‘Owning’ the value chain: Agriculture in the Asian century

Donald McGauchie AO, Chairman, Australian Agricultural Company (AACo)

In 2013 Australian agriculture was primed to reap the opportunities that would be provided by what was becoming known as the Asian century. It was at that time however, comparable to the Australia that Donald Horne described in The Lucky Country in 1964, an industry that was lucky despite itself.

While agriculture can’t be accused of being lazy in quite the same fashion that Donald Horne portrayed, there were a number of factors that gave cause for concern about the sector’s ability to grasp the opportunities that were being presented to it. A lack of policy direction in agriculture and a sense of complacency that was a hangover from the mining construction boom meant that the unique opportunity that the Asian century presented to redirect Australia’s growth engines and capture a new boom in agriculture was potentially being lost.

Agriculture was at risk of missing the boom unless there was national reform in the following key areas:

  • skills and labour costs
  • infrastructure and energy costs
  • market access
  • foreign investment
  • research and development
  • leadership.

Over the last four years the Asian middle class has continued to explode in size and Australian agricultural exports have outpaced our competitors in supplying this market, but this has occurred without many of the national policy reforms called for in 2013 and outlined above.

This article will address each of the points raised as areas of deficiency in 2013 in answering two vital questions about the direction of Australian agriculture:

  • Why is Australian agriculture doing well despite a lack of policy reform?
  • What does this tell us about the future of Australian agriculture in the Asian century?

The Asian century

In 2009 Asia’s booming middle class numbered 500 million. In 2015 the number of middle-class consumers had grown to 1.4 billion and is forecast to reach 3.2 billion by 2030. According to the Brookings Institution the global middle class will grow by 1 billion people over the next seven years and 88% of this growth will occur in Asia.

By 2020 the value of China’s middle-class consumption will overtake the United States (US), India’s middle-class consumption will overtake Japan, and Indonesia will enter the top 10 for the first time.

The impact of this growth in middle-class consumption is already being felt in Australia. Between 2012 and 2016 the value of Australian agricultural exports to Asia increased 24%, from $22.9 billion to $28.5 billion. Over the same period agricultural exports to China have increased by 33%.

Since 2010, the value of total Australian agricultural production has grown at an average 7% each year, up from just 4% per year between 2000 and 2009. Four years ago, the general goal was to double agricultural production between 2010 and 2050 with more optimistic forecasts looking to double production in 20 years (by 2030).

Four-year report card

In 2013 the concern was that if the Asian century was a race, Australian agriculture had missed the starter’s gun and been left behind by countries such as the US, Brazil, Malaysia and Indonesia. Since then, the value of US agricultural exports to Asia has declined by 6%, Malaysian and Indonesian agricultural exports to Asia have gone backwards, and only Brazil appears to have continued growing this market.

Australia’s record of 24% growth over the same period indicates that clearly something has shifted in our relationship to the region over the last four years yet, for the most part, we have not seen significant national policy reform in agriculture in that time. Rather than policy reform what has occurred is individual businesses driving massive change. Understanding these changes that businesses have made is the key to understanding how Australian agriculture will capture the opportunity of the Asian century.

Skills and labour costs

In 2013 there was a desperate need for more skilled young people on the land. At that time, the median age for Australian farmers was 53, in 2017 it has increased to 56. In 2013 labour costs were prohibitively high and they remain high today. If anything, the labour system is less flexible as the impact to changes to 457 and other visas remains to be seen.

Despite the lack of national reform to address these issues, businesses have responded with their own solutions. At AACo the overall focus has been on higher quality product and higher value customers. In parallel, AACo has addressed skills and labour costs by investing in people and production systems to achieve quality and by sourcing labour offshore as it is needed.

Technology has been critical in achieving quality and lowering labour costs. AACo’s breeding programs utilise data technology to achieve unprecedented levels of quality. Lamb meat processing is already highly automated and beef will follow, allowing significant labour efficiencies to be realised.

At AgQuip this year, the first generation of robotic tractors and sprayers was on display. Horticulture harvesting and sorting technology will transform labour requirements over the next decade.

At the same time, we have found strong interest among young people wanting to work in agriculture. AACo has formed a partnership with Marcus Oldham College to teach young leaders how to manage quality production systems. This program includes teaching an understanding of robotics and big data. Targeted training programs like the one with Marcus Oldham are crucial strategic initiatives that guarantee access to leaders with appropriate training in the future.

There also continues to be real pressure on basic skilled labour – such as diesel mechanics in remote areas. In response to this AACo has integrated skilled technicians from the Philippines. In Victoria, similar workers are meeting demand in piggeries and feedlots.

Despite the lack of policy reform in skills and labour costs, businesses that have done well have:

  • maximised returns for their product by focusing on quality
  • reduced labour costs through technology and international labour
  • have driven targeted training partnerships as required.

Infrastructure and energy

In 2013, infrastructure bottlenecks and energy costs were major problems for Australian agriculture. Since then most government infrastructure investment has been on urban commuters.

At GrainCorp, poor rail infrastructure impacted the handling of last year’s record grain harvest. Higher cost road transport instead had to be used to transfer grain to the ports.

Energy costs are forcing Nufarm to review elements of local operations and manufacturing.

Despite this, industry has responded:

  • GrainCorp has designed and secured a partnership with the Victorian and NSW governments to upgrade rail handling facilities.
  • The Wagner family has invested their own money in Australia’s first new airport in 40 years at Toowoomba.
  • The Australian Wool Testing Authority facility in Perth, has invested its own money to move to solar power generation.
  • AACo is running its Darwin abattoir at Livingstone on electricity from its own gas-powered plant. It is also working with LandBridge, the owners of the Port of Darwin, to expand refrigerated container capacity as it is needed.

There has also been massive private investment in new global infrastructure. This includes social media, e-commerce and logistics. Today a customer in Chengdu can watch a short video on WeChat, they can then click on an Alibaba link and purchase the product from the video as they watch, and they can then have it delivered to their door. A New Zealand farmer is using this infrastructure to sell apples to Chinese customers, in batches of two, and at substantially higher prices.

Australian entrepreneurs are already building whole businesses off these new value chain elements. They are not waiting for national policy reform.

Market access

In 2013 new markets were needed for Australian agricultural products. Since then, free trade agreements with Japan, Korea and China have been secured. There are however, still many technical details to resolve, before full access is granted through these agreements.

For example, AACo’s Livingstone facility does not yet have a license to deliver processed meat into China, and the horticulture sector is still working through bio-security and other technical trade restrictions. In the meantime, again, industry is getting on with the job.

AACo has partnered with Joe Lewis’s Tavistock group and launched the super premium ‘Wylarah’, and premium ‘Westholme’ beef lines into Singapore and Taiwan. AACo has connected with high-end restaurants and retail and have started marketing ‘the Art of Australian Beef.’

Every part of AACo’s domestic value chain has been realigned to service these brands and to connect high-end middle-class consumers with the story and history of the product. This strategy is working. Since the launch in Singapore last year volume has grown by 11% and the average sale price has increased by 28%. It is early days in Taiwan, but the signs are also good. AACo will move these brands into more cities in Asia, the Middle East, Europe and the US in the future.

On market access, the message is simple, government can open the way but businesses must do the heavy lifting. Businesses must tightly control the quality and supply of their product and must connect directly with the customers who will meet the cost of quality.

In practice, this means assembling unique value chains, aligning owned value chain components, aligning non-owned components through partnerships and always maintaining a precise understanding of the product and customers.

Foreign investment

In 2013 the parochial nature of Australian attitudes towards foreign investment was leading to outcomes like the collapse of ADM’s acquisition of GrainCorp. Yet AACo, Australia’s oldest company, began as a wholly owned corporation in the United Kingdom.

AACo’s full-value-chain push into high-end consumer beef markets in Asia, the Middle East, Europe and the US, at scale, is an Australian first. It is only possible because of the partnership with Tavistock, who are a 45% shareholder in AACo. The Tavistock network is being leveraged for distribution partnerships including high-end restaurants, some of which are owned by Tavistock. Tavistock’s expertise, capacity, scale, connections and financial investment in AACo is essential to the success of this Australian first endeavour.

Foreign investment will continue to drive growth in Australian agricultural exports, but it must be through genuine partnership. Effective partnerships can leverage each party’s skills and result in building value chains which connect high-quality product to high-value customers.

Research and development

Since 2013 there has not been a significant increase in public investment in research and development (R&D). As a result, R&D in Australian agriculture continues to be underinvested from public funding.

Bill Ferris and Alan Finkel recently reported on innovation in Australia. They noted that Australia is good at creating new knowledge and our businesses and consumers are great at adopting innovations brought to market overseas. But the gap – for Australia – is in applying new knowledge and bringing it to market ourselves. Again, despite the lack of reform, businesses have been getting on with the job.

Nufarm is partnering with CSIRO to incorporate the Omega 3 gene into Canola seeds. Nufarm knows their customers and is aligning the value chain to service them. They have led a targeted partnership with CSIRO to apply new knowledge for the market.

AACo has established an Innovation Group and Scientific Advisory Board chaired by Dr Megan Clarke, former Chief Executive of CSIRO. Together they are applying advances in breeding genetics to produce quality beef at scale. The exploration of innovative technology is being recognised globally. Microsoft founder, Bill Gates, visited AACo earlier this year and after the visit made these comments:

I was impressed by how high-tech the whole process was. AACo relies on cutting edge genomics to breed Wagyu beef cows, some of the most elite cattle in the world.

GrainCorp is preparing for a market shift toward highly specialised, high-value small-batch grain development. It is investing in the container facilities required and is learning more about the customer it will be servicing. This knowledge will justify R&D investment in the product. In 20 years, GrainCorp, which is currently a commodity business, may well generate the majority of its returns from specialised small-batch product. This is a trend which is already being observed with barley malt products in North America and Scotland.

These examples show that where there is a value chain connecting new knowledge to customers, it is being facilitated by industry investing in effective R&D partnerships. Without that level of precision, a national solution to the R&D gap may be much harder to find.

Leadership

The final point of concern limiting the development of Australian agriculture from 2013 was a lack of effective leadership. Australia is not complacent about this deficit anymore. The end of the mining boom has been recognised, however leadership to bring on long-term system reform so that other sectors of the economy can take up the burden has not emerged. Board rooms and C-suites do not yet have an answer to the leadership problem.

From the examples described in this article however, it has been shown that perfect decision-making in Canberra is not required in order to capture Asia’s growth. Businesses are putting their heads down and getting on with it.

So what does this mean for Australian agriculture in the Asian century?

Effective national policy reform has not yet been achieved in skills and labour costs, infrastructure and energy costs, foreign investment, research and development or policy leadership. Australia has secured improved market access, however the technical details to enable trade under these agreements are still being resolved.

Yet, despite all of this, Australian agriculture is capturing the Asian boom. It is happening through innovative targeted responses by individual businesses. In 2013 Donald Horne’s description of Australia was fairly accurate. Perhaps not lazy, but certainly lucky, complacent and lacking direction.

Today, Paul Kelly’s The End of Certainty better explains the story of Australian agriculture. In that book Kelly describes the unwinding of Australia’s industrial settlement in the 1980s and 90s. Today the traditional silos of our old production systems and value chains are gone. They have been dissolved around the world – in part by the explosion of new markets in Asia and new technology. In the 1980s and 90s, the old certainty was suffocating Australian agriculture.

In exchange, there is now an uncertain world, but one which is full of potential value, hidden in Asia’s growth. The task for Australian agriculture is to capture the value in this uncertainty by connecting the right product, to the right customer, through the right bespoke value chain.

AACo has invested over a billion dollars in recalibrating production systems and today produces the highest quality beef, at scale, 12 months of the year. In partnership with Tavistock, the company can market and deliver product directly to customers that want quality and will pay for it. In partnership with Marcus Oldham, the company is training the next generation of farm and business leaders. Partnerships with the Port of Darwin are growing capacity in infrastructure and by taking responsibility for the value chain the company has the precision to ensure quality product from paddock to plate.

Nufarm is improving quality and minimising costs because of knowledge about its value chain. It is sourcing processed base materials offshore to avoid local energy costs and working with CSIRO to bring new knowledge to market through targeted partnerships. Investment in applied innovation is being captured because the value chain allows it to.

GrainCorp continues to improve bulk and premium product value chains. The company is investing in facilities that allows it to handle small-batch high-value grains. GrainCorp will now invest and partner in applying new knowledge to bring these grains to market – because there is the confidence that the value chain will deliver to customers. Partnerships have also been formed with state governments to improve the rail infrastructure that is needed.

In 2013 national policy reform was desperately needed to capture the Asian century. This is still important. Bad decisions will continue to hurt agriculture in this country.

However, the old, siloed, stable value chains have dissolved – and with them, many of the old policy reform levers have gone too. In fact, it may be that just as The End of Certainty has made policy reform more difficult, it might just have made national leadership less important too.

Good policy should always be pushed for, however the real insight from the last four years, is that The End of Certainty is providing enormous opportunities, as long as Australian agriculture focuses on premium product. So long as new, high-value customers are found and connected with wherever they are.

The examples provided in this article show that the opportunity the Asian century presents can be captured, but each business must find and assemble their own value chains, through targeted investment, alignment and partnerships guided by a precise understanding of products and customers. This, more than anything else, has driven and will continue to drive Australia’s agricultural boom in the Asian century.

If Australian agriculture continues down this path, it will be well on the way to the goal of feeding 100 million wealthy people in the region and creating an economic boom that agriculture can be proud of. In an uncertain world of exciting opportunity, this is the New Horizon.

Donald McGauchie is Chairman of Nufarm Limited, Chairman of the Australian Agricultural Company Ltd (AACo), Chairman of the Australian Wool Testing Authority (AWTA), and a Director of GrainCorp Limited. His previous roles with public companies include Chairman of Telstra Corporation Limited, Deputy Chairman of Ridley Corporation Limited, Director of National Foods Limited, Chairman of Woolstock, Chairman of the Victorian Rural Finance Corporation (statutory corporation), and also President of the National Farmers’ Federation. During 2011 he retired as a member of the Reserve Bank Board. In 2001, Donald was named the Rabobank Agribusiness Leader of the Year, and was later awarded the Centenary Medal for services to Australian society through agriculture and business. In 2004, Donald was appointed an Officer of the Order of Australia.

Image:  Claire Bellfield