Fossil Downs

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Confidence in Australia’s rural sector, and investor interest in rural property markets are starting to surge, as evidenced by the recent purchase of the historic Fossil Downs cattle station by mining magnate Gina Rinehart. It is likely that foreign investors, including from China, are not far behind.
Perversely, the ongoing reluctance of Australian equity and superannuation funds to take major investments in agriculture because it is seen as too risky means the benefits of the “beef boom” will not be shared as widely as they could have been.
Drought, demand and the dollar are the trifecta driving Australian beef prices higher. Cattle prices in Australia have surged since 2014, breaking through the 400 cents/kg threshold of the Eastern Young Cattle Index in January 2015 and the 500 point level in June. Some analysts are now predicting that the index will pass 600 points before the year end.
Beef is Australia’s second largest agricultural commodity, and prices are driven by supply and demand forces, both internationally and domestically. Essentially this is a story of two supply shocks that still take some time to wash through the beef supply chain.
The forces driving beef prices up
The first was the large drought in the United States in recent years that affected both pasture and corn production, resulting in the US cattle herd falling to its lowest level since the early 1950s and beef production falling to its lowest level since the early 1990s. The shortages of supply caused record beef prices in the US in 2014, which have increased further in 2015. The US is both a major importer and an exporter of beef, so the drought has pushed up global beef prices to record highs. The US also took more beef from Australia in 2014, up 84% on the previous year.
The effects took some time to be felt in Australia because of its own drought – the second supply shock. Major drought in 2013 and 2014, particularly in northern Australia, has seen a rapid turnoff of stock, increasing to nearly 10.5 million head for slaughter and live export in 2014, almost 2.5 million more than in either 2011 or 2012. Prices stayed low in 2014 because of the excess supply, while the Australian beef herd fell to its lowest level in two decades.
It takes between two and three years for cattle to grow to slaughter weight. When droughts break the dynamics of herd rebuilding mean that breeders hold females back to increase their breeding herd. This adds a fall in supply to the lag in production after a drought. These dynamics are now in play for both the US and Australian beef herds, and explain why supplies are now so tight as parts of each country recover from drought. In fact the Australian herd is expected to further decline in 2016 as a result of fewer calves coming into the system.
Of course, there are many other supply and demand forces at play in international markets. On the supply side there is limited ability of our key competitors to meet the supply gaps; for example while exports from Brazil are expected to increase in 2015, they have also been experiencing some supply tightening and record prices. On the demand side, our key markets such as Japan, South Korea and China remain strong, with the 2014 surge in demand from the US absorbing any additional supply Australia can produce.
The third part of the trifecta is the low Australian dollar, which essentially translates overseas demand into higher prices. The combination of higher global beef prices, short supply and a falling dollar underpin the surge in higher prices.
Beef prices will keep rising in shops
There are three key flow-on effects that are particularly worth noting. The first is that competition and substitution effects are going to affect domestic meat prices and consumption. Retail beef prices will continue to rise in Australia in 2015 and 2016 as a consequence of the market changes, and this will in turn reduce per-capita consumption of beef, particularly as consumers continue the shift to other protein sources.
The second is that higher incomes will flow into regional Australia, given the extent of the footprint that beef production has in the country, particularly in northern Australia where almost all of the agricultural land area is used for beef production (recognising that other commodities are more intensive). This is timely given the erosion in real incomes over the past decade; cattle prices in 2014 were almost unchanged from 15 years previously despite steadily increasing input costs.
The third is that higher incomes will provide the capital for farmers to invest in productivity improvements. Cattle production is becoming a sophisticated business with better genetics, new technology and improved infrastructure just some of the options to improve both productivity and total output. Improvements in real incomes will be followed by expenditure on supply inputs as producers catch up on maintenance and invest in efficiency gains.
How long higher prices will last is difficult to predict. Price spikes in agricultural commodities, like resources, are typically followed by supply increases after a lag period, so higher prices because of the recent droughts should not last beyond 2017. Yet demand drivers are also starting to emerge, underpinned by global population and wealth increases.
The most immediate effect will be through the new free trade agreements that will increase demand from our Asian partners. This means there is the potential for new demand drivers for Australian beef to replace the current supply shortages as the key factor underpinning higher beef prices.
John Rolfe is deputy dean of research, School of Business and Law at Central Queensland University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/john-rolfe-1894" target="_blank">here</a>.
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Rural purchasing confidence starting to surge

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Fossil Downs Station, the jewel of WA's pastoral industry, has been listed for sale by the Henwood family.
Covering almost 400,000 hectares where the Fitzroy and Margaret Rivers meet, the legend of <a href="https://regionalwa.eldersrealestate.com.au/rural/buy/property-cropping-wa-derby-617707">Fossil Downs</a> started when Donald MacDonald rode from Derby in the tracks of Alexander Forrest to inspect the land and negotiated its lease in 1882.
His brothers William and Charles then set off on possibly the longest cattle drive in history - about 5600 kilometres from near Goulburn, NSW, through the outback and across the Top End to the Kimberley.
They left with 670 head of cattle, arriving 42 months later with 327 cattle. 
A waterbag the MacDonald brothers carried on their epic cattle drive hangs above the hallway in the heritage-listed homestead, dubbed the "Taj Mahal of the Kimberley".
It is true Australiana as its billiard table was bought for 28 pounds after dragged from the remains of a direct hit on Broome's billiard hall by Japanese bombers in World War II.
The MacDonald's granddaughter is Annette Henwood who runs the farm with husband John whose family ties to the Kimberley stretch back longer than hers.
John Henwood's grandfather George Rose was a horse carer on the Forrest expedition of 1879 that triggered excitement about grazing in the Ord and Fitzroy valleys.
They have been herding mainly Droughtmaster cattle, sometimes mustering in his Cessna 182. It is located 430 kms to the live cattle export port of Broome and 30 kms to Fitzroy Crossing township. 
Offers close July 2 for the property has potential to carry more cattle and for tourism, including parts of the King Leopold Ranges and Leopold River, spectacular gorges, billabongs and vast plains.
Veteran real estate executive Malcolm French told the West Australian newspaper he had seen nothing that compared to Fossil Downs in 50 years with Elders.
He declined to speculate on the price but industry sources put it close to $30 million.
"I feel an absolute traitor," <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/radionational/programs/bushtelegraph/annette-mcdonald/5895778" style="line-height: 1.3em;">Annette Henwood</a>, who was featured on the farm in a <a href="https://www.propertyobserver.com.au/https://trove.nla.gov.au/ndp/del/page/4389335?zoomLevel=1" style="line-height: 1.3em;">1952 Australian Women's Weekly article</a>, said.
"I never wanted to be the MacDonald who quit," she said.
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