KGB: AACo's Donald McGauchie

AACo chair Donald McGauchie outlines the opportunities for the Australian agriculture industry in Asia, the role of governments in promoting R&D, and what the future holds for AACo.

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Donald McGauchie gives his views on:

– Australia's potential role as a food bowl for Asia
– The likelihood of foreign investment in Australian agriculture
– The branding and marketing of Australian agricultural exports
– The need for sustained R&D in the agricultural sector to lift productivity levels
– AACo's plans to enable greater access to global beef prices
– The direction of the national broadband network

Stephen Bartholomeusz: Thanks for joining us, Donald.

Donald McGauchie: It’s a pleasure.

SB: You’re the chair of two of Australia’s largest listed agricultural businesses, Australian Agriculture and Nufarm, and you’re on the board of another one, GrainCorp.

DM: Yes.

SB: We’ve got a new Agricultural Minister, Barnaby Joyce. If you were advising him, what would you say the priorities ought to be?

DM: From this country’s perspective, you know, we have a magnificent agricultural base which is grossly underdeveloped. The opportunities are massive. And I think we have the capacity to feed probably a hundred million wealthy people. 

There are two points in that. One is the number, which means we’d have to nearly double our agricultural output to get to that sort of number, but I use the word wealthy because that’s what matters. Now we’re not a low-cost country, but we are a high-quality country. If we produce the right sort of product and feed into this massively growing market, there’ll be in excess of three billion people with a middle-class income by the middle of this century in the countries to the north of us, which is five times the population of the United States and Europe combined. 

Our opportunity is to feed a product in to the top end of that market. We shouldn’t just be selling our Wagyu beef out of AACo in Harrods at £200/kilogram; we need to be selling it in Beijing and Singapore and Seoul and in Tokyo, and many other points.

SB: ANZ and Port Jackson’s partners put out a study earlier this year, which reiterated what you just said: that we could double our agri exports by 2050 but said it required investments of $600 billion. Is there six hundred billion dollars floating around this country that’s going to go into agriculture?

DM: No, but there’s $600 billion around the world that can go into agriculture. And in fact what’s interesting is we’ve just started capital raising for AACo. What’s been really significant is the number of Australian investment institutions who have either significantly expanded their investment in AACo or bought into it for the first time. So, I think the message is very much getting through in Australia in the investment community, but around the world there’s any amount of investment capacity to be invested along with we need some government investment in infrastructure as well, so there’s a joint deal here to be done. The opportunities are huge.

Robert Gottliebsen: Isn’t it more likely that the Chinese state-owned enterprises, the Indonesians will, in fact, buy up most of the agriculture? They will make the investment, but they’ll be the equity holders.

DM: Well, they’ll do some of that. They’ll buy into companies like ours.

RG: Like GrainCorp?

DM: Like GrainCorp. Possibly, although GrainCorp at the moment – you know the situation with GrainCorp. But there are lots of opportunities to buy in to. There are lots of opportunities to buy land. I think we’ll get the whole range of investment outcomes.

RG: Are you concerned that our customers are going to buy our processing plants and some of our land?

DM: No, I’m not at all. I think that’s been a feature of Australian agriculture since AACo, which was formed in 1824 with £1 million capital from London to come in and develop Australia.

We’ve had very big investment from England, from Europe, the United States over the last two hundred years and now we have a bigger world of people who are also interested in buying.

SB: During the election campaign, there were these references to economic nationalism and then clearly some tensions within the Coalition between the Nationals and the Libs about attitudes to foreign investment, particularly in rural Australia. Do you see those as serious threats to our ability to attract the sort of capital we are going to require?

DM: Look, what I’m taking most notice of was what Tony Abbott said on the evening of the election. Australia is open for business: that means selling things, buying things, having people invest, Australians investing offshore. That’s what I think will matter. There are a lot of things said during election campaigns that, you know, hopefully will pass into the mists of history.

RG: But as chairman of AACo, does it worry you that the Indonesians might be going to set up a massive operation to grow beef in Australia to rival you? 

DM: Not in the least. 

RG: No?

DM: No. The world will not be able to supply enough beef for the demand. Beef is a very land-intensive industry and it’s a very expensive business to be in, and so if the Indonesians want to buy into Australia…

I thought it was amusing that a million hectares – I mean, that’s two medium-sized family farms in the Northern Territory. It’s not a rounding matter. Let me give you an example. One of our properties, Brunette Downs, is four million acres. That’s one of our 17 properties – and that’s only one company. 

RG: Well, maybe they’ll buy Australian Agriculture. That would be a much better way of doing it.

DM: The shares are on the market, but we’ve got some very strong and good shareholders who I’m absolutely certain will want to see this company grow which is why they bought into it.

SB: And you are primarily foreign. You talked about the institutional support for the AACo raising and the $300 million you raised recently. As far back as I can remember, there’s been a dearth of long term institutional capital going into agribusinesses. Are you saying that’s changing? Why haven’t we got national heroes in the sector? Why are they all being taken over?

DM: Well, I think the problem was that Australia had all these awful statutory marketing arrangements for so long and that really discouraged sensible investment through the agricultural reduction and marketing chain. 

As a consequence, we’ve never really been able to get our act together very well. But it’s not surprising that some of them are being looked at from offshore; I think there are still plenty of opportunities for us to grow others.

SB: In terms of the investment timeframes, isn’t there a collision in some senses between the institutional preoccupation with short-term returns and the kind of the long cycles that agribusinesses have to undertake?

DM: Yeah. That’s a real issue; there’s no question about that. But from time to time that becomes a difficulty for some of the institutions, and I think it’s one of the reasons we’re seeing more offshore investment than operations that aren’t necessarily listed, while the pension funds and others that are buying in don’t have that particular issue to deal with, so…

RG: But in Australia, the biggest superannuation investors are the self-managed funds and they’ve got 32 per cent of the market. They’re much bigger than all the others. That’s where the money is.

DM: That’s a good point. I think we’ve got to market ourselves and package our investment for that particular market because you’re quite right. It’s a huge ball of capital that would suit that sort of investment.

RG: You’re planning in AACo to put an abattoir in Darwin. It’s taken you since 1824 to do something like that. You’re competing with your customers, to some degree. They’ve got abattoirs. Is that going to work?

DM: I don’t think we’re competing with our customers at all. Our customers are the people who eat beef in the United States and in Indonesia and Singapore and Korea, so they’re the people that we’ll be supplying. Whether we do that through other people’s abattoirs where we toll process, or whether we do it through our own isn’t going to make a great deal of difference.

I can understand why standalone investments in abattoirs have not been terribly attractive in that part of the world, but when you’ve got an operation like ours where we can vertically integrate and actually manage and control the supply chain into it and then manage and control the product out of it, it makes some sense. And having put that strategy together and put that to the market, we’ve had very strong support for that investment.

RG: Abattoirs in Australia have been the subject of some terrible work practices and many of them, as you would know, had to shut down. How are you going to avoid that?

DM: I think we’re well aware of the risks. There are all sorts of issues that we need to deal with in terms of the supply of cattle, management of the whole construction operation itself, the type of cattle that go through it and, of course, the people who work in it and the work practices. But I think we’re sufficiently conscious of the issues there to know how to manage them.

SB: Part of the rationale for that abattoir is to access global beef prices, which have been diverged from domestic beef from about a year ago, presumably because of the ban on export of live cattle. You know, it’s sort of a temporary thing. In the long term, do you need the abattoir to get access to global prices?

DM: To get access to global prices regularly, yes – not from time to time. And that’s the problem. We want to be able to have access to global prices, whatever they are – up or down – at all times. What we don’t want is a situation where we can’t get access to them at times, particularly times like these when they’re very good.

SB: One of the things that has always puzzled me that for agri generally but for beef in particular we tend to at best to brand our exports “Australian”. We tend not to have specific branding, you know, corporate branding. I know you’ve got some views about the need to actually create some brand value.

DM: Absolutely. Indeed, we actually are probably one of the few companies in Australia that actually brands and markets its product under its own brand. We’re one of the few companies that you will see an actual company or producer brand on… in places like Korea. We’ve got a supermarket chain in Korea which is a very good customer of ours and we’ve developed that market very strongly and we see the capacity to continue to expand that brand marketing quite substantially.

SB: So, what’s the competitive advantage you get out of having a distinctive brand as opposed to 'Brand Australia'?

DM: Well, I think you control it yourself. You’re able to get the full value from that. So, one of the problems of investing in brand Australia is either the government does it, in which case it’s not the sort of thing we should be doing, or if individuals do, they don’t necessarily capture. You can get free rides.

You don’t see people branding German cars. You see Mercedes Benz and BMW and Porsche. You know, we sell the Porsche of wagyu meat at Harrods under our own brand. It’s got the AACo brand on it for £200/kilogram. That’s a tiny amount of the beef. But, you know, we’ve got AACo beef in Singapore Airlines’ first class suites. We’ve got a number of markets around the world and I won’t go through them all, but we’ve got a number of markets where we’ve shown them that that works and works really well. 

The other side of that is that even in the what we call the grinding meat, the hamburger meat, the very fact that 600,000 head of our cattle are individually electronically tagged means that we can give prominence to everything that we sell to a company like McDonald’s or Burger King and that’s important to them as well.

RG: You’ve been affected by drought in the last year or two. 

DM: Last year. It was last summer.

RG: Yeah. Do you think your cattle is sufficiently spread around the country? Should more of it be down south, so that you’re not as prone to the climate in the north?

DM: They are in the northern zone, so they’re predominantly north of the Tropic of Capricorn, but certainly north of the Queensland-New South Wales border. I think we can manage that issue. I mean, we’ve managed our cattle through the drought. The problem with the drought was the impact – the coincidence of this last very poor summer in conjunction with the ban on exports to Indonesia – and that created a situation where there was a very large number of cattle that was surplus to requirements and surplus to the capacity of the abattoir system in northern Australia to process them. 

The same effect has actually flowed right through to southern Australia, so people down south have had the same price impact on their cattle. And while we’ve had to move a few cattle around and do some work on feed, we understand that happens from time to time. That isn’t the big issue. The big issue has been this enormous disconnect between export beef prices and local cattle prices created by that oversupply through one artificial and one natural circumstance. 

RG: It was an amazing thing that our previous government did, wasn’t it?

DM: I think it was a very unfortunate decision, to say the least. It took very little consideration of almost any of the elements that really were part of it. Certainly to have done that to a neighbour and a trading partner who was such a good customer of ours without giving any consideration to working through it with them disgraced us.

SB: Don, I know you’ve had a long standing interest in agricultural productivity issues. To what extent can government help? We’ve got an ‘infrastructure prime minister’ now. Ports, transport, all that sort of stuff – I assume government could help lift productivity. But also we haven’t had this kind of a large scale consolidation, rationalisation investment in the science of agriculture that you’d expect in an economy like ours to have had.

DM: No. We have certainly wound back our investment in agricultural R & D to an extent and that happened all around the world. I think it was a consequence more than anything else of the surplus of food that occurred in the world as a consequence of the United States, Europe and Japan massively subsidising their farmers.

Those countries spent a billion dollars a day subsidising agriculture. If you actually add up the total deficits of Japan, the United States and Europe, it almost equates to how much they subsidised their agriculture. I know that’s a coincidence, but it’s an interesting coincidence. But this is a massive amount of money. And, you know, interestingly that flowed out of a study that was done in 1959 by a group called the Club of Rome, which prophesised that we would run out of food by the end of the twentieth century. You could put that in the same basket as Y2K and perhaps a couple of other things that we’ve been told recently about what with the end of the world coming. 

The Europeans used that as an excuse along with a whole lot of domestic politics to start subsidising their farmers. The Americans, of course, have been subsidising their farmers since the Depression years and the Dust Bowl era. And the Japanese joined in the battle. Now, all of that meant that we weren’t short of food around the world. We had these massive surpluses and governments lost their appetite for investing in agriculture R&D and it’s about time they started moving back into it. 

I think we did waste a lot of money, as governments often do, and I think there’s a limit to where governments should invest in research and development and extension. But it’s very difficult for the R&D investors to actually recover their investment. We are better capable of doing it now than we used to be, particularly with genetically modified crops because you can control the ownership of those and use it. Nevertheless there’s a lot of agricultural R&D for which no one could recover the cost and therefore there is a role for government in that area. 

RG: I want to take you back into a bit of history, talking of government. In your previous post you took on the agricultural board directorships, which was of course, the chairman of Telstra. What did you learn from that? Where do you reckon you got that wrong and right?

DM: Well…

SB: It’s going to be a long answer.

DM: That’s a fascinating question. Let me concentrate on the things that we got right. You know, I think the investment that we made in the Next G network, the mobile network. When I first became chairman, we had four mobile data and voice platforms that were a legacy issue and the decision to bring all those into one network and to move on that very quickly really transformed telecommunications in this country. There were areas we would love to have invested more in and that became almost impossible because of the approach of the ACCC.

RG: What are you talking about there? Are you talking about the fibre to the node?

DM: Well, not just fibre to the node, but just even investing in the fixed line network we were being forced to sell below our costs and therefore, you know, we were deterred massively from investing in that network. Therefore we turned our investment attention to the radio network, the Next G network, the mobile network. And even before we could see the development of iPads and iPhones and all sorts of modern equipment that people are using massively, it was still obvious that that was the area that was going to grow the fastest and it was the least regulated. So you invest where the regulation isn’t, where you can actually get a reasonable return. That’s been the basis of Telstra’s success in the last few years. David Thodey has done a remarkably good job and his competitors have been caught napping.

SB: Do you find that ironic and perhaps feel a bit vindicated that today we’re now talking about a fibre to the node network seven or eight years after you first proposed one?

DM: I’ve been very critical of the whole proposal for the National Broadband Network on two counts. One is the idea of breaking Telstra up and having a separate network company; there are no circumstances anywhere in the world where that exists naturally. The only place it exists is, that I know of, is in the UK, and it’s been the cause of their not having any reasonable investment in the system. They’re way behind almost everywhere else. So, you know, that was a bad decision. 

Telstra was never able to make the decisions about investing in its fixed line network without considering what Telstra and the competitors were doing in the mobile network. It was very obvious that the mobile network was going to grow very rapidly and everything I saw around the world said to me that mobility was more important than speed to about half the market, as long as speed was fast enough.

As a consequence of that, making a very big investment in a fixed line network with a capacity to deliver three high-def television channels simultaneously into every house in Australia was an investment that was never, ever possibly going to be able to generate a return on capital. 

SB: Okay. Thank you very much indeed, Donald. We appreciate your time.

DM: A pleasure.

Donald McGauchie gives his views on:

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