10 Driving Forces in Agrifoods - Loddon Mallee Region

32 Pages·2014·1.7 MB·English

Agribusiness briefing paper
for Loddon Mallee RDA
Ten driving forces in agrifood impacting
Loddon Mallee

August 2014

Loddon Mallee RDA 2014
Agribusiness briefing paper: Ten driving forces in agrifood impacting Loddon Mallee 1
McKINNA et al
Rear 131 Victoria Avenue
ALBERT PARK VIC 3206

Telephone: [phone]
Facsimile [phone]
Email: [email protected]
www.mckinna.com.au

Insight Outlook Consulting Pty Ltd
trading as MCKINNA et al
ABN 47 241 485 028

Established 1983
Contact: Dr David McKinna

Loddon Mallee RDA 2014
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Agribusiness briefing paper: Ten driving forces in agrifood impacting Loddon Mallee 2
Executive summary
This briefing paper was commissioned by the Loddon Mallee Regional Development
(RDA) Committee and presents an independent assessment of the forces of change in
the agribusiness operating environment in Loddon Mallee. Its intention is to provide
context to assist regional leaders to prioritise projects, advocate for the region and
encourage the investment that will strengthen the region’s food and agriculture
sector.
There are a number of forces driving change in agribusiness, which collectively will
impact the ability of Australian producers to leverage the growing global demand for
food and fibre. The ten key driving forces are:
1. Climate uncertainty: resulting in wider fluctuations of seasonal
returns and higher risk. It is also demanding change in farming
practices.
2. A shift to farming ‘water’ rather than ‘land’: Since the separation of
water entitlements from land, irrigators must now make decisions
evaluating the best return from this increasingly valuable asset
including whether to sell the entitlement rather than use the water for
production. Water again will become scarce and costly. Water usage
will move to its highest value uses and regions, which has major
implications for some regional economies where permanent water
has been sold. There will be winners and losers in the water trading
game, which is now attracting general investors.
3. Lack of global competitiveness: Australia is not globally competitive
in many agrifood categories. This is due to our high labour costs, low
productivity rates, rising input costs and in many cases, lack of scale.
4. Entrenched supermarket power: The market power from of
Australian supermarkets has resulted in a major transfer of value
from producers and processors on the one hand, to consumers and
the supermarkets on the other. This transfer of value has eroded the
profitability of many agrifood industries.
5. Advancing corporatisation and globalisation: The Australian
agricultural sector is progressively becoming corporatised and
globalised. Many large family farms have grown to become agrifood
corporations and investment by global corporate farming and supply
chain companies in Australian assets is ongoing. Such investment
will be essential if Australia is to capitalise on growing global
demand for food as the agrifood sector here does not have the capital
required to fund the sale of growth required.

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6. Declining viability of the small farm business model: The Loddon
Mallee agrifood sector was built around small family farms.
Increasingly these are under threat because of their lack of
profitability, small scale, flat productivity plus issues around
succession planning.
7. The need for social accountability: The agrifood sector is under social
pressure to improve its accountability in terms of ethical farming practices.
Social media has put the spotlight on ethics and accountability. Many
industries have been forced to change their farming methods because of the
impact of increased social activism through social and mainstream media.
8. The shifting global demand: Growing affluence in Asia (not just China) will
drive demand for food, particularly dairy products, red meat, grain and
seafood. However, in order to capitalize on the opportunity, it is essential
that Australian producers adapt products to suit market needs and
preferences. More domestic value-adding is needed to retain a greater share
of the value from our food supply chains.
9. Infrastructure and supply chain issues constrain growth: Infrastructure
limitations including road, bridges, rail, energy, water treatment, irrigation
modernisation and mobile phone coverage are impacting the capacity and
competitiveness of the Australian agrifood sector.
10. The critical need to embrace technology: To be competitive Australia must
adopt new technology at every level of the supply chain to improve
productivity, reduce cost, drive product differentiation and lift quality.

The Australian agrifood sector will need to continue to adapt if it is to take full
advantage of the emerging global food opportunity. It will be essential to change
farming practices, build scale, and adopt technology to grow agrifood exports. The
sector needs a massive injection of capital, which almost certainly will have to come
from overseas investors. It is therefore critical that government assist in making the
Australian agrifood sector investment-ready and investor-friendly and that we
manage the xenophobia that is apparent in parts of regional Australia with respect to
foreign investment; and scepticism in relation to new farming business models.
In Loddon Mallee, governments could assist in areas such as driving investment in
infrastructure (rail networks, secondary roads, increasing electricity and gas capacity,
etc.); supporting innovation such as water treatment and bio-digestion to utilise
waste; providing information to industry; and assisting with capability building
around the ‘business of farming’.

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About the authors
Since 1983 McKINNA et al has advised governments, industry associations and
agrifood businesses at every level of the supply chain including on-farm, processing,
value-adding, supply chain, retail and foodservice. The authors have worked in all
significant export markets for Australian agrifood including, South East Asia, Korea,
Japan, China, North America and Europe.
Dr David McKinna is a leading strategist and commentator on global agrifood
trends. The information and insight presented in this briefing paper comes from
many years of hands-on experience advising key players in the Australian agrifood
sector. David has been the strategist behind some of the most notable case studies in
Australian agrifood including:
• MLA’s strategies to reverse a 25 year decline in domestic consumption of red meat.
• The ‘Meat Standards Australia’ grading and labelling system.
• Ag-Notes and the Livestock Reporting Service
• Egg promotions with Peter Russell-Clarke, which arrested the steady decline in
consumption occurring in the 1980s.
• The Woolworths The Fresh Food People program.
• Marketing strategies for Big M, Rev, Skinny and Farmhouse milks.
Catherine Wall has been Managing Partner at McKINNA et al for over 10 years. Her
background is in horticulture where she managed an industry leading production
facility and served on industry expert panels.

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Table of contents
Executive summary ..................................................................................................... 3

About the authors ................................................................................................................................ 5

Table of contents ................................................................................................................................. 6

Introduction & context ........................................................................................................................ 7

Ten driving forces in agrifood ........................................................................................................... 8

1 Continued climate uncertainty ................................................................................................................ 9

2 A shift to farming ‘water’, rather than ‘land’ ..................................................................................... 11

3 Lack of global competitiveness ........................................................................................................... 13

4 Entrenched supermarket power .......................................................................................................... 15

5 Corporatisation & globalisation ........................................................................................................... 17

6 Declining viability of the small farm business model ................................................................... 19

7 The need for socially accountability ................................................................................................... 22

8 Shifting global demand ......................................................................................................................... 24

9 Infrastructure & supply issues constrain growth ............................................................................. 26

10 Critical need to embrace technology .............................................................................................. 29

Strategic considerations ................................................................................................................. 31

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Introduction & context
The Australian agrifood sector is experiencing a period of great optimism with
many predicting that agriculture will re-emerge as a driver of the Australian
economy. This mood is a result of forecast growth in demand for clean, safe food
from a growing middle class in Asia. The market growth in Asia is already
manifesting in improved farm gate prices in some categories and interest by
overseas investors in Australian agrifood assets.
Many market analysts are sceptical about Australia’s capacity to take advantage
of the once-in-a-century looming opportunity, on the basis that Australian
producers are not globally competitive in many agrifood categories and because
of a lack of capability, infrastructure and capital to expand.
It is in the above environment that Loddon Mallee RDA has commissioned this
background briefing paper on ‘the state of agribusiness’ as it applies to the
region. This activity supports the region’s ‘Growing food and agriculture’
priority. This briefing paper presents an independent summary of the
agribusiness environment in Loddon Mallee with the intention of providing
context to assist regional leaders to prioritise projects and advocate for
investment. Growing the food and agriculture economy is one of four priority
streams for investment outlined in the Loddon Mallee Region 2014 Investment
Prospectus. It is a priority because agribusiness is the region’s largest contributor
($1.96 billion in 2012-2013) to regional agricultural output in the state of Victoria.
This paper is structured around the ten so-called ‘driving forces’ that are shaping
the agrifood sector as it applies in Loddon Mallee. Producers have no control
over most of these driving forces, but by understanding them, they can put in
place strategic responses.
The forces presented are viewed exclusively through an agrifood ‘lens’. For most
of the issues discussed, there will be other social or economic implications for
regional development in Loddon Mallee, but these are not discussed here (e.g.
transitioning towns).
This document does not purport to be a detailed literature review, nor does it
represent a rigorous analysis with supporting evidence (other reports recently
commissioned by the State Government achieve that in more detail). The analysis
herein is based on the experience of the authors drawn from a commercial
practise that includes regular in-field research work in Australia’s key export
markets for some of Australia’s leading agrifood companies. This report is
designed to share insights, stimulate thinking and discussion and create a context
for strategic decision-making.
It is important to note that many of the observations in this paper are
generalisations and reflect the overall trend in the sector. There will always be
exceptions to the norm and some of the issues noted about the characteristics of
agrifood businesses do not apply to every one. Like all industries, there will
always be leaders and laggards who sit outside the norm.
In the interests of readability, much of the report is presented in concise bullet
point format so that the learnings can be quickly absorbed.
Loddon Mallee RDA 2014

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Ten driving forces in agrifood
The following are the ten forces driving change in agribusiness in Loddon Mallee
from the informed opinion of the authors:
1. Continued climate uncertainty
2. A shift to farming ‘water’ rather than ‘land’
3. Lack of global competitiveness
4. Entrenched supermarket power
5. Advancing corporatisation & globalisation
6. Declining viability of the small farm business model
7. The need for social accountability
8. Shifting global demand
9. Infrastructure & supply issues constraining growth
10. Critical need to embrace technology

While it could be argued that the cost and availability of labour should be on the
above list, the labour dynamic is not a driving force of change in its own right or
a recent trend. Labour issues are implicit throughout many of the above drivers
and are discussed in reference to Australia’s lack of global competitiveness and
in relation to the need to invest in technology and skills. Essentially, it is a given
that Australia is a high cost labour market and this situation is unlikely to change
in the short to medium term.
The following pages summarise each of the above driving forces outlining a) the
scenario, b) the implications and c) the potential role of government and industry
in responding to them. Also provided are some relevant quotations from
McKINNA et al’s industry consultation work and one or two indicative facts.
Loddon Mallee RDA 2014

Agribusiness briefing paper: Ten driving forces in agrifood impacting Loddon Mallee 8
1
1
Continued climate uncertainty
0

d
“We’ve sourced the same grape varieties here for years but it is becoming increasingly difficult - the
micro climate has totally changed and you just cant grow them here anymore.” r
i
Loddon Mallee wine maker v
i
Scenario: n
g
Respected scientists predict that by 2030, climate change will have the following

consequences: f
o
• Significant warming of temperatures r
c
• Longer and more frequent heat waves
e
• Increase in severe weather events including more violent storms.
s
• Up to 25% increase in the number of days of very high or extreme fire danger.

• Up to 20% more drought including more frequent and longer dry periods
• Changes to ground water quality and availability
• Changed migration patterns of pests and behaviour of diseases.

Implications:
• Weather patterns become more volatile and harder to predict.
• More frequent and more extreme weather events.
• Greater volatility in world commodity prices because crops are more
concentrated globally (e.g. almonds in California) therefore, weather events have
greater impact on supply.
• Increased risk to assets from fire, flash flooding, storms, etc.
• Increased insurance premiums - some assets will become uninsurable.
• A greater need to secure permanent water for permanent horticulture enterprises
(increasing the capital need for these business).
• Greater seasonal variability in production levels, i.e. more crop failures.
• Greater crop and herd risk from new pests and diseases as insect migration
patterns change.
• More heat stress on crops and livestock.
• Increased demand for emergency response due to more frequent and more
damaging extreme weather events.
• It will be difficult to grow some crops that have historically performed well in the
Loddon Mallee.

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Agribusiness briefing paper: Ten diving forces in agribusiness impacting Loddon Mallee
Role of government:
All three levels of government have a role in helping agrifood businesses to 1
adapt to, and manage the impacts of climate change, which includes: 0

• Convincing sceptics of the reality of climate change and its consequences. d
• Driving adaption and the need to change both on-farm and agribusiness r
i
management practices. v
• Bracing for the social and economic fallout of catastrophic weather events, giving i
n
rise to agribusiness failures.
g
• Helping businesses to manage climate change risk.

• Helping to connect agrifood businesses with specialist advice and support. f
o
• Promoting or facilitating R&D focused on climate change adaption.
r

c
e
s

A few facts:
below average
“ Autumn and winter rainfall in South East Australia has been
since 1990.
highest levels for at
“Concentrations of major greenhouse gases are at their
least 800,000 years
.”
continue to increase,
“Australian temperatures are projected to with more
extremely hot days.
heavy
”Average rainfall in Southern Australia is projected to decrease and
rainfall events
are projected to increase over most parts of Australia.”

CSIRO State of the climate 2014

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Agribusiness briefing paper: Ten diving forces in agribusiness impacting Loddon Mallee