AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

October 2010: Primary Industries with a focus on Agriculture and Agribusiness

EDITOR’S COMMENT

Welcome to AFG Venture Dispatches, your insight into current issues and items of interest for Emerging, Technology and Growth Companies across Australia and Asia. Agriculture and Agribusiness face immense challenges as the number of mouths to feed globally increase and arable land and water accessibility decreases. The industry’s ongoing ability for innovation and adaptability will require collaboration amongst sub-sectors and national governments, with the support of patient capital to satisfy global demands and needs.

Articles, comments or letters are most welcome and can be sent to editor@afgventuregroup.com

The next edition will be in December 2010 and will focus on Social Media, Social Networking and Social Capital. Contributions welcome.

This Month’s Theme – Primary Industries with a focus on Agriculture and Agribusiness

I call for a global contribution to deal with the reasons for the current crisis and its repercussions in a way that achieves the interests of both developed and developing countries; a global contribution that goes beyond policies, attitudes and interests in their narrow national perspectives so that this contribution will deal with the people’s food security more comprehensive… a global contribution that witnesses our joint efforts on the national, regional and international levels to contain this crisis and stop the mounting rise in food prices.”  – Egyptian President Hosni Mubarak

The agriculture sector has a track record of ongoing innovation and adaptation to satisfy food needs. This adaption has come from improvements in processes, breeding, best practices and supply and logistics.  However, the world’s food needs are increasing (and forecast to keep increasing) due to a number of factors.  These factors include global population growth, reduction in arable land, degradation of top soil, changing weather patterns, reduction in availability of water, increasing urbanisation and competition with the production of alternative crops or uses such as bio-fuels.  Agribusiness also needs efficient and effective transport and logistics and supply chains linking the producers, the suppliers, the distributors and the markets together.  All of these factors, combined with global market conditions make the provision of enough food and agri materials, one of the world’s most pressing issues.

The Australian agriculture industry remains an important sector.  Not only for our own national food security but in relation to export opportunities.  Factors affecting the industry are water rights (as an example refer Murray Darling Basin Plan – http://www.mdba.gov.au/media_centre/media_releases/basin-plan-guide-released-for-public-discussion), changing demographics, industry consolidation, sustainable land use, climate change, industry policy and structure, uptake and implications of technological innovations, supply chain innovation and export market changes and adaptation.  Our contributors consider some of these aspects within the ambit of their professional experience.

Global food security and demand for materials is going to require collaboration regionally and multilaterally. Sharing of ideas and processes “both new and tested, cooperation in trade and capital flows and the sustainable management of natural resources will be required to meet the increasing complexities of population growth and movement, in a finite natural world.

It is argued that the Indian peasants in Chiapas, Mexico are backward, they produce only two tons of maize per hectare as against six on modern Mexican plantations. But this is only part of the picture. The modern plantation produces six tonnes per hectare and that’s it. But the Indian grows a mixed crop. Amongst his corn stalks, that also serve as support for climbing beans, he grows squash and pumpkins, sweet potatoes, tomatoes and all sorts of vegetables, fruit and medicinal herbs. From the same hectare he also feeds his cattle and chickens. He easily produces more than 15 tons of food per hectare and all without commercial fertilisers or pesticides and no assistance from banks or governments or transnational corporations.

Jose A. Lutzenberger, former Minister of the Environment for Brazil.

Mobilising Capital into Agribusiness by Suren Kumar, Associate Director, Corporate Finance, Food, Fibre, Beverages & Agribusiness Section, National Australia Bank and Jamie Lord, Associate Director, Corporate Agribusiness, National Australia Bank

Suren Kumar and Jamie Lord discuss the capital structure of the agricultural sector as it constantly adapts to meet increasing demand.  The United Nations estimates that by the year 2030, demand for agricultural products will be around 60% higher than 2002 levels and that we will have about half of the arable land available to us than that of 40 years ago.

Across the globe, capital has been and is being mobilised into agriculture, as the economics justify the investment. As Australia’s farms are consolidating and aggregating, individual farmers are exiting the industry and this has attracted equity outside the traditional banking sector to facilitate this transition. Some investors are attracted to the economies of scale and synergies in a corporate structure, whilst others see opportunities to add value with improved technologies and methods.

Agriculture requires capital that is patient. It is a long-term investment and its maturity profile and lack of correlation to other asset classes may make it more suited to superannuation and sovereign wealth funds than private equity or venture capital. Australian agriculture faces capital and succession challenges as it attempts to seize the opportunity of increasing global demand for food and food products.

Foreign Investment in Australian Farm Land: Scrutiny for Acquisitions is on the Horizon by Simon Venus, Partner, Piper Alderman

Simon Venus reviews the Foreign Acquisitions and Takeovers Act 1975 in relation to acquisitions of Australian farm land. Increased investment in agricultural land around the world, due to the 80 million new mouths to be fed every year, has raised local concerns about domestic food security and sovereignty.

Whilst foreign investment has been a feature of agricultural production in Australia since European settlement, there have been calls to increase scrutiny by the Australian Foreign Investment Review Board over the agricultural sector. Currently, no notification of an interest in an acquisition rural land is required until a monetary threshold is reached.   When this threshold is reached FIRB rules apply just the same as to any other acquisition of an Australian company or business.

The premise of the debate for legislative reform in this area is based on a belief that Australia should “sell the food and not the farm”. The balance to that argument is that capital needs to flow into the sector to bring appreciable benefits in the form of innovation, intellectual property and jobs. If this cannot be met by domestic sources then it seems inevitable that sustainable agricultural production, to meet the growing global demands, will be achieved through foreign capital.

Climate Change Risk Assessment and Adaptation in Queensland by June Brundell, David Cobon and Grant Stone, Queensland Climate Change Centre of Excellence

June Brundell, David Cobon and Grant Stone present and discuss a tool that the Queensland Climate Change Centre of Excellence (QCCCE) and its partner, Department of Employment, Economic Development and Innovation (DEED) have developed to assist those involved in Primary Industry, identify and ultimately to manage, the risks associated with the changing climate of Queensland. These challenges and changes apply to other states and countries.

QCCCE developed a risk and vulnerability assessment process, which is applicable to any industry or region and it involves a number of steps to produce risk statements that will be an aid in developing regional plans and policy. The first step was to produce regional climate change projections that anticipated temperatures, evaporation and rainfall patterns. Next, a “risk matrix” was developed, with key working groups within the industry, to aid the decision making process for the process and actions of adjusting practices.

The working groups then agreed on adaptation responses depending on the vulnerability of impact risks and the adaptive capacity. These statements describe the nature and level of a risk, the need for a timing of a response; and the nature of useful adaptation responses that are used to advise management and inform policy. Further information on ClimateQ is available from the authors. It has already been used successfully with horticulturalists, crop-growers and graziers in a two-way exchange of information that increases the knowledge of the facilitators and raises awareness of stakeholders of their capacity to adapt to climate change.

Tackling the 21st Century Food Crisis with Technology by Dan Quinn, Policy Manager – Crop Biotechnology & Minor Use, CropLife Australia

Dan Quinn assesses the history of altering a plant that is intended for use as a food or material crop. Increasing population and the decrease in the size of arable land is requiring more precise modifications to crops to meet these challenges.

Cultivation of plants as a food source is believed to have commenced 11,000 years ago. Since that time crop breeders have consistently improved plants to produce better food and materials with greater yields. Methods have included: pollinating two strains of the same species; “wide cross” pollinating unrelated species that requires chemicals to make the new crop fertile; mutagenesis – mutating plants with chemicals, x-rays and radiation, to alter the genetic code of crops.

In the last 30 years another technology has begun to be used in crop breeding – genetic modification (GM) as a solution to some of the key constraints that agriculture faces in a hungry world. GM involves identifying the precise genetic code that is required to give a crop a particularly advantageous trait and inserting that into the crop. Dan discusses why we need GM, what type of major GM crops we already have – corn, cotton, canola and soybean as well as some Australian and International experiences with GM crops.

The Fresh Food Ambidextrous Challenge by Michael O’Keeffe, Company Director, O’Keeffe & Associates

Michael O’Keeffe examines the consistency and volatility challenge facing fresh food retailers and suppliers. Generating consumer confidence and repeat business for produce has been linked to providing fifty-two week supply. Retailers are encouraging suppliers to align their businesses to their supply chains and this has been rewarded with volume growth, underpinning their profitability.

However, managing consistent quality at a stable price has a number of hidden costs. Extending the growing season, with the risk of reductions in shoulder season quality can undermine demand. Increased costs in achieving 52 week yields amidst product volatility can be overlooked.

Michael provides some global examples of how retailers and suppliers are working together to satisfy consistency demands whilst managing inherent volatility issues. Fresh food firms need to be ambidextrous, balancing consistency and volatility, and perhaps re-injecting seasonality will see higher levels of consumer satisfaction and therefore more profitable primary producers.

Australian Agribusiness Needs to Prepare for a Big Increase in Overseas Demand by David Duckett, Managing Director, Structured Finance and Head of Agribusiness Practice, AFG Venture Group

David Duckett compares the structures of the industry bodies that represent our most successful exports, from a foreign exchange earnings point of view. The mining industry has the Minerals Council of Australia, tourism has Tourism Australia which relates well with State Tourism authorities, and education is of a size which can be managed relatively efficiently.

Agribusiness however, faces special challenges both on the domestic and export front but it is characterised by a plethora of organisations who protect their overseas markets and interests without necessarily sharing experiences and intelligence across the sector. Overlying all sectors are State and Federal government departments which can further complicate the efficient achieving of goals in overseas markets by confusing buyers.

As Australia is increasingly being viewed as a potential food bowl for Asia and beyond, David suggests agribusiness adopt the Minerals Council model, where ideally all agribusiness sub-sectors would be affiliated. At the moment the Agribusiness Association of Australia provides useful representation, however it is not the peak body providing a cohesive powerful force in policy development in the critical areas that are outlined in David’s conclusion.

Australian Agriculture Business and Challenges and Opportunities for the Sector by Lindley Edwards and Mitchell Brown, CEO, AFG Venture Group and Corporate Advisor/Analyst, AFG Venture Group

Lindley Edwards and Mitchell Brown assess the opportunities and challenges facing Australian agriculture in a rapidly changing world. They comment on some of the essential issues that require logical debate and decisive action.

Agriculture is a significant exporting industry for Australia. It has an opportunity to maximise its natural assets to contribute to the global effort to deal with people’s food security amidst growing populations, reductions in available arable land and water, changing weather patterns and tastes and demands for particular products.

There are prospects for shortages in the supply of food around the world and it will require global cooperation to meet those needs. Lindley and Mitchell outline some strategic opportunities for Australia.

“The poor and hungry need low-cost, readily available technologies and practices to increase food production.” New Scientist editorial, 3 February 2001

“I don’t think any of us would disagree that, if an alternative exists to a GE (Genetic Engineering) solution, it is to be preferred.” Mr Hodson QC, acting on behalf of the Life Sciences Network at the New Zealand Royal Commission on Genetic Modification, 8 February 2001

“Bring diversity back to agriculture. That’s what made it work in the first place.” David R. Brower, Environmentalist and Founder of Sierra Club Foundation

If you have any comments or would like to submit an article, please email the editor@afgventuregroup.com – your comments and feedback are always welcome. We seek articles for the next issue that will focus on Social Media, Social Networking and SoialCapital. The due date for contributions will be end November 2010.

If you were forwarded this newsletter and would like to receive your own copy, wish to change your e-mail address or no longer wish to receive further copies of AFG Venture Dispatches, please contact editor@afgventuregroup.com.

A Final Word

“Some Green Revolution crops are poor in vital nutrients such as calcium, iron and vitamins C and A. But often, under utilised crops are rich in these nutrients. One study found four African home-garden crops, leafy vegetables with twice the micronutrients of spinach.”

Stefano Padulosi, International Plant Genetic Resource Institute, Rome