The Global Food Forum
GEOFF ELLIOTT: Well, I think that really fit in well to the pop-up think tank theory that I talked about earlier. You know, in the conversation there we did hear elements of policy and financing frameworks being discussed, which, you know, it was a real privilege actually as a journo to be up here and hearing this kind of debate and formulation going on. The biofuels question I thought was a really good one. As a former Washington correspondent I did spend a fair bit of time in the Midwest. I spent time out in Iowa kicking around the cornfields, and wrote about the biofuels then. What was interesting is I completely missed the story, as did a lot of people because there was a massive gas boom going on, which has kind of made the biofuel story arguably a little bit redundant given the sort of energy boom that’s gone on thanks to technology in the gas story in the US. Now, we’re just gonna have another one of our in conversation pieces this afternoon ahead of a break at… we’ll probably just make it a little bit after three now to give you a bit more time. But we’re gonna welcome to the stage Peter Margin, the director of Bega Cheese. Peter has a Bachelor of Science from the University of New South Wales, holds a Master of Business Administration from Monash University. But he’ll be known to many of you as a person who’s had leadership experience in major Australian and international food companies. His most recent role was CEO of Goodman Fielder. And before that Peter was chief executive of National Foods, has held senior management roles in Simplot, Pacific Brands, (inaudible) Asiatic, and H.J. Heinz. So please welcome Peter, welcome to the stage. And to chat with Peter is the very indomitable John Durie, our business columnist. John’s the best business columnist in Australia without a doubt, in ‘The Australia’ every day. Welcome gentlemen. (Applause) JOHN DURIE: Hi. Thank you very much, and thank you Geoff. Look, we might get straight down to it. Peter, as Geoff said, has really worked across the spectrum in Australian food with Simplod, with Heinz, with National Foods, and then in the end working with, I think it was probably one of the worst jobs in the industry, working… making bread, where you’ve got to deal with supermarkets at one end of the chain, you’ve got world commodity prices, you’ve got workers who want too much money, you’ve got logistics problems, just everything. A lot of things out of your control, and it’s just a no-win position. So, I think he’s got a unique, a unique expertise in what can happen with Australian food. So, Peter, we might just start at a general level. J-, just from where you sit. What are the main challenges you find ahead for the industry? PETER MARGIN: Thanks John, and thanks for the kind introduction. Look, I would echo some of the earlier themes than Andrew… that Anthony presented in his keynote address. And I think if you, you think about where Australia is at the moment, you’re in that mystical fork in the road. So, you know, there is a land of enormous of opportunity, or there is a land of landmines. And I think, hopefully, we’ll take that right road. But in my mind there are probably three challenges in addition to what Anthony went through today. I think the first challenge is being able to make a decision or a choice around which sectors of
the food industry we invest in. And I think historically we haven’t been good at that. We’ve tended to want to be all things to all people. And I think there is an opportunity to say that there are certain sectors that we can be globally competitive, and are today, such as in the grains industry, such as in animal protein, such as in dairy protein. And they’re probably that you need to invest in. On the alternative to that, there are others that you probably in marketing terms want to harbour. So, being able to make those conscious decisions about where to invest I think is critical. I think the second area or challenge that Australia has got is that about labour cost. And there’s no surprise that labour costs in this country are comparatively high. But I think coming with that high labour cost, we’ve also got a great degree of technical expertise. And if you can marry some of that technical expertise with the, you know, really with the vision of trying to take labour out of the equation, I think that there are enormous opportunities. You’ve seen it in the agricultural sector, where they’ve moved to mechanical harvesting, particularly around things like grapes. It’s starting to happen in the dairy industry today, where many of the more, I call them courageous farmers, are putting robotics into their milking shed, and again just taking labour out of the equation. So I think that is an issue. And probably the third challenge that many of the speakers have talked about is that of scale. And Australia today is sub-scale in terms of many of its food production, manufacturing facilities. And I think in the early, some of the earlier addresses they talked about the need to assist in consolidation that can provide the scale that’s needed in this country to be able to compete on the global scale. So I think in my mind they’re probably three of the major challenges that we need to address, but I think there are solutions in every one of them. JOHN DURIE: Yeah, thank you Peter. It’s time we bring up consolidation, because just today Gary Helou who spoke to us earlier, he bought a few more shares in Warrnambool Cheese and Butter, and I think wearing your Bega cap that you’ve got a fairly large shareholding in Bega. So you might tell us what the outcome there’s gonna be. PETER MARGIN: That’s an easy question. When Bega made the investment in Warrnambool Cheese and Butter, as John would probably know, we did at a time when the company was under significant stress. So, we were... you know, at the time you’d call it a friendly investor and hopefully through Barry Chairman… Barry Irwin our chairman has added considerable value to that organisation. We’re very comfortable with the investment that we’ve made. At Bega I think today we have about 17 per cent. I guess you’d have to ask Gary what he wants to do with his 12 or 13 per cent. And that’d be an interesting conversation. JOHN DURIE: OK, thanks Peter. Sorry to dwell on Gary, but he made a comment today which I think you maybe should have a right of reply. He said… he talked about Australia’s farmers as being low-cost producers, but he said the downside is they’re not catching the profit potential between production and consumption. So, I guess that’s at the processing end. And I just interested in what you thought about that. PETER MARGIN: In terms of not being a able to capture it, I, you know, I think you reflect back on the dairy industry specifically, and look at probably a decade of lost opportunity. I think at around 2000, you had Fonterra looking to make its entrance into Australia, you had Murray-Goulburn and a number of other dairy cooperatives. You know, if you look at where Fonterra is today, it’s an organisation that
turns over 20 billion kiwi, arguably the most successful dairy or food cooperative in the world, and you contrast that with where the dairy industry is in Australia and, you know, we were producing I think about 11 or 12 million litres of milk 10 years ago, today we produce about 9 billion litres of milk. So, you’ve got to say to yourself the industry and its leadership hasn’t done a great job over that period. We’ve all got a stand in front of the mirror and say, you can’t blame external factors all the time because Fonterra have done it. Maybe there’s been an issue with the way the dairy industry has been led. I think I’m fortunate at the moment being involved with a company like Bega who’s quadrupled its turnover during that period, and has I think set itself up very well to service the emerging needs out of the Chinese market in particular, with investments around nutraceuticals. And I think the smarter strategies that have been put in place by that particular management team I think goes a long way to say Australian industry can make it, but it needs the right leadership and the right strategic directions. JOHN DURIE: Yeah, interesting, thank you. Peter, you’re on a good position to look at the recent deal that Coles did with Murray Goulburn, which was trumpeted as being a landmark deal and there was a longterm inve-… contract award to Murray Goulburn. And all going well, it’s a win for the supermarket, win for consumers, win for the farmers, win for Murray Goulburn. I’m sort of a bit sceptical that everyone can win. But I was wondering maybe if you could take use through who you see the winners and losers from deals like that. PETER MARGIN: That’s an easy one too. Look, I… as an observer, I’d suggest that it looks like it’s a pretty good deal for Coles, it looks like it’s a good deal for Murray Goulburn or they wouldn’t have entered into the agreement, and I think in the medium to long term it’s probably a very good deal for consumers. But if you reflect back and say, “Who are the winners and who are the losers out of all this?” you know, the fundamental principle of economics would suggest that if you add capacity to an industry that’s already got surplus capacity in a market that’s flat, then arguable the existing processes that are in place are gonna be under significant pressure from a profitability point of view, and probably their suppliers at some point in time are gonna be under some pressure. Because, you know, suppliers need profitable processors in place to be able to make money. So I think, you know, on a longer term basis, there’s no doubt consumers, Coles, Murray Goulburn do very well. I th-… it’ll… time will tell whether the existing processors and their suppliers are able to change their business models quickly enough to ensure that they maintain their level of profitability. JOHN DURIE: Do the farmers have a chance in that sort of relationship? I can see maybe line jumping, Woolworths was sort of left on the shelf a bit by the Coles move, so maybe they can easily now line who’s, you know, desperate to do a deal to get rid of their surplus milk. But in the… down the track, where do the farmers sit in the whole process? PETER MARGIN: Yeah, look, I… there’s no doubt for line and the (inaudible) of the world to maintain supply. They’re gonna have to maintain a competitive price to their farmers. But if you look at the, you know, the long-term future of dairy farming in this country, you know, I think there are huge opportunities, but I don’t think it relies on whether you’re selling one dollar milk or not. I think that’s actually superfluous to the equation. It really, you know, depends to a large extent on how the larger Victorian manufacturers put their strategies together, and put their capital investment in servicing the emerging Asian needs.
You would like to see that 9 billion litres of milk being converted back to 12 billion litres of milk into higher-value nutraceuticals and all the rest of it. And I think it has an incredible opportunity if they progress those strategies right. But I don’t think the main game is around one-dollar milk, I think that’s a red herring in my mind. JOHN DURIE: Right, yeah. But I mean is it a positive for the industry that a retailer’s prepared to offer such a longterm supply agreement like that? PETER MARGIN: Yeah, I think that’s a real plus, John, and it… you know, I reflect back on some of my early days where we had a team at National Foods that put a five-year deal together at… with Woolworths in around 2000. And that allowed the company at the time to invest in manufacturing and a logistics infrastructure and management, and at the same time it allowed Woolworth’s to pull a whole lot of back office cost out of their business. So it was very constructive in that sort of arrangement. And I think if you reflect on where the relationship between suppliers and retailers goes into the future, I think it’s very much focused about the development of those longer-term contracts. Ten years I think is a terrific achievement for what Gary has done with Murray Goulburn. And the preparedness I think for Coles to enter into that arrangement because it allows them to deploy capital and hopefully get a reasonable return out of it. And I think those sort of longer-term arrangements, rather than being frightened of them, I think the industry should embrace and be, you know, quite innovative in the way they’re prepared to put them together. But Coles, and I think Woolworths historically, have demonstrated a preparedness to put those deals together. I think it comes back to the skills of the C-… the processing sector to say, “We’re prepared to enter into those, and prepared to invest capital behind them.” JOHN DURIE: Yeah, yeah. How much at the production end are Australians hostage to foreign-owned companies. I mean, is… can we break out of that and strike our own deals in Asia, or are we dependent on what Heinz headquarters has to say about it? PETER MARGIN: Look, I think all of the multinationals, if that’s the term, are pretty pragmatic. I’ve worked on both sides of the fences, and they’re prepared to invest money in any country provided it makes economic sense. So if the opportunities are right in Australia, they’ll invest money. I’ve g-… and you know the Simplot organisation’s an example of that, who are very comfortable investing money in Australia, because they know that the opportunities are there. But I guess it comes back again, John, just to the, to the leadership in this country, and demonstrating that they’ve got the strategy in place to encourage that sort of investment. You know, I think, you know, again in trying to build businesses into Asia, you look at what some of those hurdles or impediments are to doing just that. And we’ve talked a little about scale being an impediment at the moment, which… and I think there is a solution in there if we look at the regulatory framework in Australia. I think if you move beyond the scale issue, I think there are some more fundamental issues, things like do we have the trading competency to be able to operate in some of those Asian markets? And I know many of the organisations I’ve walked into - and I’m sure plenty in the audience - and you go through your export book and look at where we’re selling product to, often you come up with
examples of Mauritius and Seychelles and Malta and a whole lot of places that look like great holiday destinations for a sales team. But they’re not actually changing the state of play. And I think that’s an indictment on Australian business in that they’re probably not as strategic in looking at developing some of those offshore markets. JOHN DURIE: Yeah, interesting. Any other impediments? PETER MARGIN: I think rather than impediments, opportunity. I think a free trade agreement. If you look at the way New Zealand’s… New Zealanders are actively progressing these free trade agreements, I think if, if we were looking at, at… you know, trying to catch up would be a great step forward, John, and remove some of the obstacles that are currently in place. JOHN DURIE: Great. Well, Peter, I think on that note we, I think we’re due for a break. Unless, are there any questions from the floor at all? I see there’s one down the end there. I’m not sure we’ve got the microphone set up. Maybe if you just yell out your question, yeah, yeah. QUESTIONER: (Inaudible) New Zealand Australia (inaudible) New Zealand. In simple terms, one, two, three, what do we have to do to really (inaudible)? PETER MARGIN: OK, there’s a couple of things. I think the first is to look at the regulatory framework that would allow some of the existing dairy cooperatives to consolidate. And I think that’s pretty difficult in the way that it is currently structured. If you go back to 2000 and the changes that occurred in the New Zealand landscape, the government stepped in and assisted that sort of consolidation whilst at the same time protecting consumers. So, I think that, that’s probably fundamental to that particular issue. I think the second issues, and it’s one of those things that’s difficult to put your hands around, but it’s actually the leadership demonstrated by the respective companies around the place. At the moment… and I’ll comment specifically from what Bega are doing. The inves-… much of the investment that’s currently happened is around trying to address the emergent infant formula needs in China and related countries. And I think that sort of strategic approach of saying there is an emerging market, Australia has a wonderful image, it has capabilities around low-cost milk production, how do we service that? And I think that that is, that is fundamental. The third area, and I mentioned it early, is in terms of our labour costs. And I don’t if there are any dairy farmers in the room, but it is a huge issue in Australia in trying to get affordable labour to run their operations. I think… and it’s not an easy one. To look at some sort of government assistance, now whether that’s through the form of accelerated depreciation or whatever to assist some of these dairy farmers, and being able to put your robotics or whatever it takes to try and lower their cost of production and remain viable, and increase their investment, I think would be a major step forward. JOHN DURIE: Great, thank you, thank you so much, Peter. I was wondering whether you could… it’s been fantastic to have your time here. Thank you very much. If we could thank Peter very much, thank you.
PETER MARGIN: Thank you.