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Feeding the ‘dining boom’

Feeding the ‘dining boom’

How well is Australia’s agriculture sector positioned to take advantage of growing global demand for food production and exports?

As China’s growth slows, and demand for Australia’s industrial resources declines, our export economy is rebalancing. The mining boom has ended, with earnings from resources and energy commodities down by 12 per cent to $172 billion in 2014-15, as higher volumes failed to offset lower prices (1).

But there is a lesser known economic phenomenon that’s already underway that could provide great potential for Australian suppliers and exporters.

Known as the ‘dining boom’, it refers to the rapid rise in demand for more, and better, food from emerging markets — most notably the ASEAN nations, China and India. Powered by rising middle classes and higher levels of disposable income — this boom is leading to new dietary preferences in these regions, including significantly higher levels of protein (and protein substitutes).

We recently sponsored the GTR Australia Trade & Supply Chain Finance Conference in Sydney, and presented the opportunities and challenges the dining boom presents.

Reshaping the food supply chain

From both a geographical and production standpoint, Australia is ideally placed to help meet this increased global demand. But as the dining boom gathers speed, agribusiness will need to overcome certain challenges within the supply chain.

Our already pressured systems mean we can’t simply use more land or more water to produce ever-higher levels of output. Instead, we may need to rethink our models and modes of production.

Deregulation and changes in trade rules have already disrupted the business models of many producers in recent years. We’ve seen a de-integration of global supply chains, and the disappearance of protected monopolies.

The sugar industry is a prime example, where Australia, Brazil and Thailand’s World Trade Organisation case saw European Union (EU) exports capped to a lower level after 2005. This legislative change fundamentally changed the geographic flow of sugar around the world, seeing producers like Brazil take a more dominant role and new sugar refining industry emerge across North Africa and the Middle East.

One thing is clear, if Australia’s producers want to play a major role in feeding the world, every part of the supply chain needs to be reconsidered: from the product and processes, to distribution.

New markets, new solutions

The rapid advances in food technology and genetically modified (GM) foods is presenting some extreme examples of solutions that may yet evolve. Take cattle, for instance: while they are currently the best means we have for producing beef, that might not be the case forever.

Cattle consume vast quantities of feedstock, are sensitive to temperature extremes, and are costly to farm and move around. Researchers in the US and Netherlands are working on alternative production techniques, making the same nutrients available via different mechanisms that don’t necessarily need the physical animal. While there has been some success in this area on a micro scale, considerable work remains to make it commercially viable — so that is one for the distant future.

In the here and now, an example of adapting the product to meet the market can be found in the dairy industry. The global market means that dairy products are increasingly consumed a long way from their original source — in terms of both distance and time. This has seen the mass-market global trade in dairy move into the powdered form.

These solutions suggest that we’re going to need significantly more investment in food manufacturing technology and processes to keep up with innovation in food production. The Australian Food and Grocery Council lifting investment is critical to Australia’s food manufacturing industry, with current rate of investments $600 million below the historical trend line (2).

Scaling up

Australia’s output and export of food stock is increasing in response to the dining boom, with processed food and beverage exports rising 28 per cent between 2014 and 2015.3 But to continue to grow at this rate, Australian agri-businesses will need to adopt greater scale.

The traditional model of family-operated farms is shifting, albeit slowly, as some farmers retire and others build larger parcels of land. As production increases in scale, and high-tech equipment speeds up production processes, agribusiness will be better able to meet new levels of demand.

But there will still be a place for smaller producers within the dining boom, supplying niche markets with specialty products, like gourmet items or quality wine. Understanding the needs of buyers in these markets and adapting products, packaging and distribution models to match, can help them secure a sustainable future.

Impacts on working capital

To meet future demand, Australian companies will need to make significant capital investments in their business, expanding manufacturing facilities and supply chain capacities. Careful cash management will be required to mitigate the risk of depleting cash reserves and potentially exceeding existing overdraft limits as this investment takes place.

Businesses may also need to rapidly set up or expand trade facilities to help service their overseas buyers. For those who prefer not to entrust their brand to outside parties, there could also be substantial costs in setting up the offshore infrastructure for sales, marketing and distribution.

To the extent that certain brands or products may be fashionable in the shorter term, there’s also the risk that demand may quickly dissipate, making over-investment a tangible risk.

Preparing for the future

The dining boom presents great opportunities for Australian producers. To succeed, we will need to find new ways to access and leverage capital — boosting the innovation and scale of supply chain and logistics operations — and speeding up the economic rebalancing that’s so desperately needed.

For more information on this and other global trade solutions, contact CommBank’s Trade Service Centre to speak to a Trade Specialist on 1300 654 112 or go to www.commbank.com.au/trade.

Tobin Gorey
Tobin Gorey

Director Agri Commodities Strategy

Tobin Gorey is the Commonwealth Bank’s Agri Commodity Strategist responsible for strategy and research in agri-commodity markets. Tobin returned to CommBank in October 2014 after a six-year stint offshore working for JP Morgan (in London) and Olam International (in Singapore). Over that time he has been a continued supporter of the view that the world will demand more, and better, food. This growing demand requires a larger and more productive agriculture sector both in Australia and globally. He was educated at the University of Western Australia (Bachelor of Economic, Hons) and later at Macquarie University (Master of Applied Finance).

1 Australian Government, Office of the Chief Economist, Resources and Energy Quarterly, September 2015 2 Business Council of Australia, Building Australia’s Comparative Advantages, 2014 3 Australian Food and Grocery Council, Australian Agrifood Sector Key to Future Growth, 2015