New Hope: It is a good time to invest in Aussie beef processing

Chinese group New Hope has opened a Sydney office and will spend A$1 billion on Australian agribusiness in the next three years. We asked its new Australia and New Zealand managing director, Nick Dowling, how it plans to invest the money and what he thinks of the country’s beef and dairy industries.

Why set up a dedicated office in Sydney?

We don’t intend to have a large investment office. We leave each of our investee companies to run themselves with the management and board representation we have. It’s not efficient for it to be large, but it is high functioning. We don’t buy companies […]; we build partnerships. We assist with information and opportunity from the New Hope Group in China while looking at business opportunities.

How will you invest A$1 billion in Australia?

We already have interests in beef and dairy and will continue to explore further investment. We will look at other areas […] like seafood or pork. Poultry [one of New Hope’s key international businesses] is pretty hard in this country, as it’s concentrated. Feed, for sure, and technology.

I would like to stay on what is core [protein], there are things we are looking at that could take us in different directions.

We also have a third private equity fund at Hosen Capital [in China], managed at arm’s length. If there are opportunities to co-invest we look to do so.

Why have you invested in beef processing in Australia?

New Hope is increasingly a global food and agribusiness supply-chain player. We particularly think about beef as a global commodity – as a processor so we don’t have land [or] herds. The majority of our products from [portfolio company] Kilcoy go to Japan, Korea and the US. In Australia, [processing] margins are down year-on-year by about 20 percent, but as an international player it is a good time to invest. We are doubling capacity to 500,000 head a year, benefitting from economies of scale.

We balance across our operations [in the US, China and Australia], so if we have a downturn, we have got capacity elsewhere, taking some of the volatility out.

What characterises the beef industry in Australia?

Australia has an incredibly volatile climate, and until a couple of years ago was very dry so there was a lot of inventory [as producers wanted to sell cattle in expensive breeding conditions]. In 2008 the industry was highly leveraged and farmers got themselves into trouble. Beef prices fell and processors made the margins. We are currently suffering from the reverse: less inventory, prices up, and processors margins’ being squeezed. It will be interesting to see how quickly that corrects or reverses. With beef prices high, producers are quite happy to even sell breeders. There has been a huge emphasis from the lenders on farmers getting cashflow, so how quickly will the inventory be stocked?

Why did you go into Australian dairy?

Dairy is different. We are operating in New South Wales, which has a relatively good balance of supply and demand. We are producing a premium quality milk largely sold via long-term supply arrangements. The Victorian market, by contrast, has been in relative oversupply to local demand, because it has been an export market. Price signalling for the last few years has been set by Murray Goldman, so that industry structure in Victoria is in a bit of a funk. We look at it and think that we are glad we didn’t go there first.