Vertical integration with joint-venture finance: an alternative business model for the sheep industry

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An alternative business model is proposed for the Western Australian (WA) sheep industry whereby a vertically-integrated company structure is coupled with joint-venture finance, with off-take agreements at either end and effective marketing to increase profits and restore confidence of producers and consumers. 

This is a summary of the Sheep industry business model development report, commissioned by the department's Sheep Industry Business Innovation project to investigate alternative business models for the WA sheepmeat industry.

With increasing global demand for protein sources but a shrinking Western Australian (WA) sheep flock, the WA industry may not be able to meet future market demand for sheepmeat, forcing buyers to go elsewhere or to other sources of protein. The challenge for the industry is to adopt change and cut costs in the supply chain, allowing more of the retail dollar to flow back to farmers to stimulate production.

A new business model may be the solution. It would need to address the objectives of:

  • economies of scale
  • farm productivity improvement
  • capital attraction
  • new value chain design.

Why is a new business model needed for the WA sheepmeat industry?

The current industry structure is a market supply/demand model, and is based on each link of the supply chain working on a commodity basis with volume determining company profitability. Every time the product changes hands, someone adds cost that either the consumer or farmer pays. The fundamental problem of the sheepmeat industry in WA is that producers’ returns are perceived as insufficient and unsustainable, reducing production volumes and testing industry viability.

Global demand for sheepmeat is rising. There is an estimated 76% global increase in protein required in the next 35 years. Meat and Livestock Australia (MLA) forecasts growth of lamb exports of 19% and mutton of 11% for the Australian sheep industry over the next five years to 2020.

Despite demand predictions, there has been a continual decline in WA flock numbers, from a high of 38.4 million in March 1990 to an estimated 13.0 million in July 2016 with the breeding flock estimated at 7.53 million in July 2015. There are a number of factors causing this long term downward trend in flock numbers:

  • low industry confidence
  • insufficient returns – a lack of profitable contracts available
  • climate change - unreliable winter rains, more variable summer rain
  • an ageing farmer population, with an average age of 53; 25% of which are over 65
  • a low acceptance of sheep farming by the younger generation
  • average farm debt of the Australian lamb producer is approximately $600 000, limiting expansion capability
  • cropping seen as less risk, higher return, more reliable and less work.

Addressing continuity of supply of sheepmeat would benefit the WA sheepmeat industry. Where supply chain continuity is compromised, subsequent price shocks can negatively impact farming families, scare off investment capital and put industry survival and growth at risk.

Substantial growth-oriented capital is needed in Australia over the coming decades to grow agricultural exports and to support older farmers who wish to exit the sector, allowing the next generation of farmers to buy them out. However the traditional sources of finance for farmers, debt and retained earnings, are insufficient to support maximum growth potential and farm turnover (Figure 1).

Cumulative Capital Required by the Australian Agricultural Industry- by requirement, by source.
Figure 1 Cumulative capital required by the Australian agricultural industry - by requirement, by source. (Agricultural Insights Greener Pastures report issue 3, Port Jackson Partners 2012, p40)

Model development

To overcome the constraints of the current market supply/demand model, a parallel model was proposed that focused on supply and sourcing new capital. The model that emerged is a vertically-integrated company with joint-venture financing, off-take agreements at both ends and end-user product specification, designed to attract institutional investment.

Early in model development, interviews were conducted in all sectors of the industry and found that:

  • The current price and lack of long term contracts for producers in WA inhibits future production.
  • There are multiple reasons for farmers withdrawing from sheep production.
  • Young people are not being attracted to the industry.
  • Processing companies do not offer a reliable contract kill service, therefore removing independent marketing options.
  • The current ‘paddock to plate chain’ has multiple links, with each link adding complexity and cost to the final product.
  • Economies of scale achieved with broadacre cropping is hard to replicate in sheep.
  • Institutional capital is readily available for agriculture, but almost exclusively for large scale low risk organisations.
  • The concept of ‘investment readiness’ is not agreed or shared.
  • Information networks are not clear, information is often guarded.
  • A collaborative state-wide investment conduit for agricultural investments is critical.

This is in sharp contrast to the positive view that demand is greater (by 10% annually) than food product supply in the Middle East and Asia.

Initially, four business models were identified from a range of options examined and reported in 'Concepts for alternative investment and financing models to expand sheep production in Western Australia'. The models, assessed as able to address the objectives, were joint-venture finance, a vertically-integrated company model, livestock leasing and pasture development.

Each model was examined by projecting productivity and profitability over a 5-10 year period. Timelines and potential costs of implementation were also examined whilst also noting constraints and opportunities of implementing such a model.

The composite model ultimately developed, a vertically-integrated company with joint-venture finance, addresses the model objectives and is the model most likely to be commercially achievable. It includes off-take contracts with end users, and the capacity and throughput of the abattoir is determined by the end-user's requirements. The company schedules the required number of sheep to arrive each day from its own farms, contracted farmers and markets, with backup livestock volume held to cover any shortfall.

Proposed business model for the WA sheep industry: vertically integrated company
Figure 2 Proposed business model for the WA sheep industry: vertically integrated company

Supply increase and continuity of production are central to the model development.

The model incorporates:

  • a forecast demand that is robust
  • the model must guarantee reliability of supply
  • a product of superior quality will be produced
  • a superior quality product will justify a premium price
  • overseas customers are currently paying premium prices for quality products
  • the product must be safe
  • capital to develop new projects will be difficult to source.

How can the WA sheep industry fund expansion?

Industry expansion is currently limited by capital availability. A source of capital worth considering is joint-venture financing coupled with off-take agreements.

There is rapidly escalating interest from institutional and large ultra-high net worth investors in Australian agriculture. The hurdles to the successful linkage of producer and financial investor are substantial, including:

  • mismatch of investment time frame requirements
  • lack of investor readiness
  • lack of understanding and mentality between two radically different sectors: finance and farming
  • reporting and governance issues
  • opposing requirements in terms of risk and control issues
  • blockages in the supply chain.

At a time of unlimited opportunity and rising demand at the institutional levels, for the producer the current conditions are inhibiting not only investment options but also their willingness to embrace expansion and, in some cases, willingness to remain in sheep production at all.  

The challenge for the sector is to create small to mid-level investment structures that broaden the depth and width of acceptable investment so that investment can flow through to the smaller agricultural operations, allowing an accelerated take up of the many unfunded opportunities in Australian agriculture.

Australian agricultural businesses are establishing joint ventures with end users injecting capital to expand operations. For example Bindaree Beef Group and Australian Fresh Milk Holdings are agricultural businesses accessing joint-venture financing to fund expansion. Sundrop Farms attracted investor funding for sustainable truss tomato production for a 10-year off-take agreement with Coles.

What are the benefits of the vertically-integrated company model to the WA sheep industry?

By integrating the supply chain, many of the expenses incurred each time the product changes hands can be eliminated. Identifying the areas in the supply chain where more of the retail dollar can be retained is an essential step towards passing it back to farmers to grow the industry. If customer demands are consistently met, price becomes significantly less important, thus boosting profits allowing profit trickle down to producers.

The vertically-integrated model using joint-venture finance meets the objectives of economies of scale, farm productivity improvement, capital attraction and new value chain design. The vertically-integrated company structure is being used by progressive companies to reduce risk at both ends of their business and maximise returns. Existing processors are ideally placed to adopt all or parts of this collaborative model to expand and grow the WA sheepmeat industry.

The integrated structure could be modified by existing processors to fund expansion and growth. It may also be used by existing players to fund productive asset acquisition on an individual or collective basis. A collaborative approach will ensure planned growth for the industry.

However, existing processors must embrace specialist marketing to maximise returns.  A sustainable competitive advantage incorporating quality, traceability and cost efficiency is essential. Also vital for future success is a collaborative relationship up and down the supply chain. 

The vertically-integrated company model is suitable for the major Australian supermarket chains, foreign state-owned enterprises, foreign retailers or any combination of the above. It addresses the major concerns of foreign investors including sustainability, live export risks, climate change, quality and pricing issues.

Sheep leasing and perennial pastures

Promotion of sheep leasing and perennial pasture development by the vertically-integrated company may have flow-on effects for the industry. Farmer access to capital for flock expansion may come in the form of sheep leasing based on the ‘Cowbank’ model that, if applied to WA, could conserve farmer capital of almost $200 million over ten years and reduce livestock financing expenses. Cowbank funds the purchase of a dairy herd where the value of the cows comprises 20% of the total capital required for the dairy operation. Cows are owned by Cowbank and leased to the farmer over five years with monthly payments and a 20% residual payable on completion of the lease term. Cowbank is now able to attract funds at more competitive interest rates than trading accounts.

Application of the Cowbank model to the sheep industry:

  • applicable to farmers with existing self-replacing flocks wishing to rapidly expand
  • farmers select their preferred flock and identify for audit purposes
  • lease payments would have to be aligned with income i.e. shearing and lamb sales
  • the lease term would reflect the age of the flock purchased (maximum term five years)
  • a residual payment of 20% on completion of the lease term appears appropriate
  • an annual audit of the flock and replacement ewes would be required.

Perennial pastures were examined as a means to increase the productive capacity of poorer land generally unsuited to cropping, providing a local comparative advantage to pasture-based livestock enterprises in parts of WA.

Sub-tropical (C4) perennial grasses sown in the low-frost areas of the Central West and South Coast of WA could utilise low value land (unsuited to cropping) and boost pasture productivity by 300% on average (anecdotal evidence from farmers) compared to annual species. Whole farm profitability would need to be confirmed by detailed whole-farm modelling.


The vertically-integrated model using joint-venture finance meets the objectives of economies of scale, farm productivity improvement, capital attraction and new value chain design.

A financial model should be prepared to assess the financial viability of the vertically-integrated business model on a high level basis. The model would reflect the broad capital investment required and profile the timing of cash flow investment and returns to both producers and investors. This will not only demonstrate if these potential returns are higher than that returned under the existing industry structure, but will also inform if the potential returns are attractive enough to attract the required funding, from the perspective of both end-users and external investors.


Download a copy of the report


Contact information

Tamara Alexander