The COVID-19 pandemic has impacted Australia’s Agribusiness, Food & Beverage industry to varying levels depending on where industry participants sit in supply chains and their level of exposure to impacted domestic and international markets.
Many businesses have been forced to rapidly change business models and channels to market in an effort to guide their organisations through the challenging period over the last several months.
We’ve seen many of our clients quickly shift to direct to consumer delivery, change manufacturing output and source substitutes for critical areas in their supply chain which became unavailable at short notice.
Australia’s reliance on its primary producers and corresponding issues around food and supply security is in the spotlight as never before and it is a testament to the resilience of industry participants how quickly they have sought to adapt to the crisis. As the Government says it will take years to fully recover from the last few months, it’s imperative the sector keeps their eye on the long-term opportunities while addressing short-term issues.
Here we explore three key challenges we’ve observed across our client base and summarised some of the key industry support measures currently available.
1. Supply chain, logistics and freight challenges
All industry sectors have been facing unique challenges regarding how to best manage specific supply chain issues – both upstream and downstream – particularly with regard to the drop in sales volumes connected to food service and the increase in direct to consumer supply, often via online channels.
For example Meat and Livestock Australia notes the challenge faced by the Red Meat industry where demand had been strongest for staple items such as mince and sausage, which were key contributors to the spikes in fresh meat sales in the domestic market, at the expense of traditionally higher value loin cuts which supplied the food service industry. This has made it a challenge to maintain overall carcase profitability.
Major disruptions were evident in the supply of some global markets at the start of the crisis, particularly those impacted by flight cancellations, restricting air-freight capacity, refrigerated containers being held at ports and not returned to global circulation, labour shortages and slow customs clearance.
The Australian Government launched the International Freight Assistance Mechanism to re-establish air freight to high-end protein markets. With international borders unlikely to be reopened to tourism until 2021 at the earliest, the Government is clearly prioritising the flow of produce and products.
Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) industry report of 5 June indicates that despite the pandemic, most agricultural exports have continued to leave Australia and reach consumers in international markets. Export levels have been on par with what otherwise would have been expected during early 2020. Seafood exports are the significant exception experiencing a material decline from February 2020.
The COVID-19 crisis has caused much of the Australian business community to re-evaluate the security of its supply chain. We expect to see longer term impacts in the Agribusiness, Food & Beverage industry where participants will be looking to form stronger relationships with key suppliers and assessing the risk to their supply chains.
2. Workforce challenges
Primary producers – particularly those involved in the production of fresh produce – have noted the significant risk to harvests posed by the restrictions of cross border travel – both domestically and for foreign workers relied upon at times of peak farm activity.
ABARES notes that vegetable, irrigated fruit, nut and cotton producers, in particular, were most reliant on migrant workers. These businesses will be most affected if travel restrictions remain in place over the coming year. The lack of available labour will likely increase the cost of production or at the extreme, limit production if producers find it difficult to harvest.
Farmers should take advantage of the temporary visa changes announced by the Federal Government, which includes an exemption from the six-month work limitation. This includes one employer for working holiday makers working in agriculture, as well as a further extension of their visa if it is due to expire in the next six months. The decision to extend the visas of foreign workers already working in Australia gives certainty to farmers when planning for upcoming plantings and harvest.
3. Impact on agricultural land and agri-business acquisitions
Rabobank’s recent report ‘Port in a storm – Australian ag prices will remain afloat in a rough COVID-19 swell’ suggests, while much of the global and local economy is being severely buffeted, Australian agricultural land is expected to remain largely unscathed – due primarily to overall farm profitability, a tight sales market, support from low interest rates and a weak Australian dollar.
The pandemic has influenced policy around the scrutiny of property acquisitions made by overseas investors – with the threshold for triggering the Foreign Investment Review Board (FIRB) process lowered to $0 from its previous limit. In addition, the FIRB has extended its timeframe to review applications from 30 days to up to six months.
The Government announced the latest changes to FIRB on 5 June 2020, including a new national security test for foreign investors seeking to invest in Australian ‘sensitive national security businesses’. The proposed changes are anticipated to be live from 1 January 2021 and may result in the lowering of the threshold for the review of foreign investment permanently to $0 in certain industries.
That being said, the definition of a ‘sensitive national security business’ is not yet clear – it is expected there will be implications for the Agribusiness, Food and Beverage industry given the likely inclusion of water as an area attracting this level of detailed review.
From an investment standpoint, we envisage there will be a shift from traditional Private Equity investments in high-end discretionary items to a focus on food security through acquisitions in their own upstream supply chains, investing in commodity based staple items and businesses that support primary producers (such as stockfeed and irrigation providers). This theme is certainly already in play with a number of Private Equity investors taking a keen interest in businesses that have weathered the harsh economic impacts of COVID-19 thus far.
Agribusiness, Food & Beverage businesses should be searching for opportunities in the current environment through strategic acquisitions to increase their own security of supply and path to market.
