Bucolics Anonymous

 
 

Forget mining and financial services. Agribusiness is shaping up to be the next hot investment sector. Some analysts go as far to say that soft commodities are exhibiting the same characteristics and demand/supply fundamentals as base metals at the beginning of the current bull market in 2001.

The world has never experienced this many drivers of demand growth simultaneously with this many constraints on supply. What this means is record prices for wheat and near record prices for almost every other soft commodity, including soybeans, maize and dairy.

These sound like dream conditions for a country born on the sheep’s back. Yet this year’s Diplomat Global 100 proves for the second year in a row that agriculture is not as relevant to Australian business in a rapidly globalising world as it once was. Only seven agricultural companies make The Diplomat Global 100 and none of these make the top 20.

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The absence of agribusinesses from this year’s Diplomat Global 100 is telling. Missing from the list are agribusinesses with reach along the entire supply chain. There are plenty of agribusinesses that grow or buy raw materials and sell them either here or overseas. But there are few, if any, agribusinesses that turn these raw materials into products. And that’s where the big money is. The crux of it is that agribusinesses have rarely harnessed a vision that has stretched beyond the farm gate.

Denis Gastin, the managing director of strategic analysis consultancy Instate and a former senior economist in the Department of Trade, says Australia has always baulked at the investment required to turn raw materials into global brands. “Historically, most of the value-adding has not been done by Australian companies but by foreign food companies. They’ve always built the global brands because the attitude towards the food sector has always been grow it, sell it, ship it as a commodity. That gap still fundamentally exists and that’s why Kiwi and Japanese and other companies have been coming in and saying, ‘If the Aussies aren’t doing it, we will’.”

Senior economist at Commonwealth Securities, Craig James, says farmers need to think more laterally about what’s required to succeed in global markets. “Farming has been more at a family level than a corporate level. We need a total re-think of the way that agricultural production is undertaken in Australia,” James says.

Most notable of the bigger players that have realised the importance of international expansion and brands are the dairy companies. Both Dairy Farmers and Murray Goulburn Co-operative have shifted their focus to value-adding in the last few years and pushed into Asia with new brands. But expanding internationally under a co-operative structure has proved difficult. Given that producers’ own financial imperatives put pressure on profits to be converted into dividends, the patience and capital needed to compete head on with the likes of Fonterra and National Foods are in short supply.

“The dairy industry has tried to value-add, but even then they haven’t set out to process and sell final high-end products. They’ve focused on sending off powder and bulk processed food, and that’s because Australian companies have always been a bit frightened by the cost of establishing a brand in other markets,” Gastin says.

The result is a dairy industry that appears to be stuck in its infancy. Compare the Australian and New Zealand dairy industries, both of which deregulated their industries about 10 years ago. Just two companies, Fonterra Co-operative Group and New Zealand Dairy Foods, account for almost two-thirds of the New Zealand market. Both are big enough to swoop into countries such as Australia and buy the prized sources of supply.

In Australia, on the other hand, the three major producers, including Murray Goulburn, Dairy Farmers and Fonterra’s local subsidiary, represent just two-fifths of the industry.

Domestic dairy co-operatives do recognise that change and industry consolidation is inevitable. Making it happen appears to be the big stumbling block. Dairy Farmers, for example, has spent the last four years planning, preparing and discussing a public listing worth as much as $1 billion. About 2000 farmers voted to turn the co-operative into a company in 2004. This paved the way for a stock market listing yet four years later the transformation has still not occurred.

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