Steve Spencer

No let-up in retail pressure

2011-08-21T03:00:00.000-07:00

Anyone involved in supply to the grocery trade who is hoping that the intensity in retail competition will soon relax had their hoped dashed last week. The annual financial results of Wesfarmers and the accompanying statements made by the company's chairman Richard Goyder about the road ahead for its subsidiary Coles give a clear indication that price-based competition with Woolworths has a while to run yet. Why focus on Coles? The resurgence by this retailer is the single biggest driver of the intensity in competition at present.

Some could expect to see the bottom line of Coles hammered by the effects of 6 months of deep-discounts under the "Down Down" campaign, which the company has valued at about $800million of “consumer savings”. But the grocery division profits actually grew more than $200m or more than 21% in the full year.

A couple of months back, the retailer pointed to a number of compensating measures that it said would offset the impact of discounts. These included a reduction in waste and costs of physically moving products through its system, but the biggest boost to the bottom line has been the growth in sales over the full year. The food business grew sales by $1.5billion over the full year. About a quarter of this goes straight to the bottom line helping pull the overall result up.

Coles underlying business is growing faster than its bigger rival Woolworths, and it has turned the tables on its competitor in leading out new initiatives. In terms of an overall grocery retail contest between the big two, the clawback by Coles against its bigger rival has some way to go. Various other measures of retail performance - sales from floor areas, margins on sales, cost of doing business etc – each still have Woolworths well ahead, with a slowly closing gap.

Wesfarmers will be happier with this result, but it knows the contest can’t slow, as any retail chain can’t rest on its laurels when retail spending by consumers is as cautious as we’re seeing in 2011. Chairman Goyder indicated the play will get harder as Coles will only dig deeper. With the hunt for value by shoppers expected to remain intense, any retailer is challenged to refresh its appeal to grow customer numbers, and then win more of their business once they are in the store. Coles updated store format is delivering more added sales than the roll-out being made by its rival.

The rivalry will also remain fierce as regime-change continues as work-in-progress at Woolworths, with a new chief now appointed and management team being assembled. This is a reversal of the state of play before and after Wesfarmers took control.

But while outrunning rivals in food retail is one issue for Wesfarmers, the overriding priority is locking-in better returns on investment. Coles has a relatively low return on capital sunk into the business by its parent compared to other Wesfarmers units. Coles uses more than half of Wesfarmers’ capital, producing only 35% of its profits in 2011.

Extended price-based competition - coupled with a high $A, weak consumer spending and rising operating costs - will continue to force revolutionary change in the supply chains of grocery suppliers.

Food Companies

2011-08-15T03:00:00.000-07:00

Ownership of many brands that grace the shelves in stores grocery stores which are foreign-owned may soon change hands with major corporate changes under way. Given the harsh economic reality of a strong $A and rising processing costs in Australia, the reshaping of global food company portfolios is a danger time for food processing jobs.

US-based Kraft Foods, which turns over about $50 billion in revenue, recently stunned the corporate world with plans to split in two. Kraft is still digesting the hotly-contested purchase of Cadbury made in 2009. Kraft will give birth to two companies - a North American grocery products business - which makes up about a third of its overall sales turnover - and a global snacks maker. The timing is interesting, but gives an insight into how the global landscape has forced a redesign of one of the biggest food groups in the world, which itself was spawned from a split several years ago. Those that rallied in defence of the takeover of Cadbury 18 months ago are claiming "told you so".
There has always been a lot of debate about the best way to build large, successful multinational food companies. That question alone – and the deals that been spawned from the issue – have kept planeloads of consultants busy for years.

Some say that it is better to be “diversified” or to operate as a conglomerate with a stake in many food sectors to protect against exposure to specific sectors of the economy or geographic regions. The likes of Kraft, Nestle, Unilever and General Mills follow this model and, between them, dominate supermarket aisles whether in developed or developing economies. The strong presence in most aisles of the supermarket offers strong bargaining power with retailers and, in Australia especially, can resist the expansion of "private label".

Others would say it is better to remain “narrow” and focus on some core strengths and skills. The likes of Kirin Holdings (which owns brewing, juice and milk businesses in Australia) and Coca Cola stick closely to a “drinks” focus yet, when venturing into food which they have each done recently, it hasn’t been so happy.
In recent years these large multinational groups have seen varying success - resisting the tough times in developed western markets, while riding some spectacular growth in emerging economies.

But the varying growth rates in the world's economy and risks of volatility are causing some to rethink of the shape of their vast food conglomerates.

Kraft isn’t the only food group to question its future structure. A spate of "unbundlings" will possibly create new companies and keep the advisory houses feasting in huge fees. Sara Lee (with frozen food units under a cloud in Australia), Pepsico and possibly others are working on plans for either a breakup or the sale of major units. There are common intentions behind these changes. The aim is to ensure things are made simpler for investors to understand and to ensure managers are able to gain better focus. Time will tell if that theory holds before we see the next fad emerge.
Food processing units involved in several food categories in this country will be examined as part of those changes, at a time when the variables in play (consumer spending, the strong currency, labour costs, and rising ingredient prices) don’t make this a happy hunting ground for food processors.

We are going to need China now

2011-08-09T03:00:00.000-07:00

While the world’s financial markets teeter on the abyss created by falling credit-worthiness of several major countries, the situation has the populous cowering and expecting the worst. Now more than ever, this country needs the relatively new and narrow trading dependence on China to stay strong.

A China fact sheet sitting on the DFAT website shows just how large but narrow that relationship is - and where it has quickly come from. China is now Australia’s largest export customer, responsible for a quarter of all merchandise exports in 2010, while they are our also biggest supplier of imports, with nearly 20% of that share. The usual suspects of clothing, computers and phones (and their associated bits) and toys head that list. Imports are growing as the hunger for cheaper goods driven by bargain-hunting consumers and a strong $A pulled in more products.

It’s the exposure to minerals, iron ore in particular which alone speaks for 60% of the value of exports that stands out in the numbers. We’ve got here very quickly. We didn’t have a trade surplus with China until sometime in 2008/09 when the value of exports first passed imports. A few short years later, exports are now 50% greater in value than imports, and in 2010 grew at almost 40% in value due to the surge in shipments of iron ore.

The Western Australian iron ore quarry shipped more than 400 million tonnes of iron ore offshore last year. China took a staggering 70% of that volume. The base of natural resource exports won’t change too quickly but it will broaden in future years. China would probably like to have more of our coal, which went from a little more than nothing to 4 million tonnes in the short space of a couple of years. The two countries have signed up a $50billion natural gas project that sees a lot of capital being plowed into north-west Australia, but actual export dollars won’t flow on that and other big gas export projects for several years.

Are there risks? The economic power base of the world has firmly shifted to China, not only due to its massively expanding consumer demand, but also given that it is now the effective banker to many, albeit now with added risk due to sliding credit ratings. China has a few internal challenges of its own to digest – inflation is a key one of those.

It is fantastic that we get to ride that coattail – it is probably the best option we have compared to that if we’d staked all our belief in the “special relationship” with the broken and battered United States.

In the meantime the ill wind of recession that endangers stable recovery in the US and many parts of Europe may threaten China’s own growth train. A large part of China’s growth miracle has been due to its role as a low-cost factory for the western world – steel (consuming iron ore and coal) being one of the key products in question, but consumer goods exports are generally at risk.

We’d like more out of the relationship. Australian negotiators have been grinding away for more than 6 years in negotiations over a free trade agreement, while others (such as New Zealand) brokered one seemingly in a flash. Maybe we keep mentioning “human rights” too often in official talks and websites for a broader deal to be a higher priority for our most important customer.

Inflation numbers defy reality

2011-08-01T03:00:00.000-07:00

The fears of further pressure on a fragile Australian economy were raised again last week when the Australian Bureau of Statistics released its latest guesswork on inflation.

Thin analysis that appeared in many news reports set the hares running that inflationary pressure had built and that this would be putting pressure on the Reserve Bank to crank up interest rates. The last thing the delicate situation needs right now is a more downward pressure on consumer spending, which has stalled in 2011 much to the alarm of retailers of all forms. Consumer sentiment plunged in the latest assessment by Westpac and the Institute of Melbourne to the lowest since May 2009, when the flow-on effects of the global financial crisis were rippling through the economy. Blame it on any of the factors getting plenty of media play at present – debt crises, carbon tax, house prices, interest rate fears and the pressure to restore household savings.

According to the inflation numbers, the key movers in the list of goods and services shows that the hot spots for upwardly mobile prices are food (booking a 6% rise), energy, fuel and water charges. Just about anything else that consumers buy continued to fall in price according to the ABS. If a lift in interest rates is warranted in response to inflationary pressures, it should address overheating demand that is driving up costs of living. That isn’t apparent in any sector except the supply of labour to mines.

There are two major problems with the food CPI numbers that we’ve seen before. Firstly, the ABS seems to have made the same “Larry mistake” it made the previous time a cyclone bowled over the North Queensland banana crop, by failing to take account of the fact that only a small volume of bananas were available as a result. While unit prices have been very high, the cost of living impact across the board has been limited. The distorted gains in fruit prices have dragged up the entire food CPI result. The concept of “weighted average” isn’t endorsed in crunching inflation calculations.

The second issue is that just as the ABS put out its numbers with food CPI at 6% for the June quarter, two major grocers, with 60% of the spending on food, put out their own numbers on the weighted average of price changes in their businesses. They collectively showed price deflation that probably averaged out at 2.5% over the same period, with the effect of discounts and promotions continuing to drag down prices. Both have mounted major discounting campaigns that kicked off at the start of 2011, pulling prices on fast moving lines below what they were this time last year. The retailers’ numbers make more sense on this basis, leaving us to believe that prices for goods outside the supermarkets have bolted so sharply that the ABS is truly capturing the net effect.

I don’t think so. Sales non-retail channels are depressed according to my firm’s own tracking of household spending, and any price gains in those areas would be hard to achieve.

So, if we’ve got these sorts of issues in one sector, how reliable are the rest of the numbers?

Tackling volatility?

2011-06-27T03:00:00.000-07:00

We’ve never seen global food commodity markets in such tight and complex states, with the complexity and interrelationships of influences on the values of grains, milk, meat and horticulture. We’ve also rarely seen as much investor interest in food production assets.

Agriculture ministers of the G20 group of nations agreed last week at a two-day talkfest in idyllic springtime Paris to a set of measures to tackle volatility in food commodity prices. But the deal reached contained few elements that might inflame disagreement between key players in that club and claimed to “pave the way to greater international cooperation on sensitive agricultural issues”. We’ll see.

The parts of the actual agreement reached play it safe by dealing mostly with humanitarian issues. The G20 nations agreed to exclude humanitarian aid from ongoing export restrictions, and explore use of humanitarian food aid stocks.

Many harder issues have been deferred. The French President Nicolas Sarkozy – who star has faded badly at home - has used this platform as a hope to build his position as a statesman with a French election less than a year away. He’s been beating the food security drum for most of 2011, but has been most vocal about the influence of commodity trading speculators on food prices. Sarkozy blames speculators for causing the surging food prices - especially wheat, corn and soy - that have increased the exposure to the world’s population to poverty and driven unrest in many countries.

His government took a hard stance in the negotiations, claiming it wouldn’t sign a deal that didn’t take a tough line on speculators, by placing “position limits” on trading in food derivatives.

The G20 didn’t go near that. It has merely called finance ministers and Central Banks of G20 countries to better regulate and supervise agricultural financial markets. Proposals on these actions are due later this year, but bitter differences between countries exist here – just as they have surfaced within Europe when trying to agree an exit from Common Agricultural Policy.

The agreement swerved any forceful effort to reduce the distortions from biofuels policies, only going as far as to support further analysis on its influence on food production. Hardly breaking any new ground there!

Information and transparency is another theme of EU reforms that the G20 has also grabbed. The meeting wish list provides for the creation of a global agricultural markets information system (“AMIS”), which would “keep track of stocks and provide supply forecasts”. AMIS will initially cover wheat, corn, rice and soybeans, with others to be added later. There isn’t much urgency about this measure – appropriate given the challenge in making any such approach commercially relevant. AMIS managers will hold their first meeting in September 2011, and publish their first outlook in June 2012.

It’s a bit ironic now that the French want to be the driving force for liberating trade to take the world out of the current tight food supply situation. French agricultural and trade policies have for many years been at the heart of traditional European values that have kept trade walls high and helped protect its homeland farmers. Now it suits the French to free-up trade – quickly.

Don’t hold your breath waiting for any rapid change in the landscape driven by outcomes of this meeting. “No change” is a more realistic bet.

Milk discounting

2011-06-20T03:00:00.000-07:00

A lot of profile is given to the allegations that the milk price war has claimed many casualties since it commenced on Australia Day. Dairy farmer organisations have invested considerable managerial efforts and expense to highlight the risks for their members associated with deep-discounting of mainstream dairy products.

With retailers absorbing the price discount on private label lines, the key reality of any impact on farmers depends on how much volume migrates to private label products. This has varied state to state – in Victoria for instance, branded fresh milk sales volumes are now higher than they were a year ago.

Milk producers in Queensland are at greatest risk from cuts in farmgate prices, where most milk ends up in milk cartons. Processor competition ensures branded milk prices are typically much lower than in Victoria and NSW, while farmgate prices are higher to ensure year-round milk production. Milk producers in Queensland feared the added slug from discounting would result in a slashing of farmgate prices to restore profit to processing in the northern state.

The timing of the discount campaigns heightened protests, as water had barely receded from the January floods which immediately cut milk flows by 20%. Production challenges coupled with fears of farmgate price cuts has deflated regional sentiment in an anxious recovery period.

Discounting has two effects – volume shift and price response. A volume effect has been greatest in Queensland. After 5 months, it seems the annual equivalent of about 14 million litres, or 6% of sales, has moved from processor brands. A seminar in Brisbane last week heard (with some disbelief that it wasn’t worse than this) the annual volume effect adds up to about 1.3 cents a litre when applied to differences in product prices. A price impact appears to have been less than this – retail data suggests branded prices have held ground, and the regional wholesale price index (tracked by Dairy Australia) is also steady. The volume impact in NSW is about the same despite the gaps in milk product prices being larger in that state.

In hindsight, this won’t be industry-threatening by itself. Putting it into perspective, a 2-cent shift in the $A (seen frequently in the past year) is worth about 1.2 cents a litre to a Victorian producer in the current season. A $20/tonne lift in grain prices has a larger impact to costs for most farmers. National Foods suppliers have been hit with far greater adjustments due to the change in private label supply arrangements to Woolworths in the northern states. But demonising grocery chains is a favourite agripolitical pastime.

Such a low impact to date across industry can mean several things. The vocal political and industry protest persuaded consumers to pause before choosing the cheaper product. The entrenched value of milk as a convenience product, accessible from in a vast array of places outside the supermarket, protected brand sales. The result will be a combination of these effects and others.

For the farm sector, there might be bigger fish to fry, but now confidence is the biggest casualty. Where this issue goes from here matters most, as the story may be far from over. If milk processors are forced to sacrifice branded prices to claw back market share in an extended price war, the harm to margins – and the threat to milk suppliers – may grow.

A tragic salad

2011-06-13T03:00:00.000-07:00

Big lessons can be taken out of Europe’s food safety nightmare. The story about the e.coli crisis in a salad vegetable is far from over – people were still dying over last weekend in Germany where the death toll went into the 30s, with thousands ill across several countries. The episode sprang from people eating affected food about a month ago in a number of outlets in German and Eastern Europe.

Consumers across Europe are shunning fruit and vegetables, and German warnings against eating cucumbers, tomatoes, lettuce and sprouts are still in place.

There will be many that use the benefit of hindsight to lay out the unholy mess in the EU’s food safety alert system and how the issue was handled from the time people started checking into hospitals. That might be a tad unfair, as the outbreak was detected over a large area over several days, as the unsafe products were had been distributed to a number of food service outlets in several countries.

As the drama rolled on it has been conclusive proof that has evaded scientists and regulators. Several strains of the bacteria have been found – not all have been killers.

The European Commission quickly laid the blame on Spanish cucumbers which tested positive for the bacteria – but unfortunately it wasn’t likely to be the strain causing death and illness. Growers that suddenly lost their livelihood sought compensation. As the Germans and EU authorities fumble for a definitive trail and source, the mounting compensation bill is approaching $A1bn.

After initially blaming cucumbers, then tomatoes and lettuce, investigators narrowed their search for the source of the killer bacteria to bean sprouts from an organic farm in northern Germany.

The issue quickly escalated with some predictable and exaggerated trade responses. Russia, which is always quick to use trade barriers to make a point, claimed the need to protect its citizens in the confusion as to the actual cause of death and placed a ban the importation of any fruit and vegetables from Europe. The EU has since negotiated a back-down from the Russians.

The two big takeaways from the tragedy have been about regulatory ownership and communication.

The greatest difficulty faced by consumers and producers as authorities raced to identify the relevant strain of the bacteria and its likely source, was the lack of coordination across regional and national governments.

Germany has 16 states, each with broad powers over health and safety may have slowed response to the E. coli outbreak, with no single federal agency responsible for tracking the bug and assigning the blame. Each of the 16 states – which apply varying levels of resources - is responsible for tracking cases inside their borders. Confusion was escalated as different states were issuing parallel alerts for different vegetables.

Expect a complete overhaul of European food safety management and even a reactionary stiffening of approaches in a host of other countries.

The other problem might be harder to fix – it about keeping pace with how people are now communicating with each other. Health authorities struggle when working with conventional media communications, which compete with the lightning speed at which news and opinions spread through the community through social media networks. Luring consumers back to complete trust of fresh food will need some mastery of these channels.

WTO: Now for Plan B

2011-06-06T03:00:00.000-07:00

The ambitions of the sponsors of the World Trade Organization (WTO) Doha Round of negotiations were seriously clipped last week when the talks again broke down. The head of the WTO, Frenchman Pascal Lamy, has quickly conjured a Plan B, or a “Doha Lite”.

The 153 members of the WTO agreed last week that a full deal is now not possible in 2011. By discounting this year, you can pretty much rule out anything happening until well into 2013 with the prospects of a tight US election in late 2012 in the way. The WTO has therefore agreed to a less-ambitious scope for the global trade talks, putting aside into the hard basket the contentious issues. A deal now theoretically appears feasible to finish a deal by the end of the year. We’ve heard that one before.

The Plan B largely deals with the impacts on cutting barriers (tariffs and quota-free access to goods and services) that disadvantage less-developed countries. The hard stuff includes most of the outstanding challenges in agriculture – which are considerable.

The cut-down proposals come at a time when the world is grappling with rising food inflation which is threatening livelihoods in poor countries where most household cash is spent on food.

Protectionist pressures are increasing globally. The WTO itself reports that the G-20 developed and developing countries have introduced more trade barriers in the past six months than in previous periods since the financial crisis began. The barriers don’t amount to much – just 0.6% of total G20 imports are affected by the measures but this is an increase of 0.3% over the previous six months.

Despite the growth in total trade volumes and value which is forecast for the rest of 2011, the outlook for trade retains some big risks – a few broke European countries; unrest across the oil-producing Arab world; Japan’s recovery from natural disasters, and the increasing fragility of food supplies in the face of rising demand and the impacts of weather on crops. The last thing a large number of countries want to do is sign away their right to protect the price of food to their people – despite the crazy knock-on effects that such selfish devices have on other countries.

Lamy says that the focus on a partial outcome by the end of 2011 shouldn’t mean the remaining work should be ditched. Good luck with that one. Many countries think the process is now largely irrelevant to the trade in agricultural products. Australian exporters shouldn’t expect the deferral to alter what market access or prices can be achieved in the next few years. It will be interesting to watch what spin the Australian Government puts on this after putting all its chips onto the WTO table earlier in 2011.

There’s no denying the optimism in Lamy though. Despite what must have been a soul-destroying realisation that he hasn’t been able to halt the forces of apathy, Lamy bobs up with a broad grin and a new plan. He reminds us of that John Cleese black knight character in Monty Python’s Holy Grail trying to stop travellers crossing a bridge in the forest. After losing his arms and legs in a short bloody battle with no hope of standing and fighting back, he – like Lamy - claims this is “just a flesh wound”.

Sweet change on the way

2011-05-23T03:00:00.000-07:00

Some current developments in the sugar industry are interesting to ponder given the changes that take effect this week for Warrnambool Cheese & Butter (WCB). WCB’s cap on individual shareholder ownership will lift - potentially exposing itself to a full takeover.

Sugar may seem an industry a large distance from many readers, but it has some interesting parallels to the dairy industry, with a historical co-operative base that has gradually given way to public and private ownership as the globalisation of food commodities has compelled bigger processing and marketing units.

There are other similarities between this sugar play and WCB’s situation. The plays for Tully are between other farmer-owned processors and global processors and traders who’d like to pick up an Australian asset.

The sugar industry is going through some pain in the wake of destruction from cyclones and floods. Ownership looks like being one of the consequences. Rationalisation has a long way to go in sugar, with 26 sugar factories in Australia owned by 10 milling groups. Analysts predict there is room for only 3 to 4 if the industry is to remain competitive in scale.

Shareholders in Tully Sugar Ltd, one of the largest remaining independent farmer-owned sugar millers, have strongly supported change in ownership when they last week voted to lift a 20 per cent ownership limit to 50.1%. The move comes as a number of takeover offers are already on and expected to land on the board table at Tully. The situation has changed quickly – the owners of Tully voted in support of the limit just 3 months ago.

As with any significant agri-food supply asset that is up for grabs in the food world these days, there is a flock of circling bidders hovering for the chance to pick up one of the last independent sugar producers left in Australia’s industry. Tully might only process 6% of the industry’s sugar cane, but is a strategic asset in the sweetener supply chain. It allows for geographic diversification in the hands of a global player and the seasonal position also allow market “windows” to be serviced by Tully’s crop. This is especially critical in the aftermath of the sale of the biggest sugar business (Sucrogen) to Singapore’s Wilmar International in 2010.

Naturally, the Chinese government’s food companies are there. China’s state-owned COFCO and US-based agribusiness giant Bunge Ltd each already has offers on the table, which value Tully Sugar at close to $130 million. Another grower-owned company Mackay Sugar, in partnership with the grower-controlled Mossman Mill, has matched those offers.

The pivotal role in the bidding war for Tully sits with the industry’s major marketing company QSL which holds just under 20% of Tully’s shares. The sugar industry retains a strong collective marketing vehicle in the form of Queensland Sugar Limited (QSL) which markets 90% of the crop.

Tully was in the news for all the wrong reasons early this year as one of the towns in the path of Cyclone Yasi. The crop in the region was in early stages but damage to plantations and infrastructure on farms has hurt growers. For many farmers hurt by the wind and floods, a buy-out will be an important way to crystallise their company investment, without affecting their market for sugar. Sugar – like most commodities – will continue to benefit from a global food shortage.

Slowing the rollercoaster

2011-05-16T03:00:00.000-07:00

The wild fluctuations in prices of traded commodities and resulting movements in currencies in the past week almost feel like they are par for the course in the turbulent world of 2011.

There are a lot of analysts reading the charts and screens in these markets saying that pretty soon the heated-up bubble driven by the appetite of China for food and other resources is about to burst. Last week’s massive sell-off of oil, precious metals and other resources also sent currency markets into a spin and sliced a few cents off our over-valued dollar, which is badly needed for food exporters.

The interesting question is what has been driving these recent changes?

Speculation into asset values and related financial instruments which created massive false economies drove the world into a global crisis in 2008. Three years later, the same people are mostly at the same screens. It is hardly a surprise that the majority of the action in the day-to-day prices of a raft of agricultural, oil and metal commodities is caused by the actions of speculators. Last week’s big shifts have been blamed on the actions of US regulators watching commodity exchanges such as the CME in Chicago trying to curb the behaviour of investment funds taking speculative “long” positions.

It seems ironic. Risk management tools were originally created to help people engaged in physical delivery of products to manage their exposures by covering positions and creating more operating certainty. These same tools provide opportunity for others with much larger sums of money at their disposal to trade on information – any information at all.

Complaint about the actions of speculators is hardly news. Farmers, food companies and consumer advocates have complained for a century about the effects of excessive speculation. US regulators presently restrict speculators in many agricultural and other commodities that affect farmgate prices and input costs in Australia. The regulators of US commodity exchanges have now moved to increase the “margin” requirements for participants, inferring that prices have been driven higher and made more volatile because the scope exists for growing amounts of money to play the markets. With interest rates being so low in the world, larger funds have diverted more of their funds into instruments that offer scope for gains through speculation.

Those watching these markets may be premature in thinking that by squeezing the practices of speculators we can slow things down a bit and have prices more reflective of the underlying fundamentals. Thinking this might be a remedy ignores the underlying issue that there is increasing volatility because the world is trading most of these commodities with fairly thin levels of inventory or uncommitted supply. Demand and global turbulence – weather and political – has created scarcity. The fundamentals themselves are more complex, with a longer list of influential variables.

Nonetheless there will be attempts to close down the scope for volatility in the US. In reality they’ll take years to sort this out in that country, an engine room of speculation and financial greed, between the vested interests across politicians, regulators and financial institutions. Fixing the US health system is probably a useful analogy – there might be different players such as such as doctors and insurers involved, but the vested interests are just as big.

In the meantime, enjoy the rollercoaster!

First quarter inflation spin

2011-05-03T03:00:00.000-07:00

One of the big worries about the release of quarterly inflation data is the way in which the data – whatever quality it is – is spun, misinterpreted and misused for a variety of agendas.

The Federal Treasurer was quick to let slip what the Labor Government thinks of the issues in the deep discounting of supermarket prices which is putting the squeeze on milk processors and bread makers, suggesting that cheaper milk and bread were saving the consumer money in the face of other rising costs of living. Fingering fruit prices as one of those gains, the “Yasi banana spike” is in fact the same “Larry banana alibi” he criticised John Howard for using.

The CPI numbers have their usual problem with weighting, assuming that the same volumes of fresh food items are purchased at higher prices which have occurred since weather events pruned crops. You also have to wonder about the different readings. While the ABS suggests food inflation is up 4.3%, Woolworths and Coles booked deflation of 3.6% and 1.2% respectively.

But the wave of naive media commentary that instantly connected the CPI numbers to increased pressure for interest rate rises is very unhelpful to anyone selling through retail or those households worrying about living costs.

Basic economic strategy says that when inflationary pressures build, interest rates should be a device used to quell demand. When you drill into the CPI numbers, not much of the rise in CPI actually relates to “heat” in the economy.

The big upward movers in the March quarter CPI had very little to do with tightening supply of goods and services driven by stronger consumer spending.

Fruit & veg rises were clearly due to extremes of weather. Lamb prices - which offset price falls in other meat lines - are soaring due to a global shortage of sheep and in line with higher wool values. Energy costs are being hiked to reflect higher costs of coal thanks to the appetite of the Chinese and to presumably soften us for the coming impact of a slug on emissions. Child care rises are probably an aftershock of a major provider going belly up and a lot more mums going back to work, given we have nestled near full employment again as a country. Healthcare costs are simply catching up with the reality of the underfunded infrastructure to care for the aging population and governments allowing more of these costs to come direct to the user. Meanwhile petrol costs are bringing a higher world oil price into our fuel tanks. Tobacco price rises are based on excise rises.

In fact, as you scroll through the datasheet that accompanies the release from the Australian bureau of Stats, so many of the food and household goods categories which you would expect as indicators of strong demand have minus signs on the year-on-year CPI change.

It would seem pretty unlikely that the Reserve Bank will pick these numbers up as a signal that it needs to apply more downward pressure on spending, and indeed crank up interest costs for farm businesses. Regardless of what the RBA says in response to these numbers, the damage in perception which will drive more caution into household spending has probably been set.

The two-speed economy will roll on, but those operating at the lower speeds have just taken another hit.

China dances a fine line

2011-04-25T03:00:00.000-07:00

China’s struggle to quell rampant inflation will be one of the most important influences on the world and Australian economies in the coming year. The recovery in the world economy – given the weighting given to the massive economies of the US, Europe and Japan – is fluttering as the effects of inflation and the debt burdens post GFC stifle the ability of governments to deliver more meaningful priming of economic growth.

Those economies matter in the world scene, but it is the stability of strong growth in China at present that matters most to the flows of money coming into the Australian economy, and the value of our currency.

China's inflation hit a 32-month high last month of 5.7%. So far the interest rate hikes and other measures have failed to temper the rising costs of living. Food inflation has been one of the worst hot spots – much of which has been created by China’s own practices of affecting world prices, but drought has been a contributor. Some recent relief has been seen in vegetable prices – such a crucial food group to the Chinese – which have plummeted due to early warm weather creating a glut.

The Chinese leader Wen Jiabao said recently that his government is learning a lot about inflation, calling it “a tiger that once set free is very difficult to put back in its cage”. The official word from his administration is that inflation will start to fall in late 2011, but it will be tough to steer a speeding engine as big as China’s economy back into low-inflation territory.

The government in that country has no doubt been watching the developments in Northern Africa and the Middle East which had their origins in protests against rising costs of living. It has no doubt also been working overtime to keep the internet shields up to prevent its citizens from watching how others bring change from decades of autocratic leadership.

It is likely that the regionalised fabric of the Chinese landscape sees a large number of small localised protests on a weekly basis, as costs of living escalate beyond the reach of industrial workers. Those types of disputes are generally dealt with where they flare up. But the episode of Shanghai’s transport workers – mostly truck drivers – however got the attention of the national government, as it broke through the heavy censorship of news that may undermine the position of the government. The truckers lost patience with inflation in the form of the rising port fees and fuel costs that are eroding their ability to make a living. Fearing a spread of the problem, the government brought a quick fix – cancelling the offending fees and subsidising fuel costs.

This may get them off the hook but while it deals with such pressures like putting out spot fires, it has to also steer its fast-growing juggernaut into calmer waters. The curbs it will place on capital flows to calm inflation will be all-important for its continuing development binge. Any hint that China’s price controls will quell demand for commodities that keep our mining industries in clover will set the hares running. Watch the $A crash back to normality and take the pressure of many affected sectors of the Australian economy when that happens!

Test case for competition definitions

2011-04-03T20:21:00.000-07:00

While a lot of attention is being given to debate over the rights or wrongs of deep discounting of grocery products – with the case study on milk occupying a lot of resources and newsprint columns – a different grocery battle is playing out this week.

The tightness of competition in the grocery market over the past couple of years has gradually chipped away at the market share held by the independent grocer. Despite the strength of the convenience of smaller grocery outlets to shoppers, the intensity of the promotional campaigns of Coles and Woolworths have neutralised the growth in share of spending in smaller stores. Given the difficulties in gaining reliable data from independent outlets as a whole, the only place this effect shows up is in the results of Metcash, the wholesale supplier of products to most independent retailers including IGA stores.

In early March, the company downgraded its earnings outlook, saying its bottom line would only rise by 3 to 5%. It seems the bad news given by that company last year about “difficult trading conditions” has gotten a bit worse, as its earnings update suggested it had been forced to cut prices to keep pace with the price war being waged between the major chains. Metcash faces a deeper challenge when faced with aggressive price competition, as the wholesale margins associated its business model makes it difficult for its retail customers to compete with their bigger rivals.

One way Metcash could head off this spiral is to continue to grow volumes, buy gaining more customers. Metcash wants to buy the 80 stores, mostly in NSW, of the failed Franklin’s chain which were put on the market by its parent last year. That would have helped increase the scale of Metcash operations but the ACCC deemed the purchase would have reduced competition in NSW. Some interesting arguments arise from this view – the definition of “market” for one, as ACCC is concerned that this makes the wholesaler too dominant for its liking in NSW, while the bigger picture begs a different interpretation.

This has incensed the boss of Metcash (Trevor Reitzer) who already had taken ACCC chair Graeme Samuels off his Christmas card list since the 2008 grocery inquiry. They brawled bitterly when the ACCC shone a torch on arrangements between Metcash and its retail customers, which was an unintended consequence of the politically-inspired inquiry into, ironically, why consumers pay too much for groceries. That same issue about limitations of choice for retail customers seems to be at the core of the current dispute between Metcash and ACCC. Despite the competition regulator’s disapproval of the Franklins deal, Metcash said it will ignore the ruling, and now a lot of lawyers are feasting on the case.

There’s more than the Metcash CEO who didn’t like the assessment. A Senate economics references committee – the same group trawling through the milk business – ran its own investigation into the ACCC’s decision to block Metcash. This was the first time that a political review process had examined a decision by the independent competition regulator, but came after several years of noisy complaint from the usual suspects of outspoken senators and MPs about the effectiveness of the ACCC.

The ultimate court decision is eagerly awaited as an interesting test case for competition in the grocery market.

The Italian Job

2011-03-26T20:16:00.000-07:00

There’s been a good story building for a couple of weeks in Europe which has some relevance to our local dairy industry.

Parmalat, the parent of the local subsidiary that owns the Pauls and Vaalia brands among others in Australia, is a brand and corporate name that has done very well to get back on its feet after the crippling fraud in 2003 that left a US$14billion hole in its balance sheet. Not many come back from that sort of mess. Through the mercy of its financiers, the company was saved, refinanced and refloated on the share market. The company has done well since it was revived in 2004.

Lactalis, the largest European dairy company based in France, which owns some of Europe’s well-known dairy brands, thinks it is so valuable it wants to take control. Lactalis recently raised its shareholding in Parmalat to just below 30 percent, and was poised to take a majority of board seats at a meeting next month.

But the Italian Government and a group of Italian banks and food companies have moved to halt the French takeover. While the Lactalis purchase was happening, the cabinet of crazy Italian PM Berlusconi was scheming to bring in a change in law to block a change in control of the iconic Italian company in the interests of its strategic value to the country.
The Italians claim that this is only what the French themselves have done. The new law would copy French rules which were drawn up in 2005 when another French dairy group Danone was being stalked by US drinks group PepsiCo. The French sought to define key businesses in certain sectors including food, defence, telecoms and energy as “strategic” to France. This is hardly the European way either, when all members are supposed to lie down and allow the free-flow of investment dollars and give up all sense of national pride.

Some might ask what is strategic about a milk and yoghurt business in an continent awash with milk is hard to see. Food culture is special to Europe however, and many of its regions have fought hard to protect iconic names against copycats. Now the ownership and domicile of a business is being given the same treatment. Maybe someone should have come up with that one in Australia a few decades ago.

The protective measure would "identify certain sectors the government believes to be strategic on which it “reserves the right to intervene” when it discovers the investors come from protected markets. By making its own law, the French left themselves wide open to the ploy.

The Italian Government has already raced to pass a regulation designed to help Parmalat delay its shareholder meeting and give the company - and its potential Italian bidders - more time to consider their options. That has been pushed out from mid-April to June.

Meanwhile claim and counterclaim have ensued just as they would in any farcical Italian opera. There have been allegations of share price manipulation. Lactalis has been quick to say that Parmalat would remain in Italy and would continue to grow in its export and domestic markets, and be an even bigger name.

Ironically a film that charted the massive fraud and crash of the company started screening in early March in Italian cinemas. With the company back in the daily business headlines, ticket sales ought to be booming.

Fear of cautious households

2011-03-06T20:31:00.000-08:00

The events of the past few weeks couldn’t give anyone confidence that long term agendas such as food security and sustainability of the planet have received positive support. In fact, short-term agendas – political support and market share – are far more important when the heat is on.

You can blame the nervous Australian consumer for this. While we think we are in the process of a modest economic growth phase, my reading of what we’re seeing in spending and saving behaviour suggests that households are fairly anxious for their cash flow and stored wealth. The Reserve Bank has backed off interest rates for the same reason.

How does this affect the political will for change?

As the first example, take the circus that has erupted over the announcement of Plan B for control of greenhouse gas emissions. No sooner had the latest scorecard of Australia’s greenhouse gas pollution been released than the Federal Multi-Party Climate Change Committee had to show some of the fruits of its hard work to date by announcing an outline of a proposed carbon pricing system. While it is a scant and cautiously worded parable, it took earthquakes and football scandals off the front pages for a few days.

Let’s assume there is merit in the science that says greenhouse emissions are adversely affecting long-term climate. If we are to control emissions by limiting the permits to emitters, allowing permits to have a value or price, surely the aim of the overall exercise is to ensure that “emitting behaviour” is curbed. That way, it incurs a price that is high enough to hurt.

A tedious and noisy political football game was immediately commenced over the impact on the household, and how we should protect people from the impact of the higher costs associated with polluting activities. The vast majority of emissions are incurred by consumption – including household consumption of energy, transport and other materials. To ensure people aren’t worse off, we are going to protect as many as possible from the costs. Expect little change in behaviour. What do we achieve then except move money around from one sector of the economy (the senior emitters) to another (the junior emitters).

My other example comes from the food market. At a time when the world is running short of nutritious food and commodity prices spiralling to new heights on world markets, our food production systems are under unprecedented stress from the elements. Yet in the interests of moving shoppers from one store to another, it’s prime time to give food away. Rather than pandering to voters about a low-impact green policy, this tempts consumers to vote with their purses.

Once again politicians eager to please their constituency have waded into this issue with specific interest in the effect on the milk industry, which will undergo fundamental change if the new retail value of a litre of milk holds. Considerable anger and frustration has been poured into more than 100 submissions to an inquiry into whether the government or the ACCC or both can do something about it.

Does anyone really think politicians will stare down the interests of the struggling householder and put in place mechanisms to limit how cheap a food product can be sold, when the same politicians are trying to save them money on their future power and petrol bills?

The Currency risk

2010-11-22T18:15:00.000-08:00

There was the usual hype before the recent G20 summit meeting about the hope to resolve the stalemate of the Doha Round of the WTO. It seems every time there is a G-something meeting we get served up the same futile hopes.
When the G20 met in Seoul two weeks ago it concluded nothing more than a statement that 2011 (Doha’s 10th anniversary) presents a narrow window of opportunity to complete the long-running Doha saga. It has been so long since we’ve seen any progress in the process, it’s hard to remember what the major players are actually stuck on. There was something about coloured boxes, a few latin terms but the rest was yada yada.

Why is 2011 a window? Nobody important is having an election and the worst of the global financial crisis seems to be over. Well just try telling the Europeans that the crisis is in the past!

The ever-optimistic head of the WTO, Pascal Lamy said he’d seen “strong signals of political resolve” to finish the round in the coming year. Of course “finish” might mean “scrap”. If that happens he said that the entire discipline and structure of the WTO might start to erode and the existing historical agreements have less meaning without the credibility that he attaches to (dare I say) “moving forward”.

But failure to agree on unilateral trade is one thing. The head of the US Central Bank – Bernard Bernanke – reckons there is a far greater threat to freedom in global trade that lies ahead of the world at present as it struggles to recover from the asset bubbles of 2008. Bernanke reckons the under-valuation of currencies of some key exporting countries – read China, India - poses a bigger problem to the stability of the world economy.

The US banker is reflecting the frustration of trying to revive an economy with very low inflation and interest rates and high long-term unemployment. Distorted money flows are going to hamper an even recovery around the globe. He reckons that if exchange rates were allowed to move freely, developing export-led economies would raise their interest rates and allow their currencies to appreciate. This might curb their trade surpluses and reduce their dependence on export expansion for the growth of their economies – something China has said that it would like to achieve. It’s just that the team of central bankers in China have some very delicate policy dials to play with as inflation is haring away and interest rates are already nudging up.

The disagreement between the US and China on how to manage currency values has almost reached “diplomatic row” proportions. China allowed a small float of its yuan in the middle of 2010 but the change was minor.
The US criticism is that self-interest that comes from strong export growth may risk global stability, and hence rebound on China if the distortions created by its own bubbles aren’t reined in.

The hard part here is who will lead the world to sort this unholy mess out. The Europeans are a little preoccupied trying to plug their own leaks, and Barack Obama has lost so much self-confidence after his party’s hammering at the polls that his “fighting words” are even more esoteric and ideological than ever. This mess will get deeper.

US Ethanol market

2010-11-15T18:12:00.000-08:00

You can sue someone for just about anything in the US to choke up an overweight legal system. Despite this environment, there are some interesting cases that pop up, and this week one has come to light that will be worth watching.

The food and fuel industries in Europe and the US have a tenuous relationship over the role that ethanol plays in the fuel market – a position that has been significantly helped by strong government mandates in those regions to support ethanol demand. The US livestock and poultry industries are especially vocal in their opposition to government support for ethanol, claiming it drives up the cost of feed, and food costs generally. Those sectors face fairly complex market dynamics and in the US have seen some major business failures, consolidations and restructurings due to the cost pressures. People haven’t been keen to pay more for food as they’ve tried to weather a tough recession, yet the pressures on food producers have heightened as they cope with volatility in commodity conditions. The growing demand for ethanol and in turn for feed stock is just one of those pressures.

The US environmental regulator is also a player in the ethanol game. Their wide powers and decisions have far-reaching effect on this issue. Farm and food industry bodies last week filed a lawsuit against the US Environmental Protection Agency (EPA) over its recent controversial decision to allow for greater use of ethanol in motor vehicle fuel. The EPA decided that in enforcing the Clean Air Act it would allow fuel companies to develop and sell petrol with up to 15% ethanol – an increase from the prevailing 10% which they had previously mandated. The EPA said that cars made in 2007 and later could run on E15 fuel. It is working on extending this back to cars built after the year 2000.

The food industry says the EPA had no right to overstep its authority. The bigger question it challenges is the effect that replacing a “zero” with a “five” in the fuel regulation will have on food costs and consumer prices. It is estimated in the US that up to 40% of the motor fleet could access 15% ethanol mix.

The damages that the food industry advocates – which include Grocery Manufacturers Association, Snack Food Association, and the National Meat Association - wish to prevent through their action are the effects that higher ethanol demand will have on food prices. They think that with this greater stimulus to ethanol demand, greater volumes of corn will be diverted to fuel production, pushing up prices for corn, other grains and oilseeds used in food and livestock production.

The ethanol industry bats this straight back and reckons the gains in corn yields will result in plenty of corn for food and fuel. Ethanol already consumes about 40% of the US corn crop. Creating a market for E15 fuel may add significantly to this demand – provide cars can cope with the mix, and the fuel refiners and retailers decide to implement the change. Fuel companies so far they haven’t welcomed the EPA’s actions – they are also part of the lawsuit against the EPA!

There probably haven’t been as many cars made and sold in the US since 2007 to create a major problem, but back dating the effect will certainly kick up the demand. It’s a development to keep an eye on for those in the feed market.

The changing US political tide

2010-11-08T18:08:00.000-08:00

It was pretty difficult to miss the news last week that President Barack Obama’s Democratic Party copped a hiding in the US mid-term federal elections. What is less apparent from the dramatic turnaround in fortunes is what the development means for readers of The Weekly Times – specifically how it might affect trade in food and agricultural products.

The reaction of US voters to their unhappy lot has been swift and unforgiving, returning majority support to Republicans whom they deserted in droves just two short years ago after George W Bush exited. As we see time and time again, when people are hurting, they kick the incumbents.

The US economy is still drifting in the doldrums, despite some better news last week that retail sales were starting to show some life and that consumers now feel about as happy as they did before the GFC gutted the values of their homes. Sure Obama didn’t take the US into the gloom, but there are clearly a lot of people in his country that think that by now he should’ve done something more decisive about getting the nation back to work (and house prices back into forward gear) other than make inspiring speeches. Where new spending has been applied, it hasn’t been effective in pulling along investment and employment. The Obama rhetoric about the “challenges we face” has worn thin and it is now the time for his machinery to get things done. Maybe his “moving forward” slogan was a turn-off too?

Of course now that his party have lost control of the lower House of Reps and seen their Senate majority clipped, doing things will be much harder. He had a hard enough time convincing his own party to change, but he’ll battle the other side of politics that wants him out of office in 2012.

Some would say it really won’t matter what happened in US politics, as the world is headed for another tight shortage in food supply and therefore selling prices for agricultural commodities should keep rising.

But will this result help with the freeing up of trade if a global food crisis is averted this time around? There hasn’t been any progress on global free trade agendas in the past 4 years since the shift control in US politics towards the Democrats in 2006. Democrats thwarted Bush pushing for any progress on an effective and meaningful WTO trade deal.

The Republicans are typically more liberal in their views on trade, but that doesn’t mean much given the increasing factionalism within the US system. The ardent conservative movement – the Tea Party - which has gained momentum in this election campaign has more of a protectionist ring about it than anything, although meaningful policies to turn around the nation have been had to discern amongst the media fear-mongering. The gut-feel is that the new disciplines of American values will be trying to find and protect US jobs at home rather than find ways of trading fairly with the world.

The other factor in the trade equation is the heady value of our currency, to which a lethargic US financial system and a lifeless economy have contributed, but not solely to blame. We have higher interest rates, a hungry China and fears of inflation to that for that.

Trade imbalance?

2010-11-01T18:04:00.000-07:00

Food industry chiefs have repeated their calls for urgent attention from the Governments about the state of the trade balance in the food and grocery industry, with the release last week of the peak grocery manufacturer Australian Food and Grocery Council’s (AFGC) annual “state of the industry” document. AFGC sounded the alarm bells on the state of the trade balance, which for the first time has seen Australia slip to be a net importer of food and groceries.

AFGC is a peak body for food manufacturers. It represents companies that import the grocery raw materials, ingredients and processed food items, and so is effectively calling for the government to do something to correct the practices of its own members!

The release led to quite a bit of mis-reporting of the state of the food industry itself, due to a confusion in several reports of all that is “grocery” is not necessarily “food”. Food and groceries also includes medical and pharmaceutical products, of which we are net importers to the tune of $5.3billion. In non-food groceries, we have a total trade deficit of just over $8billion, which has in fact slipped out only $1billion in the past 5 years.

These are manufactured products. It is a bit late for a wake-up call that Australia is uncompetitive in grocery and consumer goods manufacturing.

Let’s be clear about what the numbers actually show. The figures are for processed foods only, so commodities such as bulk grains and livestock exports are excluded. Australia was a net exporter of processed food and beverages to the tune of about $5.4billion in the year to June 2010. But the size of that trade surplus has been gradually coming down, and was more than $10billion five short years ago. Imports of food and drinks have been rising at the average rate of 6% for that period, while exports have been knocked around in 2010 by our stronger dollar, and prior to that by drought. Volumes have declined slightly.

The news is not all bad. The value of dairy exports fell sharply in 2009/10 because the Australian dollar was about US20c higher than it was in the previous year. Dairy exports held up in the prior couple of years with high commodity prices, despite a small decline in exportable volumes as drought cut production. The value of beef exports was also hit by the dollar, lower beef production and lower processing throughput – ironically because a lot of rain in the major northern production areas slowed cattle getting to markets. Wine exports also fell with the glut conditions in world markets, while prices to Australian exporters of wine have been declining for many years as more of the world’s trade becomes commoditised and is forced to compete with cheap producers.

The weaker spots are horticulture, seafood and other processed foods, where the reliance on imports are increasing. Processed fruit and vegetable exports have gradually increased over the past 5 years – the trouble is the imports of these lines have expended at a faster pace. And we can’t catch anywhere near enough seafood to feed Australia.

The AFGC report is worth a read, but much of the analysis in the book about changing values of industry sectors is based on two-year-old numbers. If Governments are to do something better for the food industry, quicker numbers would be a start!

Retail jousting

2010-10-25T17:53:00.000-07:00

Now that the accounting periods of the two major grocery retailers have aligned, the reporting of quarterly sales updates happens a day or two apart, and was a feature of last week’s retail news. This ensures that the intense competition in the aisles also migrates into the management of messages for investment analysts, shareholders and the discerning public.

Woolworths lurched off of the blocks first last week with a set of sales results that continue a recent trend – low underline sales growth in its existing stores, zero food price inflation and a grim warning that shoppers remain mostly value conscious ensuring spending is “subdued”.

Woolworths food and liquor supermarket division booked a smaller lift in sales than in past quarters, which the company said was solid for the times, and paid homage to its fresh food success and growth in its private-label sales. Coles followed later in the week with a stronger lift in total sales but led strongly in underlying “same store” sales (for stores open for more than a year). Coles reckoned that food prices actually fell marginally in the period. Woolworths saw its same store number at just 2% (which was a small improvement on the prior half year) while Coles says its number is moving at more than three times that rate of growth at 6.2%.

The comparison of these indicators of store health over the past few years shows clearly how the tide is turning Coles’ way, taking share of sales from its rival and presumably other outlets. Stronger customer traffic flows and basket sizes are giving its team on the ground much needed confidence.

But this is a reversal of the pattern we saw for several years when it trailed its bigger rival for 4-and-a-half years to this time in 2009. This is like a common joust between footy fans of rival teams – one may take merit in winning on the field at present, while the other points to the scoreboard and cries “ladder!” As I’ve written before, on other scores such as the return on invested funds, retail trading margins and shop floor productivity, Woolworths retains a healthy lead.

Even though the fight has been evened up a bit between the big two, their combined sales uplift in the past quarter is still running ahead of the total growth in food sales in the economy – if you believe the numbers reported by the Australian Bureau of Statistics.

The movements in sales growth rates are interesting, but the key question that suppliers to grocery – and their nervous independent rivals - will be pondering is whether a price war escalates once again if this trend in favour of a resurgent Coles continues.

Can a price war be afforded? Pressure from rising commodity costs will gradually seep through, but the surging $A makes those effects on overall food costs uneven.
The other factor affecting how the big food players will act from here is how their other retail businesses are trading. The retail market for most other consumer goods remains tough for all with a long period of deep discounting. With food the only major part of the retail market in growth, the big players will act cautiously with their sensitive shoppers.

Walmart to save the world

2010-10-18T17:51:00.000-07:00

The stumbling by politicians world wide on how to put meaningful things in place to address the strains on natural resources leaves the door open for giant commercial players to set the pace. Who knows if governments will ever gain consensus or make the necessary strides in cross-generational leadership to ensure we can feed the world’s populations in future.

The United Nations’ FAO outlook into the challenge to feed the world in the medium term has elevated the issue. Globally, with a booming population, FAO reckons food production must increase about 70 percent to feed 9 billion people in 2050, with only marginally more arable land and far less water to play with.

The giant US retailer Walmart reckons the reality of developing world farming communities means that we can’t rely on scale and technology to solve the global food gap. A large part of the answer lies in helping small-scale farmers – where farming is a way of life rather than a business – produce more, higher quality food.

Walmart last week launched its new “global commitment to sustainable agriculture” that it says will help small and medium-sized farmers expand their businesses, get more income for their products, and reduce the environmental impact of farming, while strengthening local economies and providing customers around the world with long-term access to affordable, high-quality, fresh food. The company reckons it is uniquely positioned - given the size of its retail footprint and its spreading global empire - to make a positive difference in food production for farmers, communities and customers. Walmart says that by five years time it will help many small and mid-sized farmers gain access to markets by giving as many as 1 million small farmers access to Walmart customers. It says it will train a million farmers and farm workers in crop selection and sustainable farming practices, and expects half of those trained to be women. It will increase the income of small and medium farmers it sources from by 10 to 15 percent. Does this mean they’ll pay more? Probably not – it will just teach them some basics and give them access to a bigger market so they can grow more.

The plan goes further to also focus on waste at the other end of the chain – in the latter stages of the supply chain between suppliers and customers. It reckons it can take out 15% of the waste in the US over that same period, which is probably a very tame objective in the scheme of things. Walmart claims it will also cut out supply which results in the chopping down of rainforest – curbing the use of palm oil and Brazilian beef that incurs those outcomes.

Feed the world? Don’t think so. But win the hearts and minds in the developing world which has a much larger role to play in the future Walmart global model? It’s a cautious step in the right direction.

It seems a fairly meek effort in totality, playing at the edges to ensure it doesn’t create a supply chain that results in it having to pay much more for its produce. Saving the world has a double edge – Walmart is also highly focused on remaining a cheap as it can be in its homeland market where the consumer is likely to be tight-fisted for many years.

Life in the two-toned economy

2010-10-11T17:48:00.000-07:00

The Australian economy is in strange territory, with multiple speeds being recorded in different sectors. The Australian dollar has spurted in the past 2 weeks to now be flirting with parity against the US dollar after months of wobbling around the US90c mark. The surge in recent times is helped by the fact that the US dollar is generally weaker as that economy looks as if it is going to go back and spend more time in the toilet. Our dollar hasn’t shown the same stellar progression against the Euro and the Yen in that same period.

The surge in the value of the dollar has been led by an expectation that we will continue to sustain growth and financial capital, with the belief that pressures in the economy will force interest rates to keep rising.

This is hurting and will continue to hurt the value of exports, dampening some of the gloss for those sectors that are doing better on the back of growth in Asian export markets.

The International Monetary Fund (IMF) in its latest economic outlook published last Thursday says we are in relatively good shape compared to other developed countries, but we lag the average for the world. The IMF expects the Australian economy to grow at 3% this year and speed up to 3.5% next year – but this is behind the pace for the globe (nearly 5%). Asia is sprinting at more than 9% this year, fed by China and India.

Last week’s employment numbers confirm that the effects of job losses and cutbacks in hours never got as bad as the pundits expected it would in the slowdown. We now see unemployment resting at about 5%, with total employment is growing at more than 3%, much faster than what the population is now growing. The effects of the Chinese and Australian stimulus packages have kept the demand for labour strong, especially in mining and infrastructure projects, creating some shortages of skills that will keep cost pressures rising in the economy past the point where the Reserve Bank feels comfortable.

But there are weak spots which show that uptake of economic activity after the effects of the stimulus measures isn’t convincing!
The housing market has weakened – prices have peaked and housing starts are tipped to start falling. Retail sales growth is also patchy, with the strongest parts of the retail market in food retail and eating out. Other sectors – such as department stores and other retailers of household goods – remain in the doldrums, as retailers continue to pump-prime purchases through more aggressive promotion and financing deals. You wouldn’t think that Harvey Norman’s new 5-year interest free terms on goods is screaming of confidence in the outlook!

For those supplying the food market, the recovery continues. The ABS says total food sales for the year to August were ahead about 4.6% over the same time last year, with eating-out picking up plenty of value as more cash is splashed around, which is good news for those servicing those niches. It is still slow with the big end of food retail, with large chains locked in a pitch battle competing on value.
General surprise greeted the Reserve Bank’s decision to keep its foot off the interest rate accelerator for now. But they are clearly sensitive to this delicate balancing act!

Retailers look to new fields of growth

2010-10-04T03:00:00.000-07:00

The long-running aftershocks of the global financial crisis for the economies of North America and Europe have created huge problems for big grocery retailers who have spread themselves over several continents. The giants of grocery – Walmart from the US, Tesco from the UK, and Carrefour from France – have each long been faced with the dilemma of countering the slow growth in home markets with picking the right winners in foreign territories.
They have each had mixed success with these international forays. The challenges of coming to terms with different retail cultures, different formats of stores that are needed to work in different countries, and new types of competitors has ensured that each major offshore investment is difficult to manage.
All three of these global groups are doing plenty of soul-searching about how to keep their growth engines working. Carrefour has gone to the extent of pulling out of certain regions and is re-inventing its store format in its homeland from a tired old model that isn’t working in a more frugal, discount conscious Europe. Tesco has made a meal of its entry into the US – the timing of the GFC didn’t help either.
After a chequered history in buying outside of the US, Walmart made a large splash last week with the announcement of a A$4.5bn bid for a large African retail group, Massmart. Success is not assured though just because of size. Walmart has been successful with plunges into the UK (through ASDA), Mexico, and China but has made a mess of entering mainland Europe, South Korea and Japan, where in each case it simply picked the wrong partner.
Going into Africa is a bold move. Massmart has nearly 300 stores, more than 80 per cent of which are in South Africa, with the remainder spread across 12 sub-Saharan countries. It trades through several types of formats including grocery business and DIY. These are tough markets to make money in selling food to start with, let alone the diabolical country risks that exist in this region through ongoing political instability.
Are there issues for us in this move? Africa is a massive food market which is probably has the least-advanced developing region. By adding to the sophistication and infrastructure to food retailing, large players like Walmart can change food markets, and increase the demand for processed foods. That doesn’t happen by itself – incomes of households need to rise at the same time if a stronger food market (giving better export prospects for producers) is to follow down the track. Walmart will have learnt much from retailing in China but this new land will be a very different experience – if it wins.
But while these groups are exploring the mix of retailing in the world, I wouldn’t expect them to turn up in this country seeking bargains. The asking prices for big grocery chains in this country would need to be fairly strong if they are to be bought from their current owners. Australia is regarded as a mature market by the global players as any growth in grocery sales in future expected to be eked out against pressure from small, nimble groups nipping at their heels, and the vigilance of the ACCC and the complaint of politicians.

Rural R&D

2010-09-28T03:00:00.000-07:00

Stakeholders in rural industry research have until November this year to comment on a draft report of the report of the Productivity Commission (“PC”) into the future structure and funding of rural R&D corporations (“RDCs”), such as Dairy Australia, Meat & Livestock Australia, Horticulture Australia and Australian Wool Innovation – to name a few.
The economic think tank hasn’t questioned whether rural R&D is a good thing; it simply thinks it can be done more efficiently and by using a smaller proportion of taxpayer funds. The PC report also doesn’t propose swift change but says the shape and balance of funding should shift over time towards a greater commitment by the beneficiaries of the research – farmers themselves.
The biggest issue in the report is the extent to which taxpayers foot the bill for rural R&D. The Federal Government presently matches farmer or producer levy funds up to a maximum of 0.5 per cent of each industry's gross value of production, which the commission said this should be held for the next 5 years but then halved over the following 5 years.
But there are some significant structural proposals as well, with the commission suggesting some savings and better focus could be delivered through the creation of yet another R&D body - a new government-funded corporation to be called Rural Research Australia (RRA). RRA would manage and fund broader rural research that wouldn't otherwise be provided by the industry-specific RDCs, and presumably in a better way than project-level work that is done by industries on such issues. The PC wants to divert almost a quarter of the current level of government funding into RRA.
The “real” brief to the PC when they started work was to achieve savings for the federal budget, and to provide a recipe for better governance of the spending of farmer and public funding. The proposals will slash monies available to existing RDCs over years 6 to 10 of the PC’s plan by more than 30% (based on 2009 numbers) if the cuts and RRA proposals are adopted.
But the ultimate outcome of this review will come down to a balance of political judgement. The work was formally called in February 2010 by former Agriculture Minister Tony Burke in a very different climate. That was prior to the Rudd Government losing its lead in support of the populous and “running off track”, and also before the profile of regional issues got elevated through the election result. Both major parties are doing their level best to manage the impact of the regional agenda on their approach to this term of parliament, and so far little has been said about rural R&D in that context.
How do these proposals position rural industries in the long term? The biggest issue not covered in the PC report is the long-term positioning of Australian industries in the world markets for agri-products, nor addressing the immense challenges that are bearing down on several sectors due to changes in the world economic disorder, food insecurity and climatic outlook. There will be plenty to be said in the coming months by each affected industry sector to defend the important role of R&D in their worlds, but some long-term perspective on Australia’s interests need to colour and balance this dry economic debate.

French social reform

2010-09-21T03:00:00.000-07:00

Some changes are easier to ring than others. Europe has changed immensely in the past 20 years with landmark events such as the felling of the Berlin Wall and the integration of East and Western societies; and single European currency in most places; and the agreement to steadily sweep away the archaic support regimes for its farmers.
When the fast-talking and snappy-dressing French President Nikolai Sarkozy swept into power and picked one of Mick Jagger’s ex-girlfriends as First Squeeze, he promised to revitalise France. Sarkozy pledged to sweep through a reformist agenda that would do whatever it needed to ensure the French could keep the lifestyles they deserved. That warmed French hearts as they entered ballot boxes but since then his star has fallen as the rubber has hit the road on putting those promises into action, and he has delivered little.
The maverick Sarkozy now feels anything but cosy after national rolling protests against his government pushing through radical laws to change what may have threatened the values of society. What horrible thing has he inflicted on his people? He has dared lift the retirement age in France from 60 to 62, and push the age for full pension entitlement to 67! In essence, he has told the French they have to work more, which is one of the most dangerous things anyone can say to those collective masses - a deeply socialist culture that preciously holds onto cradle-to-grave welfare as an absolute right in being French. Governments have fallen in the past for far weaker reform than this.
Polls and surveys are misleading at the best of times but the French are specialists at creating confusion for anyone in authority – 53% of French think the proposals are “acceptable” but 70% support protests against the changes. This seems to make sense but don’t think that denies them the right to gather behind banners and throw rocks at police and government buildings. But the French ARE different and need much more cotton wool around them as they age gracefully.
It matters not that the average retirement age for the developed world is 66, or that this catches the French up with its big Euro-neighbours.
The trouble with France and with a few other countries in Europe in the post-GFC era, is that they can’t fund their social structures caused by aging populations and endemic unemployment. France has to change something big as it has an underfunded state pension (the equivalent of superannuation) to the tune of €42 billion (about A$60 billion) by 2018, high unemployment, a major social problem with cities of unwanted illegal immigrants and economic growth that looks like flagging while the rest of the big players in Europe can see the way to brighter times.
What’s this all got to do with us? Europe has long been debating how it shifts its money from funding unviable farmers towards more positive uses, and governments look to save cash to fund the black holes that have emerged in their coffers. The French will be the last to accept any such change but the longer they dither over bigger problems, the easier it will be for the European Commission to glide the remainder of farm reform past them like a quiet ship in the night.

A new play on food security

2010-09-14T03:00:00.000-07:00

With the grim outlook for future world food shortages, BHP Billiton’s hostile takeover bid for major fertiliser producers, Canada-based Potash Corporation, shows the extent to which food security is having an impact on strategies in the corporate world.
The BHP bid has been followed by the news of a potential merger of Russian potash rivals Silvinit and Uralkali which would result in tightening of the ownership of the producers of a key crop nutrient.
Chinese chemical groups fear the BHP move would lead to too much concentration in the fertilizer market and put at risk the future supply of product at reasonable prices to its food producers. The Chinese reckon BHP and one or two others will lock up the market and milk the fruits of a capacity shortage. The Chinese concern reflects the fears of its government in being able to feed its bourgeoning population with affordable food as it watches pressures on its dwindling land and water resources.
Potash production is running at about 90% capacity at present, but Potash Corp has the bulk of new global capacity coming on stream in the next 3 years which makes it a compelling play for BHP to establish a major new line of business. China buys about a third of Russian potash output, and is staring into the future of needing more of the product from the Canadians. Demand for potash imports into China is growing at 5 to 8% per annum.
The target in this contest isn’t a dominant player across the fertiliser spectrum of “N, P and K”, as it is ranked just third but well behind others in the production of nitrogen and phosphates.
The long term challenge is feeding the world with less water and minimal increases in arable land. BHP’s pitch to its investors recognises the need for the world to lift crop yields by using more “balanced” fertilisers. This investment is positioning the group to benefit from that necessary trend.
BHP isn’t yet a potash producer, but it is sitting on future reserves, and has eyes on a long-term prize. The barriers to BHP’s move to become a major force in the sector are tricky with a play like this across the globe, and they aren’t limited to the target’s ability to find a rival white-knight bidder. There isn’t a global equivalent of the ACCC, but that doesn’t mean this will be a quickly played-out deal. BHP has to get competition policy clearance in several countries – US, Brazil and Canada - the before it gets across the line. US anti-trust commissioners don’t exactly move at the speed of herd of startled gazelles, and it could be anywhere between 3 to 7 months for a verdict to come out. The Chinese government have also been looking into the ways it can block the deal but it isn’t clear how they could.
Meanwhile the prospects of rival bidders emerging to thwart BHP’s $40bn bid are weak. Potash hasn’t come up with a Plan B despite rising potash prices making the target look more valuable, and the strong Chinese interest in finding other investors to stump up the money. The irony is that the local Canadian provincial government has said it would have greater fears in a Chinese takeover of its local company, than one by the Australian giant!

The world is not out of the darkness just yet

2010-09-07T03:00:00.000-07:00

Australia posted the fastest rate of economic growth for the past 3 years when GDP numbers for the June quarter came out last week, to show further how important mining and China are to the flow of money in the lucky country.
Lucky that is that we are not shackled to the major developed economies of the northern hemisphere which seem to be running a race back to the bottom based on recent trends.
Capital markets initially took good news from the announcement that US GDP figures for the June Quarter came in at a better than expected 1.6%. But this was after the expectations for the figure had been revised downwards. The US economy is now limping after recovering to 5% real GDP growth late last year followed by nearly 4% in the first quarter of 2010. Roll the trend forward based on the June information and it is clear very fast action is needed to pull that economy up before it goes into reverse gear. Recent news about sluggish housing sales has been balanced against better unemployment, but at least consumers are spending a little more than they were this time last year.
This is now a nightmare for Barack Obama who is looking to avert a collapse in support for his party at looming half-term elections. He touched hearts as the costly mission in Iraq was formally ended, but the country is still waiting for his economic miracle to get cracking. The US Federal Reserve stands ready to plough money into another stimulus effort, but just where will it work is the puzzle.
Europe doesn’t quite look as grim as does the US, with the Eurozone economies moving ahead at just 1% per annum. But rises in consumer prices are slowing and the 12-year high of unemployment isn’t getting any weaker. The financial cracks from the risks of Greece and Portugal also remain real for bankers.
Japan last week jumped to try and pump-prime certain sectors of its economy with a paltry $12bn stimulus package – paltry that is by standards set by K Rudd when he was the resident of the Lodge. Japan’s economy has stalled with a chronic deflation which has seen consumer prices fall for the year and a half. The yen is over-priced and at a 15-year peak, and the country suffers from the other problem of political leaders bailing from the top job every few months. That amounts to instability on all fronts that hardly fills business with much confidence.
The aftermath of the GFC is proving to be a watershed time for the policy makers of these big developed economies, which are finding out the hard way that some major remodelling is needed. The cancer that erupted from the asset “bubbles” and follow-up stimulus monies were clearly sheltering some unviable sectors of these economies. Kick-starts to growth remain elusive.
What does it mean for us? Well as far as trade activity goes we need to hope like hell that the engine room of Chinese demand doesn’t fall off a cliff. Apart from that fairly major issue, the other uncertainty affecting trade is what will happen to the value of the $A on the sidelines of another developed world slowdown. Lucky we have a vibrant Asia to sell to!

The Independents’ agenda

2010-08-30T03:00:00.000-07:00

Regardless of the outcome of the political impasse that has gripped the nation since the major parties each failed to convince the masses that they deserved a mandate, we can now expect a few old issues to come back into the limelight.

The gang of three Independents who promise to work as a bloc in supporting a new Government have a long list of unresolved issues the reasons why each of them didn’t go to the election on the ticket of the Coalition. They claim to be after a shakeup in rural health, broadband, supermarket power, free trade, irrigation water use and .... oh yes....competition policy. The logic may be twisted at times though.

The free trade issue is about blocking food imports which are dealing constituents of regional NSW and Queensland out of markets for their produce. The biggest industries that provide livelihoods for voters in Bob Katter’s far north Queensland seat are beef and sugar – which depend entirely on the ability for Australia to access and retain export markets. We can’t have it both ways.

There is a lot more measure in the words of Tony Windsor however who is an impressive spokesman about the inequity that has developed in the treatment of rural and regional Australia. Windsor has long pushed for an overhaul to competition policy to recognise "distance, smallness, remoteness” of regions.

The area where it seems the three amigos can have the greatest impact is in the enhancements to rural infrastructure that could come from a serious investment in telecommunications via the NBN. This subject of political promise is one where there couldn’t have been any greater distance between the two parties, and the compromises to appease the independents on addressing this genuine need for investment in regional Australia will be worth studying.

The power and influence of supermarkets are bound to be in focus as an area for attention in this term of Government, however long it lasts. This will morph into a debate about the effectiveness of competition policy which has a large degree of focus on “consumer”. Major efforts in the past to unravel the major grocery chains have come unstuck on this fact. The consumer – including the regional and rural consumer – is the beneficiary of the current approach. That line will be used again to defend the structure of our food retail markets against whatever is thrown at the current system.

But tt comes with impeccable timing as this issue reappears on the political agenda that Woolworths announces record profits and increases food retail profitability – to a level that is almost double those of its major rival Coles. Woolworths boosted its bottom line by a little more than 10% - the 11th straight year that it has grown profits by at least double-digit percentages. This comes however when food inflation is at near zero and when most consumer goods sales areas remain in decline due to the flatness of the economy.

The wider issue of competition policy however is a more complex challenge which has dogged the conservative parties for years, with some interesting unanswered issues about the structure of supply chain arrangements still unresolved from the ACCC’s inquiry into grocery prices and the recent Senate Review into dairy industry dealings now back on the table. It will be interesting to watch where those recommendations are taken as this story unfolds.

Is there capacity for food price rises?

2010-08-23T03:00:00.000-07:00

There is building pressure in the food industry for higher costs to be pushed through to the market. This has gained recent headlines in the past few weeks we have we seen a fundamental change in the supply/demand balance in world grain markets as Russia decided to put its internal food security ahead of earnings roubles from trade. The effect has quickly rippled across grains and oilseeds as the interdependency of markets and growing choices becomes apparent. Higher costs will put pressure on a number of food and feed user segments which rely on grain as a primary feedstock.
But the cost of grains is only a new development – costs of other business inputs have been steadily rising to potentially add to a squeezing food business costs. For the past year, the average rate of cost inflation for utilities (power and gas) has been rising at around 14% per annum, while the cost of vehicle fuel has also kicked up to be running at more than 7% per annum.
Food companies have weathered tight times as they have firstly watched the drift of consumer spending towards cheaper lines, and now frustratingly wait for the return to better margins. The return to “premium” is being delayed by both lingering uncertainty for many people who remain nervous of the times, and the fact that many find cheap foods not too bad at all and are sticking with them.
The world’s biggest food company Nestle recently vented this sentiment as it announced its annual results, bemoaning that it had locked itself into too-strong a dependence on the sluggish developed world. Nestle said that not only did it need to get more of its growth in “frontier” developing markets, but it is also now time to put prices up.
There will be some challenges doing that in some markets, but green buds of prosperity are returning to Europe and the US, although the recovery indicators are patchy.
What are the chances of food suppliers getting away with that in Australia? Consumer confidence for a start has been steadily improving. Looking at the commonly report barometer of confidence – the Westpac-Melbourne Institute index – confidence has rarely been higher in the past ten years. However it is quite hard to peel that back and discern whether people are feeling happier because interest rate rises are slower than expected, or they feel the economy is strongly on the rebound, or simply there are so many good bargains out there to be had. Retailers have bemoaned with the latest reporting of retail sales that the most important reason they are holding up their sales line is that they have been forced to slice the price to keep attracting shoppers.
Ask people running some of the pricier restaurants around town and they reckon times are much better than a year ago. It’s like the double-edge of the MasterChef effect – people want to cook like the legends in their own kitchens, but the appearances of big names on TV is also drawing bigger queues to “name” outlets to see what all the fuss is about.
This situation is also symptomatic of a multi-speed recovery in consumer spending. And for this reason it would be a brave call to assume that shoppers can be quickly weaned off “value”. Price relief is needed, but it should be steady and gradual.

Local food initiatives

2010-08-19T03:00:00.000-07:00

The Tassie food branding exercise announced this week by the Government and grocer Woolworths is the latest effort in retailing to take advantage of regional provenance. Tasmania has fair chance of carrying it off – for a start it is self-contained, and there is little chance of blurring the boundaries. It has also set some clear objectives in the past based on “purity” in its stance on some ethical food fronts.

But can regional branding really make a difference? Will the Tassie label support make a difference to Tasmania suppliers and their industries? Well it can if, and only if, the strength of the brand can go distance, and win the respect by people in Sydney or Cairns or Perth rather than just those shopping on the Apple Isle. “Win the respect” means a tangible difference in spending so that Tasmanian suppliers see the difference in orders and in the unit value column of their sales invoices. Cynics may suggest that Woolworths is after another point of difference in the food retail battleground, but if it didn’t believe in the value of the local food support, it wouldn’t go to the effort.

The local food supply has some traction with other retailers, and the big players are compelled to either watch it go past them or join it. The IGA independent supermarket group recently took a similar step. Following on from its “local heroes” positioning, IGA is giving further voice to locals with its new campaign “How the locals like it”. This initiative is designed to build on “local store” appeal by emphasizing the individuality of its 1,000 stores. The scheme will extend to support of locally supplied produce where it can meet demand required at each outlet. IGA wants to add to the advantages it feels can offer in its convenience appeal, by providing a full-service supermarket experience without sameness.

Retailers see some mileage in being seen to respond to consumers’ preferences by localising their pitch. Time will tell if these initiatives hit the sensitivity of shoppers to the extent that it can drives higher store traffic and spending. There is a risk to those who don’t follow this lead and by default imply a lack of support the local community. Catering for local needs is being elevated as one of the key brand values for the larger retailers.

There’s another slant from the UK where a larger regional population begs a logistical solution if a regional promise is to work. A scheme called From My Farm is a supplier concept that divides the UK into regions in which a co-ordinator identifies and works with growers, collating orders, liaises with growers and delivering to the distribution centres or direct to store. This not only offers supermarket chains the convenience of a one-stop-shop buying solution for perishable, regional, fresh produce but also provides growers with the opportunity to supply in bulk in their regions when they would otherwise not have the volume of scale to do so.

Regional food provenance has been the backbone of the European food culture for at least a century. We won’t revive anywhere near the same cultural backdrop to sustain regional food production to the same extent, but excellence in quality and character can create better value for suppliers if the consumer gets into the spirit and demands more of it.

Interesting Food policy

2010-08-09T03:00:00.000-07:00

We are well into an election campaign that is devoid of passion and spark, and has degenerated into a me-too game of desperation for each of the two front-line candidates to win at any cost. Policies have become a mish-mash of socialism and free-market principles – one both sides of the divide. Meanwhile every now and then the Greens pop up with something admirable, profound, altruistic and completely unachievable.

Late in the piece – almost as a neglected bolt-on to either major party’s platform – came policy announcements on food and agriculture. “Food” has long been been hard for Governments as an area in which to do something significant and meaningful.

Tony Burke as the Minister for Far Too Much announced the National Food Plan last week as a major policy. The Plan promises to consult with key players to come up with - a plan. There is no new money for the plan – it will be reshuffled from Regional Food Producers Innovation and Productivity Program budgets. The plan strives for “world peace” and will tick all the topical buzz-words - food security, affordability, sustainability, productivity and global competitiveness, as well as tinkering with regulations, taxation, and the labour market. Down the track it will then take on health and nutrition.

This has been tried before hasn’t it? Remember the Corish report that tackled a massive menu but failed to change the world? Are we going to find a new way of looking at things with the same people around the table?

On the other side of the fence, there are apparent differences that money can buy, as the highlights of Opposition promises throw an additional $150milion at R&D, provide a place at the Cabinet table for Food Security, and spend money measuring the carbon footprint of the food industry, which most food sectors have already started work on. People working at managerial levels in R&D Corporations may be keener as this package may well make redundant the Productivity Commission’s current mission to streamline R&D infrastructure. The detail on the workings of that further investment aren’t available just yet, though.

There have also been the usual rumblings on the campaign trail about “dealing with the rising cost of food” which always gets a run around an election, and was a major issue in 2007. Well, hello, we’ve been in an era of deflation for food (and a few other categories of household goods) for the past year as the post-recession blues have kept retailers discounting. What can governments do about that anyway, as the consumer is the clear winner when retailers go hammer and tongs at each other’s market share?

But we have seen little tangible evidence of actual measures to address “food security” itself which has suddenly become a new clutch-phrase of politicians. Food security for many is a no-brainer - we export 60% of our food production, and have a free trade stance to ensure increasing volumes of cheap processed food gets onto our supermarket shelves. Job done? Not so when water for food production is exposed to greater competitive threat from household, industrial and environmental users than ever. We’re still waiting for leadership on that front.

Food security

2010-07-23T03:00:00.000-07:00

You could be forgiven for thinking Australia and New Zealand food industries are being raided by Asian buyers. There has been a flurry of activity in recent weeks with a new breed of players involved in a fresh wave of transactions. Chinese food conglomerate Bright Dairy & Food has announced an agreed purchase of a controlling stake in emerging NZ South Island dairy manufacturer Synlait Milk, nominally valuing the dairy company which has been operating a couple of years at about $A120 million. Japan’s commodity house Mitsui is already a shareholder in Synlait.

Bright had recently been gazumped by Singaporean commodity player Wilmar, the world’s biggest listed producer of palm oil, in a bid for CSR’s sugar division.

Dairy has been on the radar for others. A NZ-financed dairy farming operation based in South America has also been snapped up by another diversified commodity group Olam, which owns a fair slice of Australia’s cotton industry. Olam holds a stake in another NZ dairy group, Open Country.
There are other Chinese bidders involved in potential deals in NZ. A large portfolio of dairy farms is being sold off by receivers, while other large farm clusters that are in trouble due to financial pressure have potential overseas buyers in the wings.

Fears for food security are partial drivers for this activity. That motive is a strong factor in Bright’s purchase of Synlait. The Chinese dairy sector is still adjusting to a new order after the disastrous melamine poisoning fiasco of 2008 which is still sending fresh tremors through the retail market as contaminated product continues to show up in shops. Bright wants a secure supply of products (whole milk powders and infant formula products) made from “quality milk”. The Chinese retail market has not yet returned to its former self, as Bright and its competitors build new credible supply chains rather than rely on fragile and corrupt practices of the past. Bright will give momentum to Synlait’s expansion, promising to support a further planned capital raising by the company in 3 to 5 years – when the share market may also be in better health.

In the case of activity of commodity traders, the moves are interesting as they go from dealing in commodities to owning the suppliers. After taking a hiding in the global financial crisis, the commodity traders are after food security of a different form – reliable access to product without exposure to volatile conditions. Wilmar is also keen to dilute its exposure to palm oil which will only be a less-popular food ingredient in future, and promises rapid expansion in Brazilian and South East Asian sugar production.

Where else might the raiders look? Wine might be a real opportunity for a bargain hunter as there would be plenty of sellers given the depressed state of the sector reeling from the double-whammy of over-supply of grapes and the erosion of export values by low-cost competitors and the value of the $A. Bright was reported several weeks ago as in talks with Fosters which has struggled to make its wine business a worthy contributor to the drinks group.

There is little doubt we’ll see more action in this space as emerging global players compete for a slice of the hungry consumer markets in the developing world.

Food Miles buried?

2010-07-16T03:00:00.000-07:00

There’s always some distance between the intentions people have regarding their shopping and what actually happens in the store. The visibility now being given a host of issues loosely grouped together under the often-misused “sustainability” heading has led to an increase in the preferences for “doing something about it”.
But with the reality faced by the consumer when they get into the store ensures that intentions translate only in the minority of cases. At the heat of the moment in the store, they deal with a complicated set of influences - what they are willing to spend, what’s on special this week, how much time they have to shop, and what information they have to look for on food labels.

Remember the “food miles” scare? A beat-up by one of London’s big daily newspapers in support of an English dairy brand about the journey New Zealand butter and cheese makes to get into a UK supermarket led to fear of new “ethical” trade barriers being erected for food exports to the developed world. In recent years “food miles” has been one of the concepts by advocates to support food produced as locally as possible, especially fresh produce, as in order to reduce carbon emissions.
The issue stuck around for a while in the UK before it was gradually consumed in the carbon footprint industry, as major retailers started to lead the push to establish some standards of measurement that would allow consistency between claims being made on labels.

A New Zealand university has put some researchers into the field to see where the issue is these days. Two small surveys were done - one on the High Street in the UK and one in a supermarket. The researchers even went to the trouble of asking the questions in a local accent, to reduce suspicions of a link with New Zealand.
The two sets of results weren’t the same – nearly a quarter of the people on the street said they wouldn’t buy New Zealand goods due to food miles. Those in the supermarket however had it well down the list – less than 6% gave “country of origin” as a determinant of what was in the shopping basket. Exporters to the UK also claim they’ve suffered no losses in volumes – in fact business is better than it was before “food miles” became an agenda. The researchers have claimed the food miles scare is over! It may be a tad early to claim a victory on the strength of the opinions of 500 British shoppers in the hardest times.

There’s little doubt that concerns about the planet are on shoppers minds. But given on what else is apparently on top of mind at the time when they get to within two feet from the product shelf, the concern is pushed down the list. Things aren’t great at the moment in the UK so “price” is a dominant issue facing a larger percentage of households compared to a few years ago in more prosperous times when food miles surfaced as an issue.

But carbon measurement and other “sustainability” standards will get better, labels will become more believable and when money is back in pockets, the discerning consumer may change habits. Given the blight expected in European economies however, that may take a while.

Death of Franklins

2010-07-12T03:00:00.000-07:00

The announcement of the death of the Franklins grocery chain – after a slow, painful illness – won’t surprise many supplying the grocery market with produce and other goods. The small grocery chain these days has its stores mostly located in NSW.
The original Franklin’s chain – which had an expensive failure at running a “fresh food” challenge against the two major grocers but failed in delivery - was carved up between Woolworths and Metcash/IGA in 2001. Some might remember the Franklin’s Big Fresh fiasco that aimed at using a radically different approach to fresh food marketing as a drawcard into stores, but the model lost customers quickly. Old ladies and children got frightened and it was very easy to get lost in a store as you were corralled through a maze of fresh food sections.

South African retail group Pick n Pay took a punt on expanding in the Australian market and bought 50 of the stores in NSW and the rights to the soiled Franklins brand. The group subsequently added 35 stores to that portfolio. But it was never a big winner – Franklins holds about 2% of the grocery market and earned its owners a paltry margin of less than 1% on sales over its history. The majors operate at between 4% and 7% these days, depending who you study. Metcash formerly supplied the Franklin’s chain but the parties had a dispute in 2005 and Pick n Pay set up its own chain that never achieved critical mass.

Pick n Pay has agreed to sell to Metcash for $215 million. Metcash will then on-sell most of the stores to IGA store owners, but it will hold onto a few as IGA corporate stores and close a few dogs in the portfolio. The existing $860 million of retail sales made by Franklins, which will convert to around an additional $500m in wholesale sales by Metcash through these stores in future. You can do the maths, but there’s a little glimpse into the scale of the mark-up that exists in the land of independent retail, where stores are more expensive to operate and achieve much smaller sales per square metre of floor space than large supermarkets.
It will achieve a few synergies in merging that additional business into its operations as well, providing the independent sector with a little more muscle. Metcash has also made a major play in hardware with purchase of Mitre 10 to apply a similar model to food wholesaling, where it takes on the big box approaches of Wesfarmers and Woolworths groups.

Metcash and its IGA franchise partners have been pretty effective at mixing it with the grocery majors in the past few years. Couple that with the expanding and menacing presence of the discounter Aldi and the market operates with some fierce competition based on both price and convenience. This small expansion will take out an ineffectual competitor and narrow the field to further intensify the battle.
It will be interesting to see how the ACCC plays this proposed transaction. The chairman of the competition regulator and the CEO of Metcash aren’t good mates after their stoush in the 2008 Grocery Inquiry.

Society and the environment

2010-07-05T03:00:00.000-07:00

The tumultuous political events of the past two weeks have shown how delicately poised the battle for hearts and minds of the populous can be. Just as quickly as the former Prime Minister led a landslide in the run-up to the 2007 election by managing to conjure “spin” to hit the popular political nerve, he just as quickly lost it. It has been easy for a new leader to look good with such appalling policy development and delivery over the last year.

It has given us interesting examples of leadership models and styles. The country has shown in swinging towards Rudd in the first place, followed by a speedy loss of faith and now a swing towards a new yet unproven talent, that it craves strong leadership on issues that challenge this society. The country chose change in 2007 because it felt there was a greater priority placed on the issues that mattered for the quality of society, rather than the quality of the economy. It’s such a pity that so many who supported change have been left feeling vanquished ever since, as there was such a poor follow-through.

What we do about our impact on the environment was one of those massive moral issues where a clear point of difference was developed. The major environment issue in 2007 was unfortunately packaged as concern for “climate change”. It got dragged down the wrong path in worship of Al Gore and belief in the word of his hired scientists.

The opportunities provided by new leadership will probably miss the chance to correct the skewed direction of policy that addresses the sustainability of our society. The real focus of what we need to address as a society should get back to the fact that we are fast running out of finite resources that are essential for our future lifestyles – water, fuel and ultimately food. Rather than simply cap the output of a certain gas pollutant that might lead to long term change in weather, dries dams and rising seas, we should be limiting the finite fuels we take out of the ground, constraining the right to convert and consume, and cutting out waste.

At the same time, governments could face the long-term need and guide choices made about how we make things, what we consume, how we travel, and how we cool and warm our homes. Rudd’s spin team partially tapped into a major concern that is felt in households and in businesses – that we have to change habits and take the initiatives and incentives down to the point of consumption. The population has an appetite to take action but has been left confused by debates about science, rebates, compensation and a lack of support to change behaviour. Never mind the fear of new taxes – changing behaviour will only come when things are correctly costed and priced!

Go across to Europe where the concern for the environment is very strong. See how these same concerns are now entrenched in the modern European society’s values and now an essential part of business practice. We are a decade behind that pace and it doesn’t feel like we’re going to be put on the right track any time soon.

Yuan will big change happen?

2010-06-27T03:00:00.000-07:00

The Chinese Government took away one of the major sources of trade tension with the United States when it agreed to relax controls over the value of its currency. The Chinese yuan has been pegged to a constant value ($US1 to 6.83 Yuan) against the US dollar for much of the past 2 years. This has helped the Chinese sustain a massive trade surplus with the US, and fill the shelves of the Walmart chain (and other department stores) with cheap goodies.

Given that the Chinese financial system owns the US landmass after the debacle caused by the housing crisis, having it dominate trade as well has been too much to swallow. As the G20 meeting of the leaders of major economies (this time just “G19” as the new Australian PM took a leave pass to sort out a few redirections of policy) loomed, the grievance of the currency imbalance was a major agenda item for the Americans.

The change in currency values – which will see a revaluation upwards in the value of the yuan – may have a major impact on trade. It has been touted as the most significant trade development of 2010 given the scale of the trade between the two countries, and the knock-on effects of an alteration in those trade flows on other major traders. The currency situation has given Chinese exporters a major advantage as the value of the US dollar tumbled to reflect the poor state of its economy.

A stronger yuan can partly reverse that effect, although the scale and maturity of the trade balance between the superpowers hasn’t happened because of the financial crisis. It has been building steadily since 2004 as the might of the Chinese production engine became a compelling source of consumer products for the stressed US shopper.

But China won’t rapidly revalue their Yuan. Their government is managing a very delicate balancing act – and will be for some time – as it tries to deflate a few massive bubbles that have developed in its economy which, if popped, will make the GFC look like a pub chook raffle.

The weight of expectation of currency players would have driven the change quickly, but the Chinese will continue to closely regulate their currency to play this change out over time. It will follow a “Pantene effect” – it won’t happen overnight but it will happen. The Chinese are trying to gradually shift their growth engine from exports to greater household affluence, which will take years not months. So that means it also won’t change much for the complaining US politicians, but it will take the heat out of the issue so that they can focus on some of the things they can control.

The reality of a gradual impact didn’t stop our currency reacting to give our agricultural exporters more grief, with the $A rising on the expectation that it will possibly make the value of exports to China a little cheaper, and also help the Chinese fight a building inflation rate. This will also hold interest in resource commodities which have been affected by anxieties about the sustainability of the growth in demand from the Chinese nation-builders. It will also affect competitiveness of the cost of Chinese goods, which have been losing some of their advantage of late with rising labour costs.

Reform of dairy

2010-06-20T03:00:00.000-07:00

Turbulence in world markets in most agricultural commodities looks set to continue in the future – so says the combined forecasting brains trust of the OECD and FAO, which released a 10-year outlook last week.

The effects of the global financial crisis (GFC) which took hold in late 2008 have almost worn off for most of the global food industry. But in 2008, the global dairy market took the sharpest and deepest hits from the GFC of all major food commodities. The volatile impacts on product and farmgate prices rattled the players in the dairy supply chain, but the greatest noise has been sustained by dairy farmers in both Europe and the US. Due to the strength of their political lobby in both regions – exercised in different ways, politicians have been brought into the game to address the problem. The problem in reality is that regulation of dairy production and prices in the US and Europe hasn’t served farmers like it was supposed in the grand design – by preventing exposure to volatility.

But now that the dust has almost settled, lawmakers on both sides of the Atlantic are trying to work out what to do about this problem dairy child. Six months ago the European Commission set up a leadership group to come up with some solutions to at least shelter their industry from uncertainty. The aptly-named High-Level Group (HLG) ran a fairly open process and delivered a wordy set of recommendations to the industry last week after gaining consensus of the 27 member states of the European Union. No small feat given the divergent historical attitudes to regulation of markets.

With an underlying EU commitment to get out of as much regulation as possible, the HLG’s remedies have largely focused on the process by which milk prices to farmers are set. It suggests a uniform contract structure, and that farmer organisations are allowed to bargain on behalf of farmers, which will need changes to competition law. It however (disappointingly) clings to the past and says that the EU should retain “safety net” measures, leaving the door open it seems for the EU to buy surplus product out of the market and to even leave export subsidies in place – which the EU had already pledged in the WTO to drop. The HLG outcomes will yet cause a stir within EU members, and have a long path before they are adopted anywhere as law. Meanwhile the EU will (in 2015) remove production quotas which limit individual farmer output – a move that will create at least 5 years of turbulence.

Not so easy on the other side of the Atlantic. The US government has for the past couple of years been taking ideas of how to make changes to a broken set of rules that tie regulated farmgate milk prices to the results from trading on a commodity exchange. Nothing could be more exposed to nervy sentiment. Farmers and processors agree that there is a need for price-protection in future, but they are miles apart of whether supply should be managed with the support of regulation.

It’s ironic – in the past the world market felt volatility due to the fallout from the application of various forms of farmer protection by these superpowers. Our industry will watch developments carefully to ensure that devils in different forms aren’t created from these bumbling processes.

Aldi and the carbon label

2010-06-14T03:30:00.000-07:00

Remember all that stuff about climate change, greenhouses, a meeting in the city of Copenhagen, and trading schemes that was all over the news a few short months ago? A series of complete policy disasters involving expensive school canteens, burning houses and taxation of finite natural resources has taken the issue of managing climate change well away from the front pages in the past few months.

The risks to the globe of the increasing drain on finite resources to feed, clothe and house an expanding population haven’t gone away. Read any of the cheery publications put out by the United Nations’ - through the FAO – and you’ll need a sedative to deal with the anxiety they can cause.

With the leadership of the world distracted by risks of ongoing financial turmoil, we might easily see the next 5 years pass while debate continues on whether there is a major change in the climate; whether and how mankind is contributing to change; and how we should adjust our behaviour to limit damage.

But while governments remain in a confused state and unable to reach agreement on whether to decisively and unilaterally act, the willingness of the community in this country to take its own action has also weakened in 2010.

With the lack of clarity from government, major corporations have expressed the need for continued action. The sustainability agenda which I’ve written about before is a central feature of corporate strategy for most major corporations and public sector agencies. But I detect that this too has been backed off quite a bit until some clarity of “what’s in this for us” becomes a lot clearer. This is especially the case in the food market where “value” has been the central focus at the retail coalface for the past 2 years.

So against this uncertain background comes an interesting reminder from a global retailer in our midst. German grocery chain Aldi has become the first company in Australia to join the food product labelling program, which currently operates in 19 countries and is run here by environmental lobbyist Planet Ark in conjunction with the Carbon Trust of the UK. While the first carbon footprint label will appear on a bottle of olive oil but not before October this year, it is a very tentative step by marketers of food to formally account for environmental impact of a product supply chain.

There’s a lot of work being done on food labels - a tug of war between those wanting to give every product a full life story, and pragmatists who incur the costs of labels and the systems behind the information. Carbon labels offer more confusion. If governments can’t agree on climate change action, do you think achieving a single system of carbon accountability will be any easier (and meaningful)?

Aldi’s share of the grocery market is small; less than 5% nationally yet in areas where it runs head to head with the two major grocers it has a much greater influence. But Aldi has won business not for its ethical propositions, rather for its discount pricing. It will be interesting to see how it’s lead with a new piece of label information impacts on purchasing decisions – if at all. Altruism about harming the planet may feature highly in many surveyed shopper intentions, but little translates into actual spending choices.

Nestle v Greenpeace

2010-06-10T03:00:00.000-07:00

Over the past few months Nestle has been caught in a war with green campaigners Greenpeace which has been waged on social media websites, after Nestle was sprung for using ingredients supplied from an Indonesian company Sinar Mas - infamous for its efforts in rapidly levelling tropical rainforests. Greenpeace made a mock Kit-Kat advertisement which focused on the plight of the Orang-Utan, suggesting Kit-Kat consumers were in effect eating the finger of the animal each time they took a break.

Every fact that Nestle used to defend itself from the blatant distortions used in the campaign only served to heighten the focus on the issue and to spread the fire across a range of sites which engage billions of people daily. Time-wasting may be how employers and parents may view social media platforms, but a viral infection can spread globally on Facebook, Twitter and YouTube within minutes. It won’t matter if the campaign such as this infringes copyrights, twists facts or offends mothers, when it gains such instant global attention; the only action available to the target is to change something big - quickly. Use of these platforms is expanding rapidly but just how marketers can best harness and combat the powerful channel remains a challenge.

The global food industry’s largest brand owner was in this case forced to immediately drop the supplier from its business. It went further in late May to increase its efforts in sourcing raw materials and ingredients from more “sustainable” suppliers. Nestle reportedly buys just 0.7% of world palm oil production, but the company's decision could impact the world ingredients market as several other companies it uses as ingredients suppliers and intermediaries will be forced to follow suit or cop the same treatment. Currently it is estimated that only 18% of palm oil production – one of the cheap alternatives to dairy ingredients in some food manufacturing – is “sustainable”.

It matters not that Nestle took a little while to formally address to big issue that was actually at the centre of the Greenpeace attacks. but has countered by raising the stakes and creating a new standard, partnering with The Forest Trust (TFT), a global non-profit organisation, which will audit the adherence to sustainability guidelines for palm oil. A string of major food manufactures, including Kraft, owners of Cadbury, which was focus of attention in NSW and New Zealand over the use of oil in chocolates, have similar pledges.

It also matters less to the green activists that Nestlé has now committed to a four-year plan to address the palm oil problem. Nestle will ensure that in 4 years, all of the palm oil it uses comes from sustainable sources. By that time, commercial quantities will be available to the market and practices in supplying regions will have been overhauled and audited.

However, did the campaign have any effect on the market for the product that was selected as the target? Just as quickly as the viral message spread to the world, it was forgotten. Nestle reported that sales of Kit-Kat were not affected by the campaign, a fact which Greenpeace also acknowledges. As with much of the emotion about food, what a consumer will express as an aspiration in their choices rarely gets into the shopping basket.

The oil spill and agriculture

2010-05-29T03:31:00.000-07:00

The tragedy of the massive oil leak in the Gulf of Mexico might seem to have a remote connection with agriculture, but the longer the oil spews from the BP well and the greater the damage done to the environment, the influence of this event increases.

It is a month since the BP-operated rig sank 52 miles offshore on April 22, after an explosion killed 11 employees. Disputes rage as to how much oil has flowed into the sea but at lowest estimates, more than six million gallons of crude has erupted. Last week, the drama escalated as the slick reached the coastline.

Residents of Louisiana think they are still offside with their Gods with this second massive impact on their shoreline after Hurricane Katrina blew in almost 5 years ago. The attention from Government has been stronger this time. So it should - the mounting ecological and economic damage will become a political liability for Obama before November's congressional elections unless he shows very strong leadership in the coming months.

The effect of this tragedy on hearts and minds of Americans will however depend on the extent of coastal damage, and what is on other TV channels when the news coverage of the mess reaches saturation. Not much of a toss was given about the flooding of New Orleans. Possibly less will be given for marshes and birdlife. The green movement will make the most of this disaster but there is much to compete with in the entrenchment of oil in modern lifestyles.

Obama has warned that the very future of the industry hinges on assurances such a disaster "never happens again". He has given a presidential inquiry six months to work out how the oil industry can prevent and mitigate the impact of any future spills.

But for us, there are two potential effects of this event (and its aftermath) on agriculture.

Firstly there is the effect on emissions trading. The spill came as US politicians were debating a climate change bill, affecting US energy sources in future. Timing was everything for Obama when he swept to office, and all timing since has been bad. In order to get opponents to climate change action across the line, Obama had talked up hopes of placing more dependence on off-shore Gulf drilling as a key part of addressing energy self-sufficiency.

The vagaries of the causes of climate change and the new complexities from this event could make it much harder for Barack Obama to sort out a policy response. If he fails, it weakens the political will for a strong Australian government response whoever wins the 2010 election.

The second potential effect is on the biofuel sector which will no doubt claim greener credentials, even though the same oil companies that drill offshore are processing and pumping ethanol into cars. Despite the illogical energy impacts of a biofuel mandate, this is America we are talking about and far crazier things are now possible.

But it’s not likely though that the BP brand will disappear from country servos over this mess. Exxon is bigger and stronger 20 years after its Valdez tanker ran aground and spilt its cargo onto the pristine Alaskan coast, but BP will at least have a bit of work to prove its clean and green logo has real meaning in future.

China and fertilisers

2010-05-22T03:30:00.000-07:00

China has 20% of the world’s population and relies on just 7% of arable farming land and fresh water to produce the food necessary to feed the population. As the steadily growing incomes of China’s middle and low-income classes allows its people to afford better diets, the pressures on its natural resources will be extreme.

China’s food security will be one of the major influences on international trade in agriculture in the next decade. It is not so much whether we directly participate in exporting food products into the country, but how China’s demand for food ingredients and farming inputs will impact markets in a number of commodities.

Chinese freakish economic growth has passed its peak in the current cycle – what we have to watch for now is how it unravels from the astronomic levels of bank lending in the past 2 years. The chasm created from a slowdown in demand for resources might make “sub-prime” and “greek crisis” look like blips, but it depends how much money the Chinese government pours into the holes that will be created.

How will agricultural trade be affected if financial systems and metal commodities take a beating? China still has to feed its people. The growth miracle has made that harder by putting good agricultural land under houses, and by contaminating significant further tracts of land which are now impossible to farm.

Commodity analysts pushing China as an investment haven reckon fertilisers will be one of those major inputs affected which will ensure prosperity for investors. If China sticks to its aim of self-sufficiency in food, then fertiliser will be a key food production input that it will import vastly greater quantities of and/or get a lot better at using. China already consumes 30% of the world’s fertiliser production – it is either building up massive food stocks; has to improve application rates; and pour more fertilisers onto land in useful quantities and less into badly polluted rivers and streams.

An interesting development earlier in the year was a Chinese government initiative to boost crop yields by sending 100,000 agronomists to educate 160 million farmers in modern farming techniques that would boost food production to keep up with the demands of its population. One goal of this massive skilling-up project is to boost fertilizer use and demonstrate the benefits of soil testing for better output. The owners of major plants that pump out the N, P and K of fertiliser products are fairly excited about the effects on demand.

But a serious social issue around the food security challenge will continue to build: how does China produce enough drinking water to remain a viable place to live for its population? China's economic miracle has pulled millions from poverty, but smashes its ecosystems. While pushing out farming experts, the same government (different department) is also reported to be trying to wean farmers off the addiction to fertiliser use that pollutes waterways. With the massive layers of Chinese bureaucracy coupled with famous short-term vision, chances of success to change this culture are slim, as the amount of money plied into this initiative is tiny compared to the food security investment. It’s a different type of Chinese bubble which, when it gradually bursts, will be far more dangerous for the country in the long term.

Milk inquiry goes nowhere

2010-05-18T03:34:00.000-07:00

Business in the food industry is conducted these days with limited regulation that addresses failings of the market and protects the consumer. The market sorts out the way business is conducted; how goods are priced; who makes what in the supply chain; and the way products are positioned, branded and placed before the consumer.
But as the food chain has grown more complex, regulators and politicians seem to understand less and less. When inquiries or reviews comb over situations or transactions, it requires a massive investment of time by industry participants explaining how the world works.

Yet despite the enormous expense, the long-winded senate review process into milk delivered a final report last week laced with naive recommendations on how to fix things. Important messages either didn’t reach the panel or, more likely, the panel was never interested in commercial reality.

Surely even those who pushed for the review to occur in the first place – over a poorly handed piece of price negotiation in Tasmania between a company and its suppliers – must also be disappointed. The process has dragged on into an election campaign period where it will be lost in the background. It also came up with suggestions will be readily discredited; can’t be put in place; and/or have been visited many times before. It hand-balls issues to the ACCC which can’t be acted on or have already been done to death.

Importantly however it calls for better protection of weaker parties in negotiations between suppliers and customers – but increased regulation won’t solve most situations. Better skills and information on both sides of the transaction might, but that’s up to the spirits of the parties and the circumstances in the market.

A call for more money to be spent to assess whether more co-ops will help shows limited understanding of what a co-operative is, how they work, and their strengths and weaknesses. Again as seen recently in an ACCC finding, there seems to be this belief that all co-ops can’t compete, pay weak prices, hoard money and are not accountable to their owners, who sit at their board tables. Yet there is a call for more of them?

A demand for an inquiry into private label is also curious. Retailers have long used their brand on products. So when they accept offers from suppliers to these products on shelves, it ultimately rests to the consumer to support them. Consumers will generally support something of acceptable quality that is cheaper than the alternative. Owners of other brands must convince the consumer to respect and pay the difference. When we have a recession, the bite into margins for suppliers gets deeper as shoppers want to part with less money.

If supply at these prices dries up, then price will go up. Absolutely nothing is new here. If products can’t be supplied on private label terms that a dairy company has won the bid with, no-one forces farmers to stay in an unsustainable business.
So is the consumer dumb or at fault for that support? These are the same consumers after all who elected quality politicians who sit on panels like these...

Maybe reports such as these are trying to revive agrarian socialism– “I have a product and a right for someone to come and collect it and pay me a fair price for it”.

A fragile nervous world

2010-05-10T03:30:00.000-07:00

In the past few weeks we have been getting a steady run of news that the US economy might be back on track. Retail sales have grown quickly lately to be posting positive improvements on this time last year; jobs are being added again; and pretty soon we may see the US dollar gaining some value.

For those who thought we were settling in for a nice cosy ride on the road to prosperity, there’s been a few updates in the past couple of weeks. A new word has slipped into the vocab as Europe has steadily been engulfed in the Greek tragedy – “contagion” – a welcome new term that has replaced the overused “toxic”.
Some financial media reporting of the Greek Tragedy suggests we should accept that this is a new crisis, not to be confused with the mortgage crisis that was born several years ago in the US. Sorry, this is a new chapter. The GFC showed how highly interconnected are the fortunes of people around the globe.

European leaders and their investment banking advisers are trying to convince the world that they’ve got this one under control and there’s nothing to worry about. When they start saying that, you know they are waist deep in smelly stuff.
In the first chapter of the GFC, the system was taken down by poorly financed, modestly-styled houses. The only thing that is different with this next phase is that poorly financed countries known for their very old ruined houses are taking a continental financial system towards the toilet.

It’s extremely hard to summarise and unravel just what is happening in Europe at present and why financial markets are fluctuating so wildly over a little country that has a balance sheet that is only about 2% of that of the US. Europe’s financial institutions didn’t quite have the dream run out of the mud slide that we’ve been lucky to have in this country. We’re sold on the line that if the Greek mess drags in a few others on the Med, the world is in strife.

At least this chaos is happening in Europe where despite the strange marriage of cultures and political differences, there is a much better chance of decisive action than the morass known as the US Congress.

On the other side of the Asian land mass from the Greek Tragedy, the Chinese government is attempting to slow down its economy to an expansion rate of less than 10% per annum. By itself this event should not cause a calamity, except nervousness about the ongoing demand for commodities would arrive at a time when traders are already in a lather of fear. That might get nasty.

Last week’s crazy meltdown of share markets in response to paranoia shows that the world has taken some medicine but is still very light-headed from its recent last illness. Legend will tell that it was a fat finger that plunged the share markets into free fall. The massive speculation that immediately followed shows us that those who run the money trades around the world are living very anxiously indeed.
This will play out with potentially enormous impact on currencies and potentially the value of export commodities. There are as many theories as speculators on where the value of the $A will be and what it might mean for dairy, beef, wheat and other trades.

NZ: Rain is not enough

2010-04-26T03:30:00.000-07:00

Agribusiness has proven to be a fragile and volatile sector over the past 10 years with exposure to commodity cycles and changing weather. In overall terms however, what has pulled Australia through the turbulent global conditions in the past couple of years has been its resources sector, responsible for well over half national mercantile exports, while the farm provides just 14% these days.

Consider the exposure of New Zealand then, which relies on agriculture for two-thirds of its exports of goods, 60% of which are based on livestock products – dairy, meat and fleece. The health and competitiveness of its agribusiness (farm production and its supporting supply chains through to markets) is therefore fairly important for the NZ economy.

With the dust almost settled on fall-out from the Global Financial Crisis, the looming structural shortages in long-term global food supply are again gradually taking shape. Accountants KPMG have decided to assess how the NZ agribusiness sector is placed to make the most of the long-term opportunity available.

KPMG issued a report called Agribusiness Agenda which claims New Zealand's agricultural sector will be under serious threat from several low-cost commodity producers in just five years. Its self-claimed position as the lowest-cost food producer is said by KPMG to be under threat from several with good natural resources and shorter distances to markets. Those countries – Latin Americans, China, Eastern Europeans, and former USSR – presently lack necessary stability, infrastructure and an inability to eradicate corruption.

You’ve just got to look at two things – the cost of labour and the value of land in NZ and you’d have to think the “lowest-cost” tag has long flown the coop. KPMG say the challenge in the next 5 years is to become “most efficient” as well as “integrated and highly sustainable”. Furthermore, to be successful, it must invest heavily in technology and infrastructure to gain a competitive advantage in servicing premium markets.

But with a strong livestock-led commodity price upswing occurring again, the report has hardly raised a ripple. It’s easy to get dazzled by the short-term and miss the long-term game - that’s the history of agriculture right? But so many have been saying this for so long that the ag sector is sick of the message and just wants to get on with riding the cycles. Perhaps the challenge is far too unrealistic for many to grasp. There is little evidence to suggest from past performance that the focus can be so quickly engineered (in just 5 years) to turn traditional agriculture into the model outlined by KPMG with rapid evolution.

If the world is to be as short of food as the FAO suggested a few months back, many producers possibly feel they don’t have to do too much except go for the ride. KPMG have a point however, about NZ’s future need to be able to select higher-value markets rather than take commodity returns, which its expensive patch of green won’t afford. The peak farm lobby in NZ summed up its priorities - it said thanks for the report and told the government to take it out of the emissions trading scheme!

China’s bubble to burst?

2010-04-12T03:30:00.000-07:00

China has bailed the world out of an extended global recession and has conveniently given the current Federal Government a dream-ride through rough times. The seemingly unstoppable growth in the developing economy of 1.3 billion people continues to drive this country’s resources sector. But what happens if the growth miracle slows or even stalls? Rampant growth never lasts forever but with the benefit of 20/20 hindsight we can generally expect that miracles and dreams always end badly.

Along with every boom story there are the doomsayers. In the case of the Chinese economic boom, a larger number of theorists are appearing on the scene predicting how this is all going to come unstuck. A reasonable amount of coverage has been given to one of the more detailed and well-structured pieces on the symptoms that are apparent in the current Chinese situation and its recent development. I can recommend those readers interested in the depths of this thinking to seek out a paper by an investment analyst Edward Chancellor who works for GMO, a US-based funds manager.

His paper discussing the “red flags” of the Chinese economy was released in March identifying 10 factors that can be linked to impending disaster. Why would we believe an American investment firm could pick a crisis? Chancellor wrote a book in 2005 about the cancer caused by over-use of credit in the US and UK, which creates an “illusory prosperity”. He has some cred therefore.

Amongst these red flags from China are the dazzling growth story; faith in everything that authorities announce; endemic corruption; extended use of fixed currencies; a boom in investment; uncritical investors; and an over-supply of easy money. We are reminded of some amazing numbers and facts about where its growth is coming from, where money is being directed, and how much potential waste and surplus exists. Last year for example, 90% of GPD growth was provided by fixed asset investment in infrastructure. By all reports China - for a developing nation – has great infrastructure in transport and housing which is already seriously under-used. When that demand even slows, the message for commodity metals will be significant. Weakened sentiment will expose banking and resources sectors to more than a mild panic.

The risks are surely understood by its leaders, but for them it’s a dicey balancing act. China has announced, after a near face-off with the US over the distortions created by its artificially low yuan, that its exchange rate will given “more flexibility”, and will be allowed to rise in value against western currencies.

The major difference in this situation with the booms and busts of the past is that China is not a democracy nor does it have hands-off government. The case of the US credit crisis, the Asian economic crisis of the late 90s, and just about every other major bubble situation that has burst were in democracies with reasonably good transparency. By last rankings, China was 79th on the league table of country transparency! China may not only continue to tell porkies about its numbers when growth tops out, but it may also be able to prop up any weakness in its economy by tapping into its massive financial reserves. In any event, would we really ever know the full story?

Greening Walmart

2010-03-08T03:30:00.000-08:00

A bit of attention has been given to the ethical promises made by food retailers pertaining to the sourcing of their products. Stepping outside the box for a bit there are some relevant and interest steps being taken by the world’s biggest food retailer on a slightly wider scale than issues finding attention in Australia.

While political leaders failed reach a meaningful accord on how to address climate change in December 2009, subsequent announcements by several countries on emissions targets since the Copenhagen meeting remain highly conditional. Japan’s statements are a good recent example.

Business leaders however have long been stressing to elected leaders that certainty on emissions targets and the methods to manage their costs is critical for investment. With the current impasse, many major corporations are making their own headway and defining their own strategy, regardless of county-to-country action.

Now much of this may well be an elaborate extension of their corporate sustainability strategies – positioning “to be seen as green” to add value to their corporate reputation.

Walmart came out with a major announcement a couple of weeks ago along these lines. It has announced that it will eliminate 20 million metric tons of greenhouse gas emissions across the lifecycle of the products that the company sells globally over the next 5 years. The size of Walmart gives the numbers more shock and awe – it is the same (they say) as taking 3.8 million American guzzlers off the road in that time, yet this represents 150% of the growth in Walmart’s emissions over that same period, if it did nothing.

The immense task involves committing their 100,000 suppliers to cuts in their carbon footprints. 10,000 of those are in China, where the group is one of the relatively new players trying to take a slice of the benefits of rapidly increasing urban retail markets. While the country itself has always put environmental priorities well behind the short-term prosperity of its people, Walmart is biting off a big challenge to push businesses and farmers through the hoops. It is trying to establish its own revolution to lead the Chinese consumer to choice, and give it a better kudos in the US where it depends on the lower unit value of Chinese labour. Right now “quality” is one of the big drivers wrapped into the supplier initiative – the recent melamine scare highlights the issue for the Chinese consumer.

There is little doubt that pollution and environmental harm will threaten China's future growth; and the awareness of climate change are becoming critical to its people. But meeting the promise will be tough. The Walmart model is firmly based on a commitment to "everyday low prices" in all its markets, which in its home US market has long been the source of criticism of its labour and environmental standards. An industry of watchers tracks its progress in these areas, and while the concerns of the US householder is about surviving as the economy searches for a bottom in the recession, one day the ethical standards will attach greater value in shopper choice.

But such standards come at a cost to the consumer, retailer and the retail suppliers. Who wears the lion share of those costs with this initiative will be interesting to watch over the years as the Chinese growth engine splutters and the western world recovers.

2010-02-22T03:30:00.000-08:00

The GM breakfast debate

Last week’s breakfast show at an inner city hotel gave an opportunity to both sides of the so-called debate on GM in agriculture a chance to strut their stuff.

The Australian chief of Monsanto, Peter O’Keefe is relatively new in his role and presented an overview to the Rural Press Club of Victoria of the progress made by his company in a key product area. The event was warmly anticipated by a hardy group of about 25 seasoned protesters (and that may be generous) who established a small stand in front of the venue, and about half that number of police and security again who were in wait for some excitement.

In the end the event itself was thankfully a fairly anti-climatic and tame affair. The Life Sciences company executive gave a very detailed chapter and verse of the story of the product and its progress in the Victorian market, followed by a set of well-rehearsed statements and fear-mongering anecdotes which were presented in return by a number of anti-GM protagonists.

Do we actually need a debate on the merits of the use of genetically-modified crops, pastures and foods in this country? It seems pretty clear that we do. For starters, some states retain a moratorium on their use; our national government is querying the resources applied in future to sustain the competitiveness of agriculture; the community is far more demanding of farming to minimise environmental impact and... a climate that is drier, but clearly prone to serve up extremes. In future there is little doubt world farming needs to make much more from far less to feed an expanding world market. For Australian farmers, it’s one of whether we take the chance to be in the game or not.

Frankly if this was the best material from each side of the debate, then it is a wonder there is even a debate at all, as the technical gains will surely speak for themselves and commercial business operators on farms and food companies will make their own calls. While the opportunities available to grain growers to save costs and improve yields are impressive, the case “for GM” needs a far better pitch, with a case that compels the community to come on board. There is a showcase of potential benefits for the environment, farming viability, human health and the future ability to feed the world that need to be far better conveyed by GM advocates.

On the other side of the fence, the critics of the advance of GM in this country prefer to retain the appearance of activists rather than well-informed thought-leaders. My own direct exposure to advocates of the non-GM movement show there is a very poor understanding of the structure of food industries, food markets and the acute pressures on the sustainability of food production in a country like Australia. Anecdotes about seed-drift, European consumer studies, the effects of rats’ testicles and “R&D funding corruption” amount to little or no credibility. Most glaringly, there is absolutely no response from that side of the fence as to how the hell we will fill the world food gap in 20-30 years? Until that fundamental issue is tackled, a debate on this issue will remain a non-event.

Cheapening the food market

2010-02-08T03:30:00.000-08:00

The latest jousts between major grocery chains suggests we’ve slipped into a new phase in the retail food market that might spell even tougher times ahead for food suppliers.

Given the tit-for-tat announcements from Coles and Woolworths in the past 2 weeks, competitive tension is going up a few notches. Coles got the ball rolling saying it would move to uniform pricing across the country, reducing the use of regional pricing zones and establishing nationally equivalent prices on about 8,000 lines. Woolworths responded with a price reduction program, vowing to slash prices on the shelves, and then snuck in its own uniform pricing pledge, upping the ante on Coles by offering to align over 12,000 products. Go to any Woolworths or Safeway store or pick up a major newspaper this week and you won’t miss the messages.

There are a few things happening here. Uniform pricing deals with one of the areas probed in the 2008 ACCC Grocery Inquiry, which queried the ways that retail prices are set region to region. A lot of interested parties in the inquiry got upset at the time over one of the basic no-brainers of any retail situation – if your competitor is right in your face, you’ll price a product keener than when he isn’t.

This step also strives to counter Aldi, which uses national prices and is gradually spreading its network of small-scale deep-discount grocery stores. Aldi would be adding stores faster than its current rate if it could find the sites!

Another subtle agenda being driven home to the consuming public is the comparative cost of living. The current promotional adverts of both major grocery chains this week point to price comparisons with this time last year. The rate of food price increases over time was one of the catalysts for the 2008 review, and remains a political football if Tony Abbott’s performance in a Canberra store is a guide.

A drive to be seen as cheapest is hardly a new ploy, and now a feature of retail in the UK, Europe, US and Japan. It has been the main game for nearly 2 years. The large grocery players did quite well to capture a greater share of household meals when things in the economy started to get tough in the middle of 2008.

But with the economy gradually getting better in 2009 through the flow-on effects of the stimulus package, the food market simply got tougher. With the continuing focus on “value” the major grocers held onto a greater share of the food spend. Taking advantage of concern about the cost of living, the promotions pushed savings in the cost of meals – “feeding the family cheaper”.

With the stimulus party now over, the New Year is tougher for most retailers, and the fight for customers hearts and minds is fiercer. Consumers have found satisfaction with cheaper lines. The drift over the past 2 years has taken enormous value out of the food chain, and put most of the pressure back up the chain on suppliers. The hard part is seeing how we climb out of what seems to be a spiral – even when the economy is fully back on the rails.

Coles says NO to pigs

2010-02-08T03:00:00.000-08:00

The news that Coles Supermarkets will only sell fresh pork from sow stall-free production in its meat department in the latest step in a well-established “ethical foods” trend in a bid to improve animal welfare and satisfy consumers concerns about them. Coles, and its pork producers, are phasing out fresh pork from piggeries that use confinement stalls by 2014. The Tasmanian government, other state legislators and New Zealand are heading down the same path.

The developments come at a time when the economics for the pig producer are fairly challenging. Less than a third of the meat from a pig is sold as fresh pork, with the remainder going into what is called “manufactured meat” – ham, bacon and other products – which compete with a growing volume of imports.

This development regarding fresh pork however should not surprise anyone. It is the latest action in a strong trend towards greater support by food producers and consumers of ethical standards in food production. “Ethical production” of foods covers a wide variety of attributes which include fair-trade, free-range, organic, rainforest alliance, a carbon footprint in future, and even goes extends to the use of recycled or bio-materials in packaging.

Australia is not acting alone in relation to the use of sow stalls. Denmark – a major source of imported smallgoods - has outlawed stalls from 2014, as part of a push across the European Union. The pressure from animal welfare and consumer groups has also gained a high profile in other major exporters of processed pork to this market - Canada and the US.

There is no doubting the consumer demand for ethical foods and their willingness to pay the difference for them. These trends have continued despite the effects of the economic downturn. Our own analysis suggests that consumer demand is well ahead of supply which is constrained by the time it takes growers to adjust their farming methods.

By far the greatest impact of this ethical foods trend has been around animal welfare issues. The egg category has seen strong gains in shares won by free-range and barn laid eggs. There is considerable brawling within that industry about the definition of free-range, however the ultimate arbiter of what will prevail will be the consumer, and whether they believe the message on the label. The free range share of Lilydale-branded poultry products has also been impressive within the meat category despite the price differentials. Pork will follow the same path as consumers respond to market offers like Coles.

Crucial to maintaining that consumer support, as demand expands, are production systems that are backed with credible, uniform standards that consumers can readily recognise, understand and trust. The risks of “ethical washing” are high which may serve to weaken that trust.

The news of this move has been accompanied by protests that the same restrictions should be placed on imported products. As noted the market is already moving in this direction both domestically and internationally. The signs are there and forward looking producers have read them. It’s what the consumer wants. It was the consumer that led Coles to this decision for their fresh pork offer and it will ultimately be the consumer that decides whether or not they want their ham and bacon products from pigs that are farmed in the same way.

NZ debates standards, but a bigger risk lurks

2009-10-05T17:49:00.000-07:00

Every now and then activist groups that seek to influence community opinion and ultimately government policy get a free kick. Developments on a group of New Zealand farms have delivered just that. Horrific scenes from one of the highest profile NZ dairy farms reached households in the Shaky Isles in the past couple of weeks. That profile has been gained for all the wrong reasons as the Crafar family operation, reported to be worth NZ$200million, has long battled with local and national governments in the country over poor regard for management practices, which the owners seem to believe is their business within their farm boundaries.

Crafar Farms, which was built from a single family farm, has sometimes been held out as a success story of enterprise development in New Zealand agriculture. It has grown quickly over the past 15 years to a group of 22 farms reputed be worth NZ$200million – at least in asset value – although it carries a pile of debt of about the same value, lent to it by the cream of the NZ agrifinance sector.

But the owners are notoriously bad managers and are well-used to scrapes with officialdom. They were recently the losers in one of their many battles with NZ’s environmental regulators. That court loss resulted in a NZ$90,000 fine and no doubt some hefty court costs, prompting the head of the group to declare the group was up for sale and helped spread rumours that there were Chinese investors interested in the operation. This week the group was put into receivership by its lenders.

Years of running a large, entangled operation using heavy debts rapidly built on the back of rising farm values have resulted in a well-established culture of short-cuts. The Crafar roughhouse style of running a farm business was brought into living rooms after a newspaper columnist exposed its practices and posted a graphic video on his website showing poor treatment of calves. That quickly led to a current affairs profile of the issue and a camera walk into the operation. The ongoing nightmare for the Crafars got worse, and has dragged the government’s farm ministry (MAF), its customer Fonterra and its list of bankers into the issue, each implicated by association for letting Crafars grow so large so quickly yet so poorly. All good in hindsight.

While MAF officials now crawl over the operation, shutting down an operation with a 30,000-unit herd requires extreme care, else a larger scale disaster will follow.

There is a lot of coverage of the issue in NZ but the most interesting trawl I enjoyed was through the blog site of journalist Bernard Hickey who took on the issue. The blog comments from a range of people in the country shows, disturbingly, there is still some support for the luddite stance the Crafars take that the farm is the business of the owner, and cruel decisions are often necessary for the good of the business. There’s also an interesting debate about the fragility and future risks of the NZ rural economy that allows such business propositions and practices to flourish.

Unfortunately in this day and age, and moreso in the future, food production and land stewardship take on much deeper obligations to those well downstream from direct customers and community.

Let's debate reality: food security with an ETS?

2009-09-28T03:31:00.000-07:00

The global economic slowdown has it seems taken a small dent only out of the long-term problem of producing enough food to feed the world. According to the FAO of the United Nations, the world faces the challenge of producing 70 per cent more food for another 2.3 billion people by 2050. At the same time, it has got to try and overcome poverty and hunger (which it hasn’t managed to do in the last 40 years, despite U2’s Bono being on the job), using limited water resources more efficiently and also adapting to the mounting pressures of climate change.

The numbers in FAO’s analysis are dazzling and should be enough to excite primary producers into making long term plans to remain good at what they do. Demand for food will continue to grow as a result both of population growth and rising incomes. Demand for cereal crops (for food and livestock feed – leave out biofuels for now) is expected to reach 3 billion tonnes by 2050, compared with annual cereal production of about 2.1 billion tonnes today. Meat production will need to increase by over 200 million tonnes on the current 270 million tonnes by 2050. FAO says that 72 per cent of that consumption will be in developing countries – as we know them today.

FAO says that 90 per cent of the growth in crop production will come from higher yields and increased intensity, but regardless of those efforts, the amount of arable land will have to expand by around 120 million hectares in developing countries, mainly in sub-Saharan Africa and Latin America, which suggests farming deserts and pruning more rainforests. Meanwhile urban population needs and industrial land use in developed countries is expected to use up some 50 million hectares of arable land.

With those incredible futures lying ahead, is it relevant to be having debates about GMO’s and worrying about the impact that food production has on the production of greenhouse emissions on this barren corner of the world? The numbers work by the FAO, CSIRO and countless other scientists and academics says the world has already passed the tipping point – we did that in 2007 where we didn’t produce enough to feed the planet.

We have to be very careful with policy decisions that might impose a disincentive food producers and manufacturers, in the interests of giving lip service to creating an altruistically green society, before the rest of the world has even come to terms with how to produce enough food from available resources and technologies. We really haven’t properly looked at ways of properly measuring emissions let alone encouraging mitigation and fair treatment of farming and land management practices.

It throws up an interesting issue doesn’t it – do we try to plan for a better world environment in the long term or do we ensure we can feed the human race that is going to live in it?

Clearly the world has to plan to do both in the next few months but we will again wish politicians with short-term mandates (that’s anything less than 5 years) can make courageous calls which balance managing climate change against ensuring that their peasant farmers have jobs and their people can buy food.

Do we seriously expect the developing world to thrust their food production industries into a half-baked global emissions trading regime that will ensure we aren’t disadvantaged?

Ethanol is a test for Obama

2009-06-14T21:00:00.000-07:00

The environmental credentials of the Obama Government in the United States are going to be sorely tested as lobbyists from all sides – grain producers, ethanol makers, livestock producers, food manufacturers and environmentalists – debate the future of the ethanol mandate.

The US federal government allows conventional petrol to be sold in a blend that contains with up to 10 percent ethanol. The US ethanol industry has grown rapidly in the past few years with the benefit of generous government incentives lavished upon it by the Bush administration and mandates that call for increased ethanol blending over time.

The industry is now lobbying the still-new Obama team seeking an increase in the blend rate to between 12 percent to 15 percent ethanol so that the industry to continue growing. This is presumably as the American public realizes they are burning too much fuel in their oversized cars.

The US Environmental Protection Agency is evaluating whether to lift the blend level beyond 10 percent. A major concern is whether the higher blends would affect the operation of fuel lines and car engines, especially in older vehicles. The EPA has said it has until the end of November this year to act upon a request to increase the blend level to 15 percent.

A report issued last week that had been commissioned and paid for by US Grocery Manufacturers suggests 12-15 percent blends would push up the amount of land needed to grow corn to at least 100 million acres by 2015, which is up from the 85 million acres this year, and the average over the 20 or so years to 2006 of 76 million acres. Naturally given that there isn’t much new land being found in the US to convert to broadacre production, such an increase would induce corn farmers to take land away from other crops, helping to raise prices for all sorts of grains, whether destined for the mouths of humans or livestock.

Ethanol advocates argue that technology that has given them increased corn yields. They claim that while the demand for ethanol will rise by more than 70% with added mandates and usage, grain yields should double in 20 years through these devices. Better yields on paper in a lab result, but corn producers themselves point to weather as a major foil to sustained yield improvement – and the increased scrutiny on their operation due to increased water and fertiliser use which better yields would certainly require. Using increased portions of the corn crop to fuel cars leaves food systems more exposed to the cost impacts of bad weather.

The US is gradually realizing that water is a finite resource, and at least one fuel distributor is worried about this issue. The water needed to grow feedstock for a litre of ethanol in the US ranges from 500 to 5,000litres, depending on crop and location. Work done by the Shell Centre for Sustainability at a Texan University reckons the volume of water used in fuel-efficient cars running on ethanol that uses irrigated corn from Nebraska is about 120 litres per kilometre of travel.

With land and water under so much pressure, you have to wonder the point of an alternate fuel policy with these consequences.

Is there a free trade agenda?

2009-06-02T23:41:00.000-07:00

There has been a lot of anger expressed in the statements from virtually everyone in an official capacity associated with dairy and trade over the past week. The anger and disappointment is totally justified, but we shouldn’t be surprised that the US Government resorted to the use of its dairy export subsidies.

There may have been too much faith placed in the belief that Barack Obama would save the world from a large number of ailments. We’re being overly hopeful and naïve to ignore the reality of the Obama administration’s intentions when it comes to what we might call “promoting free trade”. With the depressed US economy staying in the toilet for a while yet, and efforts to repair the perception of the US’ global citizenship on foreign policy and environmental issues, the inbox for the new team is overloaded, and many hopes will be left vanquished .

Free trade (or even fairer trade, which would be a start) is even not among the 29 priority issues that are listed on the White House Web site. And in a time of global financial and economic crisis, protectionist sentiments in the US, as in many major developed and developing economies, are running high.

Newly appointed US Trade Secretary Ron Kirk’s agenda is only partly defined. Kirk talks up a push for a revival of the global Doha round of trade talks, amongst grave doubts of its prospects with the current economic turmoil.

Americans are dubious about expanding trade deals, one of the issues which soured the populous over the years of the Bush era as the products of China and other low-cost exporters filled the shelves of Wal-Mart and Costco and ate away at manufacturing jobs. They resoundingly elected a Democratic regime which has a strong social platform, part of which is protecting jobs – including those on farms.

At the same time though, they don’t want the consumer to pay too much for basics, which brings the inevitable conflict about the cost of goods in US stores. If cheaper imports bring down the prices of products, they could be better for US households, but will also cost jobs while the structure of the economy adjusts.

While the US farm sector is reeling from turmoil, the exposure for major sectors is patchy. Grain is doing OK – dodgy weather and the ongoing biofuels mandate has kept prices firm. Beef has suffered with the lack of export access to premium markets, and a dip in hamburger sales, but dairy wears the pointy end. Just as a lot of our producers are feeling, cash milk prices for many US dairy operators are below bought-in feed costs.

The US has turned to its export subsidies as one of the available devices that may be seen to address the imbalance between demand and supply that causes milk, cheese and butter prices to go through huge cycles. After all, the Europeans had cranked theirs up in the first place. Product prices within the US internal market are low not because of the world market because household demand has slowed and milk supply from farms is slow to respond. But with over-supply clearly the problem, other revived subsidies actual pay farmers to help them stay in business.

The US agripolitical farmer cares little for the world market despite its growing importance to its manufacturers, yet this step will ensure that critical market to our exporters remains sluggish for longer.

Salt intake and the nanny state

2009-05-25T09:25:00.000-07:00

The Australian food standards agency FSANZ reported recently that, according to its own research, Australians consume an average of 2.2 g of sodium per day from salt, with about 80 per cent of that average coming from processed food. FSANZ’s says 95% of Australians consume less than 8.5 g of salt a day.

FSANZ published a list of common food groups and their relative contribution to the national salt intake, a list which might surprise, but also belies the size of the challenge that might lie ahead for the food processing sector if this becomes a bigger issue. FSANZ reckons were the worst offenders were bread and bread rolls, processed meat, and cereal or cereal based products, such as biscuits and pizza. At the lower end of the spectrum were cheese and breakfast cereals.

The salt reduction agenda is hardly a new one for food companies, and for several years has been one of the big agenda items in generally making foods healthier, and promoting a healthier diet. For some this has been competitive territory, and early adopters of reduction policies have promoted the issue as a major corporate initiative.

Some of the major global food companies – such as Kraft and Unilever - have been on this road for several years, as part of trying to improve their standings as health-conscious suppliers. Consumer advocates complain that it shows how “bad” some foods have been for people’s health for years.

This is a global issue that has a fair bit of momentum in Europe as well. Just last week, the UK’s food standards agency (FSA), published voluntary targets for the UK food industry to reach over the next 3 years. It seems the salt issue might be a bit worse in the UK – not known for high standards of excellence in national diet. The FSA trimmed down its salt-content targets revision for 80 categories of foods, to ensure continued momentum in the initiative.

The food industry here will be watching the sentiments of our government towards this issue given the escalating costs to the country of healthcare. The UK food manufacturers, while careful not to complain about the morality of such an agenda, have pointed out some important basic facts in lowering the content. Firstly you have to deal with consumer preference, which has an in-built taste expectation. Food companies have booked complaints about taste after reductions, in breakfast cereals, biscuits and soups for example. Tastes are developed over a reasonably lengthy period of time, so that quick reversals are noticed.

The other major issue for manufacturers is the role that salt plays as a food preservative and as a functional part of the production process. Salt is critical for example to the structure and texture of cheeses. Biscuits would get soggy, bread would fall apart, and processed meats would have shorter shelf lives without a level of salt in the process. The food industry will be worried that stringent reductions might be difficult without new processing R&D. Processors in the UK have the added impetus of living in a land dominated by retailer private label, and you can be sure the retailers will insist their supplier toe the line to also show Joe Public how responsible they are.

It’s another example of course where Joe Public may not know what they are eating.

Or if they do, they probably don’t mind because food has to taste and look good and they’re going to die at some stage anyway!

Pain for EU farmers

2009-05-19T23:35:00.000-07:00

Europe’s economy continues to take a battering from the global recession, with recent economic growth and retail sales showing the slowdown is possibly worse than what the US has felt. With the slump in consumer sentiment, retailers have taken the knife to food prices to keep consumers in their stores.

Europe’s dairy farmers are caught in a painful bind which seems all too familiar to their counterparts in Australia. Given the more volatile effects of a tighter trade balance in the dairy sector, and the lack of transparency in the supply chain, the spikes in prices are getting sharper and it seems closer together.

German and French dairy farmers recently basked in the glow of historically high prices. Between November 2007 and January 2008, farmgate prices tipped 45 euro cents in some major countries, which equates to about 80 Australian cents. Farmgate prices slid during 2008 and have crashed further this year, with prices paid by major German co-ops at 22-25 euro cents (still up around A$0.40-0.45c) in March 2009.

European farmers reckon they smell a con – the cuts don’t need to be that deep. Wholesale spot prices for dairy commodities meanwhile have fallen in similar style, but producers don’t believe the whole market could have dropped that quickly.

In late April, thousands of producers took their tractors and cows to the street to demonstrate for fair milk prices in over ten European countries, calling for "flexible volume regulation for fair milk prices". This roughly translates to “restrict milk production when prices fall leave us enjoy higher prices to the full”. That’s the classic euro farmer “cake and eat it” stuff. Essentially farmers are protesting about over-supply of their own milk and want their governments to stop them feeling the market signal that comes from over-supply. As a milk producer in southern Australia what that feels like when your costs remain pretty much fixed.

German farmers are copping the worst of the price cuts due to the disaggregated state of their industry, and a high exposure to commodities. They also have the most cut-throat retail sector. Last week farmers raised the extremity of their protests as retailers including the large discounter Aldi, slashed the price of milk from 55 to 48 euro cents per litre (A$0.86c/litre) leaving (what farmers claim) only between 20 and 25 euro cents per litre for farmers. About 150 women lashed themselves to the fences outside the German Chancellor’s office, starting a hunger strike. German farmers threatened a repeat of a delivery strike, which landed them in court for collusion last year.

So far the strength of the continental protest have not caused their politicians to blink, with the EU’s minister for agriculture recently stating that they have done everything possible within the EU’s power to address the slump, and that from here, the market will have to work to help prices recover. Back in plain speak, she meant “cull some cows my friends”.

Don’t think this is over. Watch the strife escalate over the new few weeks and the pressure on Euro-pollies increase. French dairy companies have held back cutting milk prices, some of which remain about 50% higher than their German neighbours. But they have thrown their farmers into distress seeking a 30% cut in prices, claiming producers need to overcome delusion about realities of the marketplace in Europe.

Australian dairy farmers have been hit hard enough in 2009. Hopefully we don’t see political will weaken in Europe and the world market used as a prop to create the impression there’s action to address the problem.

Emissions targets

2009-05-14T23:08:00.000-07:00

Media analysis was busy at the passing of the first 100 days of the Obama regime in the United States. The new President has been given a mixed start, achievements cloaked by the deterioration in the US economy. This week the tone of the coverage of the financial crisis in the US continued a theme that they are at last seeing new buds of life and growth.

There is little doubt Obama has worked very hard to reposition the US on a number of issues after the appalling performance of his predecessor who took his country to new levels of disrespect. Some critics in the US have labeled Obama’s approach as partisanship, but surely the demonstration of a new broom and a new direction were what Obama pitched for and is delivering on.

One of the key reforms is on climate change, supporting the need for an effective global pollution reduction strategy. While the fate of the CPRS in Australia has been engulfed in a debate over whether we should have a debate, while few tangible alternate options are being proposed as the K Rudd government lumbers towards implementation.

Hilary Clinton took on the job of whipping up fervor towards a meaningful international approach – interesting as she is in charge of foreign policy. While this is an environmental policy issue, the US sees it as key to improving its relationships with other countries after the isolationist approach of the previous regime.

Clinton has pledged to ensure the US makes up for lost time in the fight against climate change. At the opening of a conference in Washington, she told diplomats from the world's 16 largest economies that her country “was now ready to lead the fight against global climate change… both at home and abroad”. The conference was the latest in a series of meetings meant to get climate talks rolling with a bit of impetus in advance of the December meeting in Copenhagen which hopes to find a follow-up agreement to the Kyoto Protocol, which expires in 2012.

The US stance has partially pleased the Europeans, who have embraced the need to address the threat to the global economy from emissions. The EU agreed to cut greenhouse gas emissions by 20 percent by 2020 from 1990 levels, rising to 30 percent if the rest of the developed world -- mainly the United States and Japan - agrees to do so. The sheer depth of Japan’s recession might take care of that country’s efforts by itself!

But while Hilary might stir the passions, the strength of commitment has to be seen in numbers, and gaps already exist – of almost Doha proportions. A draft bill of law introduced into the US House of Reps aims to cut carbon emissions by 20 percent from their 2005 levels by 2020 and boost reliance on renewable sources of energy. US targets are a positive sign - unheard of before Obama took over – but Europeans gave this a cautious response. The base year for comparisons is, after all, 15 years after that of the EU, meaning the commitment would represent just a 5 to 6 percent reduction using the EU's baseline of 1990, already a bone of contention.

But if the US involvement can bring major developing countries to the table around a meaningful pact, the gaps might be papered over, and Australia may not feel so alone with its CPRS. Let’s just hope this doesn’t descend into a similar frustrating process as we’ve seen in global trade talks.

China's milk fiasco

2008-10-13T12:26:00.000-07:00

It may be several weeks before the enormity of the milk poisoning tragedy in

China

is fully understood. After the past 2 weeks however we’ve seen enough of the detail to see that the practices of milk suppliers and dairy companies are an inherent part of a system of product cheating that puts segments of its population at high risk of death.

The dairy company that was initially fingered as the culprit – Sanlu, which is 43% owned by New Zealand dairy farmers through Fonterra – was originally aware in March this year that there were complaints about babies getting ill after consuming its infant formula products. Sanlu’s board melamine was in its products a week before the Beijing Olympic Games but claims it was working with local authorities to manage a product recall. It wasn’t until a frustrated Fonterra told the NZ Government of the issue, and that the NZ Prime Minister then told her Chinese counterpart, that the problem got the right level of attention in China. All that while, unsuspecting parents were feeding their children poisonous products.

That was clearly the tip of the iceberg. A fifth of China’s 109 registered dairy companies have now been implicated, and the list of suspected products has spread beyond baby infant formula milk powder to mainstream consumer products such as yoghurt, ice cream and liquid milk. Officials added to the apparent confusion for consumers, saying originally that liquid milk was safe, but late last week milk sold in liquid form by three leading Chinese dairies was found to be contaminated with melamine.

This melamine-injection racket is reportedly well entrenched as a practice used to dud the tests of protein levels in a range of products made from watered-down milk. The same chemical was found in exported pet food last year and blamed for killing thousands of cats and dogs in the United States. The tragedy has partially lifted the lid on a culture of corner-cutting, copying and cheating that is well understood by many who’ve done business in the country as a risk with pretty much any manufacturing in China.

This is not the first scandal involving the deaths of children at the hands of criminals cutting corners to weasel a few more yuan out of the dairy market – a higher death toll was reported in 2004 when infant formula products were sold without adequate nutritional content, causing widespread malnutrition in babies.

It is perhaps ghoulish to think that the outcomes of this tragedy hold opportunity. Chinese mothers will surely find it hard to trust local infant formula brands and a wider range of tainted dairy and milk products, so there may be a retreat towards the safety of fully-imported products. The wider risk is that the trust for the whole dairy category is placed at risk at a time when the prospects for dairy were being strongly influenced by the future demand from Chinese consumers.

The tragedy of trust is huge for the government of China – it has encouraged its people to consume higher levels of dairy product as a cornerstone of a societal nutritional policy, yet failed to back that up with a food safety regime befitting the trust it was demanding.

The safety crisis ravaging China's dairy sector shows the country faces a very long haul before a reform drive can bring order to a chaotic and deadly food industry which threatens its own consumers and those of its trading partners. The culture of corner-cutting and cost minimisation for the sake of profit will plague this and other sectors of the food industry until China’s consumers wage their own effective revolution.