Capitalising on the opportunities presented by Free Trade Agreements with Asia

Presented by Ben Smith

Partner, Minter Ellison

30 October 2014

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

The regulatory environment

• World Trade Organisation (WTO)

• Most Favoured Nation Rule

• Agriculture stalls Doha Round

• Free trade agreements (FTAs) – what are they?

• Bilateral, regional, multilateral

• Criticisms

• Gaps in coverage

• Power of bigger economies

The regulatory environment

• 7 bilateral FTAs in force

• Includes the USA, NZ and Singapore

• Japan-Australia Economic Partnership Agreement (JAEPA)

• Korea-Australia Free Trade Agreement (KAFTA)

The regulatory environment

• Multilateral negotiations – TPP, RCEP

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

JAEPA

JAEPA

• Overview

• 2nd largest trading partner; $70B two-way trade

• JAEPA – 8 July 2014

• Complimentary trade relationship

• Third arrow of ‘Abenomics’

• Good relationship - PM Abbott and PM Abe

JAEPA

JAEPA

• Agriculture and food sector

• Over $4B agricultural exports to Japan

• Beef – $1.4B

• Japan: 8% immediately; 39% to 19-23% gradual

• Dairy - $452M

• Immediate duty free quotas on cheese; elimination on lactose, yoghurt and ice-cream

• Grains – $770M

• Immediate duty-free and quota free access for wheat and barley

• Agriculture and food sector

• Sugar – $200M

• Immediate and progressive tariff removal on raw sugar

• Wine - $42M

• Japan: immediate for bulk; gradual 15% decline for bottled

• Seafood ($200M), horticulture ($111M) and processed foods ($172M)

• Rice excluded, but otherwise comprehensive

JAEPA

• Investment

• Japan 3rd largest investor – $130B in 2013

• FIRB and Australia’s foreign investment policy

• FIRB threshold increased from $248m to $1078m for non-sensitive sectors

• Agricultural land ($15m) and Agribusiness ($53m) thresholds remain

• Symbolic or real?

JAEPA

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

KAFTA

KAFTA

• Overview

• 4th largest trading partner; $30B two-way trade

• KAFTA – 8 April 2014

• 84% duty free (on entry); 99.8% (on completion)

• Core benefits similar to JAEPA

• Tariff reductions

• Greater market access

• Increase FIRB threshold

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

Future opportunities with China

• Australia’s largest trading partner - $150B in 2013 (double of Japan)

• Negotiations commenced 2005 – 21st round

• Issues

• AUS wants same agriculture outcomes as NZ

• China wants:

• Consistent $1B FIRB threshold – even for Chinese SOEs

• Chinese workers for Chinese investments

Future opportunities with China

• Opportunities from changing demographics

• Increasing prosperity of 1.35 billion population

• Increasing middle class

• Changing consumption trends – high protein diet

Future opportunities with China

• Learn from NZ-China FTA

• Dairy increased $3.7B in 2008-13 period

• NZ made significant concessions

• China largest customer; NZ largest supplier

• Food safety critical

• China FTA will help, but not a necessity

• Key driver of success = safe and healthy food

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

Taking advantage of FTA opportunities

• Keep doing what we are good at

• Produce high quality, safe and trusted food

• Maintain and improve biosecurity regime

• Leverage our competitive advantages

• Good position to expand into Asia

Taking advantage of FTA opportunities

• Challenges to realise benefits

• Complex ‘rules of origin’

• Long lead-in times

• Exclusions from coverage

• Behind the border barriers

• Lack of information

• Partnerships can help realise benefits

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

Joint ventures

• Greater benefits than M&A

• Example – Interflour

• CBH (Australia) and Salim Group (Indonesia)

• Wheat sourced in WA milled and sold in SEA

• Capability and contacts

• Access to SEA flour market

Joint ventures

• Risks in joint ventures

• Due diligence

• Incorporation or strategic alliance

• Disputes and choice of law

• Sovereign risk

Joint ventures

• Partnerships with the Government – Ord River Project

• Ongoing since 1945

• WA State Government and Kimberley Agricultural Investment (China) partnership

• Lease and development of new stage of project

• $200M investment = 50 year lease

• Future opportunities will be available

Overview

1. The regulatory environment

2. JAEPA

3. KAFTA

4. Future opportunities with China

5. Taking advantage of opportunities

6. Joint ventures

7. M&A activity

M&A Activity

• Introduction

• Opportunity to exit

• Access to capital rather than access to markets

• Port Jackson Partners Report1

• $9B capital gap now

• $600B capital for growth needed by 2050

• $400B capital for farm turnover needed by 2050

1 ANZ Insight Port Jackson Partners Limited Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand (Oct 2012)

M&A Activity

• Recent activity

• Cotton

• Sino-Japanese consortium – Cubbie Station

• Grains

• Sumitomo – Emerald Grain

• Mitsubushi – Olam Grain Australia

• Mitsui – Plum Grove

• Beef

• Santori (part of Indonesian Japfa group) – NT beef properties

M&A Activity

• Alternatives to M&A

• Innovative options

• Off-take agreements and leases - investment without ownership

• An opportunity, not a foregone conclusion

• Sumitomo Mitsui loan to Amaggi (Brazil)

Questions?