November 26, 2014

Paul McMahon Managing Partner SLM Partners LLP

The story about Asia’s growing demand for meat is well-known. Incomes are rising, dietary preferences are changing, people are eating more meat as they join the middle class. The effects can be seen in the explosion of Chinese beef imports in recent years. A nation that was for decades self-sufficient is increasingly turning to global markets to meet its appetite.

Source: USDA

How will this meat be produced? And what is the best way to invest in this trend?

One option is to raise animals in confinement on concentrated feeds – primarily soybeans, maize or other cereals. About 40% of all the cereals grown in the world now go to feed animals in this way. But it is a precarious business. Producers are intermediaries, caught between feed prices that they can’t control and meat prices that they must accept. Price-takers to the power of two, they suffer from extremely volatile earnings. For example, Purdue University calculated that the American hog industry lost $4 billion in 2012 when the rising price of maize and soybeans pummelled margins. Cattle feedlots and chicken producers faced a similar storm. The most important driver of profits is often skill at hedging markets – which makes it an unattractive play for an investor who wants the security of real assets.

There is a different way, especially for red meat – raising animals on pasture. Grasslands cover 3.5 billion hectares, or 26% of the planet’s ice-free landmass. This is where grazing ruminants, such as cattle and sheep, belong. Indeed, grasslands and grazing animals have co-evolved and both require each other to function properly. In regions with extensive grasslands, an appropriate climate, good infrastructure and competitive land prices (unskewed by lifestyle buyers, for example), grass-based systems can be the lowest cost form of meat production.

The challenge is dealing with climate variability, a risk which is set to increase because of global warming. Grasslands are, by their nature, usually found in areas of low or intermittent rainfall – if they were wetter, they would probably be forest. Dry periods combined with poor management can degrade pastures. Either production collapses or farmers are forced to buy expensive feed for the animals, which puts them back on the high-input, high-cost treadmill they were trying to avoid.

However, with the right management, these problems can be overcome. Careful investment in infrastructure (especially fencing and stockwater) together with innovative forms of rotational grazing (a process known as ‘holistic planned grazing’) can ensure that pastures get the right amount of animal impact and then sufficient time to recover. This builds soil fertility, increases grass productivity and improves animal health – allowing stocking rates to double or triple. These grazing systems also give the farmer greater visibility into the amount of grass available, allowing animal numbers to be adjusted accordingly. The result is a more resilient system which maintains the low-cost advantages of rearing animals on grass while reducing the risk of climate volatility.

SLM Partners has raised AU$75 million for a fund that implements this sort of strategy with beef cattle in Australia. The fund has acquired 480,000 hectares (more than 1 million acres) of land so far. After 18 months of full operations, the initial results are promising. The fund’s first developed properties were able to sustain a cattle herd of more than 4,000 animals (60% above the historical average) during a period when rainfall was 40% below average.

SLM Partners is also developing an investment strategy for southern Chile, which is ideally suited to large-scale sheep production. In recent years, the price per kilo of sheepmeat has converged with the price of beef for the first time. Dual purpose sheep can also provide a second revenue stream in the form of wool, increasing diversification. Changed grazing practices and improved genetics have doubled or tripled productivity and profitability on sheep properties in Chile already.

OECD-FAO price projections for food commodities

Grass-based cattle and sheep operations can have low operating expenses. Once the land has been acquired and properly developed, there should be little need for feed, fertilisers, chemicals or other inputs. Machinery can be kept to a minimum. The primary asset is the land and efforts can be focused on increasing the quality and the value of the land through the proper management of livestock.

At the other end of the supply chain, there is increasing consumer recognition of the health and environmental benefits of grass-based meat. For example, a new Pasturefed Cattle Assurance Scheme launched in Australia in 2013 has seen rapid take-up and is already paying premiums of 5-10% to participating farmers. Demand for grass-fed beef and lamb in North America greatly exceeds domestic supply.

Producing meat in a way that takes out many of the input costs, benefits from higher output prices and increases the value of the underlying asset (the land) – this is the sort of opportunity that investors may want to look at.
Paul McMahon is a member of the speaking faculty for Global AgInvesting Europe 2014 at the Landmark London, 1-3 December. 

The opinions expressed in this editorial are the author’s own and do not reflect the view of Global AgInvesting.