Australia: Key trends in Australian Agribusiness

Last Updated: 1 March 2017
Article by Nicole Radice and Lea Fua

In 2016 we saw plenty of movement in the Agribusiness sector – from the blockage of the foreign sale of Kidman, Bellamy's fall from grace and the death of the TPP, this wrap up covers the need to know agri trends which emerged in 2016, along with some predictions for 2017.

World sugar deficit - Australian grower gains

The deficit in world sugar stocks resulted in a climb in Australian sugar prices to Australian cane growers.

The industry is feeling the effects of the partial re-regulation of the sugar industry in Queensland in 2015. As a result, several mills removed themselves from the sugar marketing pool with Queensland Sugar Limited (QSL) and had difficulty renegotiating supply contracts with QSL.

Sugar in 2017?

The election of Donald Trump is likely to be a big hit to the industry globally, with the industry conceding that the Trans Pacific Partnership (TPP), which would have doubled the access of Australian sugar into the US, is dead and buried. China's response will determine the way forward with the economic leader pushing negotiations for the Regional Comprehensive Economic Partnership (RCEP) (which includes ASEAN, Australia, New Zealand, Japan, Korea, India and China). However, the primary aim of RCEP is distinct from the TPP. Whereas the TPP tried to set regulation around investment and intellectual property and services, RCEP is focused on traditional matters like lowering barriers to trade, such as tariffs – which is likely to be of greater benefit to countries that export textiles rather than primary producers and exporters such as Australia.

Innovation - driverless tractors, drones...what's next?

2016 has seen some exciting innovation initiatives make their way to the agribusiness sector.

After initial trials on rice farms, driverless tractors are now being tested on cane farms in northern Queensland. The venture, which uses satellite and drone technology to map paths for tractors, has quietly (but confidently) been hailed as a massive labour-saving initiative. Plans to introduce more satellites to orbit in 2017 will ensure that Australian farmers have consistent round the clock coverage, improving accuracy and solidifying the project's potential.

The utility of the humble drone on Australian farms does not stop there. We are increasingly hearing that drones are being tested and incorporated into daily use by farmers to reduce labour costs, improve crop health and ensure higher harvesting rates. A number of reports in 2016 indicated that drones have been used successfully for disease and pest management, as many crops are difficult to see into from the ground when growing, while some farmers are also using drones to check on fires and muster cattle.

What next?

With technology on the horizon as ultramodern sounding as "CRISPR-Cas9" (a gene-editing technique to redesign specific genes without introducing DNA from another species), Australian farmers will no doubt benefit from the innovation. Coupled with increased trade opportunities as a result of new free trade agreements negotiated between Australia and its largest Asian trading partners, we expect to see new innovations infiltrate the agribusiness sphere in 2017. With this phenomenon we anticipate a wave of new legislation aimed at facilitating such growth and a renewed appreciation in the agri sector for the need to protect intellectual property developed during the innovation boom.

The Boom and Doom for infant formula imports in China

Some of the best-performing Australian companies have, over recent years, ridden a wave of Chinese demand for "clean", high-quality infant milk powders. During this time Bellamy's Australia Limited enjoyed a massive spike in Chinese imports of its organic baby formula which helped drive its share price to a peak of $14.99. The tightening of Chinese import regulations in October last year resulted in Bellamy's lower sales, "increased inventory levels, excess ingredients and shortfall payments to suppliers". With its earnings forecast being slashed and a mass exodus by investors, more than 70% was wiped off its market value since its 2016 peak. The company is bracing itself for an upcoming vote for a board spill and threatened class actions. Although media reports have Bellamy's Chairman hopeful that interim results to be published shortly will restore some confidence.

The aim of the shift in China's import regulations is to increase safety standards and minimise the risk of contamination. The new rules provide that all dairy factories supplying China must be registered and each manufacturer is limited to three brands, and three unique formulations per brand. The change is expected to have the spin-off effect of strengthening the market power of domestic Chinese brands.

While many of the problems with Bellamy's are specific to the company, it is also the latest in a string of Australian businesses that have run into challenges trying to crack the lucrative Chinese consumer market. The shares of other dairy groups such as The a2 Milk Company, Bega Cheese, Murray Goulburn and Blackmores slumped through December but have mostly recovered.

Australian infant milk formula exporters in 2017?

The turmoil in the infant milk formula market will continue, as brands push for access under tighter Chinese import regulations. Further tightening of regulations is predicted given China's status as a young market and the rise of the demand for imported food products, putting the security of Australian companies (with China reliant business models) at risk.

FIRB's stance on sensitive deals: By no means a line in the sand

The sale of Australia's largest private land holding brought with it an abundance of controversy.

In December last year, Treasurer Scott Morrison approved the sale of the S Kidman & Co property on recommendation by the Foreign Investment Review Board (FIRB) for $386.5 million. Anna Creek Station, the largest cattle station in the group, will go to a neighbouring farming family, Williams Cattle Company. The rest of the pool is to be acquired by Australian Outback Beef, a joint venture majority owned by Gina Rinehart's Hancock Prospecting in conjunction with Chinese investment corporation Shanghai CRED Real Estate Stock Co Limited (Shanghai CRED).

The road to this outcome was paved with FIRB rejections of earlier proposed sales of the Kidman cattle empire. Mr Morrison originally blocked the first successful bid for the entirety of the property in November 2015, made by Chinese company Shanghai Pengxin Group Co., Ltd (Shanghai Pengxin) as the sole buyer, citing that the sale was contrary to Australia's national interests. Anna Creek borders the Woomera rocket range, which is the world's largest weapons-test range.

The Treasurer, upon review of the original deal, also found that there was significant domestic interest in the sale of Kidman, and suggested splitting up the property of 13 farms to allow smaller domestic investors the opportunity to make bids worthy of consideration for the separate parcels of land. But the board of Kidman decided against this, citing the strategic advantages of having a property portfolio spanning across multiple geographically diverse areas.

In the second version of the deal proposed in April 2016, Anna Creek Station was to be excised and sold to an Australian buyer, whereas the rest of the farms were to go to Australian Rural Capital to take 20%, with 80% to be acquired by Shanghai Pengxin and Shanghai CRED. This restructure of the deal was similarly rejected by the Treasurer.

What appears to have been appealing to the Treasurer in the latest deal is the reduction of foreign ownership of the property, as well as the sale of the "sensitive" part of the land to an Australian entity.

Will Australia open its doors in 2017?

The rejection of the original Kidman deal, as well as the sale of the NSW government's electricity distributor, Ausgrid, has sparked a push by private equity and commercial property professionals to see that guidance is released by the Treasurer to help discern what acquisitions raise national security concerns.

New legislation for Agribusiness

2016 saw an increase in regulation with an agribusiness focus. Despite this, there is a widely held perception that national regulation
is necessary to encourage private enterprise in agribusiness and enhance trade opportunities, without compliance and administrative costs being imposed on farmers by multiple local, state and federal agencies.

The Biosecurity Act 2014 (Qld) commenced on 1 July 2016 (Act). The Act replaces a number of other legislative instruments and broadens those obligations. The Act primarily deals with pests, diseases and contaminants. Individuals and organisations whose activities pose a biosecurity risk have greater legal responsibility to manage those risks under the Act. Accordingly, a person whose dealings may give rise to biosecurity risks must take all reasonable steps to ensure that those risks are mitigated. Particularly noteworthy aspects of the Act include the introduction of "biosecurity zones" imposing special restrictions for areas of concern, and a registration and monitoring system for particular animals susceptible to certain diseases. Biosecurity regulations play a key role in ensuring not only the safety of Australia's population and environment, but also the value of our agricultural commodities in the international market.

Changes to the Australian Taxation Organisation's Farm Management Deposit scheme (FMD) are effective from 1 July 2016. The scheme allows primary producers to defer payment of tax on profits derived until a later income year. Under the changes, the maximum that can be held in an FMD increased from $400k to $800k. Additionally, farmers experiencing severe drought can now withdraw amounts held in FMD within 12 months of deposit without affecting the tax treatment of the FMD in the earlier year, whereas before the changes no part of the deposit could be withdraw within 12 months. Amounts held in FMDs can now also be used to offset interest on other debt relating to the FMD owner's farming-related business.

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