Why are investors still over the moon about Australian beef?

Australia’s iconic beef industry is seeing heady days, but that doesn’t mean there aren’t opportunities still for the right type of investor.
 
Record prices and the recent sale of large cattle assets to institutional investors and others show that, even as Australia’s iconic beef market is set to face new headwinds, confidence is high.

The predicted headwinds are well-founded. Low grain prices and cattle numbers in the Americas and Australia have created the conditions for high profits. But the Australian government sees beef and veal export earnings falling 9 percent in 2017, due to growing herds and export competition. US cattle businesses are now better prepared to meet domestic demand, which will almost certainly dent what was Australia’s largest export market. Brazil is also selling more beef to Asia.

Some investors are hinting that they don’t see it as the right time to buy. Tim McGavin from Laguna Bay told me earlier this year that the beef market was “for the last three or four years our favourite sector. Sadly, it’s been repriced now.” CIC’s former chief investment officer warned investors at our June Melbourne forum not to rely on too much growing demand from China.

And yet NZ Super head of international direct investment Nigel Gormly is hunting for an Australian beef investment and VicSuper has hinted it could look at the sector in a year or two. QIC acquired a majority share of the North Australian Pastoral Company in May. And Peter Hughes, a Stanbroke sale participant and fourth generation in a family of cattle runners, has been reinvesting, after selling in 2009. Even McGavin qualified his statement, adding that “beef is priced for perfection now, but it doesn’t mean there isn’t opportunity ahead of us”.

So why is there so much continued interest?

For one thing, investment advisor and cattle business-owner Philip Jarvis told me the other week that grain prices are still low enough to cushion falling beef prices in the near future. Investment advisor Jennifer Wainwright said at our June forum there are still bargains to be had in northern Australia. She advised going into specialist breeds like Wagyu, which is targeting luxury markets in Indonesia and China. That is the play Peter Hughes made buying Tumbar station.

Herd and station prices may be higher than before, but investors with big tickets are taking a long-term view. QIC global private equity principal Phil Cummins said his firm would invest in NAPCO for at least 10 years and would “de-commoditise” the company by making it vertically integrated. Michael Dundon, from VicSuper, told me high prices also made it an attractive time to sell, and that although they would not pay over the odds, the climate could open up the best quality assets.

For many investors, their strategy is not to buy at a high point in the cycle. When exports declined in 2007 and 2008 after the market had heated up, the industry took a heavy hit.

There are also signs, though, that the Australian beef industry has changed since then.

Those who have gone into beef recently, such as institutions or Chinese investors, have the financial clout and connections to ‘beef up’ their supply chain or a deep knowledge of the sector. As Jarvis put it: “We don’t want to be the food bowl of Asia, we want to be its delicatessen,” making breed choice and market knowledge another key.

It seems that there is still opportunity out there, be it a family farm deal or a buyout, but given high prices and the coming headwinds, investors might want to consider whether those deals are the right fit for them.

How do you think investors should approach Australian beef? Email clare.p@peimedia.com