2015 Australian Grains Industry Conference

by Chris Gillies
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More than 1,000 growers, traders, and others in the supply chain gathered July 27-29 at the Australian Grains Industry Conference to network and listen to speakers discuss important topics impacting the Australian and global grain sector.

The annual event, held at Melbourne’s Grand Hyatt Hotel and hosted by Grain Trade Australia, Australian Oilseeds Federation and Pulse Australia, focused on topics such as Asian demand for Australian grains, the potential growth of the region and the importance of remaining competitive by operating an efficient supply chain.

Presenters included some of the industry’s most significant players including ANZ Banks’ Graham Hodges, GrainCorp’s Mark Palmquist and Interflour’s Greg Harvey. Each spoke of the enormous potential Asia presents Australia, in part due to the country’s reputation for producing quality grain as well as its proximity to the region.

Key points made during the session were:

85% of global population growth will occur in Asia.
40% of Australian food exports are destined for Asia.
Australia’s freight advantage has been neutralized by extremely low ocean freight rates.
Further investment and cost efficiencies in the local supply chain are needed to remain competitive.
Foreign investment is needed to make improvements to the supply chain.

Asian market and growth

The July 28 presentations commenced with a market snapshot of Asia, with Hodges, deputy chief executive officer (CEO) of ANZ Bank, discussing China’s economic performance and rising middle class. In his presentation, Hodges illustrated that spending on food would grow one and a half times from 2013 levels by 2020. While the country is expanding its agricultural production, it is constrained by limited land resources and water, and pollution problems.

Northeast Asia, Hodges said, represented approximately 32% of Australia’s grain exports including wheat, barley, sorghum, oats, rice and canola. This was followed by 29% to Southeast Asia and 17% to the Middle East.

While China may dominate in Northeast Asia, its growth will flow through to Southeast Asia and likely benefit Australia’s export prospects. Countries like Indonesia, the Philippines and Thailand will be key wheat importers where Australia will seek to maintain or increase its market share, he said.

Harvey, managing director of Interflour Holdings, presented his company’s Southeast Asian demand figures to illustrate this growth. In 2010, the combined population of Southeast Asia consumed, on average, 16 kilograms of flour per person each year. He predicts this will increase to 29 kilograms by 2020.

He said this increased demand in flour and growing population translates to over 13 million tonnes in Southeast Asia alone. Supplying this demand from Western Australia and South Australia, the origins that are typically competitive into this region, will be a challenge and require alternative sources.

Palmquist, managing director of GrainCorp, echoed this sentiment, saying that increasing demand coupled with a desire for quality grain will drive Australia’s prospects in the region.

“We’re all well aware of the twin dynamics of population growth and economic development in Asia. About 85% of global population growth over the next decade is expected to be in Asia, and the region is also expected to experience the highest growth in individual wealth – by up to A$50 trillion ($37 trillion) by 2017. That’s 11% compound growth on 2011,” Palmquist said.

This wealth will drive a switch in eating habits as people opt for more and higher quality calories. Australia’s competitive edge lies in its ability to supply a quality product rather than trying to position itself as Asia’s food bowl.

In addition to demand for cereals such as wheat, there is increasing demand for canola and, in particular, a growing appetite for canola oil, which has increased from 3 million tonnes in 2000 to 7 million tonnes today.

The live export of cattle and sheep will continue to grow despite recent market hiccups. In 2015, Asia accounted for 86% of Australia’s live cattle exports. As a result, feed grains will take up a bigger slice of the supply pie.

Australia’s advantage

Australia’s competitive advantage in Asia is not simply its geographic location but also its reputation for supplying a quality product, the skill of its grain growers, high industry standards and a sophisticated supply chain.

Australia has recently signed or is finalizing free trade agreements with significant trading partners that include Japan, South Korea and China. ANZ Bank is expecting the latter will have particular influence as new investment into agricultural investments flows in and consolidation of the supply chain occurs to create a more efficient and cost-effective system.

Buffering the advantages Australia enjoys is the removal of the long enjoyed freight advantage of A$10 per tonne when compared to North America, South America and the Black Sea. This is due to extremely low ocean freight rates the industry has experienced over the last 12 months. This should not change in the near term.

All speakers at the conference warned against complacency in assuming Australia would be the natural supplier to meet Asia’s growing demand and pointed to the need for a competitive industry and supply chain.

Reducing supply chain costs

The Australian Export Grains Innovation Centre released a report on the competitiveness of the Australian supply chain in 2014 and found supply chain costs total 30% of production costs. Some factors leading to this cost have been aging infrastructure, lack of government investment in rail and regulation of ports.

GrainCorp’s network of up-country elevators and ports make it a dominant player in eastern Australia. In 2014, the company announced it would invest A$200 million over three years to improve the supply chain and reduce costs.

“Australia must make it as cheap as possible to get grain from the country to the port and remove any unnecessary costs,” Palmquist said.

“GrainCorp estimates that in eastern Australia, rail inefficiencies make it A$10 per tonne more expensive than it should be to get a tonne of grain to port. This has translated to a significant shift of grain onto the road – around 2 million tonnes. Today, only about 50% of export grain is delivered to our ports on a train. Ten years ago this figure was 90%.”

Under the title “Project Regeneration,” the company is investing in improvements to its supply chain to increase loading speeds at up-country silos and move an additional 1 million tonnes of grain to port by rail.

The company expects the net result to be a reduction in the cost to port of A$5 per tonne.

In discussing the company’s investment, Palmquist warned that without additional improvements to state rail assets it would be difficult for the industry to make further efficiencies.

“These gains will be entirely based on our ability to cycle 40-wagon-unit trains far more rapidly between country and port. And this is where government investment becomes critical. At many sites, there is no point in GrainCorp investing if a government-owned siding remains too short to hold a unit train. Furthermore, (no investments will be made) if the condition of the branch line is so poor that we can only put a partially loaded train down the line,” Palmquist said.

To this end the New South Wales government has committed to investing over A$420 million to improve rail sidings and branch lines, which was welcomed by the company.

In addition to government investment in rail assets, GrainCorp called for additional deregulation of ports to create a more efficient environment.

“This is why GrainCorp has been seeking measured reductions in port regulation through the Ports Code exemption process. Any regulation translates into added costs and reduces the competitiveness of our grain into Asia,” Palmquist said.

On top of calls for deregulation of ports, Palmquist spoke of the need to attract foreign capital to invest in the supply chain.

“If Australia is serious about being a reliable supplier of commodities and processed foods into Asia, then we will need huge amounts of capital to be invested in our industry, to enable us to keep improving our supply chains and to stay competitive,” he said

“The reality is – whether we like it or not – the majority of this capital is going to come from outside Australia. The growth of Australian agriculture throughout its history has been highly reliant on foreign investment and this will not change.”

The federal government is considering changes to regulations governing foreign investment into agribusiness. One model being considered will require a foreign company, seeking to increase its ownership by as little as 1%, to first seek approval from the Foreign Investment Review Board. This will become particularly important as investment into Australian agriculture filters through as a result of the free trade agreements with Japan, South Korea and China (yet to be ratified).

Chris Gillies is a freelance writer based in Sydney, Australia. He may be reached at chris@jamtincopy.com.au.