Big carbon revenue opportunities for northern pastoral operators, AA Co tells investors

THERE will “absolutely” be opportunities for the extensive northern pastoral industry to engage in the carbon space – but reliable tools to measure and monitor carbon in this environment had to be developed and perfected first.

That was the message from the chief executive of Australian Agricultural Co. Hugh Killen during a question-and-answer session held as part of a briefing for analysts and investors this morning, following the publication of the company’s financial statements for the year 2021-22.

Cattle muster on AA Co’s Canobie station in the Gulf.

Carbon was a popular topic for analysts and investors to consider at this morning’s briefing – with AA Co’s meat sales performance, beef processing patterns and ongoing questions over the likelihood of shareholder dividends This year.

As reported separately on Beef Central this morning, AA Co posted a strong operating profit of $49.9 million for the year ended March 31, double the previous year.

Private investor Charlie Kingston asked a series of questions about the carbon opportunities for AA Co, given its extensive land holdings in northern Australia.

“There is a lot of focus on carbon farming and rotational grazing etc. What is the carbon opportunity for AA Co?” He asked.

Managing Director Hugh Killen said that in terms of carbon and natural capital more broadly, this was a key part of the company’s sustainability strategy.

“I think there is a very significant opportunity going forward for AA Co, and larger landowners in northern Australia more broadly, with soil carbon,” he said.

“But first we need to have the technology and the science to be able to assess this properly.”

“When it comes to our own operations, it’s not just soil carbon, it’s landscape carbon. We have an ongoing project right now to (monitor and measure) this, working with a number of partners to deliver it.

“But there will also be material (financial) opportunities in natural capital, and we’re really looking forward to talking to the market about that in July when we update AA Co’s sustainability strategy,” said Mr. Killen.

“What’s interesting for companies like ours is that the opportunity is much broader than just soil carbon – it also encompasses landscape carbon and the value of ‘natural capital’ in our field.”

“In the future, AA Co will not only produce beef protein, but also other opportunities that arise from the natural realm.”

Mr Kingston also asked if the “Packhorse Pastoral Co model” (see previous Beef Central story) of buying land, changing management practices and eventually generating carbon credits, year after year, was a system that AA Co envisioned to generate a more consistent revenue stream for the company.

“The simple answer to that question is yes,” Killen said. “The Packhorse model is interesting and works well in the production environment in which the company operates. But AA Co’s scale is much larger and works in different environments.

“We are already investing in infrastructure to be able to scale up, and our version of rotational grazing, given our scale, is much larger. We believe this will give us better carbon opportunities in the future as we register these projects and bring them to fruition,” he said.

But the big challenge in extensive production systems in the North was getting the right science and baseline data in place to measure soil carbon.

“That’s ultimately why we didn’t set a goal in our new sustainability framework from day one. It’s going to happen in the next couple of years,” Killen said.

“There will absolutely be an opportunity for the northern pastoral carbon industry, but going forward it needs to be adapted to the northern grazing environment in which we operate. This is why we prefer to refer to landscape carbon, not just soil carbon, i.e. all food biomass. »

“This whole enteric methane cycle is part of our initiative that AA Co will be implementing over the next two years. From there, it opens up the possibility of saving those projects and creating another revenue stream for businesses like ours. »

Meat sales performance

A CLSF Broker Analyst asked why gross beef sales improved only modestly last year, given that the company’s average price per kilo for beef sold increased by 21%.

Wagyu meat sales volume was down 14% last year, due to historic low calving numbers in the previous two years, in line with drought and flooding, he was told.

“It fits well with the Australian industry’s herd reduction,” Mr Killen said.

“Most importantly from an AA Co perspective, our kilograms produced this year so far have increased by 28% and our herd has increased by 42,000 head. As we enter fiscal year 2023 and beyond, this will stand us in good stead for generating additional revenue in the future.

The same analyst asked how AA Co’s average selling price of beef per kilo increased (+21pc) compared to the whole industry, given that all meat prices had increased significantly.

“I think it compares very strongly,” Mr. Killen said.

“Mecardo’s overall Australian beef price index is up about 12% for the year, so AA Co’s 21% (85% of which is now Wagyu branded) is pretty good,” he said. -he declares.

“It really underscores our focus on brands and premiumization in the markets our product is going to.”

“I also think in the commodity beef market, those margins on 100 day shorter type cattle are very, very tight right now given input prices and feeder cattle prices (click here to see Beef Central’s report on this topic published yesterday).

Will shareholders see a dividend?

Private investor Charlie Kingston asked whether, given soaring pastoral land prices, AA Co should pay a dividend to shareholders this year, break a decade of drought, or sell land to take advantage of favorable conditions.

“As we said in our briefing remarks, we want to continue to reinvest in the business,” Killen told him.

“This is one of the reasons why we have seen a very good increase in the valuation of our properties this year.

“You’re right, though, in that it’s a really good time to be in farming right now. The work we have done to make the business much more efficient and simpler, and to have the right tools at our disposal to make the right decisions, will put us in a strong position, when seasonal conditions change again (for the worse) in the future.”

Mr Killen said the dividend issue was one for the board and the chairman would brief shareholders at AA Co’s next annual general meeting.

“So there’s no hard target in the form of a consistent level of earnings that would see some of that money returned in the form of a dividend?” Mr. Kingston asked.

“NTA (net tangible assets) is rising – but that’s certainly not exclusive to AA Co. The company’s shares have been trading chronically at a discount to NTA for years. Is there a prospect of potential redemption to close out this inherent discount? Mr. Kingston asked.

Mr Killen said that operationally his focus at the moment is to ensure the company has the capital to reinvest in the business.

“It shows good results over time. The share price over the past two years has reflected this. But we still have work to do – continuing to improve these assets. »

Ultimately, share buybacks were a topic for the board to address, he said.

“That’s probably a great question for the AGM.”

Scope of a “local” processing model?

Another webinar participant asked for a breakdown of the costs involved in putting meat on the plate, from the livestock production phase to transport, batch feeding, processing, marketing and added value.

He also asked about the possibilities of “local” processing, to “reduce the stress on livestock”. Beef Central understood this to mean a Provenir-type concept, where mobile slaughterhouses move from site to site, killing livestock on the farm.

AA Co’s CFO, Nigel Simonsz, responded to the cost of production question by saying roughly that for Wagyu, the cost of feeding the animal was the largest component of product cost – about 40 % of overall production cost. Other parts of the supply chain (farming, growing, processing, etc.) effectively shared the rest.

In terms of ‘local’ processing, Mr Killen said all cattle pass through the company’s supply chain, from northern ranching properties to growing feedlots, in central and southern Southern Queensland – gradually approaching processing facilities throughout their life cycle.

“By feeding at Dalby or Comet in central Queensland, we have a relatively well-managed increase in our treatment partners. Animal welfare is a key consideration in doing this,” he said.