Pre feasibility study of the commercial viability of a ... · PDF filePre Feasibility Study Of...

Pre feasibility study of the commercial viability of a Central Queensland Multi-crop Oilseed processing

facility and its impact on grower returns

Study and Report prepared on behalf of Department of Agriculture, Fisheries and Forestry by D Sands

Edited by P Long

Acknowledgments This study could not have been completed without the support of the following companies and their staff who voluntary gave up their time and leant there experience and knowledge for the benefit of this project and their industry sector. It cannot be underestimated the value that these organisations have brought to the quality of this report. Individuals will not be named as a number of them wished to remain unpublished; however those individuals, who helped me with this research, know who they are and know that I hold them in the highest regard for their professionalism and unique knowledge. I am most appreciative of their contribution.

Doug Sands Cootamundra Oilseeds Riverina Milling Merel’s Foods Australia Queensland Cotton Dunavants Riverland Oilseeds Riverina Oils & BioEnergy Australian Oilseed Federation Australian Sunflower Association Bluedog Agribusiness Australian Agricultural Company Advance Rural Causeway Produce Agency Ridley Agriproducts Barmount Feedlot Riverina Stockfeeds Sandral Marketing Stocklick Trading Integrated Animal Production Acknowledgement of contributions internally from DAFFQ staff

Megan Star Peter Long Rob Milla Mike Hanks Karl Kloessing

Acknowledgement of the contributions by the original oilseed industry working group that helped initiated this project.

Graham Spackman Nick Goddard Tony Machett Graeme Tooth Annie Pfeffer Liz Alexander

This publication has been compiled by Doug Sands of Regions and Industry Development, Department of Agriculture, Fisheries and Forestry.

© State of Queensland, 2013.

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You must keep intact the copyright notice and attribute the State of Queensland as the source of the publication.

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Contents

EXECUTIVE SUMMARY........................................................................................................................VI

1. INTRODUCTION ................................................................................................................................. 1

1.1 EXISTING AUSTRALIAN OILSEED PROCESSORS .................................................................................. 2

2.0 CQ OILSEED CROP PRODUCTION................................................................................................ 5

2.1 MAJOR CQ OILSEED CROPS............................................................................................................. 5 2.2 OILSEED CROP CAPACITY AND SEASONALITY IN CQ........................................................................... 6

2.2.1 Sunflowers............................................................................................................................... 6 2.2.2 Cottonseed .............................................................................................................................. 7 2.2.3 Soybeans ................................................................................................................................ 8

2.3 COMPETING USES FOR OILSEED PRODUCTION AREAS ......................................................................... 8 2.3.1 Sunflowers............................................................................................................................... 8 2.3.2 Cotton...................................................................................................................................... 9

3.0 PROCESSING FACILITY ............................................................................................................... 10

3.1 BACKGROUND ................................................................................................................................ 10 3.2 ASSUMPTIONS................................................................................................................................ 10

3.2.1 Structural Design................................................................................................................... 10 3.2.2 Production scenarios............................................................................................................. 14 3.2.3 Basic Operating Requirements ............................................................................................. 15 3.2.4 Additional project parameters ............................................................................................... 17

3.3 CAPITAL COSTS ............................................................................................................................. 20 3.4 OPERATING COSTS ........................................................................................................................ 21

4.0 MARKETING ASSUMPTIONS ....................................................................................................... 23

4.1 MEAL MARKETS AND PRICING ANALYSIS ........................................................................................... 23 4.1.1 Cottonseed meal pricing ....................................................................................................... 23 4.1.2 Cottonseed meal markets ..................................................................................................... 24 4.1.3 Sunflower meal pricing.......................................................................................................... 26 4.1.4 Sunflower Meal Markets........................................................................................................ 26

4.2 OIL MARKETS AND PRICING ANALYSIS .............................................................................................. 27 4.2.1 Cottonseed Oil Pricing .......................................................................................................... 27 4.2.2 Cottonseed Oil Markets......................................................................................................... 30 4.2.3 Sunflower Oil Pricing............................................................................................................. 32 4.2.4 Sunflower oil Markets............................................................................................................ 35

5.0 FINANCIAL ANALYSIS.................................................................................................................. 36

5.1 OPERATING RETURNS .................................................................................................................... 37 5.2 INVESTMENT ANALYSIS ................................................................................................................... 47 5.3 GROWER RETURNS......................................................................................................................... 48

5.3.1 Seed Prices ........................................................................................................................... 48 5.3.2 Further analysis of Oilseed Grower Returns......................................................................... 51

6.0 DISCUSSION OF ANALYSIS......................................................................................................... 56

6.1 OUTCOMES FOR INVESTORS ........................................................................................................... 56 6.2 OUTCOMES FOR GROWERS ............................................................................................................ 56

6.2.1 Sunflowers............................................................................................................................. 56 6.2.2 Cotton.................................................................................................................................... 57

6.3 MARKET OUTCOMES....................................................................................................................... 58 6.3.1 Forward contracting .............................................................................................................. 58 6.3.2 Direct marketing .................................................................................................................... 58

7.0 RISK MANAGEMENT ISSUES ...................................................................................................... 59

7.1 INTERNATIONAL PRICING MECHANISM............................................................................................... 59 7.2 FREIGHT COSTS ............................................................................................................................. 59 7.3 COMPETITION FOR OIL SEED........................................................................................................... 59

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7.4 CONSISTENCY OF SUPPLY .............................................................................................................. 60 7.5 PRICE OF SUPPLY .......................................................................................................................... 61 7.6 VOLATILITY OF OIL MARKETS ........................................................................................................... 61 7.7 COMPETITION FOR MEAL MARKETS .................................................................................................. 62

8.0 FUTURE MARKETS AND ADDITIONAL USES. ........................................................................... 63

8.1 CANOLA......................................................................................................................................... 63 8.2 SAFFLOWER................................................................................................................................... 63 8.3 LINSEED......................................................................................................................................... 64 8.4 SOYBEANS..................................................................................................................................... 64 8.5 SESAME SEED ................................................................................................................................ 65 8.6 COMMERCIAL DRYING AND SEED CLEANING .................................................................................... 65 8.7 BIODIESEL...................................................................................................................................... 66

9.0 CONCLUSIONS AND RECOMMENDATIONS .............................................................................. 68

10.0 REFERENCES.............................................................................................................................. 70

11.0 APPENDICES ............................................................................................................................... 71

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Executive Summary

Background The Central Queensland (CQ) cropping area can grow up to 65 000–70 000 tonnes of oilseed per year. This tonnage is dominated by cottonseed and sunflowers but can also include peanuts, soybeans and macadamia nuts. Queensland has had no major commercial crushing facility available in the last 30 years. Growers of oilseed crops are continually disadvantaged with high freight costs to send their seed to processors in northern NSW. In the case of sunflowers the cost of freight makes up to nearly 30 per cent of the seed value. This study investigates the scenario of an oilseed crushing plant in CQ based on two primary feedstocks of sunflower and cottonseed. Currently CQ has a well established cotton industry that produces between 40 000 and 50 000 tonnes of seed per annum, of which 90 per cent goes unprocessed into the stock feed market. It would seem logical to investigate the savings and potential value adding that a local oilseed crushing facility can make to the CQ oilseed production. This is particularly relevant given Australia imports nearly 40 000 tonnes of sunflower oil per year and domestic consumption of cottonseed oil has increased by approximately 10 per cent per year over the last five years. Viability of a CQ oilseed processing facility This study has investigated the profitability of three production scenarios for oilseed crushing infrastructure based on an extrusion–expeller processing system complimented by a pelletizing plant. This design produces a pelleted meal product with an oil content of six to seven per cent and stabilised crude vegetable oil with low levels of volatile fatty acids. Scenario I – 34 000 tonne crush capacity Scenario II – 64 000 tonne crush capacity Scenario III – 64 000 tonne crush capacity with an additional full oil refining capacity of 12 000 tonnes Results of the financial analysis demonstrated that Scenario II and Scenario III had positive investment outcomes with returns on capital exceeding 16 per cent for an initial capital outlay of $18.6 million (Scenario II) and $26.6 million (Scenario III). This was based on the median gross margins generated from the crushing of both sunflowers and cottonseed. The smaller crushing plant in Scenario I could not generate a positive net present value (NPV) for the initial capital investment of $12.3 million over a 20 year investment period. Benefits to Growers The larger crushing capacity in Scenario II and Scenario III generated a positive improvement in seed values with a set crushing margin that was equivalent to a 10 per cent return on capital. Cottonseed values were raised by $30 per tonne and sunflower values were raised by $20 per tonne on a historical range of values paid for seed. The upper end of the calculated seed price range was also improved by a locally based crushing facility. Sunflower gross margins were enhanced by an improvement in seed values from a local crushing facility in comparison to other competing crops. A local crushing plant reduces the inefficiency of transporting seed by freighting oil instead; in which the freight cost is only 10 per cent of the product value. However the cost of freighting and distributing the meal to markets in Northern and Southern Queensland reduces those freight savings; especially as there is more meal sold than oil and the proportional cost of freight on meal is much higher than oil. An offset to this would be some demand for meal direct to local regional consumers which would reduce the total freight outlay.

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Challenges Stability of the international trade in vegetable oils will remain the biggest threat to the viability of an oilseed crushing business and the local prices paid for seed. This is the same for many agricultural businesses where our ability to supply a competitively priced product into the domestic market against imported product from overseas is the most crucial aspect for economic sustainability. The current high Australian dollar influences returns for all agricultural commodities both unprocessed and processed. Distance to domestic markets for both oil and meal from a CQ crushing facility will be a constant pressure in making the plant sustainable in the long term. Meal markets particularly will have a strong bearing on profit as freight cost is a big proportion of the overall meal value. Acceptability of a meal product generated from an extrusion–expeller process rather than a solvent extraction process will have a large bearing on the value of the meal product, especially in relation to cottonseed meal. The success of a CQ processing business will be dependant on capturing an adequate market share of feedstock in a region that has a degree of climate variability resulting in changing crop volumes. Future Potential The establishment of oilseed crushing infrastructure can play a major role in expanding and developing the production of oilseed crops across a wide area of CQ. This is similar to the role that locally based cotton gins had in developing the cotton industry in CQ. Equally, comparisons can be drawn from the growth of the canola sector in southern Australia and the location of regional crushing capacity. There is potential for further downstream processing to the oil product if a crushing facility has the added ability to refine crude oil. There are a number of other oilseed crops that can be grown in CQ such as safflower, linseed, sesame and potentially canola. There are a number of other production areas that could be accessed to expand production such as the Burdekin, Bowen, Mackay, Isaac and Whitsunday regions and potentially a new irrigation precinct in the Gulf region.

Pre Feasibility Study Of Oilseed Processing Facility 1

1. Introduction

Domestically and internationally there is a high demand for Australian oilseeds, oil, meal and other value–added products. Australia usually produces between two to three million tonnes of oilseed crops each year, with canola and cottonseed accounting for over 90 per cent of total oilseed production (Australian Oilseeds Federation 2010). Australia also produces other oilseeds such as soybean, sunflower, safflower, peanuts, and linseed/linola. Soybeans and sunflower comprise about three per cent and four per cent of domestic production respectively. Australian canola oil and canola seed have gained an excellent reputation with international buyers based on our efficient chain of production, processing and distribution. Their unique characteristics of canola oil are particularly appealing to the food industry looking for vegetable oil products that meet the growing demand for healthy oils in cooking and dining. Australia currently consumes nearly 600 000 tonnes of oils and fats annually with the vast majority utilised in edible applications (Australian Oilseeds Federation 2012a). The Australian consumption of oils shows a growing preference for healthier products with unsaturated seed oils strengthening their share of the total fats and oils market, and now account for over half of all usage. Internationally the trend is the same with a steady increase in demand for food driving increased demand for vegetable oils. The Central Queensland cropping region has a strong history of oilseed production but very little processing infrastructure to support it. It is therefore timely that consideration be given to the commercial potential of an oilseed crushing facility in CQ. A number of different oilseed crops have been commercially grown in CQ in the past. In the 1970s crops such as linseed and safflower were common annual crops and in the 1980s sunflowers were considered a major crop for the area. Irrigated cotton has been grown regularly in the central highlands1 with the construction of the Fairbairn Dam and Biloela had some of the first cotton plantings in Queensland. Other oilseed crops such as peanuts and soybeans have been grown in the past although not expressly for crushing purposes. A number of factors are worth noting in regards to the oilseed sector. 1. Australia currently imports between 30 000 and 40 000 tonnes of sunflower oil per year

for human consumption. 2. Australia also imports nearly 500 000 tonnes annually of soybean meal for intensive

animal production (mainly pigs and poultry). 3. Currently CQ has a well established cotton industry that produces between 40 000 and

50 000 tonnes of seed per annum, of which 90 per cent goes unprocessed into the domestic stock feed market.

4. Less than 20 years ago the CQ cropping region produced over 80 000 ha of sunflower seed. Whilst current CQ sunflower production is relatively low, this has in part been driven by the significant freight cost to market along with significant disease issues. These disease issues have now been minimised but freight costs are still the same.

5. Over the last decade there has been an increasing use of soybeans as a legume break crop within sugar cane farming systems of Central and Northern Queensland.

6. CQ growers have successfully grown other oilseed crops such as safflower and linseed in the past and currently grow crops such as peanuts and macadamias in small quantities.

7. Evaluation trials for a number of canola varieties are currently underway and initial results are encouraging.

1 Central Highlands extends from in the north Kilcummin to Rolleston in the south, Blackwater in the east and Sapphire in the west


With these current national and regional factors in play, there is an opportunity for the expansion of domestic oilseed production and this could be facilitated by additional crushing capacity in CQ.

1.1 Existing Australian Oilseed Processors

The crushing of summer oilseed crops is dominated by one processor in Australia, which is Cargill. Cargill crushes over 600 000 tonnes of oilseed per year through three crush plants located at Newcastle, Narrabri and Footscray. Cargill is the only major crusher that uses cottonseed, soybeans and sunflower on a regular basis. It is also one of the largest crushers of canola seed in the country. The next largest crusher in Australia is Riverland Oilseeds who also have three plants located at Numurkah (Victoria), Millicent (South Australia) and Pinjarra (Western Australia). They have a capacity to crush up to 300 000 tonnes of seed of which currently, 95 per cent is canola. Riverland Oilseeds has just recently been sold to Graincorp. Other smaller plants such as Cootamundra Oilseeds (organic and conventional) and Atlantic Pacific Foods will crush some small amounts of summer oilseeds when available. A new player in the crush market is Riverina Oils & BioEnergy (ROBE) who will start crushing this coming summer at their Wagga Wagga plant and they have indicated that they will crush some summer oilseeds (mainly sunflowers) if they are produced in the local area. It is estimated this new plant will have a capacity of up to 160 000 tonnes per annum. In relation to CQ, the nearest sunflower crush plant is in Newcastle (Cargill) and the nearest cottonseed crush plant is Narrabri (Cargill). There are small purpose built plants in Toowoomba (Southern Queensland) and Tolga (Northern Queensland) who focus on full fat soybean crushing for the livestock feed markets. Accordingly, CQ growers have very few marketing options for sunflowers and cottonseed. These limited marketing options have in part contributed to the decline in sunflower production along with the ever increasing freight costs. As with many agricultural commodities, processing margins are very tight hence processors need a significant share of the market to maintain a profitable operation. The primary purpose of this study is to investigate the feasibility of building and maintaining a profitable oilseed crushing plant in CQ. Processing capacity in Australia has more recently been based around the regions where canola has become a major winter crop such as southern NSW, Victoria, Western Australia and South Australia. This has seen the crushing plant capacity grow in proximity to the cropping areas and meal markets or a proximity to capital cities with port facilities. Table 1.1 lists the major crush plants in the country and their location. ² Recently in 2012-13 season a number of other crushers have started to actively sourcing sunflower seed.


Table 1.1 Major Australian oilseed crushing plants

Suppliers of Crude oil

Plants Location

Region

Footscray Industrial area of Melbourne Narrabri Namoi Valley, North west slopes and plains, NSW.

Cargill

Newcastle Eastern end of the Hunter Valley Aus Oils Kojonup Middle of south west corner, WA. 150klm north of Albany Atlantic Pacific Foods

Rutherford Middle of Hunter Valley, NSW

Cootamundra Oilseeds

Cootamundra South west slopes of NSW on the eastern end of the Riverina region

MacSmith Milling Manildra Between the agricultural centres of Parkes and Orange Numurkah Northern end of the Goulburn Valley Millicent Coastal area north west of Mount Gambier

Riverland Oilseeds

Pinjarra Coastal area between Perth and Bunbury Windermere Oilseeds

Ballarat 120 km north west of Melbourne

Riverina Oils & BioEnergy

Wagga Wagga On the Murrumbidgee river and centre of the Riverina region and south west slopes of NSW.

At least seven out of the twelve plants (60 per cent) are located in areas that are close to cropping production or areas where the protein meal can easily be utilised for intensive animal production rations. At least four plants are situated close to major cities that have access to ports. Proximity to capital cities can be more relevant for meal markets rather than oil markets as there always seems to be a certain amount of intensive animal production close to large population areas. In the case of Windermere Oilseeds, the crushing plant was started to compliment a large piggery the owner already operated. The location of oilseed crushing plants is a mixture of proximity to input feedstock and distance to end users. A number of crushing plants have come about because of history rather than position. For example, Manildra had a large flour milling business with all the associated infrastructure long before oilseed crushing was started and has evolved to be a centre for grain processing. It is also linked between the central cropping area of NSW and Sydney. Another point to remember is that most of these plants are almost exclusively canola crushers and at least 25 per cent of all the canola oil produced in Australia is exported, therefore proximity to ports is also a factor in location. Road transport access to plants is another issue. Freight costs are more competitively structured if crush plants are on major freight routes where back loading is regularly available. For example, Wagga Wagga is located close to the Hume Highway and is approximately halfway between Sydney and Melbourne. The Hume Highway offers the most competitive road freight rate in Australia with the large volumes travelling between the two state capitals. Accordingly a crush plant located at Wagga Wagga has a significant marketing advantage by having equal access to both these major urban markets. The Australian Oilseeds Federation (AOF) has provided an excellent schematic of the Australian Oilseed Value Chain in their 2010 Strategic Plan (Figure 1.1). It also provides a basic description of the current situation relating to various sectors of the oilseed value chain.


Figure 1.1 Summary of the Australian Oilseed Value Chain

Source: www.australianoilseeds.com (2012). Australian Oilseeds Federation Strategic Plan 2010.


2.0 CQ Oilseed Crop Production

CQ is the most northern grain growing region in Australia and growers have adapted their dryland production systems to deal with one of the most variable climates in the world. Crop selection is widely based on soil moisture opportunities rather than a set rotation policy. A long growing season allows for flexibility with planting windows, therefore crops will be planted on the basis of when a full soil moisture profile is reached rather than the timing of a seasonal window. When seasonal rainfall is not limiting then crop selection is made on a range of factors including weed control, gross margin, nutrition and yield reliability. Likewise some producers in mixed farming operations have the ability to shift cropping country in and out of pasture for beef cattle production. Although it is difficult to get an accurate figure for the cropping areas of CQ, it is well accepted that dryland cropping exists across approximately 450 000 ha with up to 30 000 ha of irrigated crops grown in years of full water supply. Major crops grown include: wheat, sorghum, chickpeas, cotton, mungbeans, sunflower and corn.

2.1 Major CQ Oilseed Crops

The dryland cropping area, where sunflowers can be grown, extends from Kilcummin in the North through to Rolleston in the South and from Emerald in the West through to Biloela in the East. Traditionally sunflowers have been grown across all areas and soil types; however the largest area of dryland sunflowers has always been in the Central Highlands. Figure 2.1 Map of Central Queensland with the main cropping area highlighted

Source: www.wotsoninqld.com.au


Cotton is predominately an irrigated crop although at times of high prices and when early spring rainfall has been received, a significant dryland crop has been successfully grown. The main irrigation areas include the Emerald Irrigation Scheme (Fairbairn Dam) and the Dawson Irrigation Area (series of Dawson River Weirs) with a number of unsupplemented irrigatorsalong the Comet, Theresa, Mackenzie, Fitzroy and Dawson Rivers. At times of low cotton prices and attractive grain prices, up to 50 per cent of this irrigatable area has been used for grain and pulse production.

Soybeans have been produced with irrigation on the Central Highlands but have never become a major crop. In recent years, soybeans along with other grain crops, have been integrated into the sugar cane production areas as a rotation crop (Mackay, Isaac and Whitsunday, the Burdekin and Bundaberg regions particularly). Although these cane growing areas are outside the traditional CQ cropping region they are in neighbouring zones where a crushing plant could have the opportunity to draw on another commodity to crush. The advantage of crushing soybeans is that the meal product commands a premium price for monogastric feed rations (pigs and poultry).

2.2 Oilseed crop Capacity and Seasonality in CQ

2.2.1 Sunflowers

During years of low rainfall, summer cropping dominates dryland production with sorghum being the most reliable (rainfall in CQ is summer dominate). In these years growers generally programme at least 80 per cent of their ground to summer crops. More recently (last four to five years) there have been consistent opportunities to plant winter crops, so much so that the current cropping rotation has been 50/50. Dominant winter crops include wheat and chickpeas. In a recent survey2 of 23 CQ grain growers (Appendix 11.2); sunflower was nominated as a minor rotational crop that would cover between three to five per cent of the area surveyed on an annual basis. By extrapolating that percentage to the entire dryland cropping area for the CQ region; an area of 13 500 ha to 22 500 ha is the potential, consistent planting area for CQ.

In the 2011–12 season it is estimated that 16 350 ha were planted and harvested from both spring and summer crops (AOF Crop Estimates, 2012). This has occurred in a year when sorghum prices where depressed but sunflower prices were also below average. Summer plantings for the 2012 season were above seed distributor’s estimation and as a result total sunflower seed demand was unable to be fully met within the planting window. Therefore an area larger than 16 350 ha could have been planted if seed had been available. Table 2.1 gives a summary of sunflower plantings across the eastern seaboard for the last five years. Individual data for CQ has never been collected until last year so there is limited data for sunflower production in the CQ region both from industry and seed companies.

2 DAFF survey of CQ growers, March 2012


Table 2.1 Sunflower production data for the last five years across the Eastern seaboard

Source: Pers. Comm. Better Sunflower Project Co-ordinator, AOF (2012)

Anecdotal information sourced from a former Pacific Seeds area manager indicates that from 1988 to 1998 sunflower seed sales for CQ averaged between 70 to 85 tonnes per annum (Pers. Comm. Rick Jones 2012). This equates to an area of between 35 000 to 43 000 ha. This would suggest from historical information the highest potential for sunflower production in CQ would be about 40 000 ha. Based on the recent grower survey and the results of the 2012 season, the upper end of the previous area estimates (22 500 ha) would be a reasonable long term expectation for sustainable production in CQ, under average market conditions. Long term agronomic data would suggest that a reliable yield for sunflowers is about 0.8 tonnes per ha; however yields in 2012 ranged from 0.7 to 2.5 tonnes per ha. Utilising the above area estimates and long term average yield, consistent sunflower production in CQ would range between 11 000 to 18 000 tonnes annually.

2.2.2 Cottonseed

Irrigated cotton areas tend to fluctuate from year to year however based on average figures there is 20 000 ha across the two irrigation schemes on the Central Highlands and Dawson Valley. These two areas combined can produce up to 200 000 bales of cotton per year in an average season. Three cotton gins service Central Queensland grown cotton with two at Emerald and a third at Moura. Industry rule of thumb expects between 270–280 kg of seed produced for every bale of lint. This would then equate to a top end figure of 55 000 tonnes of cotton seed produced in CQ with the average year in year out figure of about 39 000 tonnes. The data contained in Table 2.2 does include those years of prolonged drought where water allocation levels were at historical lows. For example, in the seasons of 2006–07 and 2007–08 there was a zero announced allocation for the Emerald irrigation scheme at the start of the cotton season.


Table 2.2 Summary of cotton production figures for CQ over the last 10 years

Year of Production

Ha of Production

Total Production in

Bales

Production of Cottonseed

(tonnes) 2010-11* 36 800 189 680 52 162 2009-10 20 100 140 700 38 693 2008-09* 17 200 151 300 41 608 2007-08* 4 970 36 680 10 087 2006-07 7 620 70 000 19 250 2005-06 20 700 174 500 47 988 2004-05 21 500 198 000 54 450 2003-04 14 100 111 500 30 663 2002-03 24 600 145 300 39 958 2001-02* 27 700 206 280 56 727 Average 19 529 142 394 39 158

*Denotes seasons that had some dryland production included. Source: Cotton Australia (2012).

2.2.3 Soybeans

Theoretically there could be up to 16 000 ha of available fallow country in the Burdekin irrigation area to grow grain, oilseed and pulse crops in rotation with sugar cane on an annual basis. To date only about 2 500 ha (15 per cent) of this fallow country has been utilised for other crops (Pers. Comm. DAFFQ Extension Officers 2012). In most cases these crops are not grown out to maturity to be harvested for grain but ploughed in as a green manure crop. The other major sugar cane area that could be utilised for soybean production is in the Burnett region centred on Bundaberg. In 2008 it was reported that nearly 2000 ha was grown in this region (Australian Bureau Statistics. 2008) For the purpose of this report soybeans will not be part of the evaluation of a locally based crushing plant as currently there is not a big enough crop to make it worthwhile. The future potential of this crop is discussed later in section 8.4 of this report.

2.3 Competing uses for oilseed production areas

2.3.1 Sunflowers

The decision to grow sunflowers is not only based on its marketability and price but also on its relative gross margin to other crops that can be grown with the same resources. Within CQ its direct competitors for planted area are sorghum, maize and mungbeans. Sunflowers grown in CQ, also has the unique situation where they can be planted quite late in the season and chickpeas and wheat can be planted quite early because of a reduced frost incidence in CQ. Therefore growers can face the decision of planting sunflowers in early March or conserve their moisture for four to five weeks for a chickpea plant in mid April. Chickpeas, in particular has proven to be a very robust crop because it can be deep planted and does not require follow up rainfall to develop its root system. Wheat, in the same set of circumstances has a much higher risk of crop failure with no in crop rain. The potential returns for competing crops influences the area of sunflowers that will be planted. For example in the past year (2012) low prices for sorghum, limited markets for corn and the potential for weather damage on mungbeans has increased the sunflower planting from 5000 ha the previous year (2011) to 16 000 ha this year (2012).


2.3.2 Cotton

Most CQ irrigators have consistently grown cotton over several years and therefore have developed a high skill level in cotton production. Traditionally cotton has been a far more attractive crop to grow because it has consistently delivered higher gross margins then all other crops over a number of years. It has meant that the only time cotton hectares have changed has been due to lower water allocations during drought years or very low prices. Cotton areas will reduce significantly once cotton prices are below $400 per bale (up to 50 per cent). The Emerald irrigation area has provided some buffering capacity in the past in that when the Fairbairn Dam is full, growers can expect full water allocations for at least the following three years. This allows them to forward sell part of their crop at least two seasons ahead and therefore allow them to average out some of the effect of dips in market cycles. The Dawson irrigation area water storage only allows growers to plan on a seasonal basis. The current principle markets for cottonseed (as whole cottonseed), is for the feeding of ruminant livestock, particularly in feedlot and dairy rations. There is some demand coming from the supplementing of extensively grazed sheep and cattle with this market expanding significantly during periods of drought. Whole cottonseed (WCS) is one of the few raw products that are seen as a complete feed for ruminant animals. This is because it can supply roughage as well as protein and energy. The one weakness with the WCS is that it contains a natural pigment known as gossypol which is toxic to monogastric animals (pigs and poultry). The pricing of the cotton seed can vary significantly from year to year depending on seasonal demand for the raw product. There is also a significant export demand for raw cottonseed from countries such as Japan, China and the USA, where the export price is influenced by global production volumes. A crushing plant would need to compete for the raw WCS in the current market and more so in drought years where the price of cottonseed has been over $340 per tonne. The upside is that cattle feedlots and dairies can replace the raw cottonseed with cottonseed meal and cottonseed hulls without interfering with animal performance. The other advantage is that when cottonseed is processed, the gossypol is removed in the oil component meaning that the meal can then be fed to monogastric animals such as pigs and poultry which further opens up the options for selling the meal. Whilst there is no commercial poultry production in CQ there are a number of larger pig producers in the Biloela and Monto districts. Currently cottonseed is being bought at $150–$160 per tonne for export as WCS. The cost of exporting WCS is quite expensive with Queensland Cotton estimating it costs another $150 per tonne to get the product landed in a Chinese port. At these pricing levels it would be expected that a locally based crushing plant would be able to offer a competitiveprice.


3.0 Processing facility

3.1 Background

The capital and operational costs of a processing facility can vary significantly depending on the plant technology, commodity being crushed and annual tonnages processed. The success of a crushing plant or any new business is usually dependant on how it performs in the first two to three years. It is suggested that initially the capacity of a crushing facility be built on the current regionally available supply of oilseeds. The plants capacity could be expanded following successful and profitable plant operation, market demand for products (both oil and meal) and ability to secure additional volumes of oilseed crops.

3.2 Assumptions

3.2.1 Structural Design

Based on significant consultation with several smaller processors in the industry a number of processing technologies were examined. Oilseeds can be processed in a number of ways:

a. Cold pressing b. Cooking–Expelling c. Solvent extraction d. Extrusion–Expelling Based on the estimated volume of oilseed available and capital and operational costs, it is suggested that the most appropriate of these for a local CQ crushing facility is the Extrusion-Expelling design. Extrusion-Expelling involves forcing the raw oilseed through an extruder that effectively forces the seed through a segmented screw around a solid shaft with various choker plates inserted in between the screw flights. The material is eventually forced out through a narrow diameter die at the end of the barrel. The increasing pressure in the barrel effectively generates massive shearing forces which in turn develops heat that cooks the oilseed on the way through. Temperatures get up to 135°C to 150°C, however because the material moves through constantly it is only exposed to this temperature for a short period of time. The resulting processed material from the extruder can then be put through a conventional expeller mill which can then extract at least 70 per cent of the oil in a single press process. The resulting meal cake will have about six to seven per cent of its original oil content plus some extra roughage as the seed coat is part of the meal. An expeller mill also operates on a continual screw press mechanism but instead of generation shearing forces, (like the extruder) its action generates a pressing or squeezing action within the barrel in order to extract as much oil as possible. There are a number of advantages to the extrusion-expelling system that would suit a CQ based operation. 1. It is a less capital intensive system to set up in comparison to a cooking–expeller plant.

This is because there is no requirement for delinting, dehulling, cooking, or flaking of the oilseed before extrusion. The only seed preparation required is cleaning. There is also no requirement for double pressing which means less expeller mills are required to extract the same amount of oil.


2. There are no extra waste products that need to be disposed of such as second cut linters for cottonseed or seed hulls for both cotton and sunflower seed. The extrusion process allows for the hulls to be included in the meal without losing any efficiency in oil extraction.

3. This process can handle a variety of oilseeds from low oil content seeds such as soybeans and cottonseed to high oil content seeds such as sunflowers and canola. The extruders can be set up as dry or wet extrusion machines which is the only change required when processing products that have less than 15 per cent oil content. Wet extruders allow for steam and water to be injected into the barrel during processing.

4. The extrusion–expeller process has proven to produce good oil quality with low volatile fatty acids, peroxides and phospholipids (Riaz 2005). The oil is remarkably stable with good levels of antioxidants left and this is attributable to the quick heating and cooling that this method applies. This attribute also gives the crude oil a good shelf life.

5. The extrusion–expeller method also produces good quality protein meal because it applies enough heat to denature the enzyme inhibiters but not enough to break down the primary amino acids (Riaz 2005). Among other things this makes the meal have a better shelf life and a higher digestibility. Cottonseed meal produced in this way also has remarkably low gossypol levels which are critical when feeding this meal.

6. The extrusion–expeller method has a lower environmental and workplace health and safety requirements as it requires no dangerous chemicals in the process such as hexane which is required by the solvent extraction method.

7. The capacity of the plant can be expanded in modular stages to cope with increased capacity with no lower limits to viable throughput. Solvent extraction systems require a minimum of 100 000 tons throughput to make a crushing plant viable.

8. The protein meals produced by the extrusion - expeller system will have between six to seven per cent oil content as opposed to a solvent extraction plant that only leaves about one to two per cent oil in the meal. This means the oil extraction is not as efficient but the oil content of the meal makes it a more marketable product to ruminant feeding operations such as feedlots and dairies.

9. Traditionally meal that has a higher oil content usually has a shorter shelf life, however the pelletising process has the ability to improve this shelf life by improving the aeration of the stored product and having less moisture in the product.

Recent industry development has also shown that the addition of a pelleting plant to process the extruded meal into a pelleted product has some significant marketing, handling and storage advantages. A pellet can be stored in conventional silos with 60° cones rather than bunker storage. They are easier to transport then conventional meal and have a better shelf life. They are also easier to put through conventional feed out and batching equipment. The pelletised product from an extrusion–expeller process normally has a lower protein content than other extracted meal products because the hull is included in the meal and this creates a dilution factor for the protein level. The roughage or fibre content of the meal is also increased. For example in cottonseed meal, solvent extracted meal averages about 42 per cent protein and 1.5 percent fat where as pelletised meal from extrusion–expeller systems is about 28 per cent protein and seven per cent fat (Pers. Comm. Riverina Milling 2012). For ruminant nutrition this may not have a negative impact on marketing as a more balanced meal is desirable especially in terms of energy content (Pers. comm. Integrated Animal Production Consultant 2013). However there are a number of feed companies that buy their meal purely on the cheapest unit of protein and they will prefer solvent extracted meal for this reason. Figures 3.1 and 3.2 illustrate in a schematic form the requirements of an extruder–expeller processing system for both cottonseed and sunflower seed.


Figure 3.1 Basic schematic of an extrusion–expeller system required to process cotton seed

Raw product input

Process

Output product

Whole Cotton Seed

(WCS)

Basic seed cleaning - gravity table with mesh

and a aspirator

Dry Extruder – shearing forces with heat and friction

break material down into semi glutinous material

Expeller press – extraction of oil and

production of meal cake

MEAL CAKE

Put through hammer mill

CRUDE OIL Pressurised filtration – to

remove ‘foots’. Degumming through centrifuge

Pelletiser plant – meal is pushed through

pelletiser and cooled. Maximum 9% moisture

Storage – meal product ready for sale/transport

Refining Plant – Stripping with Sodium Hydroxide

(caustic soda) to remove gossypol pigment

High speed centrifuge – clean oil after stripping

Production of soap stock

Storage – Semi refined oil for sale/transport. Further

refinement includes bleaching, deodorising and

winterising


Figure 3.2 Basic schematic of an extrusion – expeller system required to process sunflower seed.

Raw product input

Process

Output product

Sunflower Seed

Seed cleaner/screening

– forced air aspirator

Dry Extruder – shearing forces with heat and

friction break material down intosemiglutinousmaterialExtrusionplant

Expeller press – separate oil and meal

cake from seed

MEAL CAKE

Put through hammer mill

CRUDE OILPressurised filtration –

remove ‘foots’ and other impurities. Degumming

with centrifuge

Refining plant – Striping off VFA and

other waste with sodium hydroxide

High speed centrifuge – cleaning

oil after stripping

Production of soap

stock

Full refining - includes Bleaching and Deodorising

Crude oil can be sold as it is or refined further,

using same process as for cottonseed oil

Pelletiser plant – meal is pushed through

pelletiser and cooled. Maximum 9% moisture

Storage – meal ready for transport

and sale

Tank farm – Bulk refined oil storage ready for sale and

freight


3.2.2 Production scenarios

In order to give this study a wider scope, a number of production scenarios have been investigated. This will allow comparison of scale and vertical integration on the viability of a crushing plant. Accordingly this study has modelled three scenarios: Scenario I (small plant) is the lowest tonnage scenario based on a total processing of 34 000 tonnes per annum. This would be made up of 23 000 tonnes of cottonseed and 11 000 tonnes of sunflower seed. These tonnages are based on crop estimates made in section 2.2.1 and 2.2.2. Cottonseed is based on securing 50 per cent of average CQ production (refer section 2.2.2). The average based on taking the last 10 years data and excluding the two lowest years for drought where irrigation allocation was zero. This gives an average production of 46 000 tonnes per annum. Sunflower production is based on securing 100 per cent of the lower end of the production range which is 11 000 tonnes to 18 000 tonnes per annum. Scenario II (large plant) is the highest tonnage scenario based on a total processing of 64 000 tonnes per annum. This would be made up of 46 000 tonnes of cottonseed and 18 000 tonnes of sunflower seed. The cottonseed tonnage is based on securing 100 per cent of the average production of cottonseed for CQ. Sunflower tonnage is based on securing a 100 per cent of the upper end of the production range, outlined in section 2.2.1. Scenario III (large plant plus refining) combines the higher tonnage throughput with the addition of a full refining plant to convert crude oil into a stabilised refined oil product that could be sold as bulk liquid. In this scenario cottonseed oil would be refined for the domestic hospitality frying market specifications and food service sectors. Monounsaturated sunflower oil specifications would also be for a similar market to cottonseed oil although polyunsaturated sunflower oil would be suitable for processed food products such as margarine, mayonnaise and salad dressings. Table 3.1 summarises the outputs of oil and meal that would be derived from an extrusion-expeller crush plant given the above production scenarios. Theses figures are based on an average oil content for sunflowers of 40 per cent and 22 per cent for cottonseed. Extraction percentages are based on: Sunflowers – 33 per cent oil, 65 per cent meal and two per cent waste @ nine per cent

moisture. Cottonseed – 15 per cent oil, 82 per cent meal and three per cent waste @ nine per cent

moisture.


Table 3.1 Summary of outputs for processing scenarios

Crushing Scenario Product Weight (tonnes)

Volume (ML)

Cottonseed oil 3 450 3.7Cottonseed meal

18 860

Sunflower oil 3 630 3.9

Scenario I. 34 000 tonnes per annum (23 000 tonnes of cottonseed and 11 000 tonnes of sunflower seed)

Sunflower meal 7 150 Sub-totals 33 090 7.6

Cottonseed oil 6 900 7.4Cottonseed meal

37 720

Sunflower oil 5 940 6.4

Scenario II. 64 000 tonnes per annum (46 000 tonnes of cottonseed and 18 000 tonnes of sunflower seed)


Refined Cottonseed oil

6 555 7.1

Cottonseed meal

37 720

Refined Sunflower oil

5 643 6.1

Scenario III. 64 000 tonnes per annum (46 000 tonnes of cottonseed and 18 000 tonnes of sunflower seed) Refining plant included. Assume a minimum of 95 per cent recovery.


3.2.3 Basic Operating Requirements

This section outlines those operating procedures that will have an impact on the capacity and efficiency of the plants operation. Many of these assumptions will relate to the capital and operating cost of the plant. General Requirements The plant will operate 24 hrs a day, 340 days of the year. There will be an annual shut

down of 25 days. Timing of the shut down would be most likely in December/January just prior to cotton harvest in March and spring grown sunflower harvest in February. Operating will be based on two X 12 hour shifts, seven days on – seven days off roster.

The operation will aim to produce oil and meal all year round for both commodities. Monthly production is split between the two commodities depending on the total tonnage from each oilseed to be processed.

Capacity of the crush plant will be built around the capacity of commercially available extruder mills and expeller mills. In all likelihood this capacity will exceed the required capacity set out in each scenario. The plant would be set up in a modular unit type structure with each extruder matched up to a single expeller press. These units would then be multiplied to reach the required capacity of the crush plant. This has the added advantage that it would be a simple process to increase the capacity of the plant. All other infrastructure and machinery would be matched to the total extruder and expeller capacity.

Marketing of meal and oil is on supplying the product on a monthly basis, all year round. Nearly all buyers of oil and meal only have the capacity to store one month’s inventory at any one time. This is also dependant on the shelf life of the commodities as meal and oil can degrade over time. To be competitive in this market place, a local crushing plant will need to be able supply product consistently on a monthly basis, throughout the year. It is therefore logical that the crushing plant can store at least 50 per cent of its monthly production on site.

There would be efficiencies for the crushing plant to be built close to a local cotton gin. This would minimise freight for the highest volume feedstock and would also allow the


plant to take advantage of the storage capacity of the gin for cottonseed. For these reasons it is anticipated that a crush plant would only need enough storage for five days of production. Most ginning companies will do contracts on a weekly delivery with a three to six month spread for the total tonnage.

Sunflower seed storage is a different situation. Currently there is no locally based accumulation facility. Growers with sunflower contracts either deliver direct to market at harvest or use their own storage facilities and negotiate a delivery schedule. Over the last few years many growers have built some storage capacity to give themselves the ability to spread their marketing risk. For a local crushing facility there would be opportunities to negotiate a spread of sunflower seed delivery beyond the harvest period. However it would be expected that a local crushing facility would be able to take in at least 50 per cent of the local crop at harvest.

Scenario I – Specific requirements 34 000 tonnes total annual capacity (23 000 tonnes cottonseed/11 000 tonnes sunflower

seed). Minimum capacity required 105 tonnes per day or 4.4 tonnes per hr. 20 days per month for cottonseed and 10 days per month for sunflower seed. 2100 tonnes of cottonseed processed per month, 1050 tonnes of sunflower seed

processed per month. Storage capacity to be based on being able to store 50 per cent of one month’s

production of oil and meal. Oilseed storage based on 50 per cent of total harvest for sunflowers and five days worth of production for cottonseed.

Table 3.2 Scenario I Anticipated production per month and storage requirements

Commodity Tonnes Storage RequiredCottonseed oil 300 150 tonnes/162 KLCotton seed meal 1700 900 tonnes Sunflower oil 350 175 tonnes/190 KLSunflower meal 700 350 tonnes Cottonseed 525 tonnes Sunflower seed 5500 tonnes

Scenario II – Specific Requirements 64 000 tonnes total annual capacity (46 000 tonnes cottonseed/18 000 tonnes sunflower

seed) Minimum capacity required 206 tonnes per day or 8.6 tonnes per hr. 21 days per month for cottonseed and nine days per month for sunflower seed. 4300 tonnes of cottonseed processed per month, 1850 tonnes of sunflower seed



Table 3.3 Scenario II Anticipated production per month and storage requirements

Commodity Tonnes Storage RequiredCottonseed oil 650 325 tonnes/350 KLCotton seed meal 3500 1750 tonnes Sunflower oil 600 300 tonnes/325 KLSunflower meal 1200 350 tonnes Cottonseed 1030 tonnes Sunflower seed 9000 tonnes


Scenario III – Specific Requirements All the requirements for Scenario II will be the same as for Scenario III 64 000 tonnes total annual capacity (46 000 tonnes cottonseed/18 000 tonnes sunflower

seed). Minimum capacity required 206 tonnes per day or 8.6 tonnes per hr. 21 days per month for cottonseed and nine days per month for sunflower seed. 4300 tonnes of cottonseed processed per month, 1850 tonnes of sunflower seed



Addition of a full refining plant that has capability to refine, bleach, deodorise and hydrogenate. Plant will require a maximum capacity of 70 tonnes per day or 3 tonne per hr

Additional storage requirements based on 50 per cent of monthly refined oil production. Reduction in crude oil storage requirements back to just two days of production.

Table 3.4 Scenario III Anticipated production per month and storage requirements

Commodity Tonnes Produced Storage Required Refine oil StorageCottonseed oil 650 60 tonnes/65 KL 300 tonnes/325 KL Cotton seed meal 3500 1750 tonnes Sunflower oil 600 140 tonnes/150 KL 300 tonnes/325 KL Sunflower meal 1200 350 tonnes Cottonseed 1000 tonnes Sunflower seed 9000 tonnes

3.2.4 Additional project parameters

A. Environmental The advantage of the extrusion–expeller process is that it has few environmental impacts as opposed to a solvent extraction plant. It has been assumed for this study that an Environmental Impact Statement (EIS) would need to be completed before final development approval could be obtained. Although this would not be considered a complicated project, the minimum time frame required to put an EIS together would be 18 months. Some of the major impacts would be: Waste water – Most of the water will be used for degumming, producing steam and

cleaning of the oil. As a result the waste water will contain a certain level of BOD (biological oxygen demand), no heavy metals and minimal salts. Biofiltration within a basic water treatment plant will meet most state government environmental standards in which it can be released into the natural environment. Waste water production for a 65 000 tonne capacity plant is estimated at 25 KL per day (8.5 ML per annum).

Odour – There may be low levels of odour associated with the crush plant although much less than for a solvent extraction plant. The aim for this crushing plant would be to build away from current and future urban areas with sensitive receptors.

Noise – There will need to be considerations made for noise levels and a certain amount of noise dampening built into the sheds that will house the extruder and expeller presses as well as the pelleting plant. Again if this plant can be built away from town then that will reduce the number of sensitive receptors.

Dust – Dust mitigation practices will need to be employed as this crush plant will have a lot of traffic moving in and around the site. For Scenario I it is estimated there would be the equivalent of 60 road trains per month taking away meal and oil (two per day) and in Scenario II the equivalent of 120 road trains per month (four per day). Added to this


would be deliveries of cottonseed on a weekly basis and sunflower on a monthly basis. The capital cost of this project will allow for some sealing of main roadways around the plant. Grain dust from the crushing plant itself will also need to be minimised.

Site contamination – Although the plant would have little high risk material on site, it will need a complete storm water management plan and the ability to manage any water runoff areas that were considered high risk. Also the storm water plan must be able to contain any erosion hazards and prevent sediment movement.

B. Land For the purposes of simplifying the analysis, the study will assume that a crushing plant would be built in close proximity to one of the existing cotton gins in order to maximise the freight advantage of having a cottonseed source close to the crush plant. Cottonseed is a very inefficient commodity to transport as it has a low bulk density. Therefore a shorter freight distance would produce superior crushing margins. It will also allow the crush plant to reduce its storage requirements for the cottonseed. Out of the three gins that exist in CQ, the Yamala gin managed by Dunavants would be an ideal site for a number of reasons. Positioned well away from any urban development. Has access to piped water from the Weemelah channel in the Emerald Irrigation Scheme Existing traffic access to the Capricorn Highway and major railway crossing Local land owners interested in subdividing land for further industrial development,

currently used for grazing production. Potential for the development of much larger industrial blocks (<two ha) compared to

industrial development in the major towns such as Emerald or Blackwater. Access to three-phase power. Close proximity to railway siding. Other options that could be considered for the site of this crushing plant could be on closed mine sites. Recently the Rio Tinto owned, Blair Athol coal mine was closed and the company has been working with the community to find alternative uses for the site. There is a heavy industrial area established on the mine site and it would be in close proximity to the Kilcummin cropping area located just to the north. The disadvantage would be that all the cottonseed would need to be freighted over 100 km to the crushing plant. If the cost of the land was heavily subsidised, under this option it could reduce the overall capital cost of the crushing plant which would be a significant advantage. Another alternative would be to place the plant near a port such as Gladstone or Mackay. This would reduce the freight advantage to the grower but could allow for the opportunity to service export markets more easily. Equally it would provide some efficiency if there was a need to import feedstock in times of reduced regional production due to seasonal conditions. The majority of oilseed crushing plants in Australia are located as close as possible to the growing region rather than the port. This study has made the assumption that the oil and meal would all be sold into the local domestic market and take advantage of the import parity, therefore the advantage of being located close to a port is diminished. Also the cost of industrial land close to the ports of Gladstone or Mackay is currently high due to the demand from resource based industries. Using other crush plants in southern NSW and Victoria as a template, it is estimated that the ideal land area required would be eight to 10 ha. Although a plant could be constructed on a smaller site, it is not ideal and would lead to logistical issues in the operational phase and may limit possible expansion.


The current cost of industrial land is $120–$150 per square metre within the town development boundaries of Emerald. If the site was a greenfield site within close proximity to the Yamala Cotton Gin then the cost may be reduced to rural residential land price. Currently the price for 10 to 40 ha of undeveloped rural residential land ranges between $300 000 to $450 000. There would be added costs to this as the land would need to go through a material change of land use process and would also need to be subdivided off a larger piece of land. C. Local Government A development approval will be required through the local council which will be conducted in accordance to the Queensland Government Integrated Planning Act 1997 and the Integrated Planning Regulation, 1998. Local government acts as the gate keeper for this type of development (high intensity industrial) with various Departments being brought into assess parts of the development application against the relevant legislation. Central Highlands Regional Council (CHRC) planning scheme is part of the Integrated Development Assessment System (IDAS) which integrates both state and local government assessment processes. Most commonly with this type of development the Department of Environment and Heritage Protection and the Department of Transport and Main Roads would be involved. Costs are largely an unknown as there is no formalised plan for the crushing facility and it will depend on the size and intensity of the application. It is worth mentioning that CHRC has a special industrial zone created around the Yamala cotton gin for the “co-location of related industries” or for “heavy industry that due to their size and nature are not suited to town…” based industrial areas (Central Highlands Regional Council, 2013). This special zoning would have advantages to get development approval for an oilseed crushing plant as long as all the assessable codes under this zoning are met. D. Labour The CQ region has a strong resources sector which provides competition for labour at many levels. Currently there is a shortfall of skilled people on the Central Highlands and this has created a shortfall in supply and therefore increases the cost of labour in many sectors. The current unemployment rate for CHRC is less than 2.5 per cent and approximately 25 per cent of the residents in CHRC area earn $1500 or more weekly (Central Highlands Development Corporation - Economic Profile, 2012). A crushing plant would need to operate on a 24/7 basis much like most mineral and gas projects. Staff would be required to work a 12 hour shift roster. The majority of operational staff on an extrusion–expeller crush plant do not need specialist skills. Most potential employees with a basic machinery background are suitable with some on site training which is very similar to staff that work as operators on mine sites. This would put a crushing plant in direct competition for operators that work in mining positions. The labour costs for this study will be priced in at the minimum level of resource company staff ($75 000–$80 000) which will impact significantly on the operating costs compared to southern crushing plants. The wages paid to suitable CQ staff would represent a 35 per cent premium above those operating in the southern states. A number of crushing plants are situated in rural regional areas and have difficulty in attracting technical staff especially in those plants undertaking oil refining. A number of these commercial plants have targeted expertise from overseas on 457 visas or similar work sponsorship programmes. This has been reasonably successful and a number of these


specialist staff have been recruited from India and Pakistan, where there is a large and well established oilseed crushing industry. E. Continuity of supply The variable nature of the climate in CQ means that there can be a lot of variation in the annual supply of crops. In short, the business modelling for the plant would need to consider a range of regional oilseed supply volumes. On the other hand, by sourcing the main feedstock from an irrigated crop, the risk of supply is reduced however, in the long term it would be very risky to sign up to long term supply contracts for oil or meal derived from dryland grown sunflowers. Positioning and branding product is a possibility of extracting greater value from a supply chain and the same is true for quality food grade oil. Market differentiation is best undertaken by identifying a product niche that your product can satisfy and exploiting that opportunity. Equally once established there needs to be very strong supply line that can guarantee delivery of the product at a certain quality. In general it may be difficult for a crushing plant in CQ to pursue this avenue for other than a portion of its product as it would be difficult to guarantee supply. The alternate is to brand a portion of the oil and supply the balance into the bulk oil market. This would then mean that crude oil produced from CQ would have limited potential to grow the value of its product as the returns would be fully exposed to the general supply and demand of the international trade.

3.3 Capital Costs Much of the information contained in this section has been derived from interviews with various industry participants where a lot of the data was commercial-in-confidence material. In order to protect the participants individual data and in doing so respect the wishes of those who contributed, the capital costs have been summarised to some extent. An effort has been made to make the values as precise as possible.

Capital Costing – Scenario I (small plant)Extrusion–Expeller crushing plant with a daily capacity of 105 tonnes/day day or 4.4 tonnes/hr. Annual capacity of 34 000 tonnes with 23 000 tonnes of cottonseed and 11 000 tonnes of sunflower seed. Cost Descriptions:

1. Machinery (including extruders, expellers, hammer mill, centrifuge, AR plant, boiler, compressor, pelletiser, seed cleaners, NIR testing equipment, oil filtration, various mobile machinery)

2. Fixtures ( including weighbridge, Sample stand, water treatment plant, workshop, laboratory, offices, water storage, gas storage)

3. Land & Civil works ( including purchase 8ha site, foundations, drainage, roadways, car park, access)

4. Storage and elevators (bunkers, silos, grain pads, tank farm, pumps and materials handling equipment)

5. Power and electrical (including PLC fit out, 3-phase installation) 6. Development Approvals (including EIS reporting)

Machinery & Equipment $ 4 880 000 Fixtures $ 545 000 Land & Civil Works $ 1 600 000 Power & Electrical $ 2 464 750 Storage & Handling $ 1 422 500 Development Approvals $ 200 000 Cost over run (10%) $ 1 111 225 Total $ 12 223 475


3.4 Operating Costs

Gathering information on operating costs is difficult as so much of this is based on commercial–in–confidence data. Many of the more detailed costing has been based on the advice from one processor; however a number of industry sources provided an estimation of total production costs per tonne. For the benefit of this exercise we have used the average of those total cost estimates and then made an attempt to break those total figures down into some basic sub-categories. Thus some of the values may not match what individual crushing plants experience for each sub-category however, the overall cost of production should be a close reflection of industry standards for this type of processing plant. The only sub-category that has been worked out on an individual basis has been the labour component. This labour cost must reflect the elevated wage levels that are currently being

Capital Costing - Scenario II (large plant) Extrusion–Expeller crushing plant with a daily capacity of 206 tonnes/day or 8.6 tonnes/hr. Annual capacity of 64 000 tonnes with 46 000 tonnes of Cottonseed and 18 000 tonnes of sunflower seed. Cost descriptions as described in Scenario I.

Machinery & Equipment $ 7 980 000Fixtures $ 605 000Land & Civil Works $ 1 600 000Power & Electrical $ 3 910 125Storage & Handling $ 2 552 500Development Approvals $ 200 000Cost over run (10%) $ 1 684 763Total $ 18 532 388

Capital costing – Scenario III (large plant plus refining) Extrusion–Expeller crushing plant with a daily capacity of 206 tonnes/day or 8.6 tonnes/hr. Annual capacity of 64 000 tonnes with 46 000 tonnes of Cottonseed and 18 000 tonnes of sunflower seed. Full refining plant attached, capable of 70 tonnes/day capacity. This plant will need to be able to alkali refine, bleach, hydrogenate and deodorisation. Refine oil product meets all human consumption standards. Costing Descriptions as described in Scenario 1.

Machinery & Equipment $ 13 025 000Fixtures $ 905 000Land & Civil Works $ 1 600 000Power & Electrical $ 5 660 125Storage & Handling $ 2 750 500Development Approvals $ 200 000Cost over run (10%) $ 2 414 063Total $ 26 554 688


experienced in CQ from a high level of competition for labour resources. The operating costs estimated below include both variable and overhead costs together based on the assumption that the plant is operating at full capacity. Table3.5 Summary of operating crushing plant costs

Scenario 1 – 34 000 tonnes

Scenario 2 –

64 000 tonnes

Scenario 3 – 64 000 tonnes plus

refining

Cost Category

Annual cost $ Annual cost $ Annual Cost $ Electricity 612 000 1 152 000 1 209 600Repairs &

Maintenance 476 000 896 000 940 800

Gas & Water 153 000 288 000 302 400Labour 1 704 000 1 950 000 2 316 000

Vehicle leasing 73 000 73 000 89 400Rates/Insurances 51 000 85 000 89 200

Contractors 136 000 220 000 231 000Admin & Comms 34 000 64 000 67 200

Permits, Licenses, Fees

34 000 45 000 47 200

Consumables 170 000 320 000 336 100Major Maintenance

& Annual refit 611 000 926 600 1 327 700

Total Costs per annum

4 054 000 6 019 600 6 956 600

Cost per tonne (total crush cost)

119.2 94.1 108.7


4.0 Marketing Assumptions

Prior to the financial analysis, the pricing for meal and oil needs to be set as it will dictate the gross revenue for a local crushing plant. To set these values a number of assumptions need to be made. This chapter will endeavour to describe how the pricing assumptions have been made.

4.1 Meal markets and pricing analysis Long term data for protein meal markets is quite difficult to obtain especially in relation to the domestic market. For the purpose of this report long term international pricing has been used with various conversion factors used to get back to an Australian domestic price. Conversations with local stockfeed manufacturers have provided valuable spot pricing data and short term pricing information, which has been used to benchmark current Australian values against current global commodity prices. Most protein meals around the world are priced off soybean meal which is widely traded around the world and is seen as the ultimate protein meal for intensive livestock rations. The general rule of thumb is that whatever the cost per unit of protein for soybean meal (48 per cent) then all the other meals are priced as equivalent cost of protein. However soybean meal does command a significant premium over and above its protein content because of its amino acid profile (high in Lysine). It is also a very safe protein meal for rations especially for monogastrics (pigs and poultry). Therefore when soybeans start to become in short supply, such as when drought affects many areas in the USA, then soy meal tends to stretch the margin between itself and the other protein meals. For example, currently soybean meal is priced at $670–$700 per tonne landed in Brisbane port (2012) which is $1.45 per kg of protein. Cottonseed meal is currently about $320–$350 per tonne ex Narrabri which is $0.83 per kg of protein. This makes the protein unit cost of soybean meal almost double that of cottonseed meal.

4.1.1 Cottonseed meal pricing

A useful indicator for cottonseed meal pricing is presented in Figure 4.1 indicating the range of prices paid for meal in the US. Protein meal markets are notoriously volatile and the graph below illustrates this clearly. Over the last four years since February 2008 cottonseed meal prices has ranged between $200 to $350 per tonne. According to stock feed manufacturers in Atherton, Charters Towers, Townsville and the Darling Downs, domestic prices seem to have mirrored the US values with Australian prices ranging from $220–$360 per tonne ex plant. The other distortion to the cottonseed meal market is that there is only one major processing facility3 on the eastern seaboard that actually crushes cottonseed, therefore supply can be restricted and there is an absence of competition.

3 Riverina Milling in Hillston has started crushing cottonseed over the last two seasons.


Figure 4.1 Historical International data for meal pricing

Historical values for Soybean and cottonseed Meals for USA

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2

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12

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2

Time period (10 years)

Pri

cin

g (U

S $

/ton)

0.00

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1.00

Rat

io

Soybean meal Cottonseed meal Ratio of Soybean to cottonseed meal Source: USDA, Economic Research Service (2012)

Figure 4.1 illustrates that there is a very loose relationship between the pricing of soybean meal and cottonseed meal. The ratio between the two seems to operate between 0.8 to 0.6; although in the last three years that ratio has been getting a lot broader and more volatile. Another variable in meal pricing is the relative supply of each protein meal. For example in Australia currently, cottonseed supply has been driven by two successive record breaking cotton crops hence cottonseed is in plentiful supply. In contrast with the high cost of soybean meal it would be expected that cottonseed meal could be used as a replacement. However with only one crusher available, supply is restricted and some stockfeed manufacturers do not use the least cost protein as they have specific blends that commit them into using a particular meal. Therefore the reliance on soybean meal to provide a direct indicator for other protein meals is somewhat problematic as it increases in value. Given recent history, the movement in international pricing feedback from domestic users; a price range of $220–$360 per tonne will be adopted for analysis in this report.

4.1.2 Cottonseed meal markets

Cottonseed meal can be used in a range of rations across a number of industry sectors. Predominately cottonseed meal is used to supplement ruminants such as beef, sheep and dairy cows; however it can also be used at lower levels for poultry rations (Broilers). Feedlots tend to only use meal in their starter rations for younger cattle as they prefer to use the whole cottonseed in their finisher rations. Given that finisher rations make up 80 per cent of what is fed in a feedlot, usage of meal is limited to about 10 per cent of starter rations. Supplementary feeding of grazing operations appears to be a much larger market for the meal. Markets for cottonseed meal are plentiful with a range of businesses using cottonseed meal in Northern and Southern Queensland. The Atherton Tablelands has a larger broiler market where they are reportedly processing 180 000 birds per week. There is also a layer market with 210 000 birds spread between the Tablelands and Townsville. Additionally there are still about 55 dairies in operation milking just over 8000 cows and a number of small piggeries operating with a total capacity of about 500 sows in North Queensland.


Added to this there has been a developing market in supplementary feeding for extensive grazing operations in North Queensland. Although this market is very dependant on the variable seasonal conditions, it has the potential to be a large market with the greatest consumption during the dry season between May to December. Underpinning this growth is the need for beef producers to finish cattle for the feeder market as well as the live export trade. The once dominate live export market of Indonesia has been dramatically reduced in the past 18 months resulting in more cattle being marketed domestically. Equally there are also very strong markets in the southern part of the state including the Darling Downs, Burnett and northern NSW. The majority of these markets are based in the beef and dairy sectors. The table below gives an indication of the market spread. This table is by no means a complete list of end-users. Table 4.1 Summary of major end users for cottonseed meal

Source: Pers. Comm. Various company staff 2012

Table 4.1 illustrates that there is a sizeable market for cottonseed meal in Queensland. In relation to a crushing plant being positioned near Emerald there is still significant freight distances to get the meal to the end users. The main advantage for cottonseed meal going into North Queensland markets is that there is a freight advantage over the current supplier who is situated in Narrabri.

Table 4.2 Freight rate comparisons between Emerald and Narrabri delivering to North Queensland end users

Destinations

Cost per

tonne $

Destinations

Cost per

tonne $

CQ Freight

Advantage/Disadvantage $

Emerald to Atherton

80 Narrabri to Atherton 140 60

Emerald to Townsville

70 Narrabri to Townsville

135 65

Emerald to Charters Towers

55 Narrabri to Charters Towers

160 105

Emerald to Oakey

80 Narrabri to Oakey 56 (24)

Source: Pers. Comm. End users, 2012

On the other hand moving cottonseed meal to Southern Queensland will be a freight disadvantage with Narrabri being significantly closer.

Company Mills Tonnages Advance Rural Atherton 1200 tonne per annum Causeway Produce Townsville 1000 tonne per annum Stocklick Trading Charters Towers, Mt

Garnet, Roma 3000–7000 tonne per annum

Ridley Agriproducts Townsville, Toowoomba, Dalby, Clifton, Tamworth, Taree

4000–10 000 tonne per annum. (1000–1500 tonne per mill)

Riverina Pty Ltd Kingaroy, Oakey, Murgon, Casino, Loganlea, Warwick

5000–12 000 tonne per annum (some mills up to 170 tonne per month)


4.1.3 Sunflower meal pricing

Sunflower meal is a far less traded commodity then both cottonseed meal and soybean meal both around the world and in Australia. Sunflower meal can be used in both monogastric and ruminant diets although it is predominately used in ruminant diets particularly beef and dairy. It is also quite often used in equine rations. Sunflower meal is a third choice meal behind soybean and cottonseed meal in Queensland and Northern NSW. In the southern areas it comes in second again to soybean and canola meal. Thus sunflower meal tends to be discounted to find a place in the market as the cheapest source of protein. Sunflower meal also tends to be restricted to a smaller percentage of the rations in comparison to soybean meal and canola meal. Currently all sunflower meal is sourced from the Cargill crush plant at Newcastle. Once again obtaining good historical data has been difficult and in this case this report will rely on the feedback from two stock feed manufacturers; Ridley Agriproducts Pty Ltd and Riverina Pty Ltd. Their advice was that sunflower meal values ranged from $150–$300 per tonne with current pricing being approximately $245 ex Newcastle. In comparison to cottonseed meal protein values, this price range compares well on a protein unit cost. Table 4.3 Comparison of protein values for cottonseed and sunflower meals

Meal Price range tonnes $

Protein content %

Protein unit cost Kg $

Cottonseed 220–360 42 0.52–0.86 Sunflower 166–275 32 0.52–0.86

Based on the domestic industry information and protein values; a price range of $150–$300 per tonne ex plant will be used as the basis for further analysis in this report.

4.1.4 Sunflower Meal Markets

According to industry intelligence there is no existing market for sunflower meal in North Queensland. Most current usage for sunflower meal is through mills on the Darling Downs, Burnett and Northern NSW regions. Sunflower meals are currently primarily used in specific blends for poultry, equine and stud cattle markets. Under some circumstances it is used in the dairy and feedlot sector. An example of some of the users is shown in the table below. Table 4.4 Summary of end users for Sunflower meal consumed Southern Qld and Northern NSW

Company Mill Locations Tonnages Ridley Agriproducts Toowoomba, Dalby, Clifton,

Tamworth, Taree 2000 to 4000 tonnes per annum

Riverina Pty Ltd. Murgon, Oakey, Kingaroy, Loganlea, Warwick, Casino

Approx. 1200 tonnes per mill per annum

Several independent companies (Bec Feed Solutions, Hyfeed Holdings, Mi-Feed, Woods Stockfeeds)

Goondiwindi, Gympie, Toowoomba, Dalby, Brisbane

Unknown

Source: Pers. comm. various company staff, 2012


Sunflower meal produced in CQ will need to compete for these markets mainly centred around the Darling Downs. This dictates that sunflower meal from CQ would need to be sold at a slight discount to the meal being produced in Newcastle as there is a freight advantage from Newcastle. Freight – Newcastle to Oakey = $66 per tonne Freight – Emerald to Oakey = $80 per tonne The sunflower meal market seems to be far more limited then the cottonseed meal markets. This will mean that a crushing plant in CQ may have some issues in selling the meal and to overcome this it may have to significantly discount the price of the meal. On the positive side the tonnage of sunflower meal produced by a CQ plant will only be approximately 35 per cent of the total meal production. There would be an opportunity to explore and develop a market for sunflower meal in North Queensland.

4.2 Oil markets and pricing analysis

4.2.1 Cottonseed Oil Pricing

Cottonseed oil in Australia is largely only produced to fill the domestic market. Only small amounts are exported or imported depending on the supply of cottonseed and crushing capacity. Figure 4.2 illustrates this point from data compiled by the USDA on the Australian market. Figure 4.2 Australian production and consumption of cottonseed oil

Australian Production and Consumption of cottonseed oil

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Years

(000

) to

nnes

Domestic Production Domestic Consumption

Source: Index Mundi (2012a)

While the data highlights an expanding consumption for cottonseed oil, especially over the last three years, it also shows an expansion in production. This production is largely inline with record cotton crops and plentiful supply of cottonseed at competitive prices. To support this additional production there has been upgrades to the crushing plant at Narrabri. Alternatively when cottonseed supply is restricted, such as those drought years of 2006–09, local production has been reduced and cottonseed oil has been imported to cover shortfalls. These shortfalls could be met by countries such as the USA or Malaysia.


Across the world cottonseed oil and meal are not traded to any significant level, however whole cottonseed is traded to a much larger extent despite the logistical difficulties in shipping cottonseed. Figure 4.3 Cottonseed importing countries

Source: Christian, A (2012) How the Market Works – presentation at Australian Cotton Conference 2012.

Over the last two years Australia has been by far the largest exporter of whole cottonseed. Whole cottonseed is widely considered one of the most complete supplementary feeds for ruminants. Importing countries use cottonseed for both livestock feed and crushing (primarily Japan and China). Added to this, crushing costs in China are often far lower then in Australia ($22 per tonne versus $55 per tonne on a solvent extraction basis). This strong demand for the raw cottonseed both domestically (beef and dairy) and more recently to fill export markets puts limitations on cottonseed availability for crushing each year. This is particularly evident in drought years as it was used extensively in cattle maintenance rations on properties. Accordingly there was a shortfall in domestic supply of oil with less than 30 per cent of the Australian crop being crushed 2005–06. Even when cottonseed was in short supply (2007–10) the percentage crushed was 30 per cent or better. Figure 4.4 Breakdown of the Australian Cottonseed market

Source: Christian, A (2012).


This means that the price of cottonseed oil is based on an import parity market and this places a ceiling on the return on cottonseed oil domestically. Consequently if the value of the raw cottonseed in Australia pushes the cost of oil production too high then refiners and end users will switch to importing the oil. Although cottonseed oil is not traded in high volumes there are enough sources such as USA and Uzbekistan to fill the small volumes that might be required in Australia. Internationally, cotton seed oil values have followed the soybean oil market quite closely. In fact in the last three years, soybean oil and cottonseed oil prices have been almost interchangeable in the US. Figure 4.5 US Cottonseed and Soybean oil price comparison

Sources: USDA Economic Research Service (2012), Index Mundi (2012b)

Although oil markets have been volatile in the past, figure 4.5 indicates some smoothing out in volatility and importantly a rising trend in prices for both commodities from 2002 through to 2012. The past 18 months has shown a range of $1100 to $1250 per tonne which has never been seen before so consistently. Equally figure 4.5 highlights the close correlation between soybean oil and cottonseed oil, accordingly soybean oil price can be used as a reliable indicator for cottonseed oil. Given the recent trading history of the A$ and US$ it will be assumed that parity between the two currencies will continue to exist in the near future and this will be used as the basis for price conversion for this study. Figure 4.6 below indicates a five year price range of $850–$1250 per tonne quoted in A$ at port in the US Gulf of Mexico.

US Vegetable oil prices for the last 10 years

0

250

500

750

1000

1250

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2250

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11

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1

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12

Jun-

12

Time Period

Price

US $

/ton

Soybean oil

Cottonseed oil


Figure 4.6 International vegetable oil pricing using soybean oil as a surrogate indicator, for last 5 years

Soybean oil five year monthly average converted to AUS$ (CBOT)

0.00

200.00

400.00

600.00

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Sep-0

7

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-08

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-08

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8

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12

Mar

-12

May

-12

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2

Sep-1

2

Time Period (5 years)

Pri

ce $

AU

S/t

on

Average Monthly Price Source: Index Mundi (2012b)

As outlined earlier this study will assume an import parity pricing mechanism for cottonseed oil. Therefore based on the above information this study will use a price range of $950-$1350 per tonne delivered to an Australian port. The addition of $100 per tonne on the above price range is estimated to cover Pacific Ocean shipping costs ($50–$55 per tonne from US Gulf), FOB charges and insurances. Spot pricing comparison during September 2012 from Cargill hovers around the $1250 per tonne which compares well with the soybean oil futures that were being quoted at the same time. These figures will be used as the price range for further analysis.

4.2.2 Cottonseed Oil Markets

Producers of crude vegetable oil have three choices for marketing their product. Selling the crude oil to a refiner as a bulk liquid commodity. Selling refined oil to a food manufacturer or processor as a bulk liquid commodity. Marketing the refined oil as a packaged product direct to the end user either through a

food distribution business or as direct sales.

A number of the companies that buy crude vegetable oil for refining are also specialist food manufacturers. They have a vertical integrated system where the refined crude oil is used in their own manufacturing of consumer products such as margarine, salad dressings, mayonnaise and shortening. Within the three production scenarios that this study is assessing, the marketing of crude oil and refined oil will both be tested. The crude oil value chain is quite simple, stabilised vegetable oil is sold to a refiner in tanker loads on a monthly basis. Refined vegetable oil is a little more complicated depending on the eventual end user. Some refined oil is sold in bulk to food manufacturers where as other refined oil is packaged up in smaller containers and sold directly into hospitality and food service providers for human consumption. Cottonseed oil particularly is known as the major frying oil in Australia and almost 90 per cent of it is sold in 20 litre drums to the hospitality industry. Most of the end users for cottonseed oil would purchase their oil through a food distribution company such as PFD Foods, Bidvest or JB Distributors.


The main refiners and packers of vegetable oil on the Eastern seaboard include: Peerless Foods Braybrook (Melbourne) Cargill Newcastle Goodman Fielder* (via Integro Foods) Murarrie (Brisbane), West Footscray

(Melbourne) Merel’s Foods Australia Silverwater (Sydney) Atlantic Pacific Foods Rutherford (Hunter Valley) * Goodman Fielder have since sold (Sep 2012) their Integro Foods business to Graincorp. At the same time Graincorp have also bought the Gardner Smith group of companies that includes this countries 2nd largest crusher, Riverland Oilseeds.

Of the main refiners Cargill is the only company that does not further value add into their own food products but rather market refined oil directly to food manufacturing companies. Merel’s is a specialist packaging and distribution agent for food service providers. By capacity Integro Foods is Australia’s largest refiner of vegetable oil followed by Peerless and then Cargill. When there is a shortfall in the domestic production of crude oil, it is the refiners that undertake the importation of crude oil. This is one of the reasons why most refiners have their operations located close to port facilities while crushing facilities tend to be located in the growing regions for oilseed crops. In relation to this study it will be assumed that a CQ based crusher will sell its crude cottonseed oil direct to the closest refiner as a bulk product. In this case that refiner will be Integro Foods in Brisbane (Graincorp). This will simplify the analysis as a standard freight rate can be applied from Emerald to Brisbane. For ease of analysis the refined oil will also be sold in a bulk format direct to Integro Foods in Brisbane. At least two industry sources estimated that refined oil can achieve a $150–$200 price premium over crude oil. They also estimated that refining crude oil should not cost any more than $50–$60 per tonne, thus representing up to a $140 per tonne margin. Within the analysis for this study a price premium of $150 per tonne has been built into the price for refined oil over crude oil. There is the option further down the track that a local crushing plant could move into packaging its cottonseed oil into 20 litre drums and market that direct to a food distribution company. It is unclear (and not in the scope of this report) whether there would be a substantial profit in pursuing this line of marketing. There may be a distinct freight advantage in supplying cooking oil to all the hospitality sectors located in major population centres such as Cairns, Townsville, Mackay, Whitsundays, Port Douglas, Rockhampton and Gladstone. A number of these areas also have a major tourism industry which multiplies the number of hospitality businesses operating. Freight A CQ crushing plant would endeavour to achieve the highest return for its crude and refined oil within the domestic market. Although for a CQ crush plant, price competiveness will be influenced by freight costs to southern markets. This study will incorporate the relevant freights costs into the prices achieved for cottonseed oil based on transport costs to Brisbane, being the closest refiner and food processor to CQ. The general freight charges for bulk goods to the Darling Downs are $70–$80 plus another $20 for freight over the range through Toowoomba to Brisbane. Accordingly, the freight costs used to calculate the price of crude oil at a CQ plant will be approx $100 per tonne.


4.2.3 Sunflower Oil Pricing

Sunflower oil is a commodity that is well traded around the world with the largest exporters of sunflower oil being Ukraine, Argentina and Russia. Australia is a net importer of sunflower oil to meet domestic consumption. Australia first started importing sunflower oil consistently since 1986 and has been importing over 30 000 tonnes a year for the last 10 years. Although consumption data seems to fluctuated dramatically over the past 20–25 years; in the last five years there has been more consistent consumption data that averages around 60 000 tonnes per year. Accordingly with domestic demand consistently exceeding supply there is an opportunity for additional local production, given competitive prices against global parity. Table 4.5 Production and Consumption data for Sunflower Oil in Australia

Year

Domestic seed crushing

,000 tonnes

Domestic Oil production ,000 tonnes

Domestic Oil consumption ,000 tonnes

Oil imports ,000 tonnes

2007 65 27 52 31 2008 68 28 56 34 2009 44 18 62 48 2010 41 17 54 41 2011 44 18 54 40

Source: Index Mundi (2012c)

Australian Oilseeds Federation (AOF) estimated the 2012 sunflower crop at 87 300 tonnes from just over 63 000 ha. This will be the biggest crop that Australia has produced in the last five to six years, however it will still only fulfil just over half of our domestic demand (refer Table 4.5). Australia would have to double sunflower plantings to meet domestic consumption. The other issue is that 95 per cent of the Australian sunflower crop is from high–oleic varieties (currently a higher price) and a number of products such as margarine uses polyunsaturated sunflower varieties. Thus a lot of the imported oil is polyunsaturated. Again the reliance on imported crude oil makes the Australian market driven by import parity with international pricing mechanism for vegetable oil (underpinned by soybean oil) being the main driver for the value of oil in Australia. Sunflower oil is generally considered a superior oil for human consumption compared to soybean and cottonseed oil. This is mainly due to its health characteristics (low saturated fat and high unsaturated fats) and stability as cooking oil. This has been driven by the trend in health awareness (including the shift away from saturated fats) of Australian consumers as well consumers in most other developed economies.


Figure 4.7 Nutritional breakdown of most common Fats and Oils used for human consumption

Source: Christian A. 2012

The market recognises this and pays a consistent premium for both sunflower oil and canola oil especially the high–oleic varieties. The premium for ‘healthy’ oils such as sunflower is illustrated in figure 4.8, although it has only achieved a consistent higher return since the beginning of 2009. Figure 4.8 Comparison of Sunflower Oil4 and Soybean Oil values over the last 10 years.

US Vegetable oil prices for the last 10 years

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

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11

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1

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12

Jun-

12

Time Period

Pri

ce U

S $

/ton

Soybean oil

Sunflower Oil

Source: International Monetary Fund (2012)

4 Sunflower oil as stated in all figures relating to the international pricing is referring to polyunsaturated seed oil


Although this premium does fluctuate to some extent, it does seem to centre on about a level of 30 per cent. Figure 4.9 illustrates the spread of data in ascertaining this premium. Soybean oil has been used as the main indicator for other common vegetable oil being traded around the world. Figure 4.9 Level of price premium for Sunflower Oil over Soybean Oil

Historical Premiums for Sunflower oil over Soybean oil

0

200

400

600

800

1000

1200

1400

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1800

Jan-

09

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-09

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Time period 3 years

Pri

ce (U

s $/

ton)

0%

10%

20%

30%

40%

50%

60%

70%

% p

rem

ium

over

Soy

oil

Soybean oil price

Sunflower oil price

Price premium % for Sunflower oil

Source: International Monetary Fund (2012)

Finding a reasonable price range for vegetable oils is difficult given the inherent volatility of international vegetable oil markets. The last three years have been relatively more consistent and the price range has not been as wide. The changing exchange rate also adds furthercomplexity to this pricing mechanism. Figure 4.10 presents sunflower oil prices converted into A$ for delivery at a US gulf port. Figure 4.10 International pricing of Sunflower Oil over the last three years

Historical International Sunflower Oil pricing data

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

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2,000.00

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-0

9

Nov-0

9

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10

Mar

-10

May

-10

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11

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1

Nov-1

1

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12

Mar

-12

May

-12

Jul-1

2

Time Period

Pri

ce A

US

$/ton

Monthly Price

Source: Index Mundi (2012d)


This data gives us a reasonably consistent range of prices to work with from around $1200-$1600 per tonne. Further analysis in this study will use this price range as its international benchmark. These prices are quoted on a US Gulf basis and need to be converted to import parity delivered to an Australian port. Assuming exchange rates will continue to operate at parity and allowing a $100 per tonne for FOB, sea freight and insurances, the price range for sunflower oil would be $1300–$1700 per tonne landed in an Australian port. Current quotes for sunflower oil from Cargill in August 2012 were averaging around $1450 per tonne, which fits the import parity range given and exchange rate of nearly A$1.05 at the time.

4.2.4 Sunflower oil Markets

Sunflower oil has similar supply chain characteristics as cottonseed oil with the main refiners handling a range of vegetable oils including sunflower oil. In contrast to cottonseed oil, sunflower oil is a globally tradable commodity hence the domestic price tracks quite closely to the international values. A significant threat to the sunflower oil market is the exportable surplus of Australian canola oil that is now produced annually. Additionally new high–oleic varieties of canola have now been released and grown and although it cannot be substituted in certain margarine products, it does have the similar ‘healthy’ oil characteristics to sunflower oil. To further illustrate consumer trends a large national fast food chain, (KFC), recently changed its frying oil due to the health specifications of the new oil derived from high–oleic canola varieties. This year prices for canola have been above sunflower which is unusual given that canola works off export parity as at least half the Australian crop is exported as seed. This may be a sign of things to come in the future although so far sunflower oil consumption has had modest growth over the last five years. Refined sunflower oil has a different market place to cottonseed oil in the fact the biggest end users of sunflower oil are in the manufacturing of margarine, salad dressing and shortening for baking. Therefore sunflower oil is easily traded as a bulk liquid commodity as opposed to cottonseed oil where a lot of it is sold in 20 litre containers. For the benefit of the analysis in this study, the sunflower oil produced by a plant in CQ will also be marketed to Brisbane refiner (Integro Foods) for crude oil and Brisbane based manufacturer Goodman Fielder for the refined oil. This will then standardise the freight rates for delivery of the oil. Freight Assumptions on freight costs remain the same as for cottonseed oil with the nearest refiner being in Brisbane. This will make road freight costs approximately $100 per tonne from a plant based in the Central Highlands.


5.0 Financial analysis

This chapter will step through the economic analysis of an oilseed crushing plant based in CQ for the three operating scenarios and will include an investment analysis and a sensitivity analysis. The four preceding chapters of this report have described and constructed a case for the assumptions that will be needed for this analysis. This chapter will now pull all this information together. The methodology for the analysis is premised on working backwards from setting the likely range of returns for oil and meal being produced by the plant and then deducting operating costs to get a set of potential returns. These returns then have a range of historical values paid for the raw seed deducted within a sensitivity analysis framework. The results of this sensitivity analysis will then give a complete set of potential profit margins for a crushing plant and it is this data that will provide the basis for the investment analysis and further analysis of oilseed pricing especially in relation to cropping gross margins. Figure 5.1 provides a schematic for this process. Figure 5.1 Schematic representation of financial analysis process

Set range of returns for oil and meal based on historical, domestic and international values for

each crop.

Incorporate the range of oil and meal prices into a sensitivity analysis to find a full range of

revenue returns for the crush plant on a per tonne basis.

Select a range of revenue returns for the plant and incorporate into a second sensitivity analysis against a range of values paid for the raw seed. Also deduct operating costs from the return. Use these set of returns

(or gross margins) to find a median gross margin. Use the median gross margin return for investment calculations such as Net Present Value, Internal Rate of Return and Return on capital.

Optimise raw seed price ranges to generate a set return on capital for the crush plant (what can

the plant afford to pay for the raw seed and still make a return on capital).

Utilise Sunflower raw seed values for further gross margin analysis and compare returns to competing crops

For Cottonseed compare seed prices to ginning costs and highlight net returns to growers.


5.1 Operating Returns

In chapter four, a range of prices were justified for both the oil and meal in both crops. Those figures are summarised in the two tables below. Also included in these tables is the freight rates to the mostly likely markets and these are used to bring all the prices for meal and oil back to a base value at the plant. For standardisation of calculations the freight rates are based on the crushing plant being based closed to Emerald. In Scenario III the prices for refined oil are the same as for crude oil but with $150 added to each pricing interval and there is no change to the freight component. Table 5.1 Summary of net returns to local crushing plant for Cottonseed Oil and Meal

Table 5.2 Summary of net returns to local crushing plant for Sunflower Oil and Meal

Price Ranking

Price of Meal Delivered $/tonne

Average

Freight cost to market

(SQ market) $/tonne

Net

return to Crush plant

$/tonne

Price of Oil Delivered (Import

parity Port price)

$/tonne

Freight cost

to market (Brisbane

refiner) $/tonne

Net return to crush plant

$/tonne Lowest 220 80 140 1300 100 1200 240 80 160 1350 100 1250 260 80 180 1400 100 1300 280 80 200 1450 100 1350Medium 300 80 220 1500 100 1400 320 80 240 1550 100 1450 340 80 260 1600 100 1500 360 80 280 1650 100 1550 380 80 300 1700 100 1600Highest 400 80 320 1750 100 1650

The above net returns are substituted into the following analysis tables (Table 5.3–5.7) to obtain a range of revenue results for the crush plant on a per tonne basis. These spreadsheets have two tables with the top table representing total revenue from sales of meal and oil while the second table takes a spread of revenue results from low to high and subtracts the cost of seed and the operating cost for each production scenario. The results in this second table represent the net return of the crushing plant. Also highlighted in this table is the median return for the data set and this figure will be used in later calculations.

Price Ranking

Price of Meal Delivered $/tonne

Average

Freight cost to market

(NQ market) $/tonne

Net

return to Crush plant

$/tonne

Price of Oil Delivered (Import

parity Port price)

$/tonne

Freight cost

to market (Brisbane

refiner) $/tonne

Net return to crush plant

$/tonne Lowest 280 80 200 900 100 800 300 80 220 950 100 850 320 80 240 1000 100 900 340 80 260 1050 100 950Medium 360 80 280 1100 100 1000 380 80 300 1150 100 1050 400 80 320 1200 100 1100 420 80 340 1250 100 1150 440 80 360 1300 100 1200Highest 460 80 380 1350 100 1250


The range of prices paid for the raw seed used in the following analysis are based on historical values that have been paid to growers in the current marketing system. This allows the analysis of returns for the crushing plant to do be done within current marketing circumstances. Further discussion of these seed prices and their impact on growers and the crusher will be done in a later section of this economic analysis.


Table 5.3 Summary of the net return calculations of cottonseed crushing for a plant capacity of 34 000 tonnes per annum with highlighted break-even gross margins and the median gross margin

Scenario 1. Annual Plant Capacity 34 000 tonnes

Cottonseed crushing calculations

Components of 1 tonne of seed

Oil 15% Meal Price Oil Price ($/tonne ex Plant) Meal 82% $/tonne ex Plant 800 850 900 950 1000 1050 1100 1150 1200 1250 Hulls 0% $ 120 0 200 284 292 299 307 314 322 329 337 344 352 lint 0% $ 230 0 220 300 308 315 323 330 338 345 353 360 368

Add on 0 240 317 324 332 339 347 354 362 369 377 384

260 333 341 348 356 363 371 378 386 393 401

280 350 357 365 372 380 387 395 402 410 417 300 366 374 381 389 396 404 411 419 426 434 320 382 390 397 405 412 420 427 435 442 450 340 399 406 414 421 429 436 444 451 459 466 360 415 423 430 438 445 453 460 468 475 483 380 432 439 447 454 462 469 477 484 492 499

Net Margins

Total Revenue ($/tonne of seed processed)

Cottonseed Buy Price ($/tonne Del Plant) 308 332 356 380 404 427 451 475

Crushing Cost 119.2 170 19 43 66 90 114 138 162 186 Crushing Margin 0 190 -1 23 46 70 94 118 142 166 210 -21 3 26 50 74 98 122 146

119 Subtract 230 -41 -17 6 30 54 78 102 126

250 -61 -37 -14 10 34 58 82 106

270 -81 -57 -34 -10 14 38 62 86

Median Value 32 290 -101 -77 -54 -30 -6 18 42 66

Positive Crushing Margin 310 -121 -97 -74 -50 -26 -2 22 46


Table 5.4 Summary of the net return calculations of sunflower seed crushing for a plant capacity of 34 000 tonnes per annum with highlighted break-even gross margins and the median gross margin

Scenario 1. Annual Plant Capacity 34,000 tons Sensitivity Analysis for Sunflower Value

Components of 1 ton of seed

Oil 33% Oil Price ($/ton ex Plant)

Meal 65%

Meal Price ($/ton ex Plant) 1200 1250 1300 1350 1400 1450 1500 1550 1600 1650

Hulls 0% $ 90 0 140 487 504 520 537 553 570 586 603 619 636 lint $ 230 0 160 500 517 533 550 566 583 599 616 632 649

Add on 0 180 513 530 546 563 579 596 612 629 645 662

200 526 543 559 576 592 609 625 642 658 675

220 539 556 572 589 605 622 638 655 671 688 240 552 569 585 602 618 635 651 668 684 701 260 565 582 598 615 631 648 664 681 697 714 280 578 595 611 628 644 661 677 694 710 727 300 591 608 624 641 657 674 690 707 723 740 320 604 621 637 654 670 687 703 720 736 753

Net Margins

Total Revenue ($/ton of seed processed)

Sunflower Buy Price ($/ton Del Plant) 517 546 576 605 635 664 694 723

Crushing Cost $ 119.2 390 7 37 66 96 125 155 184 214 Crushing Margin $ - 420 -23 7 36 66 95 125 154 184 450 -53 -23 6 36 65 95 124 154

119 subtract 480 -83 -53 -24 6 35 65 94 124

510 -113 -83 -54 -24 5 35 64 94

540 -143 -113 -84 -54 -25 5 34 64

Median Value 5 570 -173 -143 -114 -84 -55 -25 4 34

Positive Crushing Margin 600 -203 -173 -144 -114 -85 -55 -26 4


Table 5.5 Summary of the net return calculations of cottonseed crushing for a plant capacity of 64 000 tonnes per annum with highlighted break-even gross margins and the median gross margin

Scenario 2. Annual Plant Capacity 64 000 tonnes

Cottonseed crushing calculations


Oil 15% Meal Price Oil Price ($/tonne ex Plant) Meal 82% $/tonne ex Plant 800 850 900 950 1000 1050 1100 1150 1200 1250 Hulls 0% $ 120 0 200 284 292 299 307 314 322 329 337 344 352 lint 0% $ 230 0 220 300 308 315 323 330 338 345 353 360 368

Add on 0 240 317 324 332 339 347 354 362 369 377 384

260 333 341 348 356 363 371 378 386 393 401

280 350 357 365 372 380 387 395 402 410 417 300 366 374 381 389 396 404 411 419 426 434 320 382 390 397 405 412 420 427 435 442 450 340 399 406 414 421 429 436 444 451 459 466 360 415 423 430 438 445 453 460 468 475 483 380 432 439 447 454 462 469 477 484 492 499

Net Margins



Crushing Cost 94.1 170 44 68 92 116 139 163 187 211 Crushing Margin 0 190 24 48 72 96 119 143 167 191 210 4 28 52 76 99 123 147 171

94 Subtract 230 -16 8 32 56 79 103 127 151

250 -36 -12 12 36 59 83 107 131

270 -56 -32 -8 16 39 63 87 111

Median Value 57 290 -76 -52 -28 -4 19 43 67 91

Positive Crushing Margin 310 -96 -72 -48 -24 -1 23 47 71


Table 5.6 Summary of the net return calculations of sunflower seed crushing for a plant capacity of 64 000 tonnes per annum with highlighted break-even gross margins and the median gross margin

Scenario 2. Annual Plant Capacity 64,000 tons Sensitivity Analysis for Sunflower Value



Meal 65%


Hulls 0% $ 90 0 140 487 504 520 537 553 570 586 603 619 636 lint $ 230 0 160 500 517 533 550 566 583 599 616 632 649

Add on 0 180 513 530 546 563 579 596 612 629 645 662

200 526 543 559 576 592 609 625 642 658 675

220 539 556 572 589 605 622 638 655 671 688 240 552 569 585 602 618 635 651 668 684 701 260 565 582 598 615 631 648 664 681 697 714 280 578 595 611 628 644 661 677 694 710 727 300 591 608 624 641 657 674 690 707 723 740 320 604 621 637 654 670 687 703 720 736 753

Net Margins



Crushing Cost $ 94.1 390 32 62 91 121 150 180 209 239 Crushing Margin $ - 420 2 32 61 91 120 150 179 209 450 -28 2 31 61 90 120 149 179

94 subtract 480 -58 -28 1 31 60 90 119 149

510 -88 -58 -29 1 30 60 89 119

540 -118 -88 -59 -29 0 30 59 89

Median Value 30 570 -148 -118 -89 -59 -30 0 29 59

Positive Crushing Margin 600 -178 -148 -119 -89 -60 -30 -1 29


Table 5.7 Summary of the net return calculations of cottonseed crushing for a plant capacity of 64 000 tonnes per annum plus oil refining with highlighted break-even gross margins and the median gross margin

Scenario 3. Annual Plant Capacity 64 000 tonnes fully Refined Cottonseed crushing calculations


Oil 15% Meal Price Refined Oil Price ($/tonne ex Plant) Meal 82% $/tonne ex Plant 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 Hulls 0% $ 120 0 200 307 314 322 329 337 344 352 359 367 374 lint 0% $ 230 0 220 323 330 338 345 353 360 368 375 383 390

Add on 0 240 339 347 354 362 369 377 384 392 399 407

260 356 363 371 378 386 393 401 408 416 423

280 372 380 387 395 402 410 417 425 432 440 300 389 396 404 411 419 426 434 441 449 456 320 405 412 420 427 435 442 450 457 465 472 340 421 429 436 444 451 459 466 474 481 489 360 438 445 453 460 468 475 483 490 498 505 380 454 462 469 477 484 492 499 507 514 522

Net Margins



Crushing Cost 108.7 170 52 76 100 123 147 171 195 219 Crushing Margin 0 190 32 56 80 103 127 151 175 199 210 12 36 60 83 107 131 155 179

109 Subtract 230 -8 16 40 63 87 111 135 159

250 -28 -4 20 43 67 91 115 139

270 -48 -24 0 23 47 71 95 119

Median Value 65 290 -68 -44 -20 3 27 51 75 99

Positive Gross Margin 310 -88 -64 -40 -17 7 31 55 79


Table 5.8 Summary of the net return calculations of sunflower seed crushing for a plant capacity of 64 000 tonnes per annum plus oil refining with highlighted break-even gross margins and the median gross margin

Scenario 3. Annual Plant Capacity 64,000 tons Fully Refined

Sensitivity Analysis for Sunflower Value



Meal 65%


Hulls 0% $ 90 0 140 537 553 570 586 603 619 636 652 669 685 lint $ 230 0 160 550 566 583 599 616 632 649 665 682 698

Add on 0 180 563 579 596 612 629 645 662 678 695 711

200 576 592 609 625 642 658 675 691 708 724

220 589 605 622 638 655 671 688 704 721 737 240 602 618 635 651 668 684 701 717 734 750 260 615 631 648 664 681 697 714 730 747 763 280 628 644 661 677 694 710 727 743 760 776 300 641 657 674 690 707 723 740 756 773 789 320 654 670 687 703 720 736 753 769 786 802

Net Margins



Crushing Cost $ 108.7 390 67 97 126 156 185 215 244 274 Crushing Margin $ - 420 37 67 96 126 155 185 214 244 450 7 37 66 96 125 155 184 214

109 subtract 480 -23 7 36 66 95 125 154 184

510 -53 -23 6 36 65 95 124 154

540 -83 -53 -24 6 35 65 94 124

Median Value 65 570 -113 -83 -54 -24 5 35 64 94

Positive Crushing Margin 600 -143 -113 -84 -54 -25 5 34 64


The previous six tables give a broad range of results for the earning potential for each commodity in each production scenario. To narrow down the results, each table has given the median return for each commodity and each scenario; this means from the full range of results this number represents the result that is exactly half way between the worst performance and the best performance of a crushing plant. The next table uses these median values to calculate the net earnings of the crush plant, the average return per tonne of crushed seed and the return on capital from these earnings. Table 5.9 also includes a summary of plant returns under gross margin levels that are 20 percent over and under the median return level. In other words, using the gross margins that represent the 30th and 70th percentile in each data set. The capital values have been taken from chapter three. Table 5.9 Summary of Plant returns at three different levels of potential revenue

Assessed Revenue

Level Production Scenario

Cottonseed GM return per ton

Cottonseed tonnage

Total Cottonseed returns

Sunflower GM return per ton

Sunflower tonnage

Total Sunflower returns

Total Plant Revenue

Capital Costs Return

on Capital

Capacity (tons)

Avg Plant return per ton

Scenario 1 - 34000 tons $ 32.0 23000 $ 736,000 $ 5.0 11000 $ 55,000 $ 791,000 $ 12,223,475 6% 34000 $ 23.3

Scenario 2 - 64000 tons $ 57.0 46000 $ 2,622,000 $ 30.0 18000 $ 540,000 $ 3,162,000 $ 18,532,388 17% 64000 $ 49.4 50th percentile - median Scenario 3 - 64000 tons plus full refining $ 65.0 46000 $ 2,990,000 $ 65.0 18000 $ 1,170,000 $ 4,160,000 $ 26,554,688 16% 64000 $ 65.0

Scenario 1 - 34000 tons $ (29) 23000 $ (670,459) $ (78) 11000 $ (855,694) $ (1,526,154) $ 12,223,475 -12% 34000 $ (44.9)

Scenario 2 - 64000 tons $ (4) 46000 $ (182,461) $ (53) 18000 $ (946,918) $ (1,129,379) $ 18,532,388 -6% 64000 $ (17.6) 30th percentile - Low level Scenario 3 - 64000 tons plus full refining $ 4 46000 $ 178,949 $ (18) 18000 $ (319,496) $ (140,547) $ 26,554,688 -1% 64000 $ (2.2)

Scenario 1 - 34000 tons $ 94 23000 $ 2,156,701 $ 89 11000 $ 976,906 $ 3,133,606 $ 12,223,475 26% 34000 $ 92.2

Scenario 2 - 64000 tons $ 119 46000 $ 5,471,859 $ 114 18000 $ 2,051,882 $ 7,523,741 $ 18,532,388 41% 64000 $ 117.6 70th percentile - High level Scenario 3 - 64000 tons plus full refining $ 127 46000 $ 5,833,269 $ 149 18000 $ 2,679,304 $ 8,512,573 $ 26,554,688 32% 64000 $ 133.0

Table 5.9 illustrates that none of the three proposed operating scenarios can generate a profit when revenues are in the bottom 30 per cent of the gross margin range. All three scenarios can operate profitably at the median gross margin level but the smaller plant can only generate a six per cent return on capital. All three scenarios are very profitable when pricing is at or above the 70 per cent of the assessed range, with return on capital exceeding 20 per cent in all production scenarios. It is also clear from the table that there is a marked difference between cottonseed and sunflower seed. At the median gross margin level on a small operating plant, sunflowers make a small return of $55,000 while on the larger operation it still only generates a modest $540,000. In both these cases cottonseed production makes a significantly larger contribution ($736,000 and $2,622,000) which inturn lifts the average return per ton for the whole plant. This would point to the fact that a crushing plant based only on sunflower production would never be sustainable unless tonnages could be increased dramatically. It is also worth noting, from the median return level, that although the addition of the refining plant does improve the average return per tonne of seed processed by over 25 per cent, the return on capital is slightly lower then scenario II.


Overall the data in table 5.9 would suggest that in the good years when market prices can generate a return that is 20 per cent above the median level (70th percentile), the plant can generate enough income to cover the bad years when market prices are generating returns 20 per cent under the median levels (30th percentile). This is a lot like many agricultural businesses where operators rely on the good years making up for the bad years and still generate a positive return over a 10 or 20 year period. The other point that could be made is that the smaller crushing plant is a lot more vulnerable to changes in the market place then the larger plants and its ability to cover the bad years is not as good as the larger plants. All of this data is based on the assumption that the crushing plant is operating at full capacity and the only variable being assessed is the changes in market values. The other big variable for any crushing plant is the seasonal influences on production of seed and how many years will the plant be operating below full capacity. By way of example Table 5.10 shows a summary of potential returns when seed production is reduced by 30 per cent within a median gross margin level. Table 5.10 Summary of plant returns from a median gross margin level when seed production is reduced by 30 per cent

Assessed Revenue

Level

Production Scenario

Cottonseed GM return per

tonne $

Cottonseed tonnage

Total Cottonseed

returns $

Sunflower GM return per tonne

Sunflower tonnage

Total Sunflower

returns $

Total Plant Revenue

$

Capital Costs

$

Return on

Capital %

Capacity (tonnes)

Avg Plant return per

tonne $

Scenario 1 – 34 000 tonnes $ 2.0 16100 $ 32,200 $ (25.0) 7700 $ (192,500) $ (160,300) $12,223,475 -1% 23800 $ (6.7) Scenario 2 – 64 000 tonnes $ 35.0 32200 $ 1,127,000 $ 8.0 12600 $ 100,800 $ 1,227,800 $18,532,388 7% 44800 $ 27.4

50% - median

Scenario 3 – 64 000 tonnes plus full refining $ 38.0 32200 $ 1,223,600 $ 38.0 12600 $ 478,800 $ 1,702,400 $26,554,688 6% 44800 $ 38.0

There is a double impact when seed production is reduced since not only is there less revenue from less tonnes going through the plant but the cost to process each tonne increases so the gross margin is also reduced. The above table demonstrates the impact of a reduced tonnage on the overall average return per tonne processed and the return on capital. Scenario II and scenario III show some resilience in capacity as they still manage to make a positive return to the plant even with a 30% cut to production (7% and 6%). The smaller plant in Scenario I makes a small loss which would indicate this would be close to a break even tonnage for scenario I and further demonstrates the vulnerability of a smaller plant. Further analysis that was done within this framework has indicated that scenario II and scenario III would have a breakeven tonnage of about 50% of capacity. A breakeven summary would be: Scenario I – 70% of capacity, 23,800 tonnes total. (16100 tonnes of cottonseed and 7700 tonnes of sunflower) Scenario II - 50% of capacity, 32,000 tonnes total. (23,000 tonnes of cottonseed and 9000 tonnes of sunflower) Scenario III - 50% of capacity, 32,000 tonnes total. (23,000 tonnes of cottonseed and 9000 tonnes of sunflower)


5.2 Investment Analysis

This investment analysis will utilise the data already presented in this study in relation to capital costs and cash flow based on the likely revenue derived from the gross margin of each operating scenario (refer Table 5.9). The investment analysis is assessed by calculations to determine the Net Present Value (NPV), Internal Rate of Return (IRR), Benefit Cost Ratio (BCR) and the Payback Period for each operating scenario under high, low and median revenue (cash flow levels).

NPV – This is the most important of all the investment criteria used to assess these operating scenarios. The NPV is a way of converting all the estimated cash flows for each year of the investment period into a present dollar value through a discount rate that is set to account for weighted cost of capital. If the NPV is a positive number after the investment period is completed then the project is considered to be economically viable. If the NPV is negative then the project is considered to be not economically viable.

IRR – The internal rate of return is very similar to a return on capital if all the annual cash flows are the same (which they are for this assessment). Malcolm et al (2005) describe the IRR as the rate of return on capital invested in a project over the life of an investment. The term internal means that it does not take into account bank interest or inflation.

BCR – The benefit cost ratio is really only relevant when there is a positive NPV. This ratio is based on what the dollar return is for each dollar invested over the life of the investment. When the NPV is negative then the BCR will be less than one which means for each dollar invested there is less than a dollar return over the life of the investment.

Payback Period – Payback period relates to the number of years of discounted cash flows it takes to payback the original capital invested. Similar to BCR the payback period is really only relevant if the NPV is positive. If the NPV is negative then this would indicated that the sum of all the discounted cash flows for the investment period have not exceeded the original capital invested.

The discount rate used in the NPV calculations is based on a combination of the inflation rate and the commercial interest rate on capital. In this case a maximum commercial lending rate of nine per cent has been used (Canstar 2013) along with a maximum inflation rate of three per cent (Reserve Bank of Australia target maximum for CPI). Therefore the discount rate used for NPV calculations will be 12 per cent. Table 5.11 summarises the results of the investment analysis completed for this study. The table shows what the investment outcomes are for each production scenario under three different cash flow (revenue) projections. These cash flow projections are based on a median gross margin level derived from the sensitivity analysis in tables 5.3–5.8 and a high and low revenue stream based on the 30th percentile and 70th percentile of these gross margin data sets. This 20 per cent difference from the median is calculated from the whole range of gross margins that have been generated from the sensitivity analysis in tables 5.3–5.8. For example if the total gross margin range goes from -$158 to $259 and the median level is $51, then the -20 per cent level (30 per cent of total range) will be -$33 and +20 per cent level (70 per cent of total range) will be $135.

The calculations used in the investment analysis have assumed that the salvage value for the crushing plant would be zero after 20 years. This is because a crushing plant has a lot of wearing parts and therefore has a defined working life; also because of the small nature of


the crushing industry in Australia it would be very difficult to find a market for any used parts from the crushing plant after 20 years of operation. Table 5.11 Summary of Investment Analysis for three revenue levels

Investment Period 20 years

Calculated Revenue level

Production Scenario

Net return

per tonne $ Capital cost $

Discount Rate

% NPV $ IRR % Benefit:

Cost ratio Payback Period

Scenario I 23 $ (12,223,474) 12% $ (6,315,144) 3% 0.48 n/a

Scenario II 49 $ (18,532,387) 12% $ 5,085,994 16% 1.27 11

Median revenue levels or 50th

percentile Scenario III 65 $ (26,554,687) 12% $ 4,518,199 15% 1.17 13

Scenario I (45) $ (12,223,474) 12% $ (23,622,993) n/a -0.93 n/a

Scenario II (18) $ (18,532,387) 12% $ (26,968,222) n/a -0.46 n/a

(-20%) median revenue level or 30th percentile

Scenario III (2) $ (26,554,687) 12% $ (27,604,497) n/a -0.04 n/a

Scenario I 92 $ (12,223,474) 12% $ 11,182,821 25% 1.91 6

Scenario II 118 $ (18,532,387) 12% $ 37,665,770 41% 3.03 4

(+20%) median revenue level or 70th percentile

Scenario III 133 $ (26,554,687) 12% $ 37,029,495 32% 2.39 5

Once again the investment analysis has shown that at the median gross margin level the larger crushing plant has a far more positive return then a smaller one. The analysis would suggest that the smaller plant would struggle to pay back the original investment. The data in Table 5.11 would also suggest that the revenue streams for the crushing plants are quite marginal as at the 30th percentile, the gross margin per tonne has made all production scenarios unsustainable from an NPV perspective. This is not surprising given that all production scenarios are making negative gross margins per tonne. At the 70th percentile, the increase in gross margins has a huge impact on the size of the NPV and the internal rate of return and reduces the payback period to less than 10 years in all scenarios. This is worth noting for future assessment and in the likelihood of international markets increasing their demand for vegetable oils it would give rise to an increase in the value of oils. Overall this data would indicate that a crushing plant with a capacity of 64 000 tonnes would be economically sustainable given the plant could generate median level gross margins as indicated in the table below. As with all agricultural enterprises there is a degree of risk involved with the investment as a drop of 20 per cent in gross margin at full capacity would make the investment unviable. It is worth noting there is little advantage in developing refining capacity in terms of investment returns, however under low revenue conditions the addition of the refining plant has minimised the losses significantly with this scenario going close to breaking even on a gross margin per tonne basis.

5.3 Grower returns

5.3.1 Seed Prices

The price ranges paid for seed in the sensitivity analysis in Tables 5.3–5.8 were based on a range of historical values paid under current marketing arrangements (delivered to Cargill in Newcastle). The range of $390–$600 as price delivered to a local plant is equivalent to a $525–$735 price range delivered Newcastle. This allows for a $15 per tonne freight charge to a local plant from farm and then a $150 per tonne freight charge direct to Newcastle from farm. Overall it is an adjustment of $135 per tonne from those values presented in Tables 5.3–5.8.

Within these tables (5.3-5.8) there was no allowance for a crushing margin (capital return or profit); the data was presented as 64 potential gross margins with the highlighted options


delivering an above breakeven margin. By adding in a 10 per cent crushing margin on top of the crushing cost, changes the number of potential results that can deliver a positive gross margin. This is illustrated below in Table 5.12 and 5.13 where the change in positive returns from breakeven to delivering a 10 per cent return on capital on sunflower crushing in Scenario I is demonstrated. Table 5.12 Margin on sunflower production on a breakeven analysis for Scenario I

Total Revenue ($/ton of seed processed) Sunflower Buy Price ($/ton Del Plant) 517 546 576 605 635 664 694 723

390 7 37 66 96 125 155 184 214 420 -23 7 36 66 95 125 154 184 450 -53 -23 6 36 65 95 124 154

480 -83 -53 -24 6 35 65 94 124 510 -113 -83 -54 -24 5 35 64 94

540 -143 -113 -84 -54 -25 5 34 64 570 -173 -143 -114 -84 -55 -25 4 34 600 -203 -173 -144 -114 -85 -55 -26 4 Table 5.13 Margin on sunflower crushing after a crushing margin of $36 per tonne has been subtracted (equivalent to a 10 per cent return on the capital value of this plant) for Scenario I


390 -29 1 30 60 89 119 148 178 420 -59 -29 0 30 59 89 118 148 450 -89 -59 -30 0 29 59 88 118 480 -119 -89 -60 -30 -1 29 58 88 510 -149 -119 -90 -60 -31 -1 28 58 540 -179 -149 -120 -90 -61 -31 -2 28 570 -209 -179 -150 -120 -91 -61 -32 -2 600 -239 -209 -180 -150 -121 -91 -62 -32 These two tables illustrate that by keeping the seed price range consistent the number of positive gross margins generated by a crushing plant reduces from about 56 per cent of the total set to 32 per cent when a 10 per cent crushing margin is added into the cost. This would indicate that the price range paid for seed in this production scenario is too high. A more appropriate level of seed price would be when the number of positive gross margins approaches 50 per cent of all the potential outcomes. The next table illustrates this concept by reducing the price range to a point where every seed price can have a positive return within the current range of oil and meal revenue.


Table 5.14 Margin on sunflower crushing after a crushing margin of $36 per tonne has been subtracted (equivalent to a 10 per cent return on the capital value of this plant) for Scenario I and all seed pricing can be matched to a positive gross margin.


355 6 36 65 95 124 154 183 213 385 -24 6 35 65 94 124 153 183 415 -54 -24 5 35 64 94 123 153 445 -84 -54 -25 5 34 64 93 123 475 -114 -84 -55 -25 4 34 63 93 505 -144 -114 -85 -55 -26 4 33 63 535 -174 -144 -115 -85 -56 -26 3 33 565 -204 -174 -145 -115 -86 -56 -27 3 This table illustrates a more appropriate price paid for seed which will allow for the number of gross margins to approach nearly 50 per cent of the data set. This means that the crushing plant can deliver a positive gross margin with a 10 per cent return on capital at every pricing level as long as revenue for oil and meal can justify it. This price range would represent the equivalent of $490–$700 price range delivered in Newcastle. By following this same process through for each commodity within each production scenario an appropriate price range paid by a local crushing plant for the raw seed can be calculated. The following table summarises the findings of this process for each production scenario. Table 5.15 Summary of calculated price ranges that could be paid by a local crushing plant for the raw seed whereby the plant has the potential to make a positive gross margin at each price level

Production Scenario

Commodity

Calculated Price Range at Plant - $

Equivalent Newcastle Price - $

Cottonseed 150–304Scenario I – 34 000 tonnes Sunflower 355–565 490–700

Cottonseed 180–334Scenario II – 64 000 tonnes Sunflower 390–600 525–735

Cottonseed 180–334Scenario III – plus refining Sunflower 410–620 545–755

The data contained in Table 5.15 illustrates that the capacity for a small plant to deliver a premium price to oilseed growers is quite restricted, especially in relation to sunflower production where that price would be considered lower than current marketing arrangements. The larger capacity plant has the ability to deliver a better price range for both cottonseed ($30 per tonne) and sunflowers ($35 per tonne). However, the sunflower price range would only be considered on a par with current marketing arrangements. Interesting in Scenario III the refining plant has a much larger benefit to sunflowers than it does to cottonseed. The cottonseed price range does not change from Scenario II to III but with the sunflower production there is a clear $20 per tonne premium for the price of sunflower seed. This is possibly attributable to the fact that sunflower produces a lot more oil then cottonseed does and therefore the advantage of refining the oil plays a larger role in sunflower seed value.


5.3.2 Further analysis of Oilseed Grower Returns

A. Sunflower Based on the calculations summarised in Table 5.15 in the previous section, the best price range for sunflower seed came from Scenario III was $410–$620 per tonne. This is approximately a $20 premium over the current marketing situation and it is worth seeing what this $20 premium can do for the oilseed producer. To put these prices into perspective it is worth relating it to a common sunflower gross margin for CQ. In Appendix 11.1 a typical sunflower gross margin for CQ has been established. The resulting sensitivity analysis from this gross margin has been documented in the next table. Table 5.16 Sensitivity analysis for dryland sunflower

Expected On-farm Expected Yield (t/ha) Price ($/t) 0.56 0.64 0.72 0.80 0.88 0.96 1.04

$405 $3 $35 $67 $100 $132 $165 $197 $435 $19 $54 $89 $124 $159 $193 $228 $465 $36 $73 $111 $148 $185 $222 $259 $495 $53 $93 $132 $172 $211 $251 $291 $525 $70 $112 $154 $196 $238 $280 $322 $555 $87 $131 $175 $220 $264 $309 $353 $585 $103 $150 $197 $244 $291 $337 $384

The expected on–farm price in this sensitivity analysis represents the crushing plant price range outlined previously, minus a $15 freight charge and the industry grain levy as quoted in the gross margin table. At an average yield of 0.8 tonnes per ha (standard industry yield for CQ) the gross margin ranges from $100–$244 per ha. These gross margins do not seem to be particularly high for a dryland crop; however the best way to relate these figures is to compare them to the other dryland crops that can be grown under the same circumstances. Table 5.17 compares the crops sorghum, maize, mungbeans and chickpeas to the current gross margin for sunflowers based on an equivalent yield potential (i.e. same growing conditions and stored moisture). Chickpeas have been included in this analysis, since in a number of circumstances with sunflowers late planting window and with chickpeas early planting window, a number of growers choose to conserve their moisture and seek a chickpea crop instead of planting sunflowers on an existing moisture profile. Prices have been selected as a mid range value so that the gross margin can be compared appropriately to the sunflower gross margin. It is worth noting again that the sunflower price represents a mid range price that could be paid by a Scenario III crushing plant which will deliver a $20 premium per tonne over above the current marketing values.


Table 5.17 Comparison of Sunflower gross margins against the main competing crops under average yield conditions and medium base prices

Maize Mungbean Sorghum Sunflower Chickpea

Gross income

Price Quote (Port/Depot/Plant) $220 $720 $200 $515 $480 On-farm price ($/t) $169 $537 $148 $495 $426 Yield (t/ha) 2.20 0.80 2.50 0.80 1.50 Gross income ($/ha) $371 $429 $371 $396 $638 Variable costs Machinery Operations $21 $17 $21 $12 $17 Fallow spraying $15 $16 $16 $15 $20 Seed $88 $38 $24 $40 $70 Fertiliser $36 $24 $36 $24 $24 Herbicide $26 $50 $42 $47 $17 Insecticide $0 $44 $28 $19 $47 Fungicide $0 $0 $0 $0 $12 Growth regulant Aerial spraying $33 $17 $17 $33 Scouting $8 $8 Casual labour Chipping Insurance Pre-harvest spray $11 $8 Harvesting $54 $69 $39 $52 $58

Total variable costs $240 $310 $231 $224 $304

Gross margin ($/ha) $131 $119 $140 $172 $334 Source: DAFFQ Internal data developed in 2004 for Southern Queensland. Updated in 2010 for Central Queensland

The previous table demonstrates that sunflower returns sit between sorghum and chickpeas when using the mid range prices for these commodities. The next step is to compare the full pricing potential for sunflowers with the full pricing potential for these alternative crops. To do this, prices have been graded into pricing scenarios from one to five with three being the middle of the range as shown in the previous table. Table 5.18 below shows for each crop the pricing for each numbered ranking. All prices are quoted as a depot price equivalent. Table 5.18 Categorisation of price ranges for Sunflower and its competing crops.

Price Scenario for each crop, 1=lowest, 5=highest (Price $/tonne Del Port/Plant)

Crops to compare

1 2 3 4 5 Sunflower 415 465 515 565 615 Sorghum 160 180 200 220 240 Maize 180 200 220 240 260 Mungbeans 600 660 720 780 840 Chickpeas 400 440 480 520 560

The above pricing scenarios are incorporated into the standardised gross margins as shown in Table 5.17. The only variable that is changed is price; all other costs are kept the same as are all the comparative yields are also kept the same. The price increments have been worked out by taking the total expected price range and the middle pricing point for each commodity; and dividing it evenly into two equal increments above and below the middle pricing point. The resulting gross margins are summarised in Table 5.19


Table 5.19 Comparison of gross margins across a range of pricing scenarios

Pricing Scenarios (1-Low, 5-High) Crop

Del Price vs. GM 1 2 3 4 5

Price $/tonne 415 465 515 565 615 Sunflower GM $/ha 85 124 172 203 243 Price $/tonne 160 180 200 220 240

Sorghum GM $/ha 41 91 140 190 239 Price $/tonne 180 200 220 240 260

Maize GM $/ha 44 88 131 176 219 Price $/tonne 600 660 720 780 840

Mungbeans GM $/ha 34 77 119 162 205 Price $/tonne 400 440 480 520 560

Chickpeas GM $/ha 216 275 334 394 453

The results from Table 5.19 of changing gross margin from altering price levels is more easily compared in the following graph. Figure 5.2 Graphical representation of the data contained in Table 5.19

Comparitive Gross Margins for Dryland grain crops at average yields.

0

50

100

150

200

250

300

350

400

450

500

1 2 3 4 5

Pricing Scenario (1=low,5=high)

Gro

ss M

arg

in (

$/h

a)

Sunflower

Sorghum

Maize

Mungbeans

Chickpeas

The above graph illustrates the changing dynamic between competing crops when prices change. The decision whether to plant one crop or the other is often made on a range of management issues. However the gross margin results are always a big factor in planting decisions. The above graph illustrates that sorghum has a less competitive gross margin at the low pricing scale but then becomes more equitable with sunflower at the higher pricing scenario. The relative yield for grain crops such as sorghum and maize has a multiplying factor on the price that is much higher than for sunflower; for instance sorghum at 2.5 tonne per ha versus sunflower 0.8 tonne per ha. Therefore within each price increment sorghum gets multiplied 2.5 times where as sunflower is multiplied by less than one.


The data in Figure 5.2 would suggest that sunflower being crushed and refined by a local plant has superior returns than sorghum, maize and mungbeans when prices for those commodities are at historical lows. It is also evident from this data that all three of these crops become more competitive with sunflowers at the high end of the price range. It would seem that the premium paid by a local crushing plant could in fact make sunflower a more competitive crop to sorghum on pure gross margin basis. This would demonstrate that when both sorghum and sunflower are at low values then the gross margin generated by sunflower is higher. This previous season has been a good example of this when sorghum was down to $170 per tonne at port, a number of growers decided to plant sunflowers and reduce their area of sorghum because the sunflower gross margin was better even though sunflower prices were also historically low. Chickpeas demonstrate a clear advantage in the gross margin comparison over sunflowers however there are a number of production risks associated with this crop, which is why historically it has never become a mainstream crop like sorghum and wheat. The risk for planting chickpeas instead of sunflowers is that; it is a winter crop and the grower will need to conserve the soil moisture profile for up to two months from a sunflower planting opportunity. Although deep planting has overcome some of this risk it still means the grower is at the mercy of highly variable weather conditions in March and April to get a chickpea crop planted. B. Cottonseed Based on the calculations summarised in Table 5.15 in the previous section, the best price range for cottonseed came from both Scenario II and Scenario III which was $180–$334 per tonne. This would seem to be a competitive range for cottonseed given industry feedback on historical average prices. The value of cottonseed last season was historically low with reported prices being in the range of $150–$190 per tonne in Central Queensland. In relation to cotton growers the price paid for the seed has not been a major priority as they make most of their money out of the cotton fibre. Most growers would consider it a bonus if the value of their cottonseed would cover their ginning costs. In most cases growers will sell their seed to the gin as payment or part payment of their ginning costs. For a local crushing plant most of the cottonseed purchased would be contracted directly from the gins. Cotton gins would be looking to sell their cottonseed to end users who are as close to the gin as possible. In CQ the major markets for raw cottonseed is the Atherton Tablelands dairy industry, local feedlots and the balance to a mixture of feedstock processing and extensive grazing operations. Best industry estimates would split the markets into thirds with one third going to the northern dairies, another third to feedlotting and the remaining to the processing and grazing sectors. To put this expected price range into perspective it is worth detailing the cost of ginning and where the breakeven point is where growers achieve a return for their seed. Ginning costs are between $65–$70 per bale. Yield of cottonseed averages between 275–285 kg per bale. Cost to breakeven with ginning costs is from $236–$245 per tonne of seed. These breakeven values for ginning costs compare well with the expected range of seed prices that a local crushing plant could pay. At the top end of the price range growers could expect an extra $89 per tonne of seed which would relate to an extra $25 per bale over and above ginning costs. This would amount to an extra income for the grower of $225 per ha.


At the lower end of the price range, growers have a $56 deficit per tonne of seed which would relate to about a $15 per bale deficit in their cost of ginning. Overall it would seem there is more upside in the price range that could be paid for cottonseed from a local crushing plant. Discussions with key staff from the gins indicated that $300 per tonne for cottonseed would be very competitive in the market place and in most seasons would secure a significant share of the local cottonseed market. A number of the competitors for cottonseed may well be able to replace their use of cottonseed with meal generated by the crushing plant.


6.0 Discussion of analysis

6.1 Outcomes for Investors

The data produced in chapter five would indicate that there is strong case for investment in the Scenario II and Scenario III production plants under median expectations for revenue and a 20 year investment period. Between these production proposals, Scenario II was slightly better although there are advantages to both sides. Those advantages were: Scenario II has the highest, positive NPV ($5,085,994) and the highest IRR (16 per cent). Scenario II has the highest return on capital (17 per cent) and the best BCR (1.27) which

means for every four dollars spent you get five dollars in return at the end of the investment period.

Scenario II also had the shortest payback period of 11 years. Scenario II and III demonstrated some resilience by being able to breakeven with only 50

per cent of productive capacity being utilised. Scenario II and III could not make a positive NPV under 20 per cent reduction in cash

flow projections. However Scenario III was very close to a breakeven gross margin under a 20 per cent reduction in cash flow which demonstrates that refining will add more resilience to the project.

All these points would indicate a strong case for investment in a crushing plant with 64 000 tonne capacity or better. However, this production scenario relies heavily on the use of cottonseed and gaining access to 46 000 tonnes of cottonseed per year. Cottonseed always seems to have the strongest gross margin in all the production scenarios studied and this, added to a larger number of tonnes available, means this plant capacity could not be successful without cottonseed playing the major role. It is assumed that an investment in a local crushing plant is most likely to come from a company or individuals that are already involved in the oilseed crushing industry. The investment in a CQ plant would support an existing oilseed processor to expand their geographical base where they can draw product and tap into markets they had not previously had access to. The management of a crushing facility does require some specialist knowledge and skills and this could be provided by an existing processor. An existing processor would also have well established industry networks and marketing contacts that would be required for the establishment of what would essentially be a green field site project.

6.2 Outcomes for Growers

6.2.1 Sunflowers

The initial concept for completing this pre-feasibility study on an oilseed crushing facility was to identify if extra value could be extracted for CQ oilseed growers. The analysis in chapter five has showed the range of potential returns for sunflower growers, based on what a local crushing plant could afford to pay and still maintain a crushing margin that delivered a 10 per cent return on capital. The price range for all scenarios was not a lot different to the current marketing arrangements. The lower end of the price ranges was certainly no better than early marketing regimes however, the upper end of the price ranges were more lucrative than what has historically been paid for CQ sunflowers.


Of all the production scenarios analysed, Scenario III offered the best range of $410–$620 which is a $20 premium over Scenario II and a $55 premium over Scenario I. The values used in Scenario II are a good representation of what can be paid historically for sunflowers. This would indicate that Scenario III offered farmers the best chance of receiving a premium over and above their current market rates, although an additional $20 per tonne may seem to be a minimal amount on generally a low yielding crop. Comparison of gross margins from other competing crops would indicate that sunflowers can produce a competitive range of gross margins against both mungbeans and sorghum. As long as international markets for sunflower oil maintain current import parity levels into Australia, then a local crushing facility could give growers some significant upside in the price range paid for the raw seed. In a recent grower survey (refer Appendix 11.2) just over 80 per cent of respondents indicated that sunflower prices needed to be close to $700 per tonne delivered Newcastle (or $550 on farm) for them to consider sunflowers in their rotational cropping mix. In Scenario II, $550 per tonne is in the top 25 per cent of its price range while in Scenario III it is in the top 30 per cent of its price range. This would indicate a local crushing plant under Scenario II or III could easily afford to pay producers a $550 on–farm return as long as meal and oil prices could justify it. It is worth noting that prices for sunflowers over $700 per tonne (Newcastle) in the past have been quite rare over the last 12 years. Since January 2001 the price has only exceeded $700 per tonne in one season (2007–08).

6.2.2 Cotton

The results for processing cottonseed are even more positive then those for sunflower. The range of prices that a local crushing plant could afford to pay and maintain its crushing margin is between $150–$304 for the small crushing plant in Scenario I. This price range will improve by another $30 per tonne for the larger crushing plants in Scenario II and Scenario III with a range from $180–$334 per tonne. The larger crushing plant can maintain a more robust price range for the raw seed which will ensure that it will be very competitive in the market place even during drought conditions when the price for cottonseed has peaked at $360 per tonne for short periods of time. Cotton growers could benefit from a crushing plant that can afford to pay a maximum price, when oil and meal prices are high, that is $90 above their ginning costs. This will make a significant improvement in their gross margin per hectare of up to $225. A local crushing plant that can work in closely with the local ginners would ensure more competition for the raw cottonseed and therefore more likely that the cotton growers will be able to extract the maximum value for their seed. The relative isolation of CQ from southern markets can have a negative impact on pricing of cottonseed. For example, last season cottonseed from a CQ gin was about $180 per tonne where as on the Darling Downs it was closer to $240 per tonne simply because there are more end users for the raw seed in close proximity to the southern gins. The Scenario III crushing plant has the potential to enhance the price of raw cottonseed by value adding the oil product. It is an industry rule of thumb that 90 per cent of cottonseed oil in Australia is sold in 20 litre drums into the hospitality sector. A local crushing plant is uniquely positioned by its relative distance to some large and expanding population centres in Queensland such as Cairns, Townsville, Mackay,


Rockhampton and Gladstone. A number of these coastal centres also have major tourism sectors that promote a strong hospitality industry. Added to this, CQ is at the centre of a large mining industry which has the capacity to house up to 20 000 non-residential workers in single person quarter (SPQ) accommodation facilities that have full catering services (Department Natural Resources and Mines, 2011). This means that a local crushing facility with refining and packaging capacity could service a large hospitality and catering sector with a significant freight advantage over southern processers who are all located in NSW. The distribution and marketing of this value added product would certainly provide distribution challenges but would also have the potential to increase the value of cottonseed by marketing the oil product more directly to the consumer.

6.3 Market Outcomes

6.3.1 Forward contracting

One of the advantages of having a local crushing plant is that growers have the ability to lock in forward contracts when they plant, as a local crushing plant requires some certainty of supply. Growers will also get some benefit that they are being relied on to produce the crop therefore the crushing plant needs to keep prices at a level that will ensure growers will plant the crop. This should bring more consistency to the market and the opportunity to achieve premiums when oil and meal markets are high. A local crushing plant means that local growers do not have to compete with producers in different growing areas that have lower costs of freight and higher yields, which generally means more willing sellers at a lower price. The growers have the advantage of a more level playing field as all the producers in CQ are planting at the same time and under the same conditions.

6.3.2 Direct marketing

A local crushing facility is a more direct link between seed growers and the rest of the value chain. Buyers of the oil and meal now recognise that the produce is coming from a specific area and if the quality of that product is consistently high then there is the opportunity to achieve preferential supplier treatment that may in turn produce a competitive advantage in price. This is something that could become of real benefit to growers but is very difficult to quantify at this point in time. It is also likely that this benefit will only come after a number of years of operation so it is not something that growers will see the benefit of in the first four or five years of operation.


7.0 Risk Management Issues

Elements of risk for this project have been mentioned throughout this report however; it is worth summarising the main issues together in the one section. The identified risks that have the potential to have a significant impact on the profitability of a crushing plant in the CQ region relate to the price and consistency of supply for the raw commodity and the value of the processed products.

7.1 International pricing mechanism

There are only a handful of refiners in the country of which only three (Goodman Fielder, Peerless and Cargill) import and supply the greatest portion of the vegetable oil required for the domestic market. The three companies are vertically integrated and have a sound appreciation of the domestic consumption trends and international oilseed and vegetable oil prices and trends. The daily movement in the international vegetable oil price benchmarks may not always translate directly into what the refiners are prepared to pay for local product. This is often referred to as the basis within the pricing mechanism and may provide a dampening effect on import parity prices. The vagaries of market fluctuation is not easily captured or predicted, which is why this study has focused more on the total price range that the market has experienced historically and not on individual pricing points.

7.2 Freight costs

One of the main drivers for this feasibility study is that distance to domestic markets for CQ growers reduces their on-farm return. The concept of transporting a higher value product such as oil rather than the seed makes a lot of sense in terms of cost efficiency; however this analysis has shown that this cost efficiency only provided moderately better returns for growers. This study identified that the gain in freight costs by transporting oil is somewhat diluted by the freighting of meal to market. Meal makes up over 60 per cent of the product processed from seed and there is no significant end user in the local CQ area. In the case of sunflower meal, which is a low value protein meal, the freight cost is at least one third of the value of the commodity. Increasing freight costs will have a more dramatic effect on a local CQ crushing plant then it will on most southern plants because of the distance to meal markets.

7.3 Competition for Oil Seed

CQ’s largest regional consumer of raw cottonseed is the feedlot sector of which there are only two major commercial feedlots and several smaller opportunity feedlots (<500 head). These two feedlots (Barmount and Goonoo) represent about 25 000 standard carcass units (SCU) and between them they consume about 12 500 tonnes of whole cottonseed per annum. There is also a smaller market of about 10 000 tonnes that goes to the dairies on the Atherton Tablelands. The two Emerald gins produce about 32 000 to 36 000 tonnes of cottonseed per annum which leaves approximately 12 000 tonnes available for a processing plant without impacting on the two current major markets. There is another 11 000 tonnes of cottonseed available from the Moura gin (280 km away from Emerald), although freight costs would influence the landed price.


A consistent supply of local cottonseed and its relative abundance should insure that there will only be a moderate price rise for the raw commodity if a new player came into the market such as a local crushing facility. Feedlots generally will reduce their purchases of cottonseed if the commodity starts to become expensive. This is because they have the ability to switch to higher quality grain and other roughage sources to replace some of the cottonseed in their rations. This is influenced by the relative price of grain, however it does ensure that there is less volatility in the pricing of the raw commodity under normal circumstances. A crushing plant will have more flexibility to cope with higher prices for the raw cottonseed then a feedlot operation. This study has identified the price ranges that a crush plant could afford to pay. The other variable with cottonseed prices is the extent of export demand. Locally the gins only consign cottonseed for export as a last resort. The local market tends to provide a better return than the export market. In the last two years China has bought over 350 000 tonnes of our cottonseed per annum. This may have coincided with two of the largest cotton crops that Australia has ever produced ensuring a large surplus of cottonseed hence the commodity has been relatively cheap. Cottonseed is a very difficult commodity to transport with resulting high freight costs to China. A recent presentation at the Australian Cotton Conference identified the cost of delivering cottonseed to a Chinese port at $150 per tonne which was equal to the value of the commodity ex gin. This means a delivered price to China of $300 per tonne. This may seem high for the feeding of livestock however, the volume of demand rises if it coincides with high world grain prices, so it may have been seen by the Chinese as comparatively good value. Based on these relatively cheap values, the export market will continue to be opportunistic when there is a surplus of cottonseed above domestic demand. A local crushing plant would have the ability to be competitive against most export quotes.

7.4 Consistency of Supply

A crushing plant needs to be running at peak throughput all year round to keep its crushing costs as low as possible. The main reason for using cottonseed as the major commodity (apart from being the largest oilseed crop in CQ), is its reliability in that it is sourced from irrigation areas with highly reliable water resources. The majority of the cotton grown in the Central Highlands is irrigated from the Fairbairn Dam which once full, has the capacity to hold enough water to guarantee the production of cotton for the following three years. This dam has a hydrologic reliability of just over 80 per cent and since it was commissioned in 1973 has had only two years out of 39 when there has been a zero allocation at the start of the water year. In those years of zero allocation a small cotton crop was still produced from summer storm runoff lifting the allocation. Equally the Dawson Valley is a highly reliable irrigated cotton production area only missing out on planting a cotton crop in two years out of 44 years of production. This reliability is largely due to the Dawson River catchment straddling the sub-tropical and temperate climate zones. Overall cotton production in CQ offers a high degree of reliability for a local crushing plant. Sunflower production is far less reliable as it is a dry land crop and the variability of rainfall in CQ is possibly the worst of all the cropping regions in Australia. On the other hand sunflower is a crop that is planted in late summer and CQ is predominately a summer rainfall region. Even during the height of the drought, most farms got at least one opportunity per year to plant a summer crop from storm rains. The advent of zero tillage and controlled traffic farming techniques has also increased the reliability of cropping significantly in CQ.


Generally the issue for sunflowers has not been about getting a planting opportunity when soil moisture was adequate but the decision to plant sorghum instead as a more profitable option. The area of sunflower plantings would be more positively influenced by the price on offer rather than planting opportunities. It will therefore be critical that a local crushing facility can offer prices that are competitive with the gross margins of crops such as sorghum and chickpeas.

7.5 Price of Supply

The price offered for sunflower seed will influence the area of sunflowers that are planted in CQ. Given the analysis demonstrated prices at the lower end of the range that a local processor could offer is not too dissimilar to current market options. This issue will be the main risk to a crushing plant maintaining its throughput. The analysis demonstrated that under Scenario III a $20 per tonne price premium for sunflower could be offered at all price levels. This will go someway to reducing the risk of low supply. The production scenarios analysed in this study have been deliberately based on relatively modest tonnages to also reduce the risk of low seed supply. One of the complicating factors for the price of CQ sunflower production is the comparatively low yields for this area. Average yields for NSW are almost double that of CQ (0.8 tonnes per ha versus 1.6 tonnes per ha) and freight costs to processors from the Liverpool plains are only one third or less than that paid by CQ growers. Therefore the pressure on price is far more acute in CQ to be able to maintain comparatively good gross margins in relation to other competing crops. The returns from other grain crops and the international benchmarks for vegetable oil will influence both the potential supply of sunflower and a crushing plants ability to pay. A lowering of the Australian currency could have a significant impact on the value of sunflower oil domestically. A drop in the currency from parity to 90 cents would increase the average value of sunflower oil by $155 per tonne which in turn would increase the capacity of a local crushing plant to pay growers an extra $60 per tonne for the seed. Cottonseed is not as heavily influenced by the exchange rate as it has much lower oil content, therefore meal prices tend to have a bigger influence on the overall value of the seed. Meal values are largely controlled by domestic demand. Cottonseed supply is not as heavily influenced by price as it is essentially a by-product of the crop and the decision to plant is based on the returns from cotton. On a local basis the level of cottonseed production means supply is not restricted in most cases and therefore pricing levels are more stable. Given that cottonseed will make up at least two thirds of the crush or better, the reliance on sunflower seed is not as critical and therefore the supply risk is lowered.

7.6 Volatility of oil markets

The volatility of oil markets is a risk not easily controlled at the local level. It is a risk that will affect the sunflower market more than the cottonseed market from a local crushing perspective. One means of lowering the risk would be by crushing more cottonseed than sunflower seed. There would be an opportunity for a CQ crushing plant to become a commodity trader and use oilseed futures to offset fluctuations in the domestic oil markets. Sunflower oil is closely linked with the international trade given that Australia consistently imports sunflower oil every year.


A CQ crushing plant owned by an established oilseed processor would have some ability to reduce some market volatility by being part of a much larger and more diversified business. A crushing plant that could supply more than one market would also be more resilient to the fluctuations of the oil market. For example, if the crushing plant had the capability to supply crude, refined and packaged oil then it would have a more diversified business. Equally developing reliable meal markets would add to the value extracted from the processed seed and assist in combating volatility in the oil markets.

7.7 Competition for meal markets

The value of meal has more a direct affect in the crushing of cottonseed then it does on sunflower seed, as it makes up a larger proportion of the revenue. A CQ crushing plant would have some freight cost disadvantages for sunflower meal where all the established markets are in southern Queensland. It would also have some competitive advantages for the freighting of any cottonseed meal to north Queensland. The overall plant efficiency has a large impact on the cost of crushing. A large solvent extraction plant at Newcastle has a much lower crushing cost then an extrusion–expeller plant based in CQ. Therefore the larger plant has more room to discount its product, in order to maintain market share. For a CQ crushing plant to achieve a profitable return it would mean that the savings made on freighting oil instead of seed would be consumed by having to sell the meal with a lower return margin. The upside is that there is really only one other competitor in the both the sunflower and cottonseed meal markets in Queensland. This competitor also has significant freight costs to distribute its meal products although it is closer to the larger markets. Cottonseed meal is fortunately a widely used product across Queensland and demand for the product is growing. This provides an opportunity for another supplier in the market and especially servicing the North Queensland markets where there is a competitive freight advantage for a CQ crushing plant. This should ensure that the cottonseed meal market would be reasonably stable. The one unknown in the meal market is the acceptability of a pelleted product from an extrusion–expeller process. This product has lower protein, higher roughage and higher oil than a solvent extracted meal. Generally this may be an advantage for the feedlot and dairy sector but a disadvantage for stock feed processors. Experience from the Riverina district in NSW would suggest that the meal product is well accepted for dairying and feedlots, especially in long fed animals such as Wagyu. Any prospective investor would need to test the market appetite with this meal product before committing to an extrusion–expeller crushing process.


8.0 Future markets and additional uses.

There are a number of other considerations that need to be included in relation to committing to a CQ oilseed crushing plant. While most of these considerations are more about future potential and less about the immediate financial viability of the plant, it is worth noting what other opportunities could be leveraged from this type of infrastructure.

8.1 Canola

This is a relatively new crop for Queensland and especially CQ. In 2011, a farmer trial at Capella examined two short season varieties with the initial yield results approximately 35 per cent under what the same varieties yield in southern Australia (0.93–1.2 tonne per ha versus 1.5–1.85 tonne per ha). It must be stated that this trial was planted later than its optimum window (29 May) with anticipated superior yields from planting at least a month earlier. Further variety trials have been planted in 2012 on the DAFF Research Station and larger scale farmer trials have also been planted this year in the northern highlands. Initial assessment indicates that if canola yields could achieve a yield of 1.5 tonnes per ha then the gross margin would be attractive to growers with current pricing for canola being equivalent or slightly better than sunflowers. Canola is by far and away Australia’s largest oilseed crop with production reaching nearly three million tonnes of which almost half is exported as seed and the balance is crushed for oil. Of the total volume of oil being produced at least half of that is exported as crude oil to Southeast Asia. Canola is a crop similar to sunflower that has high oil content and oil quality. The oil is highly valued by consumers given it is low in saturated fats. The bonus is that canola meal is far more widely accepted as a protein meal (especially in poultry) than sunflower and has a higher protein level so it extracts a higher price compared to sunflower meal. If CQ yields prove profitable, which has yet to be demonstrated, canola would have a good fit in a CQ cropping system. A crushing plant that is designed to handle sunflower seed and cottonseed could be easily adapted to crush canola. A disadvantage for canola is that it is a winter crop and it does not establish as easily as chickpeas. Canola is not a crop that is suited to moisture seeking planting techniques. CQ is a summer dominant rainfall zone and therefore canola, may not be a crop that is grown every season unlike summer crops such as sorghum and sunflower.

8.2 Safflower

Historically, safflower used to be grown in CQ during the late 1970s and early 1980s. Its ability to utilise stored moisture effectively and requiring little in crop rain made it a natural fit for a CQ winter cropping programme. Experienced oilseed industry participants reported there was at least 5000 tonnes grown annually in the Central Highlands during those early years. In those days the crop was mainly grown for its high quality unsaturated oil content and was commonly blended with sunflower oil to improve the polyunsaturated fat content in products like margarine. Unfortunately the protein meal is not widely acceptable and is difficult to feed and market. Since the late 1990s safflower has not been produced in any significant quantities, however recently CSIRO has developed a variety of safflower that produces oil which is over 90 per cent pure oleic acid. This is the highest recorded in the world and is an essential ingredient in


manufacturing industrial chemicals such as lubricants, plastic, adhesives and paints (replacing petrochemical derivatives). Although commercial varieties with this trait will not be released for another five to six years, CSIRO estimate there could be a market for this crop of at least 100 000 ha. Should CSIRO predictions materialise, safflower could once again become a common crop in CQ. Its only limitation is that it is once again a winter crop in a subtropical climate where winter rainfall is highly unreliable.

8.3 Linseed

Linseed, like safflower was a crop that used to grow successfully in CQ. Historically it was used to be a common ingredient in oil based paints and the manufacture of linoleum floor coverings. The popularity of modern acrylic paints and a decline in the popularity of ‘lino’; the market for linseed has shrunk to a point where there has not been any commercial crushing of linseed for over 15 years in Australia. There is a small organic crushing market for human consumption and a small speciality stock feed market in Victoria and NSW. Internationally approximately 2.6 million tonnes of linseed is grown with Canada being responsible for 80 per cent of the world trade in seed. Between 600 000 to 700 000 tonnes of linseed oil are produced annually around the world and 70 per cent of this oil is used in paints and allied industries (Commodity Online, 2013). Linseed oil is more suitable to industrial purposes although CSIRO has developed another variety type known as Linola® which produces good quality polyunsaturated oil similar to sunflower. Should a commercial market for linseed oil re-establish then it is also another winter oilseed crop that could be grown in CQ.

8.4 Soybeans

Although soybeans are not grown locally in any quantity they have been used as a rotation crop in some of the sugar cane areas of coastal Queensland. Areas such as the Burdekin, Mackay, Isaac and Whitsunday and Bundaberg have all used soybeans as green/manure break crop for their sugar cane farming system. Data for the area planted is difficult to obtain as very small amounts of this crop is actually harvested. One of the key issues with the northern crop according to growers is that varieties currently available require too long a growing season (out to 150 days) which compromises preparations for the following cane planting. A much shorter variety of 105–115 days would be more appropriate. One industry source suggested that Brazil may have some varieties that could suit this window. The other issue is distances to processing for crushing and the price paid in the past for crushing beans. A CQ crushing plant situated closer to cotton gins would mean that there is still a significant freight component for these coastal sugar cane areas. Current estimates in the Burdekin are that there is up to 16 000 ha of fallow land available in any one season that could be utilised for rotational grain crops. However the uptake of using grain crops in the fallow has been low with estimates putting grain production at between 600–1300 ha annually. In the Mackay, Isaac and Whitsunday region fallow areas extend to about 2500 ha and of this up to 2000 ha is utilised for grain crops. Under optimum conditions (early cane harvest and normal wet seasons) it is estimated that currently up to 2500 ha of soybeans could be planted annually in the Burdekin region. Yield indications range from two tonnes/ha to four tonnes/ha. Assuming an average of 2.5 tonnes


per ha then total tonnages would be just over 6000 tonnes. Harvesting would probably occur around May/June. It is worth noting that in the last six months, a private operator (North Queensland Tropical Seeds) on the Atherton Tablelands has just built a full fat soybean crushing facility. This facility will focus on the stockfeed market on the Tablelands especially the broiler market. Current stockfeed operators believe there is a demand for about 6000 to 8000 tonnes of soybean meal per annum on the Tablelands. The prospect of using soybean as a reliably delivered commodity for a crushing plant on the central highlands is tenuous for reasons already outlined. However it remains as another potential crop that could be utilised in the future with some intensive industry development and the provision of positive price signals to regional cane production areas. Consumption of soybean meal remains high for pigs and poultry and there are current users of soybean meal spread throughout northern and southern Queensland. National imports of soybean meal regularly tip over 500 000 tonnes per annum and pricing for this meal is currently exceeding $650 per tonne courtesy of a drought in the US restricting supply. The poultry industry in Australia is continuing to expand so the expectation is demand for soybean meal will continue to also increase.

8.5 Sesame seed

Sesame as crop is not grown to any large extent in Australia currently; however during the late 1980s and early 1990s significant research was conducted on the crop in the Northern Territory, Queensland and northern NSW. It is classified as a hardy drought tolerant summer crop that is planted in December–January and most suited to subtropical and tropical regions of Australia. It is estimated that Australia imports approximately $16 million worth of sesame seed and oil products annually for domestic consumption. Yields can be quite variable with commercial crops having recorded anything from 0.3–1.5 tonnes per ha with an oil content of 45–55 per cent. Prices range from $500–$600 per tonne in the past but have been recorded up to $1100 per tonne as exported product into Japan. World production exceeds three million tonnes with China, India and Burma being the largest producers. For such a small market sesame is probably not a real alternative at present however, high quality oil is becoming much sought after. It is worth noting that as a summer oilseed crop it would be well suited to CQ conditions and may have potential to be a niche product.

8.6 Commercial Drying and Seed Cleaning

Local grains industry advocates in CQ are very concerned about the reduction in services by grain handlers locally. It is believed that there is a real need for seed cleaning and drying services to assist growers in maximising their grain value when harvesting conditions become difficult. There has been several seasons lately, where wet and dry conditions have caused issues at harvest. Wet harvests have driven a strong demand for commercial grain drying and seed cleaning services when weeds have got out of control at the end of the season. Dry seasons have also caused demand for seed screening when a dry finish has caused small seed to become a significant percentage of the sample. An oilseed processing facility would require a significant amount of infrastructure for the storage of seed and meal. A crushing facility would have a significant investment in the use


of gas for heating steam as well as seed handling equipment such as cleaners, conveyors and elevators. It may be appropriate to develop this infrastructure to a point where alternative uses of some of the infrastructure could be utilised when crushing operations are not fully utilising the plant and equipment. There are a number of factors to be considered in this concept. The demand for these services is quite likely to coincide with peak crushing periods when

the entire infrastructure is being fully utilised for core crushing operations. Demand for these services will not be consistent from year to year. Seasonal influences

will mean typically a peak of demand for services one year and then almost nothing the next.

The cost of running these services at contracted rates may make it unattractive for some growers to access the services especially when the value of the commodity is low. Currently storage and load out fees for grain into the Graincorp system already provides much consternation amongst growers.

Generally it is accepted that the only way to make money out of infrastructure used to enhance grain quality is for the supplier of these services to also become the marketer of the grain. A marketer can offset the costs of cleaning, drying and storage of the grain by utilising opportunities in the buying and selling of the commodity at different times of the year and also utilising forward selling and futures trading to spread the risk. This business model of operations may only be successful if the company takes ownership of the grain. This approach may not necessarily advantage growers, as the owner of the infrastructure becomes another marketer who will offer prices to growers based on grain supply and demand. On the other hand, the owner of the crushing plant would bring some economies of scale and turnover efficiencies as an advantage over other marketers with the opportunity to increase market share by building a dual purposes facility. This could become an additional income stream to an investor in a CQ oilseed crushing plant if the additional capital costs could be offset by the extra revenue. This study did not have the resources or time to do a detailed cost benefit analysis in relation to these alternative uses for the infrastructure contained within a crushing plant. Detailed data relating to the quantity of grain requiring cleaning or drying on a per annum basis is not readily available. It is most likely that this potential service would vary dramatically from year to year. This option would provide a means of diversifying the cash flow of a crushing plant during times of low oilseed production. Any investor investigating the development of an oilseed crushing plant would be wise to design the infrastructure with the capability to take advantage of this potential market for handling other grain crops. It would add some cost to the base infrastructure as storage and handling equipment will need to have more features, be of a higher quality standard and have the extra capacity. However it will be far more efficient use of capital to build this capability and capacity into the original design of a green-field site then to add it on later.

8.7 Biodiesel

It is estimated that there is currently 275 ML of biodiesel produced in Australia. The NSW government has mandated that a minimum of 5 per cent of all diesel sold is biodiesel. This has created a market for at least 217 ML of biodiesel in that state alone.


In 2011, the Isaac Regional Council commissioned a feasibility study (AEC Group, 2012) into the viability of a biodiesel processing facility situated on land associated with the Blair Athol mine site near Clermont. This study investigated the requirements and projected options of building a fully operational biodiesel plant complete with a multi-crop crushing capacity to make 50 ML of biodiesel per annum. The plant was costed at over $27 million and projected to require 100 000 tonnes of oilseed per annum. The calculations in this study assumed an average cost of sunflower seed at $700 per tonne and this would then relate to a breakeven price for the biodiesel produced of $1.64 per litre (wholesale value not retail). This price was based on continuation of the biodiesel excise rebate through to 2022. If the biodiesel excise rebate was discontinued after this date then the breakeven price would rise to $1.73 per litre. If the price of sunflowers was dropped to $600 per tonne then the breakeven price for fuel could be reduced to $1.41 per litre. Over the last few years there have been a number of studies into the cost:benefit of biodiesel production. In most cases the results have been that biodiesel is expensive to manufacture compared to current oil prices and without government intervention it is difficult to make the product cost effective. In terms of carbon emissions it does produce less emissions when burned but when all the carbon emissions are taken into account in terms of growing the oilseed crops to produce the diesel then the differences between fossil fuels is not as great. The other issue is that our usage of diesel is so high that it would be very difficult for Australian farmers to produce enough oilseed crops to replace even 10 per cent of the total diesel consumed. Certainly in CQ it would be difficult to even replace one per cent of the diesel used in all the Bowen Basin mining operations. The only way to make biodiesel cost competitive with fossil fuels is to either pay a lot less for the raw ingredients (lower prices for farmers) or to find alternative feedstock that is much cheaper and more efficient to produce (perennial tree crops or algae derivatives). Biodiesel does have some positive attributes over normal diesel for underground mining operations particularly in regard to factors such as a higher flash point, no sulphur emissions and 50 per cent reduction in carbon monoxide production. Air quality and combustible gases are critical issues for underground mining operations not to mention lower carbon emissions.


9.0 Conclusions and Recommendations

The research conducted for this feasibility study has not uncovered any fundamental problems that would prevent the construction and operation of an oilseed crushing plant. Essentially there are four major components for justification that are still current: a) a major cropping region with a strong history of producing oilseed crops from irrigation

and dryland resources b) good access to power, water and land c) an area with developing industrial businesses and services and d) good access to freight services This study has examined three different production scenarios for a local crushing plant. The analysis identified that a smaller plant (34 000 tonnes) has little chance of success as the economies of scale are not large enough to justify the capital expenditure for an investor nor can this size plant produce a price range for the seed that would be competitive for growers. A larger plant (64 000 tonnes) has a much greater chance of success with a good return on capital (16 per cent); positive NPV and can afford to deliver a better price range for growers. The adding of a refining plant to this larger crushing facility does not necessarily improve the return on capital to the investor (16 per cent) but does provide a better return to sunflower growers ($20 per tonne). The analysis is based on a median revenue level for the sale of oil and meal. The larger capacity has a superior resilience factor as it can still make a breakeven return when only 50 per cent of the capacity is being utilised. On the other hand, as with all agricultural enterprises, there is a certain level of risk associated with all these crushing plant scenarios as a 20 per cent reduction in the operating gross margins resulted in negative returns for all three production operations and a negative NPV. The addition of a refining plant in Scenario III did result in an almost breakeven cash flow when gross margins were reduced by 20 per cent. All of these investment calculations were based on strenuous discount factor of 12 per cent. The conclusion from this prefeasibility study is that a large capacity crush plant, based on using cottonseed and sunflower seed has a high chance of success with solid returns for the investor and improved gross margins for growers. However there are a number of conditional points that need to be associated with this recommendation. The initial arguments for the instigation of this study was built on the concept that

freighting high value products such as oil instead of seed was more efficient and therefore there was potential cost savings. In reality this concept still holds but the efficiency created by the freighting of oil (high value product) is eroded by having to freight protein meal (low value product) large distances to market. The other issue is that small capacity plants (100 000 tonnes or less) have a higher processing cost per unit than solvent extraction systems and this processing cost differential negates the savings in freighting oil instead of seed. This is why the improvement to grower’s prices is described as a moderate improvement rather than a large change.

A crushing plant can only pass on higher prices for seed if revenue from oil and meal are also high. The vegetable oil markets are largely controlled by large international producers such as Argentina, Brazil, USA, Ukraine and Russia. Most of these countries have a lower cost of production than Australia. As a result the domestic price is directly linked to import parity, hence the pressure on Australian oilseed crusher margins is constant. Meal prices are set by local supply and demand and can fluctuate significantly


from season to season. Cottonseed meals and sunflower meal are considered second and third tier protein meals with demand and price influenced by the supply and price of first tier meals such as canola and soybean. Queensland does not have the same levels of consumption for protein meals as NSW and Victoria and therefore pricing in Queensland will be slightly weaker than those other states.

Yield for sunflowers in CQ are comparatively low compared to other growing regions which means there is far more pressure on price in the gross margin for CQ growers. This effects how attractive sunflowers are against other competing crops. If average yields could be improved in CQ then the ability for a crushing plant to stimulate the number of ha grown would be considerably improved.

No matter how much processing is undertaken locally, proximity to major population areas continues to impede the ability of CQ growers to make the most of domestic markets for grains and oilseeds. Freight will be a constant challenge for any CQ crushing plant because of the relative distance that products need to travel to. This has greater price return implications for meal which is 60 per cent or more of the processed oilseed. In some aspects CQ has better access to export markets (Gladstone and Mackay) than domestic markets and this scenario will further deteriorate if the cost of road freight continues to increase. Proximity to ports may well be more of an advantage for CQ growers in the future if rail freight can be expanded for agricultural commodities.

A large oilseed crushing facility requires a high degree of management skill and experience. There are a number of failed oilseed crushing operations around the country which demonstrates that a lack of knowledge, expertise and professionalism, poor financial analysis and poor risk management can have a devastating effect on an oilseed crushing business.

In summary, this report has defined the critical parameters for the successful establishment of an oilseed processing facility and has identified benchmark figures on where the breakeven lines for this kind of investment and production margins need to be. This study has also indicated the potential opportunities that a crushing plant could leverage into the future. The analysis used within this study could be used for any size crushing plant. As with all agricultural commodities the dynamics of production and markets can change quickly; however the long term trends are suggesting a steady improvement in the consumption of vegetable oils and animal proteins around the world as well as in Australia. This should mean that any crushing business that can be profitable in today’s terms should continue to improve its profitability into the future.


10.0 References AEC Group (2012) Clermont Biodiesel Facility Feasibility Assessment Report (Online) Available at: http://www.isaac.qld.gov.au/c/document_library/get_file?uuid=6fbd78f3-1200-4b48-aae6-a9c60254c11f&groupId=12238 Australian Bureau of Statistics (2008), Agricultural Commodities: Small Area Data, Australia, 2005-06, Cat.No.7125.0, ABS, Canberra. Available at: http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/7125.02005-06%20(Reissue)?Open Document Australian Oilseeds Federation (2010) Australian Oilseeds Federation Strategic Plan 2010 (Online) Available at: http://www.australianoilseeds.com/about_aof/strategic_plan Australian Oilseeds Federation (2012a) Oilseeds Industry (Online) Available at: http://www.australianoilseeds.com/oilseeds_industry Australian Oilseeds Federation (2012b) Crop report June 2012 (Online) Available at: http://www.australianoilseeds.com/__data/assets/pdf_file/0003/8949/AOF_Crop_Report_June_2012.pdf Canstar (2013) Interest Rates – Business Loans (Online) Available at: http://www.canstar.com.au/interest-rate-comparison/compare-commercial-secured-5yrfixed-rates.html Central Highlands Regional Council (2013) Planning Schemes (Online) Available at: http://www.centralhighlands.qld.gov.au/web/guest/planning-schemes Christian, A. (2012) How the Market Works – Australian Cottonseed Supply & Demand for Domestic & Export Markets, (Online) Available at: http://www.australiancottonconference.com.au/2012-presentations-papers/christian-angus Commodity Online (2013) Commodities / Oil-oilseeds – Know Linseed (Online) Available at: http://www.commodityonline.com/commodities/oil-oilseeds/linseed.php Index Mundi (2012a) Agricultural Production Statistics – Cottonseed oil - Australia (Online) Available at: http://www.indexmundi.com/agriculture/?country=au&commodity=cottonseed-oil&graph=production Index Mundi (2012b) Commodity Prices – Soybean Oil (Online) Available at: http://www.indexmundi.com/commodities/?commodity=soybean-oil Index Mundi (2012c) Agricultural Production Statistics – Sunflower oil – Australia (Online) Available at: http://www.indexmundi.com/agriculture/?country=au&commodity=sunflowerseed-oil&graph=production Index Mundi (2012d) Commodity Prices – Sunflower Oil (Online) Available at: http://www.indexmundi.com/commodities/?commodity=sunflower-oil International Monetary Fund (2012) IMF Primary Commodity Prices – Market Prices (Online) Available at: http://www.imf.org/external/np/res/commod/index.aspx Malcolm, L.R., Makeham, J.P. and Wright, V. (2005) The Farming Game – Agricultural Management and Marketing. 2nd edition. Cambridge University Press Riaz, M.N. (2005) Extrusion Processing of Oilseed Meals for Food and Feed Production, Chapter 13 in Shahidi, F. (Ed) Bailey’s Industrial Oil and Fat Products, (6th Edition) New York: John Wiley & Sons, Inc., pp. 533 – 572. USDA Economic Research Service (2012) Oil Crops Outlook (Online) Available at: http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1288


11.0 Appendices Appendix 11.1 Average Dryland Sunflower Gross Margin for CQ

DRYLAND SUNFLOWER - COSTS AND RETURNS District: Central Highlands Area: 100 ha

PER HA TOTAL

INCOME ($/ha) Price/tonne $515.00 /tonne

less: Cartage (Farm to Depot) $15.00 /tonne

Freight /tonne Drying /tonne Storage /tonne Levies $5.00 /tonne ON-FARM PRICE ($/tonne) $495 /tonne times YIELD 0.80 t/ha GROSS INCOME ($/ha) $396 $39,600 VARIABLE COSTS ($/ha) Machinery Operations (F.O.R.M) Primary tillage x $8.76 Secondary tillage x $6.98 each Fertiliser application 0 x $6.98 each Inter-row tillage 0 x $3.34 each Boomspraying 3 x $2.38 each $7.15 $715 Planting 1 x $4.55 each $4.55 $455 operation x operation x Fallow spraying glyphosate 1 sprays x 1.20 L x $4.30 /L $5.16 $516 plus Surpass 1 sprays x 1.00 L x $4.75 /L $4.75 $475 glyphosate 1 sprays x 1.20 L x $4.30 /L $5.16 $516 Seed 3.0 kg x $13.20 /kg $39.60 $3,960 Fertiliser Starter Z 30 kg x $800.00 /tonne $24.00 $2,400 Big N 0 kg x $866.00 /tonne Herbicide Stomp 1 sprays x 1.00 L x $10.75 /L $10.75 $1,075 Verdict 1 sprays x 0.40 L x $90.00 /L $36.00 $3,600 herbicide sprays x 0.00 L x $0.00 /L Insecticide

alpha-cypermethrin 1 sprays x 0.40 L x $46.67 /L $18.67 $1,867

insecticide sprays x 0.00 L x $0.00 insecticide sprays x 0.00 L x $0.00 Fungicide fungicide sprays x L x $0.00 fungicide sprays x L x $0.00 Growth Regulant sprays x L x $0.00 Aerial spray 1 x $16.50 /ha $16.50 $1,650 Scouting $0.00 Casual labour $0.00 Chipping $0.00 Insurance $0.00 TOTAL PRE-HARVEST COSTS $172 $17,228 Pre-harvest spray sprays x L x Harvesting: Own Harvesting Costs $0.00 /ha Contract header 6.0 ha/hour @ $270.00 /hr $45.00 $4,500 plus fuel 8.1 L/ha x $0.86 /L $6.95 $695 TOTAL HARVEST COSTS $52 $5,195 TOTAL VARIABLE COSTS ($/ha) $224 $22,424 GROSS MARGIN ($/ha) $172 $17,176


Appendix 11.2 Summary of CQ Grower Survey Results March 2012 Summary of Grower Feedback for the Oilseed Project Presentation – “Capturing Value for Oilseed Production in CQ” Introduction The information contained in the following table is based on the responses of 23 grain growers who attended the Delta Agribusiness “Central Queensland Grains Conference” held in Emerald on 12 and 13 March 2012. These 23 grain growers represented 62 157 ha of dryland farming in Central Queensland. This sample size reflects about 14 per cent of the total dryland farmed area for Central Queensland. In most respects this sample size would be considered as a good representation of Central Queensland grain growers, given how difficult it is to obtain good quality, up to date, industry information. Original Feedback Questions Results Comments Q2. How would you rate the following aspects of the proposed Oilseed Project? (Rating 1-5)

All aspects of the project received high level of support. All aspects of this question getting at least 85% of growers giving a ranking of four or five.

Q2a. Will this project deliver some useful information for CQ growers

35% of respondents ranked it as a four 61% of respondents ranked it as a five Weighted average of 4.57

Highest support from growers. 96% ranking of four or better.

Q2b. Do the outcomes of this project have potential to improve $ returns to CQ growers


Q2c.Please indicate your interest in the three project stages:

Stage 1. Feasibility study of locating a Processing plant in the region.


Highest support out of the three stages with 91% of growers giving a score of four or better.

Stage 2. Investigation of new markets for oil and meal products.


Stage 3. A value chain analysis of the domestic Sunflower oil supply chain.


Q3. Historically, what oilseed crops have you grown before? (eg. Sunflower, cotton, soy, canola)

83% Sunflowers 30% Safflowers 9% Cotton

Clearly demonstrates that we have plenty of experience and expertise in growing sunflowers. Surprising the number of people who had also grown Safflowers in the past.

Q4. What is the largest amount of Sunflower you have grown

52% grow 100-500ha 26% grow 500-1000ha 17% had never grown the crop

This result indicates the relative status of sunflowers in the cropping regime. Over 50% of growers only committing between 100–500 ha at time


Original Feedback Questions Results Comments would suggest that sunflowers are a rotational crop rather than a main crop. Growers are only committing a relatively small area of the farm each year to the crop.

Q5. In relation to summer cropping, what % of your area would you normally commit to rotational crops? (asked in the forum to also nominate area of winter crop grown if it was considered a competing opportunity)

Had to split up this data as some growers gave a percentage of their summer cropping area only and other growers gave a percentage of their total cropping area for the year. I have treated the data separately. Seven out of 23 growers (21 221 ha) nominated summer cropping areas. Fifteen out of 23 growers (40 936 ha) nominated their whole cropping areas (Winter and Summer). The following data is based on the raw percentages given by the respondents. Summer crop data: 78% of summer crop is Sorghum 12% of summer crop is Mungbeans 9% of summer crop is Sunflower 1% of summer crop is other (mainly cotton and forages) All crop data: 39% of all cropping is Sorghum 8% of all cropping is Mungbeans 4% of all cropping is Sunflowers 2% of all cropping is Maize 24% of all cropping is Chickpeas 19% of all cropping is Wheat 5% of all cropping is other (mainly cotton and forages) It is possible to extrapolate out the actual hectares for each crop in the all crop data set. These results have slightly refined the above results. 38% of all cropping is Sorghum 7% of all cropping is Mungbeans 3% of all cropping is Sunflower 4% of all cropping is Maize

In relation to these sorts of calculations these data sets are possibly a bit small. A couple of big growers can sway the data one way or the other when you are dealing with smaller data sets. An example of this is the figures for maize is basically made up of one big grower and two very small growers. If you take out the one big grower then Maize is reduced from 4% of the cropping area to 0.4% of the cropping area. The data does reflect that Mungbeans is a more popular summer crop than Sunflowers but is viewed as a rotational crop the same as sunflower. In the summer cropping data growers would only commit 20% of their summer cropping area to either Mungbeans or Sunflowers. The all cropping data gave a slight advantage to mungbeans with growers willing to commit 16% of their total area to mungbeans or 12% of their total area to Sunflowers. It seems that maize is not a popular option at the moment with only 19% (three out of 16) of growers willing to plant maize out of the all crop data and there were no maize growers in the summer crop data. Therefore the major competition for Sunflower in the summer crop rotation is Mungbeans. It would seem Sorghum is still seen as the major summer crop that is easy to grow, relatively low risk and provides some consistency (the summer default crop). Its domination of CQ cropping is a lot less then it has been in the past (38%), which probably reflects the run of good winter seasons that we have had for the last four years.


Original Feedback Questions Results Comments 20% of all cropping is Chickpeas 20% of all cropping is Wheat 8% of all cropping is other (mainly cotton and forages) Also worth noting from the all crop data was that: 100% of respondents grew Sorghum 75% of respondents grew Chickpeas 63% of respondents grew Wheat 50% of respondents grew Mungbeans 31% of respondents grew Sunflowers 19% of respondents grew Maize 19% of respondents grew other crops. The summer crop data was similar as well with: 100% of respondents grew Sorghum 57% of respondents grew Mungbeans 43% of respondents grew Sunflowers 14% of respondents grew other summer crops

The all cropping data would also suggest that equal areas of Chickpea and Wheat are grown. This has not been the case in the past as the area of Chickpeas grown has usually been about 1/3 of the Wheat area. However Chickpeas has grown in popularity rapidly over the last few years with encouraging yield results and good market prices. This result could be a reflection on what this year’s winter crop will be. Current markets would indicate that chickpeas will be again be a very popular crop this coming winter. Again the data set is probably too small to give an accurate indication of hectares for each crop across the whole Fitzroy basin. Interesting to note that if Sunflowers are currently about 3% of the total cropping area for CQ (450 000 ha), then we could expect about 15 000 ha of sunflower to be grown under present circumstances. This would indicate an annual production of between 20 000 and 25 000 tonnes of seed.

Q6. What would make you consider growing MORE sunflowers?

96% - Consistent and Better prices 87% - Availability of bulk storage in Central Highlands 70% - Better varieties/higher yield varieties 65% - Availability of disease resistant seed 65% - Availability of market – accepted quality testing in central Highlands.

As suspected, pricing is the key component of getting farmers to grow more sunflowers; although a number of issues got a lot of support in this question. This was closely followed by availability of local storage facilities. Three other areas also got plenty of attention including better varieties, Disease resistance varieties and locally based quality testing availability. This would reinforce the sentiments expressed at AWB grower meetings earlier in the year. It also shows that as an industry, sunflower has a number of impediments to overcome within CQ.

Q.7 Given an optimal planting opportunity, select your top three reasons for planting sunflowers?

86% - Assists with control of difficult grass weeds as it allows the use of ‘group A’ herbicides. 64% - End of February window extends growers’ summer crop

In the next two questions, growers were asked to rank their preferences from one to three. However less than 50% of the respondents actually did


Original Feedback Questions Results Comments planting options 55% - Potentially higher return gross margins than other summer crops depending on price.

this, the rest just ticked their three options. Therefore all the options were reduced back to a value of one and assessed purely on the number of ticks each option got. The fact that it is an agronomic management issue which provides the greatest motivation to grow the crop rather than the gross margin would indicate that growers do not expect Sunflowers to be a highly profitable crop. It also coincides with other evidence that summer grasses have now become growers No.1 production problem in CQ. The down side to this is that mungbeans have the same advantage as sunflowers in respect to summer grasses. If grass weeds become less of a problem in the future then it is possible that fewer sunflowers would be grown.

Q8. Given an optimal planting opportunity, select your top three reasons why you would NOT plant Sunflowers?

68% - Freight to Newcastle 45% - Risk of TSV disease impacting on crop yields 36% - Lack of local bulk storage 32% - Limited stubble for next crop 32% - Reducing potential soil moisture for Chickpeas/Wheat 32% - Risk of loads not meeting standards on delivery and increased costs of grading or drying.

This question got quite a broad range of responses. Obviously the freight costs are the biggest turnoff. However the other issues are quite evenly spread. TSV is still a major barrier, although a response of 45% would indicate that this barrier has been broken down somewhat over the last few years. The other issues indicate that Sunflower has to battle some major agronomic restraints as well as other competing crops. Chickpeas are seen as an alternative use for the soil moisture. Sunflower has quite an extended summer planting window in CQ which then means it is only a month from a Chickpea planting window. Over the last few years chickpea has provided some excellent gross margin returns. Therefore Chickpeas could easily be a bigger competitor to sunflowers for crop area then mungbeans.

Q9. When Sunflower contracts are being advertised what sort of price range makes you consider Sunflowers as part of your

Average price nominated from 19 respondents = $692/tonne Del Newcastle. 16% - nominated $550 or less

This is a crude measure but it does indicate that for Sunflowers to increase its area at the expense of other crop options then the price needs to


Original Feedback Questions Results Comments summer cropping plans ($/tonne Del Newcastle)?

21% - nominated $800 or more around the $700/tonne delivered Newcastle ($550 on farm). This is the level where the decision to grow sunflowers would be based purely on the financial return.

Q10. Can you think of any obvious changes that need to be made to this project? What other issues should be considered?

Five comments made for this question. (See spreadsheet for details)

Mostly centred on the importance for the processing plant to be able to handle multiple crops. Canola and Safflower were two other potential crops. Concern expressed about separating GM crops from non-GM crops.

Q11. Can you think of any other opportunities where value adding could benefit some of the current crops that we grow?

Nine comments made for this question. (See spreadsheet for details)

Other opportunities included Safflower, Durum wheat, Mungbean grading, Flour milling and other by-products for cattle fattening.

This QR code links to: www.daff.qld.gov.au

QR codes can be obtained via the intranet under ‘Communications > Communication tools > QR codes’.

Call: 13 25 23 or +61 7 3404 6999

Visit: www.daff.qld.gov.au

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