output through increased investment from foreign and Australian capital sources. Australia must ensure it has a regulatory regime which is unambiguous, transparent and conducive to such investment.”

Land values

The role of foreign investment in Australian agriculture was also relevant when considering the value of AA Co’s major asset – its substantial prime agricultural land holdings across northern Australia – currently on the books at a value of $585m.

“However, there is potential for our land to be worth a great deal more. During the course of this year, one of these holdings, Meteor Downs, was sold to Xstrata Coal. The decision was made as part of a process to rebalance the company’s property holdings in line with our business strategy, and the board will continue to evaluate individual assets in this light.”

Meteor Downs was sold for $21.6m, which was 37.6pc in excess of the book value of the property. The sale price achieved for Meteor Downs reflected the higher value that is sometimes placed on agricultural land by investors, particularly where an alternate use is identified.

“Currently, the AA Co share price is trading at a discount to net tangible assets, and the board remains focused on lifting return on assets employed and having the value of the group’s unique assets reflected in the share price,” Mr McGauchie said.


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