NORTH AUSTRALIA BEEF April 2018

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1 Market Overview NORTH AUSTRALIA BEEF April 2018 The Northern Australian cattle and property market appears to have stabilised in 2017 on firm price levels following a significant increase in cattle prices and property values in Rural property and cattle being the most sought-after assets by agribusiness investors in This trend is set to continue into Colliers International s team of 24 dedicated Australian rural and agribusiness professionals can deliver you better results, faster when progressing your property goals in INDUSTRY OVERVIEW Australia is one of the world s most efficient producers of cattle and the world s third largest exporter of beef. The off-farm value (domestic expenditure plus export value) of the Australian beef and cattle industry was $16.85 billion in (ABS, MLA estimate). The global outlook for beef and veal demand is steady, with countries including China and Japan increasing both imports and consumption from Australia in 2017, however consumption in Korea has decreased for the first time in five years. Australia s export market is declining, with Japan representing the biggest export market during 2017 with 292,000t shipped weight (swt) exported (29 percent of the total export market and valued at about $1.9 billion). This represents an 11 percent increase in exports to Japan, with global exports steady at 1.01 million tonnes swt. Global prices are reflecting the increasing demand for protein. Global production is also forecast to increase over 2018, which reaffirms the need for Australia to position itself globally as a supplier of a superior quality product to maintain market value. Domestically, prices remain steady with the Eastern Young Cattle Indicator sitting slightly below its position at this same time in This price activity is not so much a reflection of poor market conditions, but rather a return to sustainable levels following historically high prices seen in 2016 and These high prices, as well as a strongly performing Australian dollar, has resulted in increased competition from South America in the global market since If the strong wet season currently being experienced in northern WA and the NT continues and spreads into QLD s lower gulf and central Australia, the entrance of re-stockers into the market could place upward pressure on prices, again pushing Australian prices well above global competitors. High prices, decreased live export trade to Australia s major live export destinations such as Indonesia and Vietnam, and a strong Australian dollar could all result in a decrease in exports. The Australian cattle herd is expected to increase in 2018, up 1.1 percent year-on-year to 27.6 million head, according to Meat & Livestock Australia s (MLA) 2018 Cattle Industry projections. This follows on from the movement seen in 2017, being the first increase in three years. Current dry conditions in central Australia, QLD and NSW may impede the herd rebuild rate leading into the second quarter of The Western Australia beef market is seeing increasing demand for chilled beef from major export destinations including Indonesia and Korea, with forty percent of beef processed in WA being exported to 35 countries. This has prompted northern producers to send their stock into Western Australian feedlots for finishing prior to processing and export into these markets. This activity is reflected in the number of cattle on feed in the west for December 2017, which reached a ten year high of 50, Despite these high levels, there is still excess capacity within Western Australian feedlots, with the industry able to accommodate over 100,000 cattle on feed across the state 2. CURRENT PRICING AND PRODUCTION In early 2017, cattle prices were forecast to remain at record levels throughout the year, however, downward pressure on prices caused by weaker export demand has seen prices weaken from recent record highs. Good conditions towards the end of 2017 saw an increase in re-stocker demand in QLD, paying a 54c/kg premium to feeders. The weighted sale yard cattle price averaged 595c/kg for The change in price over time is best represented by the yearly lines in the Graph 1 below indicating the increase in young cattle prices over the five year period from 2013 to Mercardo, Meat and Livestock Australia, Australian Lot Feeders Association Government of Western Australia, Department of Primary Industries and Regional Development, North Australia Beef Market Overview COLLIERS INTERNATIONAL

2 In January 2018, MLA reported eastern states weekly adult cattle slaughter averaged just over 98,500 head, up 6 percent on the same time last year but below the five year average, underpinned by greater stock retention and tighter availability. In January 2018, average weekly adult cattle slaughtered in QLD declined by 12 percent year-on-year to 41,386 head, while NSW dropped 2 percent to 27,535 head. Kill levels in VIC lifted 16 percent to 20,879, with a 5 percent increase in Tasmania to 4,321, while numbers in SA dropped 36 percent to 4,405 (Graph 2). The poor winter and spring across a number of regions in 2017 temporarily halted or undid many producers herd rebuilding efforts in the affected areas. This has meant many young cattle were pushed into feedlots in 2017 due to lack of decent pasture. Stock that otherwise would have been finished in the paddock and sent to market in This is part of the reason there is an expectation of tighter slaughter numbers than previously forecast in 2018, as these producers look to rekindle rebuilding efforts. Seasonal conditions will play a critical role in the pace of slaughter throughout the year and a lot is still riding on how the northern wet season plays out. It is likely that the winter months will be tight in 2018 compared to 2017, if average seasonal conditions prevail, before supplies potentially improve towards the end of the year. Female slaughter will likely remain relatively low for the next few years given the rebuild and, when combined with the ongoing growth in the proportion of Meat Standards Australia (MSA) cattle, there should be an improving quality of product coming through the system. It is important to note, however, that ultimately the female kill will increase as the herd comes out of the rebuild, increasing the reliance on our manufacturing markets Although likely to be lower this year, the seasonal lift in weaner calf numbers over the coming months is expected to be met by robust buyer demand in the physical market. While cull cows also typically become available over the coming months from January, female cattle slaughter is expected to continue to be lower through the industry s rebuilding phase. Compared to 2017, the MLA forecasts the Australian cattle slaughter to increase 3 percent in 2018, to 7.4 million head. This comes on the back of a below average wet season across Central Australia and into QLD s lower gulf country extending to the Channel Country, western QLD and down into the Central west of NSW, raising both cattle on feed and slaughter numbers. Graph 1: Eastern Young Cattle Indicator 2014 to 2018 Montlhy Average (Ac/kg cwt) Source Meat and Livestock Australia and Colliers International Graph 2: Annual Adult Slaughter Numbers million head Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Source ABS, MLA Forecasts Graph 3: Australian Beef Live Exports by Destination ( 000) Vietnam, Thailand, 0.8 Philippines, 4.2 Malaysia, 25.3 Japan, 9.5 Israel, 45.8 Indonesia, 518 Indonesia Japan Malaysia Philippines Thailand Vietnam Israel The Bureau of Meteorology s (BOM) latest rainfall outlook points to above average rainfall for most of WA, northern Australia and parts of the east coast for the three months from February to April. Areas in the eastern states have a moderate chance of above average rainfall 3. Exports remained relatively mixed with increases in shipped weight to Japan (11 percent) and China (17 percent), yet decreases in shipped weight to the United States (3 percent) and Korea (17 percent) for the 2017 calendar year. 3 Source: MLA Source ABARES and Colliers International. Live cattle exports over the 10 years to 2017 experienced continual growth, through the increased consumption of beef products in the emerging Asian economies. However, 2017 saw a decrease in live export numbers, largely due to the domestic herd rebuild, as well as high cattle prices and uncertainty surrounding import policies in Australia s largest live export markets. It is expected that this trend will continue in 2018, as the herd rebuild continues. Graph 2 illustrates the number of feeder and slaughter cattle sent by live export to overseas countries in North Australia Beef Market Overview COLLIERS INTERNATIONAL

3 Indonesia s share of Australia live cattle exports is expected to decline over the medium term, as the implications of its 5:1 feeder to breeder import policy begins to be felt. It is expected that this policy will have a negative impact on Indonesia s national food supply, as local importer suspensions increase, restricting both breeder and feeder imports, consequently minimizing Indonesia s capacity to achieve self-sufficiency. Thus, exports are forecast to return to perpolicy levels in the long term. Despite this activity in Indonesia, the country still remains the primary destination for Australia s live cattle exports, accounting for 60 percent of total exports, with Vietnam taking 19 percent. In 2018, live cattle exports are expected to remain consistent with 2017 levels, which were 22 percent below 2016 levels. A strong Australian dollar, high Australian cattle prices, and tightening supply due to domestic herd rebuilding efforts are largely responsible for these low export levels, compared to the historically high levels seen in 2014 and Decreases in import tariffs on both chilled and frozen beef supplies to Japan under the Japan-Australia Economic Partnership Agreement is expected to continue aiding growth in exports to the nation. A decrease in tariffs under the Korea-Australia Free Trade Agreement should have the same impact, however competition with the US operating with a 5 percent tariff advantage has put downward pressure on exports to Korea. As seen on the previous page (Graph 4), in Japan made up 29 percent of beef and veal exports. IMPACT ON PROPERTY VALUES The strong demand for beef products can be seen to have a significant impact upon investors wanting to access the beef producing market. Rural properties geared towards beef production will be the most sought-after assets by agribusiness investors in Stock numbers will continue to have an effect on property sales in While the national herd remains at low levels, and cattle prices are high, properties with significant stocking rates will be more attractive to potential investors. Properties offered to the market on a walk-in walk-out basis represent the potential to acquire a herd without the costs associated with freight and the complexities involved in purchasing new stock. As a result, properties offered with stock included are expected to attract significant interest. Rainfall across northern Australia could spur further interest in the cattle industry. With El Nino climate conditions being present over the past couple of years, Northern Australia has not had a sufficient wet season for the past 3-4 years. Although there has been isolated rainfall throughout the northern regions this season, it hasn t had a notable affect upon property values thus far. If more rainfall occurs, it is likely that properties for sale may exceed demand due to vendors wanting to take advantage of potentially improved investor interest in beef-producing assets. Graph 4: Australian Chilled Beef Exports by Destination Other, 7% Malaysia, 1% Philippines, 3% Saudi Arabia, 1% Taiwan, 3% Indonesia, 5% Canada, 2% China, 10% South Korea, 17% Source Meat and Livestock Australia and Colliers International High confidence is fueling interest in the beef market with strong demand from domestic investors as well as international investors and institutions, significantly impacting property sales over the last year. The most notable events occurring in 2017 in the cattle industry was Hewitt Cattle s purchase of Numery and Ambalindum, and the sale of Fossil Downs in WA to HPPL. Both of these sales represent 30 million to 40 million dollar transactions, of significantly lower scale than transactions seen in 2016, which included the sale of the Kidman and Co portfolio of properties, the sales of North Australian Pastoral Company (Part Sale to QIC), Western Grazing Company s Tanbar and Rocklands, and SAWA Pastoral Company s portfolios. All of these represent 100 million up to nearly 500 million dollar transactions, which set the benchmark for further large cattle portfolio sales predominately throughout the northern region of Australia. The number of pastoral properties listed for sale is limited, with the recent notable listing of Thames Pastoral Properties Tanumbrini Station on the Carpentaria Highway and Forrest Hill Stations on the Sturt Highway being the most recent properties to be listed. The aggregation has a combined overall area of approximately 559,000 hectares and a reported carrying capacity of approximately 42,000 Adult Equivalents (AE). NORTHERN BEEF MARKET US, 22% Japan, 29% The northern beef market comprises the NT, QLD and the northern portion of WA. Within Australia s total broad hectare beef producing farms (32,350), the northern market comprises approximately 8,800 properties (ABARES ). The northern market is characterized by the production of primarily Bos Indicus breeds including Brahman, Santa Gertrudis and Droughtmaster, with the vast majority developed for live export. There has been a notable increase in the number of properties changing their cattle herd bloodlines to a composite breed which includes both Bos Taurus and Bos Indicus bloodlines. In recent times, the northern market has been operating in adverse market conditions of a high Australian dollar and extensive periods of low rainfall, particularly throughout QLD, and live cattle export trade restrictions into Indonesia. US Japan South Korea China Canada Indonesia Taiwan Saudi Arabia Philippines Malaysia Other 3 North Australia Beef Market Overview COLLIERS INTERNATIONAL

4 Herd liquidation was rapid during and the first half of Generally, unfavourable seasonal conditions resulted in lower calving rates and higher than average mortalities. Slaughter and live export numbers were high, supported by strong international demand. The extent of herd liquidation is reflected in monthly female cattle slaughter numbers, which increased year-on-year every month from June 2012 to December The number of cattle slaughtered in 2017 fell as a result of the retention of breeding stock and subsequent expansion of the national beef cattle herd. Though this expansion is to continue throughout 2018, poor seasonal conditions has meant increased cattle on feed and slaughter numbers. 4 North Australia Beef Market Overview Australia s livestock export industry is enjoying a period of sustained growth which is delivering significant flow-on benefits to the rural sector and the broader national economy. Live export prices defied the trend in the Southern Markets throughout the past two year period. The period experienced a decline in export numbers for live feeder and slaughter cattle of approximately 802,000 head down from a high of 1,114,200 head in by approximately 27 percent. The forecast is to remain steady in The value per unit rose in 2018 by approximately 22 percent to average approximately $1,402 /head. With declining live export numbers, the overall value for the period fell by 3 percent to approximately $1.2 billion. COLLIERS INTERNATIONAL

5 NORTHERN AUSTRALIA COMPARATIVE SALES The below illustrates the most recent large scale transactions of beef assets throughout North Australia. PROPERTY LOCATION STATE AREA (Ha) SALE DATE SALE PRICE TRANSACTION TYPE 1 BROADMERE MCARTHUR NT 259,000 Oct-17 $7,000,000 BARE 2 WILLEROO STN* DELAMERE NT 171,000 Oct-17 $35,000,000 WIWO 3 CONISTON ANMATJERE/TI TREE NT 217,700 Jul-17 $13,000,000 WIWO 4 AROONA DELAMERE NT 147,500 Feb-17 $25,750,000 WIWO 5 NUMERY & AMBALINDUM CENTRAL DESERT NT 534,794 Feb-17 $48,050,000 WIWO 6 BAN BAN SPRINGS BURRUNDIE NT 192,084 Dec-16 $11,500,000 BARE 7 NAPPA MERRIE DURHAM QLD 727,700 Nov-16 $18,000,000 BARE 8 VERMELHA BIRDUM NT 203,900 Sep-16 $18,000,000 WIWO 9 FLORINA KATHERINE NT 57,498 Aug-16 $6,802,534 WIWO 10 MANNERS CREEK LOWER BARKLY NT 672,167 ha Aug-16 $15,000,000 WIWO 11 SAWA AGGREGATION KIMBERLEYS WA 1,039,000 Aug-16 $100,000,000 WIWO 12 ROCKLANDS CAMOOWEAL QLD 677,964 Aug-16 $103,000,000 WIWO 13 TANBAR WINDORAH QLD 1,021,940 Aug-16 $32,000,000 WIWO 14 NEUMAYER VALLEY QUEENSLAND GULF QLD 143,000 May-16 $41,500,000 WIWO 15 BENMARA CRESWELL NT 451,000 ha May-16 $11,600,000 BARE 16 HODGSON RIVER ARNOLD NT 111,000 May-16 $4,000,000 BARE 17 OLD MT BUNDY MOUNT BUNDY NT 38,470 Apr-16 $4,500,000 BARE 18 LONESOME DOVE ROPER RIVER NT 72,350 Apr-16 $6,000,000 WIWO 19 HUMBERT RIVER VICTORIA RIVER NT 108,000 Apr-16 $17,500,000 WIWO 20 RIVEREN & INVERWAY VICTORIA RIVER NT 555,400 Mar-16 $61,250,000 WIWO 21 ESMERALDA CROYDON QLD 406,000 Feb-16 $40,950,000 WIWO 22 WALLHOLLOW CRESSWELL BARKLY NT 999,700 Dec-15 $97,000,000 WIWO 23 BULLO RIVER TIMBER CREEK NT 162,700 Aug-15 $9,500,000 WIWO 24 FOSSIL DOWNS WEST KIMBERLEY WA 400,000 Aug-15 $30,000,000 WIWO 25 DOUGLAS STATION DOUGLAS DALY REGION NT 154,844 Aug-15 $8,000,000 BARE 26 BARKLY DOWNS CAMOOWEAL QLD 924,500 Jun-15 $61,000,000 BARE 27 BOLWARRA CHILLAGOE QLD 155,000 Mar-15 $12,000,000 WIWO * WILLEROO STN* CONTRACT PRICE SUBJECT TO CONFIRMATION TRANSACTED BY COLLIERS INTERNATIONAL North Australia Beef Market Overview COLLIERS INTERNATIONAL

6 FOR MORE INFORMATION Contact Alex Thamm National Director Shaun Hendy Director Malcolm Malone Associate Director Jason Osborn Associate Director John Harrison Manager Rawdon Briggs Head of Rural & Agribusiness Ben Forrest Associate Director Jim Guilfoyle Manager Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one-way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. 6 North Australia Beef Market Overview COLLIERS INTERNATIONAL