Annual Operating Plan Summary 2016/2017 Australian Pork Limited Annual Operating Plan 2016/2017 Message from the CEO It is my pleasure to present the 2016/ 17 Annual Operating Plan for Australian Pork Limited (APL). This Plan outlines the activities and associated resources envisaged to meet the objectives contained within the APL Strategic Plan 2015-2020. It is the third Annual Operating Plan operating under this Strategic Plan. The APL Strategic Plan 2015-2020 was developed in 2014 in consultation with our key stakeholders – levy paying Australian pork producers and the Australian government. Additionally, discussions and consultations were conducted with other stakeholders such as members of the pork supply chain and other industry bodies. APL budgeted income outlined in this plan has increased due to the levy increase taking place on the 1st July, 2016. On this date, the marketing levy increases from $1.95 to $2.25 per slaughter pig, and multiplied over the 5.15 million expected slaughter pigs, total levy income is more than $16 million (also considering the $1.00 per slaughter pig R&D levy). Alongside this is the government’s investment in our industry through the matching funding for R&D activities, adding more than $5 million to income, ensuring that our total income for the year will be well over $22 million. Whilst we do envisage a significant deficit for 2016/ 17, a longer term strategic view shows that APL reserves remain well above minimum levels. A windfall gain in 2015/ 16 for the refunding of payroll tax for a previous number of years amounting to around $1 million gives us the opportunity of getting more resources working for Australia’s pig producers in the shorter term. A combination of factors seem to have resulted in excellent demand for pork in Australia and a number of export markets. One of these factors is responses to industry funded promotional programs which have seen domestic fresh pork consumption consistently increase over the past five years. Another factor is undoubtedly in the last couple of years, the restocking of the Australian beef herd and excellent export demand for it, resulting in shortages of beef and associated high prices. This has led to species substitution at a consumer level with them looking for more cost effective protein. This demand for pork, coupled with limitations in available infrastructure to increase supply in the short term, has resulted in pork prices reaching very attractive levels for producers. The high prices are now stimulating investment in increased production capacity within the industry which will hit the market over the next couple of years. Our challenge at APL through the promotional plans is to ensure that we do everything we can to avoid the “overshoot” scenario where we end up with an over-supply of Australian pork and a crash in prices. In short, we have to continue to invest in demand creation and this Plan is consistent with this requirement. The Plan continues to look for improvements in fresh pork consumption domestically. We are seeking to move per capita consumption from 9.75kg to 10.12kg. Four years ago, this figure was around 8.4kg. The Plan also continues to look for progress in the phase out of sow stalls, committed to in 2010, up to a level of 90% of the industry (measured on a sow or production basis), recorded either through our APIQ® verification process or other means. Australian Pork Limited Annual Operating Plan 2016/2017 The Plan is consistent with our longer term aspirations of increasing international trade in Australian pork, investing in market development and access in particular through China and the rest of Asia. Strategically, this is seen as an important development in reducing the risks associated with participation in a limited number of markets. The relative shortage of pork in the Australian market leading to our higher prices, is not a situation that allows for us to increase our participation in the processed pork sector in Australia. Our market share in this sector is now below 30% and we don’t expect it to increase over the next 12 months. The 6;2;2 campaign, helping consumers to cook their pork steaks, is one of our key promotions for the coming year, having already commenced earlier in the 2015/ 16 year. Concept testing in South Australia showed very good industry returns on investment for such a campaign and we look forward to good results nationally. This is occurring alongside our longer term “Get Some Pork On Your Fork” health advertising, the PorkMark campaign (with Bacon and Ham Weeks) highlighting Australian origin, and the PorkStar campaign focussing on the food service sector. Changes to Country of Origin Labelling legislation, due to take effect over the next two years, presents an opportunity for Australian pork to be more clearly differentiable in retail stores and perhaps will facilitate some stronger promotional work highlighting the benefits of “Australian”. Improving the production of our pigs – in terms of alignment with community expectations and increased productivity – is always a focus for the APL R&D program. Alongside seeking improvements in on-farm productivity, projects contained within this plan continue to demonstrate our investments into continuous improvement of pig welfare, continuous improvement of our industry’s environmental footprint, stewardship of the use of antibiotics, better pork and improved product integrity systems. The High Integrity Australian Pork Cooperative Research Centre (Pork CRC) remains a key partner to APL in the performance of relevant research and development on behalf of the industry. The total industry R&D program is planned in such a way as to maximise the use of resources, hit our strategic targets and avoid duplication. With this Pork CRC due to cease in mid-2019, planning is already well underway by the Pork CRC with APL as partner into an ongoing model to engage industry in the industry’s R&D activities. The Australasian Pork Research Institute Ltd (APRIL) will be the model to continue the highly collaborative approach to R&D that the Pork CRC has helped so much to foster. Memberships and structures for APRIL are now starting to be formed. APRIL will also help to continue the base funding of core research providers into the future which has proven to be both a stabilising influence on research relationships as well as improving cost effectiveness of research provision. As part of the rural research and development corporations (RDC) community, we continue to look for opportunities to learn from each other, improve our efficiency by working together and seek research targets of common interest mutually. More recent successes in Rural R&D for Profits Program grants will facilitate significant collaborative R&D efforts in 2016/ 17 with other RDC’s. As always, we design our operational plans with outcomes for our pig producers and the Australian government as our major investors in mind, but understanding that ultimately, the consumer (or the tax Australian Pork Limited Annual Operating Plan 2016/2017 payer) will be the beneficiary of our labours. Maximising the benefits with our limited resources is our focus. Andrew Spencer Chief Executive Officer Australian Pork Limited Annual Operating Plan 2016/2017 CONTENTS The Competitive Environment 1 Domestic Market 1 Grain Prices 2 Beef 3 Sheep Meats 3 Chicken 3 Pork 4 Pork Imports 4 Export Market 5 Strategic Objective 1 – Growing Consumer Appeal 7 Industry Outcomes 7 Program 1: Better Pork 7 Program 2: Pork Made More Popular 7 Program 3: Increasingly Different 7 Risks & Opportunities 8 Strategic Objective 2: Building Markets 9 Industry Outcomes 9 Program 1: Market Insights 9 Program 2: Domestic Market Development 9 Program 3: International Market Development 9 Risks & Opportunities 10 Strategic Objective 3: Driving Value Chain Integrity 11 Industry Outcomes 11 Program 1: Trust in Pork Provenance 11 Program 2: Pork Quality Assured 11 Program 3: Fairness in Risk and Reward 12 Risks & Opportunities 12 Strategic Objective 4: Leading Sustainability 13 Industry Outcomes 13 Program 1: Addressing Societal Needs 13 Program 2: Healthy Herds and Farms 13 Australian Pork Limited Annual Operating Plan 2016/2017 Program 3: Continuous Productivity Growth 14 Risks & Opportunities 14 Strategic Objective 5: Improving Capability 15 Industry Outcomes 15 Program 1: Applied Learnings 15 Program 2: Building Industry Image and Reputation 16 Program 3: Operational Effectiveness 16 Risks & Opportunities 16 Government Research Priorities Attributed to R&D Program 17 Strategic Objective Expenditure by National Research Priorities 18 Financial Budget – 2016/2017 19 Financial Budget – 2016/2017 (Cont.) 20 Financial Budget – Project Spend Breakdown 2016/2017 21 Definitions of Financial Terminology 21 Australian Pork Limited Annual Operating Plan 2016/2017 The Competitive Environment Domestic Market Pig slaughter numbers and pork production volumes have taken a step up over the past twelve months. The slow and steady rise we have been used to for the past few years has been interrupted with a swift increase across several months with what seems now like a period of consolidation. We expect moving annual total pig slaughters to surpass five million later in calendar 2016, with the budget for this period expecting that number to increase to 5.15 million by the end of June, 2017. Monthly & MAT Pig Slaughter Numbers 5,200 550 500 5,000 )s000( reth 4,800 440500 )s000( reth gu 4,600 gu alS TA 350 alS ylh M 4,400 tn 300 oM 4,200 250 4,000 200 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 6 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 -raM -yaM -luJ -peS -voN -naJ -raM -yaM -luJ -peS -voN -naJ -raM -yaM -luJ -peS -voN -naJ -raM -yaM -luJ -peS -voN -naJ -raM -yaM -luJ -peS -voN -naJ -raM Monthly Total MAT Total Data Source ABS. Produced by APL. Graph 1: Monthly and Moving Annual Total Pig Slaughter Numbers in Australia 2011–2016 Strong pig prices – which have net effect increased over the past year – have resulted in more industry interest in production increases. The increases in production happening so far have had little impact on softening pig prices. There is a significant lag in investing in increased production and that hitting the market (a couple of years at least typically) so increasing production volumes are expected to continue for some time to come. Grain prices have decreased over the past year, increasing the profit drive for increased production. Whilst the impact of the shift of the industry away from sow stalls is not complete, a lot of the shorter term productivity impacts have now been overcome. We start to see slow but real improvement in key indices across the industry such as piglets born alive and pigs weaned per sow per year. Not only now do our annual price cycles avoid the mid-year slump which was previously a natural and expected part of the planning process, but prices have shown steep growth over the past year as a result of strong domestic demand for fresh pork. This strong demand is partly underpinned by dynamics in the red meat industry (see later section) and is not expected to significantly change for a couple of years. 1 Australian Pork Limited Annual Operating Plan 2016/2017 Graph 2: Average Australian National Baconer Prices Surveyed by APL 2011–2016 Grain Prices Grain represents the most significant input into the cost of producing a pig in Australia. The price of grain has come down in real terms over the past year mainly as a result of global grain market dynamics and better seasonal conditions. Shorter term volatility around the value of the Australian dollar continues to affect prices and our domestic grain seems locked into a basis premium over the same quality product traded on international markets. Graph 3: Monthly Major Grain Price Trends 2006–2016 2 Australian Pork Limited Annual Operating Plan 2016/2017 Beef Projections for the beef industry were released by Meat and Livestock Australia in January, 2016, as follows: ‘The Australian cattle industry will be influenced by a number of extreme forces in 2016. From a cattle supply point of view, numbers over the coming two years will fall to levels not seen in more than twenty years. This alone will more than likely stimulate strong competition between restockers, feedlots and processors for the limited availability. The national herd is estimated to fall to 26.2 million head by 30 June 2016, before declining slightly again in 2017, to 25.9 million head. If this occurs, it will represent a 3.4 million head, or 12%, fall since 2013 and become the lowest national herd for 24 years (1993). Working to partly offset the projected 16% year-on-year decline in adult cattle slaughter for 2016, at 7.6 million head, will be the expectation that average carcase weights will increase considerably. This assumption is based on much lower stocking rates, a greater proportion of lighter northern cattle exported live, a higher proportion of cattle on feed and fewer female cattle processed.’ Clearly cattle price expectations are very solid for the medium to longer term, maintaining the environment for higher protein prices overall. Sheep Meats Projections for the sheep industry were released by Meat and Livestock Australia in April, 2016, as follows: ‘The 2016 Sheep Industry Projections April Update encompasses some significant revisions to the December Projections. Most notably, there is a larger sheep flock and a 750,000 head increase in the number of lambs expected to be processed in 2016 (to 22 million head) - yet this will still be down 3% from the 2015 record. Lamb production is now forecast to decline 3% year-on-year in 2016, to 488,400 tonnes cwt. Despite anticipated tighter sheep and lamb availability through the winter months, prices may be tested by the strengthening A$ and if there are prolonged hot and dry conditions. Australian lamb exports in 2016 are forecast to be fairly steady with the past two years, at 235,000 tonnes swt, before gradually growing with production to 280,000 tonnes swt by 2020.’ Similar to beef, some production constraints for the sheep industry are likely to support strong lamb prices also. Chicken The chicken meat industry continues to be characterised by a close linkage between supply and demand through the limited number of volume players and a relative lack of volatility. Market share of free range product does seem to be continuing to taking a kick upwards. With the higher retail prices of red meat in particular over the past year or two, chicken fits alongside pork as the protein which has taken the most advantage of this situation. 3 Australian Pork Limited Annual Operating Plan 2016/2017 Pork Very good demand for fresh pork has already seen supply limitations lead to continued market share decreases for Australian pork sourced smallgoods, with most product going into the fresh market. Whilst volumes remain likely to increase over the coming year, they are unlikely to fully satisfy the strong fresh pork demand which is likely to see high pork prices maintained and high competitive protein prices (see above). Pork Imports The past year has seen high imported pork volumes maintained consistent with expectations. High apparent consumption levels (see Graph 5) exist at present, the root cause linked to increased domestic production and maintenance of high import volumes. Imports over the past year have maintained supplies of pork for processing as more of the domestic carcase is diverted to fresh pork markets. Australian Pork Imports 200,000 20,000 180,000 18,000 160,000 16,000 140,000 14,000 )W S )W 120,000 12,000 sen S se not( nnot( 100,000 10,000 strop s m tro 80,000 8,000 I y pmI TA 60,000 6,000 lhtnoM M 40,000 4,000 20,000 2,000 0 0 11-raM 11-yaM 11-luJ 11-peS 11-voN 21-naJ 21-raM 21-yaM 21-luJ 21-peS 21-voN 31-naJ 31-raM 31-yaM 31-luJ 31-peS 31-voN 41-naJ 41-raM 41-yaM 41-luJ 41-peS 41-voN 51-naJ 51-raM 51-yaM 51-luJ 51-peS 51-voN 61-naJ 61-raM Monthly Volumes MAT Volumes DataSourceABS. ProducedbyAPL. Graph 4: Australian Pork Import Volumes – Monthly and Moving Annual Total 2011–2016 Internationally, pork prices remain low on average due to ongoing trade blockages into Russia due to various sanctions in place. This is very much against the trend of what is happening in Australia, causing a greater than usual divide between Australian and global pig prices and motivating pork trading nations to continue to seek fresh pork access into Australia (which the industry fights vehemently as a biosecurity threat). 4