Business innovation and opportunities
Are there new business models that will make the WA sheep industry more profitable?
- Business models are currently evolving to meet the needs of all members of the supply chain and improve the sustainability of those businesses.
- In many cases efficiencies of scale can’t be achieved with existing levels of investment. Smaller enterprises that are looking to capitalise on demand may look toward forming joint ventures or partnerships.
- The development of a range of innovative business models with robust financial modelling will also support increased confidence. A report on alternative investment models “Concepts for alternative investment and financing models to expand sheep production in Western Australia” summarises the opportunities. The follow up report, “Sheep Industry Business Model Development”, explores four of the investment models in more detail.
What role can contracts play in making sheep businesses more profitable and resilient?
- Contracts give producers some visibility on future lamb and wool prices which provides confidence to invest in their business and retain lambs to build flock numbers. Contracts also allow producers to lock in a future price for their lambs and manage the farm system to maximise profit.
- Processors can utilise agreements to book in kill space, secure supply and manage sales to meet profit targets.
- Enforceable contracts to supply or forward contracts are used by the cropping industry and provide certainty of returns for both growers and traders. Processors in other livestock industries are also driving the move to contracts, which facilitates increased investment in production and processing.
Are carry-over lambs a profitable business model?
- The lamb production system in WA is characterised by a large supply of lambs finished on green feed during spring and then a reduction in supply through summer, autumn and winter. This pattern of supply reflects the cost of finishing the lambs, with it being cheapest finishing on green feed and progressively more expensive as the season progresses.
- It would be advantageous for the processing sector to have a more even supply of lambs through the season, because this would allow them to supply markets on a consistent basis through the year and to better utilise the capital invested in abattoir facilities.
- Higher prices are offered for out-of-season lamb, however, historically these premiums have not been sufficient to entice farmers away from the sucker lamb production system.
- A price cost analysis for out of season lamb production in WA was commissioned by the SIBI project and showed that the sucker system is the lowest cost system, while the carry-over system requires a higher price in order to have equal profitability. The later lambs are turned-off, the higher the price required to break even, generally being $4.50/kg to $5.00/kg over the hooks.
- The price increase required to make equal profit from turning off lambs one month later is greater than the 5 year average increase in price per month. However, a strong forward pricing mechanism may help manage the risk of turning lamb off later.
What training is available to increase business skills?
- Increasing business skills both on-farm and within the value chain is a focus of the SIBI project.
- Opportunities to increase on-farm business skills are regularly promoted on the SIBI website and associated publications including the SIBI newsletter and Ovine Observer. Examples include Sheep Updates, the SIBI agribusiness professional development training days and feedlotting decisions workshops, and the promotion of training opportunities such as the Lifetime Ewe Management program, Bred Well Fed Well workshops, RamSelect workshops and the Lamb Survival Initiative.
- To increase business skills within the value chain a number of training and scholarship programs have been developed. To see more details visit the webpage. Each program is focused on interaction with supply chain partners and may in the future include industry placement opportunities.
- For example, a one-week value chain training course was held in January 2017 to increase the skills of people employed in the sheepmeat value chain. Participants were early in their careers in the agricultural industry and included agricultural students, consultants and advisors.
How can we attract more capital investment into the sheep industry?
- The WA sheep industry is an exciting sector to be involved in. By creating an agreed industry vision of a confident, future-focused and profitable industry with a strong future, the industry will be able to exhibit a high level of sustainability and resilience, which are attractive attributes for investors, both public and private.
- Independent reports such as Deloitte “Building the Lucky Country: Positioning for Prosperity” named agribusiness as one of the ‘fantastic five’ key drivers of growth opportunities for the Australian economy into the future. Of all the sectors in the Australian economy, agribusiness was the sector with the strongest combination of competitive advantage and producing what the world increasingly wants. Within agribusiness sheep was seen to be the second strongest driver of opportunity.
- The development of tools that can build a full picture of the industry sector will identify strengths of the industry which can be built on to attract capital investment. The proposed SIBI project to map the existing sheep supply chain for inputs and outputs is an example. Modelling with this information can determine how to increase efficiency, plan for expansion or minimise cost and waste. Further information on identifying potential cost savings can be found here.
- The development of a range of innovative business models with robust financial modelling will also support increased confidence and is planned for the final year of the SIBI project. Further information on alternative investment models can be found in the report “Concepts for alternative investment and financing models to expand sheep production in Western Australia”.
- At an enterprise level, businesses should ensure they seek professional advice to meet investor needs. This includes well-maintained documents outlining business structure, financials, cash flow, risk management and future plans. Corporate investors often look to invest in large operations, so it could be worth entering into discussion with contemporaries who may be interested in amalgamation to build scale.