Horizons #87 – For grain markets, a loss of concentration can help

10 March, 2023

by Dr Chris Carter, Senior Economist

Our export grain industries are exposed to concentration risk, where a single policy decision could affect the whole trade.

In 2017, India purchased about 1.1 million tonnes of Australian chickpea, or 62% of Australia’s chickpea exports in that year. Only a few years later in 2022, India purchased just 0.2% (or 932 tonnes) of Australia’s chickpea exports. The huge reduction was due to India imposing in 2018 a tariff of 66% that effectively closed the market to Australian and other exporters (Figure 1). The policy change by India’s government had an immediate effect on the global chickpea trade which had left itself open to concentration risk.

A similar situation occurred in May 2020 when China imposed an 80.5% tariff on Australian barley, effectively closing its borders to Australian barley and revealing the concentration risk Australia was exposed to by being so reliant on the Chinese market.

Figure 1: Indian and global imports of chickpeas, and Australian chickpea exports to India 2002-2022. (Source: Trademap)

The unexpected loss of a principal export market often triggers a scramble to find other markets that usually are lower paying. Finding new markets is also costly, whereas expanding an existing market is less so.

Being forearmed with knowledge of which grains are most exposed to concentration risk is a useful starting point for developing an industry contingency marketing plan. One way of measuring export market concentration risk is via the Herfindahl index. In this index, a score of 100 means that one market purchases all of the product; whereas a score approaching zero means the product is evenly distributed among a vast array of markets. The Herfindahl indices for Australia’s main export grains are listed in Table 1.

Table 1: Normalised Herfindahl Indices for Australia’s main export grains.

The data in Table 1 shows that Australia’s principal export grain, wheat, has low market concentration risk. Moreover, this market concentration risk remains consistently low (i.e., the coefficient of variation for the index remains low). Canola and barley have reduced their export market concentration risk.

Following China’s imposition of tariffs on Australian barley, AEGIC has actively communicated the benefits of Australian barley to a greater range of overseas markets to try and lessen the market concentration risk for Australian barley. However, minor crops like field peas, faba beans and oats remain exposed to market concentration risk and volatility in their concentration indices.

In general, the adage of ‘not having all your eggs in one basket’ is sound advice. Reducing market concentration risk via enhanced market diversification helps underpin industry resilience. That said, some key grain export markets can be reliable, premium markets, so sending a large proportion of export volumes to those markets can be attractive, even though additional market concentration occurs. Hence, in practice, plotting a course for each export grain requires being aware of the trading reliability of each trading partner.

The key take-away is that, in general, each export grain industry needs to reduce, where possible, its concentration risk wherever and whenever that is judged necessary.

Banner image: Indian consumers shopping for chickpeas (Shutterstock)

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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.

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