No pain no grain: Improving Australian grain supply chains
Australia's grain supply chain is being challenged by the high cost to move grain from the farm gate to the holds of ships destined for foreign shores. This article reviews the ways to reduce erosion of this competitive advantage.
The Agribusiness Bulletin
The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise.
Receive the Agribusiness Bulletin
No pain no grain: Improving Australian grain supply chains
Australian grain growers are now half way through the winter cropping season and crop forecasters are hopeful for a national yield of 1.93 tonnes per hectare (AEGIC Crop Prospects Report August 2015). In a few short weeks combines will start their annual paddock migration. But once the grain is harvested, the supply chain challenge to efficiently transport the crop to port could again become apparent.
But why does this logistical challenge matter?
By virtue of proximity, Australian grain has a cost advantage compared with North America with regards to transport to key wheat export locations.
The Australian Export Grain Innovation Center consistently rates transport (including receival charges, rail freight and port charges) as the biggest single cost in the domestic grain supply chain, and specifically rail freight, which when compared to rivals such as Canada, is hamstrung by the infrastructure limitations.
Figure 2: Supply chain cost breakdown by state
After initial private attempts at the provision of rail transport were unsuccessful in the mid-1800s colonial governments took the mantle and the costs of services and assets were considered an investment in nation building. As asset with low financial return, decisions were based on cost minimisation (Australian Industry Commission: Rail transport).
It’s not surprising then that an array of rail grades, gauges and load ratings colonies across the colonies resulted, and that these decisions, which may have been appropriate a century ago, are now problematic in attempting to move grain from farm to port, across state borders, and with the benefit of modern rolling stock design.
But this competitive advantage could be eroded over time as a result of the high cost to move grain from the farm gate to the holds of ships destined for foreign shores.
Infrastructure issues are compounded by operational nuances in different states:
- In Western Australia and South Australia a large portion of the rail network is utilised mainly for grain haulage with a freight window that is less than half the year. Costs, however, continue to accrue throughout the year
- In eastern states, by contrast, competition exists for rail allocations. Depending on the location this can come from other commodities such as coal or passenger movements, which in Queensland have a legislative preference to allocations over all other rail movement.
So for much of the late 20th century, much of Australia’s regional rail network was unprofitable and losses were regularly incurred. But the Productivity Commission recommendations of the early 1990’s pushed for a large portion of Australian rail assets to be privatised or subject to long term lease arrangements in order to address the market failure.
However, the difficulty in commercialising historically subsidised assets exists.
- In Western Australia Brookfield, the lease holders of regional rail assets, and CBH, - the only customers for large stretches of rail infrastructure - have been engaged in ongoing negotiations for rail access. Since 2013, there have been four interim rail access agreements and little to indicate the prospect of a long term arrangement
- Whilst to the east receival sites are being closed to channel grain through more efficient rail routes. For example in 2014 GrainCorp announced “Project Regeneration” to improve its storage and logistics network, which will see approximately a 25% reduction in recieval sites (dependant on harvest volumes) (GrainCorp Project Regeneration: Fact sheet).
So in the face of this, what can be done to ensure that the power of Australia’s proximity to key grain export countries is not eroded?
All stakeholders of the grain supply chain stand to gain from a reduction in costs associated with rail infrastructure. So whether this takes the form of innovation in rolling stock design or improvements to the fixed assets there is value in collaboration to identify efficiency opportunities across the end to end supply chain.But before a dollar is spent on upgrading physical assets there are gains that can be made in the improved collaboration between infrastructure owners, rail operators and bulk handlers (in states where these are separate groups). If bulk handers were able to improve grain movement forecasting and communicating this to operators facilitates, they can help operators in longer term rolling stock planning, reducing the costs that stem from short lead times and excess asset capacit
Network infrastructure consolidation
The practice of maintaining unproductive infrastructure cannot continue indefinitely. Although in the short term producers in proximity to closed receival points will face increased transport costs from the farm gate, the economies of scale and increased investment in the remaining receival points should drive regional efficiencies and reduce unit receival costs.
Road transport costs to reflect usage
The reduction in rail capacity for grain will likely result in increased haulage by road. Without changes in the way that road usage is charged, along with how rural road (re-)construction is funded, there could be an accelerated deterioration of road assets. Charging for usage and directing funds to the improvement of key grain road transport routes will improve the efficiency and safety of these routes, and reduce the financial burden on the local governments who maintain them.
These changes will not be easy by any stretch of the imagination with transport infrastructure a charged issue at the best of times. But despite the political capital required, improvements to the Australian grain supply chain are needed to ensure the price competitiveness of our produce abroad, and to ensure that Australia’s grain growers prosper.