International grain competitors -what can we do at the farm and industry level?

Take home messages

• Understand the nature and ramifications of ongoing international competition.
• Diversify your crops, enterprises, marketing opportunities and where possible, play the season.
• Know and manage your supply chain; paddock to grain receival.

Background

Wheat is by far the main grain grown and exported from Australia. In South Australia (SA), wheat is of increasing importance, with wheat production growing from an average annual production in the early 2000s of 3.28mmt to 4.47mmt over the last five years (i.e. a 36% increase) (Table 1). Moreover, wheat’s share of crop area and total crop production has also increased. Now almost 60% of the crop area in SA is devoted to growing wheat and wheat comprises a similar proportion of the State’s total grain production.

By contrast, over the last five years, barley has diminished in relative importance, although it is still by far the second most important crop, and canola has slightly increased in importance, but not to the degree of importance seen in Western Australia (WA). Grain legumes remain as minor crops.

Most wheat produced in SA is exported to overseas or east coast destinations. International forces of supply and demand determine the prices growers receive for their wheat in overseas markets; yet substantial change has occurred in the international sources of wheat exports over the last two decades (Table 2). The United States and Australia have experienced substantial declines in their shares of the volume of global wheat exports. Over the five-year period 1999/2000 to 2003/4, the United States and Australian share of the volume of wheat exported by the main wheat exporters listed in Table 2 was 30% and 17%, respectively. However, over the most recent five years, these two countries’ export share of the volume fell to 17% and 11%, respectively. Russia and Ukraine have emerged as key global sources of exportable surpluses of wheat. Russia is now the world’s leading exporter of wheat.

Table 1. Grain production in South Australia; five yearly averages.

Table 2. Major wheat exporters; five yearly averages.

Australian Export Grains Innovation Centre (AEGIC) reports (see White et al, 2015; Kingwell et al, 2016a,b; Kingwell and White, 2018) provide detailed descriptions and explanations about how Australia’s key wheat export competitors have emerged over the last decade. Some of Australia’s wheat export competitors (e.g., Russia, Ukraine and Argentina) have benefitted from substantial depreciations of their currencies, major upgrades of their supply chain infrastructure, historically low sea freight rates and greater adoption of modern methods of crop production in their respective countries. Often the rate of improvement in grain yields in these countries surpasses that of Australia and often these countries are blessed with fertile soils and more reliable rainfall or snow cover. Wheat is frequently exported from these countries into Australia’s traditional and emerging markets. The underlying causes of the competitive strengths of these newly emerged exporters are unlikely to dissipate any time soon, so the question arises for Australian wheat producers: What can, or should they do?

Possible courses of action

(i) Understand that these emerging wheat export competitors will cause increased direct and indirect competition in Australia’s key wheat export markets. The indirect impacts arise because as these new competitors enlarge their export reach they will not only displace some Australian wheat but will also displace some wheat from other traditional exporters (e.g. Canada) that in turn will need to find new markets for their displaced wheat. Some of this displaced wheat will find homes in some of Australia’s wheat markets.

(ii) Note that Australian wheat exporters will face not only growing price competition but will also experience intensified organisational competition from industry organisations in some of these countries funded to serve their wheat industries. Australia’s wheat industry formerly had the Australian Wheat Board that provided a range of industry services. Now in Australia there are disparate bodies, often insecurely funded and with their activities not necessarily well co-ordinated. Australia needs to ensure all its grains organisations are well co-ordinated so that from wheat breeding, varietal classification, supply chain infrastructure provision, wheat research and trade development; all efficiently align to deliver strategic benefits to all transactional parties, including Australian wheat producers and end users of Australian wheat.

(iii) Produce wheat as cheaply as possible (i.e. high-yielding varieties with a prospect for price premia). Australia is unlikely ever to be a reliable source of highly affordable feed wheat. Most growers’ strategic needs will remain in growing fit-for-purpose, affordable wheat for human consumption. To protect wheat margins and control costs of production, most growers, to the extent it is possible, will need to ‘play the season’; curtailing costs in poor years and chasing upside in some occasional bumper years.

(iv) A competitive strength of Australia is the quality and magnitude of its investment in wheat breeding. Traditional wheat breeding has long lead times and path-dependency effects, yet uniquely, Australia’s main wheat breeding companies can quickly develop wheat types attractive to end-users and Australian wheat growers. When combined with other activities ― such as classification changes, new segregations, more efficient supply chains and industry-good marketing functions ― Australia can meet some of the competition it faces in international markets.

(v) Diversify crop and enterprise portfolios. Growers’ experiences over the last two decades have revealed how commercially risky is the business of wheat production. Variable seasons, varying prices within and across years and ever-increasing costs of inputs makes the business of grain production always challenging. One way to address the challenge is to spread the biological and commercial risk by growing a few different crops (e.g., grain legumes, cereals and oilseeds), perhaps with a complementary animal or side-line enterprise.

(vi) Know and manage your supply chain; paddock to grain receival. In SA, grain supply chain costs amount to around 30% of the Free on Board (FOB) price of wheat (White et al, 2018). Planning and managing harvest logistics and grain marketing can be important sources of incremental commercial gain for farmers. The 2018 season, for example, unveiled many highly profitable grain marketing opportunities for many growers. White et al (2018) outline how reducing Australia’s supply chain costs is feasible through synergistic infrastructure investments and emerging innovations involving automation, information technologies and organisational change.

Conclusion

Australian growers who depend on wheat exports should expect on-going competition, especially from low-cost emerging wheat exporters like Russia. In the face of these competitive challenges, Australian wheat farmers and their industry, in general, will need to embrace new opportunities to bolster the profitability of wheat production. The comparative advantage of Australia’s wheat breeding system, when complemented by classification changes, new segregations, more efficient supply chains and industry-good marketing functions, will help deliver value to wheat farmers.

Useful additional strategies for most farmers will include crop and enterprise diversification, flexibility in grain marketing and where possible, ‘playing the season’. In addition, carefully planning and managing harvest logistics will offer further commercial gains for many farmers.

Useful resources

https://www.grainsinnovation.org/documents-materials/

References

Kingwell, R., Elliott, P., White, P. and Carter, C. (2016) Ukraine: An emerging challenge for Australian wheat exports, Australian Export Grains Innovation Centre, April 2016. Available at: http://aegic.org.au/wp-content/uploads/2016/04/Ukraine-Supply-Chain-Full-Report.pdf

Kingwell, R., Carter, C., Elliott, P. and White, P. (2016) Russia’s wheat industry: Implications for Australia, Australian Export Grains Innovation Centre, September 2016. Available at: http://aegic.org.au/wp-content/uploads/2016/09/Russia-wheat-industry-Implications-for-Australia.pdf

Kingwell, R. and White, P. (2018) Argentina’s grains industry: Implications for Australia.  Available at: https://www.aegic.org.au/wp-content/uploads/2018/11/AEGIC-Argentina-Report_18_LR.pdf

White, P., Carter, C. and Kingwell, R. (2015) The puck stops here! Canada challenges Australia’s grain supply chains. Australian Export Grains Innovation Centre, Perth, Western Australia. AEGIC Industry Report, May 2015. Available at https://www.aegic.org.au/wp-content/uploads/2016/04/Canadian-Supply-Chain-Full-Report.pdf

White, P., Carter, C. and Kingwell, R. (2018) Australia’s grain supply chains: Costs, risks and opportunities. Australian Export Grains Innovation Centre, Perth, Western Australia. AEGIC Industry Report, May 2015. Available at https://www.aegic.org.au/wp-content/uploads/2018/11/FULL-REPORT-Australias-grain-supply-chains-DIGITAL.pdf

Contact details

Ross Kingwell
Australian Export Grains Innovation Centre
3 Baron-Hay Court, South Perth, WA
61 8 6148 9920
Ross.Kingwell@aegic.org.au