Australian agri-food producers are behaving more and more like miners.

This week, when most of us sit down with a glass of Christmas cheer to reflect on the year just finishing and speculate about the one ahead, we’d be feeling much better about life than the last few Christmases.  However, unlike those in the sector who’ll be checking off the year’s wins, my reflections are likely to be laced by a sense of frustration and lost opportunity, despite all the hype about the rosy future of agrifood. 

For a start, the Gillard government tried its hardest to kill us all off. The National Food Plan and Asian Century papers were big on philosophy but totally lacking in pragmatic policy direction. The mishandling of the live cattle trade did serious long-term damage and offended a strategically important customer. The carbon tax and the pro-union attitude of that government put the nail in the coffin of our few surviving food manufacturers, most of who were already in the intensive care ward.  At risk of sounding like the Christmas Grinch, I don’t feel that confident that the Abbott Government will do much better. It seems that the agrarian socialists are running the show.

Any thinking person looking at the Australian agrifood sector from afar must be totally confused by the Graincorp/ADM debacle and the hysteria around the Warrnambool Butter and Cheese takeover. It shows that the most vociferous defenders of the farming sector are either extremely xenophobic or extremely naïve. Effectively they are willfully destroying the sector that they claim to be so passionate about protecting.

The reality is that most industries within the Australian agrifood sector are in a critical situation. Many food processors have moved off shore or closed down and others are seriously questioning their future in this country.   SPC is contemplating closing its Goulburn Valley facilities with a loss of 2000 direct jobs. The impacts of such closures are not just economic; the social consequences for regional communities are more devastating.

There is no doubt about the growth prospects for agrifood in the Asian region. The demographic data forecasting the rising Asian middle class is conclusive.  But the tired old proposition that Australia will become the “food bowl to Asia” or leaders in a “dining boom” as advocated by the many agrifood think tanks, is still a bit hard to swallow, even in the current environment.

The reason it is unrealistic is that much of the growing global demand for food is at the highly contested and competitive, low end of the market.   Australia sells undifferentiated commodities at world parity prices, with all the volatility that comes from being a global commodity trader. If Australia is to truly cash in on the Asian opportunity, it needs to target the high-end, premium food segments by developing differentiated products built around the brand values of provenance and safety.

But the reality is that in this space, Australia is hopelessly uncompetitive and poorly skilled. With a weighted average labour cost of $55 per hour for a factory worker compared with $18 in New Zealand and $4 in China, we are not in the game, even when the $AUD is around $US 80 cents. Our factories are old and inefficient, our energy and water costs have risen sharply and the cost of compliance with complex, government-imposed red tape is crippling. The road, rail and port infrastructure greatly adds to cost; the majority of secondary roads don’t have legal B Double access.  Furthermore, our capabilities in marketing, supply chain development and export market development are poor.

If Australia is to be a global player in food we need a massive investment in infrastructure, new plant and equipment and technology. This capital must come from overseas investors because the industry doesn’t have the money and Australian retail investors are gun-shy about agrifood, seeing it as too volatile and risky (no wonder when it is so poorly managed and government policy is so unstable).

We need active investors who can bring more than capital alone. We need their global supply chain and cultural connections and market knowledge. Passive superannuation fund and short-term equity players are not the answer.

Politicians need to let global agrifood world know that we are open for business. The starting point is some sensible, coherent policy that should include:

·         A pro-foreign investment policy (with adequate safe guards).

·         A flexible work force policy that recognizes the 24/7 and seasonal nature of perishable agrifood products.

·         Accelerated depreciation and incentives to invest in automation and technology.

·         Government investment in infrastructure, roads, rail, ports, electricity, gas, water and waste water recycling, bio-digester technology and co-generation.

·         Cutting government red tape

·         Taxation incentives for mum and dad investors (although it was poorly managed the much maligned MIS did create world class, globally competitive and sustainable businesses).

·         Promoting agrifood as an up and coming career opportunity for young talented people.

·         Fewer expensive trade missions and more export capability building.

The alternative is for Australian agrifood to go the same way as Australian mining i.e. large, listed companies ripping huge volumes of low value commodities out of the ground for short term gain, letting other countries extract the value from the supply chain.  It seems that the miners and agriculturalists have more in common than they think.

About the author

Dr David McKinna is Principal and Director of global strategy consultancy McKINNA et al in Melbourne.  David’s commercial ‘street smarts’ belies his academic background.  Over 30 years of global consulting has given him deep insight into how markets work.  In particular, David has been the quiet achiever behind some of Australia’s most successful strategy break-throughs in the food sector.  His experience and expertise in agrifood spans paddock to plate.  David’s ‘tell-it-like-it-is’ style makes him a sought after speaker, writer and social commentator.  David was also a founder of the David Syme Business School at Monash University.

E: david@mckinna.com.au

W: www.mckinna.com.au

M: 0418 332 488

T: 03 9696 1966

An Australian Century is food for thought.

Asian markets alone will not save Australia.  International competitiveness and global scale will.  In particular, we must see ourselves as part of the global food system and plan to invest accordingly.

An Australian Century captures that sentiment nicely.  It puts greater emphasis on the need to be pulling the right economic levers domestically, whilst thinking globally – Asia and beyond. 

Talk of an Asian Century is appealing.  In particular, there is an overwhelming expectation on China making us wealthy.  However, abundant food exports are not a forgone conclusion because of our proximity to the Asian region.

The overriding limitation of our new national vision is it aspires to produce more of the same for some.  The risk lies in the political proposition Australia will now ride a food commodity boom and sell its way out of trouble.  Food markets do not operate like the resource markets we have been supplying.  When it comes to global food production, only a very small percentage is traded across borders.  Asia will buy Australia’s food commodities when it is convenient or cheaper to do so.

So let’s be clear.  Nowhere in the world does there exist a mass-market for food from Australia.  We are not anyone’s food bowl and we never will be.  Australia’s current contribution to the global food system is less than one percent.

Spruiking absolute numbers is cruel for those least likely to benefit, as the emerging situation in Asia is very complex.  The devil is in the detail.  For many it will be the realisation that opportunities in Asia are very limited.

My Australian Century includes getting our food industry in a competitive position to also do business with those we are not already close to.

The economies of many other countries are developing at amazing pace. Some will sustain their growth well past the bulk of Asia’s peak.  As we will soon find out in Asia, these new markets will be incredibly discerning about what foods they allow to be imported and in what form.  This will be driven by the nuances of local middle-class consumers and strong domestic policies.

In my Australian Century there is a re-balancing of public money invested in Australia’s long-held tradition of producing and exporting bulk foodstuffs.  The time and money required to sustainably re-intensify the primary production of food under Australian conditions is immense.   The world will not wait and many countries will close their productivity gap much quicker than Australia.
 

Future attempts to raise agricultural productivity will increasingly need to be funded by those most likely to gain in that sector, by developing new investment relationships with other companies in the global food system.

The emerging change in the composition of where and how food is purchased and consumed presents the most profitable and timely opportunity for Australia’s food industry.  Consumers put greater importance on convenience and packaging.  Food experience is the one key trend consistent in all emerging food markets.  Consumer purchasing behaviour now points directly to the non-price characteristics of food and so requires the innovation of Australia’s food processing sector in particular, to create tailor-made solutions and take advantage of these new preferences.

Arguably, Australia does not value its food processing sector.  While it is in survival mode, Australia’s competitors are in expansion mode.  We have been outpaced and outflanked in emerging value-added markets.  The result is we now import more value than we export.  Trying to becoming a food quarry and commoditising our food products will not economically mitigate these issues.

In my Australian Century we pursue a whole-of-chain approach to food innovation and transformation.  Australia’s food industry is characterised by its imagination and sophisticated thinking.  Anticipating and providing tailored food solutions is the best wealth-creation strategy Australia has.  We make the necessary structural and economic adjustments to allow this to happen.

Still, it is only those businesses with the strongest leadership that will make the hard decisions needed to survive.  It is the ambition and foresight of these people that will ensure our food industry will expand and prosper – whitepapers or otherwise; Asia or otherwise.