Bill Cordingley

1
Outlook Conference 2006

• Bill Cordingley
• Rabobank - Food and Agribusiness Research

2
Contents

• Section 1
• Section 2
• Section 3
• Section 4

• WHY LENDING TO SEAFOOD IS CHALLENGING
• CHALLENGES FACING THE SEAFOOD INDUSTRY
• WHAT DETERMINS BANKABILITY
• SOME COMMENTS OF SELECTED FISHERIES

3
WHY LENDING TO SEAFOOD CHALLENGING

• NOTORIOUSLY DIFFICULT TO FORECAST PRODUCTION,
  SALES AND PROFIT
• INHERENT LACK OF STRONG ASSET BACKING TO MANY
  SEAFOOD BUSINESSES MEANING LOW SECURITY TO
  LENDING
• HIGH CASH FLOW VARIABILITY
• VERY CHALLENGING TRADING ENVIRONMENT MEANING
  INDUSTRY PROSPECTS LOOK MODERATE

HIGHER LENDING RISK FOR BANKS
4
CHALLENGES FACING THE SEAFOOD INDUSTRY

• STRONG AUSTRALIAN DOLLAR

USD PER AUD
Source Rabobank
5
CHALLENGES FACING THE SEAFOOD INDUSTRY

• DECLINING INDUSTRY OUTPUT

Source ABS
6
CHALLENGES FACING THE SEAFOOD INDUSTRY

• GROWING IMPORTS AND DECLINING EXPORTS

Source ABS
7
CHALLENGES FACING THE SEAFOOD INDUSTRY

• HIGHER INPUT COSTS
• HIGHER FUEL COSTS
• HIGHER LABOUR COSTS
• DIFFICULT TO ATTRACT AND RETAIN LABOUR

8
CHALLENGES FACING THE SEAFOOD INDUSTRY

• DECLINING BALANCE OF TRADE SURPLUS

Source ABS
9
WHAT DETERMINES BANKABILITY?

• PROBABILITY OF DEFAULT?
• SECTORAL ISSUES
• Industry life cycle stage
• Nature of competition in the industry and
  barriers to entry
• State of the raw material base
• Nature of licensing, value and security of
  licenses
• MANAGEMENT QUALITY
• Strong business model and realistic business plan
• TRACK RECORD OF PROFIT AND LOSS
• CASH FLOW QUALITY AND STABILITY
• LOSS GIVEN DEFAULT?
• LOAN TO SECURITY RATIO
• THE QUALITY OF SECURITY
• SALEABILITY OF THE SECURITY

10
SOME THOUGHTS ON FISHERIES IN WHICH WE PARTICIPATE

• WA rock lobster fishery
• Rabobank is positive about prospects for the WA
  rock lobster industry
• Fishery management
• Improved prices
• Industry has scale
• Challenges must not be overlooked
• Rising input costs
• Pot reductions pressuring efficiency
• Continued rationalisation expected

11
SOME THOUGHTS ON FISHERIES IN WHICH WE PLAY A
BANKING ROLE

• Southern bluefin tuna fishery
• Rabobank is cautiously positive about prospects
  for operators in the southern bluefin tuna
  industry
• Operator numbers have rationalised
• Fishery transparently managed
• Innovation driving future strategies
• Prices have shown a strengthening trend
• Challenges must not be overlooked
• SBT wild stocks are badly depleted and catches
  are down
• Rising input costs are challenging
• Relatively strong competition from Europe in
  Japan market
• Significant imports
• Rabobank can see a path of profitability for the
  SBT fishery and is thus happy to bank
  participants selectively

12
SOME THOUGHTS ON FISHERIES IN WHICH WE PLAY A
BANKING ROLE

• Tasmanian salmon industry
• Tasmanian Salmon industry is in a relatively
  strong position
• Much needed industry consolidation has occurred,
  two major players now produce 90 of output
• Sound property rights in terms of marine leases
  and industry management
• Rapid uptake of farming technology helping to
  reduce cost of production and minimise disease
  impacts
• Strong upswing in demand from local market,
  meaning output and prices have risen
• Further rationalisation of excess processing
  capacity likely
• Challenges can not be overlooked
• Potential for imported salmon to pressure local
  suppliers, especially fresh salmon from Chile
• Disease risks are ever present and must be
  managed pro actively
• Rabobank will bank participants selectively

13
SOME THOUGHTS ON FISHERIES IN WHICH WE PLAY A
BANKING ROLE

• Eastern tuna and billfish fishery
• Rabobank concerned about profitability of players
  in ETBF
• Overcapitalised
• Property rights in a state of confusion
• Structural adjustment package delays
• Creates confusion in the sector
• No way to value licenses until final details of
  both initiatives are known
• Difficult to make investment decisions
• Resource clearly under pressure
• TAC for swordfish, the most valuable resource,
  has been heavily cut, leaving operators to chase
  less valuable canning tuna species such as
  skipjack and albacore tuna
• Operator revenue has declined drastically year on
  year, by over 30 plus in some cases

14
Conclusion

• Primary goal of banks is to lend to clients who
  will not default on a loan
• Companies thus must be able to demonstrate strong
  asset backing or strong, stable and reliable cash
  flows
• This has been relatively difficult to achieve in
  the fisheries sector
• Australian fisheries industries have been under
  pressure
• Declining catches
• Declining prices
• Increased imports
• Increasing costs
• Market trends will turn and production issues can
  be addressed in most cases with strong fisheries
  management
• Banks will support sound businesses in good
  industries