It is a great pleasure and honour to have been invited to address your conference.
As a Queenslander I am a long way from home so I am very humbled to have been invited to speak here at the Southern Grasslands conference. I hope that you take it as a sign of my commitment that I have come all of this way on one of the three most important nights on the Queensland calendar – State of Origin night!
But it’s actually not a demonstration of my commitment to you sorry, it’s more a sign of my disorganisation. I didn’t realise it was State of Origin night until a few weeks ago, long after I accepted the invitation. It’s all ok though – I have checked the guides and you might have to excuse if I make a hasty exit at about 10.30pm to catch the replay on Fox!
The beef industry of Queensland has a greater connection to Victoria, and to Ballarat in particular, than most would realise. At 12.6 million head, Queensland, of course, has more cattle than any other state – around 3 head of cattle for every Queenslander. A lot of those cattle live in areas that were first opened up by Victorian explorers. Burke and Wills of course being the most prominent.
I just got back a few weeks ago from working in a stockcamp on a cattle station in the Gulf. The station was called Miranda and is about 100km northeast of Normanton. All around the Gulf there are the legacies of Burke and Wills’ intrepid mission. There is Burketown, the Wills Development Road, the Burke Development Road and the Burke and Wills roadhouse. Even the town of Cloncurry is named after Robert O’Hara Burke’s cousin, Lady Cloncurry.
The Burke and Wills journey can be traced back to this town. It was the wealth created by the gold rush that funded their exploration, and drove the Victorian Government to dream of claiming for themselves the vast areas of western Queensland. I didn’t realise that until I read a book recently to help my son do an assignment on Burke and Wills, but there is strong evidence that while the Victorian Exploration Committee was notionally set up for scientific purposes, powerful political figures in the background, like Sir William Stawell, had the overriding aim to annexe large swathes of northern Australia to expand the territory of the otherwise hemmed in Victorian colony.
Thank God they weren’t successful because half of Queensland might then have been playing AFL today not rugby league, and we would have no chance in the game tonight!
We have just come through the biggest mining boom since the gold rush. In my view, we should be using this wealth and opportunity like our forefathers did. Opening up new areas of our nation, creating new industries and leaving a legacy for our children is what we should be doing with the wealth we have been lucky enough to have inherited.
Once again our vision should turn to the north. There is so much opportunity in northern Australia. I want to focus in particular on the north this evening in particular the implications it has for the beef industry.
We have just come through the biggest mining boom since the gold rush. In my view, we should be using this wealth and opportunity like our forefathers did. Opening up new areas of our nation, creating new industries and leaving a legacy for our children is what we should be doing with the wealth we have been lucky enough to have inherited.
Once again our vision should turn to the north. There is so much opportunity in northern Australia. I want to focus in particular on the north this evening in particular the implications it has for the beef industry.
The development of the northern beef industry is important for the southern industry. We can all see now how connected the beef industry is across Australia. Not many live cattle were shipped from Victoria to Indonesia but the closing of that market had a huge impact on beef producers from Darwin to Davenport.
Likewise, a stronger northern industry will help the southern industry too. It is much better to live next door to a solution rather than a problem.
Before I do that I might just explain a little about myself.
Around nine months ago was elected represent Queensland in the Senate but I am still waiting to get into the Senate. My wife is pregnant at the moment and I joke with her that she will have a shorter wait for a new baby than I will to start my job in the Senate!
So I have had to find something else to do for 10 months to pay the bills. My background was economics and finance, but I wanted to try something different. Stanbroke offered me a job and I thought it was a great opportunity to learn about the beef industry, which represents around half of the value of agricultural output in Queensland.
As I said, part of that experience included a few weeks on a cattle station. I learnt a lot. There is only so much you can learn from reading a book, compared to actually doing it. I’ve read part of the Kama Sutra and I’ve actually tried to practice lovemaking, and I can confirm that they are very different experiences.
Before the election, I was Barnaby’s Chief of Staff for three years. That wasn’t at all like lovemaking but I did get myself into many positions from which I didn’t know how it would end up! Barnaby was great to work for because he was never afraid of a fight. You might not always agree with all of his decisions as Ag Minister but he won’t give up trying to fight for a stronger agriculture industry.
Before that I was a Director of the Productivity Commission for about six years. As an economist I know how important it is to support our wealth producing industries. We don’t make TVs, whitegoods or soon even cars. We have to import these things and to do that we need to put other goods on a boat to send overseas to maintain our standard of living. That’s why we need to support our beef, cotton, wheat, iron ore and coal industries.
Over the last few decades we have been able to produce more wealth by getting more out of existing infrastructure by reforming our electricity industry and improving the efficiency of our roads, rail and port networks. Over the past few years that process has come to an end, however, with increasing power prices and congestion in rail and ports. We need to invest in new infrastructure now to keep producing wealth, and a lot of that investment should focus on areas that are relatively undeveloped, including in northern Australia.
Just 5 per cent of Australia’s population live in northern Australia despite it taking about a half of our land mass, and accounting for more than half of Australia’s exports. While the northern climate presents challenges, these are hurdles not brick walls. Around 40 per cent of the world’s population lives between the Tropic of Capricorn and the Tropic of Capricornia. So if other countries can develop their tropical areas, there is no reason why we can’t too.
Another important reason that we should develop the north is that almost 30 per cent of our Aboriginal population live in northern Australia, and many of the most disadvantaged Aboriginal communities are in the north. We can’t close the gap without developing the north.
Northern Australia receives 60 per cent of Australia’s water but accounts but we use just 5 per cent of that water. Some argue that we can’t develop the north’s water resources because we don’t want another Murray-Darling. Well, I think the Murray-Darling is actually something we can be very proud of. The Snowy Mountains Scheme is something we can be proud. The wonderful country towns of Griffith, Deniliquin, Mildura and Berri are something we can proud of as a nation. Sure there has been a period were too much water was being used in the system but both sides of politics have come together to fix that problem, and that shows that Australians can manage our environment in a sustainable way that still allows for food production and economic development.
There is no reason why we can’t do the same in Northern Australia. The environment is very important but it is still just one factor among many important factors. Ultimately, environment is a word just as community is a word, economy is a word, development is a word and jobs is a word. I want all these things to thrive in Australia and we can develop our nation while balancing all of them.
Northern Australia has the right soils. The CSIRO has estimated that there is around 5 million to 17 million hectares of soils that can be irrigated in the north. To put that in context, Australia has just 2 million hectares of irrigation today.
The economics of more intensive irrigation in the north will be tight but it can work. The CSIRO has just completed a detailed investigation of water resources in the Flinders and Gilbert river systems. These rivers flow into the Gulf of Carpentaria. They have found that there is at least 600 gigalitres of water annually available in these areas alone. That would be enough water to irrigate almost 100,000 hectares. It would equate to the water use in the South Australian Riverland along the Murray.
The economics of irrigation in the north will be tight but they are not blue sky. Let’s take cotton production. It costs around $10,000 per hectare to develop irrigation. You would expect yields of around 10 bales per hectare and a bale sells for around $500 per bale. That’s 5,000 per hectare per year in revenue. To pay back that $10,000 initial investment in say 10 years, you need to make an operating margin of $1,000 a year, or 20 per cent. A margin of 20 per cent will be tough to achieve but it’s not impossible.
Of course there have been attempts to develop the north before and many like to point to high profile failures such as the Ord, as if the whole history of northern Australia can be summed up by an irrigation project in a small part of the East Kimberleys.
The reality is that northern Australia is already a thriving, dynamic economy and environment. It is home to 1 million people and large sized towns such as Rockhampton, Mackay, Townsville, Cairns and Darwin. Northern Australia is already growing fast. Its population has been growing at 1.9 per cent a year over the past decade, well above the national average of 1.5 per cent a year. And, northern Australia is younger than the rest of Australia with 22 per cent of people below 15 years of age, compared to 19 per cent in the rest of Australia.
Northern Australia’s proximity to Asia also puts it in the right place at the right time. By 2020 half of the world’s middle class will live in Asia. The big challenge for Australia has always been our distance from the world but we are now embarking on a century where the centre of economic activity will be in our hemisphere of the globe. This is a big opportunity for all of Australia but particularly the north.
I just got back from China about a month ago and I was shocked by the prices of Australian beef there. Average quality Australian beef were selling in Chinese supermarkets for AUD60 per kilogram. I had a T-Bone steak at a Shanghai restaurant for AUD110. Liveweight Chinese cattle prices are around $4 per kilogram compared to around $2 here. There is lots of money to be made in trading here.
And for all the naysayers that concentrate on the failures of northern development, none of them focus on the beef industry – because the beef industry has been outstanding economic development success in the north.
More than half of Australia’s cattle live in northern Australia. We have world class breeding properties in the north, and had a thriving live export market which is rebounding again from that terrible decision a few years ago.
Northern development delivers the prospect of developing the northern beef industry to the next stage. The whole life cycle can happen in the north in the future. Not only should cattle be born in the north, they should be fed and fattened in the north and ultimately have their heads chopped off in the north too.
What has limited the northern industry thus far has been a lack of grain, cottonseed and other highly concentrated forms of protein. Irrigation though will help develop those products and allow feedlots to be located in the north. Better infrastructure can keep roads open throughout the wet and allow abattoirs to operate throughout the year, an absolute necessity given the modern economics of the processing industry.
So I think there is a bright future for the beef industry in the north but there is a lot we have to do to take those opportunities. We can’t be complacent. For all the talk of the Asian century, Beijing is closer to Berlin than to Brisbane. And, while cattle prices are high in China now, they have prospects to increase the productivity of their beef industry. The average herd size in China is just 5 head and there have been limited efforts at land reform for farmers in China thus far.
That will probably change and we will certainly be aiming at a moving target in Asia, which of course means we have to move too. I just want to spend the rest of my talk outlining what I think we need to do in the short, medium and long term to make sure we fully take advantage of the opportunities in front of us.
In brief, in the short-term we need to improve trade, in the medium-term we need to reduce the costs of production and in the long-term, as Keynes said, we are all dead. But even if we are dead we need to have made the investments both on and off farm that will pay off for the next generation.
All of these policies should have the over-riding goal of improving the profitability of the beef industry. Private businesses are not going to invest unless they think they will make money, and there is not enough money in beef production today. Part of that is temporary factors resulting from the drought, the live cattle ban and the high dollar that is increasing supply in the domestic market, but even looking back longer, beef prices have been on a declining trajectory for some time.
The first step to getting a better price for Australian beef is to open up new markets. Like any market the more buyers we have interested in Australian beef the higher the potential price will be.
That is why it was so important to get the live cattle trade restarted. Australia’s domestic market is relatively small and the processing industry is relatively concentrated. That means without multiple options for sale the negotiating table will be skewed against beef producers all of the time.
Agricultural producers are more vulnerable to concentration in the market place than most. There is much truth in the John F. Kennedy quote that “For the farmer, is the only man in our economy who has to buy everything he buys at retail – sell everything he sells at wholesale – and pay the freight both ways.”
That result is not surprising given that there are always lots of farmers but only a few buyers of agricultural product in the supply chain. That makes agricultural producers vulnerable to dominant buyers being able to force the price of farm products down to the bare costs of producing them. Leaving little for long-term investment and innovation.
The best antidote to this outcome is for us to find new markets that inject competition into the buy-side of the agricultural industry. The new Coalition government is focused on doing exactly that. It has fully supported the reopening of the live export industry to Indonesia and developing markets such as Vietnam, Malaysia and the Middle East. I am told that we are about to export on 1 millionth head of cattle since the election last year.
The government has negotiated a free trade agreement with Korea after years of dithering by the previous government. That agreement will mean that we will not continue to lose competitiveness to the United States with Korean customers. Unfortunately, the US has got the jump on us and US beef already has a 5.4 per cent advantage but at least that gap will now stay cost (rather than widen) for the next 15 years as tariffs on beef from countries gradually decline.
In Japan an agreement in principle has reached to reduce the tariff on frozen beef to below 20 per cent, and to 23.5 per cent of chilled beef. While it is disappointing we could not get to a true free trade position with Japan, in the context of Japanese politics it is a remarkable victory for our beef industry that puts them ahead of any other beef producer in the world. The Japanese agreement is certainly the most significant trade agreement Australia has signed with Japan since John McEwen had the guts to sign the first agreement with Japan just 12 years after the end of the Second World War.
We are also hopeful that an agreement with the Chinese can be reached when the Chinese President visits Australia later this year. While Chinese tariff on beef products is a much lower 18.6 per cent, Australia (along with all countries) have not been able to export chilled product to China since mid last year, and that has particularly hurt Australian exporters who tend to specialize in high quality products. Keep in mind that that $110 T-Bone I had in Shanghai was a frozen product because of the current restrictions!
Over the medium term, however, just having access to markets will not be enough. We will need to remain competitive in these markets as there are other parts of the world that can produce beef.
You all have probably heard the statistics that it costs us around $300 to $350 a head to process a head of cattle in Australia, compared to around $150 to $200 in America and around $100 per head in Brazil.
We are a high cost country and that won’t change anytime soon but we risk going from a high cost country to a “too high” cost country and pricing ourselves out of the market.
Power prices in Australia have more than doubled in the past 5 years. That has increased the cost of processing a head of cattle by around $60 to $80 per head. We are country blessed with cheap and accessible coal and gas. Cheap energy should be our birthright.
Water prices have increased by 82 per cent since 2007 and transport costs have been increasing as well.
These costs all have connection with government policy decisions. Government’s have gone down the path of green energy with little thought of the cost on business and households, governments have spent too much on water infrastructure such as desalination plants and governments have failed to invest in crucial road links particularly in our northern industry, such as the link between Clermont and Roma.
This is disappointing because it wasn’t that long ago that Australian government’s had the opposite approach. Not everyone agreed with National Competition Policy process but it was ruthlessly committed to reduce the costs of doing business including infrastructure charges. From the early 1990s to the mid-2000s electricity prices fell by almost 30 per cent for businesses in real terms. Gas prices by 12 per cent, telecommunication prices by 30 per cent, road freight costs by 15 per cent and shipping costs by up to 50 per cent.
If we are to maintain a competitive beef industry we need to rekindle that determination to bring down the costs of doing business in Australia. That process was started under the Keating government and we need a son of NCP to deal with the unprecedented increases in costs that we have experienced over the past 20 years.
We can at least make a start on that in a few weeks when we will get rid of the carbon tax in the Senate. I am proud that one of my first votes as a Senator will be to remove a tax that imposes a cost on Australian businesses that is not levied on our competitors overseas. This is at least a first step in reversing the unsustainable cost inflation that we have experienced over the past decade.
Longer-term I hope that a beef industry that can access more markets and is more productive will have the optimism to invest in expansion. That hopefully will mean large investments in northern Australia and elsewhere.
Most of the potential future investment in the north will not be directed specifically at beef but the beef industry could be a major beneficiary. The most likely candidates for crops if irrigation is expanded in the north are cotton and sugar as these produce the highest gross margins per megalitre of water. However, there will be spinoff benefits to the beef industry as well.
First, paddocks will need to be spelled, for cotton on average once every three years. In these years it is likely that fodder crops will be planted, such as sorghum. That will then most likely be used to fatten cattle and move the northern beef industry up the supply chain.
Second, the by-products from cotton and sugar production can both be used to feed cattle. More than 60 per cent of raw cotton is made of seed and trash and this can be used as a feed supplement. Likewise, sugar produces molasses, which is already widely used as a feed supplement
There will be wider benefits for the entire Australian beef industry if there is investment in our north too. It is always easier to operate in industry that is growing rather than declining, and there is technical economic reason for this too.
The price that beef producers receive at the farmgate is going to reflect the costs of the marginal beef producer. In other words, Australia produces about 2 million tonnes of beef and the price of beef is determined by ranking the cost of producing those 2 million tonnes. In a competitive market the price will be the cost of the the most costly kilogram to produce.
As demand for beef grows that pushes the industry up the cost curve, assuming that new areas of beef production are going to be more costly than existing sources of supply. That means that those producers that produce at or below the average cost (not the marginal cost) will achieve higher returns. The faster demand grows, the larger the profits that the average producers can receive.
We are a long way from Normanton here tonight what happens up there can have a real influence on the farmgate price for cattle in Ballarat. Prices are more likely to go up if the industry is growing.
That’s one reason why the Coalition Government is committed to seeing the north develop. This week we have issued a draft report from the Joint Parliamentary Committee inquiry into Northern Australia (their final report is due next month). Last week we issued a green paper on Northern Development, with a white paper due early next year.
There is no doubt that developing the north will take a significant commitment from government to invest in new infrastructure and services. We need investments in roads, ports and energy assets, this will amount to a substantial investment but it is an investment that we have to make because if we have to start investing in assets that will actually create wealth and help us repay the huge debt that we now have as a nation.
Much of the investment will need to come from private sources too, and the northern pastoral industry has unfortunately had some tough years. I worry that the high debt that has been left as a consequence of these problems will constrain the northern industry from taking the risks and making the investments that will allow us to take the opportunities that exist in the beef industry.
Some of this debt has been accumulated because of the over-optimism that gripped producers and banks before the global financial crisis. In the few years before the global financial crisis, rural property prices in Queensland increased by around 300 per cent. Since then they have fallen by about 30 per cent. That is a very similar trajectory to house prices in the US. There the government has a range of programs to help bail out homeowners that got themselves into too much debt. Here we have done nothing to help rural producers that are in a very similar position.
Some of the debt too has been caused by the poor government decision on the live cattle trade. There is a case that the government should help compensate producers for the mistakes that it made. It was not our government that made the decision but it was the Australian Government. There is already an existing Australian Government scheme that provides compensation of defective administration by the Commonwealth. If the live cattle ban was not a defective decision I don’t know what is.
Wherever blame is attributed there is a large adjustment for the northern beef industry to make. A recent Meat & Livestock Australia report found that returns to the beef industry have fallen dramatically over the past decade, among all producers even those that are the top performers. Ten years ago the top 25 per cent of northern beef producers made an operating return of 4% and that has fallen to 2.4% today. Almost all of this decrease has been due to reductions in prices and increases in debt not decreases in productivity.
Debt has increased rapidly. Over the past 20 years debt has increased by 228 per cent to now average $1.4 million per producer (of those producers that do borrow money). While debt has increased in broadly in line with asset values for most of the last 20 years, now that asset values are falling net worth is coming down fast. It is likely that the northern beef industry has hundreds of millions of non-performing debt that needs to be cleared.
The best way for the northern beef industry to recover is for us to get high prices at the farmgate. Higher prices will increase cashflow, higher prices will open up new investment opportunities, higher prices can help pay back debt and, most importantly given the debt load of many northern producers, higher prices will help bring confidence back to the industry and increase land values.
Part of that process needs to be a concentration in developing northern Australia to its true potential. We will get higher prices if we are successful at opening up new markets, bringing down the cost of production in the supply chain and making the investments that will let the beef industry thrive.
Let’s just hope that our efforts in the north this time are more organised than the ill-fated Burke and Wills mission. Robert O’Hara Burke and William John Wills were chosen more for political reasons than their exploring credentials, and the 20 tonnes of equipment that they left Melbourne with played a big role in their ultimate slow progress and demise. As the author Sarah Murgatroyd outlined what they carried:
Luxuries were well catered for: a large bathtub, an oak and cedar table with two oak stools and forty-five yards of gossamer for fly veils. Yet the party took just two sets of field glasses, two watches and only twelve water bottles
Were twelve sets of dandruff brushes and four enema kits really necessary? There were six tonnes of firewood, 200 kilograms of medications for the camels and horses and enough ammunition to win a small war.
In addition, they carried 270 litres of rum ostensibly for the camels for “medicinal” purposes. So they were not all that organised but given how much rum they were carrying perhaps they would have made very good Queenslanders after all!
