AACo Going Premium to Counteract Live Export Issues

On Tuesday, Indonesia decided to slash its cattle quota for Australia. It will only import 50,000 head of cattle in this July quarter. That’s down from 250,000 the last quarter.

It was a big deal for the industry. Indonesia is one of the biggest takers of Aussie beef cattle. According to the ABS, in the December quarter, Indonesia imported 195,700 cattle. That was more than four times as much as the next biggest importer, Vietnam. The chart below, from Meat and Livestock Australia using ABS stats, shows just how much cattle exports to Indonesia exceed those to any other country. Both in numbers and (historically) in growth rate.

Australian cattle to Indonesia
Source: Meat and Livestock Australia
[Click to enlarge]

The cut took some industry bodies by surprise. Australian Live Exporters council Chief Executive Alison Penfold said ‘This is much lower than we’ve had in the last five yearsWe’re disappointed and surprised by the figure, but we’ll work within the parameters that are set.

A spokesperson for agriculture minister Barnaby Joyce made a statement on Tuesday morning. They said that ‘A reduction in the size of the quota is likely to see a shortage of cattle in Indonesian feed lots, reduced slaughter numbers and upward pressure on beef prices in IndonesiaThe Australian government will continue to make representations on behalf of exporters to ensure this important trade relationship is maintained.’ In other words, they’re denying that it has anything to do with political tension between Australia and Indonesia. And even if it is, Indonesia will be back for more Aussie cattle very soon — and Australia will welcome them with open arms.

But one of Australia’s biggest beef exporters isn’t particularly bothered. Australian Agricultural Company Ltd [ASX:AAC] didn’t make an official statement until yesterday. Managing Director Jason Strong pointed out that at least the quota reduction isn’t as bad as what happened in 2011, when the federal government decided to suspend live cattle exports to Indonesia.

At Thursday’s AACo AGM, Chairman Don McGauchie expanded on why the company isn’t particularly focused on live exports to Indonesia.

Pitching to the top end of town

The first thing McGauchie mentioned in his report was the new processing facility in Darwin. Livingstone Beef cost the company a whopping $91 million. Now, it processes around 350 head of cattle per day. At its full capacity, it will be able to process up to 1,000 per day. In addition to export beef, the facility also produces cow hides and rendered products like lard. At the moment, the Livingstone facility is mostly producing boxed beef for export.

Beef from the facility has already been sold throughout Asia and the United States. But McGauchie wants to take that even further. And he wants to concentrate on a variety of cattle that AACo already does well: wagyu.

Seedstock-Breeding
Source: Australian Wagyu Association
[Click to enlarge]

Wagyu is a Japanese beef cattle breed. The breed is genetically predisposed to having more intramuscular fat cells. In other words, it’s got a lot of fine natural marbling. In Australia, farmers raise both pure bred wagyu and wagyu crossed with other breeds. For example, F1 is wagyu crossed with Angus. This way, the farmer gets a good compromise between the highly prized marbling and the bigger size of the Angus.

McGauchie pointed out that 42% of the boxed beef that AACo sells is wagyu. And that share accounts for 52% of all boxed beef revenue. AACo puts a premium of about 57% on its wagyu, kilo for kilo, according to their AGM presentation on Thursday. Perhaps that’s down to some of the awards they’ve won; their Darling Downs wagyu has won top gongs at the Sydney Royal Spring Fine Food Show, the Royal Queensland Show, the Royal Queensland Food and Wine Show, and the Royal Melbourne Fine Food Awards.

Importantly for international audiences, AACo’s Master Kobe Wagyu won the Grand Champion award at the 2015 World Wagyu Conference. Master Kobe Wagyu is made from full blood and pure bred Wagyu cattle, not cross breeds. This makes it suitable for marketing to picky chefs who’ll only take ‘the real deal’.

In his speech at the conference, McGauchie said that ‘Our purpose is to produce the best beef, and then to get the best margin we can from it. And the success – and potential of Wagyu – was a very big part of influencing that decision. On a pure revenue basis, Wagyu has become more and more important to our company.’

He wants to take AACo wagyu beyond Asia, to the fine restaurants and elite gourmet stores of Europe.

Gourmands paying a premium for wagyu around the world

Wagyu is the most expensive variety of red meat in the world. The cattle are naturally smaller, and grow slower than normal beef cattle. Wagyu cattle are normally slaughtered at over two years of age, with the best wagyu taking three to four years. Other beef cattle can be slaughtered from as young as eight months of age, if it’s fed grain.  This makes it expensive to produce. But discerning, cashed up beef eaters are willing to pay the price.

For example, at Nobu in Melbourne, you’ll pay $53 per 50g of wagyu. At Rockpool Bar & Grill in Sydney, a little 200g wagyu rib-eye that’s dry-aged for 26 days will set you back $119.  At M in London, a wet aged sirloin steak from Australian wagyu will set you back £120 — that’s about $253. At Fleur in Las Vegas, you can get a wagyu burger for just US$5,000 — thought $2,000–3,000 of that is from the 1996 Chateau Pétrus that’s served with it. Fries are for poor people; extremely rare wine is where it’s at.

It doesn’t get any cheaper when you go to a butcher, either. McGauchie cited the example of Harrod’s in London, where wagyu goes for up to £200 ($422) per kilo, depending on the cut. At Victor Churchill in Woollahra, Sydney, it’s a little less pricey, but still up there.

1370569_thumb
Source: Chopin and My Saucepan
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Of course, it does get a bit more affordable if you don’t insist on wagyu with a marbling score of over nine.

wagyu marbling examples
Source: Vic’s Meats (images courtesy of AACo)
[Click to enlarge]

A lower grade wagyu in a thinner cut for grilling might only set you back about $60 per kilo. In Australia, most wagyu is at the lower end of the scale. There are only a handful of farms doing the really expensive stuff.

The important thing is the power of branding. In Australia at least, there aren’t strict rules about what can be labelled wagyu. The general convention is to label according to the breed of the sire. If cattle come from wagyu bulls and Angus cows, they can be sold as wagyu. So big wagyu producers like AACo can sell to discerning buyers who want the best, as well as middle-class buyers who just want a little taste of luxury.

By the way, if you’re looking to invest in an Aussie brand that’s taking on the world, don’t miss Kris Sayce’s free report, ‘The Five Best ASX Stocks for 2015’. In this report, Kris discusses an Aussie building materials company that exports to several countries, and an airline that’s become a true icon of Australia around the world. Click here to find out how to download your free copy.

Eva Mellors
Contributor, Money Morning

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