Most Northern Australian beef producers have lost money most of the last ten years (Holmes and McCosker 2010).

This partly accounts for the fact that the average northern beef producer has debts of more than  $1million on average, fuelled by a 17.2pc increase in the past two years (QRAA 2012 Debt Survey).

Terms of trade for northern producers have been falling at a rate of around 2pc p.a. since 1980 according to ABARES, and total factor productivity has been unable to keep up, at around 1.3pc for the beef industry in the north since 1977.

This trend shows no sign of reversing, with costs expected to continue to rise on the back of increasing energy costs, and the absence of any significant productivity improvements on the near horizon.

Returns in real terms have flat lined since the 1990s and there can be little immediate expectation of any increase. All this paints a gloomy picture of the state of the industry.

An overlay of age of producers in the industry gives more cause for concern. One would expect that at an average age of 58, producers would be less able to manage succession planning with this financial burden, and less well able to cope with the grind of the farm if they don`t have someone to take over from them when they are ready to retire. Labour availability from beyond the family group is severely impacted by the mining boom in many of the pastoral areas and beyond.

Against this somewhat gloomy assessment, we are nonetheless bombarded with an upbeat appraisal of the likely increase in demand from Asia, driven by population increases to nine billion by 2050. UNFAO predicts that to meet the demand of this larger, wealthier population, food production will need to increase 70pc in that time.

This hopeful expectation fuels the rhetoric which predicts a bonanza for Australian farmers, northern beef producers included. I would argue that this expectation may never be realised or at least, not for many years. This paper will attempt to say why and to identify some impediments to its achievement.

The purpose of such an approach is to attempt to present a balance to the rhetoric which will lead to more realistic short and medium-term expectations, and therefore to better management of enterprises expected to supply the anticipated growth.

Hopeful expectation leads to increased debt. Misplaced hopeful expectation leads to disaster.

In Queensland, we are in danger of just such a disaster. In 2005, the gross value of debt on  agriculture was equal to the gross value of production. Now, just seven years later, debt is 50pc higher than the value of production.

In beef, in the past two years, debt has increased 17.2pc whilst production has decreased 5pc. This is simply unsustainable. What is needed is an immediate turnaround in the returns to producers to balance the ledger. The time frame for such a turnaround, if we assume it can happen, becomes of critical importance to farming families, and to their banks.

For some it will already be too late.

Bridging the gap – getting to profit

The key ingredients to farm profit for the purposes of this are: income, costs, debt and productivity.

Costs are rising at 3.5pc a year, and one would expect will continue to rise at that rate or more based on increased energy prices and on the impact of remoteness on the northern property cost structure.

Labour costs if incurred are forced up by mining job availability, and property essentials such as vehicles and fencing materials are becoming relatively more expensive.

The well known Toyota Index tells the tale – 19 bullocks for one Toyota Landcruiser in 1970 to more than 60 now, reflects the failure of returns to keep pace with costs.

Improved productivity has been the only way out, and continues to be so, but a gradual slide is still on, as productivity gains of 1.3pc can't match a terms of trade deficit of 2pc p.a. It`s death by a thousand cuts for producers.

As in all average based assessments, there are some doing much above average, and beating the odds, so avoiding the average interest bill of +$100,000 per year will be of great significance, making debt a key issue to be overcome for families wanting to be long-term in the industry.

Businesses with debt on additional properties purchased in the last ten years will also be grappling with a further problem, the decline in the value of their asset base, which for some will be up to 40pc.

For some forced into a fire sale situation, there may not even be a buyer as recent auction attempts show. Returns for the product is key and based on the past 20 years, it would be difficult to predict much of an increase in the near term. Beef returns have been stable in real terms for that time.

Since 2007, returns in US$ terms have increased significantly, but have been eaten up by the strong A$ exchange rate which serves to make our product more expensive on the export market.

For Northern Australia which exports 85pc of its beef production, this is a double whammy. The fact that our cost of beef processing is double that of one of our competitors and well above most others puts us further behind the global eight-ball.

Aspirational targets for beef production increases of 100pc by 2040 fly in the face of common sense and a realistic assessment of industry condition, as well as a sensible understanding of resource condition and capability. Better to have the aspiration of producers being profitable running the same number of stock, leading to an improvement in landscape condition.

Domestic factors of Influence:

1.       Low productivity growth

A number of factors influence the fact that we have a relatively low rate of productivity growth. Firstly, the lower hanging fruit, as it were, have been picked already and we are making only marginal gains from relatively mature R&D areas like Brahman fertility.

Secondly we have a research system dominated by reductionist approaches which has run out of ideas, and thirdly we are facing a significant decline in government investment where it has been traditionally relied upon.

The resultant decline in capacity and aging of the key research operatives further stifles innovation.

A fourth factor could well be that an aging and unprofitable producer group will be less likely to innovate, especially where that innovation requires more investment or more time. This has also to be seen in the context of declining national productivity growth across all industries.

2.       Lack of profitability

Northern beef producers have significant investments in the resources needed for their business. Most are looking for only sufficient profit to ensure the future of their family in the industry.

The Holmes McCosker report commissioned by MLA in 2010 suggests that most farm businesses are not profitable over recent years and anecdotal information seems to support this.

Like all populations, the bell curve distribution applies and some are still doing ok whilst some are not. I would argue that we need better data firstly, but that there is sufficient evidence to suggest that poor profitability remains an obstruction to the progress of the industry.

3.       Rising Debt

Poor profitability is evidenced by the increase in beef producer debt in Queensland over recent years whilst the value of production has declined.

This suggests that the increased debt has been used to keep businesses afloat rather than funding expansion. A 17.2pc increase over the past two years against a decline of 5pc in the value of production is alarming. The average debt is now $1.4m which means at current interest over $100,000 per year in debt servicing – a heavy weight to carry. This must be seen as a severe impediment to industry renewal in the light of Asian opportunity.

4.       Declining land values

Anyone who has borrowed understands the notion of security and capacity to pay back the loan. A critical factor becomes the value assigned to the key assets of the business and its relationship to the size of the loan.

Unfortunately, land values generally and for the beef industry in particular spiked during the 2000s and now have come back significantly, in some cases in the order of 50pc. For some producers trying to sell, no one is prepared to pay anything approaching a reasonable price, if anything at all. This adjustment of values will eventually cost hundreds of millions of dollars, mostly to producers.

5.       Lack of Capital

In the light of the above situation, availability of capital and a preparedness to invest in northern beef production become critical issues. Overseas investors may in fact be the only ones who are willing to take the punt, based on their commitment to their own countries food security needs.

Our understanding of the export outlook given 85pc of northern beef is exported, will fuel the flow of additional capital to the sector, but current indications are less than optimistic. The political settings regarding foreign ownership will therefore have a marked impact on the shape of the industry.

6.       Producer demographic

The average age of northern cattlemen is approaching 60. As a member of that demographic myself, I have a sense of the loss of risk taking and of physical capability which were once the hall marks of youth.

Whilst in many cases the next generation is keen to take over, financial circumstances makes succession more difficult. Innovation must be stifled by these factors.

Getting the next generation into the key roles in businesses will remain a critical issue for northern beef. Where will the capital come from to fund generational transfer for example?

7.       Labour availability

The mining boom has been largely detrimental to the grazing industry by its competition for land, often better quality land, and by virtue of its demand for regional labour at what is deemed to be a premium rate.

It does present an opportunity for those producers who can work for the mines nearby and still keep the property going, so there is good and bad, but the bad outweighs the good at this stage.

Fly-in, fly-out workforces also are detrimental to rural communities because of their itinerant nature.

8.        Processing costs and ownership and the effect of exchange rate

A majority of Australian beef processing is owned by overseas interests. Those companies play in a global marketplace where beef supply is matched to beef demand according to the most profitable mix available to them at any time.

Australia's significance to their bottom line and to their mix is relatively insignificant, in the order of 1pc for Cargill for example. Whilst the A$ is as strong as it is, Australian beef traded in US$ is significantly overpriced compared to cheaper Brazilian or Indian beef.

There would be some doubt therefore about Australia's importance in meeting Asian demand whilst this situation applies. JBS's closure of its King Island works shows the tight nature of processing sector returns and how companies can be forced by financial circumstance to close operations with great negative impact on producers.

Northern Australian producers are no less exposed to global forces and economics.

9.       Landscape condition and capacity

Any effective plan for the northern beef industry needs to have strong regard to the sustainability of grazing lands, and to community expectations of their management.

The net effect of such concerns has been to reduce the land available for grazing and especially under pastoral lease conditions, to increase the scrutiny on management. This has increased under recent times with the advent of initiatives like Reef Rescue and Wild Rivers legislation.

Whilst there are vast tracts able to be developed in parts of northern Australia, allowing greater numbers of cattle to be run, there are many areas where landscape condition necessitates less rather than more cattle, and grazing studies which prove lighter stocking provides more consistent long term returns.

10.   The so called ‘social licence to operate’ and what it means.

The live export market to Indonesia was temporarily if not permanently injured by a handful of agitators for whom the animal has the same rights as have humans.

The growth of urbanisation in Australia means that increasingly people with no knowledge of or connection to the land and its people will influence its future.

Animal welfare is one area where this will happen as has already been proved with devastating consequences for industry. In my view this will only worsen.

Access to water and general landscape and biodiversity issues will also capture the metropolis' opinion as we are already seeing. Producers will need to deal with increasing compliance and intrusions into their operations, increasing the cost burden upon them.

Global forces of influence

Eighty five percent of northern beef production is exported, making the northern industry extremely exposed to global forces.

The trend to globalisation has led to less protectionist policy settings and therefore has increased this exposure over recent decades.

Our exchange rate therefore is very important in defining our competitive advantage or disadvantage in the marketing of our product. Whilst our dollar is above par with the US dollar and our beef is paid for in US dollars we are at a possible 30pc disadvantage to our clients.

As mentioned, our processing cost disadvantage compounds the problem. We are at a considerable disadvantage to our major exporting competitors.

This is reflected in the emergence of India as the major world exporter of beef ahead of Brazil and then Australia. Indian beef and buffalo production has actually increased 46.5pc in the past four years, and it is finding its way to many of the poorer Asian markets who may have been seen as the market for our beef under the ‘foodbowl for Asia’ scenario.(See recent MLA Analysis).

Given its capacity, India (and Brazil for that matter) will be strong contenders for the cheaper Asian markets.

I can't engage in a full market analysis here, but considering a decline in Chinese beef consumption of nearly 10pc in the past four years (USDA), the precarious state of the Japanese economy where 50pc of tax revenues go to debt servicing and where a collapse is being predicted by the same people who predicted the GFC, our competition with the US in Korea where we are at a significant disadvantage due to the FTA, there must be some room for speculation about our Asian opportunity.

Lindsay Falvey from the University of Melbourne writes about small-holders in Asia and quotes that 90pc of global agricultural production doesn't cross a border, and one might propose that for beef (where the figure is 86pc) and other meat protein, in the short to medium-term, their needs will be satisfied by domestic production increase.

Bear in mind that the meat protein of choice for China is actually pork, accounting for 65pc of consumption. Could it not be the case that Australia's best role in the medium term is to help Asia develop its food production systems.

For this reason I challenge the foodbowl for Asia notion, at least for some years.

Other global issues

Much of our future will depend on the link between the US and China and the relationship between them.

US owes China US $1.17 trillion. Professor Jerry Holechek from the University of New Mexico, speaking at the recent Rangelands Society Conference talked about the possibility of a US default on debt to China within the next five years.

Antagonism is already building in the US against China and one suspects vice versa. The possibility of conflict cannot be ruled out. Meanwhile, the US Treasury continues to print money as does Japan, and whilst this happens it keeps the upward pressure on the A$. How the US handles its deficit of over a trillion dollars will impact us as well, and failure of the houses of parliament in the US to agree a strategy continues to impede the solution to the problem.

Add the disfunction of Europe and the volatility of the Middle East and our uncertainties are compounded – sufficiently, I would argue, to constrain us from excessively optimistic rhetoric and nonsensical politically selfserving grandstanding. The producers of Northern Australia deserve better.

What might be done

• A comprehensive farm performance monitor program or alternative to validate the state of the industry now, and a better understanding of where issues are.
• A mechanism for succession which allows the next generation of farm mangers to take over from the older generation without being crippled by debt.
• Some encouragement for investment in Northern Australia even foreign investment to allow producers who want or need to exit the industry with dignity and more than the shirt on their back.
• Some improved approach to business planning for northern producers which highlights profitability and causes them to strengthen and diversify their operations, and where possible to reduce debt.
• A focus on getting to industry profitability rather than productivity or production.
• Some focus on supporting infrastructure and policy settings which encourage rather than discourage producers.
• Some focus on national issues to reduce processing costs and to reduce the exchange rate where possible.
• A commitment from industry leaders to a more objective assessment of risks and opportunities and a rhetoric which is better reconciled with industry position.

I would hope that those of you who read this discussion paper will find other interventions which lead to an improved state of the industry. That is ultimately my intent in preparing it.

• Ralph Shannon is the chairman of the North Australia Beef Research Council. NABRC brings together industry and major R,D and E providers in Queensland, the NT and morthern WA. It supports and relies upon 11 Regional Research Committees throughout the area, each chaired by an industry leader in the region and supported by regional provider representatives.