Journalist Andrew Cornell’s article in today’s Australian Financial Review Magazine "Our Next Boom" makes interesting but challenging reading and can be read here:
The “Our Next Boom” article cites the must read October 2012 joint ANZ / Port Jackson Report Issue 3 called “Greener Pastures, The Global Soft Commodity Opportunity for Australia and New Zealand” which can be read at:
and which predicts that Australian agriculture should be the next sector to cash in on the Asia-led growth. Greener Pastures estimated an additional $710B increase in Australian exports to 2050 with New Zealand also likely to double agricultural exports.
The Green Pastures Report notes that globally agricultural commodities are already enjoying the boom with one index of forty global agribusiness companies in the Boston Consulting Groups Value Creators sample showing a total annual shareholder return of 13% in 2007-2011, higher than every other industry group survey and dwarfing the S&P Global 1200 Index, which delivered just 1.4% annually (the long term historical average for equity is approximately 9%).
The “Our Next Boom” article says that the soft commodities boom is no secret and is linked to the growing wealth and development – and collateral demand for protein and calories – in the developing world and long term threats to supply.
The “Our Next Boom” article forecasts that rising incomes and changing diets in developing countries will mean that the world will have 77% more agricultural output in 2050 compared to 2070 with an expected rise with the average real prices for many agricultural products over the next decade at 20%-30% with an estimate of a requirement of $600B capital in order for Australia to take advantage of the coming food boom over the next 40 years.
The “Our Next Boom” Financial Review article also quotes packaging magnate Anthony Pratt’s recent call for Australian exporters to ramp up to feed 200 million people rather than 50 million and to use tax incentives and regulation reforms to unlock more of the nation’s agricultural and food processing potential.
The Barriers to the Boom
The graphics in Andrew Cornell’s Financial Review article start with a picture of how much more it costs to slaughter and process a cow in Australia vs America (2.4 times).
The article goes on to say that it costs 2.5 times more to slaughter a cow in Australia than in Brazil and 1.5 more than in New Zealand.
The Greener Pastures Report notes that by the mid 2000’s the average production cost for Australian beef was already double that of Argentina and Uruguay and about 20% more than Brazil while the cost of Australian wheat production was almost double that of Argentina, Russia and Ukraine.
Agribusiness analyst David McKinna is quoted as saying that the Australian competitive trading disadvantage starts with the high Australian dollar and terms of trade and foreign tariffs on Australian exports and includes high labour costs and regulation, lack of scale, higher input costs, higher OH&S costs, higher plant and equipment costs, lack of transport infrastructure, poor productivity, and a delay or adoption of technology.
McKinna identifies access to markets as the key issue noting that there is little point having a world class product if the markets are closed. McKinna calls for a reversal in the current practice of Chinese firms investing in Australia to ensure supply of product and replacing it with the concept of Australian producers establishing a relationship with Chinese firms that have Government connections to ensure market access.
Andrew Cornell observes that the domestic food market is dominated by the Coles and Woolworth’s duopoly strategy that drives a relentless push on costs to the benefit of the supermarket’s margin but not that of its suppliers. A strategy borne out in the article by Andrew Marshall in yesterday’s Financial Review “Woolies Cuts Into Beef” (a copy of which was forwarded to HuntBlog Newsletter readers) regarding the move by Woolworths to follow the recent supermarket price wars on lamb and milk by slashing the price of beef by almost 30%.
Andrew Cornell also notes that in Europe and the US the supermarket structure includes Eataly or Wholefields which favour premium products rather than every day low prices which supports niche premium producers whilst in Australia the share of competitors to Coles and Woolworths such as Leos or Harris Farms or Farmers Markets are a tiny proportion of the market.
McKinna asserts that the bargaining power of supermarkets is such that any major supermarket supplier is dependant upon a relationship “that allows the supermarket to push more costs back on the producer, like freight, and that means the producer cuts back on things like research and development and producer innovations”.
The Greener Pastures Report also slams the loss of Government and industry focus on driving competitiveness and long term growth of Australia’s agricultural section over the last decade with Australian agriculture shifting to short run thinking to deal with short term threats with emphasis on profit protection rather than investing in growth. A malaise exacerbated by the long term capital raising limitations of Australia’s current banking structure.
The Greener Pastures Report also notes that Australia have yet to reach a free trade agreement with China after 18 rounds of negotiations which were first initiated in April 2005 approximately six months after the New Zealand/China talks commenced with progress on Australian negotiations having stalled because of disagreements over Australian agriculture gaining the same level of access to Chinese markets.
The Greener Pastures Report goes on to point out that since New Zealand’s FTA with China came into force in October 2008 the growth rate of New Zealand’s agricultural exports have tripled to 38% per annum.
The Unpalatable (or Misconceived?)
Andrew Cornell also reaches conclusions that may be unpalatable to many, quoting the Productivity Commission’s finding that 20% of the most efficient broad acre farms accounted for nearly two thirds of total rural production in 2005 with the remaining 80% producing only 36% of output.
The article then goes on to suggest that those small farms, often third or fourth generation owned with run down machinery and scarcity of capital have been saved by various governments and assistance packages such as drought relief subsidies and all kinds of industry protection which in the long run don’t protect the sector or benefit tax payers.
This conclusion ignores the material contained in the Heilbron 2001 Report into Australia’s uncompetitive Government influenced costs and charges discussed in the 16 May 2013 issue of the HuntBlog Newsletter which shows that Australian livestock producers receive a fraction of the assistance and subsidies received by our overseas competitors and pay four times the amount in Government influenced costs and charges than their American counterparts.
Although to be fair, the “Our Next Boom” article does acknowledge the bucolic idyll embedded behind the agricultural protectionism of Europe and Japan which distorts global markets in the interests of protecting traditional ways of life.
Perhaps if Australian small farmers were given similar protections and subsidies as their European and US counterparts and were relieved from the crippling burden of uncompetitive costs and charges they would be in a better position to compete on the global market and produce a higher percentage of Australia’s agricultural output.
The Need for Reform
Paul Morris, the Executive Director of the Australian Bureau of Agricultural and Resource Economics and Sciences, notes that:
“if agriculture continues to do what it does now, we are probably not going to be able to take advantage of the opportunities for the future. We need to go through some transformational changes.”
The Greener Pasture’s Report and the Financial Review’s “Our Next Boom” article underscores the calls made by the Debt Roundtable Working Group, Northern Gulf Cattle Producers, the Australian Meat Producers Group and many others for establishment of a Development Bank to provide the long term “patient” finance required by Australian agriculture to engage with the “Asian Century” and the clarion call set out as far back as 2010 in the Beef’s New Direction Strategic Plan prepared by Hunt Partners for Graeme Acton’s United Beef Group 2010 industry forum in Rockhampton for:
· a more vigorous approach for relief from trade barriers for Australia’s exports,
· an increase in real cattle prices by increasing domestic and export demand for better quality beef,
· a reduction in beef industry costs by a reduction of Australia’s uncompetitive Government influenced costs and charges,
· the Reserve Bank giving greater weight to the Terms of Trade when setting cash interest rates to reduce the strength of the Australian dollar to provide the Australian industry with competitive interest rates,
· modernisation of our farming organisational structures to reduce unnecessary duplication of services and to provide a well funded voice for the agricultural sector with Government with a seamless interaction between policy setting and policy delivery to bring about the changes needed to take advantage of the opportunities for Australia’s food exports in the Asian Century.
A copy of the “Our Next Boom” Financial Review article by Andrew Cornell, Hunt Partners Beef’s New Direction Strategic Plan 2010, copies of previous HuntBlog Newsletters and links to the ANZ/Port Jackson Greener Pastures Report can be found at www.HuntBlog.com and by following the links to the documents section in the Hunt Partners website.