Investment opportunities in Western Australia’s grains ... · Investment opportunities in Western...

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Department of Agriculture and Food Investment opportunities in Western Australia’s grains industry: cereal hay for feed

Transcript of Investment opportunities in Western Australia’s grains ... · Investment opportunities in Western...

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Department ofAgriculture and Food

Investment opportunities in Western Australia’s grains industry:

cereal hay for feed

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ContentsInvestment highlights ...................................................3

Industry overview .........................................................4

Investment opportunity ..............................................11

Financial analysis .......................................................14

Marketing and sales ...................................................16

Risk analysis ...............................................................16

Other important information .......................................18

How to progress .........................................................18

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Investment highlightsWestern Australia (WA) is an ideal location to establish a global scale cereal hay export business as well as having the foundation of a strong domestic market. Cereal hay and especially oaten hay has proven to be highly profitable over the last decade with increased demand from Japan, Korea, Taiwan and the Middle East. Oaten hay is well suited to partial replacement of alfalfa hay, especially as global supplies tighten.

The WA cereal hay industry has many advantages including:

• Competitive pricing compared to similar grass hay products.

• Well established logistics network of growers, processors and transport operators within 200 kilometres (km) of Fremantle export container port.

• High quality product with high digestibility and palatability.

• Strict quality control measures and grading systems that enhances marketability.

• Land located in areas with suitable soils and climates and not requiring irrigation.

• Available land within transportable distance to ports to enable exports.

• Available road, rail and port infrastructure providing access to both domestic and international markets.

• Proximity to Asian market. Established markets in Japan and South Korea and potential market in China.

• Strong support from the WA Government through the Department of Agriculture and Food, Western Australia.

The market for cereal hay production is expected to remain firm for the foreseeable future given there is:

• stable and established markets for cereal hay in Japan and South Korea. Both markets are dominated by US sourced product, which provides an opportunity for Australian producers to capture additional market share

• potential to penetrate new markets in China, particularly as China increases its dairy herd

• growing domestic demand for cereal hay.

Investment in the production and marketing of cereal hay could provide good returns. For those with foreign operations requiring fodder as an input, (such as large scale dairy businesses) an investment in the production and export of cereal hay can provide a dedicated supply chain, supporting security and continuity of supply and lowering overall costs.

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Industry overviewThe Wheatbelt

The Western Australian Wheatbelt covers approximately 19 million (m) hectares, from Northampton north of Geraldton, to the south coast at Albany, east along the coast to Esperance and to Southern Cross further inland. Across this vast area of Western Australia (WA), professional grain growers have been able to effectively build Australia’s leading dryland cereal hay province that consistently produces bright, clean cereal hay with a combined value in excess of $A100m per annum.

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Image 1 Western Australian Wheatbelt

The majority of fodder produced in WA is oaten hay, however there are also significant amounts of clean cereal straw produced in the central Wheatbelt Region. Like wheat, oaten hay is well adapted to the dryland area of the WA Wheatbelt and has potential to expand production, particularly to the Southern Region. Dryland oaten hay production has lower entry and operating

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Investment opportunities in Western Australia’s grains industry: cereal hay for feed | 5

cost compared to irrigated fodder systems due to reduced watering costs, suitability of soils and climate in the wheatbelt. The crop fits well within existing farm rotations and adds an extra level of income diversity to farm businesses.

Growers in central locations with high rainfall and close to the export port of Fremantle, can become dedicated cereal hay growers and can offer returns often in excess of those available to grain specialists.

Export market

The export cereal hay market has a high quality requirement. The cereal hay is tested for a range of quality parameters on delivery including fibre levels, sugar levels, colour and crude protein.

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Figure 1 Export tonnage of fodder products from Australia and Western Australia from 2008/09 to 2012/13 (Source: Australian Bureau of Statistics)

Australian oaten hay has a very good reputation in Japan and Korea and the oat industry continues to work together with customers to ensure this is maintained.

WA exported 332 000 tonnes of fodder in 2012/13 (Figure 1) which comprised of approximately seven different sub-products, with cereal hay making up 77%, worth a total of A$91.9m.

Cereal straw and husks is the second-largest single feed product exported, with 47 000 tonnes worth A$11.3m exported from WA in 2012/13. This represents approximately 14% of total animal feed exports (see Figure 2).

Demand for WA fodder is currently tied to production from overseas competitors (including the US) and their supply to Japan and Korea.

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Major animal feed exports from WA 2012/13 (% tonnes)

Lucerne meal1%

Cereal hay77%

Cereal straw and husks

14%

Cereal meal3%

Stockfeed5%

Figure 2 A breakdown of the types of animal feeds exported from WA

The Western Australian cereal hay industry has expanded steadily in the 1990’s to now consistently exporting between 230 000 and 380 000 tonnes of fodder per year. In 2012/13 Western Australian fodder exports were valued at over $A113.1m, which represented 40% of the value of Australia’s total fodder exports (Figure 3).

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Figure 3 Value of fodder exports from Australia and Western Australia from 2008/09 to 2012/13 (Source: Australian Bureau of Statistics)

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The most significant export destination for WA cereal hay is Japan, with 219 000 tonnes worth A$77.7m exported there in 2012/13.

Asian export markets

WA is ideally placed to service the Asian market and the WA fodder industry has been expanding in response to the growing demand from South Korea along with significant demand from Japan (Figure 4). Additional markets are being established in the Middle East and there is desire to penetrate the Chinese market. Concurrent to this increased international demand, there has also been a growing market for WA quality cereal hay in the Australian domestic market.

WA’s proximity to South-East Asia affords it a significant transport advantage both in terms of costs and timeliness over other producing regions in Australia and also over other foreign competitors.

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Figure 4 WA’s top fodder exports destination countries from 2008/09 to 2012/13

Demand for alfalfa hay in China has grown in the last four years from 219 000 tonnes to over 750 000 tonnes in 2013. Projections are for this to continue to grow by a minimum 20% per annum over the next five years (Figure 5). Western Australian cereal hay exports are already successful in Japan and Korea and can potentially be successful in China where oaten hay has already complemented the use of alfalfa hay in feed rations.

Western Australian cereal hay exports will complement the growth of China’s alfalfa imports from the US. Potentially up to 15% could be substituted with oaten hay, which will provide benefits for Chinese dairy cattle and reduce risk in future fodder supplies.

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Figure 5 China imports of alfalfa from US 2010–13

Australian domestic market

Demand from the domestic hay market tends to depend on seasonal conditions such as pasture growth and meat prices for beef and sheep. While the returns for producing hay for the domestic market can be high, there is a risk of oversupply creating a downward pressure on prices. Any limitation on meeting domestic supply can have a direct impact on exporters’ ability to supply their international customers.

While it is recognised that approximately 80% of all fodder used in Australia is not sold but instead held on farm and traded farmer to farmer in times of feed shortages, hay exporters remain the largest buyer group of hay and can draw upon a wide range of resources to meet their demands. Investors can benefit from the flexibility oaten hay brings to the farming system as it can increase livestock carry capacity and diversify revenue streams. 

Quality

Western Australian oaten hay is a preferred feed for dairy cows, due to its high digestibility and palatability. Its main attribute, water soluble carbohydrates (WSC), is around 25% which provides the cow with an instant source of energy that can be effectively utilised for high milk production and sustained liveweight gain. Oaten hay, with its high WSC plus acid detergent fibre (ADF) levels of 28–35% and neutral detergent fibres (NDF) of 50–55%, provides a rapidly fermentable source of roughage that complements sources of protein (e.g. soya bean meal and alfalfa hay). The quality of WA cereal hay provides an excellent source of nutrition that enhances the performance and wellbeing of dairy cows.

WA hay exporters routinely monitor production and the quality of their growers’ hay; colour, digestibility and sugar is closely scrutinised. Exporters and processors as an industry self-regulate quality assurance programs to ensure that their hay is of consistent quality and is green, clean, disease and weed free. Hay processing companies in WA apply a grading system based on nutritional value according to the standard set by the Australian Fodder Industry Association.

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There are currently 13 hay exporters operating in WA and each can have different requirements and methods of testing and grading hay. It is important to build a strong relationship with a chosen exporter prior to developing a cropping program as they can provide advice on how to maximise the chances of producing high yielding, quality hay. Fodder export facilities must meet strict regulatory requirements of the Australian Quarantine and Inspection Service before they can be granted an export licence.

Infrastructure access 

There is a concentration of export hay producers within a 250 kilometre (km) radius of Perth where freight costs and farming systems favour hay production and processing with facilities for oaten hay in regional centres like New Norcia, Wongan Hills, Northam, Brookton, York and Narrogin.

Beyond 200kms from the port, transportation costs make the growing of cereal hay for export less economical. Also the decline in growing season rainfall further inland away from the coast lessens the yields and again reduces the potential returns of producing cereal hay.

The Department of Main Roads manage and maintain an extensive network of sealed roads and highways for easy access to ports or processors. They also manage permits for transport operators of oversize loads like hay and have clear guidelines on road usage and access.

The Wheatbelt Region of Western Australia has ready access to the main container port of Fremantle with potential in the future that the ports of Bunbury, Albany, Geraldton and Esperance could be upgraded to handle the export of agricultural produce in containers (Image 2).

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Esperance port zone

Albany port zone

Kwinana East port zone

Kwinana West port zone

Geraldton port zone

Esperance

Albany

Bunbury

Fremantle

Geraldton

Current export cereal hay and straw

New Norcia

Northam

Narrogin

200 km

100 km

Image 2 Proximity to south-west ports (100km and 200km)

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Investment opportunityInvestors in Australian cereal hay production and export can participate in the industry in a variety of ways, specifically:

• domestic production of cereal hay

• marketing and distribution within Asian markets

• infrastructure and capital

• or a combination of any of those above.

The primary means of participating are described in Table 1 below:

Table 1 Investment types and opportunities

Investment type

Description Management options Types of return available

Land only Purchase land only

• Lease – the land would be leased out to other growers who would pay to have access to the land and take all the risk of producing a crop.

• Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crop grown on a leased property.

• Capital gain – this is only realised on sale of the asset.

Land and operations

Purchase of agricultural land with control of operations

• Passive – owners employ a farm manager to manage the property on investor’s behalf. The manager would make all operational decisions in-line with the investment objectives of the owner.

• Active – become actively involved in on-farm management, in particular the key decisions of what crops to plant, the application of key inputs, production hedging strategies, investment in capital equipment and use of on-farm labour.

• Profit generated by the property – as the owner of the property the investor would keep the net income from the property. Returns are highly dependent on the yield and market price for the crops grown on the property.

• Capital gain – this is only realised on sale of the asset.

• Access to cereal hay for export.

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Investment type

Description Management options Types of return available

Joint venture

(Land and/or operations)

Partnering with existing growers who already own land or for the purchase of additional land

• Lease – land is leased to third party growers who would pay to have access to the land.

• Passive – all operating decisions would be left to the joint venture partners with review of key decisions and results in line with the joint venture agreement.

• Share farming – by mutual agreement with joint venture partner, the investor would provide inputs into the venture such as decisions around cropping, fertilizer and seeds. The owner would also handle insurance and production hedging. All other growing activity would be carried out by the joint venture partner.

 

• Lease rental – this would be a monetary payment for use of the land. There is normally no participation in the value of crop grown on a leased property.

• Share in profits generated by the property – this is would be the nominal profit generated by the property less an agreed management fee for the operators of the property.

• Off-take from property production – according to the joint venture agreement, an investor could take their return via physical product which they can sell or use as they wish, less an agreed management fee for the operators.

• Capital gain – this would only be realised by the sale of the land by the joint venture or the winding up of the joint venture.

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Table 1 Investment types and opportunities (continued)

Investment type

Description Management options Types of return available

Infrastructure – port and up country processing

Installation and operation of equipment required for exporting cereal hay at ports

• Passive – owners employ an installation manager to operate the facility on behalf of the investor. The manager would make all operational decisions in-line with the investment objectives of the owner.

• Active – become actively involved in the management and operation of port facilities, in particular investment of capital in machinery and interaction with exporters and customers.

• Profit generated by the infrastructure – as the owner of the assets the investor would keep the net income from the operations. Returns are highly dependent on the throughput of cereal hay to export markets.

Infrastructure – storage

Shed and warehousing facilities and services, upcountry or at internodal transfer centres (land ownership optional)

• Passive – owners employ a warehousing manager to operate the storage facilities on behalf of the investor. The manager would make all operational decisions in-line with the investment objectives of the owner.

• Active – become actively involved in the management and operation of storage facilities.

• Profit generated by the warehouse – as the owner of the assets the investor would keep the net income from the operations. Returns are highly dependent on the volume of cereal hay in transit and interactions between transportation services, resulting in the need for storage facilities.

Marketing to export markets

Development of export customer relationships in export destination countries, particularly China

• Active – using market knowledge and relationships create new markets for Western Australian cereal hay in China and or other countries in Asia.

• Trading margin for selling the product in market.

• Access to dedicated supply of cereal hay for the investor.

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Financial analysisThe production and export of cereal hay in Western Australia has stood the test of two decades as a viable investment proposition. There are a number of influences on the returns that can be achieved through an investment in the cereal hay industry. Some of these are outside of an investor’s control and others can be substantially influenced by the decisions the grower and investor can make. Key uncontrollable factors include:

• fluctuations in demand and the subsequent influence on pricing

• exchange rates are also important for the viability of exports; the recent weakening of the Australian dollar benefits export based industries, like agriculture, by making the Australian product relatively cheaper

• weather, particularly rainfall and the timing of that rainfall. Frost in some areas can also have an impact

• the price of fertiliser and fuel.

Controllable factors include:

• the timing and selection of an investment in land

• production yield achieved, as influenced by the timing of seeding, application of fertiliser and timing of harvesting

• use of labour and other key operational inputs such as fuel and fertiliser

• off-take agreements/contracts for cereal hay production

• transportation costs

• investment in equipment (hay presses) or specialised machinery

• ability of cereal hay to improve weed management, reduce soil borne disease and add diversity to crop rotation options from a sustainability point of view.

An indication of the cost per hectare of land is provided in Table 2, focused on locations in high rainfall zones appropriate for the production of cereal hay.

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Table 2 Approximate farm values in some selected higher rainfall agricultural districts of Western Australia

LocationDistance

to nearest port (km)

Rainfall zones: high<450mm medium 450-350mm

Average land value (A$/ha)

Typical dryland hay yields

(t/ha)

Gingin 100 High–west coast south 3500 6–7

Dandaragan 150 Medium–high–West Midlands 2190 5–6

Bindoon 120 High–north east Perth 3000 7–8

Williams 150 High rainfall south–east Perth 2500 5–6

York 120 High-medium–east Perth 2000 5–6

There are a number of variables and inputs into the production of cereal hay, an estimation of relevant costs being provided in Table 3. Free on board (FOB) price at Fremantle for export cereal hay has averaged around A$345 per tonne over the last five years but is very dependent on quality. Export hay businesses typically receive between A$150 and A$200 per tonne on farm depending on quality and distance to port. A gross margin analysis is given in Table 3 to indicate the main elements of production costs and estimates a net return of A$355 per hectare based on good soil types, high rainfall (450+ millimetres) and production of six tonnes of oaten hay per hectare. Net return is based on an on-farm price of A$170 per tonne.

Table 3 Estimated cost of production and net return per hectare

VariablesCost per hectare

(A$)

Grading and seed cost 45

Fertiliser costs (eg. urea, potash) + cartage 200

Lime (soil conditioner) 10

Operational costs (machinery repairs & fuel etc.) 25

Crop protection (herbicides/fungicides) 80

Casual labour – seeding & carting 20

Cut, condition, rake, bale and stack 240

Finance costs 45

Total estimated costs of production – on farm 665

Total estimated net return 355

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Marketing and salesIn Western Australia, cereal hay businesses have a choice in selling their product directly to an export hay processor/exporter, a stockfeed manufacturer, livestock enterprise or domestic retail trader. Growers sometimes choose to retain some oats or oaten hay on-farm as a fodder reserve. Production may also be undertaken to specifically meet export customer needs.

Investors developing an integrated supply chain in WA could produce hay and export it for sale or use in an associated business overseas.

Export and domestic markets may differ in their specifications and quality attributes. It is important to check on delivery specifications, location and the quantity of a variety required by the different markets when deciding upon what variety to grow and where to market the oaten hay.

There are four main methods by which growers can market their cereal hay and manage price uncertainty:

• Forward contract which sets a minimum guaranteed price per tonne. Forward contracts can take advantage of any up-side in domestic or export markets. This contract method is particularly preferred by the export hay processors as payment is finalised based on the quality delivered and final market conditions.

• Fixed price contract is calculated per tonne for a proportion of the crop. For some growers this provides certainty and assists in them securing finance. This can act as a partial hedge in the cereal hay market where there are no formal mechanisms.

• Accept the best cash price on offer at the time of harvest.

• Store cereal hay in on-farm storage sheds or processors warehouses until the market price has reached an agreeable amount.

As well as the different pricing arrangements to choose from, there is also the natural uncertainty of fluctuating levels of world supply. These fluctuations have a direct impact on prices on offer to the WA oat and hay industry, which is largely export orientated.

Risk analysisInvesting in dryland cereal hay properties has similar risks to grain production. Returns can be high (A$325 to A$500 net per hectare), however the variability of both market prices and weather can impact the returns that are available to an investor.

The different ways of participating in the industry have different associated risks. Investing in production and becoming an active manager would be the highest risk investment, whereas working in a joint venture would be a lower risk form of participation. Creating export facilities would require a significant capital outlay and would also be a higher risk activity (Figure 6).

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Growers have developed a number of different mitigation strategies. Growers can forward sell a portion of the production or simply contract for a fixed tonnage at an agreed price. Oaten hay producers can reduce their risk by switching over to grain production if hay outlook is unfavourable. It is known as a dual purpose crop as it can be cut for either hay or grain.

Owning land which can switch between grain and cereal hay production increases the robustness of the investment mix, as does investing in parcels of land in different parts of the wheatbelt. No two regions of the wheatbelt experience the exact same weather, as there is a wide diversity of soil types.

Winter rainfall (June–July) in the south-west of Western Australia has decreased at a rate of about 20 millimetres per decade for the last 25 years. Temperatures have also increased but not as much as expected. The atmosphere has become more stable over the south-west of WA, with a weakening and southward shift of winter weather systems. For growers and investors in fodder production this means later starts to winter rainfall and generally drier seasons. Less frequent wet years can lower the risk of waterlogging and damage to hay but yields can be less.

The risks involved in investing in cereal hay production should be discussed with a qualified advisor and reflect the investment goals and objectives of the individual investor.

Return

Risk

Operations- active

Land and/or operations - passive

Joint venture

Marketing to export markets

Infrastructure - port & storage

Figure 6 Investment risk matrix

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Other important informationIt is extremely important that all applications for regulatory approvals are underpinned by a clear and concise intent to achieve full disclosure based on a properly developed project proposal. This is because regulators need full disclosure of all required information from a properly developed project for quick and efficient processing of an application.

A comprehensive, integrated development application could be used to attain concurrent development approval from the Local Government, Department of Environment Regulation, Department of Transport, and Department of Water. This could result in the time required for a total approval process of three to six months.

The Department of Agriculture and Food, Western Australia is skilled in assisting proponents to seek approvals and will work closely with proponents for the inception of the project.

The time period for all regulatory bodies to access a proponent’s application commences from the point at which they receive all the information required to make a decision in an appropriate format. This time period should not be confused with the point at which the proponent makes first contact with the regulators.

Proponents from overseas also need to comply with the requirements of the Australian Government’s Foreign Investment Review Board (firb.gov.au).

How to progressInterested parties can contact: Dr Mark Sweetingham Acting Executive Director Grains Industry Department of Agriculture and Food, Western Australia Phone: + 61 (0)8 9368 3298 Email: [email protected] Web: agric.wa.gov.au

Services provided by the Department of Agriculture and Food, Western Australia to assist investors in the agrifood sector include:

• Provide detailed information on opportunities.

• Assist with pre-feasibility plans to assess opportunities.

• Assist an investor to seek the Government approvals required.

• Supply contacts such as project managers, joint venture partners, financiers, immigration specialists, accountants etc.

• Access to relevant research and development information.

• Information and advice on Western Australian Government natural resource management and biosecurity legislation and regulations and the responsibilities and obligations.

• Information on Australian Government Quarantine and Export Regulation requirements.

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The Grain Industry Association of Western Australia represents all interest groups across the grain supply chain in Western Australia and act as a central contact point for the industry.

Executive Officer Phone: +61 (0)8 6262 2128 Email: [email protected] Web: giwa.org.au

The Australian Association of Agriculture Consultants of Western Australia is the professional body of WA agriculture consultants. Its members are highly qualified and experienced professionals who can assist investors to meet their investment goals. It is recommended that investors utilise their services before making any grain farm investment decisions or engaging real estate agents.

Phone: 1800 644 855 Email: [email protected] Web: aaacwa.com.au

Disclaimer

This business case provides indicative modelling on the grains industry in Western Australia. The business case and any additional information or documents that the state of Western Australia through the Department of Agriculture and Food, Western Australia (DAFWA) may supply, are to be used only as preliminary and indicative information, to be considered and used by prospective investors in the Western Australian grains industry in conjunction with other information and appropriate financial, legal, industry and other expert advice tailored to their individual circumstances and intentions. Prospective investors should conduct (or engage appropriate professional advisers to conduct) their own analysis and due diligence on any proposed investments, including the process for obtaining approvals. No part of this business case or any additional information or documents that DAFWA may supply constitutes or should be relied on as financial, investment, legal or other advice.

The Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia accept no liability whatsoever by reason of negligence or otherwise arising from any use or release of material (which in this disclaimer includes this business case, any information in it or other part of it, and any other information, advice or material, oral or written, DAFWA may supply in relation to any aspect of the Western Australian grains industry, regulation of it or investment in it) or any error, inaccuracy or omission in the material. Although reasonable care is taken to make the material accurate, the Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia do not make any representations or warranties about its accuracy, reliability, completeness or suitability for any particular purpose.

Copyright © Western Australian Agriculture Authority 2014.   ABN: 86 611 226 341

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Department of Agriculture and Food, Western Australia 3 Baron-Hay Court, South Perth, Western Australia 6151 Telephone: +61 (0)8 9368 3333 Email: [email protected]

agric.wa.gov.au