by Professor Ross Kingwell – AEGIC Chief Economist.
Key message: Loss of a major grain market like China’s barley market can trigger calls for greater market diversification and more niche markets. However, developing niche markets has pros and cons. Developing niche markets usually requires careful effort.
The word “niche” comes from the French word “nicher”; to make a nest. A niche market is nest-like; the receptacle for a small parcel or particular category or type of grain. Typically, niche markets are associated with price premia paid for the type, origin or mode of production of that grain. A particular variety of malt barley may be sent to a particular maltster. Wheat, certified as organic, may be purchased by a handful of food processors. Special parcels of oats may be sort out by suppliers of racehorse feed who offer price premia.
Although small markets, often underlain with a price premium, most niche markets rarely can or will only receive grain of that particular type from a particular country supplier. Despite the claims of some marketers, most classes and origins of grain are to some degree invariably substitutable; especially in the long run when buyers can seek out alternative supplies or develop new technologies to rely less on the particular characteristics of grain usually delivered to that niche market. Price premiums inevitably are limited by ease of substitution and technological innovation.
In addition, niche markets often involve sizeable transaction costs relative to the volumes and values of grain being traded. Identifying and sustaining the niche market opportunity can require significant expense of time and effort in establishing the trust and reliability of both parties in the transaction. Developing mutual dependence that underpins niche markets imposes vulnerability on both sides of the transaction. This can be an especially difficult issue for Australian suppliers whose production environment is naturally volatile. Australian grain production is subject to marked climatic variation; so the ability of Australian exporters to be reliable suppliers of consistent volumes and qualities of grain to a range of niche markets is sometimes questioned.
That said, niche markets often have desirable characteristics. They can encompass barriers to entry for possible competitors due to the transaction costs involved or due to the breeding expenses involved in trying to create a duplicate or competitive alternative. They can be a source of price premia and they are outlets for various types of grain or ways of producing grain. Accordingly they allow diversification of market exposure of Australian grain that spreads market risks.
Often a challenge for businesses who specialise in niche markets, such as container trade operators, is their vulnerability to market poaching. Explaining further, there can come a point in time when growth in the size or value of a niche market occurs. Traders and marketers who regularly monitor and gather intelligence on trade flows will identify when market growth occurs. At some stage a larger trader or marketer will be attracted by the potential reward of capturing some market share or value of a growing niche market. In that circumstance when the barrier to entry is breached, smaller traders become a casualty of commercial competition; adding to the risks these smaller players face in developing and servicing niche markets.
HORIZONS: the AEGIC Economics and Market Insights blog
Expert grains industry analysis and commentary from AEGIC’s Economics and Market Insight Team on a range of big-picture topics that affect Australia’s export grains sector.