In July 2015, the Australian Government released the Agricultural Competitiveness White Paper, a document designed to set the policy direction for the support and promotion of the Australian agricultural sector.
The White Paper exhibits a grassroots, farm gate-centric perspective. While the majority of the initiatives are laudable in having as their objective the support and encouragement of farmers, farming families and rural communities, the relatively narrow focus of the White Paper raises the question as to whether we are best positioning Australian food and agriculture businesses for the "Asian opportunity".
The Asian opportunity
For those who have been "napping in the hay stack" for the past few years while the magnitude of the Asian opportunity has become apparent, the key trends and developments driving the prospects for the Australian food and agricultural sectors are outlined below:
- The world’s population will grow significantly over the next 35 years (the world is heading for a population exceeding 9 billion, from current levels at around 7 billion), with most of that growth coming from Asia (and most of Asia’s growth being attributable to China).
- Not only are Asian populations growing, but these populations are increasingly affluent, with a burgeoning middle class of “aspirational” consumers buying an increasing amount of Western-influenced, protein-based and quality foods.
- Australia enjoys proximity to these rapidly growing Asian markets, in some cases conferring a freight and market access advantage over producers from other jurisdictions.
- Australia has a reputation for safe and high quality produce, produced in an environmentally conscious manner with the potential to attract a premium price in Asian markets.
- Free Trade Agreements struck with several Asian countries (most notably China, Japan and Korea) will reduce tariffs and facilitate trade, improving Australia’s competitiveness.
This confluence of demand-side and supply-side factors, with a sprinkling of government facilitation and a more competitive Australian currency, add up to a fantastic opportunity for Australian farmers, producers and other participants in the food and agricultural supply chain.
An opportunity potentially lost?
The question must be asked, however, is the Australian Government doing enough, or is it even proposing enough in the forward-looking parts of the White Paper, to position Australia to take full advantage of the opportunity before it?
The White Paper contemplates several initiatives that should provide meaningful opportunities for primary producers. Initiatives that are particularly positive include:
- a $500m commitment to the National Water Infrastructure Development Fund, $200m of which is ear-marked for projects in Northern Australia (although this commitment is not one that exclusively benefits the agricultural sector); and
- a $30.8m commitment aimed at removing technical trade barriers in Australia’s key export markets.
However, the majority of initiatives are incremental, and while they no doubt have the potential to improve the lot of farmers, they do not appear to be “game changers” for the broader agricultural sector. It is therefore difficult to envisage that trade or investment will be enhanced in a material way as a consequence of the White Paper's proposals.
Thankfully, initiatives that may be counter-productive are in the minority. Changes to the foreign investment regime (understatedly described as a “refine[ment of] the settings for foreign investment in agriculture”) should be singled out, however, as being counter-productive to the promotion of foreign investment in the sector. We know from speaking with many of our clients that the new agriculture-focussed FIRB changes, representing the most significant change to the foreign investment regime for 40 years insofar as agricultural land is concerned, have caused consternation, and may well have the effect of discouraging further foreign investment in the sector. As some in the sector are fond of saying, “foreign investment is better than no investment”.
The bigger picture
A key limitation of the White Paper is that little policy attention is paid to the food and agricultural value chain beyond the farm gate.
As we know from the debate over the proposed definition of “agribusiness” to be used in the foreign investment regime (and the definition that has found its way into the draft legislation), agricultural businesses do not stop at the farm gate. Unfortunately, the White Paper does not look beyond the farm gate with any clarity or commitment.
Why is focus, vision and action beyond the farm gate important? Because of the often modest proportion of the value created from exported products that is ultimately garnered by Australian farmers. So whilst the White Paper explicitly seeks to improve farm gate returns (which is commendable), the potential for the White Paper's initiatives to deliver these improved returns feels limited, particularly in light of the price-taking position occupied by our primary producers.
In our view, the Government should develop and promote initiatives to position the agricultural sector to do something which the mining industry failed to do with any conviction during its time in the sun, and that is to encourage investment up, and along, the value chain, beyond the farm gate, with a view to participating in value-adding opportunities. This will allow farmers (either individually or collectively) to capture more of the value chain and mitigate exposure to farm gate risks.
The closest that the White Paper gets to a value chain initiative is to recognise the power of cooperatives to move farmers up or down the value chain, to extract value and potentially achieve a diversification of income. But all the White Paper does is recognise the availability of the structures and establish (at a modest cost of $13.8m) an education program to assist farmers to better understand these structures and opportunities that currently exist.
It is generally accepted that the Australian agricultural sector requires significant investment to increase production and export capacity, to improve competitiveness as against offshore suppliers, and to capture productivity and efficiency gains. Other than generally encouraging farmers to get their "house in order" so as to be a more attractive investment proposition (farmers are implored to “present business propositions that are attractive to investors, including domestic superannuation funds”), the White Paper does little to stimulate investment in the sector. It certainly does nothing to unlock the potential for Australia’s mandatory superannuation schemes to support Australian agriculture.
Whose job is it anyway?
What is clear is that significantly more is needed, beyond the initiatives outlined in the White Paper, in order for the sector to achieve its potential in this period of Asian opportunity. An important question becomes, whose responsibility is it to position Australia for agricultural prosperity?
The White Paper is unapologetic and explicit in demarcating the roles: “It is up to the Government to set the right environment for business to flourish … It is up to industry to seize the opportunities: to tackle new markets, take up new technologies, experiment with new breeds and varieties and try alternative approaches to business.”
As a principle, an over-arching philosophy of non-intervention is not necessarily disagreeable. Lack of government financial support is not new for producers, with Australian producers being very near the bottom of the international league table for government subsidies.
As always, it is a question of balance.
What is particularly disappointing is that the Government has clearly demonstrated an appetite to adopt an interventionist stance in the agricultural sector. However, the vast majority of the initiatives operate pre-farm gate, often in a manner that may keep marginal, capital-consuming producers in operation, when what is needed are initiatives that operate to meaningfully promote and support industry in a way that improves our competitiveness internationally and will facilitate the sector grasping the Asian food and agriculture opportunity.
Where to from here?
The White Paper represents a positive start to improving policy settings in the agricultural sector and recognising the importance of the sector to Australia’s prosperity.
Hopefully we can look back on the White Paper as the start of the process of change. The recently announced agreement on protocols for the export of live cattle to China, which is a tangible outcome of the Government’s aspiration to remove trade barriers, suggest that the Government’s endeavours in the agricultural sector are just getting started in a meaningful way. May there be many more positive developments that operate beyond the farm gate.