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Australian grain industry set for dramatic transformational change

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article image Graydon Chong

A new report by agribusiness banking specialist Rabobank reveals that new infrastructure investment is leading to a transformational change in the Australian grain industry.

According to the report, Australian Grains – Infrastructure Growing Pains, new investment in grains infrastructure will result in differentiated supply chains and long-term commercial partnership between industry players. This structural shift 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.

The report says new grain port infrastructure on the eastern seaboard and in Western Australia will change how market participants interact with each other, signalling a move towards exclusive supply chains and long-term service agreements.

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, with partnerships between growers, marketers, supply chain operators, capital investors and export customers dictating how grain infrastructure is utilised.

Report author, Rabobank senior grains analyst Graydon Chong says the recent development of port infrastructure around Australia 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 Newcastle and Port Kembla, in New South Wales, and Bunbury, in Western Australia.

The report says competition for grain to ‘feed’ a port system, which is already significantly overcapacity, is one of the key drivers of the new dynamic in grain. Mr Chong explains that Australia’s new grain port infrastructure investment is expected to exceed $A150 million over the 2012 to 2015 period, resulting in additional grain export capacity for the nation.

Average annual Australian grain production over the past five years has been 38.9 million tonnes, peaking at 43.8 tonnes in the 2011/12 marketing year, and this was already significantly less than the 55 million tonnes of up-country and port storage, which existed in the storing and handling networks prior to this latest round of port infrastructure investment. Supply chain operators are therefore likely to face strong competition for grain with this significant overcapacity in the system.

Mr Chong said co-investment in port infrastructure has raised the incentive for supply chain operators to form partnerships along the supply chain to maximise the utilisation of infrastructure assets. The investment now being seen in port infrastructure 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.

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. Grain growers will need to weigh up the costs associated with storing grain on farm against delivering grain into the bulk handling system with the costs inclusive of the risk associated with quality, safety and pest management.

More competition for grain at the farm gate level is also likely to result in overall higher prices for grain growers.

Rabobank’s report Australian Grains – Infrastructure Growing Pains is the third in a series of keynote research reports being released in 2014 to assist clients address competitive challenges and opportunities in their agricultural businesses.

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