The Evolving Hay Market: a discussion with Pat Guerin

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’re joined by Pat Guerin with an introduction from Tim Ford. Tim, take it away.

Tim Ford 0:19
Welcome to the podcast, Pat. As always, it’s wonderful to see you and welcome to our podcast. Thanks Tim. Pat has a long career in the hay sector in South Australia predominantly. Pat will dig into this a little bit more later. I first met Pat, probably in 2002-2003, when he was manager of one of the large hay export factories here in South Australia, in more recent times has worked for Balco. And Pat has one of the strongest technical minds in our industry. Not only Pat, Pat’s very well versed in the agronomic side of the industry, but also has a unique skill set and he’s also versed in the animal nutrition side of our industry. So I’ll hand over to Jon Paul Driver and Pat Guerin, welcome, gentlemen, to our podcasts.

Jon Paul Driver 1:13
All right, Pat, you’re giving us an overview of your career. You said that you started with broadacre farming. Where was that at?

Pat Guerin 1:22
Sure. I’ve been in South Australia. My parents had a broadacre farm at Pinery. So that’s just that’s just north of Adelaide about 80 kilometres north of Adelaide and my wife’s family have a farming operation in Western Australia. So if you pinpoint Esperance and and Perth than about midpoint between those two, so about that distance is about 800 Ks, the farm is in the middle of that, and still today, I own that property. And my wife and I used to farm their broadacre farming some years ago.

Jon Paul Driver 1:56
Now, Tim mentioned your background in animal nutrition, and some more of the technical things. Did you start out as a nutritionist?

Pat Guerin 2:04
Sure, that was in the very early days when I studied at Adelaide University and went on to be in the tech team for one of the largest stock feed companies, Milling Industries, which today would have been owned by Ridley’s so that was my starting point. Yep.

Jon Paul Driver 2:22
And then how did you get into the hay export world.

Speaker 1 2:26
I moved to Milne Feeds in Western Australia, which is a stock feed company. And from there, I was involved there on a contract for a short term, I think that was a three year length, and then moved on to project managing the build of a stock feed pelleting operation north of Perth. At that stage, I became friends with Peter Mackie. And he was starting in the export fodder industry at that stage on quite a small scale. So we would brainstorm things. He loved what we did in the automation of the feed mill. And long story short that evolved in Peter Mackie funding the development of Gilmac. And the first venture there was the hay operation based in South Australia at Balaklava. And subsequent to that a larger national footprint. And still today, Gilmac would be the company that exports the largest volume from Australia.

Jon Paul Driver 2:26
Let’s steer over towards our topic for the day of R&D structures. Because Australia has a very unique structure that supports industry research. I absolutely love this because we’re struggling mightily in the States.

Speaker 1 3:38
So I look at it from… and I live in that world. But I look at it that we’ve still got massive opportunities to get more value out of research and development investments.

Jon Paul Driver 3:50
Let’s talk about some of the organisational bodies that exist. What are those bodies in Australia and just assume that I know nothing.

Speaker 1 4:00
AgriFutures is the peak body. It’s a government division. And it looks after the R&D investments for emerging industries. So in principle, small industries and the export fodder industry fits under that banner. There’s I think something like 16 different industries that are covered under the AgriFutures banner. So they basically project manage the R,D&E strategic plan for the industry. In parallel with that, one of the reasons that we fit into that, we being the export fodder industry, fit into that mantle is because we have a mandatory levy that’s based on all tonnes exported from the country contribute the AgriFutures body or the advisory section for the export fodder industry looks after that investment. At present, it’s based on 50 cents a tonne for every tonne of fodder that’s exported with about 1.2-1.4 million tonnes of fodder being exported at present.

Jon Paul Driver 5:08
Gives you a half a million dollars a year to play with.

Pat Guerin 5:10
Yeah, Aussie dollars well, it’s probably 600-700k by two now, that’s crude extension. But the government contribution is typically… there’s a model there that’s got a lot of detail about it, but it’s typically representing topping that up another 100%. So 600k becomes 1.2 million K per annum. That’s not including the likes of endpoint royalty that come out of things like plant variety release systems. And in Australia, we we have the ability or the right to be able to collect levies for 20 years from the point of release until the 20 year period lapses. So there becomes a bit of a revenue stream that can feed back into that plant breeding process.

Jon Paul Driver 6:00
So you’re talking about intellectual property rights on the plant breeding, and we have that same structure in the states. Who owns that IP?

Pat Guerin 6:08
It varies. So it depends on who’s been involved in that process. For example, if it was plant varieties that came out of a AgriFutures funded project, then there would be the plant breeder would be involved. And that’s typically a government institution. But at present, the primary plant breeder for oat fodder industry is Intergrain. And Intergrain is a is a privatised company, it does have ownership of Western Australian Department of Agriculture and GRDC. So the key peak body for the broadacre cropping systems.

Jon Paul Driver 6:41
So there’s some self funding mechanisms there, too. On the AgriFutures side.

Speaker 1 6:46
The owners of the IP will be determined by who’s contributed to that process. And they’ll have each… there’ll be a predetermined share of that endpoint royalty contribution. So it might be for example, if the plant breeding was done under the timeframe that AgriFutures were the principal funder, then they might be 50% owners of that IP.

Jon Paul Driver 7:09
Okay, that makes sense.

Pat Guerin 7:10
Therefore, they end up with 50% of the endpoint royalty that’s collected.

Jon Paul Driver 7:15
What’s the collection point for that endpoint royalty?

Pat Guerin 7:18
That’s actually based on when it’s exported?

Jon Paul Driver 7:21
So all of this is based around the export?

Pat Guerin 7:23
That’s right. Yes. I mean, there are other systems to capture domestically traded product use product that’s, you know, a small component.

Jon Paul Driver 7:33
I was just thinking about some of that rained on 2022 hay that had 150 mils of rain, that probably didn’t get exported.

Pat Guerin 7:42
Some of it didn’t. But a lot of it did actually get exported, and still is being exported today.

Jon Paul Driver 7:47
Did that affect the revenue streams for all of this R&D?

Pat Guerin 7:52
No, because so long as the volume is similar, the revenue is based on tonnes exported. So it’s reasonably stable. I mean, it’s linked into the industry showing a steady growth curve. So therefore, the revenue stream potentially is paralleling with that.

Jon Paul Driver 8:09
Can you take me through the incentives of the producers and the breeders in these systems that perpetuate it, the growers get a benefit, and then the breeders also get a benefit out of it, or else they wouldn’t be doing the breeding?

Pat Guerin 8:24
I think the thing I’d like to first emphasise is that the levy is on the exporter. And one of the reasons behind that is so that R&D investments can be in the whole process chain. So it’s not specifically to the benefit of the grower or indirectly to the plant breeder, it is actually investment that could be used at any stage of that process change. That is an important distinction. Now, as an example of that, is that in the earlier days, so go back 10 years ago, all of that investment was feeding back into the plant breeding programme, I’m referring to a time where before it was actually mandatory levy. So the level of collection then was much smaller. And all of that investment was going into the plant breeding programme for oat fodder. Okay, fast forward to today. The snapshot today is that investment is being transitioned from the grower perspective, the plant breeding perspective, to the other end of the process chain, to better understand what the key drivers are that predominates the contribution value of our fodder.

Jon Paul Driver 9:38
Help me understand that better.

Pat Guerin 9:40
Okay, so our investment is basically in the animal performance end of the chain so that we’re focusing on there. What are the key aspects of our cereal fodder that are most contributing to the value from an animal performance perspective?

Jon Paul Driver 9:59
You’re talking about things like fibre digestibility nutrient content, and pulling those apart, the geeky economist in me goes to a hedonic pricing model, because the price of the thing is all of the components combined. And you can kind of pull some of those values out, right.

Pat Guerin 10:16
And the detail we’re driving that to is identifying different potentially digestible fractions of fibre for example, within the plant. In your alfalfa world, for example, you predominantly have two fractions, you’ve got a stem fraction, and the leaf fraction, there’s quite a difference in those two extremes, and not too much in the middle, joining the two together, whereas in a cereal fodder world, you’ve got the fibre fraction varies, and typically it is top to bottom of the plant or bottom to the top of the plant. And then you’ve got leaf fractions in there contributing on top of that. So you actually have quite a different product. It’s fibre is ranging into digestibility from top to bottom, if you know what I mean. So it’s not two fractions, there are multi fractions in there. And the other bit where we’ve got significant investment going on in the animal performance world, is what else is in our cereal fodders. Aside from the fibre fraction, in your alfalfa world, you’ve clearly got the crude protein fraction that adds value there. So what is it that makes up a significant amount of the cereal hay fraction, and at present, you’d put it under non fibre, carbs, carbohydrates fraction, but in there, there’s a lot of detail that we’re breaking out to understand specifically, how that interfaces with contribution value to the dairy cow.

Jon Paul Driver 11:44
And in simpler terms, we’re talking about the various types of sugars that are contained within that plant, and then how they’re metabolised or how that converts to milk, that thought process, right?

Pat Guerin 11:55
That’s right. Following on from that, how that interfaces with different diets. So you know, you can put the same forage into different diets and get very different performance outcomes. So how does that all interface together?

Jon Paul Driver 12:08
What are some of the challenges with the current state of the R&D?

Pat Guerin 12:12
In Australia, we’ve seen very significant gains in productivity within the grain industry. So one of the challenges that we’re faced with, the old adage was that grain yield was about half of the biomass yield of a hay crop. So a cereal hay crop, if it was typically five tonne to the hectare, then a wheat or barley grain crop would be correspondingly, would be producing two and a half tonne. The reality today is that we see grain yields that exceed well and truly five tonne to the hectare. We’ve seen in recent years, and I’m now talking, you know, probably the last 10-20 years significant increases in the productivity of the grain sector.

Jon Paul Driver 12:56
And that makes hay less competitive in crop rotations.

Speaker 1 13:00
Absolutely, absolutely. And some of the driver there is that perception of how we achieved the contributing value in our forage is to grow it on sections of the crop rotation that don’t return high gross margin levels to the grower e.g. put it into the least fertile paddock that you’ve got available, put it in last rather than early in your seeding program so that you can throttle the the yield potential of the crop. Factors like that are very directly contributing to negative gross margin or lower levels of gross margin not necessarily a loss situation but lower levels.

Jon Paul Driver 13:42
Right. And it’s all about relativity, right? Because producers are… growers are looking at as an economist, I’m obligated to ask the question, what’s the next best option? That’s what the grower is always asking themselves is what’s the next best option? Exactly? Yep. I’m just pulling up some of the work that I’ve done in the States. And we have very similar problems. In the US we have really good hay data, and it’s a perfect place to start an argument. It’s never the exact right answer. Just full disclosure. We have 100 years of yield data, the US Department of Agriculture started keeping records in 1922. And from 1922 to today, corn yields have increased by about 1200%. Now that’s the largest crop in the US is corn. Alfalfa, well, all hays somewhere around our wheat production and number three or number four, it kind of varies year to year. There’s three states that have lower alfalfa yields now than 100 years ago, and it’s the exact same problem. Correspondingly, the US loses 1,728 acres of hay ground every single day.

Pat Guerin 15:02
So our focus has been, in very recent times, actually spin that whole concept around. So we’re going to target the maximising the gross margin of the grower, and as a result of that work through, what’s the end product that we’ve achieved? Or potentially will achieve? And how do we need to manipulate or modify the system, the growing system to continue to achieve those high yields, but improve the quality of production concepts like photoperiodism, and vernalisation of your plant types, the varieties that we use in the oat and hay industry in Australia don’t have either of those characteristics inbred into them. So an opportunity for us is to focus on areas like that, as an example of may being able to achieve higher yield values in parallel with higher quality.

And I lied to you; corn yields in some states in the US have increased 1500% While alfalfa and well Arizona in particular has doubled its yield since 1922.

Unknown Speaker 16:16
So it is the same story

Jon Paul Driver 16:19
It’s the exact same problem. And there are states where the yields are lower than 100 years ago, and it boggles my mind that that’s a possibility. I do like your thought, though, and I’m going to take this and use it that it’s about the system. Yep, that’s right. That’s right. This has been wonderful. I’ve learned so much and I hope that the growers have a better understanding of the industry now. hat I really want to say thank you for your time. Cheers.

Pat Guerin 16:45
Thanks, Jon.

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’re joined again by Pat Guerin. Okay, some of the other structural challenges to the industry. What do you see out there?

Pat Guerin 0:21
Our industry has a very, it’s a small industry. And there’s a large diversity of opinion. So it’s quite difficult, quite challenging to get a consolidated view that can be taken to represent the view of the industry objectives like R&D focus points, for example, you go back to your industry to try and understand consensus of direction for something that is quite a small industry, it’s a massive task to achieve that next step. That’s a challenge. I mean, it flows through into your R&D world, for example, that plant breeding focus range might be from thin stems and green colour, right through to having very high levels of digestibility of fibre. There is a massive range of diversity in how to go about that. There’s also quite a range in that follows through the process chain into the end marketplaces, on how different exporters market their products.

Jon Paul Driver 1:30
That’s one of our great challenges. I’m relatively new to the export world. My family’s been exporting timothy since the 80s. But I’ve only done it the last three years exporting and it boggled my mind that three different exporters would come out and look at the exact same timothy stack, we have tarps, instead of sheds, and we pull the tarps up in the exact same spot and they take a flake from the exact same bale that the previous exporter cut a couple of strings on. And they gave me three different quality grades, and three different price points. That’s a bastard system.

Pat Guerin 1:30
So it’s the same here. It’s the same here. But if you think it through, each company has its procurement matrix. So whatever that is, and that varies massively there is there is no single standard in Australia, that controls that, you then parallel that or mirror that over the marketplace demands. The diversity in the marketplace, doesn’t mirror the procurement grading matrix. Because there’s a lot more diversity in that marketplace. They’re never going to be exact matches.

Jon Paul Driver 2:41
One of the best experiences that I’ve had as a hay grower, was having the Japanese buyer come out and look at the stack and take notes, right. And apparently, I’m the first grower to ever stop and ask the Japanese guy writing in Japanese and his English isn’t super good. In through a translator, we had a wonderful conversation about what he was actually looking for in the product, and why my dryland timothy was particularly valuable to him. And to your point, he liked my hay, because it had a big, thick, heavy stem. And he has customers that like big, thick, heavy stems, because they process well and in ration mixers.

Pat Guerin 3:24
I think similar scenario, it’s often said, particularly by the people that have been in the industry for a long time, that it’s the customer that’s paying the bill that you’ve got to satisfy. From a commercial perspective, I understand that. I think our priority in R&D is changing its focus from that, to actually making sure that we are also equally or more deliberately focusing on the animal performance contribution value.

Jon Paul Driver 3:54
I’m taking notes.

Pat Guerin 3:56
I think about some of the ironies that you come across is typically in our industry, you would say physically, that you’re looking for a thin stem, generally speaking, yes. So we are looking for and we ask our breeders to breed for a thin stem. So what does that mean ends up happening? Exactly like your alfalfa, the stem structure has to end up with more indigestible components in it so that it continues to stand erect.

Jon Paul Driver 4:27
Yeah, you have to have woodier structures to prevent lodging, while at the same time, it’s like wood versus steel, it has to get tougher and stronger as it gets smaller.

Pat Guerin 4:40
So there’s a conundrum going on. We’re breeding for thinner stems. But the animal performance bit says that that’s in the wrong direction, because we were increasing the indigestible component of it to prevent lodging. Absolutely. Whereas go back the other direction and say so, today for example, focus point, let’s have a look at the stem wall thickness. Because in that stem wall thickness, we can get structure that doesn’t need the lignin there.

Jon Paul Driver 5:11
A different way to accomplish the same thing. But does that address the consumer, the end users? You’re going to say yes, you’re going to say that reducing the lignin answers the animal performance question. But what about the people that are used to buying thin stems instead of thick stems, there’s an education component.

Pat Guerin 5:31
Absolutely, the RD&E so the E bit has to include the end audience as well.

So research, development, and education.

Matter of fact, sometimes people like to emphasise that by saying that it’s double E. RDⅇ education and extension.

Jon Paul Driver 5:53
That may very well I’ll make it into my talking points.

Pat Guerin 5:57
I mean, I’ve done collaborative presentations over in countries like China and excetera, very particularly in the early days with the China market with the US Grains Council. Whilst in some perspective, you might think that there’s competition for supply there from the different countries, the reality is that we’re both trying to improve… contribute to the improvement of the animal productivity.

Jon Paul Driver 6:25
That allows them to build out their industry, grow their industry and increase the size of the pie that everybody’s trying to divvy up. And focus on the size of the pie instead of the size of the slices to start with.

Pat Guerin 6:38
I like your description.

Jon Paul Driver 6:40
It’s only in the maturity of the market, that you have to fight over the size of the slice. When the pie is still growing, everybody wins.

Pat Guerin 6:47
There’s a long way to go. And of course, with the diversity of the marketplaces, the strategy there for the individual markets is going to be very different.

Jon Paul Driver 6:57
Oh, absolutely.

Pat Guerin 6:58
I mean, some, some markets are regulated, the supply and demand elasticity is going to be very different to other markets.

Jon Paul Driver 7:05
I just heard you say an economic term, do you have a background in economics? Not everybody throws around elasticities and fewer people actually know what they mean. Your example is maybe Korea where they have import limits. Sure. They have a quota structure, tiered tariff structure. I’m not exactly sure what it is, but it’s something along those lines, that supports their rice growers, right.

Pat Guerin 7:32
I think an investment for the future where we’re going with the Australian Export fodder at present is health and wellbeing it’s concepts like understanding the chemical residues in the product, the potential for mycotoxins in the product, presence of heavy metals, all in any of them are not indicators that Australia has significant issues in any of those areas, rather, giving the process chain confidence that products will contribute benefit to their health and well being.

Jon Paul Driver 8:07
I love that the exporters in Australia, call it alfalfa. And Tim beats me over the head with lucerne all the time, and how I learned it in Germany, so I say it wrong. But in the alfalfa world, as we’re talking about regenerative agriculture, and call it carbon smart farming, alfalfa is pretty favourable. In that world. It’s a perennial crop so we’re not doing annual tillage, we’re maintaining soil structure, we have a deep root that’s translocating carbon from the air down into the root structure. And we have a wonderful, wonderful story in the alfalfa world now acknowledging that I’m a timothy guy, and I have a plough and a disk, and I do all the bad things in the world. We have great stories that we can tell around our forage and I think there’s opportunity to do that better. And I’m just guessing on your end that you have similar discussion topics.

Pat Guerin 9:02
I think we’re just starting that process. It’s a long journey to go. It’s certainly on the radar screen. I mean, one of the existing AgriFutures backed projects is about carbon footprinting and developing for the industry so that for the export fodder industry a model that we should be using, rather than let individuals in the industry go off and end up with a diversity of different models.

Jon Paul Driver 9:28
Because that always works. We’ve talked through quite a few challenges. You’ve mentioned the focus on the animal performance, because that’s the end use for the product you get you have to have the animal performance. Are there any other opportunities that we didn’t talk about whether it’s machinery, cultural practices?

Pat Guerin 9:50
One of the largest contributors to lower gross margin for existing hay growers in Australia is weather damaged product and so any investment into that catchment, I think is a potential positive contributor. In our world, super conditioning has proven to be very beneficial. It reduces the distance that moisture inside the plant needs to move… travel to get out. So that bit has worked well.

Jon Paul Driver 10:22
But we still talking about like a Massey double conditioner…

Pat Guerin 10:26
And in our marketplace, grower, that would probably be the premium product a lot of growers have, your Massey.

Jon Paul Driver 10:33
Twin Max with a double conditioner, yeah, razor bar.

Pat Guerin 10:36
So the outcome of that is the windrow typically sits on the ground for six days, maybe 10 days, you know, that type of thing… still relies heavily on a temperature and humidity differential between the inside and external of the plant, there’s a risk time there that we can continue to focus on as to how we can improve contribution value there.

Jon Paul Driver 11:01
The way that I think about it, as I’m doing my budgets for the year, on my timothy, I actually go through and do a weighted average price. And I might say if, if I’m expecting a five tonne yield, I’m going to value two of those tonnes at a rained on price, and three of those tonnes at a high quality price. And that’s how I come to my revenue projections. Is I factor in a loss right from the start. In my neck of the woods. The odds of having that timothy rained on are about two in five.

Pat Guerin 11:38
I think of it as and it depends where you are in the catchment of course, but long term average, I think is about 10 or 15% weather damage that’s got a fair range in it, but obvious weather damage to excessive you know, it’s that’s the opportunity. I think that if that disappeared, because we eliminated total weather damage, and 15% of grower returns are going to be significantly improved. One of the challenges, of course, is that it can be the total crop of the year. So an individual farmer might get negligible contribution one year cash flows mightn’t be able to handle that type of diversity.

Jon Paul Driver 12:16
Yeah, anything that you can do to shorten that dry down period is certainly beneficial. And you’re thinking some more mechanical processing, like hay conditioners make a difference. The one thing that surprised me that I didn’t see you’re probably familiar with the Hay Bob style tedders. We use those a lot in timothy to mix and blend colours, but also to promote that airflow through a tall skinny windrow. And I just didn’t I just don’t see any of that. And I didn’t see any of those machines in Australia.

Pat Guerin 12:48
There’s little bits of that developing, but the negative bit on that, so that you know I talked about the conundrum of thin stem versus animal contribution value. Well, similar in this circumstance, we’re looking at the tedder rake can hasten the drying process, but it also increases the risk of losing colour. So that’s the conundrum that that’s been the reason that people haven’t been more receptive to using teddering. I think as we refocus on animal performance based contribution value, that you’ll see more inclination to use tedders and we’re seeing that today.

Jon Paul Driver 13:33
Now, I do want to draw the distinction between the tedders that spread the crop out across the ground, that do contribute to sun bleaching. Those are very common in the east coast of the US where the sun is dry and the ground is wet, and the air is wet. So they’re trying to take advantage of the sun to expose and dry as much as humanly possible as fast as possible. Or in the West. The sun is dry, the air is dry, the ground is wet. So we and our timothy fields, we try to stand those windrows up and do tall, skinny windrows to promote airflow through the windrows. So our tedders don’t spread the hay out. They just fluff the windrows up, promote that airflow through the windrows. I hope I left some of those seeds of ideas with growers as I toured around Southern New South Wales and Victoria and South Australia.

Pat Guerin 14:28
Look, I think you’re talking about an opportunity that I’m sure that we will explore.

Jon Paul Driver 14:33
Pat, thank you again for being on the podcast. It’s wonderful to have you back. Cheers.