19 May, 2014

Tandou

Cotton crop transforms a dry lake bed

Aerial view of the Tandou property, showing the scale of the operation. Picture: Stuart M
Aerial view of the Tandou property, showing the scale of the operation. Picture: Stuart McEvoy Source:News Corp Australia
THE fluffy fields of white cotton stretch endlessly towards the distant red sandhills as six giant green harvesting machines march relentlessly across the flat dry bed of former Lake Tandou in far southwest NSW.
Yet few Australians are aware that one of Australia’s biggest ­irrigated cotton farms is thriving amid the outback saltbush plains 100km southeast of Broken Hill, adjacent to the Darling River and fed from the Menindee Lakes water storages.
Even fewer realise that the remote Lake Tandou farm — ­labelled the most ambitious, visionary and risky irrigation project in Australia when first dreamed up in the 1980s — is today owned and run by one of Australia’s few publicly listed specialist agricultural companies, Tandou.
Or that it grows 8700ha of cotton crop annually, boasts one of the most sophisticated and modern channel irrigation systems in Australia, is as large in its 14,500ha of irrigated country as the much better known Ord River scheme in Western Australia’s Kimberley, runs its own cotton-processing gin and employs 50 permanent staff plus 30 contractors.
Tandou chief executive Guy Kingwill admits one of the most frustrating aspects of his job is trying to explain to potential investors, financiers and analysts exactly why the Lake Tandou farming operation that lies at the heart of the company’s business model is so special.
“The scale, the complexity, the strategy that underpins it all; it’s impossible to envisage or understand really until you come here,” he says.
“I try and start by saying that it’s not really a farm but a factory, an agricultural business on an industrial scale, where timing is everything but when, if we get it right, we do really well. But most people — until they see it for themselves — can’t get past the point of wondering how you can ever have a highly productive or profitable operation in such a remote part of the outback.”
From the air, it is easy to see why.
Outside the kidney-shaped ring of the Lake Tandou bed are caked hard clay pans, dry billabongs, the meandering, peripatetic anabranch of the Darling River with its pelican-filled lakes and creeks, and a few mobs of hardy sheep wandering the spartan, but currently grassy, pastoral plains.
Inside the ring of irrigation channels fed from nearby Lake Cawndilla, the most southern of the Menindee lakes filled by the Darling River, is the highest yielding cotton and wheat farm in Australia, which produces more clean cotton from every drop of its current 70,000-90,000 megalitres of annual irrigation water than any other Australian property, despite having an annual rainfall of less than 200mm.
But another source of Kingwill’s good-natured frustration is that Tandou is also much more than just a big cotton farm.
When Tandou first listed on the Australian Stock Exchange in 1987, after being converted in the late 1970s and early 80s by high-stakes agricultural pioneer Bob Smith from an outback pastoral lease to an irrigated horticultural and cropping farm, cotton growing was only in its infancy in ­Australia.
The public listing converted the operation into a serious, but very small, agribusiness player, with its irrigation areas able to be further developed and expanded, a cotton gin built and larger irrigated cotton and wheat crops grown on the 20,000 megalitres (or 20 billion litres) of water ­licence entitlements then owned by the company.
In the process of dealing with such large amounts of irrigation water to grow its crops, Kingwill says his company fortuitously became one of the early experts in juggling the economics of water availability and current water prices in the southern Murray-Darling Basin system against the economics of growing a big cotton crop at the Lake Tandou farm.
“We know if the cotton price gets north of $450 a bale (227kg), this is a cotton farm,” says Kingwill, happy in the knowledge that cotton prices for next year are already close to $500 a bale.
“But for four years between 2007 and 2010 when the drought was at its worst and water was scarce and expensive we grew zero crop on the whole of Tandou. Our logic was why grow cotton and get $150 profit for every megalitre of water used to produce it — plus put it all the effort of farming — when we could sell the same water allocation we owned to other farmers who needed it more for $500 per megalitre profit without having to do anything?”
It is a canny understanding of the economics of water use versus farming, plus a trading skill, that Tandou has now turned into its new business model.
Instead of remaining just a food and fibre producer, Kingwill — who has been managing director of the company since 2005 — has converted Tandou into an emerging but significant water owning and trading business, as much as a cotton company.
Tandou now owns more than 84,000 megalitres of permanent water rights across the southern half of the Murray Darling basin, making it one of the largest water holders, along with Singapore-owned Murray River almond-growing company Olam.
The water rights are sourced from various parts of the river system — including the Upper Murray, Murrumbidgee, Goulburn, lower Murray and Lower Darling.
Because water is now tradeable across the river systems, the water portfolio gives Tandou the flexibility to either choose to water its own crops, “move” the water across basins towards its Tandou farm, or sell the water when it is more profitable to do so to other farmers and water buyers.
The new focus on water has completely transformed the asset base of Tandou. Despite its current market capitalisation of $92.5 million — after a $25m capital raising completed last week to pay down debt linked to its Hay acquisitions — the company internally values its 84.5 ­gigalitres of water at $75m.
Kingwill says water assets now make up 60 per cent of Tandou’s asset base, while its land, crops and machinery at both Hay and Tandou are valued at about $50m. Company debt, before the most recent share issue, sat at $64m in March.
But the Tandou chief executive says most investors have not yet realised that Tandou now has the biggest, most actively managed water portfolio in Australia.
It trades water daily and in large amounts, with the daily trading — buying and selling of permanent water rights — as well as trading in available actual irrigation water to farmers, now generating profits for the company as great as the returns on its farming assets.
“A lot of people are scared of water trading because there are a thousand different rates and rules regulating it across different basins, but it’s an area we specialise in and understand,” says Kingwill.
“Our fundamental belief is that water is a highly undervalued asset that will only appreciate in value over time, especially if an El Nino is coming And we always have the choice to either utilise the water on our own farms or sell it depending on price; it complements our farming and is a very good business for us.”
Foreign investors appear to have caught on to Tandou’s pivotal water position ahead of locals. Its latest major shareholders, after the $25m capital raising offer, show the New York based Water Asset Management fund holding 10 per cent of Tandou.
Specialist NZ based agricultural investor, Selwyn Cushing, holds 21 per cent, while a Cushing associate and Tandou director Roger Findlay has amassed a further 13.6 per cent.
Other major investors include Australian private equity player Martin Foreman and his PF Agriculture vehicle with 8 per cent.
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