Australia needs to continue to reform its export grain supply chains to remain competitive in an increasingly challenging global grain market, according to a new report from the Australian Export Grains Innovation Centre (AEGIC).
The report, Australia’s grain supply chains: costs, risks and opportunities, found that despite major investments to improve efficiency in Australian supply chains since 2014, costs to users have only slightly decreased or remained stable.
AEGIC Chief Economist Professor Ross Kingwell said the costs of Australia’s supply chains and grain production were high in comparison to most competitors (except Canada, where costs were higher due to long transport distances).
“Supply chain costs are consistently 30-35% of the total cost of grain production in Australia and this percentage is similar across competitor countries,” he said.
“Even so, these competitors – such as Ukraine, Russia and Argentina – are benefiting from lower labour costs and increased economics of scale due to large production increases.
“In Australia, overall supply chain costs have either fallen slightly or stayed steady. It is important to note there are differences between Australian states. (Note: see regional summary below).
“Decreases in the costs of some components of supply chains, for example freight, have been offset by increases in the cost of others, such as ports. The creation of new port facilities has created more flexibility for exporters.”
Prof Kingwell said action should be taken to ensure Australian grain stays competitive.
“Australian grain needs to remain attractive to international buyers, therefore it needs to remain affordable and be fit for purpose with the characteristics required or desired by end-users,” he said.
“Australia’s grain industry will increasingly need to concentrate on exporting to premium-paying nearby markets and delivering high quality wheat with characteristics not easily or cheaply replicated by competitors.”
The challenge from low-cost producers such as Ukraine, Russia and Argentina is unlikely to dissipate, according to Prof Kingwell.
“Significant investments are underway in these countries that will further challenge the competitiveness of the Australian industry,” he said.
“AEGIC’s report identifies important areas of reform that are likely to produce enduring benefits for Australia’s grain supply chains.”
AEGIC’s recommendations (see report or fact sheet for full version)
Ensure least-cost grain paths are developed and maintained by enhancing planning and investment in roads and preventing future conflict with urban development.
Align grain breeding, classification, assessment and grain production to support the export of Australian wheat to differentiated, premium markets and meet customer requirements.
Ensure there are sufficient incentives for supply chain operators to commit to R&D investment to improve the cost-efficiency of supply chains.
Supply chain owners should consider making the basis of component charges more transparent to increase confidence in supply chains.
Further region-specific information to be attributed to AEGIC Chief Economist Professor Ross Kingwell
- On-farm storage is increasing in the eastern states and is changing the demand for upcountry commercial storage of grain. On-farm storage allows growers flexibility in marketing their grain and the ability to manage the risk of drought for livestock enterprises. However, on-farm storage is often more expensive than commercial storage, thereby adding to the cost of supply chains.
- The larger domestic market in the eastern states makes the network used for transporting grain complex and multidirectional when compared to port-based grain catchments in WA and SA. Coordinated long-term planning for high-capacity freight corridors to avoid conflict with urban development will be an important ongoing requirement. Infrastructure planning and supply chain investment on the east coast is challenging due to the complexity of the network.
- Compared with 2012/13, freight rates have decreased by about 14 per cent in real terms over this period (GrainCorp export direct execution, adjusted for inflation to 2017 equivalent prices). This is despite GrainCorp dealing with large seasonal variations in grain production, as evidenced this year when drought has emerged.
- Viterra’s transport costs have steadily declined over the past five years and there are significant differences between routes.
- Freight rates (Viterra Export Select) have decreased by about 15 per cent in real terms since 2012/13, the greatest reduction in all jurisdictions.
- Viterra attracts grain to key sites through lower transport pricing. This enables logistical efficiencies that reduce operating costs at these preferred sites.
- Road transport rates are higher in the eastern region than in the western region for the equivalent journey. The reasons for the higher road rates are complex and are related to smaller truck sizes, a greater demand for trucking services and the requirement to pass through the Adelaide Hills on some routes.
- Viterra, part of Glencore Agriculture, currently provides 90 per cent of the state’s port export capacity and the majority of its grain receival, storage and transport capacity. Several new facilities are being proposed for SA.
- The bulk handling division of CBH owns and controls almost all the warehouse storage and port loading infrastructure in WA as well as a good proportion of the grain freight capacity.
- WA grain growers have benefited from CBH’s rebate policy, particularly in the past two years when rebates have been over $10 per tonne.
- In contrast to eastern Australia, in SA and WA there is less rationale for growers to invest in on-farm storage. This is particularly the case in WA due to CBH’s cooperative structure and the magnitude of its rebates, especially in recent years, offered to growers who use the CBH storage and handling network.
- Compared with 2012/13, charges for grain export through all WA ports have decreased. For example, in Kwinana the decrease has been 4.2 per cent. In addition, rebates in 2016 and 2017 have further reduced the real cost of CBH services, including port services borne by growers. CBH has offered rebates again in 2018.
- Nominal freight charges in 2017/18 published by CBH are on average about 3.5 per cent lower than in 2012/13. Nonetheless, this relatively small change translates to an overall reduction of about 8 per cent in the real cost of freight when inflation is considered.
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