Grains: Ross Kingwell, Australian Export Grains Innovation Centre

So I'm here to addressthis question of, is the Black Sea sendingAustralian grain into the red.

So the Black Sea regioncomprises Ukraine, Russia, and Kazakhstan.

I'm going toconcentrate on Ukraine as an indicator of what'shappening in that broader Black Sea region.

AEGIC will be releasing areport in April that outlines the situation in Ukraine.

Then in coming months, we'llbe releasing other reports on Russia and Kazakhstan.

So a bit of background.

The Black Sea region, asmany of you will know, has rapidly emerged as aglobally important exporter of grain.

And that has implicationsfor Australia, because we are a major exporterof grain, particularly wheat.

And I've asked the question,how concerned should we be about those developmentsin the Black Sea region, using Ukraine as an example.

And then also to ask thequestion, well, so what? If they are a challenge, whatshould we be doing about it? So here's a map ofwhere Ukraine is.

Ukraine, the largestcountry in Europe, has the largestmilitary base in Europe, which may be no surprise toyou given what's happening in the east of Ukraine.

So what makes Ukraine aninternationally competitive force in grain export? Well firstly, it has alow cost of production– I'll go into that.

It also has a low cost ofits grain supply chain.

It has [? fibral ?]yields, which underpin it's low cost of production.

It producers a range ofcrops, which gives its farming systems biological resilience.

Whereas in most of the wheatexporting regions of Australia, those farming systemsare very wheat dominant.

And therefore, lack thebiological resilience.

Fortunately forUkraine, it's also very close to major emergingmarkets in North Africa, the Middle East.

What are Ukraine'snatural advantages? Well, it has about a thirdof the world's resource of a rich, black topsoil.

It also has a favourableclimate for crop production.

It has nearby markets in NorthAfrica, Europe, and the Middle East.

It also has veryaffordable labour.

The per capita GDP of Ukraineis about $3,000 US dollars.

In Australia, we're sittingat about $60,000 US dollars.

So they have 1/20 of the percapita GDP wealth of Australia.

And that translates intovery affordable cheap labour.

And it's not justunschooled labour, either.

Ukraine has a historiccommitment to education, so many of its youthare very well educated, albeit very low paid byinternational standards.

Increasingly, with the politicalin Ukraine in recent years, they've opened themselvesup to foreign investment, and that's allowed the inflowof modern crop technology and equipment.

So what underpins the emergingcompetitive threat of Ukraine? It's certainly not that theyare committing more land into wheat production.

This chart looks at the areasallocated to growing wheat in Australia and Ukraine.

Australia had been flat lining.

So has Ukraine with respectto the area allocated to growing wheat.

The big difference is inthe wheat yield trends.

So you have thesituation there where Australia is on a slightupward trajectory in its yield improvement.

And there was aninteresting presentation by Steve Jeffries of theAustralian grain technologies responsible for about60% of the areas assigned to modern wheatvarieties in Australia.

And they haveshown that they are at a point where they aredelivering now consistently high yielding wheat varieties.

But they're up againsta country like Ukraine that is on a muchsteeper yield trajectory.

And then when you look atwhat that yield trajectory translates into, andthe cost of labour, when you convert that intowhat does it mean in Australia dollar terms to growa tonne of grain, then you find that thereare some pretty remarkable differences.

So this is a chart thatcontains a lot of detail, but it compares Canada, andwe did a report last year on Canada, and we've updatedthose figures to 2015.

We've similarly updatedAustralian figures, and these are the mostrecent figures for Ukraine.

What you find, comparingthose countries, is that Canada has a veryexpensive supply chain cost, about 37% of theport value of wheat is due to the costof getting the wheat from the Canadianprairies, which are about 1800 kilometres away from port.

So a lot of the valueof Canadian grain is due to the experience ofmoving that grain from farm to port.

Australia had,relative to Canada, quite a respectablesupply chain cost.

And about 30% ofour grain value is due to the supply chain cost.

However, when you look atthe cost of farm production as well as supplychain cost, you find that Ukraine isabout $100 a tonne cheaper than Australian grain.

That's a huge difference.

And it's not just that theyare more cost effective due to the nature of their farmingsystems and farm production, but they also havecheaper supply chains.

So their competitive forceis a force the arises not only in the paddock, but italso arises beyond the paddock.

When we investigated Ukraineand had a look at its costings, it wasn't just a desktop study.

We spent some time in Ukraine.

We spent time visitingfarm properties in Ukraine.

This is one property wevisited in southern Ukraine.

The fellow in the centrethere is Lawrence Richmond.

He was actually the crop managerfor Victoria's largest wheat producer about a decade ago.

He's now moved to Ukraine andmanages some very large grain farms in southern Ukraine.

And he was able to give usa great level of information and detail about costingsand the nature of crop production in Ukraine.

And it's based on his personalexperience of several years.

And no surprise thatthe productivity of Ukrainian production alsooutstrips that in Australia.

So we, again, as[? Lise ?] was mentioning, Australia has experiencedlow rates of productivity improvement in recent years.

So why, given that information,why isn't even more wheat being grown in Ukraine? Well, fortunately for us,that's as I said at the start.

Ukraine is able togrow many crops.

And no surprisethat farmers choose to grow those crops which, on agross margins basis, or return basis, offer them thegreatest advantage.

And that's in recent years,clearly been in corn, soybeans, and sunflower.

So most of Ukrainiancrop production is switching into corn,soybeans, and sunflower.

Wheat has been pretty stable.

As I showed you before,the area allocated to wheat is pretty stable.

What's happeningis there a change in the spatial distributionof wheat in Ukraine.

So this chart shows areasthat are in decline when it comes to the areaof wheat, and areas that are subject to growth.

So in the red colouredareas, over a 15 year period, there's been more than a 2%decline in wheat production.

So wheat production is shiftinginto the southern areas.

The southern areashave lower rainfall, they are lower yielding, theyare slightly poorer soils.

So that's goodnews for Australia, that the wheatproduction is moving away from really high yielding areasinto lower yielding areas.

The bad news is that it meansthat wheat production is increasingly being centredin areas closer to port.

So wheat is being grownin regions where they have a supply chain cost advantage.

What's emergingin central Ukraine is a corn, soybean typebelt.

The other issue about the competitivenessof Ukrainian grain is that some peoplethink Ukrainian grain is hugely inferior.

It's just feed wheat, so wedon't need to worry about it.

Within about four to eightweeks of last year's harvest, I was able to obtain datafrom a reputable third party.

So this chart is basedon 525 samples of wheat across all the majoroblasts in Ukraine.

So if I'm a buyer of wheatin Ukraine, just a few weeks after harvest, Ican get information on exactly wheat ofdifferent quality is located.

I can't generate thatmap in Australia.

So in terms ofservicing buyers, we might say Ukraine is almostin developing country status.

But I can tell you,it's internet service in its regions,and its provision of grain qualityinformation exceeds that available in Australia.

The implications for us isthat a lot of the wheat that is being exported in recentyears, fortunately for us, has been mostly in NorthAfrica and the Middle East.

The concern, though,is that what's happened in more recentyears is that grain has been spreading into ourSoutheast Asian markets.

And that trend has continued.

So even this year, in themarketing season to date, Ukraine has exported 2.

6million tonnes of grain to Asia.

At the same period last year,it was only 1.

5 million tonnes.

So this trend of movingwheat into out Asian markets is continuing.

The issue for Ukraineis that it is still in economic transition.

It's subject to huge corruption.

It's subject topolitical uncertainty.

There's conflict still inthe east of the country.

So there's a lot ofimpediments facing Ukraine.

So briefly, what are theimplications of those trends for Australian wheat exporters? The good news is that Ukrainianwheat exporters are currently a modest threat inour key markets.

But they have the potential tobe a very great threat if they ever switch land outof corn, soybeans, and sunflower into morewheat, if they further invest in their supplychain infrastructure.

I haven't mentionedso far, but there's huge potential for Ukraineto invest in barge transport.

And if they do that,that will further lower their supply chain costs.

So the fundamental point hereis that we actually do have time to prepare for this challenge.

And this last slide is what do Ibelieve are our needed actions.

Well, probably the italic fontis the more meaningful points here.

We need to be forewarned ifwe're going to be forearmed.

So we need to know what'sunfolding in the Black Sea, what's unfolding inArgentina, because if we're not aware of those developments,we can't meaningfully prepare and react.

One of the thingsthat we do need to do is we know thatAsian markets are going to be crucial tothe success of the wheat industry in Australiaover the next two decades.

We need to know whatit is about our wheats that our Asian customers like.

And we need toprovide more of that.

So we need to getintelligence about what are the characteristicsof Australian wheat that are mostdesired, that people are prepared topay for, and then bring that informationback to our plant breeders and marketers.

And we need to use this windowof opportunity very carefully.

If we don't use thiswindow of opportunity carefully and prepare forthese competitive threats, then we end up disserving ourAustralian grains industry.


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