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 Boom
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.
Sorry,
ReplyDeleteI can barely stomach these sort of hallincinations by all the commentators that are out to sell the fantasy.
To me - this is akin to a pimp blowing on about the future needs and expansion of his flock- promising more and more tricks for even less to satisfy the masses. Great for everyone BUT the ones providing the goods.
Time we all put the shutters up till we are appreciated -I say!