Fonterra eyes massive growth with Chinese baby food JV

Fonterra said it welcomes the formal approval by Beingmate Baby and Child Food Company to establish a joint venture to purchase the Co-operative’s Darnum plant in Australia.

Chief Executive Theo Spierings said China is a key strategic market for Fonterra, and the global partnership with Beingmate provides significant growth potential for both companies. 
“The partnership will create a fully integrated global supply chain from the farm gate direct to China’s consumers, using Fonterra’s milk pools and manufacturing sites in New Zealand, Australia, and Europe.
“By working with Beingmate, we are creating additional demand for ingredients and high-value paediatric and maternal nutrition products made from our New Zealand milk, complemented by milk drawn from other international milk pools.
“The Australian joint venture will manufacture nutritional powders, including infant formula and other nutritional milk powders, at Darnum in Victoria, for Fonterra and Beingmate and other customers,” said Mr Spierings.
Beingmate will own 51 per cent of the joint venture and Fonterra will retain a 49 per cent stake, and run the plant operation.
“Our partnership with Beingmate is already strengthening the presence of our Anmum infant formula brand.  Distribution through Beingmate is underway, with the first shipments landed in China in June.
“Beingmate has an extensive distribution and sales network with significant growth potential and the company continues to pursue a leading position in the China infant formula market,” said Mr Spierings.
The Beingmate Board’s approval of the joint venture will now be put to a vote of Beingmate shareholders at an EGM on November 16.

Bar set low for a ‘do no harm’ China-Australia FTA

Recent public comments of senior Australian government ministers suggest they are increasingly confident a free trade agreement with China will be concluded by the end of the year.

For its part, Beijing has also offered hints an agreement will be reached within the same time frame. The speculation is a grand signing will take place in mid-November when Chinese President Xi Jinping will be in Brisbane for the G20 meeting.

Given that governments from both countries have staked their credibility on such a schedule, it is more likely than not pen will be put to paper next month.

But the significance of an Australia-China FTA is at least as much about diplomacy as it is about economics. The reality is that the Australia-China economic relationship does not really need an FTA to flourish. Agreements on all access in various sectors are concluded constantly without need for it to be part of a grander sounding FTA. Meaning the excitement behind the likely conclusion of an agreement will exceed the actual significance of such an agreement.

Bored into agreement

Let’s begin with what an FTA actually is. Rather than comprehensive economic agreements covering broad aspects of one’s economy, they tend to end up as rather piecemeal agreements covering specific sub-sectors that negotiators chose to target. Additionally, rather than expressing a broad meeting of minds, philosophies and policies between two economies, they contain extremely detailed provisions.

For example, there might be something about “processed dried stone-fruit” attracting a lower tariff than “semi-processed dried stone-fruit” with appendixes indicating what “processed” and “semi-processed” means, what constitutes a “stone-fruit”, what proportion of the product has to have dried fruit in its ingredients for it to be classified as “dried fruit”, and which stone-fruit are excluded from the provisions etc. It is no wonder that trade negotiators tend to admit the side that becomes bored first tends to lose.

Moreover, when one signs an FTA, especially with China, they tend to be treated as much as political and diplomatic agreements as well as economic ones. In this context, the Tony Abbott government has understood the “me too” mentality in Northeast Asia and played intra-Northeast Asian jealousies well. With Australia having signed FTAs with Japan and Korea, China pushed its own negotiators to fast-track an agreement with Australia.

Foreign investment thresholds

However, since Beijing needs the FTA for political and diplomatic purposes, it will want the appearance of a breakthrough in China-Australia relations. This will come in the form of China insisting that no Foreign Investment Review Board (FIRB) process is required for Chinese investment into Australia under one billion dollars, whether this be investment by Chinese state-owned-enterprises (SOEs) or private firms.

Such a threshold has been applied to Japan and South Korea under Australia’s FTAs with those countries. As China wants the FTA to demonstrate that it too has a special economic partnership with Australia, even if there are strategic and political differences, Beijing will insist on being treated the same as other Northeast Asian neighbours in this context.

For Australia’s part, this was always only really a political sticking point that Canberra will likely relent on. As surveys such as the annual Lowy Institute Poll demonstrate, there is widespread public suspicion of Chinese foreign direct investment (FDI), most of it being undertaken by state-owned enterprises, even if the reasons for such suspicions are not well formed or articulated. In opposition, Abbott appeared to share some of these fears. But in government, his tone seems to have changed. After all, FDI entering into Australia still has to play by Australian rules and follow Australian laws and regulations.

The reality is that the vast majority of Chinese FDI applications into Australia have been approved over the past decade, despite some high profile knock-backs. All indications are the Abbott government will accommodate Beijing’s insistence to raise the threshold to one billion dollars knowing that almost all Chinese FDI applications would have passed the FIRB test in any event. Besides, Canberra will be happy to reduce this hurdle for Chinese firms since FIRB is only an advisory body, albeit an influential one, and the relevant minister can still knock back FDI applications on national security or other grounds.

In return, Australia will receive better access to the Chinese domestic market for our diary and agricultural goods, but this would have occurred in any event without an FTA since provincial governments in various Chinese markets have been agitating for high quality imports in these sector and would have formally and informally made it possible for Australian firms to more easily access those provincial markets.

When it comes to Australian access to the services markets such as legal and financial, we are likely to receive some concessions. But the real barriers to entry in these Chinese markets are local ones at the regulatory and social levels, and an FTA will not reduce these barriers.

The bottom line is that both countries want an FTA for diplomatic reasons. The major, headline concessions that both sides will offer carry few costs to the conceding country, would have occurred in any event, or were already happening in practice. If the acceptable standard is that an FTA should “do no harm” at the very minimum, then that low threshold will be met in November.

The Conversation

John Lee does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.


To grow agriculture in Australia, farmers need to think like miners

It’s perhaps fitting that mining magnate Andrew Forrest is in the vanguard of a move to position Australia as a major food supplier to China. Fitting, because if the plan is to work, Australian agriculture needs to take some tips from another successful exporter to Asia: the mining industry.

A substantial increase in food production will require major improvements in the efficiency of existing systems, plus the expansion of farming into new areas. That will mean spending an estimated A$600 billion to upgrade and add to the ageing network that currently supports Australian farming, in much the same way that the resources industry paves the way for its activities by building roads, rail, ports and even entire towns and cities.

Industry and federal and state governments want to increase Australia’s food production in order to contribute to the unprecedented global demand for food, particularly in China.

The renewed interest in agriculture is also partly due to the new free trade agreements with major importers of our food, including China, India, Japan, South Korea and the United States.

Many people, including the federal government, see northern Australia as having significant potential for food production. In a Green Paper released earlier this year – and which is open for public comment until Friday 8 August – the government pledged that:

No longer will northern Australia be seen as the last frontier: it is, in fact, the next frontier.

A dose of realism

Yet this enthusiasm needs to be balanced with careful consideration of the scale of investment in infrastructure needed for agriculture. Indeed, recent agricultural assessments in northern Australia have highlighted the lack of transport and other infrastructure in areas that are being considered for food production, such as the Flinders and Gilbert catchments.

It could be argued that the lack of supporting infrastructure is probably one of the main reasons why Western Australia’s Ord River Scheme has not been as successful as predicted, and past mistakes should be avoided.

The expansion of agriculture across northern Australia will be influenced by the availability of natural resources (soil, water) and capacity (people, communities). But any significant expansion will also depend on the infrastructure that is necessary for food production, transport, processing and marketing.

The movement of food in Australia relies heavily on road and rail networks, which are mainly concentrated in eastern, southeast, southern and southwest Australia. Transport networks largely radiate from capital cities, because urban areas are a major destination for food and also contain export facilities such as ports and airports. From cities, the transport networks penetrate into regional population centres and areas that have historically been major agricultural regions.


Major road and rail networks in Australia Supplied

Much of northern Australia lacks decent road and rail networks. Expanding agriculture will therefore require a large-scale investment in this infrastructure. And, crucially, this infrastructure needs to be in place before significant food production begins.

This is where agriculture could learn from the resources sector. Mining firms typically invest billions of dollars in infrastructure before digging anything out of the ground. The large up-front investment is justified by the relatively quick and substantial flow of money once the operation finally begins. Of course, it helps that large mining companies have ready access to money and credit.

Putting the cart before the horse

In contrast, it is not uncommon for agricultural production to start before infrastructure is in place, and for that infrastructure to be progressively added as production expands. But this model will not work for the magnitude, and predicted time-frame, of the increased food production envisaged across northern Australia. The government has a very important role in contributing to infrastructure development across northern Australia as part of nation building.

The agricultural industry must itself look at non-traditional sources of capital for infrastructure. Resource companies' recent major investment in the northern beef industry is an interesting development, which illustrates the capital reserves of resource companies, their large investment potential, and their capacity to drive major transformations in how industries operate.

It’s the kind of thinking that northern Australia needs.

The road to the north

At the moment, northern Australia is not ready for large-scale agricultural expansion. Infrastructure is still concentrated around traditional areas of food production in other parts of the country.

Take beef, for example, where facilities for processing and marketing are mainly found in eastern, southeast, southern and southwest Australia. If beef production is to increase substantially in northern Australia, infrastructure will need to be a priority consideration. The new beef abattoir near Darwin is a rare example of new infrastructure driving production, rather than the reverse.


Beef industry infrastructure, including feedlots (red), abattoirs (black) and meat processing facilities (blue). Supplied

Similarly, grain infrastructure (silos, export facilities) is found mainly near existing rail links. Expanding grain production into northwest Australia, partly in response to climate variability and change, would require major investment in storage and transport infrastructure.

Wheat infrastructure, including grain silos (red) and export facilities (green). Supplied

Dairy is a slightly different question, as the future could see the current pasture-based system give way to intensive, larger-scale production – a move that would need lots of new transport and processing infrastructure – or a broad retention of the existing system.

Major dairy processing facilities Supplied

Can Australia capitalise?

If Australia is going to benefit from booming global food demand, perhaps we need to focus more on investment, rather than other issues such as free trade agreements and land sovereignty. Trade deals are important, but we need to make sure we can actually deliver the goods.

According to an analysis by ANZ, Australia needs to plough A$600 billion into agriculture by 2050 if it is to realise the opportunity from the global increase in demand for food. Much of that investment will need to be in infrastructure, rather than production.

Without this funding, Australia’s ageing road, rail and ports will come under increased pressure, while whole new systems will need to be constructed if the north is to join other parts of the country as a major farming area.

That’s why farming should take its cue from the mining industry, where billions of dollars are routinely invested up-front for projects that typically last for 15-20 years. If managed correctly, agriculture lasts much longer than that, potentially creating opportunities for rural and regional communities that will last for generations.

The Conversation

Michael D’Occhio receives funding from Meat and Livestock Australia and has confidential funding agreements with three veterinary pharmaceutical companies.

Beverley Henry, Chris Taylor, Luciano Gonzalez, and Robyn Alders do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.

This article was originally published on The Conversation. Read the original article.


Asian export opportunities: The Week in Focus [video]


In our latest Week in Focus video, we discuss the growing export opportunities for Australian food manufacturers in Asia.

Food magazine journalist, Aoife Boothroyd, talks about the AFGC's partnership with Austrade, which has seen the production of a series of reports aimed at deepening the industry's understanding of export opportunities in Asia.

We also look at the recent signing of the Japan Australia Economic Partnerships Agreement.


As India and China transform, Australian manufacturers must follow

As Australia laments the decline of its manufacturing sector, China is actively taking steps to accelerate its move up the value chain.

Historically a low-cost operating environment, China was once an attractive option for multinational companies seeking to minimise production costs. However with a burgeoning middle class aspiring for a better place in the global ecosystem, the cost advantages are rapidly eroding.

A Bloomberg Businessweek article examined how tech manufacturer Knowles has grappled with these changing conditions, and their experiences aren’t unique.

The rapid increase in wages, increased cost of doing business – physical infrastructure and raw material – and a higher Yuan are all contributing to manufacturing cost pressures. These challenges, and the pace at which they are taking place, are forcing multinational companies in China to rethink their local strategy to remain competitive.

For those firms not in a position to move up the cost/quality curve, an attractive option is to shift their operations to other parts of Asia where labour costs are still a fraction of China’s, such as the Philippines or Vietnam.

Increasingly multinationals are also facing hiring competition from local private and state-owned enterprises. Temporary relocations from rural areas to larger cities for work are also common in parts of China, with employees returning to their families after a year or two.

It is no surprise then for companies to be investing in employee engagement programs. In one instance, a leading manufacturer of building products in Guangzhou has made a considerable investment in employee engagement programs to achieve a staff turnover rate of 20% (which they identify as being well below the average at comparable companies).

“Indigenous innovation”

Led by the government’s 9% growth target for the production of sophisticated goods, China has concentrated on improving its business and governance environment to create a high value-adding manufacturing industry, as opposed to its traditional low-cost, low value-added ecosystem.

In doing so, their focus has been on “indigenous innovation” – creative production nationally that is less reliant on foreign capabilities.

Analysis conducted by the Royal Bank of Scotland and Bloomberg indicated a shift in job types away from traditional textile and clothing, to computers and communications. Medium and high-tech goods production has increased from 40-60% over the past two decades.

While China is transforming itself into an advanced manufacturer, India is actively promoting itself as a manufacturing hub. India’s recent 11th Five Year Plan (2007-12) showed 28.5% jobs growth in the manufacturing sector. India plans to create an industrial corridor between Delhi and Mumbai, investing in vital support infrastructure such as power plants, water facilities and transport infrastructure.

Alongside this global manufacturing and trading hub, will be the creation of seven “Smart Cities”, while at the Third Global Innovation Roundtable (GIR) 2013 in Delhi, there was also discussion of incorporating industry-university clusters, as well as virtual clusters.

How can Australia compete?

All this means that Australian manufacturers need to be prepared for increasing competition in higher value manufacturing, and consider a wider range of options when looking to offshore operations.

So where should Australia place its efforts and how does it retain its competitive edge? My recent article on Asian value chains clearly establishes the economic case for Australia to deepen its engagement in Asia. But more needs to be done. UWA Professor Tim Mazzarol’s recent piece on the “big shift” in manufacturing – from controlling assets and stocks to leading global knowledge networks – makes this case too.

This accords with calls by industry minister Ian Macfarlane for Australia to expand its industry base to cover new industries and products and transform relationships between research, skills, training and industry.

This ethos of collaborative competition will serve Australia’s interests well in moving up the value chain of activity, allowing Australian companies to lead new developments.

At the micro level, Australian companies must start to foster an enabling culture that moves individuals from thinking about ‘my’ role to ‘enabling another’s' role within the company.

But a prerequisite is the creation of a high skilled, globally minded workforce, which needs to begin through schools, universities and even into organisations.

Sustained interventions at different levels of the ecosystem in education, management and industry will enable a national culture that drives future productivity, innovation and entrepreneurship. Education must be the avenue by which we not only prepare individuals for jobs, but help them to become creators of jobs.

The Conversation

Dr Christopher Vas is the recipient of the 2014 Endeavor Australia India Education Council Research Fellowship. He is also one of the Chief Investigators in the Singapore Government funded research project on benchmarking productivity and innovation in Singapore's manufacturing sector.

This article was originally published on The Conversation. Read the original article.

Can Australia win from FTAs in the Asian Century?

Australia and South Korea are entering a Free Trade Agreement (FTA), but before you think “advanced Western country gains access to a large Asian market”, think again.

Economic powers have shifted seismically to the East Asian region (China, Hong Kong, Japan, Korea, Singapore, Taiwan), raising the question of who actually benefits from an FTA in the new world order, the so-called Asian Century.

China appears to be prioritising its Asian neighbours, including South Korea, over Australia, despite Prime Minister Tony Abbott’s ambition to have an FTA signed with China by the end of the year.

South Korea is more competitive

Korea has surpassed Western economies on most key economic dimensions. In the 60 years following the Korean War, the southern part of the Korean peninsula has become one of the most dynamic and sophisticated economies in the world, whereas in contrast, Australia’s competitiveness has dropped, and falls short on key macroeconomic dimensions.

According to the World Economic Forum (WEF), Australia ranks 21st in terms of global competitiveness, Korea ranks 25th. But in terms of innovation and sophistication, Korea is 20th and Australia 26th, in terms of infrastructure Korea ranks 11th and Australia 18th; for the macroeconomic environment it’s 9th versus 25th, and for health and primary education, Korea ranks 18th, Australia 22nd.

Nevertheless, some Australian industry sectors are strong and globally competitive. For example, agriculture will benefit from the FTA with growing beef, dairy, sugar, wheat and wine exports to Korea once tariffs fall. But at the same time, Korea’s own food industry has fast reached global centre stage with innovative noodle, confectionery and healthy herbal products, whereas Australian processed food may find only little demand in Korea. Australia can position itself to deliver raw materials for the Korean food industry, but Korea is also looking to China for produce more in line with local tastes such as rice and herbs.

Manufacturing in a spiky world

Korea is a world leader in the manufacturing of high-tech products such as mobile and smart phones, tablets and smart TVs (Samsung, LG), whereas Australia is not involved in making such things. At the same time, Korea hosts two of the most dynamic and profitable, fastest growing car manufacturers: Hyundai and Kia.

Korean manufacturers are smart in utilising comparative advantages on a regional, if not global scale. Design (R&D) and marketing of such products is largely done in Korea, but the labour-intensive manufacturing has partially been outsourced to low-cost countries such as Indonesia and Malaysia (electronics), Vietnam (tyres) and India (cars).

The Australian car industry has, in contrast, not only lost foreign brands such as Ford, Mitsubishi and Toyota, but even its own home-grown brand Holden has defected from Australia for more cost effective manufacturing in – you guessed it – Korea.

Toyota’s management made a point of mentioning tariff issues when they made the decision to pull out of Australia, but in fact such large scale decisions are more of a competition issue rather than a tariff one, which is really about market access. Ultimately, Australia may simply not have a comparative advantage when it comes to (car) manufacturing, and in the global car industry, manufacturing moves to locations with the greatest competitiveness.

Australia may gain a synchronous advantage, however, once tariffs on steel are reduced and more Australian gear boxes are shipped to Korea. The Korean car industry benefits from that revised trade too, and subsequently is able to sell more cars, which in turn means Australia can make more gear boxes for more Korean cars. This will result in a symbiotic advantage because both countries win in international trade.

Korea wins on services and education too

Australia has much to learn from South Korea. DFAT/AAP

In addition to manufacturing, Korea has emerged as a strong service provider with competitive airlines and a growing tourism sector.

The FTA will guarantee market access for education providers, but here too, Korea is fiercely competitive. Korea’s education system with a focus on academic performance, discipline and passing on Confucian values has resulted in strong PISA results.

Korean students outperform Australian 15 year olds by 10% in maths and 6% each for reading and science. The Australian government aims to lift education to East Asian standards as part of the Asian Century theme, but the Confucian approach to education took centuries to form, and is not a matter of simply “copy/paste”.

Korean parents are still sending their offspring to study down under, but Korea is increasingly attracting international students itself.

The big challenge for Western countries such as Australia is that education ultimately leads to competitiveness, and if the gap between East Asian and Western education standards and performance widens more, then by the very logic, global competitiveness of East Asian nations like Korea will further increase, and Western countries will have a less globally competitive workforce.

Where Australia can benefit

Korea will continue to be hyper competitive with fast to market products and services, it will continue to pass on Confucian dynamism in its education system, and it will focus on FTAs more important than the one with Australia.

Korea, together with China and Japan, make up 20% of the global GDP, and if territorial disputes can be overcome, then these three countries will likely enter FTAs and compete on equal footing with the USA and European Union; Australia may be a niche player in contrast.

It would be naïve to assume that Australia can in fact compete with Korean brands such as Hyundai, Kia, or Samsung and LG. The benefit of the new FTA for Australia is not merely the opening of an already key export market, but a chance to learn from Korea about an education system that contributes to a competitive workforce, an opportunity to better understand the utilisation of comparative advantages, and in the longer term, a chance to regain global competitiveness.

Chris Baumann does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published on The Conversation. Read the original article.


Australian trade beats aid in boosting global food security

Should Australia aim to become Asia’s “food bowl”? How can we help farmers earn more for what they produce? And how can Australia best contribute to global food security?

Those are some of the crucial questions now being considered in the federal government’s long-term agriculture policy, which is expected to be released towards the end of this year.

I believe our future lies in playing to our strengths. The Australian agricultural business model should not be to produce cheap food for the world’s poor, but rather expensive food for rich, largely Asian, consumers.

That doesn’t mean neglecting our responsibilities to help poorer nations or to support global food security. However, this is best done through trade – such as providing technical advice and assistance – to help improve food self-sufficiency in developing countries.

The new dining boom

Food-price shocks in 2007–08 greatly increased global consumer interest in agriculture and the challenges of food security. It has also reiginited interest in boosting agricultural development in northern Australia.

As growth in Australia’s mining sector slows, agriculture is increasingly being seen as an economic replacement, reflected in the slogan ‘dining boom not mining boom’. However, even with global food demand increasing, Australia’s response needs careful consideration and focus.

Continuing growth in world population is overshadowed by the impact of growing affluence, resulting in greater per person consumption of food and demand for more expensive foods.

For a relatively high-cost food producer such as Australia – with high labour costs and a high value currency, but a global reputation for producing clean, safe food – those are trends we can harness to our strategic advantage.

Finding our niche

Global markets are large enough to take all of our relatively small agricultural production as high-value product. So at home, our farmers need to concentrate on production of niche, high-value agricultural products.

For example, wheat is the largest crop in Australia, grown mainly in Western Australia, New South Wales, South Australia, Victoria and Queensland. Most of that wheat is sold overseas, including to Indonesia, Japan, South Korea, Malaysia, Vietnam and Sudan.

Yet even with those significant exports, Australia produces only about 3% of world wheat.

Significantly, we have a good track record of extracting a higher value for our wheat through niche marketing.

Examples include the supply of wheat from Western Australia to produce Udon noodles in Japan. Australia has produced almost all of the wheat used for this product by having a wheat variety with special characteristics delivering a high-quality noodle.


Brewing better coffee – for us and the world

Agricultural research and development – such as the work done at the Queensland Alliance for Agriculture and Food Innovation – needs to go beyond just trying to increase on-farm productivity, and instead find new ways to add value to agricultural products right along the production chain to the final consumer.

Product differentiation is essential. We need to produce niche products with recognised high value, rather than bulk, undifferentiated commodities that will only attract the prevailing price in world markets.

Coffee is a perfect example. By analysing the genetic and chemical basis of coffee quality, researchers can help develop new high-quality, distinctly Australian coffee products for international markets.

Coffee is an important cash crop for many small landholders in developing countries. Those developing nations are likely to remain the most efficient in producing large quantities of coffee for mass markets. However, with the help of Australian experts, they may still be able to find ways to increase their productivity – in doing so, helping to boost self-sufficiency in developing countries.

In contrast, Australia’s coffee production needs to concentrate not on high volume, but on novel high-value products for high-value markets. If targeted with the right products, those overseas markets could take all of Australia’s coffee production.

* This article is based on an address Professor Henry will deliver to the Australian Agricultural and Resource Economists Society’s annual conference on February 7.

Robert Henry receives funding from the Australian Research Council and Green Cauldron Coffee.

The Conversation

This article was originally published at The Conversation. Read the original article.


Free Trade Agreements are a concern for local industry: Poll

The third Cirrus Media Industrials poll reveals that industry is concerned about the impact of Free Trade Agreements (FTAs) which the Government is attempting to forge with China, South Korea and Japan.

The total annual trade with these countries is worth more than $250 billion and the stakes are high as the Australian government manoeuvres around the negotiating tables in Beijing, Seoul and Tokyo.

Over 42 percent of the respondents to our poll believe the FTAs will flood Australia with cheap goods against which, local companies can’t possibly compete.

Although only 14.2 percent of the respondents believe the FTAs will provide opportunities for local manufacturers and growers, they could well be on to something as the deals may offer local companies access to key export markets.

And some experts concur.

Chief executive of Australian Made, Ian Harrison, notes: "It is important that Australia enjoys the same access to markets, such as China, Japan and South Korea, as is enjoyed by other countries which already have FTAs in place with those three economies – so it is important that FTAs are concluded with them as quickly as possible."

It all comes down to the implementation and what's in the fine print. For instance, China is unlikely to lift the many restrictions it has placed on wool, sugar and wheat. Nor will it open up the financial services and resources investments sectors.

Over 13.7 percent of the respondents believe that more open FTAs will better link us to the rapidly growing Asian middle class. And they may have a point, especially in the food sector.

An interesting survey conducted recently in China indicated that 41 percent of Chinese consumers think the safety of their food is a big problem. And this number has risen more than three times in the past four years.

Australia has a unique opportunity to meet this demand. As reported in the Australian Financial Review, KPMG Asia business group leader Doug Ferguson said: “Consumers [in China] have choice and are concerned about the safety of their food. They prefer foreign-produced and imported processed food, due to low levels of trust in locally grown and made products.”

The Australian-made "brand" does carry weight.

Harrison explains: "A crucial element of all of Australia’s trading relationships must be the recognition and protection of intellectual property, so that country-of-origin branding is regulated and able to provide a framework within which Australian exporters can benefit from this country’s very strong nation brand."

However industry isn't exactly brimming with optimism and confidence. Only 16.2 percent of the respondents believe, "FTAs will help encourage Australia to export things other than iron ore and coal."

The votes were registered at the Ferret Group of Sites which include Manufacturers’ Monthly, PACE, Ferret, Food Magazine, Logistics & Materials Handling and Factory Equipment News websites.

Foreign investment in agriculture? How about a plan for profitability

Large parts of Australian agriculture are economically and financially unsustainable. Returns are inadequate and unbalanced; assets are depleted; risks are needlessly high. To date, governments have largely relied on the market to address problems, but problems have worsened.

Mainstream political thinking has essentially ignored issues of foreign investment in farming and food processing (where no significant wholly Australian processor remains). Popular opinion has been turning against such investments, but it was only on Wednesday evening, at the Rooty Hill leaders debate, that prime minister Kevin Rudd finally stated his anxiety about our “open slather approach” and expressed the need for change.

Responding, opposition leader Tony Abbot was reassuring. He would lower the threshold for review of foreign investment from A$220 million to A$15 million – a meaningless gesture when approvals are automatic and asset overpricing pressures remain unchecked. Understandably he did not wish to open up an issue that still divides those in the Coalition and, now openly, Labor.

Headline reactions were splendid: Rudd “retreats on foreign investment” (AFR), “risks foreign investment” (The Australian), “takes hard line on foreign investment” (The Land, The Conversation), “cautious on foreign investment” and makes “reckless flub on foreign investment” (both Business Spectator). Tidying up after this explosive “thought bubble” preoccupied most. All in all, it was a marvellous media moment for reporting, little analysis and much opinioneering.

How important is foreign investment to our farming future, and indeed our nation? Briefly, the historical record is mixed. There are no clear connections between GDP growth and foreign investment, and indeed some contrary examples (relatively slow GDP growth with high foreign investment).

The really important issue is how investors use production assets (such as farmland) and who profits where and when. Serious problems arise in markets when:

  • income streams and profit are inadequate for needs
  • distorting opportunistic strategies are not curbed or countered
  • assets from stressed enterprises are dumped on markets
  • investments are made with mixed motivations
  • funding availability and power are asymmetric
  • financing is unevenly based and biased and
  • perceptions are distorted by misinformation.

Any one of these conditions can corrupt asset markets. As all seven are evident in the Australian farmland and product markets, outcomes are likely to be perverse. Relying on a market solution in such circumstances would be foolish, something that the current prime minister seems to be realising, finally.

Not business as usual

While our politicians and, particularly, their advisers might prefer “Plan A: business as usual”, prudence dictates planning for realities. Here the Australian people are ahead, with now clearly expressed preferences for controls on farm land purchases, supply chain reform, robust national interest evaluations and the like.

This year has witnessed many collapses in rural businesses across all manner of size and form, with many more likely. Governments need to agree on an adequate “Plan B: Stabilisation” as a debt-deflation spiral builds in rural land assets.

In our open economy, the build-up in foreign investment necessitates “Plan C: asset return enhancement”. Foreign investment, be it direct or portfolio, can add significantly to the progress of regions and a nation when it adds something “new” or “better” that realises decent returns for both its domestic hosts and external investors.

Foreign capture of assets, however, is different. There, not only do the bulk of returns accrue preferentially to external parties. Control of assets also enables wider strategies, be these corporate or national.

For example, a grain handler (headquartered in the USA, China, Middle East or elsewhere) may acquire assets in Australia not so much for the earnings from a well-run business based on them but as a means of global supply chain consolidation and targeted preferencing of some suppliers (and discrimination against others).

Plan C should then minimally include a robust national benefit demonstration and measures to preclude opportunistic actions. Under some circumstances (such as current high domestic finance costs and limited rural liquidity) the only real national solution appears to be to ban foreign investment until local investors can obtain comparable finance. Currently cheap foreign money is maintaining unserviceably high asset values and privileged asset access, pushing prices above those local investors can sensibly afford.

The critical strategic question is how to manage foreign investments so that excessive domestic production earnings do not leave the country (as already happens in some Australian sectors and many parts of the world). This is central to plan “D: Restoring national incomes”.

Ownership transfer, income losses

Further ownership transfers of farm, processing, product handling and marketing assets to external parties would see increasingly serious national income losses and Balance of Payment deterioration. Australia is an increasingly indebted nation. It needs to earn its way in the world, not sell off the assets which could support such earnings. External crises can be expected soon enough if our annual net outflows of around A$50 billion continue to go unaddressed.

The usefulness of current financing arrangements could be the focus of “Plan E: sustainable finance”. Currently banks are providing what are essentially home loans to businesses with the high income volatility of agriculture. Others have structured finance in unsustainable ways.

All have been asking for trouble, and it has now arrived. High interest rates (especially the growing margin claimed by financiers for rural funds and the use of unilaterally-imposed penalty rates) need attention, as do the situations of larger debt holders. A well-constituted Rural Reconstruction and Development Bank is part of a viable solution.

Next come “F: supply chain operation”. This does not just mean the problems laid at the door of Woolworths and Coles. The real issue is one of supply chain closures, globally and nationally, as countries and corporations set up their own exclusive supply chains. Markets are increasingly bypassed as corporations tie up chains for a variety of reasons.

Such chains are tailored to preferentially serve certain parties at select parts of the chain. As this runs from farmers through transport and processing to end users anywhere in the world, there are many options for predatory, security or other actions. Recall that high prices only five years ago saw more than 30 nations enact food export controls to ensure their domestic populations were fed.

Insightful action needed

Ultimately, solutions combine in “Plan P: restoring enterprise profitability”. Suitably profitable enterprises have futures. Opportunities to develop can then be sensibly taken up. Much distress and needless destruction of wealth can be avoided if we act insightfully, now.

In all, new policy directions that canvas a range of possibilities for these uncertain times are needed. Solving serious problems in rural Australia requires focused, informed and creative responses by involved stakeholders. Unfortunately, current policy proposals are out by an order of magnitude – and many are not even on the right track.

Prompt, effective interventions can halt the deteriorating situation of Australian farm assets, and the national slide. Complementary actions can restore profitability. Such is the challenge to those who would lead us.

Mark McGovern does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation. Read the original article.


Focus on food, not cars, says Pratt

Exectuive chairman of Visy, Anthony Pratt, says the government needs to shift its focus away from keeping the automotive manufacturing industry afloat and turn its attention to food.

Pratt was visiting Visy's paper mill in Tumut when he described the subsidies the government is handing out to car makers as misguided.

"We think food is a natural fit for Australia, unlike the car industry," he said.

According to the AFR, Pratt said Australia's food safety expertise and our close proximity to Asia gives the food industry a competitive advantage over other markets.

He said Australia can quadruple its food exports to Asia and with the support of the right government and strategies can become a food "superpower" for the region.

But Australian manufacturers must  keep costs low and develop innovative new products if they're to survive the tough times Australian manufacturers are currently experiencing, he said.

"There will be a few casualties – those that don’t keep their costs under ­control. I think it’s incumbent on all companies to continue to reinvest in their businesses in order to be as low as possible on the cost curve," he said.

This isn't the first time Pratt has spoken of the need for Australia to capitalise on its food growing and manufacturing potential.

At the Australian and The Wall Street Journal's inaugural Global Food Forum in April he referred to expanding food production and increasing exports as Australia’s "greatest responsibility and opportunity in the 21st century".

He said that competition laws will need to be changed to allow consolidation among rural companies and also suggested suspension of payroll tax for food manufacturers and government incentives for innovation in agriculture.


Baby Royale to be stocked in Malaysian stores

Victorian baby food maker Baby Royale has gained Malaysian distribution, expected to eventually be worth $20 million a year.

Baby Royale – which has a strong export market in the Middle East with its premium halal products – will be stocked in the supermarket chains Tesco, Cold Storage and Giant supermarket in Malaysia.

"The ASEAN region we see as being 50 percent of our business within five years. And longer-term, we see even bigger opportunities in the region," Adam Moore, the company’s managing director, told The Australian.

The announcement is being reported in terms of the opportunities available to food manufacturers in Malaysia, frequently overlooked in Asian Century conversations, which are usually focussed on China.

“I think the focus for food is shifting beyond the China centric view of Asia,” said Moore.

"There are a lot less barriers to entry and I think we should be taking more advantage of it."

Business Spectator reports that Baby Royale spent two years researching the Malaysian expansion, then a further year in the country with advisory group DKSH Malaysia working on a product range tailored to suit the local market.

“These markets have evolved now, it’s more than ‘This product works really well in Australia, we’d like to sell some excess stock in Malaysia’,” Moore told the Spectator.

“That doesn’t work any more – you’ve got to invest in the local scene and understand it. For us, that’s where the clean, green positioning is really important.  That’s what consumers in this segment expect.”

Malaysia has fewer cultural language and cultural barriers than China, and Australian companies have the benefit of a Malaysia-Australia Free Trade Agreement, which began at the start of the year and removed most of tariffs on Australian food exports.

Baby Royale, a part of Bonkers Group, exports its products to countries including China, Indonesia and the UK.



Pratt says we need to move from mining boom to ‘dining boom’


Food will be Australia’s next great export opportunity. We need to implement economic reforms now to reap the benefits of Asia’s future demand for food.

As The Australian reports, this is the view of Visy Industries executive chairman Anthony Pratt. The billionaire packaging and recycling magnate delivered his vision for Australia’s agriculture sector today at The Australian and The Wall Street Journal's inaugural Global Food Forum in Melbourne.

According to Pratt, there is the potential for Australia to quadruple its food exports to a value of $2 trillion and feed 200 million people in the process.

A US government-funded study released this week found that food production will need to rise by 60 per cent by 2050 just to keep pace with expected global population increases and changing demands.

A major part of this increased demand will be from Asia where the middle class is forecast to grow from 500 million to three billion consumers over the coming decades. Australia is ideally placed near Asia and, given demographic forecasts, will have almost 20 times more arable land per capita than China, India and Indonesia.

So, as Pratt sees it, expanding food production and increasing exports will be Australia’s "greatest responsibility and opportunity in the 21st century".

He said that competition laws will need to be changed to allow consolidation among rural companies and also suggested suspension of payroll tax for food manufacturers and government incentives for innovation in agriculture.

Pratt contrasted the government assistance offered to the automotive and agricultural sectors; as well as the level of media and community concern devoted to each sector.

He concluded that, “the food industry decline has had a bigger impact than the close-down of car factories. The irony is that we have a competitive advantage in food manufacture. We don't have that competitive advantage in producing cars."

The concept of expanding the agricultural capacity of Northern Australia is nothing new. Only last month a coalition paper discussing the issue was leaked.

However, opinions on the sustainability of such a move vary.


Visy to target growth in Asia

Visy Industries is making an aggressive push into Asia, looking to begin manufacturing in at least four new locations and working with food makers to boost exports to the region.

In an interview with The Australian, chairman Anthony Pratt said he aimed to emulate the growth story of his Pratt Industries, which is the fifth-biggest box manufacturer in the United States.

"We are going to try and build the manufacturing part of Asia like we built America,” said Pratt.

“We are taking a 20 year view to build a good, solid business that takes advantage of the burgeoning Asian growth story."

Pratt said Visy planned to create packaging factories in four south-east Asian countries, and has set up warehouse distribution centres outside Shaghai and Beijing and a trading office in Shenzhen.

The company also plans to assist its customers – 70 percent of which are in food and beverage – to quadruple food exports to Asia by through high-quality packaging.

"They say there is no shortage of food in the world; it is getting it there to feed everyone. And packaging is an intrinsic part of that," he told The Australian.

"The single way we can help our Australian customers is to provide tamper-proof, tamper-evident packaging that is durable and has long shelf life."


China’s ‘Great Wall’ eyes off Barossa winery

After buying wineries in France and Chile, China's largest food company has set its sights on a Barossa Valley winery.

COFCO is China's largest food company and has been investing in wineries across the globe over recent years, with the government-owned conglomerate now considering an Aussie purchase.

According to The Australian, representatives from COFCO visited Barossa wineries about a month ago, and are hoping to market wine produced in the region under its Great Wall label.

A recent report in Europe's alcohol industry publication The Drinks Business includes comments from COFCO senior manager, Shu Yu, who says, "I think our next step will be Australia."

The report said he suggested the Barossa would be the preferred region.

The company is planning to release a range of Great Wall wines based on the region they're produced in.

"We will announce that Great Wall is not only China, and we will make a French Great Wall, a Chilean Great Wall and an Australian Great Wall," Yu said.

China has been showing increased interest in Australian wineries recently, with talk that foreign investors are considering taking over Treasury Wine.

The Chinese are lovers of Australian wine, appreciating top quality drops and the heritage behind them. Australia's First Family of Wines is later this year travelling to China to promote Australian wines and their family values.

There's also talk that Woolworths is considering buying the collapsed Barossa Valley Estate. Industry sources told The Australian Financial Review the supermarket giant attempted to buy the Estate for $13m before receivers were appointed in January. It's expected any further investment by the supmarkets in the wine industry will upset producers, who are concerned with the duopoly's growing influence in the industry.


Food manufacturers should capitalise on reputation in the Asian Century: Emerson

Federal trade minister Craig Emerson has said that Australian food manufacturers have noticeable comparative advantages that should be harnessed, and foreign investment in the segment should be welcomed.

Emerson, citing “natural and acquired attributes” identified in the Asian Century white paper, states that Australia should play to its strengths, which are never going to be in examples like the mass production if electronics goods or producing anything cheaply.

Arable land and Australia’s reputation for cleanness and greenness in food production are, however, places where it displays advantages over other nations. The production of premium food is a strength.

“That's why the innovation statement identifies food processing as one of the first industries to benefit from the creation of innovation precincts,” wrote Emerson in The Australian today, referring to last week’s industry and innovation statement from the federal government, which included proposed local content laws and innovation precincts.

“The precinct will involve scientists, farmers, manufacturers and service companies working together to custom-make processed food for the massive Asian market, competing on quality and reliability of delivery, not on price,” wrote Emerson.

“Premium Australian wines, cheeses and infant formula are but a few of the candidates for successful manufacturing in the Asian Century.”

Emerson also criticised the federal opposition for what he claims is “a message to Asia that its investment funds are not welcome in Australia.”

AFGC praises Kraft for manufacturing innovation

The Australian Food and Grocery Council (AFGC) gave food brand Kraft and the Victorian government a big pat on the back last week following the official opening of Stage One of Kraft Foods’ Asia Pacific Centre of Excellence in Ringwood, Melbourne.

AFGC CEO, Gary Dawson, said the centre provides a model for food manufacturing innovation that will enhance industry competitiveness and bolster manufacturers’ capacity to take advantage of export opportunities, particularly in Asia.

“Innovation is of critical importance to Australia’s $110 billion food and grocery manufacturing industry. This important investment by one of the most significant global food manufacturing companies underlines Australia’s potential to become a major manufacturing hub for the Asian Century,” said Dawson.

He said Kraft wants to use the centre to help in the development of new, innovative products and processes for both Australian and Asian markets.

“It’s ambition is to enhance collaboration between the food industry, research agencies and both large and small companies in the food manufacturing sector, unlocking the innovative capacity of Australia’s advanced food manufacturing sector.

Dawson said the centre is a perfect example of the type of food industry innovation hub recommended by the Prime Minister’s Manufacturing Taskforce, but said more innovation is required.

“In 2009-10 industry spent $466.7 million which was consistent with a three year trend of R&D growth. Governments have key roles to play in setting policies that enhance industry competitiveness by encouraging innovation, R&D and business operations.

“Innovation is at the heart of the industry's vision for a competitive future and it maintains a huge potential for growth into Asia. Governments can back the innovative capacity of Australian food and grocery manufacturers by easing the regulatory burden and through R&D tax incentives and accelerated capital depreciation to maintain and enhance the industry’s competitiveness,” he said.


Drop in Aussie wine production could be a good thing

Chairman of the Vinexpo exhibition, Xavier de Eizaguirre, has said that a predicted 15 percent drop in Australia's wine production over the coming years could be a good thing for the industry.

An International Wine and Spirit study, commissioned by Vinexpo, found that Australia's wine production is expected to decline over the next five years, compared to the last five, with Australia taking the second biggest hit out of the top 10 wine producing countries, behind Italy.

According to, de Eizaguirre said the industry isn't struggling so much as it's adjusting to the huge growth is experienced in recent years.

"Australia for two decades has showed incredible growth around the world but is plateauing now and there's an adjustment on the production side which is totally normal," he said.

"It doesn't mean Australia is in trouble in terms of exporting, it just means there's a correction after years and years of spectacular growth."

While it didn't consider export forecasts, the study did find that Australian exports declined 13.3 percent between 2007 and 2011, only (of the to 10 wine producers only Germany and Portugal fared worse) and also that the value of our wine exports fell 20.9 percent to $1.89 billion.

The UK's growing interest in Italian and Spanish drops is considered to be part of the problem.

Despite these findings, the outlook isn't grim, according to de Eizaguirre, who says Australian wine makers will start moving towards boutique labels, in turn creating a more sustainable and profitable sector.

"It will take a while for the Australian industry to adjust to the new trends but it will translate into less volume, better qualities and higher prices," he told

The International Wine and Spirit study also revealed that Chinese consumption of imported still wines jumped by more than 550 percent by volume in the five years to 2011.

China's thirst for top quality wines, particularly red wines, is a big opportunity for Australian wine makers with exports to that market jumping from $21 million a year in 2005-06 to more than $200 million a year.

Some of Australia's top family owned wine producers, including Taylors Wine, De Bortoli and Tyrell's are travelling to China this September on behalf of Australia's First Families of Wine, with the aim of promoting Australian wines and the family values behind them.


Dairy industry being squeezed by “triple whammy”

Dairy producers are under pressure from low global milk prices, the high Australian dollar and supermarket price wars.

ABC’s The Business reported last night that the industry was being squeezed by a “triple whammy”, with farmers claiming they are near breaking point.

“Farmers are losing money, service providers aren't getting paid, land prices are depreciating,” Jock O’Keefe, a dairy producer, told The Business.

“It's all getting to a very critical point, I think, yeah.”

A glut in global supply is also being blamed for producers’ woes.

“The world just became aflush with dairy products,” said Ian Halliday, the managing director of Dairy Australia, the national services body for the industry.

“And so, as a result, that has put some downward pressure on price for this current 12 months.”

Last week saw Wesfarmers (owners of Coles) and dairy farmers in WA argue over the reason for low farm gate prices, with farmers blaming milk price wars between Coles and Woolworths, and Wesfarmers claiming that oversupply was responsible.

"We've seen the one dollar milk strip the value out of dairy products to the tune of $25 million a year, and that's come out of the supply chain, and obviously that just puts far too much pressure on processors and producers, or farmers," Phil Depiazzi of the WA Farmers Federation told the ABC.

Dairy farmers and manufacturers have recently been reported as being both under strain and potential beneficiaries of the Asian Century.

Last year, for example, there were stories about big rises in Chinese demand for dairy and investors in that country buying into Australian producers.


The beef barney: is another abattoir the answer?

Australia’s beef industry is one of the best in the world. High standard for cattle and for processing have led directly to a high reputation amongst other nations for the quality of its beef. But all is not well, writes Cole Latimer.

Australia’s beef industry is under attack.

Over the past 12 months the industry has come under fire for live exports and the standards of abattoirs in Israel and Indonesia, as shocking images of cattle being brutally slaughtered circled the nation.

The flames were fanned by environmental groups which stated that it is the beef cattle and meat processing industry’s responsibility to ensure the humane treatment of animals.

The response of the industry was to immediately distance itself, declaring that the common standards in Australia stood well above these other countries, whilst looking to address the live export issue, and the ever present supply chain problems.

But how?

With the construction of more abattoirs within Australia.

The meaty issues
A major issue with any industry in Australia has always been the tyranny of distance. The majority of beef cattle are grown in the most northern parts of Australia.

According to the Australian Bureau of Statistics within north-west Queensland there are approximately 3.4 million head of cattle alone, equating to almost 50 percent of Australian beef, with the Northern Territory and Western Australia’s Kimberley region making up a large part of the rest of what’s left.

However most of the abattoirs are located closer to major cities or the east coast of Queensland where ports are available, such as Rockhampton and Townsville.

John McVeigh, Queensland’s minister for agriculture, fisheries and forestry, explained to Food Magazine that “there are no abattoirs in the north-western region for producers, so their only option is to face the significantly high cattle transport costs to get them to a port or processor.

“The cost of transporting cattle is increasing due to animal welfare and driver fatigue regulations, rising fuel and labour costs, and insecurities about the live export market”.

Local cattle producer Rob Atkinson, says not only does moving live cattle cost a lot more in freight compared to boxed beef, it also “has animal welfare benefits, with a processing plant closer to where the animals are reared it means less time in the trucks for them as when we cart live cattle a long way we get what we call ‘shrinkage’, which is dehydration of the animals while they’re in the trucks.

“As a producer, because we’re paid by meat works on carcass weight, if there’s been shrinkage it’s less profitable,” Atkinson explained.

And there are even greater distances that Western Australia’s Kimberley region farmers moving their live cattle to finishing and processing sites face.

As the former Queensland minister for agriculture and food, Tim Mulherin, explained, “An enormous swathe of Australian cattle country currently isn’t served by local meat processing facilities – if you draw a line diagonally from just above Townsville to Perth [effectively splitting the nation in two], you would find no abattoirs north of this line.”

The supply game
Live export was seen as one of the few cost effective remedies to the logistics issue of transporting cattle to finishing and processing centres, as many of these farms are located closer to ports than major abattoirs.

But this has hit a stumbling block recently as the high Australian dollar cut the profits on export, and the government announcing reduced quotas for live cattle export and boxed beef, particularly into Indonesia.

The outrage from the Australian public over a Four Corners report detailing animal abuse in Indonesian abattoirs also dented the public’s opinion of our meat processing and abattoir industries.

So what’s the solution?

“Having a local abattoir would lower the cost of supply for graziers,” John McVeigh explained, while at the same time addressing issues surrounding live exports, transporting cattle and costs being passed down the line.

Going head to head
However the solution isn’t straight forward. In the race to solve the meat processing
problems a number of different groups came forward to operate an abattoir.

In Queensland’s north-west region a study analysed a number of potential with Cloncurry being identified as the most suitable for developing an abattoir.

However the relatively nearby town of Hughenden has argued the case for an abattoir in its town instead.

And while the two towns battle it out for support to even begin construction they collectively face much greater competition from a proposed ‘super abattoir’ in Darwin.

In November construction work began on a new $85 million abattoir near Darwin, which is slated to process between 120,000 and 200,000 head of cattle, some of which will come directly from the areas that the proposed Cloncurry and Hughenden abattoirs will source their cattle – threatening their potential viability.

According to Australian Agricultural Company Limited (AACo) general manager Stewart Cruden the site could be progressed through to commission as early as September this year, having already appointed both project management and construction companies for the meat works.

He said, “construction of the meat processing facility will create around 260 direct jobs and a further 560 indirect jobs for the region, injecting approximately $126 million a year into the local economy.”

But before anyone gets too excited, there’s another player in this race: a proposed $20 million Kimberley meat processing works.

The joint venture between Yeeda Pastoral Company and Kimberley Pastoral Investments, funded by a Singaporean equity fund, has plans to process around 55,000 head of cattle pear year by 2014.

The bones of it all
It can’t be denied that the public’s perception of live exports is hurting the sector’s image. This, combined with the logistical and transport challenges faces by producers, has caused calls for abattoirs in north-west Queensland, the Northern Territory, and northern Western Australia to intensify.

However the piecemeal way in which it has been approached, with many divergent views of where they should be located and the overlapping stock areas threatening the viability of the proposed abattoirs, isn’t productive.

The rush to ‘solve’ the issue will create more issues and potentially exhaust stock quicker than planned as the demand for more heads of cattle increases to fill facility quotas.

But at the end of the day an abattoir – any abattoir – closer to home can only be good news.

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