Precision Beef

IndOz Northern Australia Cattle Supply ChainConcept Paper

Dr Shane BlakeleyPrecision Beef+61 458 651 659shane@rpsys.com.au

July, 2013

Background

Darwin/General Santos1,200 nm (2,400 km)

Darwin/Jakarta1,400 nm (2,800 km)

Darwin/Toowoomba3,300 km

• Indonesia has been a long-term market for Australian cattle, importing up to 600,000 head per year.

• This demand has been met mainly by Australian cattle stations in the NT and Kimberley where there are approximately 2,000,000 cattle producing 500,000 young cattle/year.

• The climate and pastures in the region make it uneconomic to grow these cattle out to slaughter weights. Their best use is as feeder cattle, going in to feedlots.

• The traditional feedlot areas are in south-east Queensland, 3,000 km away.

• It is closer to send the cattle to Indonesia and the Philippines to be fed on low-cost by-product feedstuffs.

Current situation

• In recent years, the Indonesian government has limited their cattle intake to about 250,000 head per year with an upper weight limit of 350 kg/hd.

• This has lead to beef shortages in Indonesia and a sharp increase in the cost of beef to consumers.

• This quota was intended to increase domestic production and supply but there is evidence that it has been counter-productive, leading local farmers to slaughter their breeding stock in response to the high prices on offer.

• The Indonesian and Australian governments are now encouraging Indonesian companies to invest in the northern Australian cattle industry to provide a more stable supply base for Indonesia.

Investment concept

• In response to this situation, Precision Beef has formulated a concept to underpin the supply and fattening of 90,000 head of cattle per year;

Australiancattle supply

Live export

Indonesianfattening & slaughter

- with about one third bred on the project’s own stations,

- one third sourced externally but grown out on the project’s backgrounding station(s), and

- one third sourced externally at the time of export.

90,000 head of cattle, fattened in Indonesia, would produce over 20,000

tonnes of beef,

enough for 10 million people, based on 2 kg per capita annual beef consumption.

Product flows

Breeding stationsBreeding cows 66,000 headWeaning rate 68%  Calves weaned 45,000 hd/yrReplacement heifers 13,000 hd/yrExport weaners 32,000 hd/yr

BackgroundingHome bred 32,000 hd/yrExternally sourced 28,000 hd/yrTotal 60,000 hd/yrEntry weight 180 kgWeight gain 130 kg/yrExport weight 310 kg

Live exportHome grown 60,000 hd/yrExternally sourced 30,000 hd/yrTotal 90,000 hd/yr

FatteningImported cattle 90,000 hd/yrEntry weight 310 kgAverage daily gain 1.5 kg/dayTime on feed 80 daysLiveweight gain 120 kgExit weight 430 kgCarcass weight 237 kgBeef supplied 21,285 tonnes

Externalsuppliers

Breeding

Backgrounding

Accumulation

Slaughter

Fattening

Export voyage

Preparation

Australia

Live export

Indonesia

External cattle

suppliers

Process flow

Cattle supply: Breeding

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

• It is proposed that an Indonesian entity purchase a number of breeding stations in northern Australia.

• Precision Beef has identified a number of suitable properties (available as of July, 2013).Cattle numbers

Property Area Breeders TotalVRD 1 550,000 ha 20,000 42,000VRD 2 550,000 ha 18,000 41,000Kimberley 1 950,000 ha 15,000 35,000Central Australia 1 650,000 ha 6,000 10,000Central Australia 2 900,000 ha 7,000 12,000Total 3,600,000 ha 66,000 140,000

• Assuming a weaning rate of between 65% and 70%, this aggregation will produce about 45,000 calves per year.

• About 13,000 heifers are needed each year to replace breeding cows that have reached the end of their productive life.

• That leaves about 32,000 head produced each year to enter the export stream.

Cattle supply geography

VRD breeding stations

Backgrounding properties

Alice Springs breeding stations

Kimberly breeding station

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Cattle supply: Backgrounding

• For the most part, calves produced by the breeding stations will be grown out on site for one year.

• At the end or that growing period, they will weigh between 300 kg and 350 kg, suitable for export.

• It is also proposed that the project purchase one or two additional properties, dedicated to backgrounding (growing out) young weaners, capable of running about 30,000 head, in total.

• These sites would complement the breeding stations in drought years when there might not be enough grass to provide feed for the weaners or to background stock purchased from third-party suppliers, growing them out to export weights.

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Live export: Accumulation and preparation

• Each consignment will comprise around 2,500 head, given the size of the available vessels.

• Assuming a voyage cycle time of 10 days, one vessel could manage the freight task for the projected 90,000 head intake.

• About two thirds of the cattle to be exported will be sourced from the project’s breeding and backgrounding properties. One third will be sourced direct from third party suppliers.

• It is essential that selected animals, facilities and handling procedures comply with the Australian government’s welfare standards (ASEL).

• Livestock need to be assembled in an Australian government registered facility, prior to export. Best practice dictates three days in the facility to ensure the animals are conditioned to the fodder for the voyage.

• The cattle are treated for parasites while in the facility, as per the health conditions stipulated by the Indonesian government.

• Prior to loading, they are thoroughly inspected by an AQIS accredited veterinarian to ensure their health and welfare on the voyage.

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Cattle supply infrastructure

• Cedar Park, Wyndham and Karumba assembly premises

• Third party transport operators

• Darwin, Wyndham and Karumba ports

• Third party shipping provider

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Live export geography

VRDKimberly

Top End

BarklyTableland

GulfCountry

Karumba

Wyndham

DarwinCedar Park

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Live export: Voyage

• The loading process and all facets of the voyage (stocking density, feed and water, health and welfare, etc) are strictly regulated under the Australian government’s Australian Standards for the Export of Livestock (ASEL).

• Darwin and Wyndham are the preferred export ports, being only 1,400 nautical miles from Tanjung Priok, but the project may also draw cattle from Karumba or Port Headland as the opportunity arises.

• The voyage from Darwin to Indonesia takes about four days.

• The most efficient vessel configuration is one of about 3,000 m2 of pen space, sufficient for approximately 2,500 head of cattle.

• An accredited stockman accompanies each consignment, overseeing a crew of five to eight trained stock attendants.

• The cattle are fed and watered on a regular schedule and inspected daily for health issues. Problem animals are isolated and treated. Losses during the voyage are minimal.

• A report must be furnished to the Australian government at the end of each voyage, detailing any animal welfare issues during the voyage and during discharge.

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Fattening and slaughter

• The fattening phase in Indonesia is the most profitable component of the supply chain.

• Precision Beef recommends the project develop two feedlots in Indonesia, each of 15,000 head capacity, sufficient for a combined annual throughput of 90,000 head.

• Cattle will enter the feedlot at an average weight of, say 310 kg (280 to 350kg range). They will be feed for about 80 days with a target average daily gain of 1.5 kg/head/day to close out at 430 kg.

• The ration comprises green-chop corn, molasses, copra, cassava, rice bran and a mineral/vitamin mix.

• All cattle that leave Australia must be accounted for on close-out under the Australian government’s Export Supply Chain Assurance Scheme (ESCAS). This is done using individual animal RFID tags, linked to the Australian NLIS database.

• Precision Beef can supply an expert management team, fully conversant with feeding, animal husbandry, animal health and records management, to oversee the facility’s operation.

• The cattle must be slaughtered at a facility that meets the standards required by the Australian government.

• As with the feedlot, all animals entering the slaughterhouse must be accounted for within the ESCAS system with that reconciliation made available to the Australian Government for auditing animal welfare conditions.

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Typical ration formulation

Kg as fed AF incln PHP/kg AF PHP AF cost Kg DM PHP DM costGreen-chop corn 16.80 69% 1.30 0.90 4.37 2.10Molasses 4.40 18% 6.50 1.18 3.21 2.75Copra Meal 2.90 12% 8.50 1.01 2.61 2.37Limestone 0.0300 0.12% 0.80 0.00 0.03 0.00Salt 0.0200 0.08% 1.90 0.00 0.02 0.00Urea 0.1200 0.49% 12.00 0.06 0.12 0.14Ammonium Sulphate 0.0300 0.12% 5.69 0.01 0.03 0.02Elancoban 0.0025 0.01% 237.50 0.02 0.00 0.06TM mix 0.0080 0.03% 24.00 0.01 0.01 0.02Total 24.31 100.00%   3.19 10.40 7.46 AUD cost     $74.18 $173.40

Nutrient compositionComponent /kg DM ReferenceME (MJ) 10.97  NEm (Mcal) 1.73NEg (Mcal) 1.12NSC 27.9% < 50%Fat 3.0% <5%

RDP 10.1% > 10%UDP 2.1%  Crude protein 12.2% >12%RDP:S ratio 27.29 < 70NPN 0.5% <0.6%

ADF 21.6% > 15%NDF 31.5% > 25%Forage NDF 22.3% > 20%

Preparation

Voyage

Feedlot

Slaughter

Breeding

Backgrounding

Accumulation

Regulatory issues

ASEL The preparation and export of live cattle is regulated by the Australian government under the Australian Standards for the Export of Livestock. These standards must be adhered to and compliance documented throughout the export process.

ESCAS The Export Supply Chain Assurance System imposes responsibility on the exporter to ensure the post-discharge welfare of all animals exported. This covers the treatment and management while in the feedlot and at slaughter. Compliance must be documented and is audited annually.

FIRB The Australian government welcomes foreign investment but land purchases by private investors must be approved by the Foreign Investment Review Board if greater then $242 million. All land purchases by state owned enterprises and sovereign wealth funds are subject to FIRB approval, regardless of size.

Indonesia Cattle can only be imported to Indonesia under permits issued by the Indonesian Agriculture Department. Imports in 2013 are likely to be limited to less than 300,000 head. There is some thought that cattle sourced from Indonesian owned farms might not be subject to import permits.

SWOT analysis

Strengths Weaknesses

• Experienced management team• Depth of internal and external expertise• Quality country and infrastructure• Scale and low cost operations• Geographic diversity• Low cost feedstuffs in Indonesia• Secure, established markets• National and local government support

• Reproductive performance in northern Australia is generally lower than eastern and southern states

• Inwards and outwards freight costs• Indonesian quotas and weight

limits• Limited alternative markets• Need to comply with Australian

government regulatory impost

Opportunities Threats

• Develop a breeding capacity in Indonesia with heifers sourced from Australian operations

• Export over-weight cattle (>350 kg) to Precision Beef’s Philippine feedlot

• Horizontal integration, eg shipping, ship-board feed production, etc

• Expansion

• Cattle supply and price• AUD/IDR exchange rate• Change in Australian government

regulations• Change in Indonesian government

regulations• Biosecurity• Drought

Management profiles

Name Position Background

Dr Shane Blakeley

General manager

Shane is is a veterinarian with thirty years experience in managing farming operations in Australia and south-east Asia. He has also provided consulting services to an extensive range of clients including Meat and Livestock Australia and Ray White Rural.

Tony Struss Supply coordinator

Tony owns and operates the northern Queensland private livestock agency business, Australian Livestock. He has almost forty years experience in sourcing cattle for live export and for domestic feedlots and abattoirs. He also has extensive experience as a livestock exporter.

Arnel Corpuz Operations manager

Arnel started work at the Polomolok Feedlot in 1998, rising to the position of manager in 2001. He ran a large feedlot in Queensland from 2007 to 2012 and recently returned to the Philippines to further his business career there.

Rammie Ylagan

Feedlot supervisor

Rammie also has a long history with the Polomolok Feedlot, as well as working in feedlot operations in Australia.

Available contractors and advisors

Name Expertise Background

Australian Livestock

Livestock procurement

Australian Livestock is an ideal partner to assist in the sourcing of livestock. Their client base extends from the Queensland coast through to the Kimberley in Western Australia and they have close associations with other agencies throughout northern Australia..

Cedar Park Export preparation

Cedar Park handles about 40% of the cattle shipped out of the Darwin Port. The proprietor, Nick Thorne, has had a long association with Precision Beef.

Vincent Posada Nutrition consultant

Masters degree in animal nutrition and range management from Texas A&M. Client base of feedlots, dairies and stock feed manufacturers in Australia, North and South America and south-east Asia.

Quirindi Feedlot Services

Veterinary consultant

Sophisticated beef cattle practice, specialising in epidemiology, disease prevention and performance analysis

Capital required

AustraliaBreeder stations (including livestock, plant & equipment)     $150,000,000Backgrounding properties (including livestock, plant & equipment) $50,000,000Working capital             $10,000,000Sub-total; Australia $210,000,000

Indonesia  Feedlots 2 x 15,000 hd @ $800 /hd $24,000,000Feedlot inventory 25,000 hd @ $800 /hd $20,000,000Working capital     25,000 hd @ $200 /hd $5,000,000Sub-total; Indonesia $49,000,000

Consolidation  Australia           $210,000,000Indonesia $49,000,000Establishment costs $10,000,000Contingency             $31,000,000Total capital required $300,000,000