AAC - Australian Agricultural Company

It's been a slow crawl, but it seems today could be THE DAY. I hold a full posi and reckon I'll top up on breakout.



"Feed the Man meat." and that is no Bull

pixel said:

It's been a slow crawl, but it seems today could be THE DAY. I hold a full posi and reckon I'll top up on breakout.

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Looks like y'day was the day... with breakout today. Is it takeover talk, re-rating based on recent results/lower debt levels or something else ?

keithj said:

Looks like y'day was the day... with breakout today. Is it takeover talk, re-rating based on recent results/lower debt levels or something else ?

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I don't know or care what caused it.
As long as it holds above Fib Phi (161.8%), I keep adding

Does anybody have an explanation for today's rally?
I did notice Friday's attempted breakout, but wasn't game to commit; today took me completely by surprise, and I've been waiting for an ASX speeding ticket or a "Notice received". So far ... Nothing

There is a lot of money leaving China and a lot of it is going on farm land. I would not be surprised to see a foreign takeover.

pixel said:

Does anybody have an explanation for today's rally?
I did notice Friday's attempted breakout, but wasn't game to commit; today took me completely by surprise, and I've been waiting for an ASX speeding ticket or a "Notice received". So far ... Nothing

View attachment 59502

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Central Queensland has had some good rains over the last couple of days, which is likely to push cattle prices up. Large cattle growing area that has been in drought for a few years. They also have a few stations in this area.

rcm617 said:

Central Queensland has had some good rains over the last couple of days, which is likely to push cattle prices up. Large cattle growing area that has been in drought for a few years. They also have a few stations in this area.

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how would better rain increase the revenue of AAC (export mostly..)?
yes they wuill have feed all good indeed but probably more important as I see it:
the AUD is falling; every % fall is extra % competitivity/revenue

qldfrog said:

how would better rain increase the revenue of AAC (export mostly..)?
yes they wuill have feed all good indeed but probably more important as I see it:
the AUD is falling; every % fall is extra % competitivity/revenue

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I think you will find that the vast majority of AAC's cattle still are for domestic supply. Breaking of the drought causes less cattle to be supplied to the market and thus pushes up prices. I agree the dropping dollar will also help, but that has been happening for a little while, so less likely to be specifically the rise today.

An interesting article from today’s Australian reports on the impact “ El Nino “ will have on agricultural commodities and more importantly commodity prices.
This is as a result of weather related supply shortages. I hadn’t considered the effect of “ El Nino” , however, I consider it to be another event akin to a favourable macro-economic event such as the falling AUD.

TO read the full article, follow the link below.
I have also quoted one of the more relevant sentences in the article for your consideration:

Quote;

“ Several agricultural prices have rallied off their lows on fears of weather-related supply shortages. Sugar prices have risen 31 per cent over the past three weeks; dairy is up 36 per cent, palm oil has gained 13.1 per cent and wheat is up 6.1 per cent over the same *period.”


http://www.theaustralian.com.au/bus...-nino-takes-hold/story-fnay3ubk-1227567903112


Disc – Opinion only. Invested in MGC, CGC, AAC and WBA. DYOR.

it is to take into account but sadly, we in Oz will bear the worst of an el nino event: higher commodity price, lower productivity for us;
My own 2c is that it is a negative for AAC
I own some AAC shares

This article is from today's Australian newspaper:



CHINA GIANT COFCO LOOKING AT BEEF, DAIRY SECTORS
THE AUSTRALIAN OCTOBER 27, 2015 12:00AM


China’s biggest food company, Cofco, plans to look at investments in the Australian dairy and beef industries as it moves to *become the face of China’s transformation of its biggest state-owned enterprises into globally competitive corporations.

Cofco president Patrick Yu told a private roundtable forum in Melbourne, hosted by the Australian not-for-profit The Global Foundation, that Cofco was at the forefront of SOE reform and that more partnerships with Australian companies would help drive its new global, commercially *focused mandate.

“For us it is very important to build a supply chain by working together with our partners. We are becoming a global citizen. We are not just a Chinese company any more,’’ Mr Yu told the forum during a rare visit to Australia.

In unusually frank comments for the CEO of a top government-backed Chinese enterprise, he *acknowledged it was challenging for an SOE to become more *market-oriented.

But he said the Chinese government planned to delegate more power to the commercial platform of Cofco and that his company’s “systems’’ were starting to change as a result.

He said Cofco’s management team and staff were learning to balance the demands of playing by global rules on the global stage while at the same time growing a local identity in the areas in which it operates, noting it “wasn’t easy”.

“While we have to be globalised, we also have to be in the local circle. You have to work closely with local industry, local people.”

Cofco ”” or China National Cereals, Oils and Foodstuffs Corporation ”” is one of the largest SOEs of the 49 directly administrated by China’s State Council.

Last year it was one of a handful of enterprises chosen by the authority to lead reforms of the SOE sector after a string of poor international investments by SOEs led to huge losses across a range of sectors in recent years.

As China’s largest food *processing, manufacturer and trader, Cofco has bought several smaller domestic firms in recent years. Then last year it made its *biggest steps onto the global stage with $US2.7 billion to acquire Dutch grain trader Nidera and 51 per cent of Noble Group’s agriculture unit, giving it new pathways into South America and central Europe.

In the interim, in 2011 it made its first acquisition in Australia, paying $145 million for Tully Sugar in Queensland, which *supplies 10 per cent of Australia’s annual sugar crush.

Mr Yu said Cofco had learned plenty from its ownership of Tully that it was applying to other parts of its empire, including sending its Tully Sugar farming expert to Brazil in a bid to reduce the company’s sugar chain production cost from its South American operations.

Mr Yu added that Australia remained a prime target for investment.

“With Chinese consumers, today people are strongly aware that Australian food and agricultural products are safer, good *quality, good products, good innovation to the China market,’’ he told the forum.

“We should have some local partners in Australia. Victoria is very strong in the dairy sector so we should look into that. The other area is protein ”” I think beef is the next potential area for Australia to China. Australia is in the best position for fresh produce.”

The Australian beef market is enjoying record high prices driven by increased demand from Asia for live cattle and boxed beef.

Last year, Cofco signed a memorandum of understanding for a landmark Asian Food Partnership with the Global Foundation.

It set the terms and understanding between the two for *mutual co-operation in contributing to an Asian Food Partnership and to global food security.

“I believe that with the support of the Global Foundation, Cofco can have the chances and opportunities to grow our business not only in Australia, but elsewhere,’’ Mr Yu said. “We can bring China demand and Australian suppliers into China and Australia will *become much stronger trading partners in the long run.’’

The Global Foundation is *already working with National Farmers Federation chief executive Simon Talbot, who attended the Melbourne forum, to forge relationships with the food-focused parts of Cofco.

Cofco has four companies listed in Hong Kong: China Foods, China Agri-Industries Holdings, Mengniu Dairy and Cofco Packaging Holdings.

“We are putting a team around Simon that develops an innovation centre for SMEs to better understand the China market and work with Cofco as partner,’’ said Global Foundation secretary-*general Steve Howard, who will visit Mr Yu again in *Beijing early next month.

But Mr Yu said the partnership with the Global Foundation could also extend into other sectors.

“There is (also) much more *potential for the Global Foundation to bring together players in the healthcare and education industries,’’ he said.

The Foundation’s Asian Food Partnership with Cofco is also complemented by a focus on *supply chains and export infrastructure, which has been led by Aurizon CEO Lance Hockridge over the past 18 months.

Mr Hockridge plans to take a team to China in the coming months to meet with Cofco to examine the company’s supply chains and distribution systems.

Have taken a position in AAC this morning.

This is a company that has and is still undergoing a major transformation. AACo has traditionally been a grazing company that bred and produced beef cattle for the purpose of live sales. This line of business has always been highly volatile and correlated to the supply/demand in the market, live cattle export quotas, cattle prices, weather conditions etc., and pricing trends within the entire supply chain.

However, the company is squarely on the path towards vertical integration and branded boxed beef sales. Boxed beef sales made up 84% of revenues in the last half, compared to 47% in the year of 2012 (and far less in the years before that).

This has required a large working capital injection to build the herd & also to build a processing facility / abbatoir in Darwin.

Most of the capital ramp up has now finished and cash flow will be starting to build up.
The geographic isolation of the new Darwin processing facility (vs the east coast processing facilities) gives it a potential competitive advantage and heaps of room to expand it. It also substantially decreases their earnings volatility (as there is no longer a reliance on live cattle price, which are far less stable than finished meat prices). The facility has almost reached capacity on the first shift and is now profitable. Given the nature of the fixed cost base, any extra capacity they can fill will start hitting the bottom line in far greater numbers. Eventually they will add a 2nd twelve hour shift, effectively doubling capacity.

Margins will improve once they are using their own cattle in the facility rather than contracting out to other farmers. It will also assist in managing capacity in times when supply of external cattle is low (something that traditionally makes meat processing companies unprofitable for periods).

Vertical integration in the beef industry is uncommon (compared to say pork or poultry) but the rewards are very big indeed if you get the cost structure and supply chain management correct.

The macro picture for food (especially in Asia) and also high quality beef products (Europe) in the very long term looks excellent to me. The TPP and other trade treaties should help free up a lot of these markets.

I also like the fact that they are exposed to the high value, high margin (non-Japanese) Wagyu markets, which seem to be far easier to turn a profit in Australia as it is easier to compete on costs with the US, UK etc.

Lastly, there is also a bit of a technological revolution in agriculture (especially live / timely data) that will greatly assist the remote management of livestock herds and improve data quality and quantity.

Interesting company, will be plenty of tough years to ride through, and probably some heavy share price movements from time to time, but potentially decent rewards for long-term patience.

Ves said:

Have taken a position in AAC this morning.

This is a company that has and is still undergoing a major transformation. AACo has traditionally been a grazing company that bred and produced beef cattle for the purpose of live sales. This line of business has always been highly volatile and correlated to the supply/demand in the market, live cattle export quotas, cattle prices, weather conditions etc., and pricing trends within the entire supply chain.

However, the company is squarely on the path towards vertical integration and branded boxed beef sales. Boxed beef sales made up 84% of revenues in the last half, compared to 47% in the year of 2012 (and far less in the years before that).

This has required a large working capital injection to build the herd & also to build a processing facility / abbatoir in Darwin.

Most of the capital ramp up has now finished and cash flow will be starting to build up.
The geographic isolation of the new Darwin processing facility (vs the east coast processing facilities) gives it a potential competitive advantage and heaps of room to expand it. It also substantially decreases their earnings volatility (as there is no longer a reliance on live cattle price, which are far less stable than finished meat prices). The facility has almost reached capacity on the first shift and is now profitable. Given the nature of the fixed cost base, any extra capacity they can fill will start hitting the bottom line in far greater numbers. Eventually they will add a 2nd twelve hour shift, effectively doubling capacity.

Margins will improve once they are using their own cattle in the facility rather than contracting out to other farmers. It will also assist in managing capacity in times when supply of external cattle is low (something that traditionally makes meat processing companies unprofitable for periods).

Vertical integration in the beef industry is uncommon (compared to say pork or poultry) but the rewards are very big indeed if you get the cost structure and supply chain management correct.

The macro picture for food (especially in Asia) and also high quality beef products (Europe) in the very long term looks excellent to me. The TPP and other trade treaties should help free up a lot of these markets.

I also like the fact that they are exposed to the high value, high margin (non-Japanese) Wagyu markets, which seem to be far easier to turn a profit in Australia as it is easier to compete on costs with the US, UK etc.

Lastly, there is also a bit of a technological revolution in agriculture (especially live / timely data) that will greatly assist the remote management of livestock herds and improve data quality and quantity.

Interesting company, will be plenty of tough years to ride through, and probably some heavy share price movements from time to time, but potentially decent rewards for long-term patience.

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Looks like they are starting to get some recognition from the market after yesterdays Report.

I can only imagine what cash flow / earnings will look like when the following happens:

1. More long-term: The proportion of AAC bred cattle that goes into the abattoir increases substantially and they don't have to buy expensive cattle bred else where.

2. More eminent: The abattoir finishes its ramp-up and operates at full-capacity. Due to high fixed costs being carried, a lot more falls to the bottom line.

Still a super long-term, ride the bumps kind of play. But exciting progress so far.

A fully vertically integrated processing plant, some time in the distant future, where most of the capacity is taken up by their own cattle to achieve much higher margins (obviously needs a much larger herd and heaps more farm land), that can benefit from increased food demand across the globe is where I am looking.

Ves said:

Vertical integration in the beef industry is uncommon (compared to say pork or poultry) but the rewards are very big indeed if you get the cost structure and supply chain management correct.

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Do you know what the reason for that is? You're painting a pretty good picture, but I'm sort of scratching my head thinking why hasn't anyone else thought of vertical integration. Higher margin, less volatile pricing. Seems like a no-brainer. Is it too complex to ensure supply, given the vagaries of weather etc, without a geographically diverse head of cattle?

McLovin said:

Do you know what the reason for that is? You're painting a pretty good picture, but I'm sort of scratching my head thinking why hasn't anyone else thought of vertical integration. Higher margin, less volatile pricing. Seems like a no-brainer. Is it too complex to ensure supply, given the vagaries of weather etc, without a geographically diverse head of cattle?

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Have a read of this mate:

http://ageconsearch.umn.edu/bitstream/35759/1/waeasp21.pdf

It's from 1997, but I think it provides a very good introduction of the differences between the poultry, pork and beef (cattle) segments and the implications on vertical integration and why it has occurring much slower in terms of the cattle industry.

I reckon the technology and understanding of genetics has come on a lot in the last 20 years, and also the wider awareness in society of different types of beef (wagyu, angus etc).

Ves said:

Have a read of this mate:

http://ageconsearch.umn.edu/bitstream/35759/1/waeasp21.pdf

It's from 1997, but I think it provides a very good introduction of the differences between the poultry, pork and beef (cattle) segments and the implications on vertical integration and why it has occurring much slower in terms of the cattle industry.

I reckon the technology and understanding of genetics has come on a lot in the last 20 years, and also the wider awareness in society of different types of beef (wagyu, angus etc).

Click to expand...

Thanks. So specialisation was the name of the game, because farms tended to be dispersed, and each stage of production needed to get volume through to be economical. I'm guessing AAC have the scale that they are not affected by things like drought etc in the way a smaller operation is?

How do the pastoral leases work? Are these for a set period of time and then renewed for a nominal amount, or for market value or....They're not amortised as far as I can see.

Is there some sort of metric around "land utilisation" that you know of, like how many more cattle could they put on their existing property without negative affects? You mention they have plenty of capacity at their new Darwin processing facility, will this be used exclusively for AAC or will they also provide contract services?

The strategy seems to be providing premium beef, and to that end they look to have really upped their wagyu herd. No doubt those genetics and breeding take years to perfect, given the long breed cycle of cattle. Is there a risk that they have pinned a lot of their success on a single type of beef and that customer taste may change (next fad diet says eat lean red meat etc)?

Lots of questions, just thinking this through.

McLovin said:

Thanks. So specialisation was the name of the game, because farms tended to be dispersed, and each stage of production needed to get volume through to be economical. I'm guessing AAC have the scale that they are not affected by things like drought etc in the way a smaller operation is?

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They might have a bit more financial clout, and possible some advantage if the drought affected QLD and not NT, or vice versa, but probably not any notable advantage.

I think you’d have to expect a few bad years along the way, that’s for sure.

Some background on all of the properties here:

http://www.aaco.com.au/operations/properties/

They do claim the breeding stations are located in “safer” rainfall areas. I guess you could probably confirm/deny and measure the risk with climate data, but I really haven’t dug that deep.

McLovin said:

How do the pastoral leases work? Are these for a set period of time and then renewed for a nominal amount, or for market value or....They're not amortised as far as I can see.

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Page 61 of the Annual Report is what you are looking for.
http://www.asx.com.au/asxpdf/20160525/pdf/437gfsvfnqhp1j.pdf

Basically they are leased from the State Government (NT/QLD). NT are perpetual leases, whilst QLD are 50 year leases. I don’t see much risk of the QLD leases not being rolled over, there’s not much else they can do with the land.

McLovin said:

Is there some sort of metric around "land utilisation" that you know of, like how many more cattle could they put on their existing property without negative affects?

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I’m not really sure, but I would imagine, given the ramp-up in stock in the last few years, they wouldn’t leave any spare capacity. My assumption is to expand they would need more leases.

McLovin said:

You mention they have plenty of capacity at their new Darwin processing facility, will this be used exclusively for AAC or will they also provide contract services?

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They haven’t been as clear in their disclosure of the activities of this facility in this report (compare the previous few halves and they had a nice capacity chart etc.)

From Page 9 of the 2016 Annual Report (link above) it says they slaughtered 217,800 during that financial year. Also looks like they purchased 95k live cattle (not sure how the accounting works here, but does this include cattle purchased for slaughter on a contract basis? Probably not)

Capacity is about 1,000 head a day, or around 365,000 (this was in the strategy updates when the new facility was announced to the market a few years back.

They definitely contract this facility out (confirmed in previous presentations), but ideally they would have an overall higher margin if they can increase the proportion of their own livestock that goes through the facility.

McLovin said:

The strategy seems to be providing premium beef, and to that end they look to have really upped their wagyu herd. No doubt those genetics and breeding take years to perfect, given the long breed cycle of cattle. Is there a risk that they have pinned a lot of their success on a single type of beef and that customer taste may change (next fad diet says eat lean red meat etc)?
Lots of questions, just thinking this through.

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I don’t think Wagyu is so much a fad diet as it is a high quality luxury product (some reports say it’s actually healthier because it has higher unsaturated fats).

If anything the risk has more to do with not enough people being able to afford to eat it than there is eating trends changing IMO.

Ves said:

Basically they are leased from the State Government (NT/QLD). NT are perpetual leases, whilst QLD are 50 year leases. I don’t see much risk of the QLD leases not being rolled over, there’s not much else they can do with the land..

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The obvious alternative choice is havland given back to aboriginal corporations, sorry land councils.
A matter of state governments and whoever is in power at the time;

The weekly chart (left) shows the completion of the corrective abc pattern. The pattern ended a little below the targeted 50% - 61.8% levels. However the CD=AB price projection hit it right on.

The completion of the corrective pattern provides the context and we wait for our setups to provide an acceptable RR opportunity.

Our trend continuation pattern has formed on the daily chart (right)and the initial target of 1.97 (old high) provides an acceptable RR.