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Infrastructure and Australia’s food industry: Preliminary economic assessment

Nga Nguyen, Lindsay Hogan, Kenton Lawson, Peter Gooday, Richard Green, Keely Harris-Adams and Thilak Mallawaarachchi

Research by the Australian Bureau of Agriculturaland Resource Economics and Sciences

Research Report 13.13November 2013


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Cataloguing dataNguyen, N, Hogan, L, Lawson, K, Gooday, P, Green, R, Harris-Adams, K and Mallawaarachchi, T 2013, Infrastructure and Australia’s food industry: Preliminary economic assessment,ABARES research report 13.13, Canberra, November.

ISSN: 1447-8358ISBN; 978-1-74323-156-2ABARES project: 43408

InternetInfrastructure and Australia’s food industry: Preliminary economic assessment is available at: daff.gov.au/abares/publications.

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Acknowledgements

This report was prepared for the Agricultural Policy Division in the Australian Government Department of Agriculture. The authors thank Trysh Stone and Ryan Wilson from Agricultural Policy Division, and Dale Ashton, Max Foster, Teresa Foster, Trish Gleeson, Michael Harris, Edwina Heyhoe, Kris Morey, Paul Morris, Daniel Pambudi and Alasebu Yainshet from ABARES for helpful comments and information. The authors appreciate useful input from Gary Dolman and David Mitchell and others from the Bureau of Infrastructure, Transport and Regional Economics (BITRE), as well as several people from the Department of Infrastructure and Transport and the Department of Regional Australia, Local Government, Arts and Sport. The authors also thank several industry representatives, particularly in Tasmania and Victoria, for information on the case studies presented in this report.

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ForewordIn 2011–12, Australia’s food exports were $30 billion or 12 per cent of total merchandise exports. Preliminary ABARES projections indicate that world agrifood consumption and imports are likely to increase markedly to 2050, with relatively strong growth in food demand in the Asian region. ABARES is undertaking more detailed assessments on the outlook in the What Asia Wants project.

This study is a preliminary assessment of infrastructure and Australia’s food industry with a focus on:

identifying issues that may affect the pattern of agricultural production in Australia and the implications for infrastructure requirements

examining impediments to private provision of infrastructure that would support growth in Australia’s agrifood industry.

The focus in this study is on the role of economic infrastructure—transport, water, energy and telecommunications facilities—in the future development of Australia’s food industry. This study identifies key possible research directions for future work that would assess impediments to infrastructure and identify policy response options that would support growth in Australia’s food production and processing industry. ABARES, in collaboration with the CSIRO, is also undertaking more detailed assessments of supply chains in northern Australia in the Northern Australia Food and Fibre Supply Chains study.

Kim RitmanActing Executive DirectorNovember 2013

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ContentsSummary................................................................................................................................................................. 1

1 Introduction............................................................................................................................................... 4

2 Background................................................................................................................................................ 5

Key economic linkages in Australia’s food market...................................................................5Global food demand to 2050..............................................................................................................5Australia’s food production and trade...........................................................................................7Australia’s key food and infrastructure industries................................................................10

3 Regional distribution of Australia’s food production...........................................................13

Methodology and data........................................................................................................................13Wheat......................................................................................................................................................... 14Sugar........................................................................................................................................................... 18Beef............................................................................................................................................................. 21Sheep meat.............................................................................................................................................. 25Dairy........................................................................................................................................................... 28Crosscutting issues.............................................................................................................................. 32

4 Case studies—infrastructure’s role in expanding production.........................................36

Tasmania.................................................................................................................................................. 36Victorian greenhouse protected cropping................................................................................38Australia’s airfreight exports of food...........................................................................................42

5 Economic issues in infrastructure investment and Australia’s food industry..........48

Economic rationale for government intervention.................................................................48Broad policy reform processes in Australia.............................................................................49Commercialisation options in infrastructure industries....................................................50Private participation in infrastructure investment in Australia......................................52Economic issues and infrastructure policy—previous studies........................................55

6 Conclusion............................................................................................................................................... 59

Appendix A Infrastructure data sources................................................................................................61

Appendix B Case study for Tasmania—consultations and irrigation projects.....................63

Appendix C Infrastructure and key food industries: ABS input-output data........................67

Appendix D Production and exports of key food commodities to 2050, by jurisdiction. 70

Appendix E Public-private partnership arrangements...................................................................78

References........................................................................................................................................................... 80

TablesTable 1 Australia's gross value of production in agriculture, fisheries and forestry, food

and non-food, 2011–12........................................................................................................................ 7

Table 2 Australia's food trade, by commodity, 2011–12..................................................................9

Table 3 Output and employment in food and infrastructure industries in Australia, 2011–12.................................................................................................................................................... 10

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Table 4 Average annual beef input, output and productivity growth, by region, 1977–78 to 2010–11.............................................................................................................................................. 22

Table 5 Average annual productivity growth in Australia’s dairy industry, by jurisdiction, 1978-79 to 2010-11............................................................................................................................ 29

Table 6 Key indicators for Australia's airfreight food exports, 1996–97 and 2011–12...43

Table 7 Airfreight and Australia's food trade, by commodity, 2011–12.................................45

Table 8 Ownership and management aspects of key commercialisation options..............52

Table 9 Value of engineering construction work done in Australia, by sector, 2011–12.................................................................................................................................................... 54

Table A1 Infrastructure data sources from key agencies...............................................................61

Table B1 Recently completed, existing and planned irrigation projects in Tasmania......65

Table C1 Value of industry and final uses of intermediate inputs in Australia, 2008–09.................................................................................................................................................... 67

Table C2 Distribution of intermediate inputs, by Industry and final use activity, Australia, 2008–09...............................................................................................................................68

Table C3 Distribution of industry and final uses, by intermediate input, Australia, 2008–09.................................................................................................................................................... 69

Table D1 Production and exports of wheat in 2050, average and trend approaches, by jurisdiction.............................................................................................................................................. 70

Table D2 Production and exports of sugar in 2050, average and trend approaches, by jurisdiction.............................................................................................................................................. 71

Table D3 Production and exports of beef and veal in 2050, average and trend approaches, by jurisdiction..............................................................................................................71

Table D4 Production and exports of sheep meat in 2050, average and trend approaches, by jurisdiction........................................................................................................................................ 72

Table D5 Production and exports of dairy in 2050, average and trend approaches, by jurisdiction.............................................................................................................................................. 72

FiguresFigure 1 Key economic linkages in Australia's food market............................................................5

Figure 2 ABARES preliminary projections for world agrifood consumption and imports, 2007 and 2050..........................................................................................................................................6

Figure 3 ABARES preliminary projections for Australia's major agricultural exports, by commodity, 2007 and 2050................................................................................................................6

Figure 4 Agriculture, fisheries and forestry—food and non-food commodities and uses.7

Figure 5 Value of Australia's food exports, by commodity, 1996–97 to 2011–12.................8

Figure 6 Leading countries in Australia's food trade, 2011–12.....................................................8

Figure 7 Distribution of uses of food products and services in Australia, 2008–09..........11

Figure 8 Distribution of infrastructure input costs for key food industries in Australia, 2008–09.................................................................................................................................................... 12

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Figure 9 Bulk grain supply chain...............................................................................................................16

Figure 10 Wheat production and exports.............................................................................................17

Figure 11 Sugar supply chain..................................................................................................................... 19

Figure 12 Sugar production and exports...............................................................................................20

Figure 13 Beef supply chain........................................................................................................................23

Figure 14 Beef production and exports.................................................................................................24

Figure 15 Sheep meat supply chain.........................................................................................................27

Figure 16 Sheep production and exports..............................................................................................28

Figure 17 Dairy supply chain......................................................................................................................30

Figure 18 Dairy production and exports...............................................................................................31

Figure 19 Value of Australia's airfreight food exports, by commodity, 1996–97 to 2011–12.................................................................................................................................................... 42

Figure 20 Key indicators for Australia's major food commodities exported by airfreight, 1996–97 to 2011–12...........................................................................................................................44

Figure 21 Distribution of Australia's airfreight food exports, by destination, 2011–12..46

Figure 22 Distribution of Australia's airfreight food exports, by jurisdiction, 2011–12. 46

Figure 23 Engineering construction activity in Australia, by sector, 1986–87 to 2011–12....................................................................................................................................................................... 53

Figure 24 Value of engineering construction work done for the public sector in Australia, 2011–12.................................................................................................................................................... 53

MapsMap 1 Population trend, 2001 to 2011..................................................................................................34

Map 2 National temperature change 2050...........................................................................................35

Map 3 National rainfall change 2050......................................................................................................35

Map B1 Tasmanian irrigation schemes overview—November 2012.......................................66

Map D1 Wheat production, by ABS statistical division and exports, by state.......................73

Map D2 Sugar production by ABS statistical division and exports, by state.........................74

Map D3 Beef production, by statistical division and exports, by state.....................................75

Map D4 Sheep meat production by ABS statistical division and exports, by state.............76

Map D5 Dairy production, by ABS statistical division and exports, by state.........................77

BoxesBox 1 Regulation reform in Australia......................................................................................................50

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Summary In 2011–12, Australia’s food exports were $30 billion or 12 per cent of total merchandise

exports. Preliminary ABARES projections indicate that world agrifood consumption and imports are likely to increase markedly to 2050, with relatively strong growth in food demand in the Asian region. Ongoing research in ABARES is examining the outlook for the world agrifood market to 2050 and assessing the implications for Australia’s food exports.

A key to realising potential growth opportunities is to ensure Australia’s infrastructure and biosecurity systems will support a growing food industry, moving food cost-effectively and efficiently to markets and supporting new export opportunities.

This study aims to identify key future research directions and provide a preliminary assessment of infrastructure and Australia’s food industry with a focus on:

- identifying issues that may affect the pattern of agricultural production in Australia and the implications for infrastructure requirements

- examining impediments to private provision of infrastructure that would support growth in Australia’s agrifood industry.

It is intended that subsequent work will assess impediments to infrastructure and identify policy response options that would support growth in Australia’s food production and processing industries.

Economic infrastructure—transport, water, energy and telecommunications facilities—provides essential services to a wide range of economic activities, including Australia’s domestic and international food supply chains. In 2008–09, the latest year available, infrastructure services accounted for 11 per cent of total intermediate input costs in the agriculture, forestry and fishing sector, 10 per cent in the food processing industry and 14 per cent in the food services industry (includes storage facilities).

Regional distribution of Australia’s food production

The potentially significant expansion of Australian production and exports of key agricultural commodities—wheat, sugar, beef, sheep meat and dairy—will increase pressure on the infrastructure that currently supports these supply chains.

- Wheat—while current distribution networks would appear to be adequate to process future wheat production in years with average seasonal conditions, additional capacity is likely to be needed in good years.

- Sugar—to accommodate significant increases in production and exports of sugar, improvements in handling capacities may be needed along the supply chain.

- Beef and sheep meat—as beef and sheep meat production increases it will be important to address issues in the livestock supply chain, including network connectivity with major supply chain points for high productivity vehicles, the condition of roads and the competition for access to ports.

- Dairy—achieving substantial dairy production increases is likely to require substantial increases in the movement of fodder and milk in some regions which would contribute to pressure on regional road networks.

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Infrastructure that allows food to be moved cost-effectively and efficiently to markets will be important in making the most of opportunities presented by rapidly growing Asian markets.

- The road network is of particular importance to food supply chains and as production and exports expand it will become increasingly important that issues affecting performance are addressed. These include connectivity across the road network and with other transport modes, road and rail pricing distortions, funding arrangements and the integration of planning and investment across modes.

- The potential expansion of production in areas currently without adequate infrastructure presents additional challenges. For example, a significant expansion of beef production in northern Australia would need to be supported by large infrastructure investments. Similarly, to achieve substantial increases in dairy production it is likely that additional investment in irrigation infrastructure will be needed, both on and off-farm.

Case studies

The case studies conducted in Tasmania and in the Victorian greenhouse protected cropping industry highlight the need to address issues related to multi-use infrastructure for production expansion. These issues include infrastructure access pricing and availability.

Further infrastructure investments in Tasmania are only viable if certain volume thresholds can be met and infrastructure use can be spread throughout the year. Even when viable infrastructure investments are available, making investments happen requires knowledge of production and consumption and the mechanisms to match this knowledge to funds.

The value of Australia’s airfreight food exports was $1.6 billion in 2011–12. International food supply chains based on air transport have increased in importance over the past several years for several food commodities. Australia’s airfreight exports of fruit and vegetables, livestock-based food and fisheries-based food accounted for 12.2 per cent of total food exports in 2011–12, compared with 9.4 per cent in 2004–05.

- Airfreight is a cost effective transport option for high value, low volume food products where food quality is dependent on timely delivery to the end-use market, and where the price premium received for the quality attributes of the food product is sufficient to justify the higher transport cost.

- Future growth in Australia’s airfreight food exports will be influenced by market access and biosecurity policy arrangements, investment in domestic high value food production and processing activities, and complementary infrastructure investment to support the further development of efficient international supply chains based on air transport.

Economic issues The economic rationale for government intervention is mainly based on the natural

monopoly characteristics of infrastructure industries (an important source of market failure). In a natural monopoly, industry costs tend to be lower if there is a single provider since this avoids costly duplication of infrastructure facilities (such as water storage, treatment and delivery infrastructure).

In recent decades, there has been a broad regulation reform process in Australia that emphasises the important role of reducing the regulatory burden on business and the community. For infrastructure industries, the main aim in policy reform has been to achieve efficient and sustainable pricing and provision of infrastructure services.

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Public provision of infrastructure services has been the traditional model used in Australia and other OECD countries, although there has been considerable interest in recent decades in reassessing the role of the private sector in infrastructure industries. Commercialisation options mainly represent alternative approaches to addressing the natural monopoly aspects of an infrastructure industry by increasing competitive pressures in the industry.

- Public-private partnerships (PPPs) are important commercialisation options that have the potential to increase competition. Such partnerships mainly refer to arrangements where the government enters into a contractual agreement with a private organisation to provide specified core functions. Public-private partnerships generally have an emphasis on private sector financing of infrastructure projects.

In Australia, private sector participation in infrastructure investment projects has increased in recent decades.

- The value of engineering construction work done for the public sector in all industries increased from $15 billion in 1986–87 to $32 billion in 2011–12 (in 2010–11 prices). Over this period, the private sector’s share of work done for the public sector increased from 34 per cent to 51 per cent.

- In 2011–12, the value of engineering construction work done in infrastructure industries (excluding gas) was $60 billion of which $28 billion (47 per cent) was private activity for the private sector, $16 billion (27 per cent) was private activity for the public sector, and $15 billion (26 per cent) was public activity for the public sector.

Future research directions Key future research directions that may be considered include:

- Australia’s food production, processing and exports to 2050: implications for infrastructure—undertake a more comprehensive assessment of key supply-side factors influencing the pattern of food production, processing and exports to 2050 in regional and remote areas of Australia, and identify implications for infrastructure requirements. This research would be complementary to the ABARES research on What Asia Wants.

- Integrated modelling by BITRE and ABARES—in this collaborative research, ABARES would focus on integrating food production and processing activities into the BITRE model framework for infrastructure in Australia.

- Food supply chain analysis—a useful area for future research may be to undertake simulations of important aspects of Australia’s food supply chain with a focus on infrastructure requirements to support export growth of key food commodities to 2050. It is beyond the scope of subsequent work to examine specific infrastructure projects.

- Pricing and provision of key food infrastructure services in Australia—assess impediments to investment in infrastructure, including the private provision of infrastructure, and identify policy response options that would support growth in Australia’s domestic and international food supply chains.

There is likely to be an important role in future research to examine the experience in other OECD countries and assess the extent to which the overseas experience provides useful policy implications for Australia.

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1 Introduction After increasing strongly during the 1990s, the real value of Australia’s food exports fell overall between 2001–02 and 2009–10 reflecting the impact of drought and increased domestic demand (Hogan & Morris 2010). With the end of the drought and strong growth in world food demand, Australia’s food exports have increased strongly over the past two years, from $24 billion in 2009–10 to $30 billion in 2011–12 (ABARES 2013; current prices). Food exports accounted for 12 per cent of Australia’s total merchandise exports in 2011–12.

Ongoing research in ABARES is examining the outlook for the world agrifood market to 2050 and assessing the implications for Australia’s food exports. Preliminary ABARES projections indicate that world agrifood consumption may increase by around 77 per cent between 2007 and 2050 (Linehan et al. 2012a, 2013). World food trade is also likely to become more important in supplying people with their food requirements over this period. Given its geographic proximity, Australia is well placed to supply additional food to the strongly growing Asian market.

A key to realising potential growth opportunities is to ensure Australia’s infrastructure and biosecurity systems will support a growing food industry, moving food cost-effectively and efficiently to markets and supporting new export opportunities.

This study is a preliminary assessment of infrastructure and Australia’s food industry with a focus on:

identifying issues that may affect the pattern of agricultural production in Australia and the implications for infrastructure requirements

examining impediments to private provision of infrastructure that would support growth in Australia’s agrifood industry.

It is intended that subsequent work will assess impediments to infrastructure and identify policy response options that would support growth in Australia’s food production and processing industry.

Infrastructure facilities provide basic services to industry and households. This study focuses on key economic infrastructure including transport, water, energy and telecommunications facilities (consistent with the coverage of Australian infrastructure statistics in BITRE 2012):

Economic infrastructure incorporates the physical structures from which goods and associated services are produced that enter as common inputs to many industries, and which play a large part in determining efficiency, industry costs and levels of production. (Chan et al. 2009, p. 3)

This report presents relevant information and examines key aspects relating to infrastructure in Australia’s food supply chain including: background information (Chapter 2); the regional pattern of Australia’s food production, processing and exports, including a comparison of historical outcomes with 2050 preliminary projections (Chapter 3); case studies (Chapter 4); economic issues relating to the pricing and provision of infrastructure in Australia’s food supply chain (Chapter 5); and concluding comments, including identifying key future research directions (Chapter 6). Major infrastructure data sources are listed in Appendix A and background information on the case study for Tasmania is provided in Appendix B.

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2 BackgroundThis chapter provides background information on global food demand to 2050, Australia’s food production and trade, and economic linkages between key food and infrastructure industries.

Key economic linkages in Australia’s food market Australia’s food supply chain includes food producers, processors, distributors and service providers (Figure 1). Australia is a net food exporter—between 2006–07 and 2008–09, around 60 per cent of Australia’s agricultural production was exported and around 54 per cent of food production was exported (Penm et al. 2010). Consistent with other physical supply chains, the food supply chain is highly dependent on a range of infrastructure for continuity of operation (Bartos et al. 2011).

Figure 1 Key economic linkages in Australia's food market

Global food demand to 2050 The world’s long-term food requirements are likely to be substantial, particularly as the world population is projected to increase from around 7 billion in 2011 to 9.3 billion in 2050 and 10.1 billion in 2100 (UN 2011; medium variant). By 2050, world agricultural production may need to increase by 70 per cent to meet the food security demands of the growing world population (HLPE 2011).

In ongoing research, ABARES is examining the outlook for the world agrifood market to 2050 and assessing the implications for Australia’s food exports. Preliminary ABARES projections indicate that, between 2007 and 2050, world agrifood consumption may increase by 77 per cent or 1.3 per cent a year on average (in 2007 US dollars) (Linehan et al. 2013, 2012,). Higher demand in Asia accounts for over two-thirds of the projected increase in world food demand. World consumption is projected to increase most strongly for fruit and vegetables (annual average growth rate of 1.2 per cent), meat (1.7 per cent), dairy products (1.1 per cent), cereals (1.8 per cent), fish (1.7 per cent) and vegetable oils (1.4 per cent) (Figure 2a).

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Farmers & fishers Key influences:

prices, availability & cost of inputs (e.g.

land, water, labour, energy),

technologies, climate & other risks

Agriculture & fishing

Food processorsEconomies of scale by accessing farm

produce from different regions;

value adding (product branding, quality premium);

innovation

Manufacturing

Consumers Key influences: food

prices, population, incomes, tastes and

preferences

Food security: reliable access to affordable, safe &

nutritious food

Households

Key economic issues: global food security, trade and market access

Outlook to 2050: strong food demand growth in the Asian region

Exports

Food demand in Australia

Food supply in Australia

World food market

Imports

Distributors & service providers

Efficient & diversified distribution network

(e.g. transport & storage, wholesale &

retail trade); restaurants etc; food

tourism, R&D

Services


International trade is likely to become more important in supplying people with food—preliminary projections indicate the share of world consumption sourced from imports may increase from around 10 per cent in 2007 to 15 per cent in 2050. World agrifood imports are projected to increase by 2.4 per cent a year on average between 2007 and 2050 with significant increases in world imports of fruit and vegetables (annual average growth rate of 1.5 per cent), meat (4.2 per cent), dairy products (1.8 per cent), cereals (5.1 per cent), fish (2.1 per cent) and vegetable oils (1.8 per cent) (Figure 2b).

Figure 2 ABARES preliminary projections for world agrifood consumption and imports, 2007 and 2050

Data source: Linehan et al. 2012a

Higher global agrifood demand is expected to provide significant export market opportunities for the domestic food industry, particularly given Australia’s geographic proximity to the strongly growing Asian market. ABARES preliminary projections indicate Australia’s agricultural exports are likely to increase most strongly for beef, wheat, dairy products, sheep meat and sugar (in 2007 US dollars) (Figure 3). Preliminary ABARES projections for the quantity of Australia’s agrifood production and exports to 2050 are provided in Chapter 3.

Figure 3 ABARES preliminary projections for Australia's major agricultural exports,by commodity, 2007 and 2050

Data source: Linehan et al. 2012a

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a) Consumption b) Imports

0 500 1000 1500 2000

Other food

Vegetable meal

Vegetable oils

Fish

Dairy products

Cereals

Meat

Fruit & vegetables

2007 US$b

2050

2007

0 100 200 300

Other food

Vegetable meal

Vegetable oils

Fish

Dairy products

Cereals

Meat

Fruit & vegetables

2007 US$b

2050

2007

0 5 10 15

Sheep meat

Sugar

Dairy products

Wheat

Beef

2007 US$b

20502007


Australia’s food production and trade

Food productionThe agricultural, fisheries and forestry sector produces both food and non-food commodities (Figure 4). Food commodities may be produced for food use (human consumption, and animal and fish feed) or non-food use (such as inputs to biofuel production).

Figure 4 Agriculture, fisheries and forestry—food and non-food commodities and uses

In 2011–12, the gross value of Australia’s agricultural, fisheries and forestry production was $52 billion, comprising food commodity production of around $45 billion (86 per cent of the total) and estimated non-food commodity production of around $7.5 billion (14 per cent) (Table 1). The gross value of food commodities produced, at least partly, for human consumption was an estimated $43 billion or 82 per cent of total production in 2011–12 (DAFF 2013; see also DAFF 2012b).

Table 1 Australia's gross value of production in agriculture, fisheries andforestry, food and non-food, 2011–12

Commodity Value Share of total

$b %

Food commodities

Crops a 24.0 46.1

Livestock and livestock products b 18.3 35.1

Fisheries products c 2.3 4.4

Total food commodity groups 44.5 85.6

Non-food commodity groups

Cotton lint and cottonseed 2.9 5.6

Wool 2.9 5.5

Pearls 0.1 0.2

Forestry products 1.6 3.2

Total non-food commodity groups 7.5 14.4

Agriculture, fisheries and forestry—total

Crops 26.9 51.6

Livestock and livestock products 21.1 40.6

Fisheries products 2.4 4.6

Forestry products 1.6 3.2

Total 52.0 100.0

Note: a Excludes cotton lint and cottonseed. b Excludes wool. c Excludes pearls. Source: ABARES 2013

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Agriculture, fisheries and

forestry

Food commodities

Food use

Human consumption

Animal and fish feed

Non-food usee.g. biofuels

Non-food commodities Non-food use


Food tradeThe value of Australia’s food exports was $30 billion in 2011–12, slightly higher than the average of $29 billion between 1996–97 and 2011–12 (Figure 5; in this report, values are converted to 2011–12 prices using the consumer price index). In 2011–12, the two main food exports were grains and oilseeds ($10 billion; 34 per cent of total food exports), and meat and meat products ($7 billion; 24 per cent) (Table 2). In 2011–12, Australia’s food imports were $11 billion with over two-thirds comprising processed crop-based food (Table 2). Australia’s net food exports were $19 billion in 2011–12—notably, Australia is a significant net importer of fruit and vegetable products ($1.1 billion in 2011–12) and processed seafood ($1.1 billion).

Figure 5 Value of Australia's food exports, by commodity, 1996–97 to 2011–12

Note: In 2011–12 prices. Data source: DAFF 2013

In 2011–12, ten countries accounted for 67 per cent of Australia’s food exports—seven Asian countries had a combined export market share of 46 per cent (Figure 6a). Ten countries accounted for 61 per cent of Australia’s food imports in 2011–12 (Figure 6b).

Figure 6 Leading countries in Australia's food trade, 2011–12

Note: Share of total exports or total imports. Food imports from China include Hong Kong. Data source: ABARES 2013

8

0

10

20

30

40

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

20

11

-12

$b

Fruit and vegetables

Other crops-based food

Live animals excluding fish

Meat and meat products

Dairy products

Fisheries-based food

a) Exports, by country of destination b) Imports, by country of origin

0 5 10 15 20

10. Singapore9. Malaysia

8. Saudi Arabia7. Hong Kong

6. New Zealand5. China

4. Indonesia3. United States2. South Korea

1. Japan

%

0 5 10 15 20

10. France9. Vietnam

8. United Kingdom7. Malaysia

6. Italy5. Thailand

4. Singapore3. China

2. United States1. New Zealand

%


Table 2 Australia's food trade, by commodity, 2011–12

Exports Imports

Commodity ValueShare of

total ValueShare of

totalNet

exports$b % $b % $b

Crops-based foodFruit and vegetablesUnprocessed fruit and vegetables a 0.6 2.0 0.4 3.1 0.2Fruit and vegetable products 0.6 2.1 1.7 15.4 –1.1Total fruit and vegetables 1.2 4.0 2.1 18.6 –0.9Other crops-based foodUnprocessed

Grains and oilseeds 10.3 34.0 0.0 0.4 10.3Other food b 0.1 0.2 0.3 3.1 –0.3Total unprocessed 10.4 34.1 0.4 3.5 10.0

ProcessedFlour mill, cereal food & bakery products 1.3 4.4 1.0 8.9 0.3Oils and fats b 0.3 1.0 0.5 4.6 –0.2Beverage and malt

Wine 1.9 6.3 0.6 4.9 1.4Other 0.5 1.8 1.7 15.0 –1.2Total 2.4 8.0 2.2 19.9 0.2

Other food productsSugar 1.6 5.3 0.1 0.8 1.5Other 1.9 6.1 2.2 19.1 –0.3Total 3.5 11.4 2.3 20.0 1.2

Total processed c 7.6 24.9 6.0 53.3 1.6Total other crops-based food c 18.0 59.0 6.4 56.8 11.6Total crops-based food cUnprocessed 11.0 36.1 0.7 6.6 10.3Processed 8.2 26.9 7.8 68.8 0.4Total crops-based food 19.2 63.0 8.5 75.4 10.7Livestock-based foodUnprocessed

Live animals except fish 0.8 2.6 0.0 0.01 0.8Processed

Meat and meat products 7.2 23.6 0.6 5.4 6.6Dairy products 2.3 7.4 0.8 6.7 1.5Total processed 9.5 31.1 1.4 12.1 8.1

Total livestock-based food 10.3 33.7 1.4 12.1 8.9Fisheries-based foodUnprocessed fish or shellfish 0.7 2.4 0.1 0.6 0.7Processed seafood 0.3 0.9 1.3 11.9 –1.1Total fisheries-based food 1.0 3.3 1.4 12.5 –0.4Total food cTotal unprocessed 12.5 41.1 0.8 7.2 11.7Total processed 17.9 58.9 10.5 92.8 7.5Total food 30.5 100.0 11.3 100.0 19.2

Note: Values are in current prices. Unprocessed food refers to minimally transformed food; processed food refers to substantially and elaborately transformed food. a Includes nuts. b Included in crops, by assumption. c Includes beverages. Source: ABARES 2013

9


Australia’s key food and infrastructure industries In this section, the key food industries are given by the agriculture, forestry and fishing sector (includes food production), the food and beverage products industry (food processing) and the food and beverage services industry (food services).

Output and employmentOutput (based on gross value added) and employment data for the key food and infrastructure industries in 2011–12 are given in Table 3. Gross value added is the value of output in an industry or sector minus the value of goods and services consumed as inputs in the production process (excluding the consumption of fixed capital) (ABS 2012a).

In 2011–12, the agriculture, forestry and fishing sector and food and beverage products industry together accounted for 4.0 per cent of Australia’s gross domestic product and 4.9 per cent of total employment. In the same year, infrastructure industries accounted for 10.0 per cent of gross domestic product and 8.2 per cent of total employment—the transport, postal and warehousing industry was the largest infrastructure industry (4.9 per cent of gross domestic product), followed by information media and telecommunications (2.8 per cent), electricity and gas (1.4 per cent) and water supply and waste services (0.9 per cent).

Table 3 Output and employment in food and infrastructure industries in Australia, 2011–12

Output Employment

Industry/Aggregate Value Share of total Level Share of total

$b % 000 %

Agriculture, forestry and fishing 35 2.4 334 2.9

Food and beverage products 23 1.6 227 2.0

Accommodation and food services 34 2.3 763 6.7

Infrastructure

Transport, postal and warehousing

Road 20 1.4 – –

Rail, pipeline and other transport 11 0.8 – –

Air and space transport 8 0.5 – –

Transport, postal and storage services 32 2.2 – –

Total 71 4.9 565 5.0

Electricity, gas, water and waste services

Electricity and gas 21 1.4 – –

Water supply and waste services 13 0.9 – –

Total 33 2.3 153 1.3

Information media and telecommunications 41 2.8 216 1.9

Total infrastructure 146 10.0 935 8.2

Other industries 1117 76.9 9153 80.2

Gross value added at basic prices 1353 93.2 – –

Taxes less subsidies on products 94 6.5 – –

Statistical discrepancy 5 0.3 – –

Gross domestic product/total persons 1452 100.0 11413 100.0

Note: Output is industry gross value added (chain volume measures); other industries include ownership of dwellings. Employment is thousands of persons; average of four quarters (based on original data). Food and beverage products include alcohol and tobacco. Sources: ABS 5206.0 (Australian National Accounts: National Income, Expenditure and Product) and 6291.0 (Labour Force)

10


Food supply chain—main uses of food products and services in AustraliaABS input-output data describe the production and subsequent use of all goods and services in the Australian economy (ABS 2012a). Input-output data for Australia in 2008–09, the latest year available, are given in Appendix C. Intermediate inputs are domestic and imported products that are used by industry (intermediate use) and/or in final use categories (domestic use and exports).

The main uses of food products and services in 2008–09 are given in Figure 7 (based on share of total supply; see Table C2). The main use of agriculture, forestry and fishing products was in the food and beverage products industry (38 per cent) (Figure 7a). The main use of food and beverage products was in the domestic market, particularly household consumption (40 per cent) (Figure 7b). Food and beverage services were mainly used in the domestic market, particularly household consumption (78 per cent) (Figure 7c).

The food supply chains for five major export commodities in Australia are discussed further in Chapter 3.

Figure 7 Distribution of uses of food products and services in Australia, 2008–09

Note: Based on share of total supply in 2008–09; total supply is given in each subheading. Figure includes intermediate and final uses of food products and services. Data source: ABS, Australian National Accounts: Input-Output Tables – 2008–09, cat. no. 5209.1

11

a) Agriculture, forestry and fishing products ($67 billion)

b) Food and beverage products ($99 billion)

c) Food and beverage services ($55 billion)

0 20 40 60 80

Final use - export marketFinal use - domestic market

Other industry usesFood and beverage services

Food and beverage products Agriculture, forestry and fishing

%

0 20 40 60 80




%

0 20 40 60 80




%


Infrastructure inputs to key food industriesIn 2008–09, infrastructure inputs were valued at $4.2 billion in the agricultural, forestry and fishing sector (10.6 per cent of total intermediate inputs), $6.3 billion in the food and beverage products industry (10.1 per cent) and $3.9 billion in the food and beverage services industry (14 per cent) (Table C0 and Table C1). Road transport and transport, postal and storage services were the two main infrastructure costs in the food production and processing industries, while information media and telecommunications was the main infrastructure cost in the food services industry (Figure 8).

Notably, these food production, processing and services industries used around 5.1 per cent of the total value of infrastructure services supplied in 2008–09 (Table C2).

Figure 8 Distribution of infrastructure input costs for key food industries in Australia, 2008–09

Note: Total infrastructure costs in 2008–09 are given in each subheading. Data source: Based on ABS, Australian National Accounts: Input-Output Tables – 2008–09, cat. no. 5209.1

12

a) Agriculture, forestry and fishing sector ($4.2 billion)

b) Food and beverage products industry ($6.3 billion)

c) Food and beverage services industry ($3.9 billion)

0 10 20 30 40 50 60

Information media & telecommunicationsWater supply & waste services

Electricity & gasTransport, postal & storage services

Air & space transport Rail, pipeline & other transport

Road transport

%

0 10 20 30 40 50 60




Road transport

%

0 10 20 30 40 50 60




Road transport

%


3 Regional distribution of Australia’s food production

By 2050 it is likely that strong growth in global food demand will drive higher world agrifood prices and production and lead to increases in Australian agricultural production and exports (Linehan et al. 2012a). It will be important to understand the potential regional distribution of this increased production, particularly in relation to the future capacity of infrastructure supporting commodity supply chains. In this chapter the supply chains of five selected commodities—wheat, sugar, beef, sheep meat and dairy products—are discussed and a simple methodology is used to disaggregate preliminary projections of increases in production and exports to 2050 to specific regions in order to facilitate a discussion of potential infrastructure challenges.

Methodology and dataA discussion of potential future infrastructure challenges facing the agriculture sector would ideally be informed by a set of long-term regional production projections for key commodities. However, long-term projections at a regional level are not currently available. To facilitate a discussion of potential infrastructure challenges, preliminary results from the ABARES agrifood model of global agricultural supply, demand and trade (see Linehan et al. 2012b) are used.

At a national level, exports of beef, wheat, dairy products, sheep meat and sugar are projected to have the largest increase in real value (Linehan et al. 2012a) with the real export value of beef and dairy products projected to more than double by 2050 (Figure 3). Due to their large potential increases in real value, these five commodities are the focus of the current scoping study but it is worth noting that future growth in production of other commodities might also be affected by infrastructure constraints; this may be explored in future research.

As Linehan et al. (2012a) highlighted, these projections are conditional on a set of assumptions about likely trends, particularly in the global macro-economic environment and agricultural technological change, together with assumptions about the sensitivity of agricultural demand and supply to changes in incomes and prices. As such, Linehan et al. (2012a) suggest this ‘conditional baseline’ may serve as a starting point for scenario analysis. The ABARES agrifood model is being further developed, so the projections of Linehan et al. (2012a) and those used in this report should be viewed as preliminary.

As output from the ABARES agrifood model is only available at a national level, it is necessary to ‘downscale’ the results to explore implications at a regional level.

Long annual time series of historical production are available at the ABS Statistical Division (SD) level. The preliminary projections for 2050 from the ABARES agrifood model have been disaggregated across the 60 SDs that partition Australia, using two simple approaches.

The ‘average’ approach assumes that an SD’s share of Australia’s production in 2050 is equal to its average share of production from the past 10 years (2000–01 to 2010–11).

The ‘trend’ approach extrapolates the linear trend in an SD’s share of Australia’s production from 1993–94 to 2010–11 to 2050, but constrains it to within 75 to 125 per cent of the 10-year average share of production.

13


Where historic trends in the share of Australian production accounted for by each region are expected to continue, the trend approach would usually be preferred. However, the continuation of historic trends may not be appropriate in all cases and the average approach may be more suitable. Substantial differences in the results produced using each approach indicate significant trends in historic data. Development of modelling capacity that produces results at a regional level and incorporates information on constraints to production (such as availability of suitable land and water resources) is required to improve on the simple approaches employed here.

The preliminary projections for export quantities in 2050 were also disaggregated across the six states and the Northern Territory using the same approaches.

The ‘simple disaggregation’ is presented with annual time series of historical production and exports from 1993–94 to 2010–11 in each commodity regional distribution map in Appendix D—employment in the corresponding food processing industry in 2010–11 is indicated by the shading of the SDs. Summary information on production and exports under the average and trend approaches is also provided in Appendix D.

The approaches taken here to disaggregate preliminary national projections will not capture future major new development areas or major shifts in the pattern of production (for example, as a result of climate change), but may be considered a first approximation to how potential production increases may be distributed and provide a way to explore potential future infrastructure challenges.

The discussion of potential infrastructure issues associated with an expansion in production of each commodity, as presented later in this chapter, draws on previous studies where possible. Further analysis is needed to identify areas where additional investment in infrastructure may be required. However, the availability of data needed for such analysis is currently limited. In particular, data on freight movements (detailed data on the products being transported and origin and destination of the products) is not comprehensive and limits the understanding of transport requirements for the agriculture sector and the broader freight task (Tulloh & Pearce 2011).

Further research could undertake a more detailed analysis of potential infrastructure constraints in agrifood supply chains, including consideration of potential scenarios for the regional pattern of future growth in agricultural production and exports (such as the potential impacts of climate change on the location of agricultural production).

WheatThe wheat industry, its supply chain and the infrastructure linking each stage are outlined below. The simple disaggregation of the preliminary projections of national wheat production and exports to 2050 is then presented, followed by a brief discussion of potential infrastructure issues associated with an expansion in production.

Wheat production and exportsWheat is the most significant grain crop grown in Australia in terms of area sown, volume of grain produced and value of the crop. In 2011–12 the total area of wheat sown in Australia was 13.9 million hectares, with 29.9 million tonnes of production. The estimated value of wheat production in 2011–12 was $6.78 billion, accounting for 14.1 per cent of the gross value of total farm production (ABARES 2013).

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Australia exported 23 million tonnes of wheat in 2011–12, accounting for nearly 77 per cent of wheat production. The total value of wheat exports was $6.4 billion, equivalent to 16 per cent of the total value of rural exports (ABARES 2013). Although most wheat produced in Australia is exported in bulk, the composition of total exports by mode varies across states. Over the five years to 2008–09, non-bulk exports accounted for about 35 per cent of Victoria’s exports, 30 per cent of Queensland’s and 20 per cent of New South Wales’ exports. In the same period, non-bulk exports accounted for only 6–7 per cent of exports from Western Australia and South Australia (PC 2010).

The wheat industry has undergone significant changes in technology adoption, management practices, structure and marketing arrangements.

Long-term productivity gains have been achieved through the adoption of new technologies and management practices in the cropping industry (Hughes et al. 2011). This includes increased use of fertilisers, seed and crop chemicals, causing materials’ share of all cropping inputs to more than double since 1977–78. Increased yields have also come from the introduction of low-till and no-till farming and the introduction of new crop varieties (Dunlop et al. 2004). A shift in the 1980s and 1990s toward much larger and more efficient sowing and harvesting equipment has been another key contributor to higher productivity (Nossal et al. 2009).

The number of grain farms in Australia declined by 40 per cent between 1977–78 and 2003–04 and the average area operated per farm increased by 50 per cent (Alexander & Kokic 2005). Increases in average farm size have facilitated productivity growth. The average area cropped per farm more than doubled over the past two decades, with the highest growth in area occurring in Western Australia. Larger cropping farms tend to be more productive because of their greater capacity to adopt new technologies (Sheng et al. 2011), particularly advanced cropping technologies that are often only suitable for use on farms above a minimum size.

The marketing arrangements for wheat have also undergone significant change. Between 1999 and 2008 the single desk marketing arrangements were dismantled, which has provided growers with more choices to market grain and manage production and price risk (PC 2010).

Wheat supply chain and infrastructureMost of Australia’s wheat is supplied through the bulk grain handling system (PC 2010). Figure 9 provides an overview of the bulk grain supply chain.

The supply system starts with farm production and on-farm storage, followed by a network of up-country storage facilities connected by road and rail transport links to manufacturers, processors, port facilities and intermediate and end use markets.

A portion of Australia’s wheat production is stored on-farm or transported directly from the farm gate to processing and manufacturing facilities or a non-bulk grain handler for packing and sale or export in containers and bags.

Export of wheat and processed wheat is mainly by sea freight from port terminals or directly from processing and manufacturing facilities.

Processed wheat products are transported to domestic markets using the road network. The domestic market is now the dominant market segment in New South Wales and Queensland and potentially Victoria (NTC 2009b).

15


Figure 9 Bulk grain supply chain

Source: Adapted from PC (2010)

Regional distribution of production and exportsTo gain an initial understanding of where infrastructure bottlenecks might arise, a simple disaggregation of the preliminary projection of wheat production and exports in 2050 was undertaken, as described earlier in this chapter.

Figure 10 presents the volume of Australia’s wheat production and exports. Map D0 shows Australia’s wheat production at SD level from 1993–94 to 2010–11, wheat exports at state level from 1993–94 to 2011–12, and the 2050 simple disaggregation and the main ports for grain export—the shading of the SDs indicates the number of people employed in the milling and cereal processing industries in 2010–11. Key points to note are outlined below.

Preliminary projections to 2050 indicate that Australia’s wheat production may increase by around 41 per cent by 2050 from the average production level achieved between 1993–94 and 2011–12 and that wheat exports are likely to increase by around 49 per cent from the average export level achieved between 1993–94 and 2010–11 (Table D0). Preliminary projections imply that to meet the potential increase in demand to 2050, an annual rate of increase of 0.9 per cent in Australian wheat production is needed between 2011 and 2050. This is lower than the average annual rate of growth achieved in Australia between 1993–94 and 2011–12 (1.5 per cent).

The large inter-annual variability in wheat production is associated with rainfall variability, with 1994–95, 2002–03, 2006–07 and 2007–08 being particularly hard hit by drought. Infrastructure largely specific to cropping industries, such as rail branch lines and storage facilities, has been constructed to account for this variability and as a result is under-utilised for significant periods.

16

Production Processing, transport & storage Intermediate and end use market

Road

Ship

Up-country storagefacility

Port terminal

Export markets

Road Rail

Road

Road

Ship

Road

Domestic markets

Wheat farms (including

farm storage)

Rail

Road ProcessingManufacturing


The simple disaggregation of the preliminary projections for wheat production and exports in 2050 is of a similar order of magnitude to the recent peak seasons. For example, in Western Australia, it is projected that by 2050, average wheat production will be 10.8 million tonnes, slightly lower than the highest production level of the past 10 years (11.4 million tonnes in 2004). However, as the 2050 volumes are an average level with significant inter-annual variability, they do imply substantial increases in years with good seasonal conditions.

Figure 10 Wheat production and exports

Note: Exports include the grain equivalent of wheat flour. ABARES preliminary projectionSource: ABARES, ABS

Maintaining current distribution networks would appear to be adequate for processing future production levels in years with average seasonal conditions. However, increased capacity may be needed in years with good seasonal conditions. In addition, increased international competition is likely to continue to drive efforts to increase the efficiency of grain handling.

The National Transport Commission identified a number of impediments to supply chain performance in its Supply Chain Pilots Draft Position Paper (NTC 2009a) which are outlined below. Wheat/grain production expansion to 2050 is likely to increase the importance of addressing these issues.

Road and rail pricing distortion is a primary impediment to efficient modal decisions and appropriate capital investment by government and industry. Under current road and rail pricing structures, much of the rural transport network is provided on a subsidised basis. The provision of subsidies makes it difficult for governments to prioritise capital investment and major maintenance needs between individual regional routes, and between rural and urban routes. In addition, for grain transport, governments have to weigh up the need for rail track provision, particularly in lightly populated areas which are already serviced by roads.

Limited integration planning and investment exists across modes in the grain supply chain despite the interdependencies between road and rail investment and between land transport and port investments. For example, the closure of branch lines in the grain networks is not normally considered together with increased road maintenance costs.

Vertical separation between low-volume rail networks and above-rail services provides few benefits and incurs high costs. The rationale for vertical separation of below-rail infrastructure provision from above-rail operations is to promote above-rail competition.

17

0

5 000

10 000

15 000

20 000

25 000

30 000

1994 1998 2002 2006 2010 2050kt

Exports

Production


However, for the grain industry, as there is limited scope for more than one above-rail operator due to low volumes, the costs of vertical separation might outweigh the benefits. The National Transport Commission (NTC 2009a) suggested that an investigation of vertical reintegration of grain networks be undertaken.

Around 90 per cent of wheat exports is handled in bulk and around 10 per cent are in bags and containers (PC 2010). The use of containers for exports expanded significantly after the marketing of Australian wheat was deregulated and reached more than one-quarter in 2007–08. Using containers can provide some flexibility in peak years. However, in more recent times, the use of containers has been consistently declining and it is not clear to what extent they will continue to be used.

SugarThe sugar industry, its supply chain and the infrastructure linking each stage are outlined below. The simple disaggregation of the preliminary projections of national sugar production and exports to 2050 are then presented, followed by a brief discussion of potential infrastructure issues associated with an expansion in production.

Sugar production and exportsThe Australian sugar industry produces raw and refined sugar from sugar cane. In 2011–12 the gross value of sugar cane production was approximately $1.2 billion and total sugar production was 3.7 million tonnes, roughly 2 per cent of world sugar production (ABARES 2013). Queensland accounts for 95 per cent of Australian sugar production and the remainder is produced in New South Wales.

Around 75 to 80 per cent of sugar produced in Australia is exported, making Australia one the world’s largest exporters of raw sugar. In 2011–12, Australia exported 2.6 million tonnes of sugar, which was about 5 per cent of world sugar exports and valued at nearly $1.6 billion (ABARES 2013).

The previous decade has seen rationalisation of the number of cane growing farms. The Australian sugar industry has 3765 cane farm businesses (ABS 2012b) and 24 sugar mills (Australian Sugar Milling Council 2012). From 2005 to 2008 there was downward pressure on the profitability of some canegrowers as world sugar supply increased (Hooper 2008). There has been a trend toward fewer, larger cane growing farms as smaller growers have left the industry. However, production has remained relatively stable and it is likely that some economies of scale exist in sugar production (Hooper 2008). Higher prices, foreign investment and a desire by processors to reduce spare capacity have also provided incentives to maintain cane production area or return land to cane production (Rabobank 2013).

Sugar cane production is particularly important for some regional Queensland economies. In the Townsville region, sugar cane production was 54 per cent ($344 million) of the region’s total gross value of agricultural production and accounted for 58 per cent of the region’s farms (Trestrail et al. 2013a). Sugar cane production was also important in the Mackay and Cairns regions, contributing 27 per cent to the total gross value of agricultural production in both regions or $240 million and $185 million, respectively (Trestrail et al. 2013b, c). The importance of sugar cane to regional economies was less pronounced in New South Wales. Sugar cane production contributed 11 per cent ($22 million) of the Coffs Harbour – Grafton region’s gross value of agricultural production, the third most important agricultural output after fruit and beef for the region (Binks et al. 2013).

18


Sugar supply chain and infrastructureFigure 11 provides an overview of Australia’s sugar supply chain.

Harvested sugar cane is transported to a miller, usually within 16 hours of harvest to avoid crop deterioration. To achieve this, most sugar production is organised around sugar mills.

In Queensland, transport from the farm to the miller is primarily by miller-owned cane railway, but also by road.

In New South Wales, transport from the farm to the miller is by road.

At the mill, the harvested sugar cane is milled into raw sugar and stored short-term in bulk bins at the mill.

Figure 11 Sugar supply chain

Source: Adapted from Woodhead et al 2006.

In Queensland, bulk raw sugar is transported by road or rail to bulk sugar terminals, where it is stored before being exported or sent to refineries. Queensland accounts for all Australian sugar exports.

Bulk raw sugar either from bulk terminals or container terminals is sea freighted to overseas markets.

In New South Wales, bulk raw sugar is primarily transported by road to refineries for refining and processing for domestic consumption.

Refined sugar and other manufactured sugar products are transported to the domestic markets through the road network and sea freight.

Apart from raw and refined sugar, the industry produces molasses, ethanol (using molasses as a feedstock); electricity for export to the grid, mulch, mull mud (fertiliser) and furfural.

19

Production Processing, transport & storage End use market

RoadRoad

RailRoad

Sugar farms Miller

Export markets

Domestic markets

Manufacturing(Refinery)

Bulkterminal

Ship

RailRoad

Containerterminal

Road

Ship

Road

Rail

Road


Regional distribution of production and exportsTo examine the potential regional distribution of sugar production and exports to 2050 the approach described at the beginning of this chapter was used. Figure 12 presents Australia’s sugar production and exports. Map D0 shows SD level historical sugar production from 1993–94 to 2010–11 and projected sugar production in 2050—the shading of the SDs in the map indicates the number of people employed in sugar and confectionery manufacturing industries in 2010–11. Key points to note are outlined below.

Figure 12 Sugar production and exports

Note: ABARES preliminary projectionSource: ABARES, ABS

Preliminary projections to 2050 indicate the potential for Australian sugar production and exports to be significantly larger in 2050 than historical production and exports:

production is projected to increase by 58 per cent by 2050 from the average production achieved between 1993–94 and 2010–11 of 4.8 million tonnes (Table D1)

exports are projected to expand substantially, to 6.3 million tonnes by 2050 from the average achieved between 1993–94 and 2011–12 of more than 3.7 million tonnes (Table D1).

Preliminary projections of substantial increases in production and exports reflect, to a large degree, expectations of increases in global demand. While Australian production would have to increase by less than 1.2 per cent a year from 2011 to reach the 2050 projection, this would be a considerable change from the average annual decline of 0.7 per cent realised between 1993–94 and 2011–12. The opportunities and constraints to increased sugar production in Australia require further investigation.

Using the simple disaggregation methods described earlier, the largest projected increase in sugar production is in northern and far northern Queensland, near the Cairns, Mourilyan, Lucinda, Townsville and Mackay ports. Projected production in these regions in 2050 is greater than the historical production average or trend. However, the existing sugar industry is largely landlocked and the scope for expanding cane areas does not appear to be large so most of any increase from these areas would need to come from improvements in yield.

20

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

1994 1998 2002 2006 2010 2050kt

Exports

Production


If significant increases from existing areas are realised, significant improvements in sugar handling capacities may also be needed along the supply chain to move sugarcane from farms to mills and ports, and onto ship for exports. Sugar specific infrastructure, including cane railways and bulk sugar terminals, as well as supporting road infrastructure, will be important.

The simple disaggregation of projected increases does not consider potential production in new regions, such as the Ord River irrigation area which produced sugar cane until the mill closure in 2007–08. Expansion of sugar cane production into new regions may be more likely than significant expansion from existing regions but will require investment in sugar specific infrastructure to move sugar cane to mills and then to refineries or to a port with bulk sugar handling capacity.

BeefThe beef industry, its supply chain and the infrastructure linking each stage are described below. The simple disaggregation of the preliminary projections of national beef production and exports to 2050 is then presented, along with a discussion on potential infrastructure issues associated with an expansion in production.

Beef and veal production and exportsThe industry accounts for more than half of Australia’s total meat production in volume terms. In 2011–12, the industry produced 2.1 million tonnes of beef and veal. The gross value of Australian cattle and calf production (including live cattle exports) was around $7.5 billion in 2011–12, accounting for 16 per cent of the gross value of farm production (ABARES 2013).

Australia is one of the world’s largest exporters of commercial livestock and red meat. The value of beef and veal exports in 2011–12 was $4.5 billion and the value of live cattle exports was $412 million (ABARES 2013).

The Australian beef industry in northern Australia is markedly different to that in southern Australia. Differences in climatic and pasture conditions have resulted in significant differences in stocking rates, average herd size and the main cattle breeds (Thompson & Martin 2012).

The beef industry in northern Australia is characterised by lower cattle stocking rates, lower carrying capacity, larger herd size and larger area of land operated than in southern Australia.

The main breeds of cattle in northern Australia are Bos indicus varieties, particularly Brahman and Brahman crossbreeds, as they are better suited to tropical conditions. In southern Australia, British and European Bos taurus breeds, such as Angus and Hereford, remain dominant.

Variations in breed, the types of cattle turned off and proximity to live export markets has resulted in cattle from the two regions being directed to different markets. In northern Australia, around 85 per cent of beef slaughter is exported and around 66 per cent of Australian live cattle exports are sourced from northern Australia. By contrast, 47 per cent of southern beef processing is directed to domestic markets (Gleeson at al. 2012).

Long-term output growth in the beef industry has averaged 0.6 per cent a year, through productivity growth (0.9 per cent a year) offsetting moderate reductions in input use (0.3 per cent a year). As shown in Table 4, in the northern region output growth averaging 0.6 per cent a year has been achieved by growth in productivity of one per cent a year outpacing a decline in input use of 0.4 per cent a year (primarily declines in land and labour use). In contrast, higher

21


output growth in the southern beef industry, has been due to a combination of moderate growth in input use (particularly land and materials, including seed, fertiliser and crop chemicals) and productivity growth (Dahl et al. 2013).

Table 4 Average annual beef input, output and productivity growth, by region,1977–78 to 2010–11

Region Productivity growth Output growth Input growth

% % %

All beef 0.9 0.6 –0.3

Northern region 1.0 0.6 –0.4

Southern region 0.4 0.8 0.4

Note: Estimates for the beef industry exclude large feedlots.Source: Dahl et al. 2013

The northern beef industry has expanded over the past 20 years, driven by growth in the live cattle export trade. Since 1988–89 average herd size has increased at an average rate of 1.3 per cent a year and stocking rates by 2 per cent a year on average (Dahl et al. 2013).

Increases in the average size of northern beef operations have increased the capacity of producers to invest in improved pastures, sophisticated cattle management systems and on-farm infrastructure, facilitating productivity growth. In addition, the shift to a higher proportion of Bos indicus breeds and the eradication of brucellosis and tuberculosis from the Australian beef cattle herd have led to improvements in animal health, increasing branding rates (calves marked as a percentage of cows mated) and reducing mortalities (Gleeson et al. 2012).

Productivity growth in the southern beef industry has been slower than in the northern industry. Output growth has been highly variable, largely because of climate factors. Southern beef producers tend to be smaller, more intensive operations that rely on improved pastures (reflected by higher average stocking rates), and are more diversified than northern producers (Nossal et al. 2008). As a result, productivity growth in the southern region is more sensitive to drought conditions that increase use of purchased feed, adversely affect crop yields, and drive significant destocking and restocking activities that hamper output growth.

Similar to the northern beef industry, advances in animal genetics and herd, disease and fodder management have contributed to higher branding rates and reduced mortalities, increasing productivity. However, the rate of improvement has been less significant in the south than in the north, partly because of the better rates already achieved by southern beef producers. This may be one factor explaining the lower productivity growth of southern producers. Another factor may be the prevalence of small farms with less capacity to invest in and benefit from improved technology and farm systems (Nossal et al. 2008).

Beef supply chain and infrastructureThe livestock supply chain includes production of beef cattle from breeding (on farm) through to fattening (either on farm or in feedlots) before processing within Australia or exporting as live animals (NTC 2009a).The focus of the beef supply chain in Figure 13 is to illustrate the type of transport infrastructure used at each stage.

Beef producers, including lot feeders, send their cattle directly to abattoirs or to saleyards using the regional road network. Queensland is the only state still using rail to move cattle livestock (NTC 2009a).

22


Beef cattle from farms and feedlots are transported to saleyards though major road networks and transported to abattoirs using the road network. Around 60 per cent of southern and 40 per cent of northern Australian cattle turn-off is marketed through saleyards (Thompson & Martin 2012).

Cattle is sold directly to exporters or their agents and transported through the road network from farms to holding facilities near live export ports before loading onto ship.

Most abattoirs carry out boning, packing and chilling/freezing activities in on-site processing facilities. Some abattoirs without on-site processing will transport chilled carcasses through the road network to processing and manufacturing facilities.

Frozen and chilled beef and veal are mostly exported using sea freight, although some high value beef and veal products are exported by airfreight (see Chapter 4 for details of Australia’s airfreight food exports).

Processed and manufactured beef and veal products are transported to domestic markets through the road network.

Figure 13 Beef supply chain

Source: Adapted from Vic DPI (2013)

Regional distribution of production and exportsUsing the approach described above, simple disaggregation of beef and veal production and exports to 2050 was obtained. Figure 14 presents Australia’s beef and veal production and exports. Map D0 shows Australia’s cattle turn-off at SD level from 1993–94 to 2010–11, beef and veal exports at state level from 1993–94 to 2011–12, the 2050 simple disaggregation and major ports for beef and veal exports. The shading of the SDs indicates the number of people employed in the meat manufacturing industries (includes all meats—beef, sheep, goats and pigs) in 2010–11.

The preliminary projections indicate that total production and exports have the potential to more than double by 2050 (Figure 14). Australia’s beef and veal production is projected to

23

End use marketProduction Processing, transport & storage

Road

Road

RoadRoad

Saleyards

Abattoirs ProcessingManufacturing

Export markets

Domestic markets

Live exports

Road

Ship

Ship/Air

Live exports ports

Road

Beef producers(feedlots & farmers)


increase by about 128 per cent by 2050 from the average production level achieved between 1993–94 and 2010–11 and exports are expected to increase by 222 per cent from the average export level achieved between 1993–94 and 2011–12 (Table D2). These estimated totals include live exports of slaughter and breeding cattle as carcass weight equivalents.

Figure 14 Beef production and exports

Note: Exports include carcass weight equivalent of live beef cattle exports. ABARES preliminary projectionSource: ABARES, ABS

These projections, to a large extent, reflect expected increases in global demand for red meat, particularly from Asia. To reach the preliminary projection for 2050, Australian production of beef and veal would need to increase at an average annual rate of around 2.1 per cent from 2011–12, significantly more than the average annual rate of 1.1 per cent realised between 1993–94 and 2011–12. The way in which Australian production could expand in existing and newly developed areas to meet this demand needs further investigation.

The largest beef cattle areas are mainly in eastern Australia, with some production in Western Australia and the Northern Territory. Due to the approach used in constructing the simple disaggregation, future beef and veal production is assumed to expand in those regions (Map D0).

The largest increase for beef is expected to occur in Queensland where beef production is projected to increase by 138 per cent from the average production achieved between 1993–94 and 2010–11 (using the average approach, Table D2).

An increase in beef production is likely to result in higher pressure on road infrastructure as cattle and beef transportation will compete with other industries for the use of road networks. Urban encroachment and competition from the minerals and energy sector for port loading capacity is a growing concern for live animal exports as gaining access to ports will likely become more difficult (NTC 2009b). In addition, achieving the increase in supply of beef and veal may involve the increased use of feedlots to finish cattle before slaughter and exports. This would also involve an increase in the volume of cattle being moved by road, the transport of fodder and refrigerated transport of meat products.

The National Transport Commission (NTC 2009a) identified a number of impediments to the meat and livestock supply chain performance. As beef and veal production increases, it is important that these issues be addressed to enable efficiency improvements in the livestock supply chain. The main issues identified in National Transport Commission (2009a) are outlined below.

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The lack of road network connectivity with major supply chain points for high productivity vehicles means that more efficient and higher capacity trucks must either detour or split the freight into smaller units. Often termed the ‘last mile’ problem, this situation occurs when routes approved for high-capacity trucks are not fully integrated with local networks.

On Queensland, Northern Territory and northern Western Australia ‘beef roads’, while wet seasonal conditions cause severe access problems for road transporters, funding from governments to maintain and upgrade these roads has been limited. Competition from mining and tourism in northern Australia contributes to the deterioration of these roads.

The minerals and energy sector is increasingly competing with the live cattle export industry for port loading capacity. As demand for Australia’s live cattle exports increases, this concern will continue to grow.

Capacity constraints in existing beef producing areas might suggest development in other parts of Australia where the beef industry is not currently present. Beef industry expansion in the northern parts of Australia (northern Queensland, Northern Territory and northern Western Australia) is a possibility but would require large infrastructure investment. For example, expansion of the beef industry will likely require investments in processing facilities (such as abattoirs and manufacturing facilities) in northern Australia and in upgrading road transport infrastructure to facilitate year-round access. ABARES in collaboration with the CSIRO is undertaking a study investigating medium and longer term opportunities for irrigated agriculture across northern Australia and critical supply chain and infrastructure investment issues that may help foster those opportunities.

Sheep meat The sheep meat industry, its supply chain and the infrastructure linking each stage are described here. The simple disaggregation of the preliminary projections of national sheep meat production and exports to 2050 is then presented, along with a discussion on potential infrastructure issues associated with an expansion in production.

Sheep meat production and exportsSheep meat, comprising lamb and mutton, is a major agricultural commodity in Australia. In 2011–12, 5.2 million sheep and 18.9 million lambs were slaughtered in Australia realising gross value of production of $383 million and $1.95 billion, respectively.

Most sheep grazing for meat production occurs in grain growing areas and competes for land used for wool production, which has declined significantly in recent decades. A fall in wool prices, combined with stronger slaughter lamb prices over the past two decades led many wool producers to diversify into sheep meat (ABARE 2007), although this trend softened slightly in 2012–13 (Caboche & Thompson 2013).

While lamb has traditionally been produced by diversified broadacre farms, non-traditional regions such as South Australia have seen a marked increase in the number and share of production of specialist sheep meat farms. Improved flock and pasture management practices allowed specialist farms to produce significantly more lambs from flocks that were only slightly larger, which contributed to superior financial performance by specialist producers relative to non-specialist producers (ABARE 2007).

The growth of specialist producers of lambs and sheep for slaughter has led to changed supply chain practices, with an increased proportion of meat bypassing saleyards and being sold

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directly to processors; however, traditional methods such as auctions and on-paddock sales are still predominant (Caboche & Thompson 2013).

Production of lamb and mutton differ slightly in their regional distribution. Meat and Livestock Australia (MLA 2012) Note that the prime lamb industry is mainly in the southern Murray–Darling Basin, the wheat–sheep region of New South Wales and in high rainfall areas of Victoria and South Australia. Mutton production is primarily located in southwest Western Australia, southwest Victoria and southern New South Wales. The production of mutton is far less concentrated in the southeast than the production of lamb.

The industry is highly export focused. In 2011–12, mutton exports were 74 per cent of the volume of mutton produced and lamb exports were 38 per cent of the volume of lamb produced. This was in addition to the live export of 2.6 million sheep with a value of $345 million (ABARES 2013). Around 60 per cent of Australian sheep meat exports (by volume) in 2011–12 were to the Middle East, the United States and North Asia. While most sheep meat exported to the Middle East is mutton, the United States and North Asia import considerably more lamb than mutton (DAFF 2012a). Almost all (97 per cent) of the live sheep trade in 2011–12 was exported to the Middle East; in particular, the gulf states of Bahrain, Kuwait and Qatar received more than two-thirds of Australian live sheep exports (ABARES 2013).

Sheep meat supply chain and infrastructureSheep meat is processed for domestic consumption and export; a significant number of sheep are exported. Figure 15 provides an overview of the sheep meat supply chain and indicates the type of infrastructure used at different points in the supply chain.

All sheep are produced on farms and are transported by road. The capacity and distance of this transportation is limited by concerns to maintain acceptable standards of animal welfare and to minimise the effects maltreatment can have on quality.

Where a farmer has established contracts, or is vertically integrated into the supply chain (that is, all stages in the supply chain belong to the same owner), sheep can be sent directly to an abattoir for slaughter. Otherwise sheep are usually transported to saleyards where they are sold to buyers from the next stage of the production process for slaughter or live export. The proportion of lamb and sheep sold directly to processors increased from less than 5 per cent in 2001–02 to more than 30 per cent in 2006–07 but has since contracted to less than 20 per cent (Caboche & Thompson 2013).

After slaughter at the abattoir, the meat is processed into prepared cuts (chilled or frozen) or other foodstuffs. This can occur at large facilities (frequently co-located with abattoirs) or at retail outlets in the case of domestic consumption. Abattoirs are most frequently located in the south of the country near the bulk of the Australian population (NTC 2009b).

Transportation to domestic markets is conducted mainly by road and requires refrigerated transport and frequently cold storage at the wholesale level.

Both live and processed exports are conducted largely by ship, but where processed exports require refrigerated containers, live exports require specialised transport ships and export facilities (including regulated biosecurity elements), most of which are located in northern Australia (NTC 2009b).

Some high quality meat is exported by air freight, which requires cold storage at airports.

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Because export destinations for lamb and mutton differ, it is possible that their export infrastructure needs will differ, and the regional distribution of this infrastructure would have implications that further research would need to investigate.

Figure 15 Sheep meat supply chain

Source: Adapted from VIC DPI (2013) beef supply chain

Regional distribution of production and exportsUsing the approach described above, simple disaggregation of sheep and sheep meat production and exports to 2050 were obtained. These are shown in Map D0 with SD level historical Australian sheep and sheep meat production and state level exports—SDs are shaded to represent the number of people working in meat manufacturing, regardless of the type of meat. Figure 16 shows Australia’s sheep meat production and exports.

Preliminary projections to 2050 indicate the potential for Australia’s sheep meat production to increase by 55 per cent by 2050 from the average annual production achieved between 1993–94 and 2010–11. Preliminary projections also indicate that Australia’s sheep meat exports may increase by almost 67 per cent by 2050 from the average export level achieved between 1993–94 and 2011–12 (Table D3).

Achieving an increase in production consistent with the preliminary projections to 2050 would require an average annual increase in production of around 1.1 per cent from 2011–12. This is in contrast to the average annual growth rate of minus 0.4 per cent achieved between 1993–94 and 2011–12. Inter-annual variation is not large compared with other commodities, such as wheat, and is more prominent in exports than in production.

Current production is primarily in southeast and southwest Australia in areas often shared with wheat production. Using the simple disaggregation methodology, the largest increases are projected in the southern states including a 60 per cent increase in South Australia, 62 per cent

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in Victoria and a 66 per cent increase in Tasmania from the average production level of 1993–94 to 2010–11 (using the average approach, Table D3).

It is not clear to what extent the increase in sheep meat production will require increased meat processing capacity beyond that required to enable significant increases expected in beef production.

Figure 16 Sheep production and exports

Note: Exports include carcass weight equivalent of live sheep exports. ABARES preliminary projectionSource: ABARES, ABS

Some increase in road freight will be needed, but it is not clear the extent to which this will place strain on existing road infrastructure. Similar to the beef industry, the transportation of sheep meat will face road network connectivity issues in which high productivity vehicles cannot access some points and will need to either take a detour route or divide the freight into smaller units (NTC 2009b).

Most of the projected increase in production is likely to be exported, and relies on export facilities for the cold transport of processed cuts and live exports. These will likely be shared with beef production. In addition, similar to the beef industry, live sheep exports may also face increasing competition for access to some ports from the minerals and energy sector.

Dairy The Australian dairy industry, its supply chain and the transport infrastructure used to link each stage are outlined below. The simple regional disaggregation of the preliminary projections of national dairy production and exports to 2050 is then presented, followed by a brief discussion of potential infrastructure issues associated with an expansion in production.

Dairy production and exportsDairy is one of Australia’s major rural industries with a $4 billion farm-gate value of production in 2011–12, which puts it third behind the grains and beef industries and accounts for around 8 per cent of the gross value of total farm production. Most milk produced in Australia is used for ‘manufacturing’ dairy products (such as cheese, butter, milk powder) and the remainder is sold as liquid milk on the domestic market. In 2011–12 total Australian milk production was 9480 ML, of which about 75 per cent was used to manufacture dairy products (ABARES 2013).

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Although Australia is a relatively small producer by international standards, it is the world’s third largest milk exporter (PWC 2011). The value of dairy exports in 2011–12 was $2.3 billion, consisting primarily of cheese (32 per cent), skim milk powder (21 per cent), whole milk powder (17 per cent) and butter (9 per cent).

In recent decades dairy farming has undergone significant changes in structure and on-farm technology, spurred by deregulation of the milk market in July 2000 and by ongoing market and climate pressures (much of which pre-dated deregulation). Average farm size (in hectares) increased by 45 per cent between 1988–89 and 2010–11, although growth has slowed in the past decade. At the same time, many smaller producers have exited the industry and the production share of small operations remaining in the industry has gradually declined (Dahl et al. 2013).

Since deregulation, dairy production has become more concentrated in the south-eastern states. Victoria’s share of Australia’s milk production has increased from 57 per cent in the 1980s to around 65 per cent in recent years. Tasmania has also increased its share of milk production, while the production shares of Queensland and New South Wales have both fallen (ABARES 2012). Overall, there has been a small decline in milk production in Australia over the past decade.

All milk producing states have experienced positive average productivity growth over the past three decades, ranging from 1.2 per cent a year in Victoria to 1.9 per cent a year in Tasmania (Table 5).

Table 5 Average annual productivity growth in Australia’s dairy industry, by jurisdiction, 1978-79 to 2010-11

Jurisdiction Productivity growth Output growth Input growth% % %

New South Wales 1.6 0.2 -1.4Victoria 1.2 1.8 0.6Queensland 1.8 -0.6 -2.4South Australia 1.6 1.3 -0.3Western Australia 1.9 1.1 -0.8Tasmania 1.9 2.1 0.1Australia 1.6 1.4 -0.2

Source: Dahl et al. 2013

Improvements in production practices, new technologies and greater automation of milk production, in particular on larger farms, have facilitated productivity growth in the dairy industry (Dharma et al. 2012). Advances in herd genetics, soil testing and pasture management have also contributed to productivity growth (Ashton & Mackinnon 2008).

Pasture improvement and more intensive feeding practices, along with adoption of dairy shed technologies that increase milking capacity, have allowed producers to increase stocking rates and helped boost average milk yields per cow, from 3811 litres per cow in the early 1990s to about 5630 litres per cow in 2010–11 (Dharma at al. 2012).

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Dairy supply chain and infrastructureFigure 17 provides a simple representation of Australia’s dairy supply chain, from farm gate to processing and end use markets.

Milk produced on farm is stored in refrigerated silos before being transported in refrigerated tankers by road to processing facilities.

At processing facilities, milk is pasteurised and homogenised and stored in refrigerated silos before and after processing. Milk at this stage of the supply chain can either be transported directly to the domestic markets in packaged form or be shipped or air freighted to overseas markets (the amount of milk exported in this form is relatively limited).

A portion of processed milk is transported to manufacturing facilities by road. For vertically integrated operations, processing and manufacturing facilities are combined. Manufacturers produce dairy and other products from milk such as cheese, skim milk powder, whole milk powder and butter. These products reach domestic markets by road and export markets by sea or airfreight.

Figure 17 Dairy supply chain

Source: Adapted from Dairy Australia 2010

Regional distribution of production and exportsUsing the approach described earlier, simple regional disaggregation of dairy production and exports to 2050 were obtained. These are shown in Map D0 with SD level historical dairy production and state-level exports from 1993–94 to 2010–11. In Map D0, the shading of the SDs indicates the number of people employed in dairy processing in 2010–11. Figure 18 presents Australia’s dairy production and exports by volume.

Preliminary projections indicate that Australia’s dairy production has the potential to almost double by 2050 with the simple regional disaggregation methodology indicating that most of the

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increase will occur in Victoria. Exports are projected to expand more substantially from an average of 9737 ML between 1993–94 and 2010–11 to 16 600 ML by 2050; the bulk of this increase is expected to come from Victoria when historical production patterns are used as the basis for indicating the location of future production increases (Table D4).

The annual rate of increase (1.6 per cent per annum from 2011–12) in Australian production consistent with the 2050 preliminary projections is slightly higher than that achieved in Australia over the past 30 years (Table 5) but is lower than historical rates of output growth in Tasmania and Victoria. New sources of productivity improvements will be needed if production is to increase to the extent projected in the 2050 reference scenario. The dairy industry’s output has increased in most states over the past three decades. In some states, such as Victoria and to a lesser extent Tasmania, higher output over the past decade has been achieved not only by improving productivity, but also by using more inputs (Table 5). However, the dairy industry is likely to continue needing to improve its efficiency to increase its output, as high input costs and environmental pressures are likely to limit increases in input use.

Figure 18 Dairy production and exports

Note: Dairy production includes milk production expressed in (million) litres. Dairy exports include whole milk powder, skim milk powder, butter, cheese, casein and other dairy products expressed in kilotonnes. Butter includes ghee, dry butterfat, butter concentrate and butter oil, and dairy spreads, all expressed as butter. ABARES preliminary projectionSource: ABARES, ABS

While the simple regional disaggregation is a useful starting point for thinking about future potential infrastructure issues, it does not account for constraints or new opportunities that may affect the location of future production increases. The regional distribution of the increase in dairy production is likely to be affected by the availability of irrigation water supplies and suitable land. For example, it may be that compared with some other regions Tasmania is relatively well placed with respect to land and water availability to expand its dairy production (see Chapter 4 and Appendix B on Tasmanian irrigation schemes).

Achieving production increases identified in the 2050 preliminary projections is likely to require substantial increases in the movement of fodder and milk in some regions. This may contribute to pressure on regional road networks, depending on changes in use from other sectors and the current state and capacity of those networks.

It is also likely that additional investment in irrigation infrastructure will be needed, both on and off-farm. More efficient irrigation systems will help dairy farmers reduce their water use and

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contribute to lowering production costs. Access and pricing regimes will need to be designed to encourage the efficient long-term use of land, water and other inputs.

Most dairy exports take the form of powder or cheese with smaller volumes of butter and other products. Thus, exports do not generally require specialised facilities and can use refrigerated and non-refrigerated containers. However, lack of an export port in Tasmania may constrain the potential for expansion in that state (see Chapter 4).

Crosscutting issuesMuch of the infrastructure that is important for agricultural production is not specific to a particular agricultural industry or to agriculture. In addition, future infrastructure requirements will be influenced by any long-term changes in governance arrangements related to infrastructure asset management and climate conditions.

Demand for multi-use infrastructureAs noted above much of the infrastructure agriculture uses is also used by many others. The road and rail networks, ports, energy, water and telecommunications infrastructure are used extensively by all sectors of the economy and the community. Increases in use by one sector have the potential to affect the access of others through increased congestion and its impacts on system performance and/or the cost of access.

The road network is the major supporting link in most agricultural supply chains. While it is likely that much of the rural road network has excess capacity and that in many areas an increase in traffic associated with increased production may be accommodated without significant detrimental impact to other users, there is potential for congestion at peak periods in specific locations and for maintenance costs to increase. Many regions support a number of agricultural industries with potential for expansion and it would be useful to gain a deeper understanding of the potential implications for the cost of maintaining existing infrastructure and the need for increased capacity.

Adequately understanding future infrastructure needs requires an understanding of potential changes in activity across sectors vying for access to multi-use infrastructure. For example, changes in energy and minerals production would be a major driver of demand for road, rail and port services in some regions. Activity in the manufacturing sector would be important in others. An assessment of the current capacity of road, rail and port infrastructure and potential changes in demand across major users would highlight regions where additional investment may be needed. As there are inherent interdependencies between road and rail investments, and between land transport and port investments, an examination of the cost savings of integrating planning and investment decisions across these modes would guide the process of prioritising capital investment and maintenance. While not possible as part of this project, this type of consolidated assessment is likely to offer valuable insights into where the capacity of existing infrastructure may need to be expanded and where new infrastructure may be needed.

Similarly, an expansion of the agriculture sector may involve the establishment of processing facilities in new regions (such as abattoirs in northern Australia) and would require access to transport, energy, water and telecommunications infrastructure. Maximising the potential benefits of providing this type of infrastructure would involve consideration of other potential uses.

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Road network issuesThe road network is a key link in agricultural supply chains and must function effectively if Australia is to make the most of opportunities presented by increased global demand for food. A number of issues that affect the performance of the road network have been identified. Of particular relevance to agriculture are some issues identified for local roads. The Allen Consulting Group (2009) identified:

difficulty for some heavy vehicle operators negotiating a desired level of access to the local network (the ‘last mile’ problem)

in some cases the standard of the local road network is suboptimal relative to industry demands

the local road network is not always well-integrated with other modes of transport (rail, ports and airports) and land uses

some parts of the local road network have not been adequately maintained. Engineers Australia (2010) rated the overall quality of Australia’s local roads as ‘poor’.

As food production expands, pressure on the road network will increase and it is likely these issues will be exacerbated if not adequately addressed.

As much road maintenance is carried out at the local government area (LGA) level there is a concern that the resources available for maintenance may fall in regions with a less diverse industrial base and a declining population. The capacity of these LGA councils to invest in road infrastructure is constrained by the council’s resources which, in part, rely on its population base.

Map 1 shows the trend in population since 2001 at the Statistical Local Area (SLA) level. These regions correspond to most LGAs. The map shows that concerns of a declining population are valid in some regions, particularly those located away from major urban centres and less remote coastal areas and areas with major mineral resource developments. In all states and territories non-urban populations are increasing, but at a lower rate than urban area populations. This is consistent with declines in many rural areas as most non-urban increases occur in peri-urban, coastal and mining areas (ABS 2013a).

The funding base for road network maintenance in some rural areas could be falling as use of the network increases. The extent to which this is happening and possible solutions needs further exploration.

Climate changeTo the extent that climate change will alter the spatial and seasonal patterns of agricultural production through changes in rainfall and temperature, more frequent extreme events and higher variability in temperature and rainfall, infrastructure to support agriculture will be indirectly and directly affected. First, additional infrastructure might be needed if production shifts to new areas. Second, extreme events, such as droughts and floods, may affect construction specifications and costs of new projects and of maintaining existing infrastructure.

Best estimates (50th percentile) of the global climate model projections for the medium emissions scenario are that by 2050 the average annual temperature in Australia will increase by up to 2.2 °C (Map 2). Temperature increases in this scenario are likely to be greatest in Australian inland areas and least in coastal areas, with north-western Australia predicted to

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experience the most significant warming. In terms of rainfall, Map 3 shows that for the medium emissions scenario, annual average rainfall is predicted to decline in most of Australia by about 10 per cent by 2050. Rainfall declines are likely to be the greatest in south-eastern and south-western Australia in all the emissions scenarios (CSIRO & BoM 2007).

Map 1 Population trend, 2001 to 2011

Note: Linear trend in population over 2001, 2006 and 2011.Source: ABS Census of Population and Housing, Time series profile data pack, 2012.

Long-term changes in temperature and rainfall will affect the profitability of alternative agricultural activities differently. The analysis undertaken in this project has not considered the potential effects of climate change on future production patterns or infrastructure requirements. Scenario analysis may be useful in exploring the potential implications in future work. In particular, it may be useful to examine the extent to which climate change scenarios, including extreme events, rainfall and temperature variability, affect expectations of future infrastructure requirements and what this implies for investment decisions. Similarly, the extent to which production increases due to agricultural productivity could compensate for losses associated with climate change is unknown and needs further investigation.

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Map 2 National temperature change 2050

Map 3 National rainfall change 2050

Note: Projections are given relative to the period 1980 to 1999 (referred to as the 1990 baseline for convenience). The projections give an estimate of the average climate around 2030, 2050 and 2070, taking into account consistency among climate models. Individual years will show variation from this average. The 50th percentile (the mid-point of the spread of model results) provides a best estimate result. Emissions scenarios are from the IPCC Special Report on Emission Scenarios.Source: CSIRO, BoM & DCCEE 2013

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4 Case studies—infrastructure’s role in expanding production

Three case studies are undertaken to highlight the role infrastructure can play in allowing the Australian food industry to adapt to changes in the coming decades, notably the potential for a large increase in expected Asian food demand. These case studies are complementary to the preliminary assessment, in Chapter 3, of infrastructure issues and the regional distribution of production, processing and exports for five major export commodities.

Two case studies are based on interviews with stakeholders; in each case study infrastructure has played a significant role in farm business decisions. The first examines how various interrelated industries in Tasmania are adapting to changing international demand. The second examines the development of a single infrastructure-intensive industry—greenhouse protected cropping in Victoria—in response to increased domestic demand and technological development. The third case study examines the importance of air transport for Australia’s food exports.

TasmaniaOpen format interviews were conducted in 2013 with several stakeholders in Tasmania, including farmers/producers, processors, industry leaders and infrastructure providers. Exploring how Australian businesses can sustainably increase or maintain production and exports of food to meet changing demand provides information on likely infrastructure needs and related issues. The experiences of the four businesses interviewed and Tasmanian Irrigation are described in Appendix B. Common themes emerging from the interviews with stakeholders (producers, processors, Tasmanian Irrigation and the Tasmanian Farmers and Graziers Association (TFGA)) are discussed here. The themes are grouped under the headings of ‘perceived opportunities’, ‘funding viable infrastructure investments’ and ‘making investment happen’.

Perceived opportunities Australian producers can compete on quality by providing a better or more reliable product than their competitors, or they can capture greater market share by outcompeting rivals through lower priced commodities. As markets become more sophisticated both options could become feasible. Stakeholders interviewed were mostly sceptical about their capacity to profitably compete on quality alone. They thought consumers would generally choose a product largely on price, and that only limited niche markets for higher-quality higher-price goods are available. The fruit grower and representatives of the TFGA voiced this opinion, and the dairy farmer had considered options to produce high-value products when reconfiguring his business, but rejected them in favour of a bulk commodity. Price competition was paramount even where opportunities for quality exports had been identified and taken, an example of which is the beef feedlot’s ‘premium economy’ product.

One possible conclusion from the information obtained from the stakeholder interviews would be that future infrastructure needs will derive primarily from providing competitively priced food products, while providing assurance of a safe product meeting specific quality standards. Stakeholders interviewed indicated two broad strategies for competing on price. The first was to lower the costs of production from existing systems. Using this strategy, farmers would try to produce profitably, but at lower prices by lowering costs without fundamental change. This

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strategy was pursued by the fruit grower. Constraints stakeholders raised to this strategy included the high value of the Australian dollar, compliance costs with the regulatory environment, the high cost of freight to Melbourne, high input costs including labour, and an inability to maintain a level of production that provided sufficient economies of scale. The second strategy involved transforming production systems and more fundamental change to production systems and industries. The dairy farmer is an example of such a transformed business.

Funding viable infrastructure investmentsAs with any investment, attracting private or public funding requires an expectation of adequate returns. Interviewees raised a number of issues relevant to the viability of Tasmania’s food infrastructure.

Economies of scaleScale is critical for the viability of many investments, with some investments only viable if certain volume thresholds can be met. This is true in terms of total production or volume of trade, but also for how that production is spread over time. Threshold issues apply to private and single use infrastructure, such as a dairy shed, but also to multi-user investments, such as roads or utilities. The fruit grower interviewed said the significant decline in the number of fruit farms in the region meant that dedicated fruit boats no longer serve Tasmania; hence growers had to rely on other more expensive freight options. This rendered fruit growing unprofitable for some, further reducing the number of growers and the prospects for regaining the numbers needed to support a dedicated freight service.

The necessary production threshold issue was also noted when discussing the most commonly cited impediment to low cost production in Tasmania—a freight leg to Melbourne necessary for export—that all interviewees claimed was more expensive than subsequent freight legs to Asian destinations. However, most also noted that to support a direct export facility, export volumes would need to be much greater than Tasmanian food producers currently supply.

The expansion of Tasmania’s irrigation schemes needs recruitment of sufficient users. Although state government managed, these irrigation schemes rely on private and public finance. Private capital has overwhelmingly been sourced from landholders who intend to use the scheme, as sufficient buyers must sign binding contracts for the use of irrigation water before construction of each project can begin. These infrastructure investments share a problem of coordination. Producers must increase production in order to make an infrastructure investment viable, but this greater production is only viable if the infrastructure investment is undertaken.

Stabilising useAgricultural produce is often characterised by seasonality, and prospective users may only be willing to use or invest in infrastructure if it has the capacity to meet periods of peak demand. However, significant downtime at off-peak periods may make the venture uneconomical. Being able to spread production more evenly throughout the year can reduce the costs of infrastructure investment if it means a lower throughput capacity is required. In some cases marketing advantages can be realised from being able to reduce the variability of supply.

The dairy processor noted the problem with supply variability and that the industry had taken steps to minimise variation in the milk supply over the year. The solutions they and their suppliers had adopted involved locating pastures on sandy soils that could be grazed without damage even during the wet winter, and the use of irrigation to stabilise pasture supply. The dairy farmer noted that irrigation allowed ‘spring pastures year round’ and thus a steady milk

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supply. A TFGA representative noted that irrigation schemes could provide water year round, but demand peaked in summer. They therefore encouraged irrigators buy cheaper winter water to store in newly built farm storages for use in summer, allowing more even use over the year.

Making investment happenFor the adoption of a viable opportunity, it must be recognised and supported with sufficient capital. This requires knowledge of production and consumption, and mechanisms to match this knowledge to funds. The businesses consulted said recognition of an investment opportunity often required particular knowledge of production possibilities in Tasmania and of consumer demand in Asia that was not readily available. They feared that in the absence of this knowledge there was potential for investment in unsuitable infrastructure.

Local producers have good knowledge of what their land is suitable for and what prices make viable business propositions. This is evident in the case studies. For example, the dairy farming business was able to benchmark its production system against New Zealand dairy and its operators made a decision based on relative input and milk prices. The development of expanded irrigation schemes was contingent on enough prospective irrigators signing contracts.

Knowledge of consumers in foreign markets can come from foreign investors. For example, the Tasmanian Feedlot was initiated 40 years ago by a Japanese firm that saw an opportunity to meet increasing demand for beef in Japan. They encouraged Tasmanian farmers to raise appropriate breeds to meet an opportunity they would not otherwise have been aware of. Foreign knowledge can be combined with local knowledge to engender confidence in the endeavour; the initial investor in the dairy processor knew it could divest part of its investment to Asian firms wishing to secure supply lines to serve expanding markets. In these instances, foreign investment was a way of obtaining information as well as capital.

Investment opportunities may be supported by debt finance if investors are able to convince others of the opportunity. The dairy farming business operator said they could only access finance to exploit their irrigation opportunity because they were able to translate their knowledge into a business plan and financial projections.

An apparent collective action problem can sometimes be overcome by a single investor, as in the case of the dairy processor. Initially the founding investor hoped to form a cooperative to bring together dairy farmers who would make use of the facility. Such cooperatives had been formed on the mainland and elsewhere, but this proved difficult in Tasmania. However, the founding investor was able to use private capital and their own reputation to support the venture until the viability of the project was apparent to external investors who could support it with equity finance.

The Tasmanian Irrigation schemes demonstrate a role for government as a broker for private capital. Although these schemes are funded by both public and private capital, including grants from the Australian and state governments, Tasmanian Irrigation was essential in coordinating individuals who could not have funded the scheme in isolation. Government involvement was both as an investor and a broker to bring together private investors.

Victorian greenhouse protected croppingThe businesses interviewed include one leafy green and three tomato hydroponic farms. The tomato farms ranged from a small-scale business to an industry leader currently undergoing business expansion. One of the tomato hydroponic farms is part of a vertically integrated fruit and vegetable business.

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Protected cropping is an industry adapting new technology to take advantage of growing demand for fresh vegetables and to manage climate variability. The industry is capital intensive and often located in peri-urban areas, and these features contribute to distinct challenges and opportunities. This case study focuses on protected cropping in Victoria using hydroponics, especially tomato production. Victoria is notable for its high tomato yields. It produces 23 per cent of Australia’s undercover tomatoes; although the land used is only 11 per cent of that devoted to undercover tomatoes nationwide, it yields double the national average (ABS 2010).

While protected cropping has long been present in the Australian food industry, strong demand for vegetables from the domestic market has led many in the sector to increase investments in their growing infrastructure, both by expanding operations and by adopting new technology. Much of this technology is adopted from world leading industries in New Zealand and the Netherlands. Stakeholders reported no difficulty gaining access to this foreign technology. Notable among these technologies is the use of hydroponics and the adoption of large rigid glasshouses in place of older polyethylene structures. These technologies allow farmers to reduce the use of water and fertiliser and pesticides compared with field cropping and older styles of undercover cropping, and allow greater control of production. The technology is expected to become more energy efficient and may in the future incorporate renewable power sources, such as solar photovoltaic.

The intention of protected cropping has always been to produce throughout the year. Improved climate control technology has improved this ability to manage climate, but Victoria still maintains some comparative advantages over other locations (such as Queensland) where climate control is either more expensive or not technically feasible. The interviews with protected cropping businesses in Victoria highlighted some issues specific to the industry. Although not as prominent as concerns about the availability and cost of suitable labour, infrastructure issues were viewed as important to the industry’s capacity to expand.

Domestic focusThe protected cropping sector’s investment in new infrastructure is only intended to meet Australian domestic needs where increased production has been met, and sometimes exceeded, by increased domestic consumption of vegetables. In particular, several interviewed businesses had expanded into hydroponic tomatoes to supply metropolitan markets in Victoria which were increasingly seeking high quality produce outside the traditional growing season.

The producers did not describe the vegetable trade between Australia and other countries (whether from protected or field cropping) as having established trading relationships such as those found in other commodities. Instead they thought trade only occurred to meet temporary shortfalls or dispose of surplus domestic production. The importance of domestic demand relative to export opportunities for the tomato industry in particular is illustrated by the later part of the past decade. Although the value of Australian domestic production from 2008 to 2011 increased from $405 million to $418 million (following much greater gains in previous years), the value of exports fell from $12 million to $6 million, and that of imports increased from $2 million to $8 million over the same period (AusVeg 2013).

The businesses interviewed saw potential for increased Australian food exports, but they thought any opportunities compared unfavourably with domestic markets. Domestic demand was strong enough that the businesses had no difficulty selling their product profitably in Australia and did not consider this likely to change in the near future. Domestic demand also offered long-term contracts with customers such as supermarkets which allowed long-term planning. Such contracts were not available in the export market. Before exploring export

39


relations and associated infrastructure (such as airfreight) they would need to have strong expectations of considerable increases in Australian production and that this production could be sold consistently in export markets. They also felt their product would need a higher value-to-weight ratio to meet the costs of airfreight. One business operator said the current ratio was no longer high enough to support interstate road freight, an option they had used in the past.

Multi-use infrastructureProtected cropping relies heavily on infrastructure shared with other industries and land uses. This infrastructure includes urban utilities such as high-quality water, electricity and natural gas and road infrastructure. It also shares regulatory environments designed for urban and peri-urban land uses. Greenhouse horticulture has adapted to infrastructure initially developed for urban uses. As hydroponics requires access to a reliable and high-quality water supply, several businesses had at times taken advantage of town water as it was easily available to complement the relatively costly option of bore or irrigation water with reverse osmosis. Likewise, the heating requirements of greenhouses were met by natural gas from existing distribution networks, and power supplies were linked to urban grids.

Despite the adaptability of existing utility infrastructure, it was sometimes difficult to access it. Two operations bore the entire costs of extensions to gas pipelines to their properties. However, in each case the extended pipeline would remain the property of the utility, and interviewees said any subsequent farms accessing the pipeline would do so at a far lower marginal cost. Another business was considering whether it could bear the cost of an extension of electricity lines to the property and faced a similar dilemma. The businesses were concerned that beneficial utility infrastructure may not be provided when those who bear the cost cannot recoup the benefits that accrue to other users.

While the businesses still evidently felt returns from investing in the gas pipelines were worthwhile, it is plausible that potentially beneficial expansion may not occur in some areas—perhaps the electricity example. This scenario could occur if the benefit an individual business receives from an extension of utilities does not exceed the cost, although the aggregate benefit to all prospective users of the extension does. In this instance the actions of prospective beneficiaries would need to be coordinated, as in irrigation expansion in Tasmania. As with the Tasmanian case study, local roads have to date been flexible enough to accommodate expansion.

Local regulatory environmentAs well as sharing utilities, the industry shares a regulatory environment with urban uses such as manufacturing and residences, which can complicate the development of protected cropping infrastructure. The newly adopted greenhouse infrastructure that differs from older polyethylene structures can present difficulties for existing planning regulations. Businesses interviewed noted that local governments sometimes classify greenhouses as factories because existing regulation only accounts for polyethylene structures. This classification in turn imposed requirements for accessibility and fire safety that interviewees felt were not intended for agricultural business. In one instance, a business also had difficulty complying with council codes for visual amenity in a region with a strong tourism industry.

Local regulators may not have the resources to effectively adapt regulation to rapidly changing industries, particularly when the primary sources of information are interested parties. This suggests a possible role for state governments or the Australian Government to develop information resources for local regulators.

40


Financing investment in protected cropping infrastructureThe recent rapid adoption of imported technology also presented difficulties when accessing finance for investment. Lenders were not very familiar with protected cropping and hence were hesitant to fund projects. This lack of knowledge also made it difficult to value the assets of a protected cropping business as easily as they did the land of a field cropping business. The businesses interviewed believed they secured loans only because they had been established in protected cropping for some time and because they had established contracts with supermarkets. This unfamiliarity could inhibit new entrants and slow expansion of the sector. However, interviewees thought lenders would soon gain more knowledge of the industry.

In contrast to the meat and dairy sectors in Tasmania interviewees showed little interest in foreign investors seeking to secure supply lines to their domestic market. One business had divested a large part of its equity to foreign investors, but did not feel the investors wanted to use the business to export to their home market. The interviewed manager felt that, apart from direct financial returns, the investors intended to use their investment to gain knowledge that could be applied to domestic cropping in their own country—particularly knowledge of supply chain management between growers and supermarkets.

BiosecurityAustralia’s biosecurity regime is part of the soft infrastructure environment within which the Australian food industry operates. The businesses interviewed recognised that a biosecurity system covering the entire industry (and indeed country) was necessary to reduce negative effects on yields from biological pests and diseases, and to maintain or regain access to foreign markets by Australian producers. They also recognised the benefits of an adaptive system; for instance, they were permitted to use parasitic wasps to combat white fly as part of integrated pest management, allowing them to meet their customers’ wishes for less insecticide. Biosecurity regulations can also impose costs. Australian producers are not allowed to use bumblebees to pollinate tomatoes and other crops. This means businesses must use manual pollination with an ‘electric bee’—a labour intensive and expensive process—to achieve comparable results. The Australian Government (2008) has determined that the risks to the environment are too great to permit bumblebees on the Australian mainland. This is an example of the kind of difficult tradeoffs involved in managing biosecurity risks.

Product differentiationSome businesses had invested in, or had considered developing, on-site packaging infrastructure. One business had done this in order to distinguish its product and exploit growing preferences from consumers for greater tomato variety and quality. The business manager felt their own packaging would allow them to build a brand that would support a price premium. It also allowed the development of specialty products (such as collections of various tomato varieties) that appealed to emerging niches of supermarket customers. The ability to develop this infrastructure was limited by their customers’ willingness to accept. One farmer was bound by the terms of their contract to lease supermarket crates, which did not allow them to either control their own costs of packaging or differentiate their product. In this case, the development was hampered by existing logistics systems.

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Australia’s airfreight exports of foodThis case study briefly examines the role of airfreight in Australia’s food exports. Air transport is typically used to export relatively high value food products to Asia and other markets. Airfreight is a cost effective transport option where food quality depends on timely delivery to the end-use market, and where the price premium received for the quality attributes of the food product is sufficient to justify higher transport costs.

Recent developments In 2011–12, the value of Australia’s airfreight food exports was $1.6 billion, accounting for 5.3 per cent of the value of total food exports (Table 6). The real value of Australia’s airfreight food exports has been relatively steady over the past decade, but below the peak of $2.2 billion in 2001–02 (2011–12 prices; Figure 19). The four main airfreight food exports in 2011–12 were unprocessed fish and shellfish ($644 million or 40 per cent of total airfreight food exports), meat and meat products ($559 million or 35 per cent), unprocessed fruit and vegetables ($144 million or 9 per cent), and live animals excluding fish (includes goats, day-old chicks and dairy breeding cows; $135 million or 8 per cent).

In 2011–12, the food commodities most reliant on air transport were unprocessed fish and shellfish (89 per cent of total unprocessed fish and shellfish exports were by airfreight), unprocessed fruit and vegetables (24 per cent), live animals excluding fish (17 per cent), and meat and meat products (8 per cent) (Table 6). Airfreight accounts for a relatively low share of total exports for other food commodities, including dairy (1.5 per cent in 2011–12), fruit and vegetable products (0.8 per cent) and other crop-based food (0.5 per cent).

Over the past several years, airfreight has become a more important international transport option for several food commodities with the major exception of other crop-based food (Figure 20). Excluding other crops-based food, the share of Australia’s food exports transported by airfreight has increased from 9.4 per cent in 2004–05 to 12.2 per cent in 2011–12 (Figure 19). Future research may examine key economic and policy factors underpinning market developments in these commodities and, in particular, the demand for airfreight transport.

Figure 19 Value of Australia's airfreight food exports, by commodity, 1996–97 to 2011–12

Note: Values are in 2011–12 prices. The dashed line is airfreight exports (excluding other crops-based food) as a percentage of total food exports (also excluding other crops-based food). Data source: DAFF 2013

42

0

5

10

15

0.0

1.0

2.0

3.0

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$b

Fruit and vegetables

Other crops-based food

Live animals excluding fish

Meat and meat products

Dairy products

Fisheries-based food

% of total food exports (excludes other crops-based food; right axis)


Table 6 Key indicators for Australia's airfreight food exports, 1996–97 and 2011–12

Airfreight Share of total airfreight Share ofCommodity food exports food exports total exports a

1996-97 2011-12 1996-97 2011-12 1996-97 2011-12$m $m % % % %

Crops-based foodFruit and vegetables bUnprocessed fruit & vegetables 275 144 16.7 8.9 34.7 24.0

Fruit and vegetable products 11 5 0.7 0.3 1.4 0.8

Total fruit and vegetables 286 149 17.3 9.2 18.5 12.1

Other crops-based foodUnprocessed

Grains and oilseeds 2 2 0.1 0.1 0.03 0.02

Other food c 0 0 0.0 0.0 0.0 0.0

Total unprocessed 2 2 0.1 0.1 0.03 0.02

Processed

Oil and fat c 1 7 0.0 0.5 0.5 2.4

Other food and beverages c 69 82 4.2 5.1 0.8 1.1

Total processed 69 90 4.2 5.6 0.8 1.2

Total other crops-based food d 72 92 4.3 5.7 0.4 0.5

Total crops-based food dUnprocessed 277 146 16.8 9.0 3.1 1.3

Processed 80 95 4.9 5.9 0.9 1.2

Total crops-based food 357 241 21.7 14.9 1.9 1.3

Livestock-based foodUnprocessedLive animals excluding fish 114 135 6.9 8.3 12.2 17.1

ProcessedMeat and meat products

Beef 99 240 6.0 14.9 – –

Other meat and offal 190 318 11.5 19.7 – –

Total meat & meat products 290 559 17.6 34.6 6.4 7.8

Dairy products

Milk, cream & milk products e 18 19 1.1 1.2 – –

Butter and other milk fat 1 1 0.1 0.0 – –

Cheese and curd 7 14 0.4 0.9 – –

Total dairy products 26 34 1.6 2.1 1.0 1.5

Total processed 316 593 19.2 36.7 4.4 6.3

Total livestock-based food 430 727 26.1 45.0 5.2 7.1

Fisheries-based foodUnprocessed fish & shellfish 838 644 50.8 39.8 – 89.2

Processed seafood 24 5 1.4 0.3 – 1.8

Total fisheries-based food 862 649 52.3 40.1 52.9 64.7

Total food cTotal unprocessed 1229 924 74.5 57.2 11.6 7.4

Total processed 420 692 25.5 42.8 2.4 3.9

Total food 1649 1616 100.0 100.0 5.9 5.3

Note: Values are in 2011–12 prices. Unprocessed is minimally transformed food; processed is substantially and elaborately transformed food. a Airfreight exports as a percentage of total exports of the same commodity. b Includes nuts. c Included in crops, by assumption. d Includes beverages. e Excluding butter and cheese. Source: Based on DAFF 2013

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Figure 20 Key indicators for Australia's major food commodities exported by airfreight, 1996–97 to 2011–12

Note: Values are in 2011–12 prices. Fruit and vegetable products are not included in this figure. Source: Based on DAFF 2013

44

a) Unprocessed fruit and vegetables b) Other crops-based food

c) Live animals excluding fish d) Meat and meat products

e) Dairy products f) Fisheries-based food

0

10

20

30

40

0

100

200

300

40019

96–9

7

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m

Airfreight exports% of total exports (right axis)

0

20

40

60

80

0

300

600

900

1200

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m

Airfreight exports

% of total exports (right axis)

0

5

10

15

20

25

0

50

100

150

200

250

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m


0.0

0.5

1.0

1.5

2.0

2.5

0

10

20

30

40

50

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m


0

2

4

6

8

0

150

300

450

600

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m


0.0

0.2

0.4

0.6

0.8

1.0

0

40

80

120

160

200

1996

–97

1999

–00

2002

–03

2005

-06

2008

–09

2011

–12

%

20

11

-12

$m



Economic and policy issues In 2011–12, airfreight food exports made a significant contribution to Australia’s net trade position for unprocessed fish and shellfish, unprocessed fruit and vegetables, live animals excluding fish, and meat and meat products (Table 7). A key issue in the outlook for the food industry is the extent to which Australia can maintain or enhance its competitive advantage in these airfreight food exports. Some key economic and policy issues relating to demand-side and supply-side aspects of airfreight food exports are briefly discussed below. The role of government in facilitating efficient supply chains, with a focus on infrastructure provision, is examined further in Chapter 5.

Table 7 Airfreight and Australia's food trade, by commodity, 2011–12

Share of food Value of food tradeexports by Food exports Food Net food

Commodity airfreight Airfreight Other Total imports exports% $m $m $m $m $m

Crops-based foodFruit and vegetablesUnprocessed fruit & vegetables a 24.0 144 458 602 354 248Fruit and vegetable products 0.8 5 620 625 1742 –1117Total fruit and vegetables 12.1 149 1078 1227 2096 –869Other crops-based food b 0.5 92 17885 17977 6415 11562Total crops-based food b 1.3 241 18963 19204 8511 10693Livestock-based foodLive animals excluding fish 17.1 135 652 787 1 785Meat and meat products 7.8 559 6643 7201 606 6595Dairy products 1.5 34 2230 2264 755 1509Total livestock-based food 7.1 727 9525 10252 1363 8890Fisheries-based foodUnprocessed fish & shellfish 89.2 644 78 721 67 654Processed seafood 1.8 5 276 281 1348 –1066Total fisheries 64.7 649 354 1002 1415 –412Total food b 5.3 1616 28842 30458 11288 19170

Note: Values are in current prices. a Includes nuts. b Includes beverages. Sources: ABARES 2013, DAFF 2013

Demand-side aspects of airfreight food exportsIn 2011–12, five of the six leading countries for Australia’s airfreight food exports were located in the Asian region (Figure 21). These five leading Asian countries accounted for $953 million or 59 per cent of Australia’s airfreight food exports in 2011–12. Hong Kong is the most important destination for Australia’s airfreight food exports ($549 million, 34 per cent of the total). Export market shares for other countries are below 10 per cent.

Income is a key determinant of demand for high value food products. People on relatively high incomes tend to be willing to pay more for the quality attributes of food products compared with other income groups (all else constant). An important aspect of this market is to provide consumers with a relatively high degree of confidence in food quality. Any significant uncertainty about the quality of a food product will result in a lower price premium (that is, a risk-averse consumer will demand a risk premium in the purchase price to compensate for the risks associated with food quality, all else constant). Product labelling is an option for food producers and processors to provide consumers with information about the quality attributes of a food product (see, for example, Hogan and Thorpe 2009).

45


Figure 21 Distribution of Australia's airfreight food exports, by destination, 2011–12

Note: Based on value of exports. Source: DAFF 2013

Demand for high value, low volume food products is likely to increase significantly over the medium to longer term, particularly in the Asian region where economic growth is projected to be relatively strong. ABARES preliminary projections for global food demand to 2050 are outlined in Chapter 2 based on assessments in Linehan (2012a, b and 2013). ABARES is also undertaking more detailed assessments on the outlook in the What Asia Wants project.

Supply-side aspects of airfreight food exports In 2011–12, Victoria was the main state of departure for airfreight food exports, accounting for $682 million or 42 per cent of the total (Figure 22). Other jurisdictions with international food supply chains based on air transport included Queensland ($328 million, 20 per cent of the total), Western Australia ($262 million, 16 per cent), New South Wales ($261 million, 16 per cent) and South Australia ($83 million, 5 per cent).

Nearly all airfreight food exports of Tasmanian origin are recorded as exports from mainland Australian airports. The economies of scale that would justify infrastructure investment to support airfreight food exports directly from Tasmania is a potential issue for future research.

Figure 22 Distribution of Australia's airfreight food exports, by jurisdiction, 2011–12

Note: Based on state of departure. Virtually all airfreight exports of Tasmanian origin are recorded as exports from mainland Australian airports. Source: DAFF 2013

46

0 10 20 30 40 50

Other

Switzerland

Vietnam

China

United Arab Emirates

Japan

Singapore

Hong Kong

%

0 10 20 30 40 50

Northern Territory

Tasmania

South Australia

New South Wales

Western Australia

Queensland

Victoria

%


In 2011–12, airfreight exports from the Northern Territory were very small (with a value of around $78 000). ABARES, in collaboration with the CSIRO, is undertaking more detailed assessments of supply chains in northern Australia in the Northern Australia Food and Fibre Supply Chains study. During consultations undertaken for this study, one farmer indicated that food produced in the Ord River Irrigation Area (ORIA) Stage 1 is trucked from Kununurra to Perth for distribution to end-use markets, including some food exported by airfreight.

Future growth in Australia’s airfreight food exports will be influenced by market access and biosecurity arrangements, investment in domestic high value food production and processing activities, and complementary infrastructure investment to support the further development of efficient international supply chains based on air transport.

An important potential advantage of airfreight is that food can be transported directly to inland destinations in overseas markets. Sea freight, the alternative transport option in international supply chains, requires food to be shipped to a seaport before distribution for use in the domestic market. Similarly, airfreight is a relatively flexible transport option for moving food within Australia.

A further potential advantage of airfreight is that it increases contestability in international supply chains, at least for high value, low volume food products. Increased contestability raises competitive pressures in the market and places downward pressure on transport costs (contestability issues are discussed, for example, in Port Jackson Partners 2012).

Future research will examine infrastructure issues in Australia’s airfreight food exports in more detail.

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5 Economic issues in infrastructure investment and Australia’s food industry

This chapter provides a brief overview of economic issues in infrastructure and Australia’s food industry, including the economic rationale for government intervention, commercialisation options, and private sector participation in Australia’s infrastructure industries.

Economic rationale for government intervention Economic infrastructure services provided by the transport, water, energy and telecommunications industries are essential inputs to a wide range of economic activities, including Australia’s domestic and international food supply chains. From an economic perspective, it is assumed that policymakers aim to ensure the adequate and reliable provision of infrastructure services at least cost over time given budgetary and other constraints, and taking into account economic and other risks in the outlook.

Sources of market failureGovernment has an important role in addressing market failures and achieving distributional goals. Market failures, which occur when private markets do not produce a socially optimal level of goods and services, provide an economic rationale for considering government intervention. Market failures may arise, for example, when:

markets are not highly competitive (imperfect competition)

markets do not provide certain goods or services (public goods)

by-products in production or consumption have a significant impact on third parties, resulting in suboptimal outcomes (including negative externalities or spillover effects such as environmental damage from farming activities)

producers or consumers have inadequate market information (imperfect information).

The main market failure in infrastructure supply and use is the natural monopoly characteristics of infrastructure industries (at least within particular regions). In a natural monopoly, industry costs tend to be lower if there is a single provider since this avoids costly duplication of infrastructure facilities (such as water storage, treatment and delivery infrastructure).

A natural monopoly occurs when a single firm can produce a good at lower cost than any alternative market structure. In a natural monopoly, the initial infrastructure investment costs are large relative to the variable costs incurred in producing the good or service. As a consequence, average costs decline as production increases. The main concern is that, without policy intervention, a private producer in a natural monopoly would extract monopoly rent resulting in a higher price and lower output than would be socially optimal.

Criteria to assess policy response optionsThe presence of market failure is not always a sufficient reason for governments to intervene in the market. Governments should also ensure policy interventions are assessed to be cost effective; for example, ideally, government policies should not have significant unintended negative consequences or cause further distortions in the market. Given the importance of infrastructure in food supply chains, the government may consider the food security implications of the policy response.

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Criteria that may be used to assess policy options include:

efficiency—maximising long-term net social benefits, including by assessing infrastructure network requirements over time, and ensuring specific infrastructure projects are both consistent with broader network planning and delivered at least cost

equity—ensure low income people have adequate access to infrastructure services

resilience—reduce the probability of major supply disruptions occurring and reduce the cost of supply disruptions when they do occur

administrative simplicity—take into account administration and compliance costs to government, industry and others

Other criteria may include, for example, flexibility to adapt to changing economic and other circumstances.

Ideally, to provide an economic assessment of the role of government, policy options that address significant sources of market failure need to be identified and ranked, where feasible, according to the assessed net economic benefits, including implementation costs. Only policy options that are assessed to result in positive net economic benefits should be considered for implementation. From an economic perspective, the policy option that is assessed to achieve the highest net economic benefits is the preferred policy option, although some aspects of an economic assessment, such as equity (distributional) and risk assessment issues, rely on the subjective judgment of policy makers.

Broad policy reform processes in Australia In recent decades, there has been a broad regulation reform process in Australia that emphasises the important role of reducing the regulatory burden on business and the community. An overview of broad regulation reform processes in Australia since the 1980s is provided in Box 5.1.

For infrastructure industries, the main aim in policy reform in Australia has been to achieve efficient and sustainable pricing and provision of infrastructure services. The traditional approach has been the public provision of essential goods and services, such as water, at low prices to support economic development and household use. Since at least the 1990s, there has been increasing recognition of alternative policy options to address market failures such as natural monopolies (commercialisation options are briefly discussed in the next section).

There has been an important process of competition regulation of Australia’s essential infrastructure (Banks 2002). Competition in infrastructure markets is based on regulation:

Competition has not been achieved just through deregulation, but also through the construction of elaborate regulatory machinery that oversees access to essential services, arbitrates disputes, and sets prices and other terms and conditions. So the nature of competition in these services is a creature of regulation. (Banks 2002, p. 2)

Banks (2002, p. 15) concluded that ‘the introduction of competition regulation to infrastructure and the dismantling of the old statutory monopolies has produced large dividends for Australia’, although there may be scope for significant efficiency payoffs by refining the regulatory frameworks.

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Box 1 Regulation reform in Australia

There have been three broad regulation reform processes in Australia since the 1980s (PC 2011a).

Deregulation of trade, financial and foreign exchange markets in the 1980s—opened the Australian economy to international markets.

Competition policy reform—included major reforms to public monopolies in key infrastructure service areas and other government businesses, culminating in implementation of the National Competition Policy from 1995 to 2005 (PC 2005).

Reducing regulatory burden on the Australian economy—in recent years the Council of Australian Governments (COAG) has sought to reduce costs to business, and the community, that arise from differences in regulation across jurisdictions in Australia. The Seamless National Economy initiative seeks to improve the national coherence of regulation and reduce its costs while maintaining or enhancing its effectiveness.

Australia’s National Reform Agenda is the successor program to the National Competition Policy. The regulatory

stream of COAG’s National Reform Agenda focuses on reducing the regulatory burden imposed by the three

levels of government (PC 2009a, p. xiii):

COAG agreed that effective regulation is essential to ensure markets operate efficiently and fairly, to protect consumers and the environment and to enforce corporate governance standards. However, the benefits from regulation must not be outweighed by the costs imposed and there should be no unnecessary compliance costs.

Commercialisation options in infrastructure industriesPublic provision of infrastructure services has been the traditional model used in Australia and other OECD countries, although there has been considerable interest since at least the 1990s in reassessing the role of the private sector in the industry. Commercialisation options mainly represent alternative approaches to addressing the natural monopoly aspects of an infrastructure industry by increasing competitive pressures in the industry.

Government ownership modelsThere are three main options for government ownership of infrastructure facilities.

Traditional public utility with marginal cost pricing (less than full cost recovery)—public provision of infrastructure services with a government subsidy to support a marginal cost pricing policy.

Public utility with average cost pricing (full cost recovery)—public provision of infrastructure services with average cost pricing or full cost recovery (with an appropriate rate of return to the public investment in infrastructure assets).

Corporatisation model with competitive neutrality features (full cost recovery)—this model includes full cost recovery pricing and other features that aim to achieve competitive neutrality between public and private infrastructure service providers (the rate of return to the public investment in infrastructure assets includes an estimate of the private sector’s risk premium).

The traditional public utility with marginal cost pricing provides a benchmark against which various commercialisation options, including alternative government ownership models, may be assessed. The traditional public utility is a government ownership model whereby a government department, local government or statutory authority is responsible for the management of

50


infrastructure services in a given location, and the government subsidises the activity to support a marginal cost pricing policy.

Two other government ownership models are based on average cost pricing (or full cost recovery), but differ in the extent to which the commercial disciplines operating in private markets are replicated. The public utility with full cost recovery may be interpreted as a government ownership where there is a limited role for private ownership of infrastructure assets, while the corporatisation model aims to achieve competitive neutrality between the public and private sectors. That is, the public utility with full cost recovery (option 2) falls between the traditional model with marginal cost pricing (option 1) and the corporatisation model with competitive neutrality (option 3).

Options to increase competitive pressures and facilitate private participationIn most cases, commercialisation options that aim to increase competition in infrastructure industries and facilitate private participation are complementary to government ownership models. It is only in the case of full privatisation of infrastructure facilities that the government ownership models would no longer apply, although governments would continue to have an important regulatory role. These commercialisation options differ according to the type of competition that is introduced in the infrastructure industry.

Yardstick competition (benchmarking)—benchmarking involves the comparison of the overall performance of an infrastructure business, or particular aspects of the business, with the performance of similar businesses; benchmarking may also be used by regulators to determine appropriate regulated prices (OECD 2004). Yardstick competition is particularly important for geographically separated utilities where alternative commercialisation options, or options for increasing competitive pressures, may be limited (Dosi and Easter 2003).

Competition for inputs (outsourcing)—outsourcing refers to an infrastructure business entering into a contractual agreement with another organisation to provide specified non-core services; functions that may be considered for outsourcing include, for example, meter reading, laboratory services, billing and revenue collection, accounting services, design, construction, specialised maintenance, emergency repairs and training (Dosi and Easter 2003; Jacobs and Howe 2005). Providing there is sufficient competition between input suppliers, outsourcing may reduce costs and enhance the performance of the infrastructure business.

Competition for the market (public-private partnership, PPP, arrangements)—public-private partnerships mainly refer to arrangements whereby the government enters into a contractual agreement with a private organisation to provide specified core functions; includes delegated management options, and a range of other options that generally have an emphasis on private sector financing of infrastructure projects (Appendix E).

Product market competition (market structure aspects and private provision)—this refers to a range of options that increase the opportunities for transactions between a larger number of infrastructure service providers and users including, most importantly: unbundling services to isolate the natural monopoly elements in the industry; common carriage competition (or third party access) to allow shared access of existing delivery networks through some form of access pricing arrangements; options to increase competition between regions (such as investment to increase water pipeline linkages between regions, and reducing or removing impediments to water trading within and

51


between regions); and private provision of infrastructure services (private cooperatives or profit maximising private firms).

Some key features of these commercialisation options are presented in Table 8.

Table 8 Ownership and management aspects of key commercialisation options

OptionAsset

ownershipCapital

investmentOperations/

managementCommercial

risk

Government ownership models G G G G

Yardstick competition

Benchmarking G G G G

Competition for inputs

Outsourcing G G P/G G

Competition for the market—public-private partnership arrangements

Delegated management options

Management contract G G P G

Franchise

Operating concession G G P G

Concession G G P P/G

Other public-private partnership arrangements

DBFO (Design, Build, Finance, Operate)

or DBO (Design, Build, Operate) G P G P/G

BOT (Build, Operate, Transfer) G P P P/G

BOOT (Build, Own, Operate, Transfer) P/G P P/G P/G

BOM (Build, Own, Maintain) P P G P

BOO (Build, Own, Operate) P P P P

Product market competition

Private ownership model

Private cooperative Users Users Users Users

Private firm P P P P

Note: G=government, P=public. Commercial risk needs to be interpreted with some caution. Further information on public-private partnership arrangements is provided in appendix E.

Private participation in infrastructure investment in AustraliaIn this section, the value of engineering construction work done is used to provide an indicator of investment expenditure in Australia (this information excludes the building components of projects). In Australia, private sector participation in infrastructure investment projects has increased in recent decades. The value of private engineering construction work done for the private sector increased from $5 billion in 1986–87 to $85 billion in 2011–12, largely as a result of the mining boom (in 2010–11 prices) (Figure 23a). The value of private and public engineering construction work done for the public sector in Australia increased from $15 billion in 1986–87 to $32 billion in 2011–12—over this period, the private sector’s share of work done for the public sector increased from 34 per cent to 51 per cent (Figure 23b).

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Figure 23 Engineering construction activity in Australia, by sector, 1986–87 to 2011–12

Note: Based on the value of work done in 2010–11 prices (chain volume measure). Source: Based on ABS 8762.0, Engineering Construction Activity, Australia (table 1)

In 2011–12, the value of engineering construction work done for the public sector was the major share of total work done for roads, bridges, railways, electricity and water (Figure 24a). Private participation in these infrastructure investment projects was important for all construction types with the major exception of the electricity sector (Figure 24b).

Figure 24 Value of engineering construction work done for the public sector in Australia, 2011–12

Note: a Includes roads, highways and subdivisions. b Includes electricity generation transmission and distribution. c Includes oil, gas, coal and other minerals. Source: Based on ABS 8762.0, Engineering Construction Activity, Australia (tables 8 and 10)

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a) Shareof total work done b) Share undertaken by the private sector

Private activity for the public sector

0 25 50 75 100

TotalOther

Other heavy industryMining sector c

RecreationTelecommunicationsSewerage & drainage

Water storage & supplyElectricity sector b

PipelinesHarboursRailways

BridgesRoads a

%

0 25 50 75 100

TotalOther

Other heavy industryMining sector c

RecreationTelecommunicationsSewerage & drainage

Water storage & supplyElectricity sector b

PipelinesHarboursRailways

BridgesRoads a

%

a) Value of work done, by sector b) Private sector's share of work donefor the public sector

Private activity for the public sector (share of total activity for the public sector)

0

25

50

75

100

12519

86-8

7

1991

-92

1996

-97

2001

-02

2006

-07

2011

-12

20

10

-11

$b

Private activity for the private sector

Private activity for the public sector

Public activity for the public sector

0

10

20

30

40

50

60

1986

-87

1991

-92

1996

-97

2001

-02

2006

-07

2011

-12

%


In 2011–12, the value of engineering construction work done in infrastructure industries (excluding gas) was around $60 billion of which 53 per cent ($32 billion) was work undertaken for the public sector and the remaining 47 per cent ($28 billion) was work undertaken by the private sector for the private sector (current prices; Table 9). The value of work done by the private sector for the public sector was $16 billion in 2011–12—private activity was most important for work done on construction projects for roads ($8.6 billion or 51 per cent of total private activity for the public sector), water ($2.6 billion or 15 per cent) and railways ($2.4 billion or 15 per cent).

Table 9 Value of engineering construction work done in Australia, by sector, 2011–12

By and for the For the public sector

private sector Total Total activity

Type of % of Private Public % of % of

construction Value total activity activity Value total Value total

$b % $b $b $b % $b %

Infrastructure (excludes gas)

Transport

Roads a 5.4 6.3 8.6 4.5 13.1 39.8 18.5 15.5

Bridges 0.1 0.2 0.6 0.2 0.8 2.4 1.0 0.8

Railways 4.1 4.7 2.4 2.0 4.5 13.6 8.5 7.2

Harbours 4.6 5.4 0.3 0.0 0.4 1.1 5.0 4.2

Pipelines 2.5 2.9 0.1 0.0 0.1 0.3 2.6 2.2

Total 16.7 19.4 12.0 6.8 18.8 57.2 35.5 29.9

Electricity sector b 4.6 5.4 1.2 5.9 7.1 21.7 11.8 9.9

Water

Water storage & supply 2.0 2.4 1.4 1.4 2.8 8.5 4.8 4.1

Sewerage & drainage 0.7 0.8 1.2 1.2 2.4 7.3 3.1 2.6

Total 2.7 3.1 2.6 2.6 5.2 15.8 7.9 6.6

Telecommunications 4.4 5.1 0.5 0.0 0.5 1.6 4.9 4.1

Total infrastructure 28.4 33.0 16.3 15.4 31.7 96.3 60.1 50.5

Other industries

Recreation 1.9 2.2 0.4 0.7 1.1 3.3 3.0 2.5

Mining sector c 53.4 62.0 0.01 0.02 0.03 0.1 53.4 44.9

Other heavy industry 0.9 1.0 0.0 0.0 0.0 0.0 0.9 0.8

Other 1.5 1.7 0.1 0.0 0.1 0.3 1.6 1.3

Total 57.6 67.0 0.5 0.7 1.2 3.7 58.8 49.5

Total 86.0 100.0 16.8 16.1 32.9 100.0 118.9 100.0

Note: a Includes roads, highways and subdivisions. b Includes electricity generation transmission and distribution. c Includes oil, gas, coal and other minerals. Source: ABS 8762.0, Engineering Construction Activity, Australia (tables 8 and 10)

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Economic issues and infrastructure policy—previous studies In preliminary consultations, various issues relating to infrastructure in Australia’s food supply chain were identified (see also the case studies in Chapter 4); key issues include:

Road freight—road freight is a more flexible and reliable transport option compared with rail freight, although there are congestion issues in urban areas; there are significant financing issues for road infrastructure investment in rural areas (such as upgrading roads to allow increased access to road freight) because lower rural populations have reduced the revenue base for local governments.

Rail freight—issues relate to congestion, time delays and uncertainty: food commodities are at a competitive disadvantage with mineral resource commodities for access to rail freight; rail freight tends to have a lower priority to passenger rail.

Ports—a key concern is limited capacity to support refrigerated containers (such as provision of electricity outlets).

Energy—issues relate to the cost of accessing electricity and gas networks; costs and risks tend to be higher for the first user (subsequent users gain network access at lower cost).

International supply chains—a key issue is the need for complementary infrastructure investment in Australia and export markets (such as China).

Issues have also been raised with respect to the need for more effective coordination across transport types (road, rail and port infrastructure), activities (agriculture and other infrastructure users) and jurisdictions. For example, there may be potential to more effectively identify infrastructure investment ideas originating in the regions and facilitate project assessments (including through to project feasibility stage).

This section identifies some key previous studies that have examined economic issues in the use and supply of infrastructure in Australia.

National infrastructure plan (Infrastructure Australia 2013)Infrastructure Australia was established in 2008 to support a national focus on long term strategic investment in economic infrastructure, planning and delivery, and to progress infrastructure reforms. The National Ports Strategy (endorsed by COAG in July 2012) and the National Land Freight Strategy aim to improve the development of Australia’s transport infrastructure.

Proposed reforms The latest national infrastructure plan proposes seven reforms to address the infrastructure funding challenge (Infrastructure Australia 2013, excerpts from pp. 18–26).

Reform 1: Establish a single national infrastructure fund—Commonwealth funds and investment sources have overlapping purposes, different assessment frameworks, and different decision making mandates. A single assessment and prioritisation framework—Infrastructure Australia’s reform and investment framework—will ensure all major projects are informed decisions, supported by a sound economic case, and tested with a robust, independently assessed cost-benefit analysis.

Reform 2: Using government balance sheets more innovatively to spread available funding—the Australian Government could leverage more private investment in

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infrastructure by structuring its contributions and funding conditions to state and territory projects differently.

Reform 3: Recycle capital—more than $100 billion of commercially suitable infrastructure assets sit within Australian Governments’ infrastructure investment portfolios. Recycled assets could include airports, roads, water services, ports, freight rail and electricity generation, transmission and distribution. Together, their value is large enough to fund a significant proportion of our most critical infrastructure priorities.

Reform 4: User pays–user says—while there are different ways to finance projects, infrastructure is ultimately funded or paid for by user charges or taxpayers, or some combination of both. To date, most of Australia’s public infrastructure has been largely funded by Government subsidies, with insufficient or no cost recovery at all from direct users. This needs to change: when all taxpayers pay for infrastructure, it reduces the accountability of Governments to provide infrastructure that meets the needs of direct users.

Reform 5: Reduce layers of Government involvement in infrastructure—Australia has nearly 600 different local, state and territory Governments that, together with the Australian Government, fund and plan infrastructure. Through this multitude of players, our infrastructure development is slow and delivery risks are high, which constrains our productivity and makes our projects less attractive for potential investors. Australia’s transport, water and energy infrastructure form complex webs of connected services. Projects are too often considered in isolation without proper analysis of the potential impact on wider infrastructure networks. Australia needs integrated infrastructure planning across Governments that clarifies which level of Government funds and delivers which projects. Efficiencies can be driven by clear accountability between the layers of government. This would reduce costs and attract further investment.

Reform 6: Be world leaders in project governance—the delivery of major projects is challenging, with long planning horizons and complex interfaces, multiple stakeholders and the potential for significant scope changes to occur over time. A study of 23 major resource projects in Australia found that strong performance management of major capital projects, best practice management from concept and design through to contracting, and a project team with superior execution skills, could yield cost savings between 20 and 50 per cent.

Reform 7: Smarter, leaner infrastructure procurement—Australian Governments must improve their project procurement processes to manage rising cost structures, support project viability and attract private sector investment.

Regional Australia Infrastructure Australia (2013) highlights the importance of increased investment in regional infrastructure to address the growing needs of regional export-oriented industries. In particular, investment in road, rail and port infrastructure is required to ensure increased food exports to 2050 are transported from farm to export market in a cost competitive way. To increase the efficiency and resilience of Australia’s regional supply chains, Infrastructure Australia (2013, excerpts from pp. 77–81) recommends:

Action 20: Coordinated, short and long term infrastructure plans in our regions—there is poor coordination and integration between different planning bodies, and disconnect between regions. A 2012 report found the full potential of regional planning was not harnessed because individual regions have limited powers and mandates to move from planning and advocacy to funding, financing and delivering infrastructure. Regional infrastructure plans fail to adequately respond to the long term freight challenge, with limited focus on regional freight systems and supply chain coordination. Greater integration

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and coordination is needed between Government entities and the private sector (resources, transport and agricultural industries). Such coordination would enable scale, support economic development, improve planning outcomes and maximise opportunities for funding through sources such as the regional infrastructure fund. As our regions grow, our ability to plan and fund regional infrastructure must also grow. A working group, comprising of members from the Commonwealth, state and territory jurisdictions and the Australian Local Government Association, is currently developing the draft regional infrastructure investment strategy. The strategy will be a guide for identifying, prioritising, financing and funding decisions for regional infrastructure projects, complementary to the work of Infrastructure Australia.

Action 21: Consolidate regional local governments—half of Australia’s local government entities look after less than 7,300 residents with correspondingly low, unsustainable revenue bases. Options to strengthen local and regional infrastructure planning and delivery include consolidation of local governments, regional infrastructure delivery models or formal agreements between bodies with infrastructure responsibilities.

Action 22: Make better use of scarce water resources to provide certainty to communities and invest in a thriving food sector—Australia’s agricultural practices and systems continue to evolve to make the best use of our precious water resources. Water use efficiency on irrigation farms has on average increased by 300 per cent since 2000 through the adoption of advanced water delivery, such as in-ground pipes replacing open channels, and new crop varieties. The merits of innovative infrastructure solutions deserve further consideration.

Action 24: Recycling capital from regional assets to much-needed regional infrastructure—governments currently own regional airport assets that could be transferred to the private sector to drive productivity in our regions and unlock funding for much-needed regional infrastructure. State Governments also own plantation forests suitable for sale to the private sector. Many of these plantations are commercial and, with the right approach to public policy issues, could be easily transferred to the private sector.

Implementing the national ports strategy and national land freight strategy are essential for planning and delivering the transport infrastructure needed to provide reliable, efficient and flexible food supply chains.

Other studies The role of infrastructure in Australia’s food supply chain has been examined in several studies. Chapter 3 briefly discussed infrastructure issues in specific commodity markets referring to, for example, Tulloh and Pearce (2011), Allen Consulting Group (2009) and various reports by the National Transport Commission. Other studies that have examined infrastructure issues in Australia’s food supply chain include:

Blueprint for Australian agriculture 2013–2020 (National Farmers Federation 2013)—the report argued that ageing and inadequate infrastructure in Australian agriculture and its supply chain is a high priority issue. Strategies to improve and upgrade critical infrastructure include: establish an agriculture infrastructure taskforce to engage with government/Infrastructure Australia on prioritising critical infrastructure to remove productivity bottlenecks, and identifying sources of future investment/capital (both domestic and international); consider alternative methods to raise capital for infrastructure, including supply chain investment and public-private partnerships; focus on provision and uptake of telecommunications in rural and regional centres to ensure equal, or at least comparable, access to new technologies for all Australians; and investigate innovative

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investment arrangements including policy and law changes to attract investment (National Farmers Federation 2013, p. 31).

Resilience in the Australian food supply chain (Bartos et al. 2011, 2012)—the research found that Australia’s food supply chain has demonstrated a high degree of resilience when localised or regional crises have disrupted key parts of the supporting infrastructure. However, the food supply chain is potentially vulnerable in large-scale events (such as a human or animal pandemic, or a national fuel shortage), or combinations of events that affect multiple links of the food supply chain at the same time (such as widespread electricity outages combined with floods or fires). The study noted that a major part of the Australian Government’s approach to critical infrastructure is the Trusted Information Sharing Network (TISN), a forum for governments and industry to assess and mitigate risks, and build resilience capacity within organisations.

Agriculture and Food Policy Reference Group (2006; ‘the Corish report’)—the report argued that a competitive, efficient and cost effective transport system is fundamental to the future of Australia’s agriculture and food sector and recommended: the interdependence of road and rail transport must be better reflected in decisions affecting the building and maintaining of networks in regional areas; the AusLink cooperative agreements between the Australian and state and territory governments must be completed and implemented quickly, and include funding for ports as part of more comprehensive export logistics planning (AusLink was replaced with the National Land Transport Network in 2009); and the National Transport Commission should be given powers to enforce uniform and nationally consistent standards, pricing mechanisms and legislative requirements across transport modes, with the aim of minimising regulatory costs to businesses (Agriculture and Food Policy Reference Group 2006, p. 18).

The review of Australia’s Future Tax System (AFTS) examined Australia’s road transport taxes and provided a number of recommendations to achieve more efficient use and supply of roads (see Henry et al. 2009, pp. 53–54 for discussion, and p. 92 for recommendations). The Productivity Commission (PC) has released several major reports on infrastructure issues and policy in Australia.

Efficiency of infrastructure policy—PC (2008) provides a summary of key findings from its previous and current research; notably, PC (2006) examined road and rail freight infrastructure pricing in Australia, and Chan et al. (2009) examined public infrastructure pricing. PC (2013) provides the draft report for the latest assessment on Australia’s national access regime. PC (2011b) examined the economic regulation of airport services.

Regulatory burdens on business— PC (2009b) provides a review of regulatory burdens on business in social and economic infrastructure; see also Banks (2002).

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) and the National Transport Commission (NTC) have released several studies on Australia’s transport infrastructure; see, for example, BITRE (2006, 2011) and NTC (2008, 2009a, b, c). Ernst and Young (2012) examined issues relating to the planning, financing and delivery of local infrastructure with a focus on identifying ways in which local governments can achieve more infrastructure facilities from existing funding sources. Local government issues are also examined in Allen Consulting Group (2009).

Future research will draw on previous economic assessments, and identify key implications for infrastructure in Australia’s domestic and international food supply chains.

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6 ConclusionA key to realising potential growth opportunities is to ensure Australia’s infrastructure and biosecurity systems will support a growing food industry, moving food cost-effectively and efficiently to markets and supporting new export opportunities. This report has provided preliminary information and analysis relevant to economic infrastructure and Australia’s food industry to 2050. Several key points are noted.

The potentially significant expansion of Australian production and exports of key agricultural commodities—wheat, sugar, beef, sheep meat and dairy—will increase pressure on the infrastructure that currently supports these supply chains.

To make the most of opportunities presented by rapidly growing Asian markets, infrastructure that allows food to be moved cost-effectively and efficiently through supply chains will be important.

- The road network is of particular importance to food supply chains and as production and exports expand, it will become increasingly important that issues affecting performance be addressed. These include connectivity across the road network and with other transport modes, road and rail pricing distortions, funding arrangements and the integration of planning and investment across modes.

- The potential expansion of production in areas currently without adequate infrastructure presents additional challenges. For example, a significant expansion of beef production in northern Australia would need to be supported by large infrastructure investments. Similarly, to achieve substantial increases in dairy production it is likely that additional investment in irrigation infrastructure will be required, both on and off-farm.

Further research could build on the approach taken here to present a more sophisticated analysis of potential infrastructure constraints in agrifood supply chains. This could include a more detailed examination of potential scenarios for the likely location of any growth in agricultural production and exports (including the potential impacts of climate change on the location of production). Importantly, given the multi-use nature of most infrastructure, understanding future infrastructure requirements will necessitate an understanding of changes in both agricultural and non-agricultural demand for infrastructure. A regional analysis of the expected growth in total demand for infrastructure is likely to be required to identify potential issues effectively.

It is intended that subsequent work will assess impediments to infrastructure and identify policy response options that would support growth in Australia’s food production and processing industries. Key future research directions that may be considered include:

Australia’s food production, processing and exports to 2050: implications for infrastructure—undertake a more comprehensive assessment of key supply-side factors influencing the pattern of food production, processing and exports to 2050 in regional and remote areas of Australia, and identify implications for infrastructure requirements. This research would be complementary to the ABARES research on What Asia Wants.

Integrated modelling by BITRE and ABARES—in this collaborative research, ABARES would focus on integrating food production and processing activities into the BITRE model framework for infrastructure in Australia.

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Food supply chain analysis—a useful area for future research may be to undertake simulations of important aspects of Australia’s food supply chain with a focus on infrastructure requirements to support export growth of key food commodities to 2050. It is beyond the scope of subsequent work to examine specific infrastructure projects.

Pricing and provision of key food infrastructure services in Australia—assess impediments to investment in infrastructure, including the private provision of infrastructure, and identify policy response options that would support growth in Australia’s domestic and international food supply chains.

There is likely to be an important role in future research to examine the experience in other OECD countries and assess the extent to which the overseas experience provides useful policy implications for Australia.

A further important aspect of future research will be to assess the availability of infrastructure data relevant to the analysis of Australia’s food supply chain, and consider the potential role in providing a coordinated list of significant food infrastructure projects at various stages of development (this may include, for example, initial project ideas proposed at the local or regional level, through to completed projects).

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Appendix A Infrastructure data sourcesTable A0 Infrastructure data sources from key agenciesOrganisation, series and website

ABARES

Agricultural commodity statistics daff.gov.au/abares/publications_remote_content/publication_series/australian_commodity_statistics Agricultural survey daff.gov.au/abares

Irrigation survey daff.gov.au/abares

Rail spatial data daff.gov.au/abares

Trade statistics daff.gov.au/abares

Australian Bureau of Statistics (ABS)

Input–Output Tables abs.gov.au/AusStats/[email protected]/MF/5209.0.55.001

International cargo statistics abs.gov.au/AUSSTATS/[email protected]/0/BD1A0DE67EF08A95CA2571C40018E087?opendocumentAustroads

National Performance Indicators - asset management algin.net/austroads/site/Index.asp?id=5

Bureau of Infrastructure, Transport and Regional Economics (BITRE)

Australia’s Bulk Ports bitre.gov.au/publications/2013/report_135.aspx

Aviation statistics (air freight) bitre.gov.au/statistics/aviation/index.aspx

Industry structure database bitre.gov.au/databases/files/databases_FOR1.xls

Infrastructure statistics bitre.gov.au/statistics/infrastructure/index.aspx

Infrastructure yearbook bitre.gov.au/publications/2012/stats_002.aspx

Maritime statistics (sea freight) bitre.gov.au/statistics/maritime/index.aspx

Rail statistics bitre.gov.au/statistics/rail/index.aspx

Road statistics bitre.gov.au/statistics/road/index.aspx

Bureau of Meteorology

Storage capacity water.bom.gov.au/waterstorage/awris/

Water data bom.gov.au/water/

Bureau of Resource and Energy Economics (BREE)

Australian energy statistics bree.gov.au/publications/aes.html

Major electricity generation projects bree.gov.au/publications/megp.html

Resource and energy major projects bree.gov.au/publications/remp.html

Resource and energy statistics bree.gov.au/publications/res.html

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http://www.bree.gov.au/publications/res.html

http://www.bree.gov.au/publications/remp.html

http://www.bree.gov.au/publications/megp.html

http://www.bree.gov.au/publications/aes.html

http://www.bom.gov.au/water/

http://water.bom.gov.au/waterstorage/awris/

http://www.bitre.gov.au/statistics/road/index.aspx

http://www.bitre.gov.au/statistics/rail/index.aspx

http://www.bitre.gov.au/statistics/maritime/index.aspx

http://www.bitre.gov.au/publications/2012/stats_002.aspx

http://www.bitre.gov.au/statistics/infrastructure/index.aspx

http://www.bitre.gov.au/databases/files/databases_FOR1.xls

http://www.bitre.gov.au/statistics/aviation/index.aspx

http://www.bitre.gov.au/publications/2013/report_135.aspx

http://algin.net/austroads/site/Index.asp?id=5

http://www.abs.gov.au/AUSSTATS/[email protected]/0/BD1A0DE67EF08A95CA2571C40018E087?opendocument

http://www.abs.gov.au/AUSSTATS/[email protected]/0/BD1A0DE67EF08A95CA2571C40018E087?opendocument

http://www.abs.gov.au/AusStats/[email protected]/MF/5209.0.55.001

http://www.daff.gov.au/abares




http://www.daff.gov.au/abares/publications_remote_content/publication_series/australian_commodity_statistics

http://www.daff.gov.au/abares/publications_remote_content/publication_series/australian_commodity_statistics


Resources and energy quarterly bree.gov.au/publications/req.html

Department of Agriculture, Fisheries & Forestry (DAFF)

Food statistics daff.gov.au/agriculture-food/food/publications/afs

Red meat statistics daff.gov.au/agriculture-food/meat-wool-dairy/quota/red-meat/statistics

Geoscience Australia

Rail network map ga.gov.au/products/servlet/controller?event=GEOCAT_DETAILS&catno=60690

Road network map ga.gov.au/geomet-datasetreport/report.jsp?datasetno=2391

Topographic data ga.gov.au/topographic-mapping/digital-topographic-data.html

Maritrade

Trade statistics maritrade.com.au/trade.html

Murray–Darling Basin Authority (MDBA)

River data and information mdba.gov.au/river-data

Spatial data mdba.gov.au/river-data/spatial-data-services/spatial-information

OECD

Transport, including freight and passenger transport tasks stats.oecd.org/

Ports Australia

Trade statistics (domestic and international) portsaustralia.com.au/tradestats

Rural Research & Development Corporation

Agriculture–specific transport data ruralrdc.com.au/Page/Home.aspx

Transmet

Transport metadata nss.gov.au/transportmetadata/index.jsp

World Bank

Quality of infrastructure (country comparison of air, port, road, rail) data.worldbank.org/indicator/IQ.WEF.PORT.XQ

62

http://data.worldbank.org/indicator/IQ.WEF.PORT.XQ

http://www.nss.gov.au/transportmetadata/index.jsp

http://www.ruralrdc.com.au/Page/Home.aspx

http://www.portsaustralia.com.au/tradestats

http://www.stats.oecd.org/

http://www.mdba.gov.au/river-data/spatial-data-services/spatial-information

http://mdba.gov.au/river-data

http://www.maritrade.com.au/trade.html

http://www.ga.gov.au/topographic-mapping/digital-topographic-data.html

http://www.ga.gov.au/geomet-datasetreport/report.jsp?datasetno=2391

http://www.ga.gov.au/products/servlet/controller?event=GEOCAT_DETAILS&catno=60690

http://www.daff.gov.au/agriculture-food/meat-wool-dairy/quota/red-meat/statistics

http://www.daff.gov.au/agriculture-food/food/publications/afs

http://www.bree.gov.au/publications/req.html


Appendix B Case study for Tasmania—consultations and irrigation projectsThis appendix provides information on the stakeholder consultations for the case study on Tasmania. Information is also provided on Tasmania’s irrigation infrastructure projects.

Consulted stakeholders in TasmaniaThe consulted primary producers include a former mixed farming business which had recently converted to an intensive dairy business and a fruit grower consolidating their production system in response to the current economic climate. Also interviewed were processors with significant infrastructure investments, including a dairy processing business providing milk powder for export and the Tasmanian Feedlot Company producing beef for the Japanese market. Tasmanian Irrigation, which is managing a rapidly expanding irrigation infrastructure, was also interviewed. Finally representatives of the Tasmanian Farmers and Graziers Association (TFGA) were interviewed.

Dairy Farmer

The dairy farming business was recently converted from a mixed enterprise to dairy production. The business is located in the Northern Midlands and is owned and operated by an extended family. The previous business had involved horticulture, grain, sheep and cattle, but for financial and quality of life reasons the family believed this model to be untenable.

After researching several alternatives (including high value products such as truffles), and visiting New Zealand to observe “the best in the world”, they decided that the returns to dairy were the most attractive, although it involved changing the entire operation and entering an industry with which they had no experience. The key to this transition was access to reliable irrigation water supply which permitted year round intensive pasture production. The farm business is now converting another nearby farm to intensive dairy.

The business was aware of the positive reputation of Australian products in the wake of a tainted milk powder incident in China, but they saw their opportunity primarily as producing a reliable and competitively priced bulk commodity. Their milk is sold to an established multinational processor.

Fruit grower

The fruit grower interviewed runs an established apple and cherry business in the Tamar Valley in Northern Tasmania and was consolidating their business to reduce costs. The primary cost reduction strategy involved removing a number of trees and cultivating the remainder more intensely, and with less labour. Alternative layouts such as a “2D” system where fruit bearing branches were cultivated in frames and shorter trees that required less safety precautions (and costs) to harvest were also being considered.

The fruit grower claimed that an inability to compete with low cost producers such as those in South America meant that Tasmania did not export apples this year for the first time in 140 years. The firm did not anticipate this would change unless the currency depreciated and other costs fell, including freight and labour. Prominent among these costs was the necessary freight leg to Melbourne before export.

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The firm had previously investigated and exported to Asian markets. They had exported Fuji apples to Taiwan until Taiwanese authorities impounded a shipment after detecting aphids. This led to a large financial loss and convinced the firm that continued exports to Taiwan were too large a financial risk.

Dairy Processor

North West Tasmania is highly suitable for dairy production because of its high rainfall and sandy soils. Tasmanian Dairy Products has recently built and begun operating its first processing facility in Smithton in North West Tasmania. The facility processes milk from the region into milk powder for export to markets in Asia and the Middle East. The operators are also hoping to export to the expanding Indian market.

To minimise the transport costs of raw milk, which is heavy and perishable, before it is processed into lighter and less perishable milk powder, it is natural to locate processing facilities within dairy regions. In this case, this was complicated as the nearest natural gas pipeline (energy is required to dry the milk) did not reach the region. After considering various options, it was decided to truck liquid natural gas from the end of the pipeline, rather than to either extend the existing pipeline or transport the raw milk further. Tradeoffs of this type highlight the importance of ensuring that infrastructure access and pricing regulations are efficient.

The dairy processing firm was initially established by a single investor and has now received active investment from Murray Goulburn Cooperative Co Ltd and investment from other firms with interests in food manufacturing who do not actively participate in management.

Tasmanian Feedlot Company

The Tasmanian Feedlot is located in Powranna in the Northern Midlands of Tasmania and began producing beef for the Japanese market in 1972. The company began as a joint venture between the Japanese firm Jusco and local producers following Jusco’s desire for quality, but competitively priced beef for their own stores.

The Feedlot’s beef is marketed in Japan as Tasmanian Beef and is distinguished as a “premium economy” product that competes with domestic Japanese beef rather than American beef or “Aussiebeef” from the mainland. This became apparent when findings of BSE in the United States caused the withdrawal of American beef from the Japanese market. This had no appreciable effect on the demand for Tasmanian beef; yet a previous scare in Japanese domestic production has resulted in an increase in demand. Despite competing in the “high end” of the market, the feedlot considered the Tasmanian product to be “premium economy”, whose competitiveness was reliant on a lower price than Japanese beef.

Although vertically integrated with a retail company, the cattle from the facility are slaughtered and processed into chilled primal cuts and frozen offcuts by Tasmanian facilities owned by other businesses.

Tasmanian Irrigation

Tasmanian Irrigation is overseeing an expansion of irrigation schemes in Tasmania funded in part by private capital. As of April 2013 the schemes operating, under construction or planned have a total annual capacity of 74GL and expect to attract $90 million of private capital. More detail is provided in the next section of this appendix (Table B0 and Map B0).

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After Tasmanian Irrigation conducts a feasibility study to assess whether a given scheme is likely to attract investors and be environmentally sustainable, they sell water entitlements under binding contracts. Only when sufficient water entitlements to support the project have been sold does construction on the scheme begin. Priority is given to landholders, but Tasmanian Irrigation is also prepared to sell to other investors if needed to reach the required sales threshold.

Before a water user is permitted to buy water, they must prepare a water use plan to ensure that their intended water use does not cause environmental problems such as runoff or salinity. It is intended that this and other measures, along with reliable Tasmanian rainfall, will help prevent the kind of problems experienced in the Murray Darling Basin. Intended uses have included food uses such as irrigated dairy and horticulture alongside non-food uses such as pyrethrum and poppies.

The irrigation expansion is also supported by the Water Infrastructure Fund, to which the Australian and Tasmanian Governments have contributed $140 million and $80 million, respectively.

Tasmania’s irrigation projectsTable B0 Recently completed, existing and planned irrigation projects in Tasmania

Project Status a Volume bIrrigable area

Start year c

ML haCaveside Dairy Plains Operational 4 570 na naCoal River (Stage 1) Operational 2 605 na naCressy Longford Operational Private na 1974Great Forester Operational 1 980 1 800 2011Hagley Operational na na 2007Meander Valley Operational 36 000 na 2007Quamby Osmaston Operational 2 850 na 2010Rubicon Operational 5 685 na 2012Sassafras Wesley Vale Operational 5 460 10 650 2011South East (Stage 2) Operational 1 975 na naWhitemore Operational 5 500 12 000 2011Winnaleah Operational 6 924 4 500 1987South East Expansion (Stage 3) Water Sales 3 000 10 948 2015Kindred North Motton Construction 2 500 8 483 2013Lower South Esk Construction 5 298 15 421 2013Midlands Construction 38 500 55 484 2015Upper Ringarooma Tendering 5 700 10 177 2015Dial Blythe Feasibility 2 500 8 630 naScottsdale Feasibility 8 600 17 366 post-2014Southern Highlands Feasibility 6 500 8 000 naCircular Head Pre-feasibility c. 20 000 na post-2013North Esk Pre-feasibility c. 3 000 na naSwan River Pre-feasibility na na na

Note: a After a scheme is deemed feasible, sufficient water sales are required before constructed is commenced. b Totals are not presented as some schemes overlap or are part of larger schemes. c Actual or expected year of commencement. na not available.

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Source: Tasmanian Irrigation; Australian Government Department of Sustainability, Environment, Water, Population and Communities

Map B0 Tasmanian irrigation schemes overview—November 2012

Data source: Tasmania Irrigation

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Appendix C Infrastructure and key food industries: ABS input-output dataTable C0 shows the value of intermediate and primary inputs used by industry (intermediate use) and in final use categories (domestic use or for export). Inputs include domestic and imported products. Primary inputs include wages and profit (see ABS 2012a for further information). Table C1 and Table C2 are derived from Table C0.

Table C0 Value of industry and final uses of intermediate inputs in Australia, 2008–09

Intermediate useAgriculture, Food & Food & Other

forestry beverage beverage industry Final use TotalSupply of inputs & fishing products services uses Domestic Exports supply

$b $b $b $b $b $b $bIntermediate inputsAgriculture, forestry and fishing 12.8 25.6 1.2 7.7 9.5 10.4 67.2Food and beverage products 1.5 12.4 11.5 14.6 39.8 19.6 99.4Food and beverage services 0.2 0.9 0.1 8.2 42.8 2.7 54.9Infrastructure Transport, postal and warehousing

Road 1.5 3.6 0.7 20.0 12.2 8.1 46.0Rail, pipeline and other transport

Rail transport 0.1 0.1 0.0 3.1 2.6 6.0 11.9Water, pipeline & other transport 0.0 0.1 0.0 3.9 1.8 1.6 7.4Total 0.1 0.2 0.0 7.0 4.4 7.7 19.3

Air, transport, postal and storage servicesAir and space transport 0.1 0.1 0.0 5.8 np np 27.8Transport, postal, storage services 1.4 1.4 0.3 37.0 np np 55.2Total 1.5 1.5 0.4 42.8 22.7 14.1 83.0

Total 3.0 5.2 1.1 69.9 39.3 29.8 148.3Electricity, gas, water and waste services

Electricity and gas 0.3 0.5 0.8 27.0 9.3 0.1 37.9Water supply and waste services 0.6 0.2 0.2 7.7 7.0 0.0 15.7Total 1.0 0.7 1.0 34.7 16.3 0.1 53.7

Information media and telecommunicationsTelecommunication services 0.1 0.2 0.4 19.2 13.3 0.7 34.0Other 0.1 0.1 1.4 29.3 17.1 1.6 49.7Total 0.2 0.4 1.8 48.6 30.4 2.3 83.7

Total infrastructure 4.2 6.3 3.9 153.1 86.0 32.1 285.6Other industries 21.1 17.1 11.0 942.6 992.4 215.2 2199.4Total intermediate inputs 39.8 62.3 27.6 1126.2 1173.3 277.3 2706.5Other input-output dataPrimary inputs 30.8 36.8 25.7 1357.3 71.6 7.2 1529.4Total uses 70.6 99.0 53.3 2483.5 1244.9 284.6 4235.9Gross value added at basic prices 29.0 22.9 21.8 1095.1 – – –Gross domestic product – – – – – – 1252.2

Note: Refers to 2008–09 input-output data. Supply of inputs includes domestic and imported products. np Not published. Food and beverage products include alcohol and tobacco. Total uses are intermediate inputs plus primary inputs. For example, $25.6 billion of domestic and imported agriculture, forestry and fishing products (first row of intermediate inputs) were inputs to the food and beverage products industry in 2008–09. Source: ABS, Australian National Accounts: Input-Output Tables – 2008–09, cat. no. 5209.0

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Table C1 Distribution of intermediate inputs, by Industry and final use activity, Australia, 2008–09

Intermediate use

Agriculture, Food & Food & Other

Supply of forestry beverage beverage industry Final use Total

intermediate inputs & fishing products services uses Domestic Exports supply

% % % % % % %

Agriculture, forestry and fishing 32.2 41.1 4.2 0.7 0.8 3.7 2.5

Food and beverage products 3.8 19.9 41.8 1.3 3.4 7.1 3.7

Food and beverage services 0.5 1.4 0.3 0.7 3.7 1.0 2.0

Infrastructure


Road 3.7 5.7 2.6 1.8 1.0 2.9 1.7

Rail, pipeline and other transport

Rail transport 0.2 0.2 0.0 0.3 0.2 2.2 0.4

Water, pipeline & other transport 0.0 0.1 0.1 0.3 0.2 0.6 0.3

Total 0.2 0.3 0.1 0.6 0.4 2.8 0.7

Air, transport, postal and storage services

Air and space transport 0.2 0.2 0.2 0.5 np np 1.0

Transport, postal, storage services 3.5 2.2 1.2 3.3 np np 2.0

Total 3.7 2.4 1.4 3.8 1.9 5.1 3.1

Total 7.6 8.4 4.1 6.2 3.3 10.7 5.5


Electricity and gas 0.8 0.8 2.7 2.4 0.8 0.0 1.4

Water supply and waste services 1.6 0.3 0.7 0.7 0.6 0.0 0.6

Total 2.4 1.1 3.5 3.1 1.4 0.0 2.0

Information media and telecommunications

Telecommunication services 0.3 0.4 1.5 1.7 1.1 0.2 1.3

Other 0.2 0.2 4.9 2.6 1.5 0.6 1.8

Total 0.5 0.6 6.4 4.3 2.6 0.8 3.1

Total infrastructure 10.6 10.1 14.0 13.6 7.3 11.6 10.6

Other industries 53.0 27.5 39.7 83.7 84.6 77.6 81.3

Total intermediate inputs 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Refers to 2008–09 input-output data. Supply of inputs includes domestic and imported products. np Not published. Food and beverage products include alcohol and tobacco. Source: Based on ABS, Australian National Accounts: Input-Output Tables – 2008–09, cat. no. 5209.0

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Table C2 Distribution of industry and final uses, by intermediate input, Australia, 2008–09

Intermediate use

Agriculture, Food & Food & Other

Supply of forestry beveragebeverag

e industry Final use Total

intermediate inputs & fishing products services uses Domestic Exports supply

% % % % % % %

Agriculture, forestry and fishing 19.1 38.1 1.7 11.5 14.2 15.5 100.0

Food and beverage products 1.5 12.4 11.6 14.7 40.1 19.7 100.0

Food and beverage services 0.3 1.6 0.1 14.9 78.0 5.0 100.0

Infrastructure


Road 3.2 7.8 1.5 43.5 26.4 17.6 100.0

Rail, pipeline and other transport

Rail transport 0.6 1.0 0.1 25.8 21.9 50.6 100.0

Water, pipeline & other transport 0.2 0.7 0.3 53.0 23.8 22.0 100.0

Total 0.5 0.9 0.2 36.2 22.6 39.6 100.0

Air, transport, postal and storage services

Air and space transport 0.2 0.4 0.2 21.0 np np 100.0

Transport, postal, storage services 2.5 2.5 0.6 67.1 np np 100.0

Total 1.8 1.8 0.4 51.6 27.4 16.9 100.0

Total 2.0 3.5 0.8 47.1 26.5 20.1 100.0


Electricity and gas 0.8 1.3 2.0 71.1 24.6 0.1 100.0

Water supply and waste services 4.1 1.1 1.3 49.0 44.4 0.1 100.0

Total 1.8 1.2 1.8 64.7 30.4 0.1 100.0

Information media and telecommunications

Telecommunication services 0.3 0.7 1.2 56.6 39.1 2.0 100.0

Other 0.2 0.3 2.7 59.1 34.5 3.2 100.0

Total 0.3 0.5 2.1 58.0 36.4 2.7 100.0

Total infrastructure 1.5 2.2 1.4 53.6 30.1 11.3 100.0

Other industries 1.0 0.8 0.5 42.9 45.1 9.8 100.0

Total intermediate inputs 1.5 2.3 1.0 41.6 43.3 10.2 100.0

Note: Refers to 2008–09 input-output data. Supply of inputs includes domestic and imported products. np Not published. Food and beverage products include alcohol and tobacco. Source: Based on ABS, Australian National Accounts: Input-Output Tables – 2008–09, cat. no. 5209.0

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Appendix D Production and exports of key food commodities to 2050, by jurisdictionIn this appendix, two sets of information are included.

Table D0 to Table D4 inclusive present the simple disaggregation of production and exports using the two approaches outlined in chapter 3. Substantial differences in the results produced by each approach indicate trends in the historic data.

Map D0 to Map D0 inclusive illustrate the SD level disaggregation of preliminary projected production and exports to 2050 alongside annual time series of historical production and exports from 1993–94 to 2010–11. These maps indicate existing growing regions. As assumed by the two simple approaches, increases in production to meet potential increases in global demand for Australian food exports would occur in the same regions as shown on the maps.

Table D0 Production and exports of wheat in 2050, average and trend approaches,by jurisdiction

JurisdictionAnnual

average 1993-94 to 2011-12 a

2050 estimates

Average approach Trend approach

Assumedshare Quantity Change


Mt % Mt % % Mt %

Production

New South Wales 5.7 27.4 7.6 34.2 29.8 8.3 46.0

Victoria 2.2 11.1 3.1 40.8 11.7 3.2 48.1

Queensland 1.2 5.9 1.6 39.3 6.1 1.7 45.6

South Australia 3.1 16.6 4.6 46.5 19.0 5.3 68.4

Western Australia 7.5 38.9 10.8 43.8 33.2 9.2 22.6

Australia 19.7 100.0 27.8 40.9 100.0 27.8 40.9

Exports

Australia 14.6 100.0 21.7 48.6 100.0 21.7 48.6

Note: Jurisdictions with less than 0.5% of national production have been excluded. a Export annual averages only extend to 2010-11Source: ABS, ABARES estimates

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Table D1 Production and exports of sugar in 2050, average and trend approaches,by jurisdiction

JurisdictionAnnual

average 1993-94 to 2010-11 a

2050 estimates




Mt % Mt % % Mt %

Production

New South Wales 0.3 7 0.5 66 7 0.6 81

Queensland 4.5 93 7.2 57 93 7.1 57

Western Australia 0.02 0 0.03 56 0 0.02 15

Australia 4.9 100 7.7 58 100 7.7 58

Exports

Australia 3.8 NA 6.3 67 NA 6.3 67

Note: Jurisdictions with less than 0.5% of national production have been excludeda Export annual averages include 2011-12 Source: ABS, ABARES estimates

Table D2 Production and exports of beef and veal in 2050, average and trend approaches,by jurisdiction

JurisdictionAnnual

average 1993-94 to

2010-11 a

2050 estimates




Mt % Mt % % Mt %

Production

New South Wales 0.4 22 1.0 119 17 0.8 82

Victoria 0.4 18 0.8 119 16 0.8 113

Queensland 0.9 44 2.1 138 50 2.3 162

South Australia 0.1 4 0.2 123 3 0.2 111


Tasmania 0.0 2 0.1 129 2 0.1 138

Northern Territory 0.1 4 0.2 109 3 0.1 65

Australia 2.0 100 4.6 128 100 4.6 128

Exports b

Australia 0.0 0 0.0 0 0 0.0 0

Note: Jurisdictions with less than 0.5% of national production have been excludeda Export annual averages include 2011-12 b Meat export figures are carcass equivalent Source: ABS, ABARES estimates

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Table D3 Production and exports of sheep meat in 2050, average and trend approaches,by jurisdiction

JurisdictionAnnual

average 1993-94 to

2010-11 a

2050 estimates




Mt % Mt % % Mt %

Production

New South Wales 0.1 24 0.2 53 20 0.2 28

Victoria 0.2 34 0.3 62 40 0.4 84

Queensland 0.0 3 0.0 21 2 0.0 -9

South Australia 0.1 15 0.2 61 18 0.2 83


Tasmania 0.0 2 0.0 66 2 0.0 90

Australia 0.6 100 1.0 55 100 1.0 55

Exports b

Australia 0.4 100 0.6 66 100 0.6 66

Note: Jurisdictions with less than 0.5% of national production have been excludeda Export annual averages include 2011-12 b Meat export figures are carcass equivalent Source: ABS, ABARES estimates

Table D4 Production and exports of dairy in 2050, average and trend approaches,by jurisdiction

JurisdictionAnnual

average 1993-94 to 2010-11 a

2050 estimates




GL % GL % % GL %

Production

New South Wales 1.4 13 2.2 54 12 1.9 37

Victoria 5.9 63 10.4 78 66 10.9 86

Queensland 0.9 7 1.2 38 6 1.0 16

South Australia 0.6 7 1.1 74 6 1.0 60


Tasmania 0.6 7 1.1 94 8 1.3 130

Australia 9.7 100 16.6 70 100 16.6 70

Exports

Australia 0.8 100 2.0 161 100 2.0 161

Note: Jurisdictions with less than 0.5% of national production have been excludeda Export annual averages include 2011-12Source: ABS, ABARES estimates

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Map D0 Wheat production, by ABS statistical division and exports, by state

Note: Historical wheat production from 1993–94 to 2010–11 and extrapolated wheat production in 2050 by ABS statistical division. Historical and extrapolated wheat exports by state and territory, with major wheat export ports. Source: ABARES, ABS

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Map D0 Sugar production by ABS statistical division and exports, by state

Note: Historical sugar production from 1993–94 to 2010–11 and extrapolated sugar production in 2050 by ABS statistical division. Source: ABARES, ABS

74


Map D0 Beef production, by statistical division and exports, by state

Note: Historical beef cattle turn-off from 1993–94 to 2010–11 and extrapolated production in 2050 by ABS statistical division. Historical and extrapolated beef and veal exports by state and territory, with major export ports. Exports include carcass weight equivalent of live beef cattle exports. Meat manufacturing employment which covers manufacturing of all meats – beef, sheep, goats and pigs overstates employment in beef and veal processing.Source: ABARES, ABS

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Map D0 Sheep meat production by ABS statistical division and exports, by state

Note: Historical sheep meat production from 1993–94 to 2010–11 and extrapolated production in 2050 by ABS statistical division. Historical and extrapolated sheep meat exports by state and territory, with major export ports. Exports include carcass weight equivalent of live sheep exports. Source: ABARES, ABS

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Map D0 Dairy production, by ABS statistical division and exports, by state

Note: Historical dairy production from 1993–94 to 2010–11 and extrapolated production in 2050 by ABS statistical division. Dairy production includes milk production expressed in (million) litres. Historical and extrapolated dairy exports by state and territory. Dairy exports include whole milk powder, skim milk powder, butter, cheese, casein and other dairy products expressed in kilotonnes. Butter includes ghee, dry butterfat, butter concentrate and butteroil, and dairy spreads, all expressed as butter.

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Appendix E Public-private partnership arrangementsCompetitive pressures may be increased in infrastructure businesses, and hence industry costs reduced, through various public-private partnership arrangements. Public-private partnerships refer to arrangements where there is a mix in the roles of the public and private sectors. There are several options that may be considered by governments to improve the efficiency of infrastructure industries.

Delegated management optionsDelegated management refers to the outsourcing of core activities whereby the government maintains ownership of the infrastructure assets but management responsibilities (including operations and maintenance) are delegated to private operators. Delegated management options may be distinguished according to whether the government pays the private firm a set fee (management contract) or the private firm pays the government a set fee (franchise). Delegated management options may also be referred to broadly as concessions, although the term concession is also used to refer to a specific type of franchise.

Management contract

Under a management contract, the owner of the infrastructure assets delegates the responsibility for operations and maintenance to a private firm for a limited period (Dosi and Easter 2003; Svendsen et al. 2003). The owner pays the private firm a set fee for providing these services, and the standards of service quality and maintenance that must be achieved are specified in the contract. An important feature of the management contract is that the private firm does not bear any of the commercial risk associated with the activity, including system operation and revenue collection.

Private firms compete to be awarded the management contract at which time there is a single service provider for the duration of the contract.

Franchise

There are two main types of franchise—the operating concession and the concession. Under a franchise arrangement, the owner of the infrastructure assets delegates management responsibilities (including operations and maintenance) for a set period. Unlike the management contract, the private firm pays the owner a set fee for the use of the facilities. The private firm bears the commercial risks of service provision and revenue collection (OECD 2004; Dosi and Easter 2003; Svendsen et al. 2003).

A franchise arrangement may also include additional obligations to invest in upgrading the infrastructure with private financing (Svendsen et al. 2003; Bakker 2003). When the owner maintains responsibility for capital investment, the arrangement may be referred to as an operating concession (or ‘affirmage’). When the private firm is responsible for the financing and risks of investment in infrastructure, the arrangement may be referred to as a concession.

Other public-private partnership arrangementsSeveral other public-private partnership options have emerged, particularly since the 1980s when governments became increasingly concerned about reducing public sector debt levels. A

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major focus in these options is to undertake infrastructure projects with private sector financing.

The key objective in most public-private partnership arrangements has been to ensure that infrastructure projects are completed with private sector financing and ownership control for a period of time (Malone 2005). These public-private partnerships typically include government support through contributions such as land, and capital and operating costs may be paid for by either a government payment stream or user charges, or some combination of both.

Infrastructure projects under public-private partnership arrangements generally involve high capital costs, long contract periods and risk sharing between the public and private sectors. Public-private partnership arrangements are named to reflect private sector responsibilities and, as given in Malone (2005), include the following:

DBFO (Design, Build, Finance, Operate) or DBO (Design, Build, Operate)—the government purchases the facility from the developer for a price that is agreed to prior to (or immediately after) commissioning, and the government takes all ownership risks from that time.

BOT (Build, Operate, Transfer)—the government owns the facility that is constructed, financed, operated and maintained by the private sector party who receives a fee for the service from the users (similar to a concession, but applies to greenfield projects).

BOOT (Build, Own, Operate, Transfer)—the service provider returns the facility to the government at the end of a specified period.

BOM (Build, Own, Maintain)—the government leases the facility from a private owner (for example, buildings owned in the private sector may be leased for use by the public sector).

BOO (Build, Own, Operate)—the service provider maintains ownership of the facility in perpetuity, while the government agrees to purchase the services for a fixed period.

An important issue regarding public-private partnership arrangements is the need for governments to assess carefully the potential costs and, in particular, the risk exposure of governments. The experience in various infrastructure markets is relevant in any economic assessment of this commercialisation option. For example, the development of public-private partnerships for the provision of road infrastructure in Australia is examined in Brown (2005).

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