AACo's transition to strong position

The world’s largest cattle producer has decided it is not, in today’s world, best served by a focus on cattle and is transitioning to a “beef company”, AACo chief Jason Strong told the 13th Wagyu Conference on the Gold Coast, Queensland, last week.

That doesn’t mean AACo is shifting out of cattle. It is moving its attention from what happens in the paddock, toward the plate, and looking at how to best capture the most value from beef toward the consumer end of the market.

Once captured, those extra margins will be cascaded back through the company’s operations.

Increasingly, Mr Strong told the conference, the company’s operations will not be owned by the company at all, but exist as a network of strategic alliances.

Those alliances are being cultivated at all points along the supply chain - cattle supply, backgrounding, lotfeeding and processing.

“We can’t do all this ourselves,” Mr Strong said.

“Historically, we’ve had a reasonably closed program, but we want to grow our business significantly, and as we grow, one of the key opportunities is to develop these strategic alliances and relationships.

“It can provide an opportunity where people can capture more value and participate in the value created by full supply chain, and what we’re building the sales and marketing side.”

When the AACo board signed off on a doubling of capitalisation a year ago, from $330 million to $630 million, it also set the company’s direction firmly on a course that will be determined by markets rather than by grass and cattle.

Mr Strong outlined some of the new principles of the guiding the 190-year-old company:

AACo has been selling beef for a decade, but “we were a cattle company selling meat. We weren’t vertically integrated”, Mr Strong said.

The transformation towards being a beef company has been in progress for 18 months, and it's occurring fast. Last year about half AACo’s output from its feedlot and backgrounding operations went into boxed beef, and half was sold outside its supply chain. In the first half of 2014, 85 per cent was sold as boxed beef.

Having the world’s largest herd - currently at 575,000 head - might be useful for pub bragging rights, Mr Strong said, but it’s a poor determinant of profit.

AACo has traditionally traded a lot of cattle, buying up to 150,000 head a year to eat grass on its northern stations and be sold back into the market.

“We’ve stepped back from this driving of the assets on an annual cycle, and trying to be grass consumers, to be supply-chain driven and where every animal that comes into the system has a terminal market.

“We don’t have any animal that doesn’t have a terminal market. If that means we end up with spare grass, that’s okay - but we’re not buying any cattle to just eat grass, because you end up in a position where you’ve got to try and capture value for them on the open market, and that may not reflect the investment you’ve made in them.”

Putting more weight on less cattle, more efficiently, is driving some useful numbers.

“This year we’ll have 140,000 less cattle, and we’ll produce nearly 25 per cent more kilos. We have to get away from this ‘more is better’ per head point of view, and focus on the things that actually drive value.”

For all the talk of the rise of Asia, AACo isn’t looking at national markets.

“Customers are more important than the market. To us, the type of customer we deal with is much more important than where they are geographically located.”

For a company that produces 50,000-60,000 long-fed cattle, the ability to turn them off faster, or more quickly hit a marbling specification, converts into a lot of money.

Those gains can be achieved by tweaking herd genetics, but AACo wants to move fast, Mr Strong said, and it is constrained when it has to wait on other initiatives to deliver the genetic gain it is looking for.

To get around those constraints, AACo has formed its own Innovation and Technology Group under Gerard Davis, a livestock technology specialist. Like Mr Strong, Mr Davis has spent part of his career with Pfizer.

Because of the size of AACo, it is assumed the company has the capability to set up a supply chain.

Theoretically yes, Mr Strong says, but in practice it is impossible to make investments across a whole chain that are all proportional to their return.

Strategic alliances are the key to AACo’s plans as a beef company, allowing it to make investments in projects like the Darwin abattoir while maintaining a robust, multi-faceted supply chain.

For those that enter into alliances with AACo, Mr Strong said the opportunity is less about sharing in the high end margin of the finished product, and more about creating efficiencies that boost the partner’s own margin.

“The bigger opportunity is to be able to make better decisions and manage costs and create more money along the path. If you can produce more value yourself, and shave your costs, your margin goes up.”

For its 1824 beef brand, AACo is breeding its own cattle in the Barkly or the Gulf, but largely backgrounding and lotfeeding them externally, and processing them through a service works.

The boxed product then comes back into AACo’s sales and marketing system.

Alliances are being built across AACo’s three supply chains: grassfed, grainfed and its Darwin plant.

When the Darwin plant hits full speed and is processing 220,000 head a year, AACo will be supplying 25pc of the throughout and looking to get 75pc elsewhere.

Mr Strong isn’t peturbed that the explosion of demand for live export cattle will leave the Darwin facility short of stock. The plant will be primarily be killing cull cows, he told Fairfax.

“The more live export, the more cows; the more cows, the better for us. The plant is very complementary to the live export program.”

AACo already sources external cattle to supply its live export contracts, and similarly with its short-fed and Wagyu businesses.

“On the short-fed side we’ve sourced carcasses for quite a while, but we want to build relationships with people to source feeder cattle or cattle in feedlots.

“We want to get commitment to our supply so we can get forward in our sales and know that others have a secure opportunity.”

In global terms, the 100,000 tonnes of beef liveweight that AACo annually turns off into the 132 million tonne global beef market is “a rounding error”, Mr Strong said.

“To get out in the global market and try and compete generically is asking for trouble,” he told the Wagyu conference. “There’s a lot of other product out there.”

“What Australia has an opportunity to do - and what AACo has an opportunity to do - is to be the premium product in whatever category we compete in.

“How do we position our products, regardless of the category, to capture value and margin? That’s the target for our company, and I think that should be the target for Australia as well.”

Mr Strong flashed up an image of a cryovacced cut of premium AACo Wagyu meat in Harrods of London. The price: £215 a kilogram (AUD$392/kg), and the customer can have their steak cooked across the way, for another sizeable consideration.

AACo only sells about a carton of beef a week through Harrods, Mr Strong said, but it indicates how much people are prepared to pay for high-end meat.

The question AACo is asking is how to capture more value from these sort of top-end markets, and cascade that value back through the company’s other operations.