Don’t make selling the farm a three-word slogan

In handing down his preliminary decision that the previous leading bid from Dakang Australia Holdings was likely to be contrary to the national interest, Treasurer Scott Morrison cited the size and significance of the portfolio being offered as a single aggregate asset.

Yet ironically, it is the very size and spread of the landholding that ensured the success of its business model for more than a century.

So what was the secret that made iconic Australian Sir Sidney Kidman immensely rich and ultimately Australia’s largest landholder.

The fabled “cattle king” even donated fighter planes to the armed forces in World War I.

Others walked off the land as severe drought, erosion due to overstocking and the spread of the rabbit ravaged properties in the first quarter of the twentieth century.

MBA students are typically taught that diversification of assets can reduce overall risk.

Although market risk cannot be eliminated, rises and falls of asset values under different conditions can cancel out the more extreme gains and losses due to specific risks. 

Kidman did the opposite.

Apart from some breeding properties in the tropical north, he concentrated his holdings in some of Australia’s most marginal country around the Simpson Desert and Lake Eyre – the Dead Heart of Australia – as well as Queensland’s Channel Country and a large area of New South Wales west of the Darling River.

Mysterious fires destroyed Kidman’s business records in 1904 and 1924 and surviving company records appear to have disappeared not long after Kidman’s death in 1935.

But it is possible to infer Kidman’s mature business model in the year he died, with the aid of the map, which shows land which he leased, owned or co-owned.

Most notable is the fact that properties were contiguous, or at least close to each other.

They also straddled and abutted stock routes and river channels.

Closer inspection further reveals two major ‘chains’ of properties.

One ran from the Northern Territory, skirting the western edge of Lake Eyre; the other through Queensland’s intermittently bountiful Channel country and down along the New South Wales border with South Australia.

Rainfall in the arid centre of Australia is notoriously unpredictable.

Because rainfall does not occur seasonally, it cannot be predicted on an annual basis, or even on decadal or other time scales.

Kidman’s success was largely due to creating so-called “real options” in his business model; a rational investment strategy under conditions of unpredictability.

In particular, he did not fully stock his properties, with the opportunity cost of lower production of cattle representing the premium for acquiring the option. 

Ironically, Kidman was attacked in the South Australian Parliament for “wasting” the productive capacity of his pastoral leases, but his approach avoided erosion due to overstocking and it allowed movement of cattle from one property to another when the grass on stock routes had disappeared.

During widespread regional droughts, his competitors could not drove their stock to market or to agistment elsewhere and their cattle died.

A second option was created because Kidman’s cattle could ultimately be moved down the peacocked stock routes to the railhead at Cockburn in South Australia.

Rail connections to the Brisbane, Sydney, Melbourne and Adelaide markets allowed Kidman to send cattle to the markets where prices were highest, thus maximising profits.

Seven of the eight properties (excluding the apparently security-sensitive Anna Creek) currently being offered for sale by Kidman & Co in the centre of Australia were held by Sidney Kidman in 1935.

Times have changed, but the fundamentals needed for success in an area of highly unpredictable rainfall and feed, haven’t.

It is thus hardly surprising that the properties are being sold as an aggregation.

The sale of individual properties is unlikely to maximise revenue for the owners of Kidman & Co and any buyers would need to have deep pockets or suffer from extreme naivety about local conditions.

What is puzzling is the attitude of the Australian government, which has blocked purchase by the Chinese-led consortium, even though it offered a higher price than Australian bidders.

There may be a risk of overstocking and erosion by a foreign owner not familiar with Australian climatic and agricultural conditions - but this is easily addressed through regulation or education.

In any case, a long-term investor is unlikely to degrade the value of their land.

Another concern may be that the Chinese-owned operator would sell beef to its parent company in China at less than its market value.

Transfer pricing of this sort can reduce the apparent profits from local production, and hence reduce tax payments to the Australian government.

This is a valid concern, but the Australian Taxation Office already addresses such issues using a compliance assurance strategy.

We need to beware lest simplistic opposition to “selling the farm” morphs into xenophobic three-word slogans.

No amount of rhetoric about agile innovation can compensate for the economic benefits forgone by arbitrarily blocking overseas investment.