Phil Holmes
Respected agribusiness advisor Phil Holmes takes a critical eye to the issue of sustainability, and how the beef industry accounts for it
IN recent times, some of the big four retail banks have started to dabble in the agricultural sustainability arena, presumably to enhance their credibility in environmentally responsible rural lending. A noble and commendable gesture, but it bears closer scrutiny and begs some questions.
It is now well documented and accepted that Commissioner Hayne showed unequivocally that the banks cannot manage their own affairs responsibly and ethically when left to themselves, so how can they step into another industry proposing criteria for responsible management?
At the time of writing, the total financial compensation numbers for victims of this disgrace are starting to emerge with the predictable pushback from some of the perpetrators, as described in the financial press.
Firstly, what is the motive here? Is it just a marketing/image issue for the banks, showing that they are making a token effort in the quest, or are they genuinely committed to the environmental health of Australian rural landscapes?
Secondly, how does the whole process work? Is your loan risk premium inflated or your loan application rejected if you cannot demonstrate superior environmental management? If so, by how much and why? Not a lot of detail evident.
Thirdly, and finally, on what basis is the whole process built? Science and economics or other sources?
If I walk into a bank requesting a loan, claiming that I have just read “The Call of the Reed Warbler” and my epiphany has put me on an enlightened path to sustainability, what will that mean to a bank? Will my loan application be accepted with open arms and little scrutiny, or will I be encouraged to go away to do a course on critical thinking and come back after re-appraisal?
Silly question really as the answer is obvious.
I am just an interested and sceptical observer, so my views have to be interpreted in that light. However, I do know a little about agricultural sustainability, so let’s see how we go.
Firstly, what is the motive? This is relatively easy to answer, as the historical evidence is that banks just deal in the simple core business of lending money.
If they can find an edge to lend more money, good for them.
Environmental issues, especially in agriculture are topical, so have they embraced them for a perceived edge? Well, maybe not? Perhaps I am too sceptical and they have morphed into rural Environmental Champions.
Secondly, what does the loan application form look like with environmental issues added? There is a range of options for the banks. Carbon sequestration through vegetation is gaining traction. How does this reduce your financial risk to the bank? On my cursory look, risk could go either way.
It may look good as window dressing, but there is no solid evidence yet that I can see that it works in the long-term, either for the landowner or the environment, financially or environmentally.
Carbon sequestration through soil? Some serious problems yet to be resolved there. Feeding seaweed to cattle in extensive production systems (where most of the cattle are) to reduce methane production on a commercial basis.
This is not my field and so I cannot provide informed comment; just asking for more evidence that it is a viable option outside feedlots.
Perhaps wind and/or solar farms on owned land? Again, the evidence for success is paper thin at best, financially still unproven.
The main problem with all of these options, possibly seaweed excepted, is that they are distractions, band-aids that do not address the fundamental sustainability issue associated with beef production, namely how do you run a profitable beef business without borrowing too heavily from the local environmental capital bank?
The beef production footprint on Australian landscapes is huge. From Hobart to Broome, Launceston to The Gulf, no other Australian agricultural industry has this spread. Is there a specific and practical industry vision or plan to address this responsibly in all regions? Not that I can see.
Thirdly, what is the basis for this? Let’s take the northern rangelands as an example, anywhere from the Northern Territory border up, where much of the hike in land prices has transpired in recent years. In fact, the northern rangelands seem to be an asset class that is currently and quickly becoming a financial plaything for the rich and famous.
The harsh reality is that too many landscapes in the northern rangelands have been over-grazed for well in excess of a century, with accompanying degradation. Some regions and especially individual properties, are worse than others in both degradation and attempted repair.
All that the banks need to do initially with northern rangelands loan applications is to insist that a long-term safe carrying capacity assessment of the potential purchase be conducted by an independent qualified and experienced professional.
The potential borrower then has to be able to demonstrate low financial risk to the bank on the prescribed numbers along with environmental responsibility. This will help to prevent the all-too-common tendency for the new purchase to be flogged to death to repay debt principal and produce a decent return.
The heat on this process is being turned up every month as land prices continue to rise.
Do the banks insist on this caveat? Not that I can see, for two obvious reasons. Firstly, the loan applicant is likely to find that she/he cannot run as many cattle as anticipated on the acquisition and the interest in the deal starts to wane; goodbye potential customer. Secondly, in the minds of many, the financials start to get wobbly with fewer cattle running around and both the banks and the loan applicant head to the shops to buy foot warmers. Again, goodbye.
The numbers game
And herein lies the biggest conundrum in the northern rangelands. The thinking in these regions should be clearly focussed on per head performance, not per hectare (the numbers game).
If there is an environmental sustainability limit on the number of cattle that can be run, there is no other option than pursuing means to have every beast performing optimally and there is so much potential there.
Years of research data have largely been ignored by too many producers and the adoption rate of measures to improve per head productivity is an industry disgrace.
If ever there was a need for a good northern beef industry PhD study, this is it.
What is the cause? Is it poorly executed extension, producer apathy, or a combination of both? A well-designed PhD study could shed considerable light on the best path forward, and is long overdue. As well, it would cost the industry next to nothing to do, surely a major attractant.
A select group of producers who have abandoned the ‘numbers game’ and embraced the research findings have simply outstanding business performance and landscapes steadily repairing or maintaining excellent condition.
There is no rocket science or magic involved and it is all quite straightforward; it is a mindset issue, especially the understanding that running fewer cattle can and should create more EBIT, not less, to a point. The scientific and economic evidence on this is rock solid, without a Reed Warbler in sight.
The arithmetic involved here is both compelling and attractive. I would much rather be running 15,000 AE with an EBIT/AE of $140 ($2.1M total business EBIT), than 20,000 AE with an EBIT/AE of $90 ($1.8M total business EBIT). Less physical work to do for a start and more time to think about and execute improved herd productivity measures.
Of course, this can only happen if there is a relentless focus on the herd productivity drivers that improve per AE performance, and fortunately, almost all of them come at low cost. As well, I would have the time to have an annual forage budget conducted for me, along with advice on how my remediation program was going with C and lower B class landscapes (D class landscapes are usually too costly to remediate, not to say that it cannot be done).
Critically, if I had 5000 fewer AE’s munching away, I would find wet season spelling easier to plan and manage, along with burning where appropriate, with less risk.
Who is there in the banks who understand all this with the environmental, herd biology and economic knowledge and skill to properly analyse the numbers and story in the loan application? I do not know.
It would be so good if the banks could tell us how all this is going to work successfully, in some detail. Exactly how are the banks going to reward excellence in landscape management in the northern rangelands and to what degree? How will they appraise this? In the acquisitions that they have some control over, what are they going to do?
I think I know what they will do: approve the loan anyway, because if one bank doesn’t another bank will.
Meanwhile, the environmental bank is slowly going bankrupt on too many landscapes. These landscapes have amazing resilience a lot of the time and the evidence is not always apparent to the naked eye, but they are still on the path to bankruptcy more often than the path to health and prosperity.
Current economic and climatic conditions continue to accelerate that path.