Australian cockies, or farmers for our international readers, have a uniquely Australian way of expressing surprise. Their eyebrows rise and they drawl ‘ya wouldn’t read about it’.
One thing you will read about at the moment is beef prices rising significantly. At Tuesday’s Wagga Wagga cattle sales, the best prices for 330kg+ vealers was 308 cents per kilogram. That might sound low to you city folk paying $30/kg in the butcher shop, but it’s double what the grazier got a year ago. In fact, it's the best price I have ever seen in the yard, by a magnitude of some 40%.
With herd numbers at multi-decade lows in both the US and Australia, they could trade a lot higher yet. If so, it will be some welcome news for long-suffering beef producers (including my parents).
For a year or so I have been looking for ways to make some money out of rising cattle prices for our investors, without much luck. To own cows, you unfortunately need to own a farm. And Bristlemouth readers will know what I think about the crap economics of farming.
But with prices rocketing I thought I’d take one more look at Australian Agricultural Company, or AACo as it is commonly referred to. AACo is Australia’s (and one of the world’s) largest beef producers with a herd of 512,000 cattle and some 6.4 million hectares of land (more than one-and-a-half times the size of Switzerland). It never makes any money but surely, finally, this is its turn to shine.
So I make my way to the latest annual report. I’m a bit surprised it still isn’t making any money. I’m even more surprised the share price has fallen during the past few months. And then I come across this:
The sale of live cattle to third-party producers and processors has been substantially reduced (down 54% compared to FY14) and, to the extent possible, diverted to support the growth in beef sales. Where the internal supply of cattle has not been sufficient to meet the demand of our beef customers, purchases of both feeder and finished cattle have been made. Much of this supplemental purchasing activity has occurred in a strong pricing environment for live cattle. While in the short term this has put pressure on the margins in our Grainfed business, we are confident that our long term vertical integration strategy is sound.
Can this be right?
My reading between the lines is that they have changed their strategy from selling cattle to selling packaged beef. But they are currently contracted to sell more beef than their cattle can produce, so they have to buy from elsewhere to meet their contractual commitments.
Finally, after all these years of woeful returns, cattle prices are through the roof. And long suffering shareholders in Australia’s largest beef company, they just happen to be short cows. Dead set, ya wouldn’t read about it.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.