22
Tasmania’s future with irrigation High level scoping study, December 2013 Rabobank Food and Agribusiness Research & Advisory
Tasmania’s future with irrigation
High level scoping study, December 2013
Rabobank Food and Agribusiness Research & Advisory
Contents
Page 2 Introduction – Snapshot of Tasmanian agriculture & global climate comparisons
Page 10 The rise of dairying in New Zealand’s South Island
Page 4 Sizing up Tasmania’s opportunity in dairy
Page 13 Specialty grains – Is Quinoa at home in Tasmania?
Page 12 Feed grains – Fuel for dairy growth
Page 16 Pyrethrum industry – Banking on consistency
Page 15 Poppy industry – Capturing growth in Tasmania
Page 18 Wine industry – The growth paradox
Page 17 Vegetables industry – The opportunity to scale up
1
Page 19 Final takeaways – Supporting initiatives to foster growth
Introduction: Snapshot of Tasmanian Agriculturep g
Tasmania’s considerable investment in irrigation infrastructure will naturally both help to improve the reliability and productivity of existing productionsystems, as well as to unlock the significant unmet potential of the state’s food and agriculture sector.
The organic growth in the sector over the past decade has already been significant, but this is expected to accelerate in coming years as existingproducers pursue greater scale economies and demand continues to grow for many of the products which Tasmania can competitively supply. In fact,
Sub-sector growth – Last 10 years Gross Value of Production by product ($1.17 bn) in 2011/12
over two-thirds of Tasmania’s gross value of food and agriculture production as it stands today can benefit from greater access to irrigation water.
300
3502001-02 Sheepmeat
Other
200
250
300
P (
$ m
ln)
2011-12Vegetables
Beef
Other
50
100
150GV
Fruit
Nurseries
Cereal grainsHayWool
0Other
broadacre crops
Milk
2
Source: ABS & Rabobank, 2013Source: ABS & Rabobank, 2013
Introduction: Global climate comparisons
Intensive agriculture is relatively untested in many parts of Tasmania’s key agricultural zones. A case in point is the Midlands region where low-inputbroadacre farming has dominated the landscape for generations, and only now are new farming models being explored with greater intent.
While Tasmania’s Midlands are unique in an Australian context, global comparisons can be made to other productive agricultural regions. For example,temperature averages for Oatlands compare closely to Invercargill in New Zealand, but with half the annual rainfall farmers can now supplement rainfall
p
Oatlands, TAS Ross, TAS
as and when needed. At the same time, different microclimates exist in close proximity which can feasibly support a more diverse range of agriculture.
192123
um
(C
)
25
30
um
(C
)
579
11131517
Mea
n m
axim
u
5
10
15
20
Mea
n m
axim
u
Oatlands, TAS Invercargill, NZ
8
10
12
mu
m (
C)
Ross, TAS Alexandra, NZ Salem, OR
68
1012
mu
m (
C)
0
2
4
6
8
Mea
n m
inim
-4-20246
Mea
n m
inim
3Source: Australian BOM, NZ NIWA, US National Weather Service & Rabobank, 2013 Source: Australian BOM, NZ NIWA & Rabobank, 2013
Oatlands, TAS Invercargill, NZRoss, TAS Alexandra, NZ Salem, OR
Sizing up Tasmania’s opportunity in dairy
The dairy industry is Australia’s 3rd largest rural industry, behind
g p pp y y
Australia’s milk production, processing and wholesale sector by state (2012/13)
QueenslandWestern Australiay,
wheat and beef, with a gross value of $4 billion.
Australia is a relatively small producer of milk, but the world’s 4th
Production: 458 million litres(5yr CAGR -1%)Producers: 555 farms and 96,000 cowsProcessors: Lion, Parmalat
Production: 337 million litres(5yr CAGR 1%)Producers: 162 farms and 55,000 cowsProcessors: Lion, Harvey Fresh, Brownes
Western Australia
largest dairy exporter.
The dairy industry is concentrated in the south-east; where Victoria is the largest production state.
New South Wales
Milk production systems vary across the country due to differing climatic conditions, market requirements and the
t f i t
Production: 1.071 billion litres(5yr CAGR 0.4%)Producers: 778 farms and 198,000 cowsProcessors: Lion, Parmalat, Bega, Murray Goulburn, Norco and Hastings
South Australia
cost of inputs.
Since deregulation in 2001, the industry has undergone significant change and rationalization.
Production: 6.039 billion litres(5yr CAGR -0.1%)Producers: 4,556 farms and 1.059 million cowsProcessors: Murray Goulburn, WCB,
Victoria
Production: 760 million litres (5yr CAGR 3%)Producers: 444 farms and 146,000
Tasmania
Production: 536 million litres(5yr CAGR -2%)Producers: 275 farms and 77,000 cowsProcessors: Lion, Parmalat, UDP, WCB, Murray Goulburn
4
Processors: Murray Goulburn, WCB, Bega Group, UDP, Lion, Fonterra, Burra, Longwarry
cowsProcessors: Lion, Fonterra, TDP, Betta Milk, Ashgrove, Cadbury
Source: Dairy Australia, Various sources, 2013
Tasmania’s expanding milk pool creates export opportunities
1,200Tasmania has a vibrant dairy sector and is one of the nation’s quickest
p g p p pp
Tasmanian milk production (million litres)
800
1,000
qgrowing milk pools.
In recent times there has been significant investment by dairy processors, but more investment on-farm is
Industry objective is to lift production a further 355 million litres
400
600
needed in the medium-term to optimise processing capacity.
To this end, the sector has a stated strategy to lift production by
ll l
0
200
400355 million litres to 1.1 billion litres by 2016/17, which equates to 190 new farms and 67,500 cows based on Tasmania’s average d i fil 0dairy profile.
5
Source: Dairy Australia & Rabobank, 2013
Dairying is a complex and volatile operating environmenty g p p g
The Australian dairy sector operates in a volatile global commodity market. This volatility is felt across all parts of the value chain, but especially at thefarm gate. As a result, dairy farming is a complex business with a challenging operating environment and has seen profitability fluctuate widely, and thereturn on investment remain quite low compared to other investment streams.
While Tasmania dairy land values have fallen from recent peaks, prices remain historically high. As dairy farmer average debt levels have risen sharply in
6,000
3 500
4,000500,00010
Tasmania average dairy financial benchmarks Tasmania dairy land values and debt levels
recent years, this has tied up much more capital on-farm and underpins the need for alternative capital streams to inject liquidity into the sector.
4,000
5,000
2,500
3,000
3,500
00
w
300,000
400,000
6
8
D
2,000
3,000
1,000
1,500
2,000
A$
‘00
A$
/co
w100,000
200,000
2
4A
UD
%
0
1,000
0
500
2003/04 2011/12
Liabilities per cow (LHS) Land value (RHS)
0
,
02003/04 2011/12
6
Liabilities per cow (LHS) Land value (RHS)Opearting profit; EBIT (RHS) Return on assets (LHS)
Source: 2013 ANZ Dairy Business of the Year Award
Operating profit; EBIT (RHS)
Global growth matrix reveals enormous upside in Asia
A number of demographic and economic factors are
g p
Dairy market size and forecast growth - by region (2010-2020)
Indian subcontinent26
on li
tres
economic factors are driving dairy demand growth in developing economies.
There are divergent growth prospects NAFTA
South AmericaChi
16ol
ute
gro
wth
in b
illio
Mostly milk deficit regions
between the developed economies and emerging economies.
Importantly, growth will be the fastest in markets which will be
EU-27
Middle EastNorth Africa
China
Japan and KoreaSoutheast AsiaOceania
-4
6
-1% 0% 1% 2% 3% 4% 5%
Ab
so
CAGR
Eastern Europe
markets which will be unable to produce enough milk locally.
Over recent years Australia has exported around 40–45% of its
Australian dairy exports by region, 2011/12
South East Asia30%Middle East
12%
Africa2%
Americas4%
Other6%
milk production, destined mostly for Asia, where Japan continues to be the single most important export market.
Europe2%
7
Japan19%
Other Asia25%
Source: Dairy Australia & Rabobank, 2013
The bridge to meet forecast future global dairy demand
Looking ahead to 2020, it is apparent that low cost regions
Trade growth: 2011 to 2020 (assuming 3.9% CAGR)
2 5 83.590
g g y
that low cost regions can’t balance the market alone as exports fall short of market needs.
59.2 3.0 1.8 1.5 0.7 1.0
8.95.0
2.5
70
80
EU/US may fulfill most of the additional requirements, but investment will be heavily price dependent.
40
50
60
n li
tres
(LM
E)
But even given the growth potential of the world’s major suppliers, a looming shortfall exists in
20
30Bill
ion
global supply to meet global dairy demand.
0
10
Trade 2011
NZ Australia Argentina Uruguay Belarus EU USA Other Trade 2020
8
Source: Rabobank, 2012
Tasmania has a clear comparative advantage in dairyp g y
On farm production is globally competitive
Strengths
Resource constraints (cows, labour)
WeaknessGlobal milk production costs have converged between exporting countries as
Growing footprint of major processors
Efficient access to growing export markets in Asia
Limited on-farm access to capital
Lack of scale across the value chain
exporting countries as traditionally low-cost milk producers have seen their production costs increase.
The cost of producing milk has become more volatile
Opportunities Threats
High quality & safe food producer Port infrastructure
has become more volatile due to increased volatility in global feed prices and the increased use of these feeds in traditional pasture-based regions.
Access to more reliable and efficient production systems with irrigation water
Scale producers & limited industry baggage
Rising costs across the value chain
Environmental checks and balances
High labour costs and rising energy costs are a challenge for milk producers in Australia to manage their future costs.
Brand ‘Tasmania’ & the promotion of sustainable production/product traceability/environmental stewardship
Tariff disparities with competitors in offshore marketsFarmers are increasingly
relying on improving efficiencies downstream in the supply chain to maintain global competitiveness.
9
The growth of dairying in New Zealand’s South Islandg y g
Over the past decade New Zealand milkproduction has increased by more than 50%.
1 500 000
1,800,000
es)
New Zealand milk solids production by region, 2000/01 – 2010/11
Dairy farmers enjoyed a run of good returns,increased capital investment and strong assetgrowth, which have fuelled significantdevelopment of new dairy farms and processingfacilities.
Much of the growth has taken place in the South300,000
600,000
900,000
1,200,000
1,500,000
Milk
solid
s (t
onn
e
Much of the growth has taken place in the SouthIsland. Flat or rolling land previously used forfinishing lambs or cropping was easily convertedfor grazing and milking dairy cows, assisted bythe increased utilisation of irrigation inCanterbury.
For farmers the attraction to dairying versus
02000-01 2011-12
Waikato Taranaki Northern North Island Other North Island
Canterbury Otago/Southland Other South Island
For farmers, the attraction to dairying versussheep or cropping was twofold:
1) The increased cash flow from dairyoperations.
2) The uplift in land values which typicallyoutweighed the capital outlay required to covert. 10%
15%
20%
25% return from farming capital value change
New Zealand dairy operating profit and total return on assets
outweighed the capital outlay required to covert.
Milk production in the Canterbury and Otago /Southland regions surged by 150%, assisted bythe addition of 1.4 million cows!
-15%
-10%
-5%
0%
5%
10%
10Source: Dairy NZ & Rabobank, 2012
NZ dairy conversions & the environmenty
Constraints to further milk production growth arenow starting to bite particularly as environmentalregulations tighten and higher input costs 70%
80%
me
The industry has also accumulated considerable debt
regulations tighten and higher input costsbecome embedded in farming systems.
To overcome feed limitation, the options areeither:
• growing more feed on existing land• purchasing/renting more land or
30%
40%
50%
60%
70%
ge of
net da
iry ca
sh in
com
Interest
Feed, grazing, run‐off lease
Fertiliser• purchasing/renting more land or• buying supplementary feed
Major issues with water resources include:
• Pollution• Over allocation• Inefficient usage
0%
10%
20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Perce
ntag Wages
Inefficient usage
In response, local governments have promoted reforms, including:
• The (voluntary) use of management practices• Mandating specific performance standards• Imposing command-and-control requirements
Environmental constraints to play a role in future growth
Source: Dairy Economic Survey, Rabobank 2012
Imposing command and control requirements• Pricing nutrient loss and/or water usage
11
Feed grains – Fuel for dairy growth
Winter grains production in Tasmania has been stagnant for a long time, with little comparative advantage relative to larger scale mainland producers andonly limited demand for inputs from local livestock industries and value-added food processors.
But with a growing dairy industry and the ability to boost the reliability and productivity of grains production, there is likely to be more scope for dairyoperations to require more feed and pursue integrated production systems to reduce existing exposures to inherently volatile feed grains markets.
g y g
Winter crop production in Tasmania Feed grain prices (ex. Geelong)
80
90 350
50
60
70
80
odu
ctio
n (
kt)
200
250
300
Pri
ce (
AU
D/t
)20
30
40Pro
50
100
150
PFeed Wheat Feed Barley
0
10
0
50
12
Source: Bloomberg & Rabobank, 2013Source: ABS & Rabobank, 2013
Specialty grains – Is Quinoa at home in Tasmania?
While there is only limited scope to compete with the scale and cost efficiencies of mainland grains producers, there are nevertheless growingopportunities for Tasmania to explore the production of higher value specialty grains that are growing in popularity in the household diet.
Of particular note is Quinoa, an ancient grain of South American origin that has been hailed as a ‘superfood’ due to it being gluten-free, very high inprotein and rich in trace nutrients. Demand for Quinoa is steadily rising in developed markets, to the extent that the traditional production base in Bolivia
p y g
Quinoa – Historical global production World trade in Quinoa, 2012
and Peru is struggling to keep pace and global prices have increased strongly in recent years.
80
90
HollandEXPORTS
50
60
70
80
mln
ton
nes
)
Peru26%
3%
France3%
Germany2%
Other3%
20
30
40
50
Pro
du
ctio
n (
m
Bolivia63%
USA40%
Canada15%
France
IMPORTS
0
10
P 40% 13%
Holland6%
Australia4%
Other22%
13
Source: UN Comtrade, 2013Source: UN & Rabobank, 2013
Specialty grains – Is Quinoa at home in Tasmania?
What makes quinoa particularly interesting for Tasmania is that it grows under climatic conditions that are very different from that of more staple grainsin the diet. In fact, quinoa thrives in a mostly arid and cool climate, with the ideal growing temperature ranging from 15-20°C. In fact, Quinoa is currentlybeing successfully grown in Tasmania, albeit on a very limited scale.
From a demand perspective, as individuals in western countries increasingly expand their understanding of dietary health and food intolerances,
p y g
Quinoa – Agronomic profile Sales of gluten free grocery products by market, 2008-2013e
restaurants and food manufacturers are tailoring more and more products to meet these growing needs.
500
600
e mln
) 2008 2013
100
200
300
400
Cat
egor
y va
lue
(loc
al c
urr
ency
, m
0
100
Australia Canada USA France Germany
(
14
Source: Euromonitor, Freedom Foods & Rabobank, 2013Source: UN FAO (http://www.fao.org/quinoa-2013/what-is-quinoa/cultivation/en/), 2013
Poppies – Capturing growth in Tasmania
Global demand for natural alkaloids for medical and scientific purposes has maintained a steady upward trajectory over recent years. Tasmania’s positionas one of the world’s most significant production locations of these products has also increased, but more recently processors have begun to explorebeyond Tasmania to the Australian mainland to more effectively manage their supply risk and secure additional supplies to fuel demand.
The demand for natural alkaloids looks set to continue increasing as income levels rise and western medicine takes root in less developed countries. The
pp p g g
Global production of Anhydrous Morphine Alkaloids Global distribution of Morphine consumption
consumption of morphine, for example, has risen by more than four fold over the past two decades, but remains concentrated in high-income countries.
350400450
(ton
ne) ROW
Australia
NB: Percentages in parentheses represent respective share of the global population
50100150200250300
Pro
du
ctio
n (
United States 54.8% (5.3%)
Australia & NZ 2.8% (0.4%)
02007 2008 2009 2010 2011
Global production of Anhydrous Thebaine Alkaloids
250
nn
e)
ROW Canada 7.1% (0 6%)
Japan 0.7% (2.2%)
Other countries 7.8% (79.7%)
50
100
150
200
Pro
du
ctio
n (
to
Australia(0.6%)Europe
26.8% (11.9%)
15Source: INCB 2012 NDR, 2013
02007 2008 2009 2010 2011
Pyrethrum industry – Banking on consistency
Kenya once supplied more than 70% of the world’s pyrethrum requirements, but in the space of just a decade, gross mismanagement has invitedTasmanian suppliers (under the direction of Botanical Resources Australia) to supply global insecticide manufacturers with a much more reliable product.
As demand remains strong, insecticide manufacturers have realised a need to sure-up supply lines beyond Australia. The task to restore the badly brokensupply chain in Africa is considerable, but has the potential to limit some of the growth that will otherwise be available to Tasmanian growers in coming
y y g y
Kenya’s demise has been Tassie’s prize The African supply chain is badly broken, can it be repaired?
years. Nevertheless, consistent supply out of Tasmania will remain in demand for the vast majority of end-buyers who value surety of supply.
12 000)
8,000
10,000
12,000
d f
low
ers
(ton
nes
)
2,000
4,000
6,000
rod
uct
ion
of
dri
ed
0Pr
16
Source: SC Johnson & Business Daily http://www.businessdailyafrica.com/Pyrethrum-farmers-export-first-load-after-State-bailout/-/539552/2094946/-/m24buc/-/index.htmlSource: PGK c/o PGA & Rabobank
Vegetable industry – An opportunity to scale up
The Tasmanian vegetable industry has suffered its share of setbacks in recent years as local processors have sought to consolidate operations offshore ina lower cost environment and the high Australian dollar has crimped export earnings. However, with greater access to irrigation comes the opportunityfor growers of fresh and processed vegetables alike to achieve greater economies of scale and restore their competitiveness.
Scale is widely recognised as a profit driver in vegetable production, and while the average Tasmanian farmer is close to being the most productive and
g y pp y p
Average farm area planted to vegetables by state, 2010-11 Average income return to vegetable growers
highest quality producer in Australia, they remain one of the smallest in Australia. Access to greater scale would act to boost their competitiveness.
50
60
ze (
ha) 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
0
10
20
30
40
Avg
. fa
rm s
iz
10
12
14
nco
me
retu
rn
Average production cost of potatoes by state, 2010-11
0NSW VIC QLD SA WA TAS
400450
ost
4
6
8
Ave
rag
e in
50100150200250300350400
vg.
pro
du
ctio
n c
o($
/to
nn
e)
-2
0
2
<5ha 5-20ha 20-70ha >70ha
17Source: ABARES & Rabobank, 2013
050
NSW VIC QLD SA WA TAS
Av <5ha 5-20ha 20-70ha >70ha
Average area planted to vegetables
Wine industry – The growth paradox
Tasmanian wine production jumped in 2013 to a record 11.4 thousand tonne, which equates to less than 1% of the Australian crush and just over 3% ofthe New Zealand crush. An industry debate over the ideal growth trajectory of the industry has been underway in recent years, but it seems apparentthat significant yet sustainable growth is in fact possible from this low base, and would in fact help to gain some level of critical mass in existing regions.
Comparisons are often drawn to the recently mixed experiences of the New Zealand wine industry. While it is doubtful that this scale of growth would
y g p
Tasmanian wine production, 2003-2013 New Zealand wine production
ever be possible given the resources available in Tasmania, a balanced growth trajectory and high-value focus are definitely in order.
12
e)
$2,500
350
400
ne)e)
8
10
tion
('o
oo t
onn
e
$1,500
$2,000
200
250
300
e P
rice
($
/to
nn
ion
(‘0
00
to
nn
e
4
6
Pro
du
ct
$500
$1,000
50
100
150
Ave
rag
e G
rap
Pro
du
ct
0
2$00
Marlborough Hawkes Bay Gisborne
Otago Other Avg Grape Price
18
Source: Winegrowers NZ & Rabobank, 2013Source: Wine Tasmania, 2013
g g p
Final takeaways – Supporting initiatives to foster growth
From this high level study it is clearly apparent that significant growth opportunities exist on the back of the investments made in the State’s irrigationinfrastructure. However, how to best foster and manage this growth remains the next burning question.
To this end, the ability to better inform investors and remove a degree of risk from investment decisions is of vital importance to encourage investmentfrom within the State and beyond. Initiatives to achieve this aim could include the development of detailed economic models for key crops and regions of
y pp g g
Cool climate crop research in Canada
interest, and partnering with universities to direct more research towards ground testing crops or production systems in various irrigation districts.
19
Source: Government of Canada http://www.agr.gc.ca/eng/science-and-innovation/research-centres/atlantic-provinces/atlantic-cool-climate-crop-research-centre/?id=1180547153109
Food & Agribusiness Research and Advisory (FAR)g y ( )
A global team of 80 analysts dedicated to delivering insights into the world’s major F&A regions
Marc SoccioSenior Analyst – Wine, Horticulture & Rural Economics+61 3 9940 [email protected]
Michael HarveyySenior Analyst - Dairy & Farm Inputs+61 3 9940 [email protected]
Meet others in the FAR Oceania research team…
Luke Chandler, General Manager
Hayley Moynihan, Senior Analyst (Dairy)
Sarah Sivyer, Senior Analyst (Animal Proteins)
Graydon Chong, Senior Analyst (Grains & Oilseeds)
Matt Costello, Analyst (Animal Proteins)
Ll d S tt A l t
20
Lloyd Setter, Analyst
About the Rabobank Groupp
With over 110 years of banking experience, Rabobank is the world’s leading specialist in food and agribusiness banking. Founded in the Netherlands in 1898, by farmers for farmers, Rabobank retains its cooperative structure and founding principles while operating in 42 countries around the world.
Rabobank is among the 30 largest financial institutions in the world based on Tier 1 Capital, with a continuing and growing presence in Australia and New Zealand. With 93 branches located throughout all major agricultural regions in Australia and New Zealand, Rabobank Australia and Rabobank New Zealand are leading rural lenders that take pride reinvesting back into the local agricultural community. Rabobank understands the cyclical nature of agribusiness and takes a long-term view of the industry, using its established network of strategically located branches across Australia and New Zealand to service rural clients.
As well as global knowledge and local market expertise, Rabobank rural managers have a genuine understanding of their clients’ businesses. This unique approach provides a real value-adding resource to help clients achieve their short and long-term business goals.
hi d i i d b b b k li i i d i d i li (“ b b k”) h i f i d i i i d i hi d h b il d
For more information on Rabobank products and services click on the links below:
www.rabobank.com.au www.rabobank.co.nz
This document is issued by Rabobank Australia Limited incorporated in Australia (“Rabobank”). The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by Rabobank or any of its affiliates to enter into a transaction. This information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any financial or strategic decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither Rabobank, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any direct, indirect, consequential or other loss or damage howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced distributed or published in whole or in part for any purpose except with the prior written consent of Rabobank All copyrights including those within the
21
be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of Rabobank. All copyrights, including those within the meaning of the Copyright Act 1968 (Cth), are reserved. Australian law shall apply. By accepting this document you agree to be bound by the foregoing restrictions.
© Rabobank Australia Limited, Level 16 Darling Park Tower 3, 201 Sussex Street Sydney Australia, +61 2 8115 4000
