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
Great article. But adding demand via loan incentives will only make it worse. Not sure what the solution is. Perhaps a combination of no foreign investment in land ownership and not being able to defer or transfer tax losses. Along with rigorous environmental assessments. Which would be rather painful.
Great article cutting through to the real picture and its deficiencies and needs.
Along with others I am currently trying to nudge the fragmented ihemp industry to evaluate itself for similar reasons to get together in compiling best practice case studies and innovations as fodder for the wise and those willing to learn. Also so the industry can begin to have a proud collective self image with which to travel forward.
I would like to see the same for successful regen farming. They are almost there with excellent examples all round the country but I think something more could be done.
The same principles underlie all of these – ie the first 2 legs Phil emphasises – the benefits that come from integrating profitability and care of the natural assets into an operational plan.
Interesting read. I rely heavily on Australian beef report by Ian McLean and others to develop my own business model to estimate value and return of properties we have been looking to buy for over 8 years. It never fails to amaze me how overpriced the majority of pastoral properties are. Cost of Production, in my opinion, is completely overlooked by many purchases with their focus only on stocking rates as touted by previous owners or those with vested interest. Government in WA and the NT turn a blind eye as the revenue from stamp duty is simply too important. Look forward to future articles.
Fantastic Phil, you are a catalyst for thought and change, thanks
This article is brilliant. I thought nobody could see the problem or hear what i was saying until i read this. I do think that some sort of loan arrangement would help although i truly feel the only way to fix the problem is to allow exactly what Ken Atkinson has indicated needs to be avoided and that is let the rural property market fall to where it should be, where it is sustainable to pay off a loan where only the property is paying the loan not high net worth or other investments.
A personal example of this is how i myself have been attempting to become sustainable in the industry for 20 years, in the first decade of bidding in auctions we always found ourselves just a couple of hundred thousand short however in the last 5 years we are millions short. The prices being paid are not sustainable or good for the long term of the industry. It s all fuelled by those who have more than they require, greed in its pure form.
A truly lovely article by Phil Holmes and a lovely editor’s comment at the end.
Truly delightful.
Please keep that style of initiative going.
I have sent it around and one recipient would like to talk to Phil – What is the best way to contact him?
All the best for Xmas
Interesting suggestions, but the question is how do you enact political change like this when it will be seen by the “bottom 80%” of producers as entirely negative and against their interests?
Thanks for publishing Beef Central. Need more people like Phil prepared to put their knowledge on the line to challenge people’s thinking!
While I don’t disagree with Phil’s comments in general, I think there are a few fundamentals that need to be addressed.
With regard to the main thrust of the article, sustainability – I don’t disagree that this issue may in time be the rock our industry perishes on. I do however disagree with the suggestion that the solution might be to – “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.”
Apart from the fact that there have been a plethora of grants and low interest loans available to landholders for decades I don’t doubt there will be plenty of ‘old’ people who run sustainably sound operations that might be offended by the inference that they are the cause of the problem….I won’t include myself as I have a pretty thick skin! I do concede however that I have observed first hand significantly improved ‘sustainable’ management practices implemented by younger people who have taken over the reins from their parents…..though not always. I consider the suggestion that ‘young well-educated folk’ are the answer to be somewhat condescending – there are plenty of old folks doing a good job – and who is going to educate these young people? Should we advocate that the curriculum be written by the EPA or universities?…. How do we convince young people with no prior exposure to grazing, or even those that have, that spending a couple, or more, years at uni to qualify for a career that in reality only pays a dividend when they retire and sell out!
With regard to the author’s comment regarding his view that owners of freehold land essentially have carte blanche to degrade and otherwise devastate their land (lucky I have a thick skin!), it is my understanding that as far as the relevant regulations go, there really isn’t much, if any, difference between leasehold and freehold.
In my view, the authors comment regarding ‘the big boys and girls being mostly in the capital gain camp’ is not helpful in the debate at all – I can imagine the financial carnage that would ensue should they be excluded from owning grazing land. I have to ask what would happen to land values if these players were legislated out of the business?……land values that underpin the multimillions of dollars of loans owed by family and individual land owners……property values would plummet overnight!!!
Like the author, I’m not taking a shot at him, or anyone else….just pointing out that the problem, and thus the solution, is far more complex than advocating for ‘young well-educated people to take over the reins’ and that the corporates be banned from owning grazing land.
Now, that is a start!
Merry Christmas Phil. This is very special to be reading your wisdom and polished sarcasm in Beef Central so close to Christmas.
WOW, spot-on Gungerdin, well said.
And whilst you are about giving the political hierarchy and rangeland pastoral tenure a good kick in the guts, please don’t forget in your scripture to put Foreign Investment into medium to large scale cattle production at the expense, of the new young generations of well-educated future producers who lose out every time to Foreign Investment.
For every acre/hectare of primary production land sold to Foreign Investment is an acre less to our sons and daughters who have an inherent right to the land on which they were born. Whereby through Foreign Investment these new generation well educated people become the working-class peasants on the land of their birth. !!
Great reading with a home truth or two mixed in.Thanks