Phil Holmes

Author, veteran agribusiness advisor Phil Holmes, has built a strong reputation as an entertaining, candid, frank and sometimes even blunt observer of the beef industry, and the way it functions…

THE editors of Beef Central have approved my request to write a series of articles about specific aspects of the beef industry, based on my experience. There will be no formal publishing schedule; the items will just appear from time-to-time, starting with the big picture and working down into more detailed topics.

Some of it will be controversial, but I am advised that the editors have functional red pens.*

This first article is perhaps the most difficult I have ever written, because it could so easily be misconstrued. I am presenting it because it is critical to a lot of the issues that will follow.

Barriers to entry

It is NOT me having a gripe or a shot at anyone, just relaying the facts. This issue has long tentacles that explain a lot of the problems that the beef industry seems to be constantly embroiled in. The issue is: barriers to entry.

What does barriers to entry mean? Years ago, a Harvard academic, Michael Porter, wrote a book on this topic called Competitive Strategy.

In it, he explained that every industry has barriers to entry. For example, if you want to be a brain surgeon, it will mean countless years of study and mandatory qualifications that must be upgraded with continuing qualification requirements.

If you want to introduce a new Cola drink, you have to overcome the huge barrier to entry set up by Coke and Pepsi. You will have no chance in doing this as many attempts have shown.

Want to produce a new morning newspaper in any of Australia’s big cities? Good luck, it is all stitched up.

What about beef production in Australia? There is only one barrier to entry, financial capital. If you have the balance sheet strength, you can go out there and produce beef by buying a property and a herd.

You do not need anything more to be part of the industry. It does not matter how much you know or how you manage your business, you have knocked down the entry barrier.

I am the same. I can go out to jackaroo on Buffalo Fly Downs, work in saleyards, wreck a few motorbikes, set drinking records in a couple of years, then come home to hang out my shingle as an agricultural advisor.

I can advise and charge what I like and nobody can stop me. I can talk absolute rubbish, cell grazing for example, and unless I really stuff up, can go on doing it forever. Thank God, agricultural advisers are not in charge of your brain health.

So here you are, with so many others. You have just become part of the beef industry and possibly, you know next to nothing of critical importance. Maybe you are a third-generation beef producer and you know nothing more than what your forbears have told you about the way forward and hopefully they were right.

You have not had to produce any qualifications and you certainly do not have to produce any evidence that you can run your show sustainably, financially and environmentally, concurrently.

Over time, this has resulted in the following industry facts:

• All the profit in the beef industry is coming from the Top 20 percent of producers. The Bottom 80 percent profit is consumed by the losses. Read this again. Here we have an industry where only 20pc of the producers know what they are doing. Try running Woolworths where only 20pc of the stores are propping up the whole show. You would be cleaning your desk for the next CEO.
• The underlying environmental resources are in decline, especially in the north.

Barriers to Entry have a lot to do with this, as there is only one barrier: cold hard cash. If you have it, away you go and nobody will stop you unless you do something illegal, the same applying to me and my ilk. Not so with Woolworths or any other profitable listed business.

If you want to purchase assets to expand or get started (ie young keen folk), all you need is the cash.

You may be in the bidding ring on a property, confident that your years of study of beef production gives you an advantage. Sorry, not so. The person next to you, who has just made a fortune selling New Fried Rice Recipes in the city, wins the bidding and you are left out.

That’s bad enough, but a young dedicated and well-educated couple wanting to make a start, were left out too. No doubt the new owner will have high staff retention if his recipes are any good.

Despite the current warped obsession with sustainability, this is the real issue in the long-term and the current industry attempts fall well short of what is needed.

Five legs to agricultural sustainability

There are five legs to agricultural sustainability in Australia. The most important two are financial and environmental, and they have to be concurrent. That is, you cannot rob Peter to pay Paul.

A beef business must be able to be financially sustainable without drawing on environmental capital (overstocking). Conversely, a beef business must be able to preserve the underlying environmental base without eroding financial capital (understocking).

In other words, the beef business has to be profitable in its own right, producing enough cash to keep it and its underlying environment intact. The other three legs flow from the first two. If the first two fail, the rest fall over.

Please show me where these critical considerations appear in the current sustainability discourse for the beef industry, as I can’t find them. The current discourse seems to me to be about distractions, some very important (animal welfare), most less so.

It would be so easy to begin to rectify this. However, in the “Sustainability Bible” (Our Common Future, 1987) the editor, Gro Harlem Brundtland, a former Norwegian Prime Minister stated that unless the political will was there for change, nothing would happen. So, you can produce all the hot air you like, but if it does not survive the political maze, it will have all been in vain. If anyone knows about that, she should.

Freehold Vs leasehold

So here is a starting suggestion. There are two broad classes of land ownership in rural Australia – freehold and leasehold – with marked differences between them.

For this discussion, let’s concentrate on leasehold, the majority of the rangelands. If you hold a rural land lease, you do not own the land, the Australian taxpayer does.

If it is freehold, you own it. If the taxpayer owns the land, you are responsible for protecting and preserving it on their behalf, with the Government looking over your shoulder to ensure compliance. Has that system been working? All the evidence says no.

If we are going to change it for the better, let’s borrow from other professions. Firstly, this should only apply initially to new purchases, as it is unfair to impose this historically.

What qualifications do you have to run this lease sustainably going forward? A book could be written on how to do this effectively and fairly. Then, what are you doing to continually upgrade your knowledge on the whole process? God knows there are enough courses out there where the carrot hasn’t worked; maybe time for the stick!

Make low-cost, long-term loans available to young, keen, well-educated folk who will bust their guts to meet the criteria. They will be likely to do a better job of protecting the assets than the current mob and will learn faster from experience. They are our future; invest in them.

The big boys and girls have appeared recently to take predator advantage of this, again especially in the north. Mostly they are in the capital gain camp and do what they do until the sell trigger appears.

There does not appear to be any evidence that they really understand all the aspects of beef production to make it sustainable and are in it for the long haul; it does not take a lot of homework to reach this conclusion.

If the above works, and it will take half a lifetime to show it, then we can move onto existing leasehold land and the criteria needed to continue “ownership” of it.

At the moment, in my view, owners of freehold land are free of all this. They can do what they like and if they stuff up, they go broke, leaving a mess behind them for the next lot to clean up. Surely, this is holding industry productivity back?

Well, there is a start, and if I am honest, my suggestions probably have the proverbial two chances of success.

Being an eternal optimist, I will keep going, but, believe me, it is hard at times. When I look at the financials of the industry and marry that up with some of the paddock devastation I see when driving about, it is testing.

Occasionally, a pristine paddock appears and I have to stop and gaze at it in silence, in order to re-charge my batteries, wishing I could talk to the owners.

* Have faith, Phil – the only reason we would edit your comments is to keep us both out of court! Editor