AACo eyes beef price stability

Cattle prices are increasing because supply is dropping, the Australian Agricultural Company (AACo) CEO said, not because beef sales are developing a growing profit margin that is proportionally shared by all players throughout the supply chain.

Cattle producers now find themselves temporarily in the box seat, but inevitably, if a more stable way of selling beef is not arrived at, they will again find themselves accepting unacceptable prices for their stock.

And, said Mr Strong, “While ever the margin disproportionately shifts up and down the supply chain, we’re going to have significant difficulty in getting people to commit to producing the product that our consumers want”.

“If your farmgate price is the thing that fluctates the most … you make decisions only as far as the farmgate, and they are rarely the decisions that contribute to the highest value for the consumer, which is where we capture all the value.”

The AACo boss addressed a Beef 2015 breakfast hosted by law firm McCullough Robertson, attended by many of the industry’s movers and shakers. He told the audience that the beef industry should return to sorting out its own problems, rather than looking to government to do the job.

“The beef industry will stand or fall on its own investment decisions,” he said.

“Unfortunately there are currently a lot of industry distractions that don’t seem to add a lot of value. We’ve got a grassfed inquiry and a processor inquiry on top of an Agricultural White Paper.”

For their part, Mr Strong and AACo are squarely aimed at the top of the market - whatever the market happens to be for a particular class of beef.

The growth of the Asian middle class, forecast to rise from 600 million today to 2.3 billion by 2030, is one signal clearly worth paying attention to.

But the rise of the middle class is a global phenomenon, Mr Strong said. In the next five years, another three billion people around the world are expected to join its ranks, in in doing so boost middle-class demand for beef by 60 per cent.

“As a sector, we can’t hope to supply even a fraction of the basic needs of these markets,” he said.

“What we do have is a really high-quality product: we have the finest beef in the world. That now is the focus for our company - tapping into the global premium market and aiming for the very top of the price pyramid in everything that we do.

“It’s not just about producing a marble score 9+ Wagyu. It’s about producing a product which can be underpinned by quality systems, by food safety, by integrity, by brand story, which allows us to capture the maximum value, regardless of the category that we’re selling our product into.”

Asia has been the focus, but Mr Strong observed that demand from a rising Asia is so immense, “We can’t respond to that opportunity”.

“It’s an incredibly important market for us, but I see more important markets that give us an opportunity to grow are the global premium markets - like the US, Europe the Middle East.”

If 1pc of 500 million European consumers had one steak a quarter, Europe would take all of AACo’s current annual 25,000 tonne production, Mr Strong said. (In a past life, he was Meat and Livestock Australia’s Europe regional manager.)

While looking into the future, Mr Strong also gave a bracingly honest assessment of AACo’s present across its three business divisions - grainfed, grassfed and Northern Beef, meaning boxed beef out of its new Livingstone works.

For grainfed, Mr Strong gave the company seven or eight out of 10 - “We’ve increased prices, we’ve captured margin, we’re building fantastic customers”.

Grassfed is more challenging, because there is more distance between AACo and its end-users - exporters, importers, retailers. Mr Strong gave the company 6/10 for its performance in its grassfed strategy.

Northern Beef scored a 4/10. Not because of problems with the plant, which Mr Strong thought many people would assume, but because it is a brand new business requiring learning about new ways of doing things on many fronts - supply, labour, machinery, delivery, marketing.

The thread that ties all AACo’s lines of business together is consistency and quality, Mr Strong told the Beef 2015 audience.

“We want every animal in our business to be identified and allocated to an end customer. Once we start doing that, it allows us to much better decisions around out investment and treatment of those animals.”

The first full year of AACo's push to transform from a pastoral company to a beef company delivered the company a long-awaited profit this week.

AACo earned a $9.6 million profit, an improvement of $49.5m on last year’s loss of $39.9m.

Sales of boxed beef now account for 77pc of AACo’s revenue, up from 59pc the previous year. Mr Strong told an earnings briefing that he was happy to push revenues from boxed beef versus cattle as far as they will go.

It’s unlikely that boxed beef will ever constitute 100 per cent of AACo’s revenue, he acknowledged, but as a general principle, the more boxed beef revenue the better.