Top line findings: McCain global benchmarking study of processing potatoes. October 2010

Transcription

1 Top line findings: McCain global benchmarking study of processing potatoes October 2010

2 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

3 Presentation overview The following slides summarise the top line findings from a global benchmarking study into processing potatoes commissioned by McCain Australia. Note: French fries are globally traded in US dollars and the data for this study has been compiled on the basis of a long term exchange rate of AUD 74c. At current rates, this means the picture for Victorian growers is significantly worse than the data presents. 3

4 This study confirms what many have suspected: Australia has the highest cost for processing potatoes in the world. 4

5 However, it quashes another theory... Scale is not necessarily a determinant of profitability

6 The reality Unless costs can be significantly reduced longer term, Australia will not have a processing vegetable sector. This is not a GROWER or PROCESSOR problem, it is an INDUSTRY problem. Clearly the Processing Potato Industry already understands the imperative to reduce cost.... 6

7 Australian Processing Potato Industry Strategic Plan Strategy 2: Improve industry competitiveness

8 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

9 French fry potatoes are a globally traded commodity

10 Realities of the global French fry market Globally, McDonald s and QSR restaurants are the volume customers for French fries. Both companies benchmark cost and quality in every, country every 6 months. There is a worldwide over-capacity in French fry production globally. McCain, Simplot, Lamb Weston, etc. compete aggressively for tenders each year. There is a very real threat that the two major food service clients will import directly. 10

11 Foodservice now accounts for 34% of the food dollar in Australia and more overseas

12 QSR goes healthy There is mounting social pressures on QSR (quick service restaurants) to address obesity and type II diabetes Salad bars Low fat offerings Grilled rather than fried Fries no longer automatic in meal combos Global French fry consumption is in decline! 12

13 Global dynamic USA and Canada are over capacity and closing factories. Belgium and Netherlands are trading below cost due to free market. Brokers and agents drive the pricing agenda in Europe. 500 growers trading in Northern Europe make it a buyers market. Belgium investment in French fry production is flooding global market with processed product. Poland is keeping European prices low. French farmers are militant lobbyists, hanging onto government assistance. 13

14 Australia is becoming less competitive Exchange rates Labour costs Scale Technology Shippings costs MCKINNA et al

15 The price of groceries has dropped by 5% in last 12 months. Australian Financial Review September 2010

16 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

17 The objectives of this study To provide an independent assessment of cost of production of French fry potatoes across main global growing areas. To identify key differences in cost components across countries. To identify the optimum scale of production. MCKINNA et al

18 Benchmarking has many challenges: Significantly different ways of calculating costs. Requires a consistent approach. Many variables to contend with: - Seasonality - Exchange rates - Family business accounting - Mixed businesses MCKINNA et al

19 Methodology Two consultants visited subject production areas to conduct interviews and collect data. Range of growers selected with assistance from McCain agricultural teams. Farms are indicative figures. Calculated for the 2009 season. Costed on factory delivered basis. Does not include on-farm storage costs. Collected in local currency and units and then converted to AUD and metric units. MCKINNA et al

20 Basis of costings Land Seed Fertiliser Chemicals Water Operations Interest Overheads Exchange rates (long term avg) One year lease cost Including treatment and transportation Not including spreading Not including application Including infrastructure, pumping, labour Includes machinery, depreciation and interest, fuel, repair and maintenance, calculated by Machinery Cost Analysis (University of Idaho) Working capital 5% of variable costs USD 74c NZ $1.17 MCKINNA et al

21 41 N 41 S MCKINNA et al 2010

22 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

23 Top line findings Overall findings $18, $16, $14, Transport costs Management Water Fertiliser Land Overheads Operating costs Chemicals Seed Average $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Cost per hectare (AU$)

24 Cost per tonne Cost per tonne $ $ Cost per tonne Cost per tonne average $ $ $ $50.00 $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Cost/t (AU$) Australia New Zealand US Canada Europe

25 Average yield per hectare 80 Yield Yield Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

26 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

27 Australia Penola Ballarat Tasmania MCKINNA et al 2010

28 Ballarat Costs/ha: $13,282 Margin/ha: 22.5% Cost/t: $250 Yield: 53t/ha Highest water costs Lowest chemical costs 28

29 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

30 Penola has the second highest cost of production in the study Costs/ha: $14,236 Margin/ha: 18.17% Cost/t: $261 Yield: 55t/ha Highest operating costs Second highest water costs 30

31 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

32 Tasmania is the highest cost region Costs/ha: $16,874 Margin/ha: 16.1% Cost/t: $264 Yield: 64t/ha Highest land costs in the study Second highest fertiliser costs Highest overheads Above average costs on most other indicators 32

33 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

34 New Zealand North Island South Island MCKINNA et al 2010

35 North Island had one of the worst growing years in history in 2009 Costs/ha: $14,993 Margin/ha: % Cost/t: $242 Yield: 62t/ha Highest seed costs in the study Highest fertiliser costs Second highest chemical costs Highest transport costs Lower yield than previous years 35

36 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

37 South Island is the lowest cost producer in the southern hemisphere Costs/ha: $12,179 Margin/ha: 16.32% Cost/t: $190 Yield: 64t/ha Close to the global average on most indicators. Second highest transport costs, behind only North Island. Lowest overheads 37

38 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

39 USA Washington Idaho MCKINNA et al 2010

40 Washington Costs/ha: $13,073 Margin/ha: 35% Cost/t: $172 Yield: 76t/ha Highest yield of all regions in the study Highest chemical costs due to need for fumigation to keep yield high. 40

41 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

42 Idaho has the second lowest cost of production by a small margin Costs/ha: $8,499 Margin/ha: 53.15% Cost/t: $168 Yield: 51t/ha Lowest operating costs overall Lowest seed costs in the study 42

43 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

44 Canada Alberta MCKINNA et al 2010

45 Alberta is the lowest cost production region Costs/ha: $7,996 Margin/ha: 39.6% Cost/t: $172 Yield: 46.5t/ha Lowest transport costs Below average costs across the board 45

46 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

47 Europe The Netherlands Belgium MCKINNA et al 2010

48 The Netherlands Costs/ha: $10,918 Margin/ha: 18.2% Cost/t: $168 Yield: 65t/ha Lowest fertiliser costs in the study No water costs are a major advantage 48

49 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

50 Belgium Costs/ha: $9,025 Margin/ha: -1.04% Cost/t: $201 Yield: 45t/ha Lowest land costs in the study No water costs a major advantage Below average costs on most indicators except operating costs 50

51 $18, $16, $14, $12, $10, $8, $6, $4, $2, $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe

52 Overview The global context Research background Top line findings Findings by region Findings by cost category MCKINNA et al

53 Land

54 Land $2, $2, $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe Land Average 54

55 Land cost in perspective Land costs are particularly an issue in Tasmania and to a lesser extent in Ballarat Tasmania 145% Ballarat 117% Penola 78% South Island (NZ) 109% North Island (NZ) 96% 55

56 Cost factors for land Best alternative land use: The biggest factor in land cost is alternative use Tasmania Ballarat Poppies Pyrethrum Vegetables Beef Vegetables Prime lamb Penola New Zealand Grain Forestry Dairy 56

57 Seed

58 Seed $3, Seed Average $3, $2, Cost/hectare (AUD) $2, $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe 58

59 Seed cost in perspective Higher seed costs are largely a reflection of higher growing costs Seed costs are particularly an issue in Tasmania and to a lesser extent Ballarat. Tasmania 162% Ballarat 94% Penola 124% South Island (NZ) 83% North Island (NZ) 186% 59

60 Cost factors for seed The cost of seed reflects the generally higher growing costs in Australia plus planting rates for some varieties e.g. Innovator Tasmania Ballarat Penola New Zealand Seed cost determinants: Variety Cost of growing Cost of cutting and treating Lower planting rates Many cut own seed Growing costs Lower cost because of scale. Nth Island high because of variety - reflected in yield. 60

61 Fertiliser

62 Fertiliser $3, $2, $2, Cost/ha (AU$) $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe Fertiliser Average 62

63 Fertiliser cost in perspective Yields are a big factor in offsetting fertilizer costs as evidenced in North Island NZ and Tasmania. Tasmania 155% Ballarat 115% Penola 96% South Island (NZ) 116% North Island (NZ) 165% 63

64 Cost factors for fertiliser The cartel in fertiliser is driving higher costs. Buying groups in USA and NZ achieve up to 20% discounts on input costs. Tasmania Ballarat Penola New Zealand Determinants of fertiliser cost: Higher yields Lack market competitiveness Higher yields Below average because of yields and purchasing powers Yield, but offset by buying advantage because of scale and cooperative buying groups 64

65 Chemicals

66 Chemicals $2, $2, Cost/ha (AU$) $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe Chemicals Average 66

67 Chemical cost in perspective Australia has lower chemical cost because of lower pest and disease risk and that it doesn t have to fumigate soils. Chemical are an issue in NZ because of growing conditions Tasmania 82% Ballarat 27% Penola 66% South Island (NZ) 114% North Island (NZ) 165% 67

68 Cost factors for chemicals Cost determinants Tasmania Relatively high for Australia because of growing conditions and dealer margins Ballarat Relatively low chemical costs Penola Relatively low chemical costs New Zealand High pest and disease e.g. Psyllid 68

69 Water

70 Water $3, $2, $2, Cost per hectare (AUD) $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe Water Averages 70

71 Water cost in perspective Mush higher in Australia due to pumping and infrastructure costs. Access costs are not very different globally. Water costs far lower in NZ. Tasmania 195% Ballarat 321% Penola 266% South Island (NZ) 90% North Island (NZ) 22% 71

72 Cost factors for water Water charges are likely to increase significantly in the future Tasmania Ballarat Penola Key determinants: Less dependant on irrigation in most years some access to hydro power. Only since the drought has Ballarat needed to irrigate. Doubling pumping with diesel power adds to costs. Restrictions on capturing on-farm runoff. High cost of irrigation infrastructure and sinking new bores. New Zealand Uses less water because of higher natural rainfall and has more efficient equipment. 72

73 Operational costs

74 Operating costs $4, $4, $3, $3, Cost/ha (AU$) $2, $2, $1, $1, $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe Operating costs Averages 74

75 Operational cost in perspective The key to minimising operations cost is optimising plant and equipment to suit farming operation and scale Tasmania 114% Ballarat 91% Penola 140% South Island (NZ) 83% North Island (NZ) 87% 75

76 Cost factors for operational costs Operational cost factors Tasmania Tasmania has been able to reduce operating costs through the adoption of one pass cultivation and increased use of contractors Ballarat Penola New Zealand Cost are below average mainly because of the use of older depreciated equipment Penola cost are high because of the heavier soils which slows down harvest and stones in some areas NZ lower operating costs are largely due to scale, flat terrain and sandy soils 76

77 Interest $1, $1, A direct function of overall variable costs Cost/ha (AU$) $1, $ $ $ $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe 77

78 Overheads $1, $ $ Includes management fee allocated on per hectare basis Cost/ha (AU$) $ $ $ $ $ $ $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe 78

79 Transport costs $1, $1, $1, $1, Related to distance to factory as well as base cost Cost/ha (AU$) $1, $ $ $ $ $- Tasmania Ballarat Penola North Island South Island Washington Idaho Alberta Netherlands Belgium Australia New Zealand US Canada Europe 79

80 Yield

81 Yield in perspective Improvement in yield offers potential to lower costs, particularly at Penola Attention to detail in management is critical. More work is needed to better understand yield and trade-off with higher input costs. Tasmania 110% Ballarat 91% Penola 95% South Island (NZ) 110% North Island (NZ) 107% 81

82 Cost factors for yield There are opportunities to improve yield Tasmania Ballarat Penola New Zealand Best alternative land use: Attention to detail in crop management and growing conditions are delivery above average yields Slightly below average Slightly below average Well above average, similar to Tasmania 82

83 Australia is the highest cost producer Costs are higher on virtually all components Fertiliser: Seed: Land: Operations: Water: Less competitive market Production costs/planting rates Competition from high value crops Smaller farms, terrain requires more costly equipment Infrastructure and pumping costs MCKINNA et al

84 There is no such thing as global optimum farm size Farms need to optimise around their growing conditions and local environment. Key factor is getting optimum utilisation of equipment. Yield is a major factor in cost of production per tonne. The yield to fertilizer trade off requires careful management. MCKINNA et al

85 Commercial in confidence 85