How the Ukranians are beating Aussie farmers

06.10.2017

Farmers from Northampton to Narrabri are worried about their wheat as they count down to the start of what, for most, will be a disappointing harvest.

Australia is expected to have about 14 million tonnes of wheat available for export by the time the harvest ends early next year, down from about 22 million tonnes in 2016-17, when exports topped $6 billion.

The big drop in production has prompted warnings from local wheat marketers and industry leaders about Black Sea competitors accelerating domination of Australia's remaining key markets.

Wheat from Russia and Ukraine is landing in south-east Asia at $US40 a tonne cheaper than Australian wheat. The region's big flour millers say the quality has improved.

South Australian farmer Andrew Polkinghorne believes supply chain costs must come down to give Australian producers a fighting chance.

"Ukraine is getting there on price and I don't believe we can compete on price any more," he said.

"Supply chain costs are a major issue. They are one of the biggest production costs in terms of getting grain to the final customer.

"My understanding is that the quality of Australian wheat still carries some weight in Asian markets but not as much as it used to and since the deregulation of the industry there hasn't been a very concerted effort to promote Australian wheat as Australian wheat."

Efficiency limit

The Polkinghorne family have increased the size of their cropping operations and adopted the latest technology to drive efficiency and productivity. They are looking for the next big on-farm breakthroughs but don't see much on the horizon.

"We crop in the order of 15,000 acres [6070 hectares]. We think we are getting fairly close to as efficient as we can get in doing that. We have had about 160 millimetres of growing season rainfall and we are going to produce two tonne per hectare crops," Mr Polkinghorne said.

"On that amount of rainfall if we didn't have the varieties we have got and the techniques we have now, 15 years ago we'd have produced no crop or very little crop. Technology advances have helped us dramatically but it's difficult to see where the next lot is coming from."

Mr Polkinghorne is looking forward to an end to a virtual monopoly on bulk wheat storage and port infrastructure in South Australia, with growers expecting competition to bring some relief on supply chain costs.

A consortium which includes former banker and current Adelaide Crows chairman Rob Chapman is well advanced with plans for a new port terminal at Lucky Bay on the Eyre Peninsula. There is talk too of an iron ore-related port development at Cape Hardy.

David McKeon, the chief executive of NSW-based industry group Grain Growers, said reducing costs and upgrading supply chain infrastructure was a top priority to keep Australia competitive on world markets.

Grain Growers data shows it costs growers $US86/tonne in fees and charges to move wheat 500 kilometres from Moree to Newcastle and then $US20/tonne for it to be shipped to Indonesia.

However, Mr McKeon is not as concerned as some about the loss of overall market share in Indonesia, the world's second biggest wheat market. It has grown at a rate of up to 5 per cent a year in recent times.

"We are a high-price, premium product into that market and we have actually grown our value into that market. Ukraine has increased its share of the market but the market has been growing quickly and there is room for a number of players," he said.

"What we have seen over time is our ability to extract that premium on our wheat decrease."

Middle-class diet

Grain Industry Association of WA chief executive Larissa Taylor said south-east Asia and north Asia were sending Australia clear market signals on supply of soft wheat and premium baking and milling solutions.

The former McKinsey analyst and Rabobank executive said Australia should look to its relationship with Indonesia to capitalise on population growth and changing middle-class diets in the region.

"Yes, there's competition from the Black Sea into our traditional markets but we have some long-standing customers relationships which we could leverage in Indonesia in particular," Ms Taylor said.

"They have been our single largest customer for wheat for 20 years and a strategic partnership with Indonesia in premium soft wheat and premium baking segments into ASEAN markets would make great sense."

Analysis by Rural Bank based on Free on Board (FOB) values shows average export prices for wheat decreased by 15 per cent in 2016-17, but due to big harvest volumes still made up more than $6 billion of overall cropping exports of $13.9 billion.

Wheat exports to Indonesia topped $1.26 billion followed by India ($743 million) after a big drop in tariffs in that market, the Middle East/North Africa ($624 million) and Vietnam ($568 million).

Leading grain marketers CBH and Plum Grove said the 2016-17 figures are a result of big volumes and should not disguise the need for urgent action on price competitiveness.

GrainCorp chief executive Mark Palmquist believes Australia may have to reconfigure its bulk grain supply chain to focus on niche markets as customers show a willingness to pay a premium for specific qualities in wheat and other grains.

"If Australian agribusiness is unable to be responsive and reconfigure its supply chain to cover this increased complexity and get our product to market in a cost-effective manner, then we will be unable to capture that value," he said.

Mr Palmquist said one of the biggest barriers to sustainably boosting wheat yields and overall production was the lack of affordable crop insurance.

"They [farmers] are expected to carry huge production risk on relatively limited balance sheets while growers in far less volatile regions overseas enjoy the protection of comprehensive crop insurance schemes often backed by governments," he said.

Elders chief executive Mark Allison has reservations about Australia positioning itself to become a niche supplier of a bulk commodity like wheat.

"Wheat is a commodity and the starting point for a commodity is to have quality and cost, you need to tick those boxes," he said.

"We have a bunch of issues because our cost base is too high and that is the problem with competing out of Australia. Our infrastructure needs renovation, particularly on the east coast, and we need to do a lot of work around research and development priorities."

Mr Allison said he was confident the industry could rise to the challenge of ever-increasing competition from the Black Sea.

"We can find another gear. The cotton industry in Australia found another gear and now leads the world. Why? Because it had to."


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