Balco’s CEO Rob Lawson talks the Export Hay Market

Jon Paul Driver 0:05

Welcome to the Feed Central Hay Matters podcast your go to source for all things hay related in Australia. I’m your host, John Paul Driver. In today’s episode, we have Rob Lawson with Balco on and we’re also joined by Tim Ford, who’s going to do the introduction for Rob. I’ll let you take it away. Tim.

Tim Ford 0:22

Thanks, John Paul, and welcome to the podcast, Rob.

Rob Lawson 0:25

Thanks, Tim.

Tim Ford 0:26

Great pleasure to have you here today and as always, wonderful hospitality in South Australia. And wonderful hospitality at Balco, as always. So Balco is a very significant player in the export market in Australia. Long history. We have a separate podcast with one of the founders, Malcolm May, which will be playing over the next few weeks. Rob’s the current Chief Executive Officer of Balco, and steering the ship of a large and successful hay export industry and a very significant play out in the Balaklava and district community. So welcome, Rob.

Jon Paul Driver 1:02

Rob. Welcome to the podcast. So you and I had the occasion to speak at an industry event back in August, just before the AFIA conference.

Rob Lawson 1:11

Yeah, exactly. Good to catch up. Yeah. Nice to nice to make acquaintance again, JP, for sure.

Jon Paul Driver 1:17

Can you talk about the basics of the Australian export industry? And then we’ll dive a little deeper into the current market conditions. Maybe we can talk a little bit US and a little bit Australia and how those things play back and forth?

Rob Lawson 1:31

Yeah, look for the Australian export industry. Like it’s relatively small compared to the total amount of hay that’s grown in the country as a whole. You know, we operate around the 1.2 million tonnes of hay and straw goes for export every year, at a different point to certainly if a lot of our export markets confuse oat hay with alfalfa hay and the difference that they both fit in the market, especially in the developing markets that in a new market, that’s a different point. And a lot of things that people don’t realise is that oat hay or cereal hay is one cut and everything in Australia, that goes for export when I say everything is let’s say 99% of what goes from Australia is dryland farming. There’s occasional small bits of some oats or some cereal hay that may be irrigated for export. But 99% predominantly is dry dryland farming. So it’s planting in between the end of April and that maybe the first week of June, so through that period, and then harvest is occurring last week of September through to the kind of middle of November is pretty much the period and it doesn’t really matter whether we’re talking about the three main hay growing states in Australia are Victoria, South Australia, Western Australia, and all of them run that same cycle of planting and harvest for hay.

Jon Paul Driver 2:59

And nearly all of the exports are oaten hay or some variation of cereal hay.

Rob Lawson 3:04

Yeah, absolutely. I’d say again, probably 99% is oat hay, there is a little bit of wheat hay a little bit of barley hay, but predominantly, absolutely oat hay.

Jon Paul Driver 3:18

And the desirable characteristic is the sugar content and the structural fibre. And that gets used in livestock rations in Japan, Korea and China and several other developing countries, right?

Rob Lawson 3:30

Absolutely. Like probably the two key factors are absolutely is water soluble carbohydrate and non detergent fibre and MDF. Yep. And they’re the key players and really, oat hay is not predominantly is not fed for protein, we’re going to range between 5% and 10% protein. And 10% is absolutely the top end we probably range more between five and eight and a half percent protein something like that.

Jon Paul Driver 3:58

Now the logistics behind the industry stop me if I get this wrong. The hay’s baled in the paddock shipped into the press facility, the volume is reduced to increase the density of the bale and then put in a shipping container and export it is there much more than that?

Rob Lawson 4:16

That’s exactly it there’s a little bit more than that, like we pride ourselves on certainly in Australia in because it’s dryland farming in if somebody’s got a relationship with an exporter, and certainly here at Balco, but I think most exporters follow a similar process but certainly at Balco we inspect the paddock straight after seeding time to make sure there’s not contamination in that field and if our field managers see an issue they work with the grower to remove that potential contamination whether it be you know, a fallen tree branch or an animal carcass or a large amount of stones or something we try to work with the grower to rectify that. So after seeding but before germination. So we try to visit that that paddock or at early germination, right in that very early stage to see that the field’s clear. And then we’ll pay another visit to the field that’s dedicated to us, probably around in July, which was right in the middle of the growing and at that point, our Field Managers are looking for any weed contamination or anything that might be in the paddock. And we’ll certainly work with the grower to treat that if it’s required. But I must say most of our farmers who are long term hay growers manage that extremely well. And then the next time we see one of our guys is right around when they begin when they begin baling. So we go through, and we run a process where we core test 20% of all of the bales in a field. And then we mix a sample and from that we get a feed test representative of that whole field for what’s the quality of the hay. But more than that we also are testing for annual ryegrass toxicity, or ARGT as it’s known. And hay is a prescribed product for export. Really what what sets it apart for that is that ARGT testing and that we must be ARGT negative for it to be able to be exported in the first place.

Jon Paul Driver 6:18

So lots of quality control is what you just said. And starting from the very earliest point.

Rob Lawson 6:24

Yeah, as early as possible, I’d say, you know, predominantly, the difference in the three states in Australia is South Australia, largely if somebody’s growing hay, they’re going to have a relationship with an exporter and they generally have it prior to seeding. And it’s probably true in Victoria and Western Australia, but maybe even more so in South Australia because there’s not a significant domestic market in South Australia. Victoria is pretty close to Australia’s largest dairy region. So there is a domestic market in Victoria as well as the export. And in Western Australia, it’s probably fair to say that there’s a group of farmers who will grow a dual purpose oat. So something that will lend itself to being a hay crop, or if the season dictates or if the grain oat grain price is high enough that maybe they’ll alternate between whether they’re going to harvest that crop or cut it for hay. So there’s kind of a small difference in each state. But for us at Balco particularly we predominantly try to have our hectares all contracted prior to or right at seeding time. And so then we have a good gauge to know that we’ve got enough hay coming in, to manage for our season ahead.

Jon Paul Driver 7:43

Without getting into any specifics around those contracts. Those are volume contracts without any price specified?

Rob Lawson 7:50

They’re pretty much a hectare based contract.

Jon Paul Driver 7:52

Oh, okay.

Rob Lawson 7:53

So not so much a volume. So it’s the hay contracts work a little bit differently to what people might be familiar with on a grain contract is that we have a hectare based contract, occasionally we cover ourselves on the top side. So you know if the yields are really high, because the worst thing that anybody can do is make hay and not be able to put it under cover. So we are making sure that you know, we might cover it on the top side. So if an average yield is this is very generally speaking buf if an average yield is 5.5 tonnes per hectare. You know, five tonnes of hectare across the states, which pretty much across the growing regions as close to that we might cover ourselves up to, you know, we can, we’ll take whatever’s out of that field up up to eight or nine tonnes to the hectare. But if it happened to have a 10 or 11 tonne looking like it’s gonna be a big yielding crop, the farmers will know then that we can take up to whatever that cap is. And then they make a choice of whether they might let some of that paddy go through and harvest it for grain or keep some additional tonnage for domestic market sales. But in the event of a drought of low rainfall conditions, there’s no penalty to the grower, we just ask them to deliver the area that they’ve contracted to us. So if that yield gets as low as three tonnes of hectare, there’s no penalty to any grower, they just deliver what came off of those hectares. And we’re flexible with them on that. So yeah.

Jon Paul Driver 9:20

Let’s dive into some export market conditions. And do you mind if I start with my perceptions and then you can kind of respond? I’m given to understand you’re just back from the states visiting El Centro and Ellensburg the kind of hay capitals of the US. And the story here has been higher interest rates driving an exceptionally strong dollar, which actually hinders the exports from the US and favours Australian exports.

Rob Lawson 9:49

That’s a good thing JP.

Jon Paul Driver 9:51

Well, I mean, it depends on which side of the ocean you’re on.

Rob Lawson 9:54

Yeah, yeah, very true.

Jon Paul Driver 9:57

It’s pretty tough times here right now in the hay industry.

Yeah, on the currency like we like it when it’s trading where it is, you know, it’s kind of mid 60s Australian dollar against the US, I genuinely believe, probably a fair currency is something closer to 75. You know, where everybody works in, there’s a space where it can work for everybody when it when it operates in that. But, you know, with that the market has a lot of don’t worry all of our export customers doesn’t matter which country, they all track US dollar exchange rate very closely, and the price does fluctuate depending on where that trades at?

Well, I could tell you that in 2021, we had a terrible drought. And we went into our 2022 season with exceptionally high prices. Our exporters were exceptionally competitive, going out and buying a lot of inventory and writing price and volume contracts like they were buying this stack of hay, and then the dollar strengthened. And that hay, there’s still 2022 hay inventory sitting around here. That’s I mean, it’s probably coming to the end of its exportable life. And the nature of the relationships between the growers and exporters is tough. It’s a tough situation here. But again, that favours Australian exports, and I’ll let you take it from there.

Rob Lawson 11:25

Well, it really is. And we watched what happened last year, that 2023, last half of 2023, you know, in the export markets, which was, you know, we saw, you know, export prices, particularly alfalfa, you know, changed dramatically. And not only was there hay left in the US, but I visited Korea, Japan and China multiple times last year, and particularly more so in China, maybe in the other countries, but we saw hay of many brands sitting in warehouses, where wholesalers had purchased hay, the price had crashed, had dropped. And so, you know, there was wholesalers in China who were holding product, hoping that the price would return before they sell it. So they don’t crystallise their loss. And so yeah, the whole market and absolutely, I understand the the American grower, and particularly for the American exporter, who’d taken a position on hay, almost unprecedented times and really challenging, yep really challenging.

Jon Paul Driver 12:33

How does that play out for the grower in Australia?

Rob Lawson 12:36

I think for the grower in Australia, we had a period where there was some issues during the COVID period where factory registrations into China where there was, you know, 23 out of 26 registered establishments in Australia, their factory renewal came up at the same point in time, they didn’t get renewed immediately. In China, there was a period of maybe around 18 months to two years where those factory renewals were waiting. And it was due to you know, just a delay through the COVID period and whatever had happened there. But there was a there was a hold up they weren’t renewed. And so the Australian market kind of lost some space that they’d got comfortable with and got used to as a whole. And then there was some work done to develop some newer markets. And then in October last year, the access to the China market was restored to all of the registered establishments in Australia. And so that’s proved it’s worked really well for the Australian export market because we also in the previous year 2022 harvest particularly in South Australia, Victoria, a huge amount of rain all through harvest, a lot of damaged hay that didn’t even make it into a bale, it was so severely damaged. I had, you know, six inches or 150 millimetres of rain on it some cases. So we were … that the market was really in recovery phase. But fortunately, in October, November 23, we had quite good haymaking weather in every state. So we’ve got a range of you know, mid to high grade hays, probably through Australia right now and then coinciding that with the with the restoration of the you know, the China market has set things up to be a relatively good space for the Australian export market. You know, couple that with a mid 60s dollar it’s it’s put the Australian market into a decent spot. I would say the right to that there was I think the dairy industry globally is under pressure right at the moment. And so whilst the demand is there, the ability to pay really high prices is it’s not existent at the moment. So I think there’s a rationalisation happening in the dairy industry and a cow numbers are settling in many of the export countries changing as in reducing when I say changing and I think we’re kind of waiting for that to level out and see what happens. And my guess is purely my own opinion. But my guess is it’ll take most of 2024 for that to settle. And I think as we enter into 2025, then we’ll know what the new normal will look like.

Jon Paul Driver 15:18

I’m watching our exporters. I like the the term crystallised losses, I would say realised losses. I’m watching our exporters realise their losses on those positions that they took. And hey, there’s also traders in Japan and South Korea and China, across the board that are also in the process of realising those losses. Is that correct?

Rob Lawson 15:39

Absolutely they are. Absolutely they are.

Jon Paul Driver 15:40

And that makes it that that doesn’t make it a great place for you to settle into even if you have a favourable exchange rate and high quality product.

Rob Lawson 15:49

Yeah, absolutely. And, and you are 100% Right, you talk about realising I guess, just this the back to that play on words. JP, on the crystallises, I think, you know, because we’ve all been in that spot where you take a position on something, you know that it’s there, and so you realise that it’s there, but actually the day you sell it is when it becomes your crystalline, you know, my term you know crystalise, it was rock solid. Yes. Yeah. Yes. But yeah, everything you just said is absolutely correct. Like that, and so people are wary everywhere I think you know, in the market because there aren’t you know, there’s equally as a saying the dairy farmers facing uncertainty as well as things are settling and.

Jon Paul Driver 16:31

And that dairy comment is ubiquitous, whether it’s the States, Australia is going okay, on their milk price. Canada doesn’t count because of their quota system. But then you get to Asia, their dairies, and especially China and Japan, are not profitable. They’re going through that right sizing process.

Rob Lawson 16:49

They definitely, Yep, absolutely. Part of that is them, then really putting extra effort in getting their rations right. So that they are producing, you know, quality milk at the least cost price that they can.

Jon Paul Driver 17:05

Yeah, absolutely. Now, there’s there’s a little bit of interplay between the Northwest Timothy world that I live in, and the Australian oaten hay, I’m seeing now that this is leading into what you think for the future for the next year, as your growers are just starting to make planting decisions? As I’m looking at our Timothy market, there’s not a lot of excitement to maintain Timothy stands in our neck of the woods. They can rotate out to dry edible beans or silage corn or there’s there’s lots of different outputs and naturally into potatoes. There’s lots of different options in our market and to look at two years worth of hay inventory. And to come back to Timothy is just plain unappetising. I think there’s probably like, we’re right sizing. And I think we’re probably going to overcorrect and not produce quite enough Timothy, I think that helps the whole market clear.

Rob Lawson 18:08

Definitely like so. Australian. Absolutely. What are you saying is right, like so oat hay, does compete for a similar space in the ration as Timothy or Sudan. Really they both fed for fibre predominantly, certainly from the States, you know, only the last couple of weeks, like seem to be a very large push of Sudan is going is down, you know, plantings of Sudan are going to be down, I guess the take and it was a very small sample size probably I probably visited eight exporters I guess. Eight or nine, and but they are no one really spoke about Timothy hectares being reduced. A lot of them thought that would be similar, or the guys that I spoke about, but they everybody was talking about alfalfa hectares going up. And that was largely around, you know, because they can fit a space in the domestic market as well as the export market pretty comfortably. As far as in Australia, we’re seeing fairly consistently, early feedback for us is I think, plantings of oat hay in Australia will be consistent. I don’t think we’re going to see any reduction. There might be a slight increase, but it’s going to be fairly, you know, going fairly, fairly well travelling as normal. That’s that’s what we’re getting back from our growers, like, if anything slightly increased, but not I’m not talking about a big push upwards. I’m saying, yeah, maintaining the status quo with a slight increase.

Jon Paul Driver 19:38

The price application there is assuming there’s no change in exchange rates. It’s been relatively stable, that mid 60s the exchange rate between the US dollar and Japanese yen for example has been stable but at a at a terrible rate for exports. That seems to suggest stability and demand for Australian producers is that…?

Rob Lawson 20:05

That’s what we’re hoping. Yeah, definitely that was just suggesting like, and I’m, you know, a couple of our Japan based customers are feeling as though the yen may strengthen a bit against the US dollar in the next couple of months. You know, if that happens that should help their affordability a little bit as well.

Jon Paul Driver 20:24

So some cautious optimism in the Australian oaten hay space.

Rob Lawson 20:30

That would be that would be very fair to say, yeah, that’s, that would be where I’m sitting. Like, if I was more confident about the global dairy space, you would probably hear some optimism, some straight out optimism, but because of not really knowing where that dairy space will settle. Absolutely, it’s cautious optimism, like wanting to feel good about it. But not wanting to let myself well let ourselves do that just yet. Because there is still those unknowns. And of course, when you’re dry, when you’re talking about dryland farming, everything’s always open to what are the weather conditions? What? That’s exactly right. What’s the weather conditions going to do?

Jon Paul Driver 21:12

It’s either up or it’s down? Absolutely, absolutely. Yeah, I play in the dryland Timothy space. So I’m well aware of what zero yield looks like, and followed the next year by, you know, 5-10 to the acre, maybe one of those 10. Let’s see here, that’d be the one of those 10 or 11 tonne to the hectare crops.

Rob Lawson 21:32

Hectare crops. Yeah.

Jon Paul Driver 21:35

From zero to 10, from one year to the next, I’m familiar with the concept.

Rob Lawson 21:41

Fully understand, yeah.

Jon Paul Driver 21:44

Oaten hay in relation to other crops. How’s that balance look?

Rob Lawson 21:48

So typically, for us, everyone’s different, everyone has something slightly different. But as a general rule, I normally explain that our farmers are probably put around 20% of their farm into if they’re a regular hay grower, it’s probably around 20% of their farm will be in hay. And typically, in Australia, they are growing, you know, wheat, barley, canola. And then they’ll have a legume of some kind, whether it’s peas, beans, or lentils, particularly South Australia, Victoria, they grow lentils, the soil type doesn’t really lend itself to grow lentils in Western Australia so much. But often in Western Australia, they’ll be growing lupins in that crop. And so for us, it’s really important that we provide a hay price to a grower that is relative to the return they might be getting on wheat, for example, you know, a gross margin per hectare kind of return. And so we’re always very aware of not only what’s happening in the export market, but then also what are the you know what, what happens for a grower because I certainly openly talk to our customers about, we need to make sure that oat hay is competitive with the other returns for the growers, because there’s got to be an incentive for the grower to keeping that in their rotation, I think it’s probably true to say there’s some agronomic benefits to growing hay, but that can’t be on its own, it’s got to be returned to the pocket as well, like just has to be, and it’s got to stand up against the other commodities. That is something that we are constantly looking at and working through. And the other thing that I’m a massive believer in is that in every supply chain, everybody has to be able to make a dollar, who plays an important role in that supply chain. And as soon as someone in that supply chain makes a disproportionate profit, you’re setting up for that supply chain to break because people will just give up, they’ll know that someone’s making a disproportionate profit. And that will bring about the reason that it will fail. And that’s whether it happens to be a farmer, a transport operator, you know, an exporter or or a customer at the other end, everybody’s has to be able to make a reasonable profit on the way through and then that that’s how supply chains last for a long time.

Jon Paul Driver 24:11

I like that. There’s a theme of stability in there.

Rob Lawson 24:15

Absolutely, there isn’t so and sure there’s times where somebody will for a season might, you know, have a better year than the last year and all of those things. That’s all part of that cyclical mix. But if someone for a sustained period is making a disproportional profit, you guarantee that within a year or two that supply chain won’t be there.

Jon Paul Driver 24:36

Yeah, absolutely.

Rob Lawson 24:37

We are starting to see that shipping rates are, you know, probably coming back to normal. You know, we certainly and I think that wasn’t just exclusive to Australia but you know, shipping rates during COVID hit some crazy levels and challenges to get containers and do all of those things. And we are seeing it started to happen during the last half of 2023. And it’s probably still continuing now, where shipping rates, they’re not back yet to pre-COVID levels, but they’re heading back into a much more settled environment, which probably is also a reason for that quiet confidence from my end, you know, that cautious optimism, because obviously, that’s a contributing factor as well, to see those shipping rates, you know, coming back into more pre-COVID levels. Then, as I said, I’ll stress they’re not at pre-COVID levels. They’re still higher, but they’re heading in that direction.

Jon Paul Driver 25:38

Some different market characteristics on shipping containers than I’m used to.

Rob Lawson 25:44

That’s very real. Yes.

Jon Paul Driver 25:46

You mean, you can’t get containers to go to Guangzhou for 500 bucks right now? Ours are coming. So we came down and crashed, and then we’ve come back up slightly.

Rob Lawson 26:02

So you’re rising back up a little bit yeah, we’re probably still from Australia, we’re probably still coming down a bit like I joke with people and say, the problem for us in Australia is we’re not on the way to anywhere. Right? Like it’s a very specific if somebody’s doing a call here, you know, we’re talking about a population of, you know, 26 million people, 25 million people, very, very export focused, you know, our shipping. And yeah, and we’re really not on the way to anywhere, so. So it’s very purposeful. I think we, you know, when that when the tail was wagging, on pricing or shipping, we probably, you know, might be the last to see the benefits at times.

Jon Paul Driver 26:49

One last question on interest rates. I don’t follow the RBA, maybe as close as I should. I do follow our Federal Reserve, and they’re talking about leaving our interest rates stable. For now. What’s the RBA looking like?

Rob Lawson 27:04

The most recent meeting, there was no change. It’s very probably the commentators are a little bit mixed. But I think we’re probably at the level where I’m hearing some commentary that saying we might see, you know, just a quarter of a percent or something, either way, but some guys are saying it may go up, some guys are saying it may come down. But again, the general commentary is that if we get through to the end of of 24, without a lot of change, it’s likely we might see some reductions coming back in interest rates in Australia. But right now, I think, for the next, you know, three quarters still to play in Australia, I don’t think there’s gonna be a dramatic change. And it certainly doesn’t matter what I think that’s the commentary on writing is that from people who do know, there’s probably not going to be a lot of change. Yeah.

Jon Paul Driver 27:51

Rob, I really want to say thank you for your commentary today. What I’m taking away is cautious optimism in the Australian oaten hay export market, with a tone of stability.

Rob Lawson 28:03

I’d say that’s very fair JP like that, that is where I’m sitting like I and I certainly have solid hopes and solid confidence in the in the future of the industry. But do I think it’s going to take a right turn upwards, you know, into flight. I don’t think that’s a reality, but I do think solid steady opportunity to build exists in Australia for sure.

Jon Paul Driver 28:28

This podcast is proudly presented by Feed Central. Stay tuned in for more episodes coming up.