Submission to the Agricultural Competitiveness White Paper Taskforce

April2014

Prepared by: Blair & Josie Angus

Introduction

Blair & Josie Angus own and operate a vertically integrated beef business, breeding, back-grounding, feeding over 35 000 head in Central & Northern Qld. Signature Beef, their beef wholesaling and export division has been in operation since 1999. The company has built a large, loyal clientele of retailers, restaurants and importers throughout 30 countries worldwide. Signature Beef operates through a service works processing company bred cattle as well as cattle from other producers and additionally has a boxed beef trading division. Blair and Josie also give considerable time to promoting Australia's agricultural strengths. Blair is chairman of Beef Australia, a voluntary position running the triennial Beef Expo in Rockhampton, he has also recently acted in an advisory capacity on Cattle Councils Market Advisory Committees and the Marketing Taskforces. Josie is a director of Trade & Investment Qld. developing global opportunities for Queensland agriculture through trade and investment.

The content of this submission is focused primarily on Beef production.

1. Ensuring food security in Australia and globally

Whilst there is a consensus that global food demand will rise dramatically in the face of population growth and increasing affluence, there is no guarantee of increased price and profitability. In fact, given the close linkages to inflation, social unrest and humanitarian issues of prolonged high food prices, the likelihood of increased demand resulting in an automatic larger cheque being delivered to Australia's primary producers is an unrealistic expectation. To achieve the maximum return from this growing demand Australia must act like any prudent business: a. Increase productive efficiency and lower our costs b. Develop a cohesive marketing and value adding strategy to ensure

that we obtain a price commensurate with the nature of the product we produce.

There is large capacity for expansion of production particularly in Northern Australia. For this this be sustainable we need: a. Capital

i. To develop innovative ways to engage that capital with existing producers so that we maximize use and efficiency of the knowledge base and skills of our current agricultural workforce and to benefit from the world leading efficiency that our current agricultural producers possess.

b. Infrastructure i. Key land areas of highest growth potential need to be identified

and prioritized for rail, road and port infrastructure upgrades, development and accessibility.

c. Access to Regional Processing i. Processing has been concentrated at times long distances from

major areas of production. d. Market Access

i. A continued focus on bilateral trade agreements and a targeted focus on technical barriers to trade

e. Competition i. It is important that increased competition is encouraged

particularly post farm gate. f. Brand Australia development

i. Defining our strengths in Agricultural production and developing a coordinated strategy to market and produce to those strengths.

g. Social License i. To achieve the outcomes required for Australia to capitalize on

this opportunity there must be support from the broader Australian voting public. Government has a role to play in assisting industry with gaining the support of the Australian public.

h. Research & Development i. Australia must continue to develop world leading production

practices. i. Improved Weather forecasting

i. At a minimum we need to focus on the ability to more accurately forecast weather for a crop cycle. 12-18 weeks.

j. Regulatory reform i. Developing a new methodology in promotion and

encouragement of best performance. k. Improved service delivery for improved standards of living in regional

and remote areas. i. Health

ii. Education iii. Telecommunications

Capital

The capital requirements of Australia's agricultural sector were well addressed in the ANZ report Greener Pastures. An estimated $600 billion is needed to achieve the growth in productivity required to meet demand growth and a further $400 billion is needed to facilitate farm succession. In our opinion the current "debt crisis" in agriculture and in particular the Northern Beef industry is real and needs to be addressed by a raft of different measures. It is important that the policy setting reward high achievers rather than forgiving or subsidizing debt from lower performers.

1. Lack of profitability a. No doubt the largest contributor to farm debt The balance of this

submission will give our thoughts on improving profitability. 2. Succession - It is our belief that there is a growing proportion of

accumulated debt directly attributed to succession. a. Profitability will drive improved succession outcomes b. Taxation implications on farm succession including stamp duty

and CGT must continue to be minimized c. New and innovative business structures need to be explored

i. to handle the asset rich, cash poor nature of family farming and to encourage multi-generational ownership and growth rather than the "big pie theory- splitting companies each generation".

ii. to allow families to balance input of capital with taxation and cash requirements. At present many operators tend to split land ownership and operational entities as this has been the most effective means of managing taxation implication, succession and divorce risk. Some of these structures, however, are not conducive to the receipt alternative capital sources other than traditional bank debt.

3. Valuation Methodology. a. The current system of land valuation is inherently not suited to

Northern Australian operation. The huge variability in land type, location and infrastructure design and their associated influence on productive capacity and profitability means that the tradition "like sale" comparative analysis is broken. When almost no two parcels of land are "like" the current methodology is not able to deliver a valuation that is conducive to the matching of debt f equity and productivity. A move to a system that integrates productivity and profitability performance is needed. Any change must, however, be managed in a way that does not create significant short term disturbance to current bank relationships.

b. A move to productivity based valuation methodology over time would do more to encourage efficient production, guard against the type of dramatic, unsustainable rise that we saw pre 2008 and provide greater incentive for investment.

4. Promotion of the skill set of current producers a. In our opinion maximum return from investment will be generated

by co-investment with Australian primary producers rather than by "selling the family farm to Asia". Most of this nation's leading agri-businesses, in terms of financial performance are not in fact corporales, they are family owned and operated. The service companies who have been the first point of contact for many potential investors have undersold the skill set required to manage Australia's unique agricultural challenges: large land size, extreme distance and variable climate. In short it takes a fair bit longer to teach someone how to handle a large mob of livestock than it does to build an excel model and we must all recognize the unique skill set that our farmers possess as a marketable asset.

5. Engagement with a global market place. a. Foreign capital has the potential to not only bring increased on

farm productivity and efficiency it also brings with it increased connectivity to market. Off take agreements should provide a new basis for investment in agriculture. Funding arrangements utilizing future production as collateral, like the Sanhe Hopeful deal in Brazil which included US$7.5 billion investment to ensure the purchase of 6 million tons of soybeans with no land ownership.

6. Marketing Australian agriculture as a global investment target a. A coordinated strategy through all levels of government, Austrade,

State government trade & investment agencies and other commercial agencies to develop brand "Australian Agriculture". Not only will this attract trade opportunities but investment as well. Even for those countries looking to source food and fibre commodity from more price competitive nations there is potential for these players to invest here in a more secure investment environment as a hedge against rising global commodity prices.

7. Competitive access to finance a. Competition from other sources of capital may encourage banking

to be more competitive in terms of margin offered to clients. b. Risk products that more accurately reflect the loan terms of

primary production. Since the GFC the ability to fix interest rates for longer terms has been diminished. ln an industry reliant on long term funding a higher level of longer term risk mitigation needs to be available.

Infrastructure

There is no doubt that transport plays a significant role in the efficiency of Australian food and fibre supply chains both domestically and internationally.

• An expensive domestic infrastructure network reduces competition in retail, global players can access the same number of consumers in one city internationally than they can in our entire nation. Better connectivity between major regional centres would increase competition in those locations.

• Airfreight- We need to ensure that we can maximize belly capacity utilization of a growing air market. As flights increase with increasing air travel (eg. Chinese tourism) and increasing inbound freight from online shopping. Air freight will give us the connectivity to build the most efficient, direct supply chains. The large volumes required for sea freight mean that often traders and larger wholesalers need to become involved at the customer end. Air freight often allows for the connectivity with customers further along the supply chain thus maximizing value retained in Australia. Air freight requires not only planes but strategic land capability at the departure air port. As our current airports strain with capacity air freight runs second place to passenger support service. We need coordinated planning in new airport development I expansion to make air freight more efficient and cost effective. Below is an example of one of our airfreight invoices. Often the additional charges amount to up to 40% of the invoice value.

~DESCRIPTION 154 CTNS CHILLED MEAT

!BROKER IIWEIGHT !!VOLUME l lcttARGEABLE IIPACKAGES

!FUGHT & DATE 50246 / IDCGK / 29<lct-13

!ORIGIN AUBNE • Br1sbane. AUSiralla

2899 KG 2899 KG 21JNT IIMAWB II.,_,HA""W,_,_,B~ ____ _ ___J

61875708474 ETD I29.Qcl·13 IDESTINAnoN II ETA I29.Qcl-13

IDCGK = Soek~Hatta Apt/Jakarta. Indonesia

DESCRIPTION GST IN AUD CHARGES IN AUD rnternuional Freight zero Rated 1,700.00 Ai rwaybi ll Fee zero Rated 40 . 00 Export Documentation Fee zero Rated 50.00 Agency zero Rated 25 . 00 car tage I Loadi ng zero Rated 200.00 Expor t Decl aration Number zero Rated 20.00 cartage Transport 10%=4 . 50 45.00 Dryi ce zero Rated 200.00 Exdoc Zero Rated 55.00 Fuel s urcharge Zero Rated 300 .00 Export securi t y charges EXempt Rated 80 . 00 Port Mark . zero Rated 100.00 cer1: . ori gin EXtll!4)t Rated 55.00 HALAL 10X=4. 62 46 . 20 call out fee HALAL l<JX=U. SO 125.00 Faci 1i t y Fee zero Rated 15 . 00

Please oonlacl us ~lhln 7 days should tnere oe any 01screpanaes SUBTOTAL 3 , 056 _ 20 ADO GST 21. 62

I TOTAL AUD 3, 077 .821

As Asian markets increasing shop on-line there are some key opportunities for growth in food sales on-line. These transactions could represent the

opportunities to see maximum value achieved for Australian produce. An efficient, world leading and cost effective air freight system is essential for us to access this opportunity.

• Domestic cabotage laws need to change to allow improved domestic logistics. The recent grain example where Brisbane grain prices far exceeded the southern ports but it was in fact cheaper to ship grain from Adelaide to China than from Adelaide to Brisbane. This represented a huge cost to the beef industry for feed grains and a lost opportunity for Southern Australian grain farmers.

• Rail -greater access needs to be provided for agricultural commodities who have often played poor cousin to mining access. There must be a blueprint for future rail development that will aid future agricultural development. For example Could the new Gallillee Basin rail development take into account future agricultural production?

• A focus on the most efficient intermodal connectivity at strategic locations to allow freight to be optimized by road - rail - sea and air access.

• Increased efficiency in road transport- maximizing size of trucks allowed on key routes - managing fatigue laws with cattle transport so that yield loss is minimized. With current fatigue laws, cattle transporters have drivers stopping for lengthy periods with cattle on the trucks which then has major impacts on shrink of the cattle, therefore costing the producer yield. Some flexibility needs to be included so that cattle can travel a reasonable distance without having to stand on a truck for longer than required.

• Regional road networks particularly dirt roads. Regional roads have seen vastly increased traffic with mining expansion. Local councils have fallen behind in service delivery, which is having an impact on length of time cattle travel (shrink I yield) and wear and tear on trucks and therefore increasing cost of transport to the farmer. Vehicle maintenance costs for farmers on their own vehicles has also increased substantially. Drainage is not being maintained to an adequate level so access is more likely to be threatened in wet weather. Local councils once had remote teams­essentially a guy on a grader camping out and consistently touching up the roads - primary producers are paying vastly increased rates for less service provision.

• Inland port development. With increases in regional processing, inland port development could increase efficiency and throughput at key sea ports

• Superannuation investment in infrastructure- we need to develop ways of engaging Australian superannuation funds in nation building infrastructure.

• Competition in infrastructure development is important to deliver maximum return on $'s spent

• Regional processing- see below Regional processing.

Smaller regional beef processing would reduce significantly the infrastructure required and cost of the beef supply chain. Changing from

live cattle to tessellating boxes of beef. One 40ft trailer can hold approximately 22 live cattle assuming an average carcass size of 280kg. One 40ft trailer of boxed beef using a saleable meat yield of 73% will carry the total beef produced from 98 head. A significant removal of trucks from our roads. On top of that the cost of transporting per animal is significantly reduced. A comparison between taking a live animal from Townsville to Brisbane would be $102 per head live vs. $30 for the beef generated. This would be $70 I hd that could be returned to the farm gate. Given that McCosker's Northern Beef Situation analysis shows an overall Production Gross Margin of $92 per LSU for the top 20% of Northern Producers a $70 lift per head is a radical change.

• The closure of the regional network of processing plants over the last 3 decades has been a major contributor to the decline in farm gate profitability of the Northern Beef industry.

o Transport costs have been passed back to farm gate. o Larger plants have failed to deliver on increased efficiency targets

in fact we have seen the opposite occur in the cost and efficiency of processing. An example is Din more- a daily production of 3 350 head per day and an onsite staff of 2000 people meaning that they process 1.675 head per man per day. This is a cost that we cannot afford to pay.

o Large plants in highly populated areas have a significantly higher environmental cost than would be required for smaller plants in regional areas

o Loss of competition has resulted in less$ being returned to farm gate.

o Loss of competition has also resulted in less $ being achieved for our overall beef exports. There is a reduced incentive for the remaining, largely foreign owned processors to maximize the$ achieved for their global beef sales, it is far easier to reduce the amount paid for cattle instead. As was evident in the past twelve months.

o Concentration of foreign ownership of meat processing- capacity for price transfer.

• Our belief is that a new model of small (250 head I day) cooperatively owned, regionally located meat processing facilities needs to be explored.

o Regional- reducing freight cost and infrastructure requirements o Reduced environmental regulation than would be needed in a city o Reduced opportunity cost of real estate (vs. eg. Beenleigh I

Din more) o Co-operative service production model like Northern Cooperative

at Casino offers vastly increased competition proportionate to capital investment. Instead of one competitor it offers 20- 30 operators who all compete for cattle. Coupling a model like this with an off -take investment would provide the funding needed.

o Greenfield site developments, many of our plants are very old and so have associated high costs of compliance.

• Service processing capacity is vital to the development of a healthy competitive processing sector. In the 1994 productivity commission

report into The Meat Processing (a comprehensive document well worth a read in the context of this review) the Livestock and Meat Authority of Qld commented that "had it not been for the public abattoir system 8 out of 22 export processors would not be here today." The Council of Australian Public Abattoir Authorities stated that "The public owned service works allow export operators to get started in the industry ....... Most of the major meat companies have had their start in public owned service works" Even Woolworths stated "if the public abattoir system didn't operate our company would have great difficulty in procuring a kill." Whilst not advocating government ownership we believe there is a definite need for service capacity. Our own company which breeds in North Qld, grows and fattens in Central Qld have to truck our cattle all the way to Northern NSW to be service processed. We then supply that product at a premium into over 30 markets. If we were to move to a plant say at Emerald (approx. 280km from our home place) it would add earnings of 5% ROA to our company- a significant lift in profitability.

• Longer freight times mean greater shrink of carcasses. American research from Iowa indicates that:

Compared to cattle standing in a pen without feed and water, transported cattle will shrink 2% more over the same time period. For the first 3-4 hours during travel, cattle lose 1% of their weight per hour. Over the next 8-10 hours, they lose 0.25% per hour. Cattle lose an additional 0.61% of their weight for every 160 km (100 mi) they are shipped.

In our example (freighting from feedlot Moranbah to Casino) 1300 km taking 24 hours from feed to slaughter our shrink using this calculation would be 10.35%. If we take 6% as excretory shrink that would leave 4.35% as tissue shrink.

A second study in which cattle were transported from Texas to Iowa ( 1400 km) there was an in-transit loss of 8.83%-47% was excretory and 53% was tissue loss.

A 4% tissue shrink loss is a straight bottom line loss for our business. Therefore any gain made by more equitable access to regional processing will deliver genuine returns to farm gate. Given the large average transit times by cattle in Northern Australia large processors often require cattle to be delivered well in front of scheduled slaughter (24 hrs) this adds to the shrink factor.

• To achieve the investment we need o Regulatory reform - many of the regulations developed in the beef

industry have been developed as barriers to entry for new players. o Initial infrastructure support to establish greenfield sites (as a

trade off reduced longer term infrastructure maintenance)

Market Access

• A continued focus on Bi-lateral trade agreements • A renewed focus on technical barriers to trade. Both international and

self imposed domestic barriers. o The 1994 report into Meat processing Recommendation 5.5 stated:

The Commission recommends that AQIS should seek to facilitate the export of Australian meat to all destinations at the lowest cost which is acceptable to importing countries­if necessary by way of multiple export standards.

o It is our belief that AQIS and Ausmeat often take an approach to market access that "overshoots the runway)l in terms of compliance and adds unnecessary expense.

• We dealt with our thoughts of how to address technical barriers to trade specific to beef in our submission to the recent grass fed levy inquiry.

Brand Australia

Australia is a high cost producer we must deliver the highest possible return for our product. Our standards in terms of environment, food safety and biosecurity are world leading and come at a large cost to our farmers and processors. It is our belief that we have not successfully delivered commensurate returns for the level of product that we are producing. In the beef industry we lead the world with product integrity systems that have been developed at producers expense we then have a product that is being marketed at a discount commodity price. Lack of adequate product description leaves us at a disadvantage to global competitors. Cattle producers have spent hundreds of millions of dollars in the development of Meat Standards Australia, we need to move away from dentition as the major descriptor of Australian meat because it both reduces market access and carcass weight.

Several countries have successfully branded their agricultural produce to deliver premiums to their farmers. "Scotland's Natural Larder" "100% Pure New Zealand" have been successful. A strong brand for Australian agriculture forms a basis for

• Regulation- standards development • Investment • Trade

The brand shouldn't be just a logo or a tag line- it needs to be a statement of our strengths, why we are better and what we bring to the market. We then need to ensure that we have a cohesive plan to produce to those strengths. Including pricing signals to farm gate that clearly illustrate a premium for sticking to the plan.

It is always vital for us as producers to remember the means through which the majority of product is marketed. The pointy end of our industry is essentially a small group of commodity traders in the Cargill, JBS & Nippon offices who sell a major portion of Australian beef. There is no point in us, as producers, spending hundreds of millions of dollars in promotion if there is no incentive for our key sellers to increase the$ they earn for Australian beef. At the moment it could justifiably be stated that it is easier for them to make a collective decision to reduce the price of the slaughter cattle to maintain profit margin as it is to build genuine price increase across many different markets and customers. Another point that is often made is the impact of the AUD on our export returns. We hear the news stories that a ten percent drop in the value of the dollar will equallO% more in the farmers pocket. In our experience many beef traders often have an AUD price objective and as the dollar falls so do their USD selling prices. The important part to note from the perspective of the Australian producer is that as the AUD falls, quite often the price of our inputs increases, grain, fuel etc. Because of the disconnect between farm gate and markets, this picture is often not expressed to international customers, our customers are often surprised when we put forward that argument. It is vital for us that marketing$ are concentrated on programs that are coordinated and build demand for Australian product.

Social License

Any outcome of this white paper is ultimately reliant on public support. In a global context Australian producers have more disconnect with their domestic public than any of our large competitors. Government decisions like the live export ban obviously had a very detrimental effect on public perception. It is important that Australians in general stand proud behind Agriculture as a driver of the Australian economy, a provider of jobs and a strong symbol of our national identity.

• A successful brand Australian Agriculture will be a key component of delivery.

• Curriculum changes need to be made that are more supportive of sustainable food production rather than the negative sentiment that is currently portrayed around food production

• A snow ball effect can be created if we can develop a positive sentiment to farming. Look at the Dodge Ram super bowl commercial in the USA, a pro-farming outlook is seen as a marketing advantage by other companies thus giving agriculture free marketing $'s.

• Our industry organizations have been too heavi ly focused on compliance rather than promotion. If the general public has an improved image of our industry, we will become less of a target to extreme interest groups.

Research & Development

The main change that needs to be made is a consolidation towards blue sky research that will make genuine bottom line improvement. As an example, one of the prime limiting factors to reproduction in the north is Phosphorous. In fact it was 1927 when the chief vet in Qld identified Phosphorous deficiency, as the cause of ill thrift in breeders in the North, he advised the feeding of rock phosphate. A couple of years ago MLA, through R&D funding presented a book on feeding Phosphorous in the North with largely no new information approximately 90 years later. Phosphorous costs our company around $400 000 to distribute annually and requires staff members to physically handle 100's of 25kg bags every week. We have not developed an accurate test for phosphate deficiency nor a method of increasing our animals efficiency in utilizing it. We spend our own dollars on working with nutritionists to further our own companies performance. MLA spent $10 million dollars on the cash cow project to tell us that cows weren't breeding in the North, just talking to our leading producers would have given us that information. This type of paddock research in North Qld is largely useless, it is almost impossible to establish baseline paddock data in Nth Qld, every year is so individual in terms of rainfall amount, timing and distribution, available herbages and grasses even varying insect populations. There are functions of R&D that a good performing business will achieve every year just by consistently analyzing their performance. It is important that transaction levies and government contributions are not used to subsidize this kind of core business activity. They should also not duplicate work done by the private sector or state government agencies. There is a culture that we must "muster the tail" when it comes to our industry. We feel that if some producers are lagging behind that it is the job of industry to bring them up to speed. It is our belief that, just like mustering a mob of bullocks the best way to get the tail to move is to "show them a lead." In other words if we concentrate on accelerating the performance of our highest achievers the majority will follow. It is then important to recognize that there are a number of farmers who farm as a lifestyle choice and who have no inherent desire to either increase production or efficiency, these type of people exist in any industry. Between 1985 and 2006 production in Brazil increased 77%. Significantly over this same period the total farm productivity gap from leading farm to average farm grew 1.9%. It is our belief that we will not achieve the gains needed if we focus on lifting average performance.

A greater level of cooperative research also needs to be developed globally and across species in Australia. For example dairy research is highly relevant to beef cattle research, cropping and pasture etc. Strong databases must be developed for research outcomes so that information is readily accessible over a long

period of time given the often long uptake times in primary production. We often see research being needlessly repeated. There may be potential for a national technical committee to oversee all ROC's and their submitted projects so that we can avoid some of the silo effects of individual species management.

Improved Weather Forecasting

Ultimately the key to drought management in Australia is rests with quality climate forecasting. There is a lag in tropical and subtropical forecasting ability as compared with temperate forecasts. We have underinvested in a global sense. The recent depletion of the El Nino forecast capability down to 40% because of US funding cuts is an example of our lack of investment. Any drought assistance policy must look to future productivity rather than propping up under performing businesses. Schemes like 70% rebates on water infrastructure are far more useful than government loans. Without genuine cooperation from the banking sector loans schemes don't work effectively. That said it is important to provide a level of immediate welfare in times of dire circumstance. Child education (secondary and tertiary) support, council rates and state government rental relief and support for the retention of staff are all the types of immediate relief that can ease genuine welfare concerns for farming families in times of extreme climatic events.

Regulatory Reform

As we stated earlier self imposed high standards of production need to be backed up by value through to market. Australian consumers need to be willing to pay for a level of food safety that is higher than our imports, we need clear statements about what the value equation is for buying Australian produce. In the beef industry we have often added regulation without adequately establishing a value equation for that regu lation. Our leading producers are early up-takers of the regulatory mechanisms but often the lower performing or more risky producers, the ones at which the regulation was aimed have the lowest performance against the standards. Examples- We seek higher standards of producers who wish their stock to be declared free of HGP's than we do of those that wish to use HGP's. The producers who are not using are largely not using because they are producing a higher quality product, they should have less regulatory imposition than the producer wishing to use the drug. Traceability- we have forced the majority of cost of traceability onto the breeder, he had the highest level of traceability of his product originally. The traders, feedlots and processors who require a more complex level of traceability wear little of the cost. We now face a new era of our own industry bodies seeking "cost recovery" of industry funded systems from producers. How can you cost recover from the very people who are providing the funding?

The beef industry requires major structural reform of industry bodies to ensure that regulation is not self serving of vested interests. It must offer increased dollars for our product at the end of the day.

Improved Service Delivery

Education

There are significant costs associated with raising a family in a rural or remote area. Given the relatively small amount of families involved it is vitally important to both enticing new people to the industry and retention of farming families that we offer more equitable access to education.

Funding for distance education Subsidization of boarding school costs Rent assistance for tertiary education without parental asset testing. Adequate internet access

Telecommunications

New staff fail to understand the concept of having no "unlimited broadband". It is a major cost to provide internet access in the bush. For example both our overseas customers and our young staff from the city are used to talking on Sype -"it's free"- in the bush limited downloads mean that Skpe can quickly become very expensive. In a remote area equitable internet access is vital. Health

Health is another area where it is important that we lift capability and access. have watched a young person die while waiting for an emergency helicopter because it was too busy ferrying people up and down the coast. Our own son took 24hrs to access a hospital for surgery when he was bleeding on his brain because the helicopters and aircraft were all too busy.

It is important that the standard of living is raised in rural and remote areas to attract and retain a new generation of farmers.

Summary

Australian farmers must embrace connectivity with a global market place to maximize farm gate returns. Government and industry policy settings must reward producers and service providers who provide

1. Lower cost structures 2. Reliable supply 3. Consistent quality 4. Consumer focused products 5. Innovation

Only by rewarding these supply chain players can we deliver competiveness, productivity, and a reputation as the preferred supplier of food and fibre to the world.