9 – Why do supply chain costs matter?

14 August, 2017

Farmers are mostly interested in things within the farm-gate, not beyond the farm in supply chains. It’s the farm asset that is sold or passed on to the next generation – not the supply chain. Farm management is a farmer’s core expertise and the focus of their energy. Most farmers have enough issues to deal with at the farm level, so devoting scarce time and energy to things beyond the farm is a tall order. It’s difficult enough staying abreast of new technologies, new machinery, new varieties, weed and pest management, et cetera.  Besides, how many farmers have the time and power to influence supply chain costs?

Yet, in a business sense, supply chain costs do greatly affect farmers, particularly those engaged in grain export. If you produce a generic quality of grain for export then the world price of that grain ultimately determines your farm-gate price. In this context, the more expensive your supply chain costs, the lower your farm-gate price. The chart below shows the various steps and costs in handling grain from the farm to its export market destination.

In most countries, supply chain costs are generally the single largest cost item for a grain producer in a typical year (click here). For example, in Canada, where the journey of grain from farm to port is up to 1200km, the supply chain costs form approximately 43% of the FOB price (see page 36, click here). Even in Australia, supply chain costs for wheat travelling 200 km from farm to port, start at A$60–75/t, and comprise 35% of the FOB price.

Generally speaking, lower supply chain costs tend to open up more opportunities, which can extend to more distant markets. This diversifies sources of revenue, thereby reducing concentration risk, as well as exposing our grain to a broader range of markets through increased competitiveness.

Moreover, any lasting reduction in a commodity’s supply chain costs can increase the relative profitability of producing that commodity at the farm-level. Such a stimulus in relative profitability encourages farmers to produce even more of the commodity, further boosting grain sales.  Extra volumes of grain production can also further lower supply chain costs, as unit handling costs are typically a function of the volume of grain that passes through the supply chain in question.

So, supply chain costs do matter. They affect farm profitability, export earnings and market risk.

AEGIC is currently reviewing grain supply chain costs in a range of grain-growing regions of Australia and our findings will be released in coming months. Also the Essential Services Commission of South Australia is currently conducting an inquiry is to determine the appropriateness of the costs that underpin the South Australian bulk grain supply chain. See ECOSA

A supply chain provides key services to farmers. The services include grain receival, grain assessment, storage, transport and shipping. Australia’s grain supply chains accommodate different types of grain (e.g. cereals, oilseeds, pulses) and different qualities of grain (e.g. APH wheat, malting barley). The more types and qualities of grain supported, however, the greater the required investment in supply chain infrastructure.  Thus, the expected benefits of diversifying our crop mix needs to be balanced against the added cost of constructing, maintaining and operating supply chains that support such diversification.

It’s widely acknowledged that Australia is no longer a low-cost supplier of grain, in part due to its supply chain costs. Hence Australia’s future lies in producing grain types underpinned by characteristics that provide functionality, consistency, reliability and food safety, for which end-users will pay a premium.

We are currently in the process of updating our 2014 report,  ‘The cost of Australia’s bulk grain export supply chains – An information paper‘ and if you would like to get in contact regarding this update, please drop us an email.

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