East Asian demand for Australia’s food and wine has put a smile back on the face of many farmers. The next battle: turn a cyclical boom into a sustainable export expansion.
In the notoriously fickle business of farming, optimism is slowly returning. Rising East Asian incomes, falling trade barriers and Australia’s clean-food reputation are fuelling a boom in overseas demand for the nation’s red meat, wine and a surprisingly wide range of other produce.
Much of it is catering to the appetite of China’s emerging consumer class, whose tastes are broadening and who are increasingly demanding that their food be clean, green and safe.
One example: the swelling Chinese market for Australian beef. China took less than 1 per cent of Australia’s beef exports in 2010; in 2015, it took 11.5 per cent, even as the price of beef soared to a record A$19.16 a kilogram.
Forecasters at the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expect the value of total Australian beef exports to top A$9 billion in 2015-16. As recently as 2012, they were barely half that.
The boom extends far beyond beef. Shipments of bottled wine to China grew more than 60 per cent last year; giant winemaker Treasury Wine Estates estimates that Asia will be its biggest single source of profits by 2017. The Californian drought and soaring global demand for almond milk have Australian producers shelling the nut as fast as they can. Honey exporter Capilano can’t get its bees buzzing quickly enough – sales in Asia are growing almost 30 per cent a year.
After some tough years for agriculture since prices last peaked in 2011, many of Australia’s export food industries are on the rise.
Asia’s protein boom
Impressive as these export gains are, they could be just the beginning. A vast new pool of middle-income earners is emerging in China and the rest of Asia. The US-based Brookings Institution estimates this Asian middle class will reach 1.7 billion by the end of the decade and will virtually double to three billion by 2030.
These people can now afford more and better food. Economists have seen this pattern before when incomes grow, though never on this scale. So they expect surging demand for food – particularly protein-rich meat and dairy products.
Chinese households are already changing their eating habits. The proportion of protein in their diet has gone from less than 20 per cent to almost 25 per cent, according to International Monetary Fund (IMF) analysis. Yet the IMF says per capita consumption of beef and pork is still well below what would be expected at current income levels, and predicts it will rise as wages head higher.
If the current growth in food consumption in China is sustained for the next 15 years, then world production of beef and poultry will have to increase by 5 per cent, lamb and mutton by 17 per cent, fish by 30 per cent and pork by more than 40 per cent.
China took less than 1 per cent of Australia’s beef exports in 2010; in 2015, it took 11.5% even as the price of beef soared to a record A$19.16 a kilogram.
Even as consumption grows, one decades-long constraint on Australian farm exports is being eased – trade rules. Recent trade agreements with China, South Korea and Japan mean all three are phasing out tariffs on beef, and China and Korea are removing dairy tariffs as well. Fruit and vegetable growers will have tariff-free access to the Chinese market within nine years, and horticulturalists have been granted improved access to Japanese and Korean markets.
No easy wins
The opportunities are vast, yet creating lasting prosperity will require hard thinking and a lot of work. An Asia-driven “long boom” in food exports is far from a foregone conclusion.
Beijing-based industry consultant Michael Boddington, principal of Asian Agribusiness Consultancy, cringes when he hears talk of a “dining boom” to replace the mining boom. Enthusiastic as he is about Asian opportunities, he warns that Australian producers will need to do more than just tip product onto grateful overseas markets.
While Australia has been geographically and technically well placed to take advantage of China’s demand for coal, iron ore and other bulk commodities, exporting food is an altogether different game.
The current dairy bust is a reminder of agriculture’s long pattern of price rises, over-investment and eventual collapse. Here are six steps experts say Australia will need to take if the country is to earn long-term prosperity from the Asian opportunity.
Brace for competition
Australia faces stiff competition from elsewhere, says Boddington, particularly Europe, South America and New Zealand. “We are not the only ones looking at this space,” he notes. “It is going to be very, very competitive.”
New Zealand has stolen a march on Australia in dairy, with exports in that sector worth about A$3 billion compared with Australia’s A$295 million in 2014-15.
Similarly, Brazil is making big inroads into the Chinese market for beef and has dislodged Australia from its position as the predominant exporter, thanks largely to lower prices.
China is also expanding its own production and has farms with scope for much higher productivity.
It is a familiar story for Greg McNamara, chair of Lismore-based farmer group Norco Co-operative Ltd, which exports fresh milk, flavoured milk and ice-cream to China and other Asian markets. McNamara says that the “clean and green” food product can attract a premium but cannot ignore price.
“There’s a limit to how much of a premium we can put on it,” he says.
Build more links
Rob Gregory, founder and CEO of food exporter Australian Fine Foods, issues another caveat: the successful builders of Asian markets will be those prepared to wear out their shoe leather building strong personal relationships with officials, distributors and retailers. They also need to be ready to persist in the face of local processes. Even after a product is approved by regulators, “it can take nine to 12 months before you get something on the shelf at all in a lot of markets like Vietnam and Thailand,” he says. “It takes a lot of work. There is no such thing as an easy market.”
Boddington says the Australian Government has been doing its part by negotiating free trade agreements with China, South Korea and Japan, and in organising events like Australia Week in China, where a delegation of more than 1000 Australian businesspeople met with Chinese counterparts at 150 separate events across 10 major cities.
“We really need our industry leaders, our brand leaders, to come up here and invest in building the brand and doing the hard work in building relationships, not only with importers and distributors, but also with end users,” says Boddington.
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Tell the safety story
Regular scares in China about the contamination of locally produced food, including melamine-laced baby formula and cabbages sprayed with formaldehyde, have driven many Chinese shoppers to seek out imported brands, and they are prepared to pay extra for food that is clean and safe.
However, as McNamara discovered, exploiting this opportunity comes with its own complications, including counterfeiting and product tampering.
“From early on, we saw replica products selling on the internet in a very short period of time, selling for $2 to $3, when we were selling for $8 to $9,” he says.
To stamp out the problem, the company changed its labels to give each bottle a unique code that consumers can scan using an app on their smartphone to reassure themselves of the product’s authenticity. Wary Chinese consumers also demanded Norco bottle its milk with tamper-proof lids.
Boddington says food exporters also need to provide “100 per cent” traceability of their product – giving retailers and consumers a full account of the origins of their food from farm paddock to supermarket shelf and attesting to its safety. This means having full confidence in the supply chain.
Understand local tastes
Getting your product onto the shelves is one thing; adjusting it to meet local habits and tastes is another.
Boddington says that so far, Australian foods for sale in China are much the same as those sold at home. But as competition intensifies and Chinese consumers become more discerning, Australian producers will have to develop products more tailored to Chinese tastes and lifestyles, which will require them to be much more intensively engaged with the Asian market and to develop a deep understanding of Chinese consumers.
Australian Fine Foods employs locals in its main export markets to research local attitudes and tastes, and McNamara says Norco has for the past two years focused on improving its understanding of Chinese consumers. It has found, for instance, that consumers in some cities and provinces prefer their banana-flavoured milk to have a more intense flavour, but in other regions the preference is for a lighter touch.
Let Asian capital in
Some Chinese outlets are applying their own understanding of their consumers. Giant Chinese retailer the Dashang Group, for instance, is buying up Australian farms and herds. It plans to breed Wagyu and Angus cattle on those farms, which will then be sold as Australian-branded beef in its own shops, supermarkets and department stores.
Prominent economist Saul Eslake argues for a change in the mindset of politicians and the Australian community regarding Asian investment in agriculture, noting estimates the capital shortfall could reach A$500 billion by 2050 without a change in approach.
“The reality is that the pools of capital potentially available to Australian agriculture are unlikely to be in the UK and the US,” he says. Increasingly, they will be in China, other parts of Asia and the Middle East, and large businesses will play a key role in the sector.
“The kind of advances in scale, productivity and efficiency required are likely to be significantly beyond the resources of the family farm,” says Eslake.
Fix the choke points
Finally, Eslake warns that Australian ambitions to grab a significant share will come up against constraints on the potential to increase supply.
Limits to the land available for farming, inefficient use of water resources, sub-standard transport infrastructure, a shortage of capital and limited potential for productivity gains are all obstructing a substantial increase in production.
“If we are going to significantly increase the quantity of agricultural exports, then part of the investment needed is to upgrade rail infrastructure, to increase hauling capacity and efficiency,” says Eslake, adding that “we [also] have to get smarter about how we capture, store and allocate water.”
The economist says the nation will need to make “some hard choices” on spending priorities and attitudes toward agricultural investment if it wants to take maximum advantage of the opportunity that Asian growth represents.
The Australian foods at the top of Asian shopping lists
Across Asia, increasingly affluent households are consuming beef. Japan, the US and Korea remain the biggest export markets for Australian beef, but China is rapidly catching up – it consumed more than 11 per cent of total beef exports last year (128,700 tonnes in 2014-15), and is expected to import an extra 30,000 tonnes a year by 2020-21 – a 23 per cent increase. By 2030, China and India between them are forecast to consume 40 per cent of global output.
The Chinese are developing a taste for wine and a preference for Australian varieties – so much so that China-Hong Kong has become the country’s most valuable export market. Bottled shipments to the market soared by 55 per cent last year. Importantly, efforts to rebadge Australian wine as a premium product appear to be paying off. Last year, while global sales volumes increased 6.4 per cent, the value jumped 13.8 per cent.
Rising demand and falling tariff barriers are expected to be a boon for Australia’s rice farmers. Exports of rice, mainly to Japan, have been growing by an average of almost 30 per cent a year since 2011-12, and industry analyst IBISWorld predicts the value of rice sales overseas to reach A$468 million by 2020-21 – a 23 per cent increase.
Health-conscious Asian consumers are willing to pay hefty prices for Australian honey. In parts of China, 500g jars of Manuka honey are selling for up to A$80, and it has been reported that in South Korea, some are spending up to A$145 for a 250g jar. It is a fillip for makers like Capilano, which reported a 29 per cent jump in export retail sales of its honey in 2014-15 and a 46 per cent rise in revenue from its health and wellness products.
California’s protracted drought and increasing Asian demand for almonds and almond milk have delivered windfall gains for Australian farmers. The US has traditionally dominated the global market, but Australia’s almond industry has virtually doubled in size in four years and last year produced 80,500 tonnes – 59,000 tonnes of which was exported, generating sales worth A$747 million. Chinese and Indian demand has the almond industry planning continued expansion toward 130,000 tonnes by 2025.
The export market for fresh Australian grapes is blossoming following the negotiation of trade agreements with Japan, South Korea and China. Last year, grape exports to Japan jumped from virtually zero to A$6.5 million after tariffs were cut by almost 2 per cent. Industry analyst IBISWorld expects the industry to grow by 26 per cent in the next five years to be worth a total of A$285 million.
Cherry exports to South Korea have gone from five tonnes in 2013-14 to 344 tonnes in 2015-16, following the elimination of tariffs under the Korea-Australia Free Trade Agreement. Cherry growers are also finding eager buyers in China – exports to the world’s second-largest economy have jumped from 330 tonnes to more than 800 tonnes after tariffs were cut from 10 per cent to 6 per cent.
Oranges, lemons and mandarins
Not long ago, Riverina farmers were ripping out their citrus trees. Now Asia is set to become a major market, with citrus exports second only to grapes as an export fruit in 2014-15. Exports to China increased almost sevenfold between 2009-10 and 2014-15, reaching A$111 million. Under its trade deal with Australia, China has committed to eliminate its tariffs on citrus fruits by 2023.
The dairy boom that curdled
Farmers are no strangers to market volatility, but the recent gyrations of the dairy industry take it to another level.
In the past 10 years, world prices for cheese, butter and other milk products have surged, in current US dollar terms, as high as almost US$6000 a tonne and have then slumped to near US$2000 a tonne. As prices climbed between 2008 and 2014, dairy farmers around the world responded by lifting production.
In New Zealand, production increased by almost 32 per cent. European farmers lifted their output by 12.4 per cent. In Australia, annual milk production increased from around 9 billion litres to almost 10 billion litres.
This enormous tide of milk threatened to swamp global markets – a risk realised when exports to Russia more than halved following the imposition of sanctions, and China, which had accumulated an enormous 300,000 tonne stockpile of whole milk powder, cut back sharply on imports. As a result, global milk prices slumped 65 per cent between February 2014 and August last year and are expected to only recover gradually in the next five years.
It is a sobering outlook for Australian dairy farmers. Many of them are already struggling with a big cut in farm gate prices, which, in the case of major processors Murray Goulburn and Fonterra, have been backdated to July last year, potentially leaving some farmers tens of thousands of dollars out of pocket.
In the past five years, China and Malaysia have emerged as the two fastest-growing markets for Australian dairy products. Exports to China reached A$424 million in 2014-15, while sales in South-East Asia totalled A$1.02 billion.
By some estimates, the region’s imports of dairy products will reach US$70 billion by 2050. The growing Asian appetite for fresh milk, powdered milk and cheese could yet save the industry.