table of - agric.wa.gov.au h… · web viewcereal straw and husks is the second-largest single...

Investment opportunities in Western Australia’s grains industry:Cereal hay for feed

Table of ContentsInvestment highlights..................................................................................................3

Industry overview........................................................................................................4

The Wheatbelt.........................................................................................................4

Export market..........................................................................................................5

Asian export markets...............................................................................................7

Australian domestic market.....................................................................................8

Quality.....................................................................................................................9

Infrastructure access...............................................................................................9

Investment opportunity..............................................................................................10

Financial analysis......................................................................................................11

Marketing and sales..................................................................................................12

Risk analysis.............................................................................................................13

Other important information......................................................................................14

Further contact:.........................................................................................................15

Disclaimer.................................................................................................................15

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Investment highlights

Western Australia is an ideal location to establish a global scale cereal hay export business as well as having the foundation of a strong domestic market. Cereal hay and especially oaten hay has proven to be highly profitable over the last decade with increased demand from Japan, Korea, Taiwan and the Middle East. Oaten hay is well suited to partial replacement of alfalfa hay especially as global supplies tighten.

The Western Australian cereal hay industry has many advantages including:

Competitively priced compared to similar grass hay products. Well established logistics network of growers, processors and transport

operators within 200 kilometres (km) of Fremantle export container port. High quality product with high digestibility and palatability. Strict quality control measures and grading systems that enhances

marketability. Plenty of land with suitable soils and climates for dryland fodder production. Available road, rail and port infrastructure providing access to both domestic

and international markets. Proximity to Asian market. Established markets in Japan and South Korea

and growth market potential in China and the Middle East. Strong support from the Western Australian government through the

Department of Agriculture and Food.

The market for cereal hay production is expected to remain firm for the foreseeable future given:

Stable and established markets for cereal hay in Japan and South Korea. Both markets are dominated by US sourced product, which provides an

opportunity for Australian producers to capture additional market share. Potential to penetrate new markets in China, particularly as China increases

its dairy herd. Growing domestic demand for cereal hay.

Investment in the production and marketing of cereal hay by foreign investors could provide good returns. For those with foreign operations requiring fodder as an input (such as large scale dairy businesses), an investment in the production of cereal hay can provide a dedicated supply chain, supporting security and continuity of supply and lowering overall costs.

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Industry overview

The WheatbeltThe Western Australian Wheatbelt covers approximately 9 million (m) hectares, from Northampton north of Geraldton, to the south coast at Albany, east along the coast to Esperance and to Southern Cross further inland. Across this vast area of Western Australia, professional grain growers have been able to effectively build Australia’s leading dryland cereal hay province that consistently produces bright clean cereal hay with a combined value in excess of $A100m per annum.

Image 1 Western Australia Wheatbelt.

The majority of fodder produced in Western Australia is oaten hay but also includes significant amounts of clean cereal straw from the central Wheatbelt region. Like wheat, oaten hay is well adapted to the dryland area of the Western Australian Wheatbelt and has potential to expand production, particularly to the southern province. Dryland oaten hay production has lower entry and operating cost

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compared to irrigated fodder systems due to reduced watering costs, suitability of soils, and climate in the Wheatbelt. The crop fits well within existing farm rotations and adds an extra level of income diversity to farm businesses.

Growers in central locations with high rainfall and close to the export ports of Fremantle become dedicated cereal hay growers and can offer returns often in excess of those available to grain specialists.

Export marketThe export cereal hay market has a high quality requirement. The cereal hay is tested for a range of quality parameters on delivery including fibre levels, sugar levels, colour and crude protein.

Figure 1 Export tonnage of fodder products from Australia and Western Australia 2008/09 to 2012/13 (Australian Bureau of Statistics)

Australian oaten hay has a very good reputation in Japan and Korea and the oat industry continues to work together with customers to ensure this is maintained. Western Australia exported 332 000tonnes of fodder in 2012/13 (Figure 1) which comprised of approximately seven different sub-products, with cereal hay making up 77% and worth a total of A$91.9m.

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Cereal straw and husks is the second-largest single feed product exported, with 47 000 tonnes worth A$11.3m exported from Western Australia in 2012/13. This represents approximately 14% of total animal feed exports (see Figure 2).

Demand for Western Australian fodder is currently tied to production from overseas competitors (including the US) and their supply to Japan and Korea.

Figure 2 A breakdown of the types of animal feeds exported from Western Australia.

The Western Australian cereal hay industry has expanded steadily in the 1990’s to now consistently exporting between 230 000 and 380 000 tonnes of fodder per year. In 2012/13 Western Australian fodder exports were valued at over $A113.1m, which represented 40% of the value of Australia’s total fodder exports (Figure 3).

The most significant export destination for Western Australian cereal hay is Japan, with 219 000 tonnes worth A$77.7m exported there in 2012/13.

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Figure 3 Value of fodder products exports from Australia and Western Australia

2008/09 to 2012/13 (Australian Bureau of Statistics)

Asian export marketsWestern Australia is ideally placed to service the Asian market and the Western Australian fodder industry has been expanding in response to the growing demand from South Korea along with significant demand from Japan (Figure 4). Additional markets are being established in the Middle East and there is desire to penetrate the Chinese market.

Concurrent to this increased international demand, there has also been a growing market for Western Australian quality cereal hay in the Australian domestic market.

Western Australia’s close proximity to South-East Asia affords it a significant transport advantage both in terms of costs and timeliness over other producing regions in Australia and also over other foreign competitors.

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Figure 4 Western Australia’s top fodder exports destination countries from 2008/09–2012/13

Demand for alfalfa hay in China and Middle East has grown dramatically in the last four years, in China alone it has grown from 219 000 tonnes (2010) to over 750 000 tonnes in 2013. The success of Western Australian cereal hay exports in Japan and Korea, can potentially be transferred to other markets throughout Asia and the Middle East.

Western Australian cereal hay exports can continue to complement the growth in Asian and Middle

Eastern alfalfa imports from the US. There is significant potentially for global dairy and beef cattle producers to be substituted alfalfa with oaten hay. This not only has health and productivity benefits to the cattle but also reduces future fodder market risk in supplies. Western Australia’s oaten hay industry is not dependant on irrigated water supplies but grown from natural rainfall.

Australian domestic marketDemand from the domestic hay market tends to depend on seasonal conditions such as pasture growth and meat prices for beef and sheep. While the returns for producing hay for the domestic market can be high, there is a risk of oversupply and creating a downward pressure on prices. Any limitation on meeting domestic supply can have a direct impact on exporters’ ability to supply their international customers.

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While it is recognised that approximately 80% of all fodder used in Australia is not sold, but instead held on farm and traded farmer to farmer in times of feed shortages, hay exporters remain the largest buyer group of hay and can draw upon a wide range of resources to meet their demands. Investors can benefit from the flexibility oaten hay brings to the farming system as it can increase livestock carry capacity and diversify revenue streams.

QualityWestern Australian Oaten hay is a preferred source of fodder for dairy cows, due to its high digestibility and palatability. Its main attribute, water soluble carbohydrates (WSC), is around 25%, which provides the cow with an instant source of energy that can be effectively utilised for high milk production and sustained live weight gain. Oaten hay, with its high WSC plus acid detergent fibres (ADF) levels of 28–35% and neutral detergent fibres (NDF) of 50–55%, provides a rapidly fermentable source of roughage that complement sources of protein, e.g. soya bean meal and alfalfa hay.

The quality of Western Australian cereal hay provides an excellent source of nutrition that enhances the performance and well-being of dairy cows.

Western Australian hay exporters routinely monitor production and the quality of their growers’ hay; colour, digestibility and sugar is closely scrutinised. Exporters and processors as an industry self-regulate quality assurance programs to ensure that their hay is of consistent quality, and is green, clean, disease and weed-free.

Hay processing companies in Western Australia apply a grading system based on nutritional value and according to the standard set by the Australia Fodder Industry Association (AFIA).

There are currently 13 hay exporters operating in Western Australia and each can have different requirements and methods of testing and grading hay. It is important to build a strong relationship with a chosen exporter prior to developing a cropping program as they can provide advice on how to maximise the chances of producing high yielding, quality hay. Fodder export facilities must meet strict regulatory requirements of the Australian Quarantine and Inspection service (AQIS) before they can be granted an export licence.

Infrastructure accessThere is a concentration of export hay producers within a 250 kilometre (km) radius of Perth where freight costs and farming systems favour hay production and processing with facilities for oaten hay in regional centres like New Norcia, Wongan Hills, Northam, Brookton, York and Narrogin.

Beyond 200kms from the port, transportation costs make the growing of cereal hay for export less economical. Also the decline in growing season rainfall further inland

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away from the coast lessens the yields and again reduces the potential returns of producing cereal hay.

The Department of Main Roads manages and maintains an extensive network of sealed roads and highways for easy access to ports or processors. They also manage permits for transport operators of oversize loads like hay and have clear guidelines on road usage and access.

The Wheatbelt region of Western Australia has ready access to the main container port of Fremantle with potential in the future that the ports of Bunbury, Albany, Geraldton and Esperance could be upgraded to handle the export of agricultural produce in containers (Image 2).

Image 2 Proximity to South-West ports (100km and 200km)

Investment opportunityInvestors in Australian cereal hay production and export can participate in the industry in a variety of ways, specifically:

domestic production of cereal hay. marketing and distribution within Asian market. infrastructure and capital.

Please contact the Department if you wish to further discuss investment types and opportunities.

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Financial analysisThe production and export of cereal hay in Western Australia has stood the test of two decades as a viable investment proposition. There are a number of influences on the returns that can be achieved through an investment in the cereal hay industry. Some of these are outside of an investor’s control and others can be substantially influenced by the decisions the grower and investor can make. Key uncontrollable factors include:

Fluctuations in demand and the subsequent influence on pricing. Exchange rates are also important for the viability of exports; the recent

weakening of the Australian dollar benefits export based industries, like agriculture, by making the Australian product relatively cheaper.

Weather, particular rainfall and the timing of that rainfall. Frost in some areas can also have an impact.

The price of fertiliser and fuel.

Controllable factors include:

The timing and selection of an investment in land. Production yield achieved, as influenced by the timing of seeding, application

of fertiliser and timing of harvesting. Use of labour and other key operational inputs such as fuel and fertilizer. Off-take agreements/contracts for cereal hay production. Transportation costs. Investment in equipment (hay presses) or specialised machinery.

Ability of cereal hay to improve weed management, reduce soil borne disease and add diversity to crop rotation options from a sustainability point of view.

An indication of the cost per hectare of land is provided in Table 2, focused on locations in high rainfall zones appropriate for the production of cereal hay.

Location Distance tonearest port

Rainfall zone: High > 450mmMedium rainfall 450 – 350mm

Average land value(A$/ha)

Typical hay yieldst/ha (dryland)

Gingin 100 km High – west coast south 3,500 6 – 7 t/ha

Dandaragan 150 km Medium‐High – West Midlands 2,190 5 – 6 t/ha

Bindoon 120 km High – north east Perth 3,000 7 – 8 t/ha

Williams 150 kmHigh rainfall South – east Perth

2,500 5 – 6 t/ha

York 120 km High‐medium – east Perth 2,000 5 – 6 t/ha

Table 2 Approximate farm values in some selected higher rainfall agricultural districts of Western Australia.

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There are a number of variables and inputs into the production of cereal hay, an estimation of relevant costs being provided in Table 3. Free on board (FOB) price at Fremantle for export cereal hay has averaged around A$345 over the last five years but is very dependent on quality.

Export hay businesses typically receive between A$150 and A$200 per tonne on farm depending on quality and distance to port.

A gross margin analysis is given in Table 3 to indicate the main elements of production costs and estimates a net return of A$355 per hectare based on good soil types, high rainfall (450+ millimetres) and production of six tonnes of oaten hay per hectare. Net return is based on an on farm price of A$170 per tonne.

Variables Cost per hectare

Grading and seed cost $45Fertiliser costs (eg. urea, potash) + cartage $200Lime (soil conditioner) $10Operational costs (machinery repairs & fuel etc.) $25

Crop protection (herbicides/fungicides) $80Casual labour – seeding & carting $20Cut, condition, rake, bale and stack $240Finance costs $45Total estimated costs of production – on farm $665

Total estimated net return $355Table 3 Estimated cost of production and net return per hectare.

Marketing and salesIn Western Australia, cereal hay businesses have a choice in selling their production directly to an export hay processor/exporter, a stockfeed manufacturer, livestock enterprise or domestic retail trader. Growers sometimes choose to retain some oats or oaten hay on farm as a fodder reserve. Production may also be undertaken to specifically meet export customer needs.

Export and domestic markets may differ in their specifications and quality attributes. It is important to check on delivery specifications, location and the quantity of a variety required by the different markets when deciding upon what variety to grow and where to market the oaten hay.

There are four main methods by which growers can market their cereal hay and manage price uncertainty:

Forward contract which sets a minimum guaranteed price per tonne. Forward contracts can take advantage of any up-side in domestic or export markets. This contract method is particularly preferred by the export hay processors as payment is finalised based on the quality at delivered and final market conditions.

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Fixed price contract is calculated per tonne for a proportion of the crop. For some growers this provides certainty and assists in them securing finance. This can act as a partial hedge in the cereal hay market where there are no formal mechanisms.

Accept the best cash price on offer at the time of harvest. Store cereal hay in on-farm storage sheds or processors warehouses until the

market price has reached an agreeable amount.

As well as the different pricing arrangements to choose from, there is also the natural uncertainty of fluctuating levels of world supply. These fluctuations have a direct impact on prices on offer to the Western Australian oat and hay industry, which is largely export oriented.

Risk analysisInvesting in dryland cereal hay properties has similar risks to grain production. Returns can be high (A$325 to A$500 net per hectare), however the variability of both market prices and weather can impact the returns that are available to an investor.

The different ways of participating in the industry have different associated risks. Investing in production and becoming an active manager would be the highest risk investment, whereas working in a joint venture would be a lower risk form of participation. Creating export facilities would require a significant capital outlay and would also be a higher risk activity (Figure 6).

Figure 6 Investment risk matrix.

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Growers have developed a number of different mitigation strategies. Growers can forward sell a portion of the production or simply contract for a fixed tonnage at an agreed price. Oaten hay producers can reduce their risk by switching over to grain production if hay outlook is unfavourable. It is known as a dual purpose crop as it can be cut for either hay or grain.

Owning land which can switch between grain and cereal hay production increases the robustness of the investment mix, as does investing in parcels of land in different part of the Wheatbelt. No two regions of the Wheatbelt experience the exact same weather, as there is a wide diversity of soil types.

Winter rainfall (June–July) in the South West of Western Australia has decreased at a rate of about 20 millimetres per decade for the last 25 years. Temperatures have also increased but not as much as expected. The atmosphere has become more stable over the South-West of Western Australia, with a weakening and southward shift of winter weather systems.

For growers and investors in fodder production this means later starts to winter rainfall and generally drier seasons. Less frequent wet years can lower the risk of waterlogging and damage to hay but yields can be less. The risks involved in investing in cereal hay production should be discussed with a qualified advisor and reflect the investment goals and objectives of the individual investor.

Other important informationIt is extremely important that all applications for regulatory approvals are underpinned by a clear and concise intent to achieve full disclosure based on a properly developed project proposal. This is because regulators need full disclosure of all required information from a properly developed project for quick and efficient processing of an application.

A comprehensive, integrated development application could be used to attain concurrent development approval from Local Government, Department of Environment Regulation (DER), Department of Transport (DoT), Department of Main Roads (DMR) and Department of Water (DoW). This could result in the time required for a total approval process of 3-6 months.

The Department of Agriculture and Food, Western Australia, is skilled in assisting proponents to seek approvals and will work closely with proponents for the inception of the project.

The time period for all regulatory bodies to access a proponent’s application commences from the point at which they receive all the information required to make a decision in an appropriate format. This time period should not be confused with the point at which the proponent make’s first contact with the regulators.

Proponents from overseas also need to comply with the requirements of the Australian Government’s Foreign Investment Review Board (www.firb.gov.au).

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Further contact:

Ms Courtney DraperTrade and Agribusiness Development Manager Grains IndustryDepartment of Agriculture and Food, Western AustraliaPhone: + 61 (0)8 9368 4658Email: [email protected]

The Grain Industry Association of Western Australia (GIWA) represents all interest groups across the grain supply chain in Western Australia and act as a central contact point for the industry.

Phone: +61 (0)8 6262 2128Email: [email protected]: www.giwa.org.au

The Australian Association of Agriculture Consultants of Western Australia(AAACWA) is the professional body of Western Australian agriculture consultants. Its members are highly qualified and experienced professionals who can assist investors to meet their investment goals. It is recommended that investors utilise their services before making any grain farm investment decisions or engaging real estate agents.Phone 1800 644 855Email: [email protected]: www.aaacwa.com.au

DisclaimerThis business case provides indicative modelling on the grains industry in Western

Australia. The business case and any additional information or documents that the state of Western Australia through the Department of Agriculture and Food, Western Australia (DAFWA) may supply, are to be used only as preliminary and indicative information, to be considered and used by prospective investors in the Western Australian grains industry in conjunction with other information and appropriate financial, legal, industry and other expert advice tailored to their individual circumstances and intentions. Prospective investors should conduct (or engage appropriate professional advisers to conduct) their own analysis and due diligence on any proposed investments, including the process for obtaining approvals. No part of this business case or any additional information or documents that DAFWA may supply constitutes or should be relied on as financial, investment, legal or other advice.

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The Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia accept no liability whatsoever by reason of negligence or otherwise arising from any use or release of material (which in this disclaimer includes this business case, any information in it or other part of it, and any other information, advice or material, oral or written, DAFWA may supply in relation to any aspect of the Western Australian grains industry, regulation of it or investment in it) or any error, inaccuracy or omission in the material. Although reasonable care is taken to make the material accurate, the Chief Executive Officer of the Department of Agriculture and Food and the state of Western Australia do not make any representations or warranties about its accuracy, reliability, completeness or suitability for any particular purpose.

Copyright © Western Australian Agriculture Authority (WAAA).

ABN: 86 611 226 341

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