A study published by the Australian Export Grains Innovation Centre (AEGIC) confirms what we all know. Australia has a very high cost of production for crops like wheat, making us uncompetitive in global wheat markets.
Presumably AEGIC are comparing like with like in their methodology, so that we can have some confidence in the conclusion that our costs of production are some 68 per cent higher than in the Black Sea, and that we are running about 18 percent above costs of production in the US.
Australia is a high cost economy across the board. That comes with having a high standard of living, and strong regulations on things like wages and working conditions. Many of the things that we think are fair and reasonable, and that we take for granted, come at a cost. As an economy overall, we can afford them, but when you are an export dominated industry, we cannot extract compensation for those extra costs from our customers.
This is really putting the pressure on broadacre cropping in Australia. It is also pressuring farmers in the US, Canada and the EU, but with our very high cost structures, we are being hit as hard as anyone.
It is fortunate that our on farm technologies are world class, giving us very high rates of productivity for labour, and delivering high water use efficiency from our crop production systems. That is keeping us in business, but it comes at the expense of larger farms and ultimately fewer people being involved in growing grain over time.
However, we are running out of new innovations that can deliver more productivity gains to stay ahead of the curve, and more farm businesses will become vulnerable to adverse seasonal fluctuations from year to year.
We are also being let down by the post farmgate part of the Australian industry. Roads conditions are deteriorating without proper renewal, and the costs of transporting, storing and fobbing our crops for export keep rising without any question as to whether growers can pay for these increased costs. It is just expected that growers will pay because they have no choice.
Australia in particular, but also the US, Canada and the EU are now coming under immense pressure from the Black Sea region. Not only are Russian and Ukrainian costs of production much lower, but they have a freight advantage into key North African and Middle Eastern markets.
While we may have a freight advantage to South East Asia, we are now learning the hard way that with their lower production costs, Russian wheat can land into our traditional markets at much less cost to the importers than Australian wheat.
A major driver of the upheaval has been a sharp increase in Russian wheat production over the last 5 years. That in part is the result of some outstanding seasons, but also from improvement in their on farm production systems.
We can’t do much about our cost structures. They are locked in by our economic system. That means to remain competitive we need another round of productivity gains. We need to produce a lot more grain from our available growing season rainfall.