China: The Newest Frontier for Australian Frontier Heritage

The wizardy of Aus: perfect source for Chinese beef?

Australia is one of the world’s top exporters of cattle and beef. Though its net production is dwarfed by other major players—its annual output of 9.5 million head is just 14 percent that of India and 20 percent that of China—its small domestic market means that in 2015, its cattle and beef exports are expected to be the second largest in the world (behind Mexico and India, respectively).

In other words, Australia’s beef industry is booming—and not only because of growing Chinese demand. Demand from the United States has also been increasing thanks to a relatively consistent drop in value of the Australian dollar (relative to the US dollar) since mid-2013 and the fact that the US national cattle herd has been at historic lows since 2009, in part due to droughts in some of the country’s most important cattle areas.

Australia’s strong performance in beef has not gone unnoticed by several of the country’s deepest pockets, especially during a time when Australia’s main raw materials are doing so poorly: iron ore, which accounts for roughly a quarter of all Australian exports  has dropped more than 40 percent over the past year.

Several Australian billionaires who made their fortune in mining, such as Gina Rinehart—the country’s richest person—and Andrew Forrest have all recently bought cattle stations (Australia’s term for cattle ranches).  Rinehart, in addition to her cattle stations, further expanded her agricultural portfolio by making a A$500 million ($367 million) investment in an infant formula operation to supply Chinese markets.

And while Australia’s own billionaires are certainly looking towards agriculture and cattle with greater interest, it’s been the attention that the sector has received from foreign billionaires and conglomerates that has been making headlines.

Australia’s production of high-quality beef, its exporting prowess, and its ideal location have made it the logical destination for those with beefy aspirations in China. Already, China has increased the volume of beef it sources from Australia by more than 2300 percent since 2010, from 5,600 tonnes slaughter weight (swt) to 135,046 this year.  In the process, China rose from being a largely insignificant trade partner to becoming the fourth largest destination for Australian beef behind the US, Japan, and South Korea.

The relationship between the two countries was further bolstered this past July thanks to a pivotal agreement that enabled Australia to become the first country permitted to export live feeder and slaughter cattle to China. The deal took the better part of 10 years to sign, largely due to China’s food and safety concerns. Chinese authorities were fearful that insects, especially biting midges capable of causing Bluetongue disease could be accidentally transmitted through the trade of live cows. Though bluetongue disease is not typically harmful to cattle, it can have a debilitating effect on sheep and goat herds—both of which are important livestock in China. Australian cattle will be subject to post-entry quarantine in order to protect Chinese domestic livestock, and much of Australia’s cattle shipments to China are expected to come from the bluetongue-free southern regions of Australia.

All cattle leaving Australia will now be tested to ensure they are free of human growth promotants (HGP), have been at the farm of origin for three months, and are not pregnant.  Some, including Australia’s Agriculture Minister, suggest the country’s annual exports to China could eventually swell to 1 million cattle, and ultimately bring in between AA$1 billion and A$2 billion) (between $720 million and $1.4 billion).  The first 150 cattle under this new deal touched down in China in mid-October.

Land Down Under for sale!

Not only is there an intensification of agricultural trade between the two countries—China has also been ramping up its agricultural investment into Australia over the past several years.

In 2012, Shanghai Zhongfu Group’s agreed to investA$700 million ($511 million) in developing 13,400 hectares of land in Western Australia   largely to produce sugar and sorghum.  In 2013, Shandong Ruyi, a textile company, purchased the majority of Cubbie Station, Australia’s biggest cotton farm, for A$232 million ($220 million).

And while those deals represent a steady stream of Chinese investment into Australian agriculture, such spending really took off with the start of 2015.

In February 2015, China’s Hailang Group paid A$40 million ($29 million) for cattle stations in southern Queensland ; the next month, New Hope Group pledged to commit A$500 million ($385 million) in Australian agriculture projects over the next three years.  In May, major Chinese beef producer Chongquing Hondo Agriculture Group Co. expressed its desire to buy A$100 million ($77 million) in Australian cattle stations within the coming year.

In July 2015, the billionaire owner of Tianma Bearing Group, another Chinese company paid A$47 million ($34.62 million) for the Wollogorang and Wentworth stations which included 705,700 hectares of land and 40,000 cattle in the Northern Territory of Australia.

New frontier for the frontier heritage

No land deal, however, has grabbed more attention than the planned sale of the 116 year-old beef producer and exporter S. Kidman & Co. In addition to roughly 200,000 cattle, the assets of the company include 101,411 km² (39,155 mi²)—equal to roughly 77 percent the area of England—of land across three states and the Northern Territory,  representing the “largest private, non-monarchical, non-state landholding on earth.”

The Kidman family, which announced its plans to sell in April 2015, owns 98 percent of the shares in the company and are, in addition to Australia’s biggest private landowners, one of the country’s largest beef producers.

Not only has the scale of the proposed sale grabbed attention, but for many Australians, Kidman represents their country’s frontier heritage.   The company’s founder, Sir Sidney Kidman, ran away from home at 13 with nothing but a one-eyed horse and five shillings. After finding work as a cattle driver in the Outback, he eventually bought his first cattle station (cattle ranch) in 1885 near Alice Springs.

Beyond feelings of national identity, some Australians worry about “handing over” control of the nation’s primary industries. Nearly half of the 12 shortlisted bidders were foreign  and the initial frontrunners for the A$325 million ($228 million) property appeared to be privately owned companies including Donlinks Grain and Oil Company, a Guangzhou-based producer of vegetable oil producer; Shanghai Pengxin, a Shanghai-based conglomerate; and a consortium headed by Shanghai CRED, a real estate development company.   An investment group from China, Genius Link Asset Management, at one point looked as though it would win the bid,  but in mid-November Australia’s Foreign Investment Review Board (FIRB), announced that allowing the Kidman cattle station to be acquired by foreign investors “would be contrary to the national interest”  and blocked the sale.

Though celebrated by some, the decision to block the sale was seen by others as a signal of Australian protectionism. But according to the Australian Finance Minister, the primary reason the sale was blocked was rooted in the fact that 50 percent of the Anna Creek station, which at 24,000 km² accounts for nearly a quarter of the Kidman’s total land holdings, is within the Woomera Prohibited Area (WPA), a weapons testing area.

And while some skeptics initially thought that the sale block was just an excuse to justify not selling to a Chinese firm, S Kidman & Co confirmed on December 10 that Anna Creek station would be carved out from its larger landholdings and sold separately. The station will be sold to Australian buyers, with a preference given to existing shareholders.  This change enables foreign buyers to acquire the remaining 75 percent of the Kidman Empire.

Cowing to nationalist sentiments?

Though Anna Creek’s proximity to the WPA appears to have been the reason blocking the Kidman sale— and the reason for blocking 2009 a bid by Chinese state enterprise Minmetals for OZ Minerals —the debate and decision around it may also be a signal of Australia’s growing reluctance to sell nationally important Australian businesses to foreign owners.

In 2013, the newly appointed Abbott administration blocked a bid by the American commodities conglomerate Archer Daniels Midland (ADM) to acquire GrainCorp, a leading Australian grain handler and storage provider. The Treasurer at the time, Joe Hockey, stated: "I consider that now is not the right time for a 100 percent foreign acquisition of this key Australian business."  There was significant political pressure on the Treasurer to reject the A$3.4 billion  offer (then equivalent to $3.1 billion), particularly given that the government at the time was a coalition between the Liberal Party and the National Party, the latter being strongly opposed the deal.  The government’s intervention resulted in a 26 percent decline in GrainCorp’s stock, and took off the table A$200 million (equivalent in November 2013 to $184 million) in infrastructural upgrades that ADM—which already owned 19.85 percent of GrainCorp—was offering.

It’s therefore not just Chinese investment that is under close scrutiny; however, legislation passed in February 2015 under the Abbot administration suggests that some investors may be more welcome than others.

These rules mandate that the FIRB, the investment review board, must assess all sales of rural land to foreign buyers that are cumulatively worth more than A$15 million (then $11.7 million). These new rules— the previous amount for scrutiny was A$252 million (equivalent to $202 million in January 2015)—apply to investors from countries such as China, Japan and South Korea. Meanwhile, bidders from countries with which Australia had a pre-existing free trade deal from before 2015, such as the United States, New Zealand, and Chile which signed free-trade deals with Australia, are able to buy land valued at more than A$1 billion ($777 million) without review.

In reality, the claims that Australia is selling off all its land to opportunistic foreign buyers is very much exaggerated. Currently, Australians still own 90 percent of the country’s agricultural land, and roughly 99 percent of the farm businesses and the cattle on offer in the Kidman sale represented less than 1 percent of the nation’s total herd.

Making moves in the beef industry

Although the number of agricultural land deals that have been rejected by the FIRB is a small percentage—of the 58 cases it reviewed in 2013-2014, only the ADM bid for GrainCorp was rejected — perceived challenges in doing business with Australia, especially considering the more stringent review process for Chinese investors, could send investment elsewhere.

Although cows are sacred to many people in India, the subcontinent is actually the world’s top exporter of beef (mostly sourced from buffaloes).  Despite India’s strong position in the beef export industry, China has yet to approve any direct imports of beef from the South Asian country, in part due to fears about foot and mouth disease. Instead, large quantities of Indian beef are shipped to Vietnam, where they are then unofficially re-routed to China. Vietnam’s middleman position has made it India’s top destination for beef, importing roughly $2.15 billion in 2014-15.  According to an Indian government official quoted by The Hindu Business Line, roughly $1.5 billion was re-exported to China. 

Beef buyers in China may not have to re-route through Vietnam for much longer: as of mid-2015, Chinese quality experts have begun examining Indian export facilities to enable them to ship directly to China. If approved, some estimate that the direct beef trade between the Asian giants could rise to more than $3 billion.

Conclusions

Thus far, the Australian state’s opposition to Chinese agricultural investment has been very much minimal. The attention, and sometimes uproar, afforded to China’s investments into agriculture are likely driven at least in part by the sheer size of the investments, the landholdings and their price tags. But still, sensationalism around the “ever-expansionary” superpower China is playing a significant role in driving the uproar, especially among the public. Some Australians have even gone so far as to blame foreign investors for the soaring  costs of housing in Sydney and Melbourne, despite the fact that non-residents are not permitted to purchase existing houses in the country.  When political issues draw close to home—literally—any tangential topic is bound to gain more attention.

But still, the state’s recent decision to apply extra scrutiny to those countries with which it did not have an FTA prior to 2015, like China, may still have interesting implications for investment going forward: implications that will depend on how Australia decides to implement this additional scrutiny, and the ability of mega-investors like China to invest more easily in other places.

Australia seems eager to attract additional investments into its cattle and beef industries, and its new live cattle export agreement has been framed around its ability to produce an additional 1 million head of cattle each year.  But it's not yet clear as to how this will happen, and how Australia would be able to effectively double its exports from its current levels of 1.2 million head—especially given the fact that the country’s cattle numbers have remained relatively stagnant for over 30 years, wavering between 8.1 million and 10.3 million head since 1980.

Though Australia’s role in global beef trade is strong and there seems to be the desire to attract capital into the sector, Australia should be careful not to dissuade foreign investment; especially considering competing countries, such as India, are making strides in securing key markets.