As a farmer we sit in the weakest position in a supply chain. The standing joke is farmers buy retail, sell wholesale and pay freight both ways. Sitting in a position of little power we are price takers. This point seems to be lost on the National Farmers Federation. Agricultures peak representative body believe it’s their role to ensure the supply chain is profitable, as well as farmers.
Provided there is profit, while we farmers supply primary products to keep the supply chain churning the supply chain will continue to operate. If there’s not profit for supply chain participants then a signal of “don’t produce” will be sent to the market. Agricultures role is not to ensure there is profitability in the supply chain. Farmers should not lose sight of the fact that our role is to heed market signals. If we’re profitable then produce, should we choose. If we’re not profitable then don’t produce, should we choose. Production is not compulsory, and either is producing tomorrow what we produced yesterday.
Farmers lament the car industry and the generous subsidies paid to the three Australian car manufacturers. Subsidies have dulled the market signal. Production lines have continued to roll, but, not for much longer for one. No subsidy has made the supply chain Ford operates in viable and management has decided to end it.
If the NFF is so determined we should have a profitable supply chain then the first fact they should be armed with is cost of production data for every farm product. If there’s no ability for the supply chain to provide break even returns there’s no point in the supply chain operating. Conversely, if the supply chain is able to provide a profitable return for primary production there is no obligation on the supply chain to pay anymore than the market determines. It is a symbiotic relationship, but the power rests with one segment of the supply chain.
The wheat supply chain is a good case study. South Australia and the east coast make up approximately 55% of Australia’s wheat exports. These supply chains are dominated by two regional monopolies. Soon they are to be dominated by two internationally owned supply chains.
Archer Daniels Midlands (ADM) and Glencore are two of the big five wheat traders of the world. They will potentially own almost all the entire storage and handling supply chains in SA and the east coast. They will potentially have ownership of the ports. They could have direct access to the end users. Post farm gate they could have control of approximately 11mmt of Australian wheat. World wheat prices are set in liquid markets such as Chicago and Paris. Buyers and users of the monopolised storage and handling supply chain will have to pay the cost. These costs will be deducted to realise the farm gate returns.
Ensuring profitability in these supply chains is more easily said than done. Farm profitability will only be determined by several factors; price, yield, costs. Costs are beyond the control of a farmer. The only control a farmer has is to use their inputs in the most efficient way. Price can be managed, but not controlled. Yield is also beyond a farmers control but we can manage several aspects of the production system.
Apart from lobbying multinational companies to request farmers are receiving profitable returns there is little that can be done. The only signal an Australian farmer can send to the supply chain is reduced supply, ultimately below the level of demand.
On the logic of the National Farmers Federation Australian wheat farmers would produce the maximum amount possible to ensure critical mass and increased supply chain profitability. The only segment facing risk is the production phase.
There are other supply chains that would make interesting case studies also, the Victorian milk supply chain for instance and the power of a grower co-operative.
Whose interests are we serving by ensuring supply chain profitability?