Corey Blacksell

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Whose interests are we serving by ensuring supply chain profitability?

May 26, 2013 by coreyblacksell · 3 Comments · Uncategorized

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?

3 Comments so far ↓

  • Nick

    Simply the national farming body has no idea about the real issues that face farmers. Lets say that there are 50-50 of the farming businesses that actually care what return they return. That is farms that are run as a business and not a lifestyle.

    The farms that run as a business mostly run as a low cost operation, that is with high debt levels and therefore interest that needs to be paid. These farms that have zero or low debt have that 6-7% advantage over the higher debt operations.

    That is why the signals of pricing for the upcoming season are ignored, it is not the ultimate aim to make a great return. Otherwise there would be very few merino sheep flocks left in Australia.

    There is too much doing what grandpa did and not enough innovation in the rural space to attempt to change the way people think . And then we have companies that see what we produce as valuable but we thank them for paying as least as they can afford at farm gate.

    The Graincorp sale is just a way for big shareholders to get some easy bucks. Without the takeover they would be worth close to $7-8, as they are a poorly run business whose core business is safety not grain accumulation, as they have lost a huge market share on the ground but have the port protection that is the real competitive advantage, even if it is outdated and inefficient…

  • John Alexander

    Corey,
    I fully agree with your blog. It should be NFF’s objective to get farmer’s profitable before the supply chain. An equivalent example is Australian Minerals Council saying Chinese Steel Mills should be profitable before BHP.
    If the majority of farmers are profitable than we wouldn’t be having regular crisis meetings, as changes would be able to be sucked up. The fact that changes external to farming (can be seen by increased costs, or decreased prices) are now affecting the majority of producers profitability means we have some fundamental issues of our own to fix first. Unfortunately I believe this will get worse than better in the short term.
    As for NFF, you can see the difference in ability of ‘our union’ to get results compared to others. It takes nearly 2 years to get any acknowledgement of issues in Live Export (and that this decision occured), compared to the unions with the Ford shutdown. Government response was immediate. Anyway let’s start the discussion.

    • coreyblacksell

      John, the silence from our farming organisations is deafening.
      Unfortunately the blueprint for Ag and the national food plan seem to dovetail into each other. Does this explain the silence?

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