Value-adding in Agricultural Production

Chapter 1.1

Importance of agricultural production in Australia

1.13 Although Australia is a major food commodity trading nation and agriculture is a significant component of its economy, in an international context Australia produces a minor component of the world's food supply. For example, despite being a significant wheat trading nation, Australia only grows 3-4 per cent of the world's annual wheat production. [11]

1.14 It has been estimated that Australia's agricultural production is 43 per cent higher than it was 25 years ago. However, the net value of production in real terms has declined by an estimated 55 per cent. [12]

1.15 Although the value of farm production and exports has continued to grow since the 1950s it has declined in relative terms compared with other sectors of the Australian economy. In 1950-51, the gross product of the farm sector was $1.83 billion, which then represented 26.1 per cent of Australia's gross domestic product (GDP). However, since that period the gross product of the Australian farm sector increased in dollar terms to approximately $13.7 billion in 1993-94 but agriculture's share of Australia's GDP had declined to 3.2 per cent in that year. [13]

1.16 Although the farm sector is small in terms of its contribution to the overall economy, a number of agricultural industries do make important contributions to a number of regional economies in Australia. [14] For example, food and agricultural industries comprise Victoria's largest export sector, constituting 40 per cent of the State's export earnings and 25 per cent of the State's manufacturing activity. [15] In “normal years” South Australia derives 5.8 per cent of its gross State product from primary industries. The State's exports of rural production represents about 50 per cent of South Australia's exports, compared with 25 per cent nationally. [16]The gross value of agricultural production (GVP) in Western Australia in 1994-1995 was estimated to be about $3.4 billion. The State has contributed about 15 per cent to Australia's GVP in recent years. The inquiry was told that Western Australia's turnover in the food and beverages sector amounts to more than $2.5 billion or 19 per cent of total manufacturing in that State. [17]Agricultural production represents 6 per cent of Tasmania's gross state product. [18]

Structure of agricultural production

1.17 In order to have an understanding of value-adding in relation to Australia's agricultural production it is necessary to have an appreciation of the structure of agriculture in this country. This structure has a significant impact on the value-adding process

1.18 In 1991-92 there were about 126 000 commercial farms in Australia, of which 102 000 were family farms, the remainder being corporate entities. In addition there were 40 000 farms, which were either hobby farms, or were not considered to be true commercial units. [19] According to Mr Alan Burdon, a consultant in the Commonwealth Parliamentary Library, despite claims that agribusiness corporations have taken over family farms there has not been a dramatic change in the pattern of farm ownership in Australia over recent years. Farm surveys indicate that sole operators and family partnerships have retained their dominant position in the ownership of agricultural enterprises in this country. [20]

1.19 Farm employment declined from 485 000 in the 1950s to 387 000 in February 1993, of whom 268 000 were members of family farming partnerships, owner operators or unpaid family helpers. As of 1993 total farm employment represented 5.1 per cent of the national work force, a figure that compares to 15 per cent in the 1950s. [21]

The importance to Australia of value-adding activities

1.20 Continued growth in Australia's foreign debt is one of the most pressing threats to Australia's future prosperity. As a share of GDP net foreign debt has risen sharply since 1979 when it stood at 7.4 per cent. By March 1995 this figure had increased to about 37.2 per cent. [22] Australia's level of foreign debt indicates how important it is for this country to take every opportunity possible to increase its level of exports.Professor Nicholas Samuel of the University of Adelaide argued that “Australia's balance of payments difficulties can be significantly attributed to the declining terms of trade in the agricultural sector.” [23] Australia's agricultural based exports, including food and fibre, in 1988-89 made up only 30 per cent of Australia's current exports, which was the lowest level in 20 years. [24]

1.21 1.22 The Committee understands that the Centre for International Economics concluded that South Australian primary industries and downstream processing activities have the potential to add an extra $1 billion a year to that State's income by the year 2005. [25]

1.23 The Queensland Pork Producers' State Council saw the prime goals of value-adding in agricultural production as being:

• to assist Australia to become a more effective international trading entity; and
• to assist in lowering Australia's rapidly accumulating national debt. [26]

1.24 It has been estimated that food accounts for approximately 10 per cent of total world trade. Trade in food in 1994 was worth in excess of $400 billion per annum with trade in processed and branded food products had been growing at twice the rate for unprocessed food commodities. [27] As of 1995 the world wide processed foods' market had been growing at 14.5 per cent a year in nominal terms which was slightly greater than the 13.5 per cent growth in the market for manufactured products. [28]

1.25 According to the South Australian Government Australia is an efficient and reliable producer of bulk, undifferentiated food commodities. However, with a few exceptions such as the wine industry, Australia has tied itself into markets with limited growth potential. [29] The Government told the inquiry that Australia's “export profile of bulk low value added commodities places us as a nation, and certainly as a state, in the slowest growing area of world trade.” [30] The South Australian Government went on to argue that “Australia must not only further diversity its agricultural base, but also must seek to shift its agricultural export profile up the trade spectrum to higher value added products”. [31]

1.26 The South Australian Government believed that other countries are adding 10 times to the value of our agricultural exports as a result of processing such exports. The Government argued that:

If Australia is to increase or maintain its share of global wealth in an increasingly sophisticated world market it must be a creator of wealth, not merely a supplier of the seeds of wealth from which other countries benefit. [32]

1.27 Graham Blight, then president of the National Farmers' Federation (NFF), claimed in 1991 that Austrade had pointed out for years that if Australia was to achieve only 10 per cent of the estimated $80 billion added to our commodities overseas our food exports would double. If this situation eventuated there would be more than a 20 per cent increase in Australia's total exports. [33]

1.28 The Department of Primary Industries and Energy expressed the belief that value-adding to agricultural production has the potential to provide significant benefits to the rural sector and to the Australian economy. The Department stated that value-adding is necessary if Australia is to “maintain its place as a major producer of agricultural based products as world consumers increasingly demand branded differentiated rural products.” [34] According to DPIE, value-adding provides the opportunity to increase the range of agricultural products Australia trades in and “hence the opportunity to expand our agricultural export earnings and meet emerging consumer demands.” [35]

1.29 The principal features and benefits to Australia of its food processing industry were noted in several submissions and can be summarised as, it:

• is the largest manufacturing industry in Australia;
• has an annual turnover of about $40 billion, which accounts for more than 22 per cent of the turnover of all Australian manufacturing industries; [36]
• has the highest employment multiplier of any major manufacturing industry in Australia; [37]
• provides increased returns to both the production and/or processing sectors;
• provides stable demand as buyers develop loyalty to particular value-added products displaying particular brand names;
• provides less volatile returns as the raw commodity makes up a smaller proportion of the product's final value;
• improves Australia's balance of payments; [38]
• improves the level and stability of Australia's export earnings;
• provides the opportunity to diversify and expand Australia's export base; [39]
• provides increased research and development opportunities; [40]
• generates demand for new investment in plant and equipment;
• provides a means of overcoming trade barriers often faced by Australian raw commodity exporters; [41]
• reduces the migration of people from rural Australia to urban areas; and
• increases the moral of rural producers. [42]

1.30 During 1992-93 processed food and beverage producers employed 153 000 people, a decrease of 2 per cent on the previous year. These workers represented just under 18 per cent of the total number of people employed in manufacturing. During the three years to 1992-93 employment in the processed food and beverage sector declined gradually. However, this decline came in the context of an overall decline in employment in Australian manufacturing. For example, manufacturing employment averaged a negative growth of minus 5.6 per cent between 1989-90 and 1992-93. [43]

1.31 The Agri-Food Industries Branch of the then Department of Industry, Science and Technology stated in relation to the processed food and beverage sector:

It is important to note that this declining employment has been associated with rapid gains in productivity and competitiveness in the industry. [44]

1.32 During 1990-91 wages and salaries paid to employees involved in processed food, beverages and tobacco production totalled $4.5 billion. [45]

1.33 In 1987-88, 31 per cent of all food processing establishments were located in Victoria, 27 per cent in New South Wales and 18 per cent in Queensland. [46] South Australia had a food processing and beverage sector that accounted for 17.7 per cent of the State's manufacturing employment in 1992-93. In June 1991 the State's food processing sector employed more than 16 000 people in 400 establishments. The food processing sector is the largest manufacturing sector in South Australia accounting for 17.8 per cent of manufacturing turnover, some $2.7 billion out of a total of $15.5 billion in 1992-93. [47] The Tasmanian food and beverage sector provides employment for more than 5 000 people and contributes in excess of $1 billion in turnover to the State's economy. In 1993-94 Tasmania exported approximately $400 million of fresh and processed food products. [48]

1.34 Most of the processing operations in Australia in the past concentrated on simple conversion activities. High valued products, such as speciality cheese, biscuits, confectionary, food and beer accounted for less than 50 per cent of the turnover in 1988-89. [49]

Footnote

[11] John Radcliffe, New Technologies for Australia's Primary Industries, Outlook 96, Vol. 2, Agriculture: collection of papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996, organised by ABARE, p. 98.

[12] I Roberts, The Future for Australian Agriculture: Important Issue to 2010, Outlook 96, Vol. 2, Agriculture: collection of papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996, organised by ABARE, p. 61.

[13] Commodity Statistical Bulletin 1994, ABARE, Canberra, 1994, pp. 1,2.

[14] John W. Longworth and Paul C Riethmuller, Exploding Some Myths About the Rural Sector in Australia, Current Affairs Bulletin, Vol. 70, No. 1, June 1993, p. 18.

[15] Evidence, Victorian Government, pp. 26, 41.

[16] Evidence, South Australian Government, pp. 553-554, 557.

[17] Evidence, West Australian Government, p. 685.

[18] Evidence, Tasmanian Government, p. 814.

[19] Australian Meat and Livestock Industry Policy Council, Submission to Regional Development Task Force, a discussion paper prepared by a Working Group of the Australian Local Government Training Board Inc., n.d., p. 2.

[20] Alan Burdon, Commonwealth Government Assistance for Adjustment in Agriculture, Parliamentary Research Service, Background Paper Number 14, 1993, Department of the Parliamentary Library, p. 5. For a selected listing of major corporations involved in agribusinesses in Australia see DPIE, International Agribusiness Trends and Their Implications for Australia, a discussion paper prepared for the Primary and Allied Industries Council, Canberra, 1989, pp. 33-38. For comment on the size of farms and productivity see I Roberts, The Future for Australian Agriculture: Important Issue to 2010, Outlook 96, Vol. 2, Agriculture: collection of papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996, organised by ABARE, pp. 62-63.

[21] Alan Burdon, Commonwealth Government Assistance for Adjustment in Agriculture, Parliamentary Research Service, Background Paper Number 14, 1993, Department of the Parliamentary Library, p. 6. For a summary of trends in Australian agriculture see I Roberts, The Future for Australian Agriculture: Important Issue to 2010, Outlook 96, Vol. 2, Agriculture: collection of papers delivered at the Outlook 96 Conference held in Canberra 6-8 February 1996, organised by ABARE, pp. 60-61.

[22] Strategic Technologies for Maximising the Competitiveness of Australia's Agriculture-Based Exports, Bureau of Rural Resources, 1991, p. 1. Recent ABS figures supplied by Commonwealth Parliamentary Library.

[23] Evidence, Professor Nicholas Samuel, p. 597.

[24] Strategic Technologies for Maximising the Competitiveness of Australia's Agriculture-Based Exports, Bureau of Rural Resources, 1991, p. 1.

[25] South Australian Development Council, Value-Added Food Processing in South Australia, Draft 24 May 1995, p. 11.

[26] Submission, Queensland Pork Producers' State Council, p. 2.

[27] Evidence, South Australian Government, p. 552.

[28] South Australian Development Council, Value-Added Food Processing in South Australia, Draft 24 May 1995, p. 6.

[29] Evidence, South Australian Government, pp. 552-553.

[30] Evidence, South Australian Government, p. 557.

[31] Evidence, South Australian Government, p. 557.

[32] Evidence, South Australian Government, p. 553.

[33] Nigel Austin, The Growing Revolution, Bulletin Magazine Vol. 113, 16 July 1991, p. 91; see also Evidence, NFF, p. 1010.

[34] Evidence, DPIE, p. 894.

[35] Evidence, DPIE, p. 882.

[36] The Australian Financial Review, 19 August 1996, p. 22.

[37] Evidence, Mr Geoffrey Quinn, p. 488 and Dr Alistair Watson, Further Processing of Agricultural Productions in Australia: Some Economic Issues, Research Paper Number 5, 14 December, 1993, Parliamentary Research Service , Department of the Parliamentary Library, Appendix A, p.1 .

[38] Evidence, AMLC, p. 307.

[39] Simon Crean, Value-adding in Agriculture: A Government Perspective, Agricultural Science, Vol. 5 (2), March 1992, p. 24.

[40] Evidence, Riverina Regional Development Board, p. 975.

[41] Dr Alistair Watson, Further Processing of Agricultural Productions in Australia: Some Economic Issues, Research Paper Number 5, 14 December, 1993, Parliamentary Research Service , Department of the Parliamentary Library, p. i .

[42] Submission, Queensland Pork Producers' State Council, p. 3.

[43] Department of Industry, Science and Technology, Food Australia: Processed Food and Beverages Industry -5th edition, prepared by the Agri-Food Industries Branch , Canberra, ACT, December 1995, p. 10. The Committee understands from preliminary information published by ABS in July 1996 during 1993-94 food and beverage producers employed 161 848 people which was 18 per cent of the total manufacturing workforce for that year.

[44] Department of Industry, Science and Technology, Food Australia: Processed Food and Beverages Industry -5th edition, prepared by the Agri-Food Industries Branch , Canberra, ACT, December 1995, p. 10. The Agri-food Council in 1996 was replaced by the Prime Minister's Supermarket to Asia Council and Supermarket to Asia Pty Ltd.

[45] Julian B. Morison, Farm Product Processing in Australia: the State of Play, Australasian Agribusiness Review, Vol. 1, No. 1 May 1993, p. 39.

[46] Nicholas Samuel and Janek Ratnatunga, Structural Constraints to the Development of Food Processing, Australasian Agribusiness Review, Vol. 1, No. 1 May 1993, p. 52.

[47] Evidence, South Australian Government, p. 546; see also South Australian Development Council, Value-Added Food Processing in South Australia, Draft 24 May 1995, p. 1.

[48] Evidence, Tasmanian Government, p. 814.

[49] Nicholas Samuel and Janek Ratnatunga, Structural Constraints to the Development of Food Processing, Australasian Agribusiness Review, Vol. 1, No. 1 May 1993, p. 52.