Port of Albany
CBH Group exports wheat through its terminal at western Australia Port of Albany.
As diets evolve and demand for grains in fast-growing Asian milling markets soars, it has been easy to assume that Australia’s export industry would continue to leverage proximity and quality advantages to entrench positions of primacy. But that assumption has been challenged by a series of reports from the Australian Export Grains Innovation Centre that detail the scale of the challenge facing national grain producers from Black Sea rivals.

AEGIC detailed how Black Sea producers, led by Russia, were now successfully leveraging the use of modern technologies, low input costs and freight rates, and private and public investment in infrastructure, to boost productivity and volumes available for export (see sidebar, page 50). Moreover, further progress is expected in the future.

AEGIC’s interventions have prompted a sharp debate in Australia about the scale of the threat from the Black Sea and how best to upgrade the sector’s grain supply chain to better serve customers and maintain market shares. They also have shaken any sense of complacency about forward demand growth that may have infiltrated The Lucky Country’s agricultural stakeholders.

Leading figures in Australia’s grain sector told World Grain that exports from the Black Sea are not just a future threat to Australian wheat farmers and marketers, but a clear and present danger.

Andy Crane, chief executive officer of the CBH Group.

Andy Crane, chief executive officer of the CBH Group, said that Russian wheat traditionally had competed against Australian varieties into the Middle East and North African milling markets, but in the past three seasons also had been more competitive in Southeast Asia.

“Australian wheat is still a dependable and crucial part of every mill’s requirements,” he said. “As future wheat import demand into Southeast Asia increases, Australian market share will likely decrease as our capacity to increase production is limited.”

A spokesperson for exporter and bulk handler GrainCorp supported CBH’s assessment. He said Russian and Ukrainian wheat was already competitive against Australian exports in “near” markets such as Indonesia and other parts of Southeast Asia, mostly due to cheap ocean freight rates and the lower cost of moving grain from farm to port in the Black Sea.

Wheat Exports Australia
Peter Woods, former CEO of Wheat Exports Australia.

Peter Woods, former CEO of Wheat Exports Australia and current head of grain marketing company AvantAgri, said Black Sea wheat producers had benefited from favorable exchange rates, production costs that were around half of Australia’s, and “incredibly cheap” freight rates that had eaten into Australia’s advantage in Asian markets.

“Most importing mills will use a blend of wheat to achieve the end product’s desired qualities,” he said. “So if Russian wheat is landed cheaper, it is used to the extent that the desired dough performance will allow.”

WA Grains Group
Ray Marshall, founding and executive member of the W.A. Grains Group Inc. (State).

The high quality of Australian wheat remained a key point of difference compared to Black Sea varieties, but that was not always necessarily beneficial to growers, said Ray Marshall, founding and executive member of the W.A. Grains Group Inc. (State) and a board member of Grain Producers Australia. He said Black Sea products often were blended with Australian wheat.

“It is ironic that the higher the quality of Australian wheat, the less they require in their economic blends,” he added.

Fighting the Black Sea tide

Stakeholders told World Grain that future-proofing the competitiveness of Australia’s grain exporting sector would require major investment, both by private companies and government, as well as a reduction in bureaucracy and institutional reform.

Marshall said Australia’s high storage and handling costs had become a competitive disadvantage “because our transportation system — road and rail — is at best Third World and expensive. We also suffer from high machinery and labor costs, government red tape, stifling compliance regulations and government — federal, state and local — which has a general disregard for agriculture.

“We are simply being priced out of the global market and out of business, maybe like the Australian car industry. Western Australian growers have little capacity to keep on absorbing rising costs.”

The GrainCorp spokesperson said Australia had some of the most efficient and innovative growers in the world, but claimed they were being let down by inefficient rail infrastructure.

“Improving rail efficiency will make Australian grain more competitive on the global market,” he said. “Federal and state funding is required to upgrade the government-owned assets. There has been some encouraging progress in this area — with improvements already made to a number of areas. However, there is much more to be done to stay competitive.”

Woods said Australian regulators should encourage more investment in biotech R&D, remove restrictions to biotech grains, especially legumes and oilseeds to help the production of wheat, and assist in removing restrictions on truck sizes to allow more efficient movement of grain from farm to silo, bin or port. They also should reduce the costs and regulatory burden that hinder chemical companies when they register products in Australia.

“If a chemical is registered in the U.S., Canada or Europe, why does Australia have to redo the trials before registration?” he said.

Crane said that in the short term consistent grain quality was imperative, but this competitive advantage was being eroded as competing origins such as Russia matured.

“In the long term we need to focus on three key areas: infrastructure, integration and innovation,” he added. “Providing efficient, low cost infrastructure is key to ensuring competitiveness in the global market. Integration is also another way we can look to improve the outlook for our growers. We are competing against global grain trading houses that are integrated through the entire supply chain from growers to consumers. That’s where we need to be heading and why CBH Group has invested in Interflour and other downstream investments.

“Finally, there is a significant opportunity on the innovation front. On the one hand we are talking about traditional research and development in terms of seeds to improve yield. However, there are also innovation opportunities through technology. We know that over 80% of Australian growers are using GPS for autosteer, but the majority lack quality telecommunications to leverage such technology.”

AEGIC also took a stance on how Australian agriculture should face up to increased competition. The organization concluded that the wheat industry needed more organizational innovation to ensure its breeding, classification systems, supply infrastructure and grain promotion activity were better aligned to meet the needs of end users. More detailed information about the requirements of buyers was required to better serve customers. And higher levels of investment in farm-level innovation via R&D were also needed. Supply chain costs — which currently account for 30% of the total cost of production — also must be optimized by encouraging “key organizations” to compete and collaborate to “deliver cost-efficient” services.

“Australia faces a tide of Black Sea grain, not an immediate tidal wave,” AEGIC said. “Australia has time to respond and so should not panic. However, a status quo response will not best serve Australia’s wheat industry. Moreover, most Australian grain growers, unlike many Black Sea growers, need not be forced or panicked into selling their grain. Australian farmers benefit from effective grain storage, complemented by a range of price risk management options, so they can be more strategic about selling their grain.”

Marshall claimed the Australian — and particularly the Western Australian grains industry — had suffered from 70 years of regulated marketing whereby the system was focused on large bulk shipments.

“In short, we have only been sellers of grain, not marketers,” he added. “There is a profound difference. It is essential as an industry to become more focused on the needs and wants of our customers, including containerization — the principle of the ‘Paddock to the Plate.’ We can and must do better.”

Australia fully intends to answer the Black Sea challenge.

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AEGIC: The Black Sea threat

Two recent reports by the Australian Export Grains Innovation Centre (AEGIC) laid out the ferocious competitive challenge facing Australia’s wheat export industry from rival suppliers in the Black Sea.

Australia’s wheat exporters traditionally have competed against those from the U.S., Canada and countries in Western Europe — all producers with similar costs of production. But Black Sea exporters — Russia, Ukraine and Kazakhstan — typically operating from lower cost bases, now account for 30% of the global wheat trade and increasingly are targeting high growth markets in Africa, the Middle East and, of most concern to Australian producers, Asia.

According to AEGIC, the Black Sea suppliers have been aided by the slump in bulk shipping costs, which has reduced the importance of freight to the landed cost, and also have benefited from investment in infrastructure and better marketing and production techniques. AEGIC warned that planned upgrades to grain supply chains and farming practices would further improve quality and cost competitiveness.

Key AEGIC findings included:

• Major enhancements in Black Sea production processes and infrastructure have enriched yields and reduced logistics blockages, boosting volumes available for export.

• Russia plans to expand wheat production by 25 million tonnes over the next decade. Much of the focus will be on yield rather than grain functionality or quality, but improvements in these areas also should be expected.

• Russian grain exports, underpinned by productivity gains at farms and the upgrading of local supply chains, are projected to increase 60% from 2015 to 2030, with wheat exports expected to reach 32.5 million tonnes, up from 21.7 million tonnes last year.

• Russia is exporting more grain into Southeast Asian markets where its products have slowly gained acceptance as filler wheat. It now is targeting China and North Korea as well as North Africa.

• Ukraine’s grain growers have not fully embraced modern farming methods yet, but as they do, this will further reduce production costs and improve yields. Investments in logistics and infrastructure by European banks and grain multinationals are cutting costs and boosting export competitiveness.

• Ukraine’s wheat exports are only ranked by AEGIC as a “modest” threat to Australia’s wheat export industry at present, with exports forecast to rise 1 million tonnes by 2024 to 9.7 million tonnes. But this threat will grow as yield and supply chain cost enhancements cut FOB costs, and volume and quality advances increasingly meet the needs of Asian end users. Farmers could also divert more acreage to wheat production in the future.

• Black Sea producers have a clear labor cost advantage over other exporting nations, while other inputs such as fuel fertilizers and machinery are also available from local sources often at reduced rates. The devaluation of the Russian Ruble and Ukrainian Hryvnia also have improved competitiveness in export markets.

• Black Sea grains also benefit from a freight advantage over Australian exports into Middle East and North Africa markets. Australia has an advantage on freight into Southeast Asia. However, the slump in ocean freight rates has reduced the relative importance of freight as a percentage of the landed cost.

• Black Sea grains could in the future reduce supply chain distances by using rail services into Asia.

• Increased grain exports from the Black Sea will exacerbate price pressure on Australian exporters, which also will be hard-pressed by “North American industry organizations funded to serve their Asian grain-buying customers.” Australia’s market share will be diluted in some markets as a result. Farm-gate prices are likely to fall.