Australian investment needed
by Michael King
Global grain and oilseed consumption growth rates could accelerate far more quickly than many are expecting, according to one leading analyst. He believes Australia needs to upgrade its infrastructure capacity and redouble its R&D efforts if it wants to maintain a leading role in export markets.
Australia needs to heavily invest to ensure its place at the top table of grain exporters over the next two decades as demand from Asia soars. That, at least, is the view of Michael Whitehead, director of agribusiness research at banking giant ANZ.
Speaking in March to major players in the Asia Pacific grains industry at the Australian Grains Industry Conference 2014, hosted for the first time in Singapore, he predicted a growing gap between global demand and supply of grains and oilseeds in the years ahead, representing a huge opportunity for Australian growers, handlers and traders.
According to Whitehead, from 2013-30 there will be a 66% increase in the global middle class, most of them Asian, creating huge new markets for a wide range of grain products. But as with any lucrative new market, no one supplier will have everything its own way, even a producer such as Australia blessed with a geographic advantage. Serious competition will come from growers in the U.S., Canada and the Black Sea.
“The top five Asian importers account for 51% of Australia’s exports now and this market will grow moving forward,” he said. “But Australia has a number of challenges if it wants to maintain market share in these markets in the face of stiff competition. Apart from North America, this will come from the Black Sea in the Middle East and Asia due its improved quality, logistics costs advantages and yield gains.”
PRODUCTION TO SOAR
Global grain and oilseed production is expected to increase by 8% in 2013-14 to an all-time high of 2.9 billion tonnes, significantly higher than the average growth rate of 2.6% over the last 50 years. But while most analysts including the United Nations expect yield and acreage gains to easily meet rising demand in the years ahead, ANZ takes a different tack.
Based on rapid convergence consumption theory, which predicts that emerging markets will reach OECD levels of consumption far faster than previously assumed, ANZ expects demand to quickly outstrip supply over the next 16 years unless major increases in production can be achieved.
“At a conservative growth rate of 1.3%, based on forecasts by the UN’s Food and Agriculture Organization, production is expected to outpace consumption by 2.9% through to 2030,” said Whitehead. “But we expect demand to grow much faster based on our economic growth projections which are based on a combination of higher GDP growth rates across a range of economies, as well as higher uptake of foods such as meats and dairy.
“Based on a consumption growth rate of 2.6% over the next 16 years, consumption is expected to outpace production by 20%. So we see a big gap opening up over the next 16 years unless supply increases rapidly.”
According to ANZ demand growth projections, for Australia to maintain its current wheat export market share through to 2030 it will need to lift production from 25 million tonnes now to 35 million tonnes by 2030.
“To support this production growth at forecasted yield harvest area will have to increase by 40% by 2030,” Whitehead said. “This reinforces the need for better R&D to lift yields and also to look at improving farm management and water usage.”
ABARES forecasts that barley production in Australia will fall 20% to 7.7 million tonnes in 2014-15, which based on average yields will see exports down 26% to 4.7 million tonnes. But, even with a downturn for barley next year, ANZ expects barley and sorghum, Australia’s two major coarse grain crops, to exhibit strong production growth over the next five years on the back of strong export demand. This will mainly come from rising Asian beer consumption, particularly in China, and surging demand for sorghum to be used as feed, especially in the Japanese pet food industry.
“If a long-term production growth trend of 25 years is applied and Australia maintains its global share of coarse grain production, it is estimated it would need to produce 16.8 million tonnes of coarse grains in 2030,” said Whitehead.
Canola exports and production are also expected to contract in 2014-15, but if Australia is to maintain its global market share in these export markets, then Whitehead estimates 29% more land will need to be harvested by 2030 based on average yields, with exports to China forecast to double in the coming years and demand from Europe and other parts of Asia also expected to remain strong.
HUGE INVESTMENT NEEDED
Meeting these targets will require extensive reform and huge investment. Whitehead said that many small-size farms in Australia did not have the economies of scale to make sufficient returns to enable investment aimed at boosting output, while producer support from government sources was just 2.65% as a percentage of sector revenues compared to the OECD country average of 19.9%.
“Profitability of growers in Australia ranges between 0.6% and 13.4%, which highlights the importance of economies of scale,” he added.
Whitehead said U.S. and Canadian supply chain costs benefited from on-farm storage facilities and consolidated receival sites, while transportation costs to ports were also lower in North America, where the cost of moving grain 1,000 km was $10/tonne compared to A$25/tonne in Australia for less than 500 km.
“Average farm-to-bin distance in Australia is around 20 km currently, leading to a large number of receival bins,” Whitehead said. “However, efficiency can be achieved only if there is consolidation in this section of the supply chain and the number of bins are reduced.”
Low siding lengths and track axle-loads also limit train lengths and cargo weights per journey. “Grain carrying capacity by rail also varies with approximately 10,000 tonnes per load possible in the U.S. compared to 2,000 tonnes in Australia,” he said. “Also, securing freight capacity on existing grain rail systems becomes challenging for accredited exporters outside the big five of Cargill, Viterra, GrainCorp, Sumitomo and CBH during the peak season for grain exports.
“Australia’s current rail infrastructure requires large investments into maintenance and bringing it up to a competitive level with equivalents in the U.S. and Canada. Grain rail lines especially require large repairs and standardization due to the existence of different rail gauges in Australia.”
He said the Australia truck fleet also needed investment to improve efficiency and capacity, while Australian grain load ports were limited in terms of the size of vessels they could receive in comparison to the U.S. and Canada, which also usually boast faster loading rates.
“Loading capacities for port terminals can vary from around 600 tonnes per hour to 5,000 tonnes per hour in Australia, leading to congestion in ports with low capacities as trucks and/or trains have to wait for a longer time,” he said. “Investment into building fast loading and large vessel handling capacities could reduce congestion in peak season.”
Australia’s biggest supply chain advantage is, of course, its relatively close proximity to fast-growing markets in Asia. Yet this is mainly of use in Southeast Asia.
“On average, Australia has around A$10-15/tonne advantage over its western counterparts,” he said. “However, the U.S. and Canada have almost the same transit time into North Asian countries — China, Japan, Korea — compared to Australia, thereby diminishing the freight advantage. Black Sea exporters are also competitive on freight into the Middle East.”
According to Whitehead, if infrastructure shortfalls in Australia are not addressed, rival suppliers could seize Australian market share as demand for imports to Asia grows. He estimated the capital expenditure requirements needed by 2030 to create a sufficient supply chain capacity for all Australian grain exporters at around A$2 billion in both storage facilities and rail track upgrades, and a huge A$7.6 billion to boost port capacity and performance.
“Infrastructural improvements throughout the supply chain could bring down the costs of grain supply by around 29%,” he said. “Efficient infrastructure for storage facilities, rail network and ports could cut down on congestion and transit time, resulting in lower per tonne supply chain cost. This would hugely assist Australian grain in maintaining its competitive position in the international market.”
And that finance is out there, according to ANZ. Australia currently attracts 12% of the more than A$3 billion investment capital currently being made by major global agri-funds and investment banks in agricultural globally. Although this is some distance behind North America with 35%, Whitehead believes that many of the funds that are investing in farming in the U.S. and Canada are now eyeing Australia with interest.
“I think the Australian share will increase,” he said. “It’s an attractive market and I don’t think investors will be put off by ADM’s failed bid for GrainCorp, not at all. The capital is out there and it’s looking at options in agriculture.
“There are risks: the weather, of course; Free Trade Agreements can be a positive or a negative; and there is political and regulatory risk. But there is a willingness there. I just think capital needs to understand the language of agriculture and agriculture needs to understand the language of finance. It’s a growing market. Once they’re talking to each other the money will come, which is precisely what Australia needs.”
Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at: Michael@borderline.eu.com