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Land and Environment : Agribusiness Assoc. of Australia
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Agribusiness Review - Vol. 10 - 2002

Paper 5
ISSN 1442-6951


The Investment Environment:
Is Australian Agribusiness getting the support it needs?

Address to the Australian Agribusiness Congress - 8th - 10th September 1997

D.P.Mercer
Chief Executive Officer
Australia and New Zealand Banking Group

ANZ is proud to be the premium sponsor of the Agribusiness '97 Conference. We believe that we are very well positioned as a bank to assist the further development of the industry with the aim of ensuring, as the theme of this conference attests, that Australia is a pacesetter in Agribusiness.

I do not have to point out to this audience the importance of agribusiness to Australia's future. Australian agriculture has and continues to be a major contributor to our export performance. And food processing is the largest component of our manufacturing sector, and a major contributor to Australian exports in its own right.

Despite the oft-repeated claim that Australia does little to process its raw materials, the food processing industry has made some impressive inroads into foreign markets. Over the last five years processed food exports have grown by a respectable 8% per annum. The growth in high value-added processed foods has been more impressive.

The potential for further growth is huge, given Australia's comparative advantage in the production of basic food and fibre agricultural products, and our geographical proximity to the growth markets in Asia. The Prime Minister's Science Council has estimated that the Asian food market will grow during this decade from US$525 bn in1990 to US$685 bn by the year 2000.

The Agribusiness sector contains some excellent success stories.

At the farm level there have been some innovative developments. Farmers have experimented with new products and the growth in some of these for example, canola production has been impressive. Others have adopted innovative husbandry and cropping techniques for example, transgenic cotton, planted for the first time in 1996, accounted for 8% of the total Australian planting. Still others have engaged in environmentally friendly practices with an economic spin-off, such as tree farming.

Throughout the agribusiness chain, the dairy industry stands out as the success story of the last decade. Following the implementation of the so called Kerin, and subsequent plans, which have emphasized deregulation of the industry, dairying has transformed its approach to business and enjoyed considerable success in exporting processed dairy products, despite on-going corruption of international dairy products markets, by other countries' trade practices.

This growth and development suggests that at least some parts of agribusiness are 'doing it right', and that investors are ready to fund viable agricultural development projects that are based on sound principles.

Let me therefore seek to dispel any notion that may be held in some circles that Australian agribusiness is not getting the investment support it needs by citing two further industry examples.

The first is the wine industry. Over the last decade the area planted to vines has expanded 38% and Australian wine exports have grown from 11 megalitres to 130. Estimates are that by the year 2002 the area planted to vines will have increased a further 50%; the volume of exports to 400 megalitres and the value of these wine exports to nearly $1.5 billion.

This is heady stuff indeed some may argue too heady but it does indicate that the industry is undertaking rapid expansion, and is hardly indicative of an industry starved for finance. Indeed, last year ANZ increased its lending to the wine industry by 28%.

Investment funds, both debt and equity, have flowed into the Australian wine industry because investors have recognized that the level of business acumen, innovation, marketing,

Quality and training are of a high order.

Second, take the cotton industry. It has been developed from the ground up to become an important part of the Australian agricultural scene. Last year cotton harvested a record crop and the value of cotton exports i.e. estimated to have risen to over $1 billion. ANZ has been very active in lending to this industry and we are by far its largest banker.

Investment funds have continued to flow into cotton despite the fact that most of the prime cotton growing areas were adversely affected by drought over a prolonged period in the 1990's. Why? Because the Australian industry is an example of world best practice' , and uses a range of risk management financial instruments designed by the financial sector to smooth out fluctuations in returns and hedge against foreign exchange turbulence.

The banks have had a history of lending to agribusiness since the 18th century and to the extent that these industries have sought debt financing, the money has largely flowed from the banks. At present, most investment houses and fund managers lack the expertise and understanding to provide appropriate vehicles to fund these developments.

However, nobody is resting on his laurels. Certainly at ANZ there is no complacency regarding the role that we can play in further enhancing the development of the agribusiness sector; and over the last two years we have made significant strides in improving the level of service to agribusiness.

We have built our expertise by establishing specialist agribusiness units. We have expanded information provided to our lenders and segment our lending so that lenders can develop specialist expertise in certain industries. Through their increased understanding of the significant changes occurring in each part of the agricultural sector. We hope to enhance the value- added services that we can supply to the individual customers.

In short, we recognize the potential lending prospects in the agribusiness sector. Support is available for investment proposals, which are soundly based and provide and adequate rate of return compared to other uses of investment funds.

However, the industry itself has, in some respects, been slow to realize its full potential.

Despite the positive developments I noted earlier, parts of the industry have been slow to take advantage of the trading opportunities available. Our share of food imports despite being the only significant food surplus country in the region is low. We have made little impact on the markets overall.

So what does the agribusiness sector require to further realize its potential as an exporter and continue to attract the investment funds necessary to carry it as a competitive industry into the next millennium?

I want to refer to two issues , which I think are important to the industry:

  • removing impediments to the free flow of pricing signals from the consumer to the producer; and
  • changing management practices.

For far too long, producers in the agricultural sector have operated as individual units. There has been little communication between participants at different stages of the production, distribution and marketing chain. The sector has lacked a sense of common purpose.

The performance of the Australian food processing industry, and its acceptance by consumers, will depend on the farm sector producing the right type and quality of produce. Conversely, unless the right signals are transmitted from the consumer to the farm sector, there is little chance of the farm sector producing the right type of goods.

The concept of the consumer a king has, historically, not been widely accepted by the agribusiness sector. Too often, producers have looked to their own wishes and traditions. As a consequence, agribusiness has lacked a sufficiently aggressive approach to finding and developing new markets.

Much of this has been due to attempts however well intended by governments to interfere in the agribusiness sector on behalf of producers. Government intervention has been excessively focussed on delivering income support with the result that the transmission of market signals to producers regarding the quantity, range and quality of product required by end-users has been impeded.

A related weakness in the agribusiness chain has been in the collective wholesaling and marketing of Australian farm product. And is a pertinent rejoinder to those who yearn for a return to regulated marketing.

I recognize that the vast majority of Australian producers would have very little prospect of competing effectively in international markets in the absence of some form of collective marketing arrangement.

But in many cases, the bodies responsible for administering those arrangements have seen their function as simply gaining the highest possible price for whatever it is that producers happen to produce, and then distributing that price more or less uniformly across all producers of that particular product. This has, in turn, limited the ability of producers to extract premiums by differentiating their product.

Regulated marketing has slowed structural adjustment; obscured the benefits of economies of size; restricted entrepreneurial management; interfered with the proper flow of information through the pricing mechanism from consumer to producer; and stifled the development of risk management instruments all at great cost to Australian agribusiness.

That has not prevented investment funds from flowing into agribusiness altogether. However the level of investment by potential investors could have been much stronger if opportunities had not been stifled and pricing signals distorted by interference.

My second point relates to management practices, which apply right through the food and fibre chain.

Investment funds will flow more readily to the farm sector if investors perceive that farms are businesses. There are outstanding examples of farms, which are well managed using sound business principles. However some farmers need to reinvent themselves as competitive businesses rather than view themselves as agriculturists.

Farmers need to take decisions in respect to production and expenditure that maximize their return on capital, and more effectively deploy their capital stock.

It is imperative and a sign of sophistication to potential investors that farmers shoulder the responsibility for operating in an industry where volatility, due to the dependence on world prices and the impact of climatic change, is the norm

Crop insurance and forward contracts that hedge against currency fluctuations are just two instruments that spring to mind. In the driest continent on earth, farmers should be utilizing a broad range of risk management instruments to manage drought risk, rather than rely on government for handouts.

Despite the development by the financial sector of a range of financial instruments to manage price risk, the take up in most industries has been slow. Witness the low number of wheat producers who locked in favorable forward prices last year. Presumably the majority view locking in price as a gamble, rather than effective management of business risk.

In the past, the failure of Australia more fully to develop a substantial downstream food processing industry can be attributed to management practices in the industry itself, than to a dearth of finance.

While scale has been an inhibiting factor, there has simply been a lack of commercial thrust. In some cases, activities in the food processing area have been carried out as though they were social welfare agencies rather than business operations. Council-run abattoirs spring to mind, but there are also examples of private sector operators continuing to run plant which lacked economic rationale.

It is worth recalling the findings of the 1995 McKinsey study into the food processing industry in Australia. It concluded that despite some overall industry gains and some impressive performances by some companies, output, employment and labour productivity in the Australian industry continued to lag world best practice.

The underlying causes of this included the operation of sub-optimal plant, often because companies had been developed and continued to focus on State rather than national and international markets. Moreover, few companies invested in leading-edge technologies and failed to develop innovative production processes and products:

"Our findings suggest that most of the barriers to achieving higher productivity are within the control of food processing firms themselves including their levels of aspiration, product innovation and export development". (1)

Nowhere in the report is there any mention of difficulty in accessing investment funds as a factor inhibiting the development and improved competitiveness of the industry

Nor is this situation likely to change. Banks will continue to be a major provider of investment funds to the agribusiness sector.

However banks are operating in a competitive environment. They cannot be seen - and will not be allowed by their shareholders to be seen as willing to fund lifestyle choices devoid of economic reality. Both market analysts and shareholders insist that banks utilize their capital in the pursuit of profitable lending opportunities that maximize the return on capital. As a consequence, loan proposals must meet some objective tests and be priced according to risk.

So what are some of the broader requirements for ensuring the flow of funds for further development of the Australian agribusiness sector?

Firstly, there must be a detailed business plan, which reflects existing competitiveness; with a strong management commitment; and a realization of the resources that will be tied up in pursuing markets, particularly overseas.

A survey published by the Rural Industries Research and Development Corporation earlier this year concluded that " a firm that has managers who are attitudinally committed to exporting and is prepared to commit resources to the export endeavor, will usually be able to overcome all but the most prohibitive of constraints, and succeed in selling the firm's products in overseas markets. There are very few constraints that the willing manager cannot overcome". (2)

Secondly, the production of a quality product is imperative. A recent marking study (3) found that while agrifood exporting firms believed they produced a quality product, they overestimated how Asian buyers perceived the quality of the product. In addition Australian firms' perceptions of the value-for-money they provide are well above the perceptions of the Asian buyers and consumers.

Thirdly, it is important to know and understand existing and likely competitors. The same study revealed that most Australian agribusiness firms underestimated the growing importance of new competitors such as those from South America; and in particular the growth of intra-Asian competitors, often with powerful connections. And, I might add, the potential threat from revitalized former Eastern bloc countries.

Fourthly, Australian agribusiness firms need to show investors that they know and understand the markets they are attempting to penetrate. For instance, is the company targeting the small but growing Asian demand for western-style foods or attempting to tap into traditional Asian tastes? Product, distribution and marketing will be different for market segments.

And of course there is a multitude of markets in Asia. Each country has its own characteristics, different levels of development and even within countries there are differences between regions.

Fifthly, companies need excellent delivery performance. On this score there is a national need to lift productivity and improve the cost efficiency of our transportation network right through the supply line from food producer to end consumer. Further micro-economic reform in rail, road and sea transport is necessary to ensure that this is delivered. At the Asian end, access to internal distribution systems can be difficult, so, Australian companies must be prepared to seek partnerships with Asian wholesalers.

In short, markets will be difficult. Australian agribusiness will not grow simply because of perceptions of us as a clean country, or proximity to burgeoning markets.

To summarize, provided that investments stand up to the normal lending criteria, and agribusiness firms address the issues discussed above there will be no shortage of investment funds for the sector.

We at ANZ have made, and will continue to make, significant commitments to your industry. It's in out interests, as well as yours, that Australian agribusiness becomes a pacesetter.

Footnotes

1 - McKinsey and Company, "Growth Platforms for a Competitive Australia" Sydney, 1995

2 - N.Philp "Why Some Firms Successfully Export Processed Food and Beverages", Rural Industries Research and Development Corporation. Canberra, 1997

3 - The Meyers Strategy Group in association with Frank Small and Associates, "Food Quality Program A Customer Focus To Food Quality", October 1995

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