The Australian grains industry is set to undergo a dramatic transformational change, as new investment in grains infrastructure results in a move to differentiated supply chains and long-term commercial partnership between industry players, according to a new research report.
The report, Australian Grains – Infrastructure Growing Pains by agribusiness banking specialist Rabobank, says this structural shift – going from a monopolistic supply chain structure in most regions towards multiple grain export supply chains competing side by side – will impact all industry stakeholders, from farmers and grain marketers through to supply chain operators and export customers.
New grain port infrastructure in Western Australia and on the eastern seaboard is anticipated to change how market participants interact with each other and signals a move towards exclusive supply chains and long-term service agreements,” the report says.
And this will likely be good news for grains farmers, resulting in increased competition for grain at farm gate level and overall higher prices.
“As the industry moves towards a more fragmented and competitive grain supply chain system, the formation of long-term supply chain partnerships will be crucial,” the report says. “Partnerships between growers, marketers, supply chain operators, capital investors and export customers will dictate how grain infrastructure is utilised and will influence the winners and losers throughout the chain,” the report says.
Report author, Rabobank senior grains analyst Graydon Chong says recent development of port infrastructure in WA and New South Wales has already resulted in partnerships between multinational companies who have co-invested in the infrastructure, while at the same time creating competition for the incumbent supply chain operators. This investment includes the new terminals at Bunbury, in Western Australia and Newcastle and Port Kembla, in New South Wales.
‘Feeding’ over-capacity
The report says competition for grain to ‘feed’ a port system which is already significantly over-capacity is one of the key drivers of the new dynamic in grain.
“In Western Australia, where over 90 per cent of the state’s grain production is exported annually – investment in new port infrastructure by Bunge and other grain players has significantly lifted the state’s annual export capacity,” the report says.
“Furthermore, export capacity now far outweighs the total average annual production for grains and oilseeds across the state of 11.3 million tonnes over the past 10 years.”
Export capacity is determined by the ability to move grain through the supply chain to port, with the major bottleneck being the capacity of the current road and rail infrastructure
These recent developments in port infrastructure investment in WA have signalled a significant shift in market dynamics across the state, with the start of a more competitive market for grain as supply chain operators fight to maximise the throughput of grain through their infrastructure.
In this way, Mr Chong said, co-investment in port infrastructure had raised the incentive for supply chain operators to form partnerships along the supply chain to maximise the utilisation of infrastructure assets. “And particularly in models which are heavily reliant on throughput of volume for economic returns,” he said.
Up-country investment
The investment now being seen in port infrastructure across Australia is also expected to result in further investment in ‘up-country’ infrastructure and in the rapid growth of both on-farm and privately-held storage facilities, the report says.
“Further development in supply chain infrastructure – whether in logistics, up-country storage or further port investment – will create more opportunities for strategic partnership for all supply chain participants, from farmers to end users,” according to Mr Chong.
This new system will likely see growers being incentivised to store and treat grain on-farm for longer periods of time before delivery, allowing a reduced capital requirement for the end ‘accumulator’ and providing financial gain to growers with on-farm storage.
However, storing large volumes of grain on farm instead of in the bulk handling system will result in quality and safety risks being shifted to the farmer, the report warns.
“Looking forward, grain growers will need to weigh up the costs associated with storing grain on farm against delivering grain into the bulk handling system. These costs will need to be inclusive of the risk associated with quality, safety and pest management,” the report says.
Prices
More competition for grain at the farm gate level will likely result in overall higher prices for grain growers, according to the report.
“Supply chain operators looking to maximise throughput will come under increasing pressure to attract grain to achieve optimal asset utilisation,” Mr Chong said. “As a result, the Australian grain industry is likely to see a dramatic shift in the pricing of grain.”
For grain growers across WA, the report says, new port infrastructure is likely to mean changes to the way grain is priced domestically. “The added competition for grain in certain port zones is likely to result in an increase in grain being priced ex-farm or delivered direct to a port facility, bypassing traditional centralised storage sites,” Mr Chong said.
Other findings
Other key findings in the report include:
- The expected end of centralised marketplaces for grain buying and selling – with the decentralisation of bulk handling systems to dramatically change the way the domestic grains markets operate, particularly in export-oriented states such as WA.
- Opportunity for specialised product development to service niche markets due to the flexibility in storage and segregation in a fragmented supply chain and
- An increased importance in cooperative grower-to-grower partnerships to increase market power, provide economies of scale, reduce operational risk and boost overall profitability for farmers.
Rabobank’s report Australian Grains – Infrastructure Growing Pains is the third in a series of keynote research report being released in 2014 to assist clients address competitive challenges and opportunities in their agricultural businesses.
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Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 41 countries, servicing the needs of approximately 10 million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading rural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 93 branches throughout Australia and New Zealand.
