Supply chain costs must be managed for Aussie grain to remain competitive internationally

Ross Kingwell, Australian Export Grains Innovation Centre (AEGIC) chief economist, said in spite of major investments from both the public and private sector designed to improve efficiency in Australian supply chains since 2014, user costs have either remain stable or only dropped slightly.

Prof Kingwell said lowering supply chain costs needed to remain a priority if Australia was to remain internationally competitive against lower cost producers such as Russia and Ukraine.

He cautioned Australia’s supply chain costs were high in comparison to most competitors and that industry needed to work to bring down the cost as a percentage of value of the grain.

“Supply chain costs are consistently 30-35 per cent of the total cost of grain production in Australia.”

While this figure is similar in key competitors, such as Ukraine, Russia and Argentina, Prof Kingwell said these other nations could benefit in the future from increased economics of scale due to large production increases.

He said targeted investment in areas such as automation to reduce labour costs, rail infrastructure to allow the use of larger trains and strategic site upgrades could all help in dragging the cost per tonne of moving grain down.

Angus Trigg, GrainCorp corporate affairs manager, said his company was committed to investment in rail.

“Rail remains a very high priority for the entire industry,” Mr Trigg said.

He said recent joint investments between GrainCorp and state governments had benefited customers.

“Rail rates have reduced over recent years, thanks to the combination of GrainCorp and state government investment in the rail and rail loading infrastructure,” he said.

Prof Kingwell said ports were another priority area, with a lack of competition meaning prices have stayed high.

“Grain ports terminals are a part of the supply chain least exposed to competition and so services associated with use of those assets are priced accordingly,” he said.

He said new port developments could help unleash efficiency improvement but added they could also mean duplication, weakening the position of both businesses and lowering the amount of funds to reinvest into supply chain upgrades.

Prof Kingwell said overall supply chain competition was a double edged sword.

“Competition is mostly effective in signalling best use of resources but it can lead to asset duplication and higher unit costs in a supply chain,” he said.

However, he cautioned against situation where a monopoly provider exists, saying monopolies generally did not push hard for efficiencies transferable to the customer.

“Monopolies can generate economies of size and scope, generally for the monopolist, but history suggests such monopolies risk resting on their laurels,” he said.

He said a hybrid approach, which he dubbed ‘coopetition’, a mix of competition and cooperation, was the best way forward.

Prof Kingwell said supply chains would develop differently in export-focused states such as Western Australia and South Australia and the east coast, where the domestic market is important.

“The vagaries of climate, especially in eastern Australia, in recent years indicate that major investments in supply chains that solely focus on bulk grain export are risky investments,” he said.

“Flexible, low-cost grain supply chains that can be multi-directional are more likely to emerge, driven not only by climate variability but also by the increase in feed grain consumption in Queensland, NSW and Victoria.”

The full AEGIC report, entitled “Australia’s grain supply chains: costs, risks and opportunities” can be found on the AEGIC website.