Investing in agribusiness: Andrew Crane, CBH Group

Investing in agribusiness: Andrew Crane, CBH Group


Here’s the theme
for this morning, investing in agribusiness. And it’s certainly easy to
say we’re open for business. The question is, should we
be neutral on the source of that investment,
the strings that comes with it or its outcomes? I strongly think that we should
have a view, a view informed by some key questions. Who’s the beneficiary? What’s the value to be captured? Where is investment most needed? And then if we answer
those questions, we can form a view on who
and how we should invest. Certainly when we’re looking
for a vision for investment– what’s that great success vision
that Andrew has wonderfully outlined this morning–
the green paper provides some focus for us. It talks about sustainability,
competitiveness, productive and profitable. But it also talks to us
about the beneficiary. It’s for the benefit of
economy and our society. There is no doubt
that there’s plenty of interest in food and
ag in Asia– investing in those things right across
Asia– and particularly in Australia. Our assets are very
attractive, but also, as been mentioned, our
expertise, our brands, and our proximity
to that market. So there’s good multiples
being paid by those who truly recognise the future
potential of our sector. I suppose the question is, do
we recognise that potential? Is it as simple as
being open for business? Do we care on the source and
the intent of that investment? A recent Allens agbusiness
survey of investors makes some interesting insights. And it talks very much about
agriculture being slightly different to mining,
perhaps– that agriculture would require a more selective,
forward-thinking strategy geared around
sustainability and directed towards capitalising
on Australia’s competitive advantage. So if we need to be selective
and forward thinking, what are those criteria? Again, looking at
the green paper, there’s some useful
shopping lists of areas of focus and as well
the intended beneficiaries. Certainly, farm gate returns,
as mentioned this morning by the minister, is
one area of focus. Infrastructure,
regulation, and markets are all that side of
improving the economy. But on the other side there
is, how do those benefits flow? How do they flow
to the family farm, to the creation of jobs
in rural Australia? How do they flow to the
rural regional communities, and how they flow
to delivering us as well high quality and
affordable fresh food? As the CEO of a
grower cooperative, I will express freely
some bias here. I believe the economy and
the society of Australia are uniquely represented
by the Australian grower. It’s the Australian grower
and farm gate returns that should be one
really important measure of the success of
any investment. So what’s the opportunity? Well, I think it’s
said by many– and this is trying to get
a lot into one slide– of the opportunity before us. We have sustainable,
growing demand in our backyard, wonderful
demand and very close to us. We have consistent but
limited export surpluses. And just as the
minister said, we’re not the food bowl–
perhaps we’re the food sourcer– of Asia. At the moment– and
when Andrew gets going, we maybe can feed more
people– at the moment, we could feed about
60 million people. So the question is, which
60 million do we feed? And we have a strong reputation
for reliability, quality, and importantly
low sovereign risk. It’s these three things, added
together or perhaps multiplied by each other, that leads
to the true value that’s to be captured from
investing in agribusiness. So the value is more
than the economic value of some of the assets that might
be up for sale or even not up for sale but sought by others. I believe we’ve got to capture
the maximum possible long-term value from our unique supply
chain, our proximity of demand, and our reputation. So there’s no doubt there’s
plenty of areas requiring investment of capital across
our agbusiness and investment in innovation to capture
that value on offer. We know that input
costs in Australia relative to other
origins are high. We have a very efficient
farm production unit called the family farm. It’s been tested over decades,
centuries, with other models. But it turns out to be
very, very efficient, giving the room to grow. But our family farmers
are an ageing population and facing quite significant
succession issues. Infrastructure is crucial to
connecting us to the world and to those markets. And in some areas, particularly
in rail, this is failing. And it is failing
our grain sector. There is investor
interest in these assets right along the supply chain. The concern that
I raise is, what’s the impact of that
investment on those supply chains and their efficiencies? And finally, there’s a lot we
can do around regulation, both adding and removing,
but also ensuring that whatever it is
that it’s fostering responsible investment. So as mentioned,
the variable costs of production in Australia are
high compared to other origins. This is just in some
respects a state of where we are and the
conditions of our soils and so on. But there is much
that we can do. At the same time, subsidies
in Australia are very low. And I am not advocating
additions of subsidies, but we need to recognise
what we’re up against. And it’s a role, I
believe, of government as it’s intended to
incentivise and support appropriate investment and
ensure that our agriculture is competitive. If I refer back
again to the Allens survey of international
investors, which asked the question,
“What hurts Australia’s reputation as an
attractive place to invest in
agriculture?”, the top one was our variable climate. The next one was
wage and input costs. The next three were all
related in some respects to government decision making. When it comes to
infrastructure, and particularly the export supply chain, we
have some real, real challenges. Now, this is not exactly an
apples-for-apples comparison, but it’s good enough. This is one of our major
competitors, Canada, where they would take about
five and a half trains to load a 60,000-tonne vessel of wheat
and we would take up to 16 trains to do the same job. Restrictions on train lengths,
axle weights, speed, and even just access to the
line when temperatures are above a certain
level in harvest time, as we have in Australia,
add huge inefficiencies to our supply chain. And I really concur
with Andrew’s comments about we are standing
at a critical moment in our competitiveness. Our proximity to the demand has
made us maybe a little lazy, a little self-assured
that Asia will buy their food from
us in preferable to more distant origins. We are now seeing huge
competition coming from the Black Sea,
from Ukraine and Russia, from Europe, from
Canada, North America, and now from South America. We are seeing our
Argentinian competitors loading capesize
vessels with grain to be able to compete
on the supply chain cost into the Middle East and
displace Australian grain. The cost of the inefficiencies
on our supply chain are borne out of the price of
grain offered at the farm gate. Other issues requiring
investment of time and money are listed here
around market access. I learned a lot
in my involvement recently in B20
and the G20 process around the protectionism
that existed around agricultural
produce, but also how that protectionism
was resisted and reduced following the GFC. The G20 nations got
together and worked very hard to reduce the level
of protectionism and trade barriers. What unfortunately
happened in exchange for that was the creation of
1,500 new, murky trade barriers that grew up post the GFC. Lots of talk about market
power, and do growers have market power? And this is often
phrased in the way that growers might
relate one way or another or through supply chains to
supermarkets in Australia. But I think this is too much
of a myopic and domestic view here. The issue for
market power for me is around growers’ participation
and ownership in supply chains. There’s a lot of talk around the
emergence of dedicated supply chains. I’d like to go one
level below that phrase, that old euphemism, and
understand what is it about and who is the beneficiary here. If it is an issue,
what is the role of growers in their supply
chain and in the way that they can access capital? And then, what’s
the way that we need to continue to invest long
term in innovation and R&D? So those are the issues. What are some of the solutions
requiring investment, and who should be the investor? Certainly, what can we do
to reduce these input costs, the cost of inputs and
labour in producing a crop? What can we do to
provide the growers some form of better-produced
safety net here? I’m talking around
multi-peril crop insurance. What is that minimised risk
of loss that we could provide our growers so they would have
the confidence to continue to grow during those uncertain
seasons where they pull back on the fertiliser, they
pull back on the husbandry because of the nerves of the
further loss when, in fact, that may have come good? What can we do when it comes to
investing in the supply chain, in rail, and in supply
chains that work for growers? And what can we do
around regulation that might assist in that? When it comes to market access,
one of the key recommendations from the B20 trade
task force was to ratify the WTO Bali Package. And multilateral
agreements are important. They get harder and
harder to achieve as more and more countries
are involved in them. And we do revert to
free trade agreements. They are also crucial
to us, and the minister mentioned those three really
important recent ones just now this morning. When it comes to market
power, as I’ve talked about, is how do we allow our
organisations, our growers, to achieve scale in the region? We are competing as an
organisation and as a country against some major global powers
and global multinational firms. All could be good for our
nation as well, but how do we grow our own ones? How do our growers have
long-term supply agreements with our distant markets? How do they participate
in that, and how do they have some control? When it comes to
innovation, I understand there’s a levy review at
the moment which I think is asking the right questions. What are the benefits,
and is the beneficiary very, very, clear, as
I’m asking this morning. As we explore more
the role of investment in the interest of
the grower, maybe we can talk about a
little bit of a phrase of responsible investment. A recent Rabobank study
on competitive challenges of Australian
agriculture identified a double-edged sword. Now, this is talking
about the sugar industry, and I’ve got no connection to it
and may be straying into areas here that I should not. But there’s a lot
of benefits here in what’s happened in
the sugar industry, I understand, from the
injection of capital from foreign investors. And it says here it’s reignited
growth in the industry. But there is a “but.” Farmers themselves have
lost control of a key part of the value chain. The question is, is
this an issue or not? A G20 food security and
nutrition framework report spoke about responsible
investment and hinted at the importance of grower
organisations, cooperatives, and small and medium
enterprises in investing, as they’re the ones that often
increase incomes and quality of employment, the ones that
increase local productivity and sustainability
of the supply chains. These are similar aims
to the green paper and also my assertion of good
for the Australian economy and society. Talking of cooperatives. Just as an example here is CBH,
a Western Australian grower cooperative. 4,500 growers across the
state growing 10 to 15 million tonnes. They own the 195 warehouses
across the state. They own the 20 million
tonnes of storage that they deliver to. They own a recent $175
million investment in new locomotives and waggons
to bring the grain to port. They own the four ports. They own a marketing
and trading business that competitively acquires
about half their grain and markets it on their
behalf direct to customers around the world to
over 30 countries. They control and ship about
70% of that grain themselves. And they now own
seven flour mills in Southeast Asia and
Malaysia– two mills in Indonesia, one
in Vietnam including a port, and four in Malaysia. And this is Australia
investing itself downstream into the market so
our growers can capture margins as they get closer to the market
and bring those margins back to reinvest in the supply
chain here in Australia. So this is an example on the
left of a grower open supply chain where growers will
deliver to a warehouse where they’ll be 10
prices for their grain, where acquirers of
grain are acquiring through an open supply
chain and actively competing at the most distant
delivery point from the port. Dedicated supply chains
owned by individual investors may bring additional
competition. That could be good. But that would only happen if
they are running side by side. And quite often, a grower
arriving at a dedicated supply chain will find only
one price on offer. So the question is, does
the open supply chain owned by the growers, which has
economies of scale, freight savings, consolidation
of stocks– it allows our growers to blend
their lots online and present blended lots to the world,
achieving an arbitrage advantage for themselves, and
it offers free warehousing– what are the pros and cons of
that against dedicated supply chains? Do dedicated supply chain really
deliver additional farm gate returns? If we’re unsure, we should
proceed with caution. If they do, it’s
something that we continue to embrace and
ensure that they do work in the interests of
the Australian grower. I openly acknowledge it’s
difficult for growers to act together
and raise capital. But if they don’t, the chain
may not be their friend. If they do, they should be
encouraged and supported and not constrained by domestic
competition policy settings. Having spent my
career in ag and food and started in ag research, I
admit another bias this morning and a concern at the lack of
R&D in long lead time work. The lag time between research
and outcome, I believe, does need strong government
direction and support. There is a very good
established relationship between total factor
productivity and R&D. But we seem to be seeing,
from the data I look at, reduced R&D intensity,
perhaps in exchange for a more immediate, perhaps
more sexy market-focused approach. There is still
plenty to be done, plenty of research to
be done in crop yields, soil health, water efficiency,
and new crops particularly suited to Australia and the
changing diet of our markets close by in Asia. And there’s plenty to
be done by both private and the public sector. I fully acknowledge that. In closing, I want to return
to the theme of welcoming investment in agriculture
from all sources as long as the test is
the national interest of our economy and society. The opportunity of
welcome foreign investment is much, much more
than injection of capital that is
otherwise hard to find. The opportunity is for us to
invest along the supply chain and down the supply chain and
into our markets to maximise the value of our limited but
highly sought-after export surplus. So in summary, Australia offers
security of supply, proximity, product integrity, low sovereign
risk, food safety, innovation, and brands. That’s a lot on offer. And Asia offers us in return
some security of demand, a growing middle class consuming
higher margin products, although others are chasing
that market as well. We have to ensure
that investment by domestic or
overseas businesses delivers the maximum possible
value to the Australian economy and society over the long term. And I suggest that
farm gate returns is a good test of that benefit
to economy and society. So I implore that in welcoming
investment in agriculture we do see and seek
the long-term value and not sell ourselves short. Thank you.

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