Investing in Australian Livestock Agriculture: With strong headwinds closing in, do the risks outweigh the rewards?
For investors in Australian livestock, significant headwinds have begun closing in; a changing climate, the spread of animal borne diseases, the rise of antibiotic resistance, animal welfare concerns, and the growth in alternative protein markets all point to a future fraught with uncertainty.
For investors in Australian livestock, significant headwinds have begun closing in; a changing climate, the spread of animal borne diseases, the rise of antibiotic resistance, animal welfare concerns, and the growth in alternative protein markets all point to a future fraught with uncertainty. Indeed, just this month the newly elected Labor Government announced the gradual phase out of all live sheep exports, citing animal welfare concerns and an industry in decline as key reasons for the move.
COVID-19 has catalysed the revaluation of our dependency on livestock and animal-based products. Global restrictions and halts to transport through the pandemic have severely impacted the movement of livestock around the world, only further entrenching the struggle to alleviate food insecurity in developing nations. Overall, the pandemic has exposed the frailty of the industry and the integrity and quality of the processes behind producing the food we consume.
Geopolitical tensions between Australia and China have seen $3 billion in Australian exports grind to a stop. This trade war has opened opportunities for the US and other countries to assume the role Australia once had as China’s leading beef exporter. Broader global conflicts such as the Russian invasion of Ukraine are placing further pressure on the industry through restricted fuel supplies and increased costs of transport, processing, fertiliser, and feed.
So, what does this all mean for the future of animal agriculture in Australia? And what are some of Australia’s listed agribusinesses doing to prepare for the risky times ahead?
Let’s unpack some of these headwinds…
Climate and Environment
First and foremost are physical and climatic risks. Given our dependency on nature and a stable climate, the anthropogenic deterioration of Earth’s systems is forcing us to re-evaluate our relationship with Nature and the sources of degradation. Animal agriculture represents a significant driver of land use change and deforestation, which both appear on Nature’s most wanted list for their role in decimating ecosystems and biodiversity. In fact, land clearing for cattle is the leading cause of deforestation in Australia, responsible for 73% of all land cleared in QLD. The Wilderness Society’s scorecard in figure 1 demonstrates that most companies have a long way to end deforestation from beef farming.
The cattle industry is the third largest contributor to greenhouse gas (GHG) emissions after energy and transport industries. According to the Department of Primary Industries and Regional Development by the Government of Western Australia, ruminant livestock including cattle, sheep, and goats contribute to 70% of the agricultural sectors’ total GHG emissions and 11% of total national GHG emissions.
On the flip side, Nature is ramping up her impact on livestock with disasters like flooding, bushfires, drought, and the pandemic, which had devastated livestock numbers across Australia. Setting aside horrific images of cows engulfed in water or flames, livestock populations are very vulnerable to environmental and climatic change. Temperature fluctuations, changes to precipitation patterns, humidity and altered biodiversity all impact important inputs like pasture growth, water supply, and the price of feed. As the availability of these inputs change, such as during periods of drought, animals may starve or die of heat stress and dehydration, forcing farmers to limit herd size and conserve resources. But livestock do not have to perish for production to be impacted. For example, extreme heatwaves can drastically affect dairy cow milk production and quality due to limitations on their ability to thermoregulate.
Overall, it is becoming increasingly difficult for farmers of livestock to navigate these climatic and environmental risks. In the long term, mitigation and management strategies may accumulate unfeasible financial costs.
Figure 1: “Scorecard ranking companies on deforestation‑free beef policies and implementation activities”
Demographic change & animal welfare
Largely driven by Gen X, Y (Millennials) and Z, animal cruelty today ranks in the top five social and environmental issues considered by consumers (see figure 2). As reported in the From Values to Riches 2022 report by the Responsible Investment Association Australasia (RIAA), 58% of respondents identified ‘animal cruelty’ as the top issue to avoid. Similarly, 50% of respondents indicated they wanted to avoid ‘Animal testing for non-medical purposes (e.g., cosmetics)’ and 28% wanted to avoid ‘Animal products’ all together.
The results of these consumer surveys send important signals to retail investors, such as super funds and banking institutions, that customers want their savings invested ethically. Given that only 32% of providers offer products that align with ethical practices, there is significant room for expansion in these markets.
Headwinds aside, livestock agriculture contributes significantly to Australia’s wealth
Contributing over $2.035 billion to the Australian economy in the 2020 financial year, the industry has created a brand synonymous with quality meat and dairy products. The latest statistics in livestock products, released by the Australian Bureau of Statistics (ABS) in March 2022, show a decline in production due to a range of environmental and pandemic related factors. Red meat production decreased by 2.5% this March quarter due to the impacts of floods across Queensland and New South Wales. Intense flooding saw abattoirs, slaughtering establishments, and transport routes closed or restricted. Labour shortages due to COVID-19 have only impeded recovery.
Despite these road bumps, the overall profitability of livestock farms is increasing. Farm cash income has risen by $32,000 to an average of $123,000 (2022, ABS statistics). There are also positive projections indicating that cattle herds will grow and boost production by 11% in 2022 as Australia and the world emerge from the pandemic. Global demand for Australian beef is expected to grow with cattle supply in the latter half of 2022, and the export industry is projected to experience favourable market conditions in the coming months. OECD projections forecast a 14% growth in meat consumption globally, driven by the rising middle class in developing countries like China and the Asia Pacific region (see figure 3). Australia’s close proximity to rapidly developing Asian markets will be a future source of growth for the industry.
Figure 3 “The emerging middle class in developing economies” indicates that Asia Pacific is forecasted to increase dramatically through to 2030
Many companies are transforming risks into opportunities
The challenges of methane and GHG emissions in agriculture has sparked progress in the alternative protein industry, which contribute less GHG emissions than animal-based industries. Notably, one of New Zealand’s prominent dairy companies, the a2 Milk Company (a2MC) (ASX:A2M), has committed to shifting away from purchasing carbon credits to offset its emissions to establishing a long-term GHG reduction programme.
In 2019, the IPO of Beyond Meat (NASDAQ: BYND) spurred investor interest in the alternative protein market, as well as open the meat industry to plant-based food products. In Australia, the poultry giant Inghams (ASX:ING) is expanding into plant-based proteins. Besides alternative protein products, Wide Open Agriculture (ASX: WOA) has actively progressed in creating plant-based milk products like OatUP and lupin-based concentrates, but the company retains interest in beef, lamb, and poultry. Pure Foods Tasmania Ltd (ASX:PFT) has similarly progressed in the plant-based market by acquiring Lauds Plant Based Foods and Cashew Creamery to solidify their growth in the plant-based food industry.
Australians are embracing alternative meat and dairy products as the third-fastest growing market for plant-based foods. In 2019–2020, the sector gained $185 million in sales at an increase of 32% from the $140 million figure in the previous year, contributing $50.4 million to the nation’s economy. International plant-based protein and dairy industries have since entered the Australian market to capture changes to Australian diets and preferences to plant-based alternatives. These international brands include:
- Alternative Kitchen (Canada)
- Beyond Meat (US)
- Fable Food Group (Malaysia/Australia)
- Impossible Foods (the Grill’d burgers chain supplier in Australia)
- Linda McCartney (UK)
- Quorn (UK)
Where animal protein is still a core product, companies are consistently raising the standards of animal welfare by embracing ethical farming practices. For example, many supermarkets are sourcing their products from recognised certifications like the RSPCA Approved Farming Scheme. For 25 years, the RSPCA has created a strict standard for Australian farmers to show their dedication in upholding ethical and humane farm animal practices. The companies sourcing RSPCA Approved chicken include:
- Coles (ASX:COL)
- Grill’d burgers
- Herbert Adams (ASX:PFL)
- McDonalds (NYSE:MCD)
- Woolworths (ASX:WOW)
Companies who participate in sourcing from ethical, high welfare farms benefit from enhanced brand reputation as they demonstrate their commitment to supporting high welfare farming. By promoting animal welfare, businesses also create competitive advantage through reduced costs, increased productivity, and accessing markets with greater welfare standards. Collectively, these advantages seek to promote long-term success and keep participating businesses at the forefront of consumer preferences. In fact, evidence shows responsible investment practices prioritising animal welfare bolster future long-term growth and stability.
Welcome to the stage the ASX’s very own Agribusiness Index
Launching in July of 2022, the ASX, in partnership with S&P Dow Jones Indices, has created a new agribusiness index (ASX:XAG). With a market capitalisation of almost $30 billion, the new index features livestock agriculture companies including Elders (ASX: ELD) and Australian Agriculture Co. (ASX:AAC) (figure 4). Elders operates as a specialist working to improve production efficiency with Australian farmers by providing technical advice and access to global markets across retail, real estate, and financial products. Elder’s performance in FY21 reported a 22% increase in revenue with a 31% increase in statutory profit after tax and holds a share price of $13.31 at the time of writing.
Australian Agriculture Co. owns and operates cattle farms and feedlots occupying around 7 million hectares of land in Queensland and the Northern Territory. During FY21, the company reported an operating profit of $17.7 million pre-JobKeeper and $24.4 million post JobKeeper payments. Since the start of 2022, the company’s share price has risen from $1.48 to $2.08, a 61.24% rise in the past year.
The inception of this index strengthens the profile of livestock agriculture and other agriculture industries into the market. The creation of this index signals significant investor interest and awareness present in the market who are seeking for opportunities to participate in an industry previously overshadowed by Australia’s other large commodities like mining and energy. By gaining this index, the industry will inherit greater attention, innovation, and progress to support efficient and sustainable practices to reflect the climate and environmental risks facing the industry. In addition, ASX:XAG will contribute to the Delivering Ag2030 goal of becoming an industry worth $100 billion by 2030 and grow a vital sector in Australia’s economy.
Livestock agriculture will face its fair share of adversity. Factors such as rising geopolitical tensions, a global pandemic, and climate change form significant headwinds that will continue to disrupt the industry. The introduction of a younger, more environmentally and ethically conscious demographic of investors will be a catalyst for change as producers are challenged to address animal welfare concerns and meet the demand for meat alternatives. Some companies have moved quickly to capitalise on this shift, turning risk into competitive advantage. Despite this uncertainty, Australian livestock agriculture continues to thrive as a highly profitable industry for investors, consumers, and producers of livestock. Only time will tell whether the risks outweigh the rewards.
In light of COVID-19, this report explores the growing concerns that the animal protein industry is vulnerable to fostering diseases, supply-chain bottlenecks, and food safety issues. FAIRR promotes the Coller FAIRR Protein Producer Index, a tool for investors to analyse how companies address animal welfare, and worker and food safety.
Rethinking food and agriculture 2020-2030: The second domestication of plants and animals, the disruption of the cow, and the collapse of industrial livestock farming
Rethinking food and agriculture focuses on new technologies driving the transformation of the food and agriculture sectors and the implications for the cattle industry in the United States. It argues that 2020-2030 will see the current industrialised, animal-agriculture system be replaced with a Food-as-Software model.
This report explores the growth of the alternative protein market, particularly in the face of supply chain disruptions, food safety concerns from COVID-19, and global emissions. This is published alongside FAIRR’s Sustainable Proteins Hub, an interactive tool which allows investors to assess how companies are diversifying toward alternative, climate-positive portfolios.
This article originally appeared in the Australian Shareholders’ Association magazine.
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