Focus on Australia
May 16, 2006
Although much attention is focused on the AWB’s Iraqi wheat trade scandal, the country’s agricultural economy is thriving
by Mario Sequeira
Australia is a vast and prosperous continent with a multicultural population of 20 million that is concentrated along the coastline. Much of central Australia is desert, dotted by large, sprawling cattle or sheep ranches.
The "Land Down Under" is endowed with rich natural resources. Western Australia (WA) is the largest grain producer among Australia’s six states, which also includes New South Wales (NSW), Victoria, South Australia (SA) and Queensland in the east and southeast and the island of Tasmania just off the southern tip. Two territories — the Northern Territory and the Australian Capital Territory, or Canberra — make up the rest of the country.
Australia’s economy is open, sophisticated and diverse. It has a well-educated workforce and a relatively affluent society. Air, road, rail, port and telecommunications networks are highly developed.
Successive governments have implemented reforms over the past 15 years to make the economy internationally competitive and export oriented. These reforms include the elimination of tariffs and other protective barriers, deregulation, privatization and dismantling government subsidies.
With its small population, Australian production exceeds domestic demand and most industries are heavily export-dependent. This is particularly true in agriculture, where up to 80% of production is exported.
Australia has about 130,000 farmers growing wheat, coarse grains and oilseeds and raising grazing cattle, sheep and swine. The average farm size is about 500 hectares.
Eastern and southeastern Australia enjoy a temperate climate, while the north is tropical and the "outback" is arid to semi-arid. Australia is a dry continent, with rainfall varying from 300 millimeters (mm) or less in the driest parts to 650 mm in a normal season.
During the past two decades, agricultural policies have been implemented aimed at building business and risk management skills and encouraging innovation, farm leadership and management of natural resources. In general, these goals have been achieved.
Market forces continue to drive consolidation in grain trading, storage and handling and logistics. The only anomaly in this free market landscape is grain marketing, where some form of regulation endures.
Regulation originated during World War I, when the federal and state governments created state enterprises invested with statutory buying and selling monopolies. Today, domestic marketing is fully deregulated, but national wheat export and barley export in South Australia and Western Australia lie in the hands of semiprivate monopolies.
The most controversial state-created monopoly is AWB Limited, the former Australian Wheat Board. AWB has a monopoly on wheat exports. Structural changes in the late 1990s resulted in its privatization in 2001 and the creation of a company with two types of shares – ‘A’ class for growers and ‘B’ class for investors. Growers maintain control with their rights to elect a majority of directors.
AWB created a subsidiary, AWB International, to manage exports of a 21-to 24-million-tonne wheat crop in a normal year, worth between U.S.$3 billion to U.S.$3.5 billion.
Private exports are permitted in containers and bags only. The Wheat Export Authority, established to regulate and monitor AWB International, issues licenses to private traders on an annual basis. AWB International has a veto over wheat export decisions, which it exercises frequently.
Free market advocates keep a critical eye on AWB. The company is frequently called to defend its monopoly as being the best option for growers. There have been two reviews of AWB in the past 15 years but recommended changes have been minimal.
The company is facing its most serious crisis ever over allegations it paid Saddam Hussein’s deposed Iraqi regime bribes during the United Nations’ oil-for-food program. A Royal Commission inquiring into the allegations since January has already claimed the heads of the chief executive officer and two senior executives. The inquiry is due to present its report in June.
But a greater blow to the monopoly appears to be a paper released in April by the industry’s peak body and a staunch single-desk supporter, the Grains Council of Australia, calling for change.
Major changes recommended include replacing the Wheat Export Authority with a grower-controlled body, stripping AWB of its veto over private export licenses and restructuring wheat exports into two tiers — a primary tier managed by AWB and a secondary tier for private traders of up to 2.5 million tonnes per year.
WHEAT AND FLOUR MILLING The domestic market consumes about 5 to 6 million tonnes of wheat and durum annually. Flour mills take about 2.7 million tonnes for the production of flour for human and industrial uses and for the production of durum semolina.
The stock feed industry accounts for about 2 to 3 million tonnes. The amount varies greatly depending on seasonal price differences between wheat and other substitute grains as well as livestock prices. Farmers save the remaining seed for planting.
Prior to World War II, the milling industry was made up of many small mills relying on a large export trade. After the war, the export trade collapsed as many overseas markets began producing their own flour. Mills closed and have been closing since. The number of mills has shrunk from 137 in 1956 to 28 today, with surviving mills expanding capacity in the mid-1980s.
The industry is modern, highly competitive and capital intensive with low margins. Growth has been limited to the degree the population grows, as export opportunities are limited.
There are eight flour milling companies that own the 28 mills between them. The two largest millers — Allied Mills and Weston Milling — have a mill in five of the six states. Another large miller, Manildra, operates only in NSW. There are five small milling companies in five states (NSW, Victoria, WA, SA and Queensland).
The industry’s average flour capacity is 11.5 tonnes per hour. Annual flour production has been flat for the past two years at about 2.1 million tonnes.
The Flour Millers Council of Australia says challenges facing the industry include competition for domestic grain, a decrease in the consumption of cereal products and competition from cereal-based imported foods. The council is exploring growth opportunities in niche, value-added cereal-based foods for export and additional industrial uses for flour.
LIVESTOCK AND FEED Australia has a significant livestock industry. The cattle herd is forecast to increase to 29.5 million head this year and continue increasing this decade. Cattle feedlot capacity reached a record high in 2005 at 1.1 million head.
Poultry is Australia’s second largest meat industry by volume. The industry remains domestically focused, driven by consumption and feed grain availability.
Australia’s sheep flock is estimated at more than 100 million head.
Australian coarse grain production, which includes barley, sorghum, oats, triticale and maize, compete with wheat for the energy and fiber component in compound animal feed.
The feed milling industry is modern and sophisticated with regards to animal nutrition and automation. The industry supplies the poultry, pig, cattle and sheep sectors as well as other niche industries such as alpaca and emu.
Unlike in flour milling, the feed milling industry is experiencing growth. Broiler and dairy feed demand is expanding as dairy farmers increase use of prepared feeds to supplement grazing and meet strengthening milk and export demand.
About 140 mills produce 60% (6 million tonnes) of the stock feed demand of 10 million tonnes. The largest milling group, Ridley AgriProducts, runs 24 mills and produces about 1.6 million tonnes of feed annually, according to Stock Feed Manufacturers’ Council of Australia data.
Other large groups include QAF, Ingham, Weston and Coprice. The five companies produce more than 50% of the feed, with the remainder coming from independent mills.
The mills source most of their ingredients locally. Protein sources include canola meal, cottonseed meal, meat meal, blood meal as well as peas and lupins. The only significant imports are about 300,000 tonnes of soybean meal annually from the U.S. and South America.
Capacity varies significantly from 400,000 tonnes a year in the largest mill to 5,000 tonnes per annum in small mills. Most mills operate below capacity.
Feed mills supply pelleted and mash feeds, depending on the market they are servicing. WG
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