You have to admit that for an economic study, this one has a great title: “The Puck Stops Here!: Canada challenges Australia’s grain supply chains.” The new study is by the Australian Export Grains Innovation Center (AEGIC), and it looks into Western Canada’s export grain supply chain.
In fact, it looks at our grain system in such a comprehensive way that Australian farmers who read the report may emerge with a better understanding of our strengths and weaknesses than many Canadian farmers have, which should both embarrass and worry us.
This report is a testament to the fact that Australia’s grain industry is working hard to grow into the global go-to supplier of wheat and coarse grains, likely at the expense of Canadian farmers.
Australia recognizes that the health of its agricultural industry does not start with the seeding of a crop. Nor does it end with the dumping of grain into an elevator pit. It understands that marketing isn’t only about the price that farmers receive for their production. It’s about a lot more as well.
It’s also a sign that Australia realizes that in order to be competitive in the global grains market, it needs to know its competitors’ supply chain systems as well as it knows its own.
Knowing your competitor is a fundamental business strategy across many industries. For example, Jeff Bezos, founder and CEO of Amazon says, “We watch our competitors, learn from them, see what they are doing for customers, and copy those things as much as we can.”
In the same way, Richard Branson, founder of the Virgin Group, once tweeted, “Strike the right balance between respecting your rivals and focusing on how you can beat them, and you’ll have a winning formula.”
This is the strategy Australia is using to increase the efficiency and competitiveness of its grain supply chain. By analyzing Canada’s system, it plans to learn from our mistakes in order to avoid making those same costly errors. Second, it will identify what is working well in the Canadian grain supply chain and highlight which practices are most appreciated by our customers. Then it can build similar features into its system.
The goal is for Australia to become more efficient and competitive in order to capture new markets, some of which are currently Canadian customers.
So what did the report reveal? Australia’s and Canada’s Prairies are relatively similar not only in their acreage, crops grown and production practices, but also in their need to find export markets for a large portion of the production.
However, there are major differences in how each country handles and markets its production, and it is largely because of those differences that it costs Canadian growers $20.50/tonne more to move grain from field to ship than it costs Australian growers.
Distance to port is a major disadvantage for western Canadian grain growers. Prairie growers must transport their production 1,300 to 1,800 km to reach tidewater compared to the 100 to 400 km for Australian growers. But even though we are moving grain about six times farther, the average cost of this movement is $49 per tonne in Canada versus $28 per tonne in Australia.
The reason is that rail rates are almost five times higher in Australia than in Canada ($0.14NTK versus $0.03NTK). While we decry the rail service for grain in Canada, our regulations, efficiencies, and multi-use rail lines keep our rail costs much lower than Australian rail lines, which are almost totally dependent on grain movement.
However, we have serious rail issues too. Australian researchers who visited Canada last winter were told of the problems Canada has had with grain movement by rail, as well as about the abandonment of branch lines and about our increasing highway costs as more grain is moved longer distances by road.
There is also a difference in the degree to which farmers rely on rail. In Canada, Prairie farmers have very limited options for bypassing their rail system, while in Australia half of the grain moves by road from farm gate to port terminals.
Our port terminals are not designed to receive grain by truck even if we were willing to move grain by road.
Because of the lower costs of Canadian rail movement of grain, the key recommendation of the Australian report is to improve the flow and efficiency of grain to port in Australia. The report calls for Australia to develop a new, clear, concise plan for least-cost grain movement to port. According to the report, that plan should encourage private as well as private/public investment to boost grain movement from farm to port.
Farm versus off-farm storage
Canadian grain-marketing specialists talk of the value of on-farm storage and the opportunities to capture higher prices by storing grain on farm. Rarely do we hear of the added costs to the Canadian grain supply system of on-farm storage, but those costs are identified in the Australian report.
According to the report, it costs Canada’s grain system $17.70/per tonne for our on-farm grain storage of the entire crop. Correspondingly, on-farm storage costs in Australia are only $5/tonne for a system where farmers store as little as 20 per cent of their crop on farm. (In areas where there is strong local or domestic demand, farmers store up to 80 per cent. Areas which export more store very little.)
The Australian system has an additional cost of $3.90/tonne for the upcountry warehouse storage which Canadian farmers do not incur, but still our storage costs are double the cost of Australian farmers.
Australian farmers, by being able to move grain into upcountry storage at harvest, also do not have to worry about the risks associated with storing grain on farm. Those risks are assumed by the warehouse and/or grain trader.
The Australian storage system also offers individual producers access to many more buyers. Instead of being limited to selling to the few companies which are within trucking distance from farm gate to local facility, as is the case in Canada, once Australian farmers move the grain into upcountry warehouse storage, it is available for electronic purchase by any grain trader, so farmers can sell at any time to any buyer. This gives them the benefits of holding grain for later sale, but without the risks and additional costs of having to store the physical commodity on their own farm.
The farmer, grain merchant, and buyer also benefit by having the grain in commercial storage and available for immediate shipment instead of having to co-ordinate the movement of grain from farm to ship after a sale is made, as happens in Canada.
In other words, Australia has adopted a true PUSH system whereas Canada relies on a PULL system in the grain supply chain.
Based on its storage comparisons, the report recommends a rationalization of some of the receiving and storage facilities to increase efficiency and further reduce the cost of the Australian grain supply chain. However, the report makes it clear that the end result of any rationalization must be that “… grain farmers are the net beneficiaries.”
Owning the Chain
While Canadian farmers and governments continue to divest themselves of grain-handling assets (pools, CWB, inland terminals, etc.), the co-operative model of infrastructure ownership and supply chain management remains strong in Australia. CBH, the dominant player in the grain supply chain in Western Australia is a farmer-owned co-operative with equity in receiving warehouses, port terminals, locomotives and rolling stock.
The Australians think their approach is right. Because we have sold the infrastructure in the grain supply chain, the report states, “The ownership structure of the Canadian export grain supply chains limits the proportion of the system from which the farmer can derive direct economic benefit.”
Then the report continues: “… Lack of equity in other sectors of the grain supply chain typically weakens the bargaining strength of farmers, especially those located in a region only served by one rail operator and with only one or two nearby receival sites owned by large grain companies.
“This limited market power of the Canadian farmer could also limit their capacity to capture the significant benefits that will result from ongoing climatic change and improved production technologies such as new inputs, crops, and varieties. Much of the benefit from increased grain production in Canada will be extracted before and after the farm gate.”
What Canada is doing right
Besides identifying problems and higher costs within the Canadian system, the report points to areas where we have an advantage, and it urges Australia farmers and governments to adopt or adapt these practices.
The Australian contingent was impressed with the work and reporting of the Grain Monitor. Its report suggests setting up a grain-monitoring program similar to ours which could lead to better policy formulation.
As well, the report encourages Australia to strengthen relationships in export markets by creating its own version of the Canadian International Grains Institute (Cigi).
Plus, the report also notes that Canada has both higher productivity and higher productivity trends. The report calls for increased research by farmers, industry and government to cost effectively boost production.
Interestingly, the report calls for a focus of this research to address climate change and the risks of declining production due to warmer and drier conditions, whereas in Canada many farmers still doubt that climate change is real.
It is important to realize that Australia, in spite of the lower productivity and a corresponding lower efficiency of infrastructure usage, is able to deliver grains into the critical Asian market at a lower cost than we can from Canada. Instead of sitting back and waiting for sales, AEGIC, Australian farmers, and their governments are actively seeking to increase both productivity and the efficiency of their grain supply chain.
Canadian farmers must take note. A good place to start may be for all Canadian farmers to read the AEGIC report and look at our system as seen through a major competitor’s eyes.
This article was originally published as ‘How it plans to beat us’ in the Western Canada, July/August 2015 issue of Country Guide.