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.

More News

05 May, 2021

The world of noodles

Australian wheat is highly valued for noodles across Asia. The Asian noodle market represents over one-third of Australia’s wheat exports! Why Australian wheat? Flour millers across Asia prefer to buy Australian wheat for noodles. The combination of excellent noodle texture and colour attributes is unique to Australian wheat. White Australian wheat results in high milling yield […]

28 April, 2021

AEGIC IS HIRING

This post is current as of April/May 2021.  AEGIC is Australia’s leading organisation for market insight, innovation and applied solutions for the grains industry. We leverage our technical know-how, market insight and innovation capabilities to find and deliver practical solutions that create value for the Australian grains industry. We are currently building our technical capacity […]

27 April, 2021

AEGIC behind the scenes: Australian wheat for Asian bread

Asian diets are changing amid strong economic growth and increasing wealth. More and more consumers are recognising the benefits and convenience of baked products. Australia is well-placed to play a positive role in this change by understanding industry requirements. AEGIC’s bread research lab helps assess Australian wheat for Asian baking to get more of it into […]

21 April, 2021

AEGIC behind the scenes: Australian wheat for Asian noodles

The Japanese udon noodle market is Australia’s most stable premium wheat market. Japanese noodle lovers know what they like when they’re tucking into a delicious bowl of udon or ramen noodles. AEGIC runs a highly-trained udon noodle sensory evaluation program with the Japanese Flour Millers Association (JFMA) to ensure new Australian wheat varieties meet Japan’s strict requirements. […]

15 April, 2021

Enhancing noodle texture and colour

Asian flour millers prefer to buy Australian wheat for noodles because of its bright, stable colour and good texture. Thanks to a landmark AEGIC research project*, we know that noodle colour, colour stability, and texture are among the most important factors that flour millers look for when buying wheat for noodles. The research found that […]

13 April, 2021

50 – The Rise of the Middle Class

02 March, 2021

Whole grain for better health

Increasing whole grain consumption represents a major opportunity and challenge for the food industry. Extensive evidence now shows the connection between whole grain consumption and reduced risk of several chronic diet-related diseases. Greater intake of whole grains in the diet leads to reduced incidence of cardiovascular diseases, gastrointestinal diseases, cancer, and diabetes. To address this […]

26 February, 2021

AGIC Asia 2021 to reach Asian feed and whole grain buyers

The Australian Grain Industry Conference 2021 will feature a special session led by AEGIC on the benefits of Australian grains for animal feed, and the health benefits of whole grains for human consumption. AGIC Asia, which will be held virtually this year on Wednesday 3 March 2021, is a key date on the grain industry […]

05 February, 2021

Stimulating Australian feed grain demand in the Philippines and Thailand

Feed grain buyers in the Philippines and Thailand learned the compelling benefits of using Australian feed grains for swine following two well-attended AEGIC webinars this week. The webinars, presented in conjunction with Austrade, featured experienced Australian feed nutrition expert Tony Edwards as keynote speaker. The Philippines event attracted 150 representatives of the grain and animal […]

Slider