Australia has seen a significant decrease in the number of grain receival sites as smaller sites are closed and replaced with fewer but larger and more efficient rail sites.
Photo courtesy of GrainCorp.
Photo courtesy of GrainCorp.
Aside from keeping the cost of production low, Australia’s supply chain is a key part of keeping competitive, particularly as its competitors in Canada, Russia, Ukraine, Brazil, Argentina and the United States may tap into the profitable Asian market via low sea freight rates and lower production costs.
Speaking to World Grain, Professor Ross Kingwell, chief economist at the Australian Export Grains Innovation Centre (AEGIC), said he saw two trends that impact on Australian competitiveness. The first was a significant decrease in the number of grain receival sites as smaller sites are closed and replaced with fewer but larger and more efficient rail sites.
“This trend has been seen over the last decade in Canada and the United States, and we are now seeing it here in Australia with GrainCorp and CBH adopting similar strategies,” Kingwell explained.
The shift is driven by bulk handlers wanting to create cost efficiencies by pushing larger grain volumes through a smaller network of silos. Ultimately these cost-savings may be passed to the grower as a reduction in the overall supply chain cost through lower handling and storage fees.
The counterargument, Kingwell said, was it shifted more transport cost to growers as they travel longer distances from farm to silo, and buy additional on-farm grain storage to compensate.
An increase in grain production is the second trend Kingwell noted. Australia and other export regions like the United States, Canada, the Black Sea and Russia also are increasing the amount of grain they produce. This increase in volume is pulling more tonnes through grain networks. This facilitates the trend of more grain being funneled into fewer sites.
Low-cost supply chain is ‘Vital’
In Western Australia these cost efficiencies are even more important when considering the state’s high cost of production due to its reliance on imports to supply farm inputs and machinery. David Capper, CBH’s general manager of operations, told World Grain a low-cost supply chain is vital if the state is to remain competitive.
Capper said Western Australia’s supply chain costs were some of the most competitive in the world due to the investment made by the state’s growers. He also said the cooperative business model of CBH and its mandate to deliver lower costs to growers is a contributing factor.
Capper explained that CBH takes a different starting point to measure supply chain costs.
“CBH measures from the farm gate to export terminal, not from the silo to export like other bulk handlers,” Capper said.
This is reflected in CBH’s development of its network strategy. This strategy will see the organization further invest A$750 million over five years to create more efficiencies, increase export capacity and cost savings that will be passed directly to the grower.
In developing the network strategy, Capper said CBH modeled 400,000 grower truck deliveries (each year) across 9,200 farm locations over 4 million road and rail routes into the receival network and export terminals. This was replicated over three harvests to optimize the most efficient supply chain network.
“This modelling highlighted three areas where costs are found,” he said. “The first being the cost to transport grain from the farm to the silo, the second was the cost of maintaining and operating the silo and thirdly, the cost of transferring the grain from up-country to port.”
While closures of some silos as part of the network strategy may result in an increase in cost for some individual grower deliveries, Capper told World Grain this is offset by a reduction in the cost of silo maintenance and cost to port – savings that will be passed directly to all growers through lower storage costs.
“The network strategy is not just about reducing the cost of the supply chain from the site but reducing the cost of the supply chain right back to the paddock,” Capper said.
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‘Project regeneration’
A GrainCorp worker at one of its new 'Project Regeneration' sites near West Wyalong in New South Wales.
Johns said three new sites had come online in the 2016-17 harvest and were working really well with growers delivering into them. All three sites are on rail lines so the grain will make its way to port, with growers given the option to do stock swaps against smaller sites that rely on road freight to meet domestic demand.
Additionally, larger sites were open longer hours with some open 24 hours over harvest to meet the extra demand and increase the grower’s capacity to deliver into the network. Johns said the company measures turn-around time from sample stand to exiting the site as part of its key performance indicators.
He said the changes and operation hours worked for both GrainCorp and the grower because it increased the volume of grain into the network and lowered costs. The savings were invested back into the network.
Johns said Project Regeneration represented a relatively small investment for a large efficiency gain. He also explained there were three areas where improvement could be made that would lift the efficiency of the supply chain, although not all had to be implemented or at the same time to see improvements.
“There are three ‘buckets’: rail and road loading and turn-around time, boosting the axle load weight limit on rail lines, and the standardization of rail gauges across the country,” Johns said. “If we do that, a A$10-per-tonne cost savings is possible.”
GrainCorp’s Project Regeneration cost savings, Johns said, will be reflected in higher grain prices for growers as freight cost to port is reduced by an estimated A$5 per tonne.
On top of streamlining up-country storage to optimize the flow of grain from receival point to export, ways to cut down on double handling of grain was highlighted by CBH as a way of improving efficiency of the supply chain.
CBH’s Direct to Vessel deliveries offered to growers is a way of addressing the double handling that may occur. Growers and buyers are given incentives to deliver directly to port during harvest and to buy the grain over this time. The benefit is the grower has reduced storage costs and the buyer can get the grain to export markets quicker.
The improvements also implemented by CBH are the speed and volume of grain to export. In 2016-17 CBH offered to market 18.7 million tonnes, a 38% increase on the 13.5 million tonnes offered in 2013. Facilitating this increase is the quick movement of grain to export, with the organization reporting it broke its monthly shipping record in January by moving 1.88 million tonnes, topping the previous mark by 13%. Capper said shipping volumes had been booked for March and April and that the record should be broken twice more.
Part of the capacity increase has been a reduction in the time a vessel spends in port. Capper explained CBH considers time in port in terms of when the ship first appears on the horizon and when it sails off. In 2016 the organization achieved a turnaround time of 2.8 days, and while in the short term there may be some hiccups, the long-term trend is for a shorter time at port.
Capper said the goal behind this drive to give more capacity to the market and to have the grain available at a time when a premium can be paid. Generally, Australian grain may get a higher price at the first half of the year before others, like the Black Sea, come into the market in June onwards.
Faster train cycles
On the east coast, GrainCorp has improved its capacity by moving to a 36-hour train cycle down from 48 hours, or a 25% improvement. Similar to the west, this makes the grain available to export faster.
Kingwell confirmed this trend toward moving grain to export faster as part of his AEGIC report released in 2015. He said rail was an important strategic part to shorten the time taken to move grain from up-country to export.
Hindering this strategy was the rail lines themselves. In comparing the Australian rail network with that of North America, Kingwell said the investment dollars needed to improve track speed and weight was not there. This, he said, was due to the relative low volume of grain and a lack of diversity of commodities that use the rail network.
Government, he argues, constrained by budgets that are already stretched are unlikely to invest in rail networks. He said despite this, the rail network badly needed investment to replace aging track that cannot handle extra weight and faster trains.
Kingwell pointed to CBH’s purchase of aluminium grain wagons that could carry more grain without adding weight pressure to existing network as a good example of innovation meeting the rail challenge.
Capper told World Grain that CBH had invested A$175 million to buy locomotives and wagons in 2011-12 to improve what it can but also pointed out that some of the state’s rail network is 100 years old and restricted capacity.
Talking about the east coast rail network, Johns pointed out that there was a challenge of an aging network and six rail gauges that made it difficult to efficiently move grain between state borders. He pointed out, however, the New South Wales government and the Victorian government were both making investments in the rail network to standardize and improve rail line capacity.
On solving the lack of investment in the rail network, Kingwell pointed out that government could make investment in the grain rail network more attractive by encouraging diverse transport asset portfolios. This would spread the return across a base of assets and not rely on rail that has poor returns due to low grain volumes moving on the network.
Another area Kingwell said may improve the supply chain costs was a change in regulation relating to road and rail. The Australian Productivity Commission handed a report on the competitiveness of Australian agriculture to the federal government in November 2016. It is expected the report will make recommendations that may reduce the cost of rail but may increase the cost of road. Currently, the full cost of rail is passed to the user due to privatized networks, while the cost of the road network sits with the taxpayer.
Kingwell said Australian grain growers will produce more grain over time and this would continue to create demand for grain supply chain infrastructure assets.
