Going through the mill

Dr Turlough Guerin CAg

Chair, Ag Institute of Australia 

 


A useful maxim in risk management is to hope for the best and plan for the worst. It applies to agricultural supply chains as with any other sector. Supply chain risks and opportunities post COVID-19 are shaping up to be material and preparation by agricultural professionals will be critical for success into the future. Due to the nature of Australian agriculture, it has vulnerabilities on both the supply and demand side, and agricultural professionals should be aware of the need to support their businesses as they plan for the future. While supply chains in Australian agriculture are at risk and will be reshaped at least to some extent by COVID-19, prudent risk management and governance, being prepared for the good seasons, and an eye to the future, means the sector is set for a strong return in the coming months and years. Australian agriculture and its work force are a resilient cohort and will adjust their businesses accordingly.  Professionals in agriculture need to be prepared more than probably ever before in our nation’s history. They will need to step up to help ensure the recovery of the Australian economy.

COVID-19 has side-swiped much of the business sector. The pandemic – a very serious, deliberate and scientific definition – has taken Australia and the world largely by surprise. Coming after severe flood, drought conditions and fires in eastern Australia, concerns have been raised by some people about Australian food and fibre security. These concerns are understandable, but misplaced. Despite temporary shortages of some food items in supermarkets caused by an unexpected surge in demand, Australia does not have a food or fibre security problem.

In Australian agriculture, advisors, consultants and professionals supplying services and advice to the sector, should however, be acutely aware of the coming changes, post COVID-19, that are likely to have on the sector. Here I explore further issues related to agricultural supply chains that agricultural and natural resource management professionals ought to be considering when thinking through client problems and decision-making for these businesses. The year 2020 will be a year of resetting business models, the way we as professionals view risk, and provide another reason why agricultural professional need to continue to develop their capabilities to meet new industry challenges.

Australian agriculture is at risk

Larger agricultural firms will already be reviewing their suppliers’ contracts with a view to the above considerations. If COVID-19 ends up being a short-term disruption, as a professional in your organisation, you will in any case benefit greatly from the attention you give this important risk exposure.

While the biggest concern is undoubtedly the serious risk to public health, fears are also mounting over the potential impacts on global trade in commodities. This puts Australian agriculture in the firing line. 

Food and drink exporters believe disruptions at ports could hit global sales to China, while importers from China are worried supply chains could eventually be hit.

Agricultural commodity traders will be following China’s economic status closely, with the country now one of the world’s largest consumers of products such as vegetable oils. There are a range of ‘expert’ views in this area. Some suggest that these markets should be largely insulated from wider economic forces. Others are less optimistic.

The coronavirus outbreak is already having a severe impact on China’s foodservice and on trade channels and this could become more serious and longer-lasting if the virus is not contained, leading agribusiness bank, Rabobank, has recently warned in a report. (1)

But the extent of the impact on Australia’s agricultural sector is expected to be limited in the short term and will depend on how quickly the virus is contained. Recent Coronavirus Impacts on Chinese food and agriculture, the Rabobank study says “disruptions are being experienced across the entire food and agricultural supply chain” with the virus. While the report says a quick and effective containment of the virus could lead to a rapid bounce-back, the longer the virus is uncontained, the more extensive, sustained and structural the impact will be on the food and fibre supply chain.

Regardless of when coronavirus is contained, COVID-19 is likely to have a larger impact on food and beverage industries than the global SARS (Severe Acute Respiratory Syndrome) epidemic in 2003 – including in Australia. It is Australia’s much higher trade exposure to China that is the biggest difference between current (COVID-19) events and SARS. For example now in 2020, Australia sends around 28% of its food and agricultural exports to China, much of which is consumed within China.

Costs of supply will likely increase

With managing risk comes costs. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) warnings on scarce and expensive air freight and logistics are important to note and experts rate logistics the biggest threat to the industry after a bounce back in demand in China. (2) ABARES indicates that there were positive signs for trade with China as long as the COVID-19 recovery there was sustained, but also indicates growing issues in other markets.

With the virus now spreading well beyond China, second and third waves of impacts on Australia’s food and fibre sectors are likely. In the immediate future, supply chain and logistics disruptions will create the most significant risk to the sector and hence to producer incomes. ABARES expects softer prices on global markets as a result of falling incomes and changes in where food is consumed.

Some countries have already imposed restrictions on food exports. However, ABARES indicated that this was unlikely to have a significant impact on Australian producers and consumers though the sector is in largely unchartered waters in this regard and any aspect of Australian export agriculture could be impacted in the coming months as the sector transitions through the pandemic.

Professionals working in and interfacing with agriculture will be aware of the critical role that China plays in Australia’s primary production supply chain and keeping abreast of these risks will be crucial. (3)

Planning during and learning from the experience is critical

Primary producers are impacted on the supply side of their businesses (e.g. fertilisers, input chemicals) which then can have an impact on the production or output side. Recent observations by experts on the farmer supply side suggest that this year it is going to be a case of making sure you have got your orders in early, giving the supplies plenty of time to arrive and not just buying hand-to-mouth.

The global picture shows the slowing of the movement of goods in all commodities, so farm supplies will likely be impacted. For example, there may be a lack of containers available or staff at wharves. On the buy side for farmers, the supply chain has held up in the face of COVID-19. While there are expected to be hold-ups and some difficulties in farmers getting supplies, the experts suggest that there will be delays rather than not being able to source the product at all.

While there is evidence of manufacturing bouncing back in China, Australia’s biggest supplier of farm inputs, ABARES warned restricted supply from other countries could hit Australian crop production. Farmers in some parts of Australia have already complained about shortages of key chemicals, like weed killer glyphosate, as they prepare for much bigger plantings of winter crops after recent widespread rain. Another example is the dairy industry which has flagged potential supply issues of items such as tins for milk powder, but ABARES expects producers to find domestic solutions to those problems.

From an agricultural professional view, it is important to accept the learning experience that comes from these types of trying times. Keeping attendances up at online conferences should be an important part of your personal strategy.

Understanding material risk

What is of the highest priority for businesses and governments during a crisis is the wellbeing of people – the individuals. Businesses can contribute and complement these efforts by having a functional and fit-for-purpose crisis management plan. (4)

A strong crisis management plan can also help businesses ensure the wellbeing of their people, keep their resources protected and strengthen their ability to perform optimally when they are literally and physically going through the mill.

The other priority is restoring and/or redesigning the financial business model which will need to include tough decisions on restructuring of logistics across every part of a business. Some of the questions below point towards the type of thinking needed.

Perhaps the most valuable outcome from the pandemic has been the opportunity to reflect on what resilience means to professionals and their clients from a practical sense, and why some individuals and organisations appear to be better prepared and able to cope in these times of uncertainty.

In terms of capital and risk management in agriculture, there is still much work to be done. More family farms need documented business plans, including succession plans, and need to be employing a range of more sophisticated financial tools to manage risk. And off-farm, there needs to be further increases in equity investment in Australian farm businesses.

What is the future outlook for Australian agriculture?

While this article has focused on risk in the sector, I see a strong outlook for Australian agriculture and still think that the 2030 vision of a $100 billion sector is achievable. (5) Put optimism bias aside, the improved terms of trade, increased rainfall in the eastern states, continued strong demand for food and the ongoing embrace by the industry of emerging innovation and technology, means that it will be one of the strongest sectors post COVID-19.  Those of you who even casually browse the rural and agricultural newspapers and journals across Australia will have already noticed that many subsectors are announcing record harvests now or on their way. (6)

It is true that agriculture is more volatile than any other sector of the Australian economy. Environmental, health, labour issues (modern slavery), and animal welfare considerations will increasingly sway purchasing decisions when it comes to Australia’s agricultural produce. Meeting these expectations presents opportunities to build on our competitive advantage as a sector and nation. It also increases reputational risks if expectations are not met. Responding to climate change will play a major role in Australian agriculture’s next decade, mitigating climate risk while creating diverse new income opportunities. Australia’s policy response can position us as a global leader in low emissions agriculture. Done poorly, our policy response could saddle farm businesses with additional risks and costs.

While it would be naïve to think that there will be no shocks and impacts coming out of the pandemic (and we are already seeing geopolitical impacts knock onto Australian producers as of mid-May 2020), the agility, ability to pivot, and innovate, reflect the sector’s overall trajectory – well positioned to return to strong growth. 
Many people involved in the Australian agricultural value chain would certainly feel like they “have been through the metaphorical mill”.

Professionals in agriculture will need to step up to help the economy reboot. And this will require an eye to the future and I argue a more sustainable approach to the way we do agriculture, and to come out the other side in a stronger position. Being part of a transformed Australian agriculture, which leverages the upside risk (it is facing now) is, in my view, where professionals need to move towards. For professionals, this means a shift to a growth mindset. This will help reboot the sector post COVID-19.

Questions for agricultural professionals 

Here are questions for agricultural professionals to help think through and better manage supply chain risks in relation to preparing for post COVID-19 (7) in the agribusiness sector:

  • Are any of your suppliers impacted? How are they likely to come out on the other side of COVID-19?
  • What will your organisation do if the virus spreads far more widely than at present?
  • What if your suppliers in China are unable to supply product for an extended period? How long can you tolerate reduced or no shipment of products, spare parts or components?
  • Do you have clarity on the contractual arrangements with your major suppliers and how their inability to supply product will impact your prioritised activities?
  • Have you identified alternative suppliers for you and your client businesses? Is there an opportunity for you as a professional to demonstrate leadership in this regard?

Further questions you can ask yourself and your clients to evaluate the fitness of your crisis management systems – while most relevant to larger organisations – there are some useful prompters here:

  • Have you defined supply chain and production risks that crises might pose and what you could do to mitigate those risks?
  • What safeguards or redundancies do you think are now needed from a logistics perspective to help ensure business continuity?
  • Have you considered the impact of the current crisis in the budgeting and business planning processes, and implemented early warning mechanisms? How can you ensure sustainable financing and stable cash reserves?
  • Is your financial business model resilient enough to recover from the impact of this crisis and manage potential crises in the future?
  • How will demand disruption impact you and how will you recover from its aftermath? What measures will you take to ensure the most sustainable transition possible for your clients’ businesses?

1. Rabobank’s podcasts can be found on the RaboResearch channel via any podcast app or at this link https://research.rabobank.com/far/en/sectors/regional-food-agri/Podcast-Coronavirus-how-worried-should-we-be.html which was a source for some of content in this article.

2. ABARES has recently released a study examining COVID-19 impacts on trade in the sector: https://daff.ent.sirsidynix.net.au/client/en_AU/search/asset/1030221/0 \

3. See also the view on China and how it plans its transition post COVID-19 as one of the world’s largest exporters and importers: https://www.foodnavigator-asia.com

4. Planning tools to help businesses reopen and be COVIDSafe are available from the Commonwealth Government, including an online planning tool to help businesses develop a plan to keep their workers, customers and the community safe as they reopen or increase their activities in the weeks and months ahead: https://www.agriculture.gov.au/coronavirus/industry

5. For details of the current inquiry into the sector and its projected 2030 vision, please see: https://www.aph.gov.au/Parliamentary_Business/Committees/House/Standing_Committee_on_Agriculture_and_Water_Resources/Agriculturegrowth

6. For further insights into the agriculture sector from the leading professional body, see the weekly updates here: http://www.aginstitute.com.au/pages/weekly-alert.html

7. For the source of questions for businesses, see the note by EY: https://www.ey.com/en_ae/covid-19/covid-19-crisis-management-essential-ten-better-questions-to-ask


Turlough Guerin is a senior leader in corporate environmental management, governance and sustainable development. He is Company Secretary Bioregional Australia Foundation and Board Chair Ag Institute of Australia. Turlough can be contacted on 0439 011 434 or chair@aginstitute.com.au

Image:  GrainCorp Limited