Look over the grain fence: greener on the other side?

Prof Ross Kingwell
Australian Export Grains Innovation Centre (AEGIC)

A recent research report from AEGIC examined the nature of Canada’s grain export system and the implications for Australia’s grain export sector. The report highlighted that the Canadians:

have rationalised hundreds of small, inefficient receival points and invested in new high volume efficient receival points located on high capacity, efficient rail lines

•  have reduced the time taken to deliver grain to port by one-third since the late 1990s

can deliver grain into Asia at almost the same cost as Australia, despite the long distance grain must travel from the inland Canadian growing areas to port, and then the long distance from Canadian ports to Asian markets

invest more in grain marketing and promotion; and continue to train the users of Canadian grain

receive more support from their governments, provincial and federal

face a changing climate likely to enhance their production of grain.

What are the implications for Australia of the above-mentioned features of grain production in Canada? The main implication would appear to be a likely gradual erosion of Australia’s relative advantage in grain exporting. Australia seems destined to slip down the grain export rankings.
Although Australia is favoured by its proximity to the burgeoning demand for grain in Asian markets, its ability to reliably and cost-effectively supply grain would appear to be hampered by the vagaries of its climate, the constraints of its soils and weeds, and the expense of its supply chains.

The expense and performance of Australia’s export grain supply chains

Has Australia’s grain handling and freight infrastructure investment and performance matched that in Canada over the last 15 years? Australia is blessed by its grain production regions being only a few hundred kilometres from export port terminals, whereas in Canada exported grain travels over 1500 kilometres to the main export terminals. Yet unfortunately in Australia, many export grain rail lines are old, low capacity grain-only lines. Upgrade of this rail infrastructure is expensive and the revenue returns from the rail transport of grain, due to grain production volatility, are uncertain.

By contrast, the main rail network in Canada is well-maintained. In 2011, for example, Canada’s two main rail operators collectively spent more than $2.7 billion on capital programs for track and roadway, buildings, rolling stock and information systems. The Canadian rail networks that carry grain also carry petroleum, minerals, fertilisers, timber and intermodal freight; plus grain production in Canada compared to Australia is far less variable. The upshot is that the two dominant private rail companies in Canada are commercially very successful. The share price for Canadian National, for example, has risen from C$8 in 2001 to being around C$80 in 2015; a tenfold increase in 15 years!

In Australia, the myriad of pathways for grain to flow from farms to ports offers great flexibility in exporting grain from Australia, but as parts of the supply chain infrastructure gradually deteriorate it also generates many possible competing opportunities for infrastructure investment. In response, however, unfortunately often regional political vigour rather than economic rigour is unleashed in establishing investment priorities. Aside from this debate over regional investment priorities, the broader issue is that such investments in Australia unfortunately are currently constrained by the enfeebled budgetary positions of state and federal governments.

To identify investment priorities does require potential investors and beneficiaries to have access to accurate information about the impacts of any investment on supply chain performance. In that regard it is worth noting how information about the Canadian export grain supply chain is generated. When legislated reform of the handling and transportation of Western Canadian grain occurred in the late 1990s the Canadian Government required a grain monitoring program to be introduced. Quorum Corporation, a private transportation and logistics consulting firm, won the tender to track and monitor all aspects of the movement of grain from the farmgate through to vessel loading and departure.

Quorum Corporation generates publicly available monthly, quarterly and annual reports that provide all stakeholders, including all levels of Canadian Government, with a comprehensive and objective set of metrics that support informed debate, policy formulation and investment planning. By illustration, a time series of more than 1500 metrics on grain supply chain performance are provided. Such regular, transparent and objective grains logistics information is not available to the Australian grains industry. Instead the Australian export grain supply chain is subject to infrequent, reactive and piecemeal investment, review and policy oversight.

As recently revealed by AEGIC, it costs $46.80 to rail a tonne of wheat in Canada from upcountry 1610 kilometres down to port. In Australia it costs around $27.80 to rail a tonne of wheat from upcountry 250 kilometres down to port. So in Canada the rail cost per tonne is around 3c/km versus 11c/km in Australia. Moreover, Canada has reduced the time taken to deliver grain to port by one-third since the late 1990s. The same cannot be said for most grain-exporting regions of Australia.

It is not only improvement in rail performance that has supported the export of grain from Canada. Rapid rationalisation and new investment in upcountry receival points has also forced cost-efficiencies in grain handling. Back in the early 1980s Canada had over 3300 mostly small upcountry receival sites. Now it has 370. Despite the reduction in grain handling receival points in Canada, since 1999 the number of class D receival facilities in Canada has actually risen from 38 to around 115; where these facilities can rapidly load 100 or more rail cars.

In Australia, by comparison, over the period 1998 to 2010 the number of receival sites declined from 925 to 625. Furthermore, in mid-2014 GrainCorp Ltd, the major grain handler in eastern Australia, announced the closure of a further 100 or so of its receival sites, shrinking its network to 180 core sites, supplemented with an additional $200 million to upgrade its remaining network. More generally in Australia, upgrades have occurred to many strategic sites to boost their receival rates, outturn rates and storage capacities. Although both countries have rationalised and improved their receival networks, the degree of rationalisation has been much greater in Canada and this has forced greater efficiency in receival point grain handling in Canada.

Climate and yield improvement

Climate change and climate variability do impact on grain production in Australia and Canada. In spite of drying trends observed in some major grain export regions of Australia, agricultural scientists, technologists and engineers have through decades of effort and innovation enabled a lift in the water-use efficiency of Australian crops. The outcome is that Australian farmers now enjoy much higher crop yields than otherwise would have been possible. Yet in spite of the commendable efforts of farmers and their science-based support, yield progress in Australia lags behind that observed in Canada (see Table 1).

Table 1: Canada versus Australia’s annual rates of yield improvement (kg/ha).

2000/1 to 2012/3
68 26

As pointed out by AEGIC, due to Australia’s much lesser rate of yield improvement, it is gradually losing market share. Note, Table 1 excludes Canada’s recent huge bumper year of crop production in 2013/14. Its inclusion would only worsen the picture for Australia.

The Canadian Government’s early acceptance of genetically modified (GM) technology for canola production supported huge investments in canola breeding that have enhanced the relative profitability of canola such that its share of crop production in the prairie provinces has increased from around 8% in the early 1980s to be currently around 25% of all crop production.

Since the late 1990s the privatisation of wheat breeding in Australia, supported by the policy innovation of end point royalties, has enhanced yield gain for Australian wheat farmers. Potentially similar policy developments are now underway in Canada. In March this year, Canada finally became a signatory to UPOV 91 which has strengthened varietal intellectual property rights and will allow new private investment in plant breeding, provided a revenue collection method such as end point royalties is developed and agreed to by the Canadian grains industry. Canada’s Federal Government has already signalled its intention to reduce the public funding of cereal breeding. The possible entry of major international plant breeding firms into cereal variety provision in Canada will only further enhance cereal yields in Canada, to the detriment of Australian cereal exporters.

When the forecasts around the impacts of projected climate change are examined, the inferences are that Australia’s principal grain export regions are liable to face environments less conducive for grain production. Warming and drying trends present agronomic challenges not easily offset by the benefits of higher concentrations of CO2. By contrast, Canada faces environments forecast to be increasingly conducive for grain production. Warmer, longer growing seasons and CO2 fertilisation effects in combination are likely to boost crop yields and potential crop areas in Canada.

Aside from the challenge of climate change, Australian farmers already face the challenge of climate variability. Compared to Canada, Australia experiences much greater production volatility. The variability in its grain export volumes already hampers Australia’s ability to be a reliable and consistent supplier. By contrast, Canada experiences far less production variability and so can market itself as a dependably consistent export supplier. For Asian countries where food security is a priority, Canada can tout itself as reliable source of export grain. It is no surprise that Asia continues to be a growing market for Canadian cereals, oilseeds and pulses.

Grain marketing and promotion

One organisation in Canada that usefully serves its export grains sector has no equivalent in Australia. The Canadian International Grains Institute (CIGI) coordinates market support for the export of Canadian grain. During its 43 years of operation, more than 39,000 people have participated in CIGI’s programs, 14,000 of whom are in Australia’s strategic Asian markets. This group constitutes a vast alumni of skilled grain processing staff, experienced in the use of Canadian grain, who are then supported through ongoing contact. The Australian grains industry has no equivalent longstanding program to support the use of its grain. According to comments made to AEGIC staff, Australian grain customers in Asia have noted the lack of an Australian equivalent to CIGI and more importantly, CIGI and other advocacy groups such as the US Wheat Associates take advantage of this fact.

There is no coordinated approach in Australia regarding grain promotion, training and grain quality processing research and development.

Concluding remarks

If stakeholders in Australia’s export grains sector look a long way over their grain fence towards the western shores of Canada, then they will see causes for concern. It does seem greener on the other side and it’s not just an illusion.
Just because Asia is on our doorstep does not mean we are destined to be ushered in. In fact our place in the queue is somewhat precarious. Our proximity to Asia is useful but it is not a sufficient advantage.
The old adage that to turn opportunity into reality requires hard work certainly remains true for Australia’s export grain sector. There are many things that all Australian stakeholders need to work hard at if Australia is to remain a key and valued exporter of grain. The AEGIC report mentions some key immediate actions that could usefully serve the future of Australia’s export grains sector.

The report can be downloaded from: http://www.aegic.org.au/programs/supply-chain.aspx
For a hard copy please email admin@aegic.org.au

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