Red Meat 2030 was recently released by the Red Meat Advisory Council (RMAC). This is a comprehensive document, which sets the vision and priorities of the red meat industry over the next decade. This document complements in many ways the NFF’s 2030 Roadmap, which sets out the vision for Australian Agriculture as a whole over the next decade.
These documents are important to you as producers as they will guide industry activities and inform government policy over the next decade. They are industry owned and there has been considerable industry consultation in their development.
An aspect I quite like in both documents is the prioritisation of environmental management and sustainability, particularly that they address how the industry will not only need to ensure that it has sound environmental management, but can effectively demonstrate those practises to the wider community. The focus on the whole value chain, and customers, is another positive feature of both documents. Having all (efficient) players along the value chain being profitable is important for the long-term health of the red meat sector, it should not be adversarial. People, consumers, community, livestock and innovation are also important themes across both documents.
The central objective of both documents is the value of sales by 2030. The Red Meat vision is a doubling of the value of red meat sales by 2030 (from 2020) and the NFF vision is $100B in farm gate output by 2030 (from an estimated $60B in 2019FY). These are ambitious goals, which is great.
Accompanying these ambitious ‘top line’ (revenue) targets, however, are no ‘bottom line’ (profit) targets for the industry. Whilst profits and profitability are mentioned in the documents, there is little detail on current industry performance or future targets. It could be validly argued that profit targets are up to you as individual businesses, not the industry as a whole. However, the ambitious revenue targets and suggestions the industry requires additional capital, raises questions of how much of that revenue will hit producers’ bottom lines, or what the target return on capital is.
From ABARES data, producers’ average return on capital over the last decade is 3.3% for agriculture as a whole and 3.6% for the red meat sector. These figures, however, include land value increases over that period. When these are removed, they are 1.7% and 1.2% respectively, which are too low.
The low return on capital of the industry leads into the discussion on the industry needing more capital. The Red Meat document lists tripling the value of capital accessed as part of their vision and the NFF Roadmap mentions a capital shortfall of $159.5B.
The apparent need for significant capital in the industry and the figure of $159.5B stems from, as far as I can determine, a 2016 discussion paper from the ANZ bank on funding the future of agriculture. This paper raises some interesting points, however the methodology for estimating the capital required by industry warrants some discussion. Firstly, it is based on increased industry revenue, which is a function of estimated global growth in food demand and Australia’s share of global food exports, both of which are reasonable. It then assumes the historic proportion of revenue to capital will remain constant, that is the capital required by industry will increase proportionally to the predicted growth in the value of production.
Assuming the capital required will increase proportionally with value produced is a debateable assumption. It does not address where this additional capital will be spent or how it will generate additional revenue. As the majority of industry capital (at producer level) is currently tied up in the value of land, does this mean that the majority of the increase in capital required will be in land values? Whilst there is no mention of change in costs, it also implies there will be no increases in industry productivity or prices driving increased revenue, and presumably no increase in return on capital.
The perceived need for capital, specifically in relation to the beef industry, is an issue we addressed in the Australian Beef Report in 2017, an excerpt of which is below.
There are claims that the Australian beef industry requires significant additional capital to grow, and meet the future demand. We challenge these claims and suggest that there is currently too much capital in the industry, due to the high land values discussed elsewhere in this report.
This report has shown that the industry, as a whole, is achieving very low returns on capital historically, this is the fundamental problem. Any profitable and sustainable industry, or business, will typically generate sufficient capital for reinvestment in itself. As well, inherent profitability attracts intelligent capital in its own right, without the need to call for more. The evidence to date is that the flow of capital into the beef industry has done nothing but push land prices up without having any discernible impact on performance.
Individual businesses undoubtedly suffer from lack of capital (one of Porter’s barriers) to achieve sufficient scale within the industry, but this is different from saying the industry, as a whole, needs more capital.
Capital will enter and leave the industry as players come and go, but further net capital investment will likely only further drive up land values, reducing industry profitability rather than improving it. The low return on capital in the industry needs to be acknowledged and addressed; this will negate the need for external capital.
It seems more needs to be done by industry to determine what additional capital is needed, and where it will give most bang for buck. Return on capital should also be included in any discussion on capital requirements.
Ultimately, it is up to each of you to set your own profitability targets. If you intend to be in the red meat industry, or agriculture generally, in 2030 then you should read both of these documents. They are an opportunity for you to think about your vision and ‘bottom line’ target for 2030, and detail your plan to achieve it. We suggest a minimum operating return (return on capital excluding capital gains) target of 4%. There are many businesses achieving this currently, and this provides sufficient returns to adequately service and repay debt, fund capital expenditure and provision for succession and retirement. Businesses returning less than this will struggle to fund all of the above and will be more reliant on capital gains for their long-term returns.
Lastly, I’d like to commend all of those involved in the preparation of the Red Meat 2030 document and the NFF 2030 Roadmap. They are ambitious and wide-ranging plans which set out a bold vision for the industry and offer a framework that will help individual producers succeed. They can be downloaded at www.redmeat2030.com.au and www.talking2030.com .
Bush AgriBusiness celebrates a decade in business this month, and in doing so we are looking forward to the next decade and what we and our clients will achieve. This is reflected in our purpose; ‘providing independent analysis and trusted insights to the sustainable and profitable pastoral businesses of the future’.