CHAPTER 6
PROSPECTS FOR VALUE-ADDING: THE PROBLEMS
Introduction to Part 3
6.1 Part 3 of this report examines the prospects for success of
Australia's value-adding industries, both in Australian and overseas' markets. Chapter 6
concentrates on setting out the prospects for value-adding in Australia, particularly in
relation to problems faced by a wide spectrum of agricultural based industries. The major
headings used in this chapter are:
- economic returns from value-adding activities;
- support for value-adding activities;
- advantages Australia has in value-adding; and
- obstacles to value-adding activities.
6.2 The concluding chapter of this report, Chapter 7, focuses on the
issue of exports in relation to existing and future prospects for value-adding in specific
agricultural industries. Chapter 7 also sets out suggested strategies applicable to
particular industries to support and further their value-adding activities.
Economic returns from value-adding activities
6.3 The establishment and successful operation of a value-adding
activity is normally dependent on the profitability of the particular activity. As the raw
agricultural product is further processed, or altered, additional value is added. The
consumer is often prepared to pay a premium for the product as a result of the value that
has been added.
6.4 There are indications of increasing confidence that value-adding
processes can continue to be profitable. For ten years, to 1991-92, there
had been a consistent upward trend in the proportion of Australian food
and beverage firms engaged in high value-added production. In 1991-92,
nearly 86 per cent of firms in the industry were engaged in high value-added
production. This compares with only about 77 per cent in 1980-81. [1]
It can be expected that this trend will continue.
6.5 The wool and tobacco industries provide two examples of
industries where increased processing can add significant value to the raw product.
However, the return vs the cost involved is an important consideration in determining the
level of processing that takes place.
Wool industry
6.6 The progressive processing of wool provides an example of how
value can be added to a raw product. The Australian Wool Processors Council has estimated
the relative prices for wool, in the form of multiples of the base price for the raw
product at different points in the processing chain, based on a 22.5 micron wool with
nominal value of $5.50 clean. These relative prices are:
From a base of greasy wool = 1
greasy wool to scoured wool 1.14
greasy wool to top 1.6
greasy wool to white yarn 2.9
greasy wool to dyed yarn 3.8
greasy wool to wool fabric 10.7
greasy wool to wool garments 39.4 (wholesale)*
greasy wool to wool garments 78.9 (retail)
* Based on a lightweight men' suit that would use approximately 1.15
kg of wool. [2]
6.7 These figures indicate that if Australia sells overseas wool worth
$5 billion in greasy form, the same volume in the form of tops would be
worth $8 billion. [3]
Tobacco industry
6.8 The Committee was advised that the value-added contribution made
by tobacco products was greater than that made by 17 of 20 industries
reported on by the Australian Bureau of Statistics (ABS). According to
Philip Morris Limited “non-ferrous metals and non-ferrous metal ores
are the only two industries whose contribution to value-adding is greater
than that made by tobacco products in Australia.” [4]
6.9 The importance of this value-adding industry was demonstrated by
the fact that it:
- includes 550 grower units growing and marketing more than $60 million
worth of tobacco annually;
- tobacco manufacturing firms employ more than 4 000 people;
- Australian tobacco manufacturing firms supply approximately 99 per
cent of cigarettes consumed in this country;
- in 1993-94 the Australian tobacco industry generated retail sales of
$5.345 billion with retail sales of cigarettes totalling $5.4 billion; and
- the tobacco industry generated $3.3 billion in government taxes during
1993-94. [5]
A cost/benefit issue
6.10 The greatest return, or profit, from processing a raw product does
not necessarily result from processing the product to the maximum degree
possible. The Murray Goulburn Cooperative Company Limited advised the
Committee that it had found “there is a very fine line between what
is value added and what is cost added.” [6] The Cooperative stated that it exported its
milk powder in 25 kg bags instead of packaging it in smaller tins because
the return on the sale of the bulk milk is greater than it would receive
for canned powder. Mr Wayne McLean, General Manager, Export Bulk Ingredients
with the Murray Goulburn Cooperative stressed that:
Provided that the bulk continues to give a better return than the higher
value added then we owe it to the farmers to maximise the returns. If
the returns are in the lower value added [sic] then that is where
we will stay. [7]
6.11 Mr Patrick Curran, Marketing Manager with United Milk Tasmania
(UMT), told the inquiry:
Manufacturing of retail packaging and small products is very expensive.
It is time consuming, and the equipment itself is very expensive. [8]
Conclusions
6.12 It is in the national interest that value-adding activities
related to agricultural production be encouraged at all levels so as to benefit the
national economy. However, the Committee is of the view that industries themselves have to
make the decision as to what extent they can profitably carry out value-adding activities.
For companies to make a correct assessment concerning profitability involved in
value-adding activities they must have access to the most up to date and reliable
information available.
6.13 There is no doubt that Australia is one of the most efficient
producers of bulk agricultural produce in the world. The Committee accepts that in some
situations it may be most profitable to export bulk produce with no value-adding component
involved.
Footnotes
[1] Department of Industry, Technology and
Regional Development, Food Australia: Processed Food and Beverages Industry - 4th
edition, prepared by the Agri-food Council Secretariat, Canberra, ACT, December 1994,
p. 6.
[2] Maximising the Return: Adding Value
to Australian Wool: Report of the Wool Processing Task Force, Department of Primary
Industries and Energy, Canberra, 1993, p. 1.
[3] Wool: Structuring for Global
Realities, Report of the Wool Industry Review Committee, Canberra, August 1993, p. 62.
[4] Evidence, Philip Morris Ltd, p.
638
[5] Evidence, Philip Morris Ltd, p. 638
[6] Evidence, Murray Goulburn Cooperative
Company Limited, p.245. Murray Goulburn Cooperative is one to the two
largest dairy cooperatives in Australia with an export turnover of about
$500 million per year. The Cooperative has six factors throughout Victoria
employing about 3 000 people.
[7] Evidence, Murray Goulburn Cooperative
Company Limited, pp.245, 248.
[8] Evidence, UMT, p.852.