plp flour miller's council strategic plan 13dec2005

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Commissioned by

Flour Millers’ Council of Victoria

In conjunction with Regional Development Victoria

Completed by Poh Len Pek

Strategic & International Marketing

Mobile: +61 417 007 118

Victorian Flour Milling Industry Sector Plan Sector Plan 2006-2010

BACKGROUND

Sector Plan Development and Methodology

There is the first Victorian Flour Milling Industry Sector Plan. The Plan was commissioned by the Flour Millers’ Council of Victoria in conjunction with the Department of Regional Development Victoria with a view of documenting the industry position to provide focus in promoting and implementing actions for industry development. It also aims to quantify the significance of the industry to the Victorian economy on production value, employment, exports, to present the challenges faced by the industry and to achieve outcomes via an action plan for implementation of strategies and objectives that would help future development of the industry. These outcomes align with the scope of the Victorian Government Next Generation Food Strategy, Strategy 2003 – Industry Planning - Industry Sector Action Plan Development. Ms Poh Len Pek of Strategic & International Marketing was commissioned to develop the Plan. The following methodology – involving 2 stages - was adopted. Stage 1 Review encompassed a comprehensive Strategic Review of the Victorian Flour Milling Industry. It involved an evaluation of immediate past and present industry position, strengths, weaknesses, opportunities, threats and issues and its prioritization by industry for attention or change. Fourteen consultations were made with industry players, customers and suppliers. Stage 2 Industry Sector Plan involved an analysis of the industry issues in the context of its environment and urgency of address. The prioritization of these strategic issues is on the basis of their capacity to reduce barriers to growth, i.e., strategic impediments or promote industry expansion. These priorities form the basis of address in the Industry Sector Plan, and are recommended to industry as the Sector Plan Objectives and Strategies. An issue encountered in developing the Sector Plan was the considerable lack of statistics and non commercially sensitive data on the Victorian industry as industry concentration is very high i.e., only 3 Victorian players and a need for observance of the Trade Practices Act which posed a challenge in articulating industry position. It is strongly recommended that the industry generates and collects salient data to help direct ongoing update and future development of the Sector Plan. Poh Len Pek of Strategic & International Marketing wishes to thank all participants who have freely provided their time, views and invaluable information which has facilitated the completion of the Sector Plan.

©Poh Len Pek, Strategic International Marketing Consultant 2


Flour Millers Council of Victoria

“Creating Value: The Essential Link Grain to Food “

The Victorian Mill Owners Association was formed in 1895 and changed its name to The Flour Millers’ Council of Victoria (FMCV) in 1974. The Council has a long history of being a strong & influential voice within the Victorian milling & grains industry. It is affiliated with the national body, The Flour Millers’ Council of Australia (FMCA). The Victorian Flour Milling Industry is an essential link in the value chain in the conversion of raw grains - primarily wheat - into technically specified flours that enables its customers in the cereals food manufacturing sector to manufacture a vast variety of consumer foods. Its challenge within the grains value chain is recognition of its value creation role in linking milled flour to an array of consumer cereal products like bread, biscuits, cakes, etc. The Objectives of FMCV are as follows: • To be the peak employer association representing the flour milling industry in

Victoria.

• To promote the interests of flour mill Members in Victoria both individually and collectively in all matters pertaining to the flour milling industry.

• To provide a conduit for communication between the industry and governments, statutory authorities and other relevant organisations.

• To determine the views of flour millers on matters affecting the industry and to communicate these views to governments, statutory authorities and other organisations.

• To provide forums for members to meet and discuss issues relevant to the industry.

The industry is expert in defining wheat quality needs and actively promotes domestic wheat quality needs to wheat breeders and milling variety preferences to growers. It procures wheat directly from bulk handlers and growers and need supplies throughout the year. It segregates wheat carefully at mill silos for blending into specified flours that are customized to its various customer demands in consistency of processing performance and cereal product attributes desired by the consumer. The FMCV Wheat Committee maintains active involvement in all wheat supply matters, especially in defining Wheat Quality Requirements and Preferred Wheat Varieties that meet miller’s requirements and communicates them regularly to breeders, growers and other participants in the grains supply chain.

Member Companies

Weston Milling (North Melbourne)

Allied Mills (Kensington &

Ballarat)

Laucke Flour Mills

(Bridgewater)



EXECUTIVE SUMMARY

The Victorian Flour Milling Industry Vision is to seek potential for growth beyond that attributable to growth in the Australian population. A fundamental issue for the industry is one of a mature industry that is contracting in size and export volume with no growth impetus from its domestic Victorian or national markets. It operates in a changing subsidized global grains industry environment and is uncompetitive in international markets which could provide a key to sustainable growth. Core strategic issues revolve around its mandatory raw material, wheat, and wheat price which makes up to 70% of flour production cost. Domestic wheat pricing is driven by international wheat price dynamics via the Australian Wheat Board Pool price. Opportunities exist to grow niche local markets like organics and develop more products utilizing other grains but these also need to extend to international markets as local markets are not large enough to sustain growth. Much of the industry core competency is developed from experience. With rationalisation intensifying over recent years, much technical and management experience and understanding of important linkages in wheat procurement and milling to customer demands has been lost. The industry needs to increase its profile in the grain value chain and as an industry attractive to potential employees. The 8 major strategic areas faced by the Victorian Flour Milling Industry are:

1. Wheat Availability All Year Round & Sustainable Access 2. Wheat Quality Meeting Milling & End User Requirements 3. Wheat Price 4. Research & Development 5. Location, Logistics and Infrastructure 6. Market Growth & Demand 7. Human Resource - Skills, Training and Development 8. Industry Profile

The Objectives and Strategies addressing these issues follow. It is recommended to members of the Victorian Flour Milling Council to adopt the strategies as their Action Plan and develop further details on timeframe, implementation mechanics and prioritization commensurate with prevailing industry circumstances.


Victorian Flour Milling Industry Sector Plan 2006-2010

OBJECTIVES & STRATEGIES

1.1 Wheat Availability All Year Round & Sustainable Access

O 1. Viable Victorian farm sector and grains infrastructure for sustainable local wheat supply. S 1. Work with Victorian Government’s Next Generation Food Strategy Initiatives to promote factors supporting a

viable farm sector and development of a globally competitive grains infrastructure. O 2. Secure access year round to suitable and available wheat.

S 2. Regularly communicate industry broad needs to industry forums and key organizations like AWB Ltd and Bulk Handlers etc.

S 3. Negotiate specific supply contracts, individual millers with marketers as part of strategic procurement options. S 4. Seek cooperation and support from Victorian Farmers’ Federation.

O 3. Priority access especially in times of wheat shortage. S 5. Gain formal acknowledgment from AWB Ltd for Victorian Millers’ priority access to wheat access in times of

supply duress (drought) [ Maintain watch on harvest conditions] S 6. Provide information to biofuel-ethanol debate on ramifications to milling industry.

1.2 Wheat Quality Meeting Milling & End User Requirements

O 4. Suitable wheat varieties available for existing and future milling needs S 7. Appraise varieties grown in Victoria against the industry collective quality needs to ascertain suitability in

meeting current and future demands. S 8. An (updated) Domestic Wheat Quality Objectives document disseminated and communicated in one on one

meetings with wheat breeders in individual breeding programs S 9. A Victorian Domestic Industry Preferred Varieties document disseminated to millers, grain growers (VFF

Grains Group Conference), AWB Ltd, Department of Primary Industries Annual Varieties Guide to Growers and interested parties.

S 10. At least an annual meeting with each breeding program to discuss industry need consider crossbreds under development and provide feedback to breeders on merit from industry.

S 11. Participate in annual AWB Ltd Breeders Forum and present on behalf of the domestic industry. S 12. Facilitate the traditional FMCV Wheat Study Tour to encourage supply chain communications to breeders,



cereal chemists and researchers, and build high level of co-operation for mutually beneficial outputs. S 13. Active participation in industry forums and working groups for appropriate representation of industry position.

O 5. Reliable and consistent Soft Wheat supply S 14. Appraise the change in Victorian soft wheat profile and all existing commercial and non-commercial breeding

programs against industry’s existing and future needs to ascertain gap and size of gap for action such as those for Rosella variety

S 15. Support soft wheat growing areas with natural advantage and critical mass such as Bordertown area SA and Murrumbidgee Irrigation area in southern NSW.

S 16. Support individual company development of direct relationships with growers for specific variety needs by maintaining general awareness of industry supply / demand balance.

S 17. Encourage breeders to identify and promote promising crossbreds from their programs which could suit niche requirements but would otherwise be culled due to concentration on high volume markets.

S 18. Work with AWB Ltd to negate factors which discourage growers from growing soft wheat, such as revisions in receival standards to those proposed by the domestic industry to ensure that marginal standard was not downgraded to feed payment scale.

O 6. Adequacy of wheat receival standards based on quality of wheat receivals at mills. S 19. Meet with AWB Ltd annually to discuss and negotiate proposed wheat receival standards for the subsequent

wheat harvest. S 20. Monitor wheat receival standards as reflected by testing of wheat received at the mills, and compare with

historic records to ascertain variation from past acceptance. S 21. Maintain consultative discussions with AWB Ltd to research apparent deterioration in wheat receival

standards despite minimal change in actual published standards, (a multiple of possible considerations have been identified, changes in harvest technology, golden grain rewards where some growers rather than aiming for premium are prepared to suffer discount and deliver lower standard, commercial flexibility of bulk handlers to work to bin average, effectively minimum acceptable standards).

1.3 Wheat Price

O 7. Wheat Price at least at lower end of Pool Price Parity for Export Flour S 22. Negotiate with AWB on concept of improving wheat access and price specifically to be more competitive in

export markets and in so doing have higher level of value adding manufacture retained in the local economy.



1.4 Research & Development

O 8. Research continues to deliver wheat quality improvements at comparative or better yields. S 23. Representation through Flour Millers Council (and individual company) in GRDC and other research

organization research programs. S 24. Regular dialogues with commercial breeders. (see previous). S 25. Increase research community’s understanding of quality characteristics and impact on processing within

chain, (see previous) O 9. Wheat Breeding Programs in place for replacement of potentially obsolete desirable old soft wheat varieties. E.g.

Rosella variety whose yields are becoming uncompetitive. S 26. Increase miller / breeder interface in the changed breeding research and commercialisation structure. S 27. Appraise adequacy of replacement potentials to varieties under threat like Rosella. S 28. Monitor commercialisation of new varieties in millers’ preferred procurement zones to ensure choice and

availability of quality varieties. O 10. New Product Development with Food Manufacturers

S 29. Foster industry cooperation with Victorian food manufacturing industry to identify specific new product opportunities.

S 30. Leverage into Victorian Governments Next Generation Food Strategy Initiatives in Regional Innovation Cluster Programs.

O 11. Efficient industry through chain S 31. Explore potential for a through chain project that assists in development of a new product, the developing

organic industry represents an opportunity for this. S 32. Investigate potential and mechanics for cooperation with the Organic Federation of Australia and AWB Ltd

who are developing this market. O 12. A New Industry Product for Export

S 33. Leverage into Victorian Government’s Exports Development and Promotion Initiatives to explore industry cooperation on development of a new product specific for industry exports

O 13. GM Technology S 34. Support development and science of GM technology to ensure international grains industry competitiveness S 35. Maintain a watch on legislation and market readiness for the technology.



1.5 Location, Logistics and Infrastructure

O 14. Suitable wheat for domestic millers in bulk segregations. S 36. Monitor varietal mix and segregation availability to meet domestic industry requirements so that concerns can

be raised with AWB and bulk handlers. S 37. Encourage growers in preferred procurement zones for the domestic industry to invest in adequate storage if

they want to engage in this supply line. S 38. Highlight industry’s quality needs for approved protectants and pesticide free requirements when negotiating

harvest treatment protocols with AWB Ltd annually. S 39. Maintain domestic industry voice in the general grains industry forum on concerns of lack of alternative

fumigant to phosphine for the industry. O 15. Consistency in bulk segregated wheat for specific purpose.

S 40. Monitor consistency levels and highlight outcomes to grain handlers, individual companies with contractual issues, flour millers council with issues of generic concern.

O 16. Strong direct relationships with growers who do not always respond to AWB premium varieties for specific variety needs, i.e., those in marginal Victorian growing areas where achieving higher protein to make into the hard grade is difficult. S 41. Develop a list of potential growers and investigate interest.

O 17. Competitive storage, handling and transportation costs S 42. Initiate a study comparing bulk handling and transport charges between Australian states to ascertain

competitiveness of a Victorian mill to elsewhere and current cost gaps to interstate mills

1.6 Market Growth & Demand

O 18. Gain strong support in development of niche products at an early stage S 43. Niche Products and Market Development. S 44. Active engagement in various grains industry CRC’s, CSIRO programs, GRDC New Products program etc. to

identify alternative and new market potential such as functional foods. S 45. A through-chain support for organic grains and for export, Extend support for export market development.

O 19. Development of a Victorian organic flour and flour manufactured products industry. S 46. Develop a Victorian industry position on organics and explore potential synergy with a national flour milling

industry approach.



S 47. Work with “The Victorian Directory of Organic Producers’, a Victorian Government’s Next Generation Food Strategy Initiative to address impediments to development of a Victorian organic industry.

S 48. Identify growers receptive to segregations for organics and specific wheat variety not conforming to AWB segregations.

S 49. Work with AWB’s existing registry of organic wheat growers S 50. Facilitate growers’ investment in storage facilities for organic wheat. S 51. Gain support from AWB in developing an organics through chain specific for Victorian cereals industry.

O 20. Increase Exports S 52. Support individual member pursuit of commercial export initiatives by lobbying AWB Ltd for improved price

basis for exports S 53. Support individual member pursuit of commercial export initiatives by exploring government initiatives to

encourage exports S 54. Encourage food manufacturers to export products to create demand for domestic flour sales

O 21. Increase use of AusAid opportunities to maximize Victorian industry’s milling capacity S 55. Lobby AusAID to increase aid shipments in form of flour and manufactured flour products rather than grains. S 56. Collaboration with AWB on wheat priced competitively such as at low end of Pool Price for flour aid

shipments. S 57. Collaborate with dairy and sugar industries in lobbying for flour/sugar/milk powder mix in Aid shipments.

1.7 Human Resource - Skills, Training and Development

O 22. Trained and skilled workforce for future. S 58. Investigate opportunities for development of cereal chemists through Universities, Bread Research Institute,

Grains Industry CRCs, Royal Australian Cereals Institute- Cereal Chemistry Short courses S 59. Assess relevancy of the NABIM distance learning course for Australian Millers and explore adaptation to

Australian industry conditions. S 60. Explore FMCA vocational training programs for mill employees. S 61. Maintain scholarship and work experience programs. S 62. Explore potential for an Industry Induction Program for new recruits into industry S 63. Consider Mentoring Programs aligning older millers with younger employees.

O 23. Talent retention S 64. Assess incentives such as Industry Apprenticeship Program, Industry Regional Cadetship programs,

Mentoring Programs and in conjunction with other sectors, e.g. Baking Sector.



1.8 Industry Profile

O 24. Attractive Victorian milling industry with career path into wider Victorian cereals food manufacturing sector. S 65. Create and promote a profile highlighting attractiveness of careers in the Victorian cereals industry within the

cereals sectors and to school leavers. [e.g. Develop and publish information brochure/project sheet profiling industry and career opportunities to students at senior, primary, late secondary and tertiary levels]

S 66. Assess collaborative partnerships with customer industry organizations (e.g. baking, stockfeed) on state or national level

O 25. Recognition of industry value add in value chain. S 67. Develop a strong profile and presence by increasing communications of the industry value add in the grains

value chain.



TABLE OF CONTENTS

VICTORIAN FLOUR MILLING INDUSTRY SECTOR PLAN..........................................................1 BACKGROUND ...............................................................................................................................2 1 EXECUTIVE SUMMARY ..........................................................................................................4 OBJECTIVES & STRATEGIES .......................................................................................................5

1.1 WHEAT AVAILABILITY ALL YEAR ROUND & SUSTAINABLE ACCESS .................................................. 5 1.2 WHEAT QUALITY MEETING MILLING & END USER REQUIREMENTS ................................................... 5 1.3 WHEAT PRICE .................................................................................................................................. 6 1.4 RESEARCH & DEVELOPMENT ............................................................................................................ 7 1.5 LOCATION, LOGISTICS AND INFRASTRUCTURE ................................................................................... 8 1.6 MARKET GROWTH & DEMAND ......................................................................................................... 8 1.7 HUMAN RESOURCE - SKILLS, TRAINING AND DEVELOPMENT ............................................................. 9 1.8 INDUSTRY PROFILE ......................................................................................................................... 10

TABLE OF CONTENTS ................................................................................................................ 11 2 INDUSTRY BACKGROUND ................................................................................................. 13

2.1 HISTORY ........................................................................................................................................ 13 2.1.1 Production and Mill Numbers ................................................................................................ 13 2.1.2 Mill Capacity ......................................................................................................................... 14 2.1.3 Mill Location ......................................................................................................................... 14 2.1.4 Exports History ...................................................................................................................... 15

2.2 PRODUCTION TODAY: 300,000 MT P.A. ........................................................................................... 16 2.3 TURNOVER: ~$150 MILLION (2004-05) ............................................................................................ 18

2.3.1 Exports and Imports ............................................................................................................... 19 2.4 PER CAPITA CONSUMPTION ............................................................................................................ 20 2.5 CUSTOMERS ................................................................................................................................... 21

2.5.1 Victorian Cereals Based Food Industry .................................................................................. 24 2.5.2 Bread..................................................................................................................................... 25 2.5.3 Cakes & Pastry ...................................................................................................................... 26 2.5.4 Biscuits .................................................................................................................................. 27 2.5.5 Animal Feed .......................................................................................................................... 29 2.5.6 Demand Drivers .................................................................................................................... 29

2.6 PLAYERS ........................................................................................................................................ 31 2.7 MILLING PROCESS & TECHNOLOGY ................................................................................................ 33

3 INDUSTRY FACTORS .......................................................................................................... 33 3.1 GLOBAL NATURE OF AUSTRALIAN WHEAT INDUSTRY ..................................................................... 34 3.2 VICTORIAN WHEAT PRODUCTION ................................................................................................... 35

3.2.1 Impact of Drought .................................................................................................................. 36 3.2.2 Wheat Yields .......................................................................................................................... 37 3.2.3 Victorian Wheat Areas & Varieties ......................................................................................... 37 3.2.4 Impact of Mill location ........................................................................................................... 39

©Poh Len Pek, Strategic International Marketing Consultant

11


3.3 WHEAT HANDLING, STORAGE AND TRANSPORTATION ..................................................................... 40 3.4 WHEAT VARIETY & QUALITY ......................................................................................................... 43

3.4.1 Wheat Variety Control Scheme & Classification ..................................................................... 44 3.4.2 Wheat Quality Standard ......................................................................................................... 44 3.4.3 Impact of Variety Segregation, Quality Standard and AWB Crop Shaping Program ................ 46 3.4.4 Soft Wheat Varieties ............................................................................................................... 46

3.5 AWB POOL PRICE .......................................................................................................................... 50 3.6 RESEARCH & DEVELOPMENT .......................................................................................................... 51 3.7 GENETIC MODIFICATION (GM) TECHNOLOGY ................................................................................. 54 3.8 REGULATIONS ................................................................................................................................ 55 3.9 HUMAN RESOURCE SKILLS, TRAINING AND DEVELOPMENT ............................................................. 55 3.10 SWOT ........................................................................................................................................... 57

4 THREATS .............................................................................................................................. 61 4.1 INDUSTRY STRUCTURE & MATURE MARKETS.................................................................................. 61 4.2 DROUGHT ...................................................................................................................................... 62 4.3 RATIONALISATION IN GRAINS SUPPLY CHAIN .................................................................................. 62 4.4 BIOFUEL–ETHANOL INDUSTRY........................................................................................................ 62 4.5 FLOUR AND MANUFACTURED FLOUR PRODUCTS IMPORTS ............................................................... 64

5 OPPORTUNITIES .................................................................................................................. 64 5.1 DIETARY & ETHNIC BREADS, NICHE PRODUCTS & USE WITH OTHER GRAINS (OATS, BARLEY) ......... 65 5.2 ORGANICS ...................................................................................................................................... 65 5.3 EXPORTS ........................................................................................................................................ 67 5.4 AUSAID FLOUR .............................................................................................................................. 68

6 INDUSTRY ISSUES ............................................................................................................... 68 7 STRATEGIC ISSUES ............................................................................................................ 72

7.1 WHEAT AVAILABILITY ALL YEAR ROUND & SUSTAINABLE ACCESS ................................................ 72 7.2 RESEARCH & DEVELOPMENT .......................................................................................................... 73 7.3 LOCATION, LOGISTICS AND INFRASTRUCTURE ................................................................................. 75 7.4 WHEAT PRICE ................................................................................................................................ 76 7.5 MARKET GROWTH & FOOD INDUSTRY DEMAND .............................................................................. 76 7.6 SKILLS & TRAINING........................................................................................................................ 77 7.7 INDUSTRY PROFILE ......................................................................................................................... 77

8 OBJECTIVES & STRATEGIES............................................................................................. 78 8.1 WHEAT AVAILABILITY ALL YEAR ROUND & SUSTAINABLE ACCESS ................................................ 78 8.2 WHEAT QUALITY FOR MILLING & END USER REQUIREMENTS .......................................................... 79 8.3 WHEAT PRICE ................................................................................................................................ 80 8.4 RESEARCH & DEVELOPMENT .......................................................................................................... 81 8.5 LOCATION, LOGISTICS AND INFRASTRUCTURE ................................................................................. 82 8.6 MARKET GROWTH & DEMAND ....................................................................................................... 83 8.7 HUMAN RESOURCE - SKILLS, TRAINING AND DEVELOPMENT ........................................................... 84 8.8 INDUSTRY PROFILE ......................................................................................................................... 85

9 IMPLEMENTATION ............................................................................................................... 86 10 APPENDIX ......................................................................................................................... 87

10.1 CONSULTATIONS ............................................................................................................................ 87 10.2 REFERENCES .................................................................................................................................. 87 10.3 CONSOLIDATED INDUSTRY FEEDBACK ON INDUSTRY ISSUES ............................................................ 89


12


2 INDUSTRY BACKGROUND

As this is the first Plan for the Victorian Flour Milling industry, considerable industry background information is presented as part of the Plan. This section covers production history of the Victorian industry, statistics on flour supply and demand, i.e., production volumes and values, customer industries, players, exports & imports and the national flour milling industry as context for comparison.

2.1 History

2.1.1 Production and Mill Numbers

Historically, the Victorian flour industry had been a flourishing industry in the nine decades from 1870s to the sixties with production attaining on average 400,000 MT in the sixties from a base of 105,000 MT in the 1870s and extensive mill rationalization from 156 mills in the 1870s to 30 mills in the sixties (refer Figure 1). This was followed by 2 decades of extensive contraction and consolidation in the seventies and eighties where production shrunk to an average 234,000 MT in the eighties and mill numbers reduced by 75% to five. Thereafter in the nineties, the remaining 5 mills operated by 5 players expanded strongly to an average 334,000 MT. Expansion continued into 2000 and 2001 where production grew by 4% and 6% respectively and peaked at a record 433 863 MT in 2001 (Refer Figure 3). FFiigguurree 11.. VViiccttoorriiaann FFlloouurr IInndduussttrryy LLiiffee CCyyccllee ffrroomm 11887700ss ttoo 11999900ss:: MMiillll

NNuummbbeerrss aanndd AAvveerraaggee PPrroodduuccttiioonn MMTT ffoorr eeaacchh DDeeccaaddee..

020406080

100120140160180

1870

s18

80s18

90s19

00s19

10s19

20s19

30s19

40s19

50s19

60s19

70s19

80s19

90s

-50,000100,000150,000200,000250,000300,000350,000400,000450,000

No of Mills

Avg Flour Production MT for the Decade

Source: FMCV: Victorian Year Books and Centenary Booklet 1895-1995


13


2.1.2 Mill Capacity

Information on the mill capacities of the national industry is presented since non-commercially sensitive data specific to Victorian mills is unavailable. From 1956 to the present day, 137 mills were progressively rationalized to the remaining 28 mills today (refer Table 1). Average mill capacity increased steadily over this period with larger mills of higher throughput (nearly 12 MT flour processing per hour in 2004) replacing smaller mills and achieving higher asset utilization (87% in 2004) compared to utilization of 55% in 1956 or low 80s% in the nineties and early part of this century. In the present day, a critical success factor for industry players in the 21st century is large mills with (globally competitive) high throughputs, economy of scale and high capacity utilization in a mature domestic market beset with low growth prospects and impacted by global competition. TTaabbllee 11.. AAuussttrraalliiaann FFlloouurr IInndduussttrryy:: MMiillll nnuummbbeerrss,, PPrroodduuccttiioonn aanndd CCaappaacciittiieess;;

11995566 ttoo 22000044.. Year

No. of Mills

Annual Flour Production

(MT)

Average Mill Capacity

(MT/Hour)

Capacity Utilisation

% 1956 137 1,400,000 2.46 55 1962 114 1,383,000 2.75 59 1966 96 1,300, 000 3.02 60 1971 85 1,336,000 3.22 65 1976 66 1,274,000 3.79 68 1981 44 1,167,000 4.82 73 1986 44 1,216,000 5.08 73 1991 39 1,385,000 6.12 78 1996 39 1,653,000 7.74 73 1999 35 1,965,000 8.95 84 2001 31 2,030,000 10.79 81 2002 30 2,077,000 11.38 82 2003 30 2,043,000 11.32 80 2004 28 2,135,000 11.75 87

Source: FMCA

2.1.3 Mill Location

Historically from 1948 to 1976, there were more regional than metropolitan mills in Victoria (as was in other states, refer Table 2). Regional mills in Victoria were more extensively rationalized than metropolitan mills with reduction by 80% from 27 to five mills compared to metropolitan mills down 60% from 11 to four, resulting in a total of nine mills remaining in Victoria in 1976. Similarly in other states, regional mills were reduced by two-thirds while metropolitan mills were halved. Over this period, Victoria’s national share in 1976 of the number of mills operating decreased from 24% to 14% in contrast to New South Wales where despite mill numbers being halved, its national share remained around 38%. Comparing the impact of rationalization on each state’s national share of mills indicated the Victorian industry as having had been the most affected.


14


Today, Victoria has 4 mills (2 regional and 2 metropolitan) accounting for 14% share of mills in operation in Australia. TTaabbllee 22.. CCoommppaarriissoonn iinn tthhee NNuummbbeerr ooff OOppeerraattiinngg RReeggiioonnaall aanndd MMeettrrooppoolliittaann

FFlloouurr MMiillllss iinn eeaacchh SSttaattee iinn AAuussttrraalliiaa.. State 1948 1956 1966 1976 2005 VIC Metropolitan 11 10 8 4 2 Regional 27 24 12 5 2 Total 38 34 20 9 4 % of Australian Mills 24% 25% 21% 13.5% 14% NSW Metropolitan 18 16 11 10 2 Regional 40 31 21 15 9 Total 58 47 32 25 11 % of Australian Mills 36% 34% 33% 38% 39% SA Metropolitan 8 4 4 4 2 Regional 23 19 13 9 3 Total 31 23 17 13 5 % of Australian Mills 19% 17% 18% 19.5% 18% QLD Metropolitan 3 3 3 3 2 Regional 7 8 8 8 1 Total 10 11 11 11 3 % of Australian Mills 6% 8% 11.5% 16.5% 11% WA Metropolitan 10 7 6 3 2 Regional 10 12 5 2 2 Total 20 19 11 5 4 % of Australian Mills 13% 14% 11.5% 7.5% 14% TAS Metropolitan 1 1 2 1 1 Regional 2 2 3 2 - Total 3 3 5 3 1 % of Australian Mills 2% 2% 5% 5% 4% AUSTRALIA

Total 160 137 96 66 28

Source: FMCA

2.1.4 Exports History

Historically, growth in the 1st half of the 20th century had been fuelled by strong export growth which accounted for up to 57% of production in the 1930s and 1940s, but declined rapidly through the fifties and sixties and more so in the seventies to 12% of production in line with extensive mill rationalization over the same period. Thereafter exports continued to decline in the eighties to 12,000 MT or 5% of production with only 5 mills remaining. Beyond the eighties, no further data on Victorian exports were available.


15


FFiigguurree 22.. VViiccttoorriiaann FFlloouurr PPrroodduuccttiioonn,, EExxppoorrtt VVoolluummeess aanndd PPeerrcceennttaaggee ooff PPrroodduuccttiioonn aass EExxppoorrttss iinn tthhee 11990000ss ttoo 11998800ss..

-50,000

100,000150,000200,000250,000300,000350,000400,000450,000

1900

s19

10s

1920

s19

30s

1940

s19

50s

1960

s19

70s

1980

s

Average MT for decade Victorian

Production

VictorianExports

57%

39%

12%5%

49%57%

Source: FMCV

2.2 Production Today: 300,000 MT p.a.

While the industry had previously expanded strongly in the nineties and up to 2001 where production had peaked at a record 433 863 MT (Refer Figure 3), the Victorian industry thereafter contracted by 29% in the past 3 years to produce 306,296 MT in 2004. This represents a wheat utilization of 375,000 MT, which is 18% of the total Victorian wheat crop. FFiigguurree 33.. AAuussttrraalliiaa aanndd VViiccttoorriiaa FFlloouurr PPrroodduuccttiioonn:: 11999955--22000044

1,545,037

1,681,763

1,710,506

1,751,752

1,790,727

1,836,024

1,871,717

1,881,429

1,951,8302004

2003

2002

2001

2000

1999

1998

1997

1996

19951,482,318

345,600

342,805

367,154

390,774

391,305

409,701

433,863

393,701

336,653

306,296

Tonnes

VictoriaAustralia

Source: FMCV


16


In the eighties and nineties, the Victorian industry had grown by 2% on average annually, in line with national growth in the eighties but below the 3% average in the nineties. In the last 3 years production had contracted by an average 7% annually while the national flour milling industry grew on average 2% per annum (refer Figures 4 & 5). FFiigguurree 44.. PPeerrcceennttaaggee YYeeaarr oonn YYeeaarr CChhaannggee iinn VViiccttoorriiaann FFlloouurr PPrroodduuccttiioonn ffrroomm

11997777 ttoo 22000044..

-20%

-15%

-10%

-5%

0%

5%

10%

1978 1982 1986 1990 1994 1998 2002

% Year on Year Change in Victorian Flour Production between 1977 to 2004

Trendline

Source: FMCV FFiigguurree 55.. CCoommppaarriissoonn bbeettwweeeenn PPeerrcceennttaaggee YYeeaarr oonn YYeeaarr CChhaannggee iinn VViiccttoorriiaann

aanndd AAuussttrraalliiaann FFlloouurr PPrroodduuccttiioonn ffrroomm 11997777 ttoo 22000044..

-10%-8%

-6%-4%-2%

0%2%4%6%

8%10%

1978 1981 1984 1987 1990 1993 1996 1999 2002

AustraliaVictoria

Source: FMCV

Share of Australian Flour Production

Over the 3 decades in the seventies, eighties and nineties, Victorian flour production had been progressively losing share in the national industry where it had accounted for between 23-26% of national production (refer Figure 6). In the last 3 years, its national share declined rapidly and in 2004, with production at just over 300,000 MT,


17


the Victorian industry accounted for 16% of domestic flour production while national flour production expanded by 4% to 1,951,830 MT. FFiigguurree 66.. VViiccttoorriiaa FFlloouurr PPrroodduuccttiioonn aass aa ppeerrcceennttaaggee ooff TToottaall AAuussttrraalliiaann FFlloouurr

PPrroodduuccttiioonn ffrroomm 11997777 ttoo 22000044..

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Victorian Flour Production as % of Australia Flour Production

Australia Flour Production %

1977 2004

Trendline

Australian Flour Production

Source: FMCV The contraction in Victorian flour production in the last 3 years could be attributable to the exit and relocation of two major user businesses interstate, i.e., the closure of the Manildra Altona North industrial flour-starch processing plant and Arnott biscuit production facilities. In the former, approximately 100,000 MT per annum of industrial flour usage was transferred to the Manildra NSW plant supplied by its NSW flourmills. The Victorian wheat starch processing plant was the last industrial flour processing facility in Victoria and had been acquired by Manildra from George Weston Foods in 2000. The closure of two Arnott biscuit factories in Victoria, the last in 2002 of the Burwood plant, was part of a $100 million overhaul of its operations that involved expansion of its Sydney, Brisbane and Adelaide factories. Arnotts is owned by its US Parent, Campbell Soups and nationally consumes 80-100,000 MT of flour per annum and no longer has any Victorian plants. The decision to retrench more than 600 workers was due to the uneconomical 50-year old Burwood facility and location.

2.3 Turnover: ~$150 million (2004-05)

Only revenues for two periods were available for the Victorian industry as shown in Table 3. In 1998-99, industry turnover was $180 million and grew to $231 million in 2001-02 when it achieved a record flour production of 433,683 MT (refer Figure 3). Revenue grew on average 7.4% per annum against a production annual average increase of 2.5%. During this time, Victorian flour industry represented 14-15% of the national industry turnover. Since 2001-02, production had decreased to about 300,000 MT in 2004-05. Assuming an average flour price of $500/MT, industry turnover in 2004-05 would now


18


be about $150 million, which represents 9% of national industry turnover of $1,644 million (refer Table 4). If assuming the Victorian flour milling industry could grow at the same projections for the national industry of 2.7% per annum over the next 5 years (Refer Table 4, IBIS World projections), it would be an industry of $170 million producing just less than 350,000 MT of flour by 2009-10.

TTaabbllee 33.. VViiccttoorriiaann FFlloouurr MMiilllliinngg IInndduussttrryy TTuurrnnoovveerr aanndd NNoo.. ooff EEmmppllooyyeeeess..

TTaabbllee 44.. AAuussttrraalliiaann FFlloouurr MMiilllliinngg IInndduussttrryy RReevveennuuee GGrroowwtthh

Year Turnover (millions)

% National Turnover

No. of Workers

% of National

Workforce 1998/9 $180.0 14% 340 16% 2001/02 $231.5 15% - -

Year Revenue Millions Growth

2004 $1,643.9 3.4% 2005 $1685.0 2.5% 2006 $1,732.2 2.8% 2007 $1,777.2 2.6% 2008 $1,825.2 2.7% 2009 $1,880.0 3.0%

Source: IBIS World Cereal Food & Baking Mix Manufacturing in Australia, 6 August 2005

Source: IBIS World in Business Outlook, February 2005, p.20

2.3.1 Exports and Imports

Data on Victorian flour exports beyond the nineties is unavailable due to the highly concentrated nature of the industry with only 3 players (4 Flour Mills). Data in the nineties indicated, exports volume had declined to 12,000 MT or 5% of production. Assuming a flour price of $500/MT, this would equate to about $6 million in exports. Based on Australian flour exports of $198 million in 1999-00, this would account for 3% of Australian flour exports (refer Table 5) or according to IBIS World estimates in 2002-03, 11% of Australian flour exports. This is a distant second to New South Wales, which leads in flour exports at 69% of industry exports (Table 6). Australian flour exports typically accounted for less than 15% of industry revenue in the past 5 years. For a country where 70-80% of wheat production is exported, it is interesting that flour exports are not significantly higher. The lack of exports by the Victorian industry will be discussed later. Flour imports into Australia are typically low and accounted for less than 4% of industry sales at $40+ to $60+ million over the past 5 years (refer Table 5). Most imports are sourced from NZ and are typically specialty flour products.


19


TTaabbllee 55.. AAuussttrraalliiaann FFlloouurr EExxppoorrttss aanndd IImmppoorrtt RReevveennuueess:: 11999999//0000--22000033//0044 1999/0 2000/1 2001/2 2002/3 2003/4 Revenue $Million 1373 1514 1607 1775 1873 Exports $ Million 198 205 222 197 180

Imports $ Million 43 44 46 67 55 Imports %share of domestic demand 3.53 3.28 3.22 4.10 3.14

Exports % share of revenue 14.4 13.6 13.8 11.1 9.6 Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151 30 September 2005 TTaabbllee 66.. AAuussttrraalliiaann FFlloouurr MMiillll EExxppoorrttss bbyy SSttaattee ooff OOrriiggiinn 22000022--0033 State Proportion of Total Industry Exports NSW 69 % VIC 11 % WA 10 % QLD 6 % SA 4 % TAS 0

Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151 30 September 2005

2.4 Per Capita Consumption

Australian per capita human consumption of wheaten flour declined over the 5 decades, from 91.6kg in the forties to just below 70 kg in 1998-99 (refer Table 7). Australian Bureau of Statistics data showed increase in per capita human consumption from the mid nineties by 1.7% in 1997-98 to 68.4 kg and by 1.9% to 69.7 kg in 1998-99 (Refer Apparent Consumption of Selected Foodstuffs, Australia, Preliminary (Cat. no. 4315.0)-November 1998). Flour Millers Council of Australia data based on that collected by the Australian Bureau of Statistics for flour produced in Australia confirms growth in human consumption per capita consumption of flour over the past decade. A major factor for change in this pattern is consumer preference in food, health, convenience, taste, innovative products, price etc. Based on a national population of 20.3 million, one kilogram per capita increase in flour consumption would represent 20,300 MT of flour. TTaabbllee 77.. PPeerr CCaappiittaa CCoonnssuummppttiioonn ooff WWhheeaatteenn FFlloouurr iinn AAuussttrraalliiaa Year Per Capita Consumption (Kilograms) 1948-49 91.6 1958-59 82.3 1968-69 77.4 1978-88 72.3 1998-99 69.7

Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151, 30 September 2005


20


2.5 Customers

Data on the specific end use of Victorian flour is unavailable. Information on the national usage is presented instead. The largest use for domestic flour is in bread manufacture, which accounted for 45% of total flour used nationally (refer Table 7). The next largest is industrial use, i.e., flour processing into starch, gluten and glucose and rice flour milling at 28% (550,000 MT). The third largest use for flour is in food manufacturing at 7% (136,628 MT), with packaged flour next at 6% followed by biscuits and pasta, each respectively accounting for 5% (97,592 MT) and usage in pastry products at 4% (~ 78,000 MT) TTaabbllee 77.. AAuussttrraalliiaann TToottaall FFlloouurr**** PPrroodduuccttiioonn UUssaaggee bbyy EEnndd PPrroodduucctt SSeeccttoorr

End product sector % share Industrial 28% Bread 45% Pastry Cooks 4% Biscuits 5% Pasta 5% Packed flour 6% Food Manufacturing 7%

Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151 30 September 2005 ** Includes rice flour and other grains. All the food manufacturing sectors which consume flour (other than industrial), i.e., the Cereal Food & Baking Mix, Bread, Cakes & Pastry and Biscuits industries are mature industries with growth lagging behind GDP growth in 2003-04 (refer Table 8) although pasta* and rice**, esp. fresh pasta are the two fastest growing segments. They also share the same characteristics of high Industry concentration except Cakes & Pastry, which is more fragmented and is medium in industry concentration. Regulatory dictates affect all flour milling customers with flour milling and the cakes & pastry segments expected to face rising regulatory imposts. Any regulatory issues faced by its customers will have repercussions on the flour milling industry.

*Pasta is made from durum wheat either as 100% or blended with wheaten flour. Wheat millers conduct milling of durum wheat. **Rice milling do not share the same equipment as wheat mills.


21


TTaabbllee 88.. DDoommeessttiicc MMaarrkkeett SShhaarree,, LLiiffee CCyyccllee,, GGrroowwtthh iinn 22000033//44,, IInndduussttrryy CCoonncceennttrraattiioonn,, LLeevveellss aanndd TTrreenndd ooff RReegguullaattiioonn ooff tthhee AAuussttrraalliiaann FFlloouurr,, BBrreeaadd,, CCaakkeess && PPaassttrryy,, BBiissccuuiittss aanndd CCeerreeaall FFoooodd && BBaakkiinngg MMiixx SSeeggmmeennttss..

Segments Domes

tic Market Share

Life Cycle

Growth 2003-04*

Industry Concentr

ation

Level of Regulat

ion

Trend of regulat-

ion

Flour - Mature - High Medium Bread 99% Mature 3.2% High Medium Steady Cakes & Pastry 99% Mature 3.4% Medium Light Biscuits 94% Mature 1% High Medium Steady Cereal Food & Baking Mix

- Mature - - Light Steady

represents an increasing trend represents a decreasing trend *Australia Average GDP Growth in 2003-04 is 3.5%

Source: IBIS World Industry Reports, Flour Mill Manufacturing in Australia C2151 30 September 2005. TTaabbllee 99.. EExxppoorrttss,, IImmppoorrttss,, TTaarriiffffss && GGlloobbaalliissaattiioonn TTrreennddss ooff AAuussttrraalliiaann FFlloouurr,,

BBrreeaadd,, CCaakkeess && PPaassttrryy,, BBiissccuuiittss aanndd CCeerreeaall FFoooodd && BBaakkiinngg MMiixx SSeeccttoorrss

Sector Export Level

Export Trend

Import Level

Import Trend

Import Tariff

Level of Global-isation

Global- isation Trend

Flour Medium Low 4.25% Medium Bread Low Steady Low Steady Medium Cakes & Pastry

Low Medium Medium Steady

Biscuits Medium Medium High Steady Cereal Food & Baking Mix

High Medium 4-5% High Steady

Source: IBIS World Industry Reports Among the 4 segments, the Cereal Food & Baking Mix segment is the most active in exports although exports have been contracting since 1999-00 (refer Table 9). NSW is the dominant exporting state accounting for 82% ($431 million) of exports in the segment in 1999-00. According to IBIS World, the Flour Milling and Biscuits segments are expected to increase exports while the Cereal Food & Baking Mix and Cakes & Pastry segments will experience a decline in exports. All segments face low levels of import competition although imports are expected to rise in the flour, biscuits and cereal food & baking mix segments. All the flour-milling customers experience the impact of globalization as evident by the foreign ownership of large and key players. The flour industry itself is expected to face increasing pressures from globalisation. The international trade of Australia’s flour and flour-based products are shown in Figure 7. Whilst the make-up of the “Flour Mill Products” are unclear in the ABARE report, it provides an indication of the trend occurring within the domestic flour and cereal based industries that showed a significant contraction in exports in the past 3 years (refer Figure 7).


22


FFiigguurree 77:: AAuussttrraalliiaann FFlloouurr MMiillll PPrroodduuccttss

EExxppoorrttss && IImmppoorrttss IInn 11999911--9922 ttoo 22000033--22000044 $$

FFiigguurree 88:: AAuussttrraalliiaann EExxcchhaannggee rraattee aaggaaiinnsstt UUSSDD DDoollllaarr

Exports Imports ABARE Commodities Australia's food industry: recent changes & challenges: R Delforce, A Dickson & J Hogan Product Code: 13169, June 2005

A major factor impacting on flour and flour based product exports is the Australian USD exchange rate. When exchange rate fell from 0.77 to 0.55 in the nineties (refer Figure 8), exports rose steadily. However when the Australian dollar strengthened against the greenback from 2000 onwards, exports had slowed, although industry consolidation had also partly contributed to the slowdown in exports.

Cereal Food & Baking Mix

In this segment, 4 major national players collectively hold 50-70% national market share and all are New South Wales based companies as follows. Cereal Food & Baking Mix Major Player

Turnover in Millions

Market Share in 2004 (IBISWorld)

Kellogg $492 (12 mths to Dec04) 20-25% Burns, Philp & Co $4,587 (12 mths to Juno5) 15-20% Australian Health & Nutrition Assoc. Ltd (Sanitarium)

$275 (12 mths to Jun05) 8-13%

Ricegrowers’ Coop Ltd $654 (12 mths to Apr05) 5-10% This segment is projected to grow on average 3% per annum to $3.07 Billion by 2008-09 (in 2003-04 dollars) according to IBISWorld, with pasta sales expected to increase faster than breakfast cereal sales.


23


2.5.1 Victorian Cereals Based Food Industry

The Victorian cereals based food industry is worth $1.66 billion (2001-02) and Victorian flour industry plays a vital input role into the sector as flour is its fundamental building block, (refer Table 10). Any factor impacting the Victorian flour-milling sector would also impact the Victorian cereals food industry sector. TTaabbllee 1100.. VViiccttoorriiaa CCeerreeaallss BBaasseedd FFoooodd IInndduussttrryy TTuurrnnoovveerr aanndd EEmmppllooyyeeeess ––

11999988--9999 aanndd 22000011--0022

VICTORIA Turnover (millions)

% National Turnover

No. of Employees

% National Workforce

1998/9 Flour milling $180 14% 340 16% Cereal Food & Baking Mix $623 30% 2332 40% Bread $300 23% 2184 40% Cake and pastry $369 34% 3014 32% Biscuits $288 30% 1630 35% Total Cereals based food industry $1,760 26% 9500 30% 2001/02 Flour Milling $231.5 15% - - Cereal Food & Baking Mix $745.8 26% - - Bread $401 n/a - - Cakes & Pastry $332 36% - - Biscuits $354 32% Total Cereals based food industry $1,663 - - -

Source: IBISWorld Cereal Food & Baking Mix Manufacturing in Australia, 6 August 2002 The cakes, pastry and biscuit sectors value add approximately three times flour industry revenue at $686 million (2001-02) and employ 9,500 employees or 30% of the national workforce within which the cake and pastry manufacturing sector is the largest employer of 3,014 workers. In the Victorian baking industry, flour is used in 2,356 establishments that manufacture bread, cakes, pastry and biscuits that are distributed as follows: • 54% Retail bakeries

• 13% Supermarket bakeries

• 13% Cakes & pastry outlets

• 12% Franchise bakeries

• 4% wholesale cake

• 3% wholesale bakery

• 1% franchise cakes

Source: The Australian Baking Industry – A Profile, Dept of Agriculture, Fisheries and Forestry, BRI Aust. Ltd, 2003 Pg


24


The Victorian cereals based food industry sector is mature and consumption of bread, cakes, pastry and biscuit – nationally – is at saturation point. The 2-3% p.a. growth in manufacturing is not sufficient to provide impetus to the Victorian flour milling industry.

2.5.2 Bread

Victorian bread industry turnover was about $401 million in 2001-02 (refer Table 10 and The Australian Baking Industry – A Profile, Dept of Agriculture, Fisheries and Forestry, BRI Aust. Ltd, 2003, pg 5). The industry is mature and operates in an intensely competitive market owing to low population growth and demand. Bread consumption nationally has been declining steadily over the last 6 decades (refer Table 11) although there was a revival in consumption in the 1990s following expansion of hot bread shops and chains such as Baker’s Delight and Brumby’s. TTaabbllee 1111.. AAppppaarreenntt CCoonnssuummppttiioonn ooff BBrreeaadd iinn AAuussttrraalliiaa.. Year Per Capita Consumption of

wheaten flour (Kilograms) Per Capita Consumption

of Bread (Kilograms) 1948-49 91.6 64.0 1958-59 82.3 69.1 1968-69 77.4 59.5 1978-88 72.3 47.7 1988-89 69.7 44.4 1998-99 n/a 53.4

Source: IBIS World Report C2161 Bread Manufacturing in Australia – 2 November 2005 Market share is keenly fought between hot bread chains, (600) independent hot bread shops, branded and in-store breads that exert downward pressure for lower flour prices. Trends towards supermarket private labels selling at 30-40% discount to branded breads also adds to the cost pushback to millers to lower flour prices and erode milling margin. It is believed that there is about 30% excess capacity in the national bread industry. The largest bakery customer outside of branded and in-store bakeries is Bakers’ Delight who holds 13% national bread market share and procures flour on a national contract. Presently, a non-Victorian miller holds its flour supply contract. Although the bread industry is highly fragmented, there are two large players with modern plant bakeries, both based in NSW: • George Weston Foods

• Burn Philp & Co. (acquired Goodman Fielder in June 2003).

Burns Philp commands 45% of the national bread market share and 54% share of the packaged bread market. Its Fresh Start joint venture with McDonalds Australia is contracted to supply buns and English muffins to McDonald stores. Since June 2003, Burns Philp has rationalized and closed 5 regional bakeries with another 3 earmarked for closure in the medium term.


25


In Victoria, there are 2 comparatively smaller players of note: • Mountain Bread & Food Pty Ltd (IBIS est. market share < 2%)

A family business based in Brunswick that specialises in the baking of mountain bread and distributed throughout Australia. • Country Life Bakery (IBIS est. market share < 0.5%)

A family business that has continuously been expanding since 1993 based in Dandenong that specialises in health, organic and dietary breads. Victoria has the second highest number (~26%) of bread establishments in Australia behind NSW (~33%, refer Table 12). TTaabbllee 1122:: DDiissttrriibbuuttiioonn ooff BBrreeaadd EEssttaabblliisshhmmeennttss iinn AAuussttrraalliiaa iinn 22000000 Region % of Australia NSW 32.7 VIC 25.6 QLD 20.4 SA 9.0 WA 5.8 TAS 4.0 NT 2.5 ACT 0.0 Source: IBIS Bread Manufacturing in Australia 2 November 2005. The national bread market is projected to increase in revenue by an average 3.3% to around $2.108 billion in 2008-09 with production forecast to increase an average 2.9% over the next 5 years. This compares with real GDP growth projections of 3.5% over the same period. It is assumed that the Victorian bread market will experience similar growth unless there is significant net population migration loss, which lowers demand.

2.5.3 Cakes & Pastry

The main products in this $332 million (2001-02) Victorian sector are cakes, pastries, donuts, meat pies, sweet/fruit pies, puddings, canned and frozen bakery products. Here manufacturers, franchises and supermarkets increasingly use pre-mixes instead of general purpose flour. The Victorian industry represents 36% of the national sector in 2001 (refer Table 10). The national sector is estimated to grow at an average 3% per annum to $1,258 Million (in 2003-04 dollars) by 2008-09 according to IBISWorld projections The 2 major Victorian corporate players in this sector are Simplot and Patties Foods (Refer Table 13.) Other major players are NSW based George Weston Foods, Burns Philp and Sara Lee, Balfours in South Australia and Pilsbury in Queensland.


26


TTaabbllee 1133.. MMaajjoorr CCoorrppoorraattee PPllaayyeerrss iinn tthhee AAuussttrraalliiaann CCaakkeess && PPaassttrryy SSeeccttoorr Major Player Market

Share Victorian Facility Interstate Facility

Simplot Australia P/L 15-20% Kensington Ermington, NSW

Labrador, Southport George Weston Foods 15-20%

Burns, Philp & Co 5-10% NSW Patties Foods P/L (Owned by six brothers)

5-10%

Bairnsdale (180 staff, $38 million sales in 2003-04) (Acquired Four & Twenty Pies from Simplot in Ju03)

Sara Lee Group (Aust) P/L 1-5%

Gosford, NSW (500 staff, ~$315 million sales in 2005)

Balfours P/L

South Australia. $63 million sales in 2000-01

Pilsbury

-

Brisbane –(acquired van den Bergh Continental Bakeries from Unilever in August 1999) Frozen unbaked into Food service industry

Source: IBIS Cereal Food and Baking Mix Manufacturing in Australia 10 August 2005 Postscript Note: Correction to IBIS data: Simplot has exited the cakes and pastry sector when it shut its Kensington pastry factory in July 2003 and sold the brands and equipment to Patties Bakery. Patties as a result increased its annual revenue to about $100 to $110 million with 45% retail pastry market share. It also holds 16% share in the pies market. Simplot also sold its Big Sister's plant at Ermington, in West Sydney in July 2002, to Fowlers Vacola, makers of the George & Simpson line of fruit cakes and puddings.

2.5.4 Biscuits

The Victorian Biscuits manufacturing sector was worth $332 million in 2001-02 (refer Table 9) but has contracted since following closure of Arnotts’ Victorian in 2002. In contrast the national biscuits sector revenue is projected to grow at an average 2.9% per annum to $1.446 Billion by 2008-09 (in 2003-04 dollars), which will lag behind real GDP growth projections of 3.5%. Flour is the most important input cost in biscuits manufacture and according to IBISWorld estimates, may constitute up to 46% of production cost with other raw material inputs. Any hike in flour and other raw material input price would thus adversely impact the biscuits industry. Up until the closure of two Arnott plants in Victoria, the last being Burwood in 2002, biscuit manufacturing in Australia was heavily concentrated in Victoria where it employed around 38% of the industry's workforce and accounted for ~31.5% of biscuit establishment (2001, refer Table 14). The industry is highly concentrated with Arnotts dominating at 60-64% market share


27


in 2004 (refer Table 15). Arnotts has no production facility in Victoria. The major remaining Victorian player is Kraft Foods who acquired Lanes Biscuits in 2002. TTaabbllee 1144:: LLooccaattiioonn ooff BBiissccuuiitt EEssttaabblliisshhmmeennttss aanndd DDiissttrriibbuuttiioonn ooff EEmmppllooyymmeenntt

iinn 22000011 Region % of Australia (2001) % Distribution of Employment VIC 31.5 38.2 NSW 30.1 19.7 QLD 17.8 29.7 WA 11.0 3.6 SA 6.8* 2.2 TAS 2.7* - ACT 0.0 0 NT 0.0 0 Source: IBIS Biscuit Manufacturing in Australia 10 August 2005 TTaabbllee 1155.. MMaajjoorr BBiissccuuiitt PPllaayyeerrss aanndd mmaarrkkeett sshhaarree iinn 11999944 aanndd 22000044..

Major Player in 1994 Major Player in 2004 Market

Share in 2004

Arnotts Arnotts Biscuits Holdings Pty Limited (no factory in Victoria, factories in Sydney, Brisbane and Adelaide)

60- 64 %

George Weston Foods George Weston Foods exit in 2003. Lanes Biscuits Kraft Foods (Australia) Limited;

Acquired Lanes Biscuits in 2002 6 – 8%

Players Acquired by Arnotts in 2002. Paradise Foods 14%

Source: IBIS Biscuit Manufacturing in Australia 10 August 2005 National biscuit exports were $63 million in 2001-02 (The Australian Baking Industry – A Profile, Dept of Agriculture, Fisheries and Forestry, BRI Aust. Ltd, 2003, pg 20) and grew to $85.4 million in 2003-04 where it accounted for about 7% of total industry turnover. Key export markets are New Zealand (over half of exports), Japan, the Pacific Islands and New Guinea. Queensland was the top biscuit exporting state (refer Table 16) and likely mostly attributable to Arnotts and Paradise Foods. Although Victoria has the highest number of biscuit establishments nationally, apart from Kraft, Sakata (rice based snacks) and Kez’s Kitchen with notable brands in retail outlets, most Victorian manufacturers are small and lack resources to develop exports. TTaabbllee 1166:: AAuussttrraalliiaann bbiissccuuiitt eexxppoorrttss bbyy ssttaattee ooff oorriiggiinn,, 22000022--0033

State % Share of industry exports QLD 30 NSW 24 SA 22 VIC 21 WA 3 NT 0


28

http://www.ibisworld.com.au/enterprise/detail.asp?enterprise_id=9959

http://www.ibisworld.com.au/enterprise/detail.asp?enterprise_id=4403


TAS 0 Source: IBIS Biscuit Manufacturing in Australia 10 August 2005 Globalisation has impacted strongly on the biscuits sector more than other baked goods with the value of imports increasing from $57.6 million nationally in 1997-98 to $83 million in 2001-02 (refer The Australian Baking Industry – A Profile, Dept of Agriculture, Fisheries and Forestry, BRI Aust. Ltd, 2003, pg 20).

2.5.5 Animal Feed

The milling of flour produces by-products such as bran and pollard (i.e. mill-mix) that are mostly sold to manufacturers of animal feed, of which there are 42 mills in Victoria producing about 2.34 Million MT feed annually. Mill-mix represents the 7th largest ingredient by volume in a feed formulation after wheat, barley, triticale, oats, lupin and peas at 3-4% of feed formulation in Victoria. This equates to about 75,000 MT of mill mix. The Victorian stockfeed industry is growing strongly at about 4-5% per annum driven by expansion in dairy herds in the Victorian dairy industry and would be able to absorb more mill-mix should the Victorian flour industry expand. A small volume of wheat germ and bran are sold into food processing for human consumption such as incorporation into breakfast cereals.

2.5.6 Demand Drivers

There are five key demand drivers for wheat flour. They are: 1) Baking and other food manufacturing activities Rises in demand for bread, cookies, pasta and other flour-based products has a positive effect on flour demand. 2) Consumer awareness of health and nutrition Growing awareness of food nutrition is influencing demand for flour and flour based products where their high fibre content is highlighted. 3) Lifestyle patterns With food increasingly prepared and consumed away from home and increasing trend in pre-packaged, take-away or restaurant meals, flourmills have shifted their orientation from household consumer markets to large-scale food manufacturers. 4) Population growth Domestic demand for flour products is a function of population size and growth a function of rising population. As Australia is expected to record low population growth, this will not increase domestic demand in a maturing market. 5) Changes in consumer tastes and preferences A model of the supply and demand of Wheat Products is provided in Figure 9.


29


FFiigguurree 99 SSuuppppllyy aanndd ((CCoonnssuummeerr DDrriivveenn)) DDeemmaanndd MMooddeell ooff WWhheeaatt PPrroodduuccttss

Flour Millers Council of Australia

ConsumerConsumer

Imports Domestic FoodManufacturer

Flour Miller

Research

Wheat Producer

Breeder

Wheat Quality

Objectives Group

Wheat Quality Requirements

Wheat Specification

(Variety)

Economic Result(Agronomic/Quality)

Flour Specification

Preference, Value, QualityDomestic FoodManufacturer

Flour Miller

ImportsImports


30


2.6 Players

The Victorian Flour Milling industry is highly concentrated with two multinational companies operating highly forward and backward integrated businesses and account for over 90% Victorian market share. They are: • Allied Mills a JV between Cargill (40%) & Grain Corp (60%)

• Weston Milling a subsidiary of George Weston Foods

Allied Mills operates from Kensington and Ballarat, Weston Milling from North Melbourne and a smaller independent miller, Laucke Flour Mills from Bridgewater Mill (formerly Water Wheel Flour Mills acquired by Laucke in June 2000).

Two NSW players: Manildra and Ben Furney Mills (Centurion); also move flour into Victoria.

The two companies and NSW based Manildra account for approximately 90% of the national flour industry output. Interestingly the Canadian flour milling industry with a similar population to Australia shares similar industry concentration of 4 players controlling 83% of industry revenue with major player, George Weston Foods, parent company of Weston Milling., being also the leader in bakery markets.

Other than the 2 Victorian mills, Allied Mills also operate 6 interstate mills while Weston Milling operates 5 other interstate mills in

addition to North Melbourne mill. Laucke Mills also operates a mill in Strathalbyn, South Australia additional to its Bridgewater mill (refer Table 17). Manildra, the key competitor to Victorian mills has 3 large mills all based in New South Wales. TTaabbllee 1177.. NNuummbbeerr ooff FFlloouurr MMiillllss ((iinnccll.. dduurruumm)) bbyy PPllaayyeerrss iinn eeaacchh SSttaattee-- 22000055 Company Victoria NSW QLD SA WA TAS Total Weston Milling 1 2 1 1 1 6 Manildra 0 3 0 0 0 0 3 Allied Mills 2 2 2 1 1 0 8 Laucke Mills 1 0 0 1 0 0 2 Independents 0 4 0 2 2 1 9 Total 4 11 3 5 4 1 28

Source: FMCA

Allied Mills had acquired the Goodman Fielder flour milling business in 2003. Its parent companies: GrainCorp, owns and operates 411 grain receival centres in south east Australia, and Cargill Australia whose parent company, Cargill Inc is an international marketer, processor and distributor of grains and operate in 60 countries with 20% of assets in grain storage, handling and transportation activities. Weston Milling is a subsidiary of George Weston Foods whose parent company George Weston, is a major UK food manufacturer and marketer with major businesses in Canada where it is dominant in flour milling and bakery markets.


31


The Victorian flour industry is estimated to represent 16% of national production and 9% of turnover in an industry that is worth $1.873 Billion (2003-04) and that had undergone significant consolidation in the past 5 years with mill establishment numbers fallen by a third since 1997 and a number of players (Bunge, Goodman, Newport Mills) having exited the industry (refer Table 18, 19). TTaabbllee 1188.. SShhaarree ooff VViiccttoorriiaann FFlloouurr MMiilllliinngg IInndduussttrryy TTuurrnnoovveerr aanndd NNoo.. ooff

EEmmppllooyyeeeess ttoo NNaattiioonnaall IInndduussttrryy..

Year

Australia Turnover (Millions)

Victoria Turnover (Millions)

% National Turnover

Victoria No. of

Workers % of National

Workforce 1998/9 $1,373

(1999-00) $180.0 14% 340 16% 2001/02 $1514 $231.5 15% - -

Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151 30 September 2005, IBISWorld Cereal Food & Baking Mix Manufacturing in Australia, 6 August 2002 TTaabbllee 1199.. AAuussttrraalliiaann FFlloouurr PPrroodduuccttiioonn 11999999//0000--22000033//0044 1999/0 2000/1 2001/2 2002/3 2003/4 Revenue $Million 1373 1514 1607 1775 1873 Domestic Demand $Million 1218 1353 1431 1645 1748 Industry Real Growth % 4.6 4.0 3.2 7.5 3.0 No. of establishments 45 38 37 36 35 No. of enterprises 45 40 40 39 34 No. of enterprises – real growth % -4.3 -15.6 -2.6 -2.7 -2.8

Employment 2340 3151 2300 2000 1970 Average revenue/employee $Million 0.67 0.52 0.74 0.91 0.95

Source: IBIS World Industry Report: Flour Mill Manufacturing in Australia C2151 30 September 2005 According to IBISWorld, the level of concentration for the industry is higher than average for the Food, Beverage and Tobacco Manufacturing Sector. The low unit value of most flour products means scale economies are necessary to minimise average production costs although this is less critical for higher value products targeted at niche markets. This requirement has driven rationalisation and resulted in fewer large-scale players. Since 1997/98, the national flour industry growth has not kept up with real GDP growth of 3.5%. Against this backdrop, the Victorian flour industry is mature and contracting. The trend towards higher levels of concentration in the flour milling industry is not unique and is common to most developed countries across the world. Industry rationalisation and concentration has been occurring since 1950s with a steady


32


reduction in the number of mills and firms operating. It has mainly been small mills that have left the industry with both metropolitan and country mills closed. The decline in the number of mills may be largely attributable to the fall in exports as technological developments, notably the trend to shorter milling techniques and improved transport facilities, have reduced the advantages of regional location.

2.7 Milling Process & Technology

The process of milling wheat into flour in practice is complex. The 3 components of wheat grain: the fibrous outer layers called bran, the starchy interior called the endosperm and the embryo or wheat germ; are separated by the milling process. The extraction rate is the amount of flour obtained from a given weight of wheat, expressed as a percentage. In Australia extraction rates for white flour, which is largely derived from the endosperm, are normally in the high 70s. Capital intensity is high with use of specialized equipment and labour is primarily in supervisory roles. Although the rate of change in fundamental milling processes is low, technological and automation improvements in individual milling components and introduction of electronics and computer programs have driven process sophistication and productivity trend towards larger computerized mills, of which a mill with a minimum 500 MT capacity per day is the norm for two-thirds of the milling capacity in USA today (refer Milling & Baking News 2 August 2005, p 7) and the largest flour mill has a milling capacity of 600-700 MT per day. Much of the industry structural change towards larger mills is attributed to advances in milling technology. Large R&D continues in these areas but undertaken by international milling engineering companies who supply the industry. As there were no significant greenfield mills built in Victoria in the past 2 decades – the last (near new) Greenfield mill: Kensington; was built 20 years ago - much of the mills’ efficiency gains have been on equipment design for process sophistication with a focus on flexibility in in-line mixing and blending of sugar, milk powders or fats for pre-mixes. As a consequence, it is implied that the Victorian industry lacks sufficient global competitive scale to remain sustainable in the international flour trade that is dominated by subsidized European flour. It would need to select growth avenues in higher value added products targeted at premium quality markets such as Japan or other increasingly sophisticated markets in Asia.

3 INDUSTRY FACTORS

The 7 major areas that impact on the Victorian Flour Milling Industry are as follows:

a) Wheat Availability b) Wheat Price c) Wheat Logistics and Infrastructure d) Wheat Quality and Variety e) Research & Development, Wheat Breeding f) Regulations g) Workforce Skills & Training

Background and context to these areas is provided in the following section.


33


3.1 Global Nature of Australian Wheat Industry

Australian wheat production over the past 20 years (1984-85 to 2003-04) has varied between 9 and 24.9 million MT per annum with an average 2% annual growth and annual 17.5 million MT. The recent 5 and 10 year average (including 2004-05) is 20.9 million MT per annum but drought in 2002-03 has adversely impacted the figure (Source; AWB Investor Fact Book 2004, p 68, also refer Figure 10). FFiigguurree 1100.. AAuussttrraalliiaann WWhheeaatt PPrroodduuccttiioonn:: LLaasstt 1100 yyeeaarrss 11999944--9955 ttoo 22000044--0055

((FFoorreeccaasstt))

Source: ABARE 2005 Australia is the most export oriented in international wheat trade, exporting on average 77% of production in the past decade (refer Table 20 despite being the 6th largest globally in production with 4% of global production (2002). Export is solely handled by a single desk seller, i.e., AWB Ltd. Australia ’s share of global wheat trade has risen more than 40% between the mid 1990s and 2004 and is now the 2nd largest wheat exporter with 15-18% of global market share, displacing Canada as 2nd largest. Area planted to wheat has grown on average 7% annually over the past decade paralleling the growth trend in world wheat production (refer Figure 11). International market forces determine AWB LTD critical success factors in wheat trade as the domestic wheat consumption market at 5 million MT is small by comparison. With Australian wheat production oriented to international trade, the “smaller” domestic wheat consumption industry is therefore exposed to global forces, both in pricing and availability. This raises important issues for the industry and will be detailed later.


34


TTaabbllee 2200.. WWoorrlldd’’ss TToopp 55 WWhheeaatt EExxppoorrtteerrss ((11999900--9922))

FFiigguurree 1111.. WWoorrlldd WWhheeaatt PPrroodduuccttiioonn,, CCoonnssuummppttiioonn aanndd SSttoocckkss ((MMiilllliioonn MMTT)) -- 1155 yyeeaarrss ttoo 22000055--0066 ((FFoorreeccaasstt))

Export MT (Million)

% of Annual Production

Share of Global Trade

USA 30+ m 50% 31% Australia 17-18 m 70-

80% 16%

Canada ? 66% 14% EU ? 25% ? Argentina ? - ? Source: AWB Investor Fact Book 2004, p 3, NAB Wheat Outlook Oct 2004.

Source: NAB Global Grain Outlook 2005

3.2 Victorian Wheat Production

Victorian wheat production has similarly grown steadily over the past 15 years from increasing acreage and yield improvements (refer Figures 12 & 13). Growth in area planted nationally has averaged 7% annually over the past decade; reference to Figure 11 suggests similar growth in Victoria. Victorian millers utilise ~18% of the Victorian wheat crop in 2004. FFiigguurree 1122.. VViiccttoorriiaann WWhheeaatt AAccrreeaaggee,, PPrroodduuccttiioonn aanndd TTrreennddss::11999900//11-- 22000055//66FF

0200400600800

1000120014001600

1990

-9191

-9292

-9393

-9494

-9595

-9696

-9797

-9898

-9999

-00

2000

-0101

-0202

-0303

-0404

-05

05-06

est.@

Aug05

'000 ha

05001000150020002500300035004000kt

Area '000 ha Production kt

Linear (Area '000 ha) Linear (Production kt)

Source: Abare 2005


35


FFiigguurree 1133.. VViiccttoorriiaann WWhheeaatt PPrroodduuccttiioonn aanndd YYiieellddss ::11999900//11-- 22000033//44

01000200030004000

1990

-9191

-9292

-9393

-9494

-9595

-9696

-9797

-9898

-9999

-00

2000

-0101

-0202

-0303

-04

Yield t/ha

0123

kt

SourSource: Abare 2005

3.2.1 Impact of Drought

The 2002-03 season was the worst drought experienced by all states with national crop size halved to 10.1 million compared to past 5 years’ average. Victorian production was also halved to below 1 million MT. This created a severe shortage in meeting local grain; milling and stockfeed industry demand in the eastern seaboard where demand is highest (refer Australian Government Wheat Export Authority, The Growers’ Report 2004). In this period of insufficient grains to meet export obligations and faced with intense stockfeed competition for limited grains, the Victorian flour milling industry had to work hard to keep its needs to the fore as wheat is a mandatory raw material that is not substitutable. To be viable wheat supply needs to be sourced locally, for example, it is uneconomical to transport wheat from WA into Victoria at $80 per MT freight penalty. The issue was alleviated with some 2001-02 carry over wheat stocks being made available from the AWB Pool and prioritised for local millers, albeit at a considerably higher price than attainable by AWB in export markets. Millers have no other recourse in recouping the higher costs other than passing higher flour prices to the Victorian baking industry.

The outcome of the 2002-03 drought has highlighted a critical need of the Victorian flour milling industry for guaranteed wheat availability and priority access to wheat irrespective of crop size or season, and availability year round to satisfy on-going baking industry demand.

Without guaranteed availability and priority access to local wheat, there will be no Victorian flour milling industry which would jeopardise the $870 million (2000-01) Victorian bread, cakes, pastry and biscuit industries where flour is their fundamental raw material.


36


3.2.2 Wheat Yields

Victorian wheat yields have been improving in the past 15 years (refer Figure 11& 12) but still are typically under 2.5 MT per hectare and below the average Australian annual increases of +2.5%, although Australian yield improvement over the 20 years to 1998-99 (refer Abare eReport 0.5.3 pg 8.) is comparatively better than USA (+0.6%), Canada (+1.5%) and EU (+2.3%) (refer Figure 14). Victorian yields below 2.5 MT per hectare also still lag behind EU at 5.24 MT per hectare (5 year average to 2002-03) and China at 4 MT per hectare (2005-06 forecast, refer Australian Grain Yearbook 2005, pg 5). Hence yield improvement remains a constant R&D theme in the Australian wheat breeding program given its considerable impact on farm income. Focus here however distracts from quality as generally better yield is at the expense of quality, which creates on-going tension in balancing R&D programs on increasing wheat quality. FFiigguurree 1144.. CCoommppaarriissoonn iinn AAuussttrraalliiaann,, UUSSAA aanndd CCaannaaddiiaann WWhheeaatt YYiieellddss ffrroomm

11996600--6611 ttoo 22000000--0011.. ((SSoouurrccee:: AAbbaarree eeRReeppoorrtt 00..55..33 ppgg 88))

3.2.3 Victorian Wheat Areas & Varieties

North-west Victoria is the centre of wheat production with the Mallee and Wimmera regions collectively accounting for nearly 85% of total Victorian production in 1996 (refer Table 21 & Figure 15).


37


TTaabbllee 2211.. AAvveerraaggee VViiccttoorriiaann WWhheeaatt PPrroodduuccttiioonn bbyy RReeggiioonn ((55 yyeeaarrss ttoo 11999955..))

FFiigguurree 1155.. AArreeaa ooff wwhheeaatt ggrroowwnn iinn VViiccttoorriiaa--HHeeccttaarreess bbyy SShhiirree ((11999966))

Region Wheat

Production MT

% of Victorian

Total Production

Mallee 760,000 44

Wimmera 690,000 40 Loddon Campaspe 173,000 10 Goulburn & Ovens & Murray 73,000 4

Rest of the state 33,000 2 TOTAL VICTORIA 1,729,000 100

Source: Growing Wheat, Margaret Hillman & Ian Smith, Bendigo, DPIV, 1996 Wheat grown in Victoria is generally Australian Standard White, Australian Hard Wheat, Australian General Purpose and Feed Wheat (refer Figures 16, 17 and 18). The change in profile of the varieties grown in Victoria is detailed later. The Mallee region is the major source of higher (≥11%+) protein hard wheat for the Victorian milling industry for bread use. Competition for this wheat from the local stockfeed industry is limited. Figure 16. Australian Standard White Growing Areas

Figure 17. Australian Hard Wheat Growing Areas

Figure 18. Australian General Purpose and Feed Wheat Growing Areas.

Source: AWB Website, Sept 2005


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3.2.4 Impact of Mill location

With key wheat areas located in North West Victoria, about 400-500 kilometers from the 4 mills: Weston Milling and Allied Mills in metropolitan Melbourne, Allied Mills in Ballarat and Laucke Mills in Bridgewater; proximity to efficient grain silos and handling infrastructure is a key logistics consideration within millers’ control to manage wheat procurement costs, additional to considerations on the right wheat quality for milling efficiency and end use requirements. The logistics trade offs considered by millers in procurement involve the following: • Proximity to wheat growing regions and storage silos

• Proximity to feed processors and consumers to offload by-products bran & offal (i.e. mill mix)

• Proximity to key end use customer markets egg plant bakeries & biscuit factories

• Back-load offsets

• Access to highly efficient logistics infrastructure geared to exports markets

Proximity to Wheat

The 2 regional mills in Ballarat and Bridgewater being in closer proximity to wheat growing regions than the metropolitan mills are better placed to meet their requirements from local catchments. However they are completely reliant on road transportation, which for cost efficiency, limit procurement by trucks within 300-400km radius of the mills.

Proximity to Market

In contrast, Allied Mills in Kensington and Weston Milling in North Melbourne while being further away from wheat growing areas and silos, are located closer to market, which partly off-set the higher costs of bringing wheat in from the countryside. However a downside of a city locale is that with increasing urbanisation, the mills have become enveloped by encroaching residential developments as industrial lands are converted to residential housing. Although there are no production noise, effluent or emission issues from the mills, the constant wheat transportation into and flour out of mills to market could eventually raise conflict with residential communities on noise pollution from on-going truck movements. It is envisaged that mills may have to relocate as early as the next decade when its neighbourhood is dominated by residential zones.

This raises issues of timing of re-location and whereabouts of a new mill that both major players would need to address in the medium to longer term.

A new mill would costs in excess of $100 million and with historical low margins deterring investments by new entrants or smaller players with limited capital; it is difficult to envisage likely scenarios as this is primarily a business strategy of the players. Of note is that there have been no significant greenfield mills built in Victoria over the last decade


39


with the last (near) greenfield mill built in Kensington in the late 80s. In contrast, Allied Mills has proposed building a new greenfield mill in Picton, NSW. Any impact this would have on Kensington and Ballarat mills in Victoria is unknown.

Proximity to Stockfeed Industry

A location in proximity to the growing Stockfeed Industry – in general regional locality - would be advantageous in transferring mill-mix in bulk for cost savings in packaging and transportation. However, as this only represents 20% of output the transport of flour to the market is a prime consideration.

3.3 Wheat Handling, Storage and Transportation

There are about 165 grain storage silos in Victoria - operated by 4 key players (GrainCorp (113 in 2002), AWB, ABA, Ausbulk) and a small number of independents such as growers, grower cooperatives, transport companies, Japanese trading houses, etc - serviced by a rail and road infrastructure as shown in Figure 19. FFiigguurree 1199.. GGrraaiinn ssttoorraaggee ssiilloo aanndd rraaiill iinnffrraassttrruuccttuurree iinn VViiccttoorriiaa ((22000022))

Source: Essential Services Commission: Review of Export Grain Handling Regulation - Final Report - 25 October 2002 - Map 3: VicGrain Catchment Area


40


In the past 5 years, deregulation and extensive rationalisation of the national grain storage, handling and transportation sectors have occurred but have yet to result in lower procurement costs according to Victorian millers. Deregulation has resulted in one dominant wheat storage and handling player in Victoria, i.e., Graincorp, who is also a key player in New South Wales and Queensland (refer Figure 17). Graincorp owns 60% of Allied Mills in a joint venture partnership with Cargill Australia, and is a publicly listed company (ASX, 1998) that merged with “Vicgrain”, the then Victorian Grain Elevators Board, in 2000. It purchased Allied Mills in 2002 in a 60:40 JV with Cargill and acquired Grainco Australia in 2003.Through its interest in Allied Mills, it is the largest national flour miller for human consumption with operations in all states with Victorian mills in Kensington and Ballarat. Deregulation of the rail sector in the eastern seaboard has similarly not benefited the Victorian flour milling industry. Infrastructure and work practice deficiencies means that the rail system cannot meet industry needs, and export demand moreover has precedence. Where access is available to rail freight, it is used in a limited way. The rail service in Victoria is dominated by one player, Pacific National (who acquired the then monopoly player Freight Australia in September 2004, refer Figure 20). FFiigguurree 2200 PPrriimmaarryy LLooggiissttiiccss PPrroovviiddeerrss bbyy SSttaattee ffrroomm 11998899 ttoo 22000044

Source: Directory of Linkages in the Australian Grains Industry at February 2004, Kronos Corp. Pty Ltd.


41


Impact of a Consolidating Grains Infrastructure

As further consolidation is anticipated within the grain handling infrastructure, it is envisaged that the cost advantage between large and smaller millers would widen as larger players have better capacity to balance the negotiating power of dominant infrastructure players on storage, handling and transportation requirements. Notwithstanding, all players would face the following challenges in the changing environment:

Smaller players will be increasingly reliant on direct relationships with grain growers to deliver at a competitive price which places the onus on growers to access an efficient and competitive grains handling and storage infrastructure to store & supply grain in meeting domestic flour miller requirements. As wheat farms in Victoria are smaller in scale compared to other states (other than Queensland, refer Table 21), there maybe potential avenues for smaller players to align with smaller growers for niche markets, although in an increasingly competitive environment and where larger farms are more profitable than smaller farms (refer Farm size & productivity, ABARE, S Hooper, P Martin, G Love & B Fisher September 2002 )

TTaabbllee 2222.. SSuummmmaarryy ooff ffaarrmm ssttaattiissttiiccss iinn tthhee WWhheeaatt--SShheeeepp ZZoonneess 22000011//0022

Average per farm NSW VIC QLD SA WA Number of farms 14,665 6,752 6,120 5,032 6,031 Area operated (ha) 1,595 869 4,263 1,727 2,680 Wheat area (ha) 171 138 83 325 660

Source ABARE 2003

As millers require comparatively smaller quantities, i.e. hundreds of MT for daily delivery compared to hundreds of thousands of MT moved for exports, it raises the challenge of getting the “smaller quantities” delivered regularly from a storage silo to mills at economical rates without incurring additional storage costs that add to procurement costs.

As the grains infrastructure efficiencies and scale are geared towards large exports volume (e.g. GrainCorp focusing on “Super Sites”, i.e. larger tonnages in silos), local millers are marginalised on their ability to access smaller parcels as required to maintain continuity of milling and supply to end users.

With more rationalisation anticipated on silo sites and location, the reduction in silo choice and location also limits availability of millers’ wheat supply options and potentially adds additional transportation and other cost penalties from operations conducted under duress and outside of programmed schedule.


42


Impact of Consolidation in Grains Logistics Providers

Road is the dominant mode of logistics for Victorian millers, and for most players it is the only mode of transportation of wheat into mills and outbound bulk and packaged flour to end-users. The volume of road freight for the Victorian millers is high with a constant need to move large quantities of wheat and flour in and out of mills. A complete reliance on road transportation subjects millers to the following issues which impacts on their operational efficiencies and thereby costs.

Rising fuel costs and fuel levy increases millers’ cost and impacts on millers’ already low margins.

Frequency of truck movements in and out of neighbouring residential areas for the 2 metropolitan mills not only pose a potential environmental threat, but is inefficient in truck turn around from congestion in city traffic.

The Federal Initiative of “Chain of Responsibility” will be implemented in Victoria by end 2005. How it would impact on wheat procurement is unknown, i.e., whether it would reduce availability of choice of freight providers and limit wheat procurement locality, whether independent growers be forced to align with “export “ aligned infrastructure and use “big” companies who can better afford to adequately train resources, etc.

It is evident that the Victorian Flour Milling Industry needs a viable farm sector to satisfy their mandatory raw material wheat, such that supply of quantity and quality is satisfied at reasonable price and an efficient infrastructure, which can service its logistical needs. There is concern that with on going rail transport deficiencies and a lack of deep harbour facility that the milling and some end use industries may relocate out of Victoria in the longer term, with direct impact on the milling industry.

3.4 Wheat Variety & Quality

Both wheat variety and quality attributes are inter-related and major determinants of milling efficiency and end use (bread, noodle, biscuits) quality requirements to meet consumer demand. Wheat quality encompasses the suitability of particular varieties grown in certain regions and environments for the manufacture of particular foods. Millers convert their knowledge of flour requirements for end-user needs into wheat quality specifications that are used to determine preferred varieties to procure. These quality specifications are also used to establish wheat breeder objectives.

Variety is a key factor within miller’s control to achieve best procurement value and reduce cost input. While variety is a key determinant of quality, different soil type and rainfall regime may affect quality.

Wheat yield and quality are outcomes determined by the genetic potential of the variety interacting with the environment. A variety may perform differently on a different soil type and rainfall regime, thereby creating variability in a variety quality and increasing procurement challenges. Thus, Victorian millers need access to a range of areas for varieties and ensure enough is grown in one area.


43


3.4.1 Wheat Variety Control Scheme & Classification

At least 5 important end-use characteristics – grain hardness, flour milling, dough processing, baking and noodle performance – vary by variety and region of production. As these cannot be easily measured, a Variety Control Scheme (VCS) was implemented by AWB to facilitate segregation and marketing against specific end use. While VCS is used for variety identification, it also acts as an incentive or disincentive to growers. Prior to planting each year, varieties by regions eligible for receivable for each class by region are published by AWB. Growers can elect to grow their choice varieties for delivery to customers other than AWB but if the varieties are to be delivered and accepted into an AWB silo for segregation, they must also meet AWB quality classification /standards and have 2 or more years of yield evaluation. There are currently about 20 specialty wheat segregations operated by AWB to meet its global customers requirements where varieties are categorised into four quality groups based on the Top 15 varieties by volume in each classification region. The four variety classifications are: Preferred varieties: Those with quality features which improve marketability Acceptable varieties Those that do not have great quality attributes Marginal varieties Those that exhibit less than ideal quality attributes. If an

older variety it would not likely achieve the same classification if released today.

Older Varieties Those that would probably not achieve the same classification if released today

3.4.2 Wheat Quality Standard

Wheat quality standards are set by AWB who also set quality segregations at harvest, although there are other segregations by other companies. The majority of the Victorian harvest segregations are: • Australian Hard 1 (APH, minimum protein

11.5%),

• Australian Premium White (APW, minimum protein 10.0%)

• Australian Standard White (ASW)

Special categories are: • Australian Noodle (protein range 9.5%-

11.5%)

• Australian Soft 1 (AS, maximum protein 9.5%), and

• Australian Feed.

Varieties not meeting the specifications of these segregations are received as Australian General Purpose. The high protein wheat sought by domestic

There are 10 classes of wheat according to AWB Quality Standards: Australian Premium White (APW) is the largest class of wheat produced in Victoria, is mainly exported and used in production of flat and pan style bread and noodles. Australian Premium White (APW) and Australian Hard (AH) wheats are the classes of wheat most used by domestic millers for breadmaking. Australian General Purpose (AGP) is used mainly in stockfeed while Durum Wheat is used in pasta production.


44


millers for traditional bread products come from the Mallee. Deliveries that meet the receival specification are segregated as Vic Hard. Elsewhere in Victoria, generally longer growing seasons give higher yields but also greater variability in wheat quality. Most of the Victorian wheat is segregated either as APW or ASW. Figure 21 below shows the different uses of wheat based on its protein content and their share in AWB exports trade.

FFiigguurree 2211.. UUssee ooff AAuussttrraalliiaann wwhheeaatt aaccccoorrddiinngg ttoo pprrootteeiinn ccoonntteenntt aanndd tthheeiirr sshhaarree iinn AAWWBB eexxppoorrttss ttrraaddee..

Source: Source: Grain Growers Association, What the World Wants from Our Wheat, July 2004, pg 13.

AWB Golden Rewards - Premium Choice Varieties

This is another initiative developed and implemented in consultation with wheat producers and industry agronomists by AWB in 2000-01 (now version III for 2005-6 season). It is a crop shaping program that sets a level of premium to reward growers for growing superior quality varieties - based on superior quality attributes and preferred status among end users of Australian wheat. This is to lift the national wheat crop quality profile by motivating farmers to grow the varieties to improve the


45


varietal mix within the regions such that the National Pool value is increased. When delivered to the AWB National Pool, Premium Choice Varieties are paid an additional premium over the Estimated Pool Return for their Pay Grade, either as Australian Prime Hard Plus (APHP) or Australian Hard Plus (AHP). These premiums vary between pools and regions based on the current mix of varieties grown and the agronomic performance of the selected varieties. In Victoria, only one Premium Choice Variety, Yitpi is highlighted in 2005 and 2006 seasons and attracts a $5/tonne premium under Australian Hard Plus Pay Grade. Yitpi currently comprises 30% of Victoria’s total receivals and 42% of Victoria’s hard-grained wheat receivals.

3.4.3 Impact of Variety Segregation, Quality Standard and AWB Crop Shaping Program

Victorian millers work within these quality segregations, standards and initiatives to procure their wheat requirements, and like other domestic millers can specify their preferred and acceptable varieties in the program and pay premiums for them. However with varieties increasingly geared towards exports requirements, there is a concern that varieties preferred by the domestic market may be marginalised because preferred export varieties may not suit the modern automated plant bakeries of the domestic bread industry. This is due to differences in bread making method, for example sponge and dough used in USA and many parts of Asia versus rapid dough methods in Australia. The dominance of one or several unsuitable varieties in a region in Victoria can totally eliminate that region from domestic markets. The Flour Millers Council of Australia, of which the Victorian Council is an affiliate, has somewhat mitigated the threat through consultation with AWB in ensuring local wheat varieties remain on the preferred premium list.

A critical issue emanating from the orientation of infrastructure towards pooling and bulk handling for economies of scale and cost minimisation is a limited capacity for millers to develop differentiation on the basis of process quality.

Millers also have an option to procure directly from growers for varieties that may not align with AWB varieties but are specific to their requirements. This requires millers to develop strong direct relationships with growers in their locality, particularly with growers who do not always respond to AWB premium varieties when the premiums are insufficient compared to better yielding varieties. This is especially in marginal growing areas in Victoria where achieving higher protein to make into the hard grade is difficult.

3.4.4 Soft Wheat Varieties

Victoria was traditionally the centre of soft wheat growing in Australia. Additionally, 91% of wheat received at Victorian silos was ASW in the 10 years from 1976 to 1986 (refer Table 23).


46


TTaabbllee 2233.. PPeerrcceennttaaggee ooff WWhheeaatt RReecceeiivvaallss bbyy CCllaassss:: 1100 yyeeaarr aavveerraaggee ((11997766--8866)) ffoorr eeaacchh SSoouutthheerrnn SSttaattee..

10 year average:1976-86

APH AH ASW AGP Victoria - - 90.7 - NSW 15.9 25.7 45.2 13.2 SA - 24.1 72.7 3.2 Source: Growing Wheat, Margaret Hillman & Ian Smith, Bendigo, DPIV, 1996

Significant change in Profile

Since then large changes have occurred to the profile (refer Table 24). Hard Wheat varieties constitute 14.5% of wheat receivals in the decade from 1989-1999 with the Mallee region establishing as a reliable supplier. In contrast, ASW varieties have decreased from 91% of receivals between 1976-9186 to 58.6% in 1989-99. Soft biscuit wheat has essentially disappeared from Victoria and is now mainly grown in South Australia and the NSW irrigation areas. A new class of wheat, Australian Premium White (APW), introduced in 1995-1996, initially comprised 29.4% of all Victorian silo receivals and has increased to 57.8% in 1998-99. TTaabbllee 2244.. PPeerrcceennttaaggee ooff WWhheeaatt RReecceeiivvaallss bbyy CCllaassss:: 1100 yyeeaarr aavveerraaggee ((11998899--9999))

ffoorr eeaacchh SSoouutthheerrnn SSttaattee..

10 year average:1989-99

APH AH ASW AGP APW

1998-99* Victoria - 14.5 58.6 10.6 57.8 NSW 16.1 25.6 41.7 7.1 24.1 SA - 16.6 51.9 14.1 56.1 QLD 51.8 25.5 14.0 3.9 18.0 WA - 5.0 73.8 10.2 29.4 AUSTRALIA 5.4 13.2 59.3 10.4 35.2 Australian Premium White Wheat, introduced in 1995-96, therefore not included in 10 season average Source: AWB Limited “ Business Statistics” Table 3: Percentage of Wheat Receivals by Class. With diminishing soft biscuit wheat varieties from Victoria, not surprisingly Victoria is now no longer the major centre of biscuits and cake manufacturing in Australia. To maintain availability of preferred varieties for specific end use, Victorian millers - in the past - cooperated to ensure on-going availability of the varieties. However cooperation has since dissolved with industry rationalisation as fewer players remain. This has raised a concern on how the industry will ensure on-going supply, reliability and consistency of soft biscuit and noodle wheat for its needs. More so when there is low interest from AWB to support soft wheat interests on the east coast that does not align with its export program, and who have over the past decade driven the


47


halving of certain ASW production towards varieties required by its export customers, mainly through establishment of the Australian Premium White Class. The divergence in soft wheat varieties requirements between local end use and AWB export customers’ requirement is a concern expressed by the industry, especially when downgraded soft wheat was classified as feed for payment purposes by AWB which deters further interest from growers to continue with the varieties. Recent changes in the breeding structure is also of concern since new players are seeking quick commercial returns to support their investment and as soft wheat varieties represent only 10% of wheat requirements they are not an immediate priority for breeders.

Rosella Variety

This variety has been singled out by industry as of particular concern. It is grown in small pockets throughout Victoria and chiefly in the irrigated flood plains of the Murray in Southern NSW. It is an old variety well known to Victorian millers for its excellent Japanese udon noodle making quality and its availability in Victoria was the basis of investment in a Japanese noodle factory in Ballarat by a Japanese manufacturer in the 1990s. The key concern on the variety is that its yields are becoming uncompetitive and there is no replacement breeding program in-place. Presently growers interest are retained by its higher price when segregrated specific for its use. Availability is diminishing and there are concerns on its potential obsolescence given in the AWB Ltd 2005 winter sowing guide to farmers supplying the “South” Silos (AWB Winter Wheat Sowing Guide 2005 pg 11), it had been classified as outclassed due to disease in Victoria but was reverted in the 2006 season guide. With soft noodle wheat preferentially concentrated in other states by AWB, such as Western Australia for Japanese udon noodles and northern New South Wales and Queensland for Chinese yellow noodles (refer Figure 22 & 23), Victorian millers are concern that Victorian soft wheat will become dominated by varieties for pastry purposes at the expense of noodle use. FFiigguurree 2222 AAuussttrraalliiaann NNooooddllee WWhheeaatt GGrroowwiinngg AArreeaass

AWB Udon Noodle Growing Areas AWB Chinese Noodle Growing Areas

Source: AWB website, Sept 2005)


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FFiigguurree 2233.. AAuussttrraalliiaann WWhheeaatt GGrraaddeess,, VVaarriieettyy aanndd SShhaarree ooff PPrroodduuccttiioonn ((SSoouurrccee:: BBRRII AAuussttrraalliiaa LLttdd))..

Source: Grain Growers Association, What the World Wants from Our Wheat, July 2004, pg 13.


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On-going availability of Rosella variety for Japanese udon noodles is essential for Victorian millers to ensure on going supply to its domestic customers such as a Japanese noodle company that has set up a regional Victorian manufacture.

Victoria may be disadvantaged in not having soft varieties suited for Asian noodles but instead driven towards wheat suited for cakes and pastry uses instead.

The Victorian industry has an avenue to ensure continuity of supply for its noodle requirements through collaboration with breeders and academics in a CRC model such as the successful CRC Soft Wheat Program for soft biscuit wheat. The program was strongly supported by Arnott’s and Goodman Fielder to ensure continuity of supply of biscuit wheat and addressed over reliance on one or two varieties for supply. These wheats were developed collaboratively between the CRC, the National Wheat Rust Control Program, University of Sydney Plant Breeding Institute at Narrabri, Goodman Fielder and Arnott’s Biscuits. It resulted in new soft wheat varieties for the Northern States commercialised in 2001.

There is also a current CRC for Value Added Wheat (2005, for 9 years) aimed at a new low-cost method of mapping genes to speed up breeding improvements to wheat, which would enable manufacturers to produce better noodles, biscuits, pasta or bread. The technology is receiving substantial industry support and with long term partners such as Arnott's Biscuits, Allied Mills and the Grains Research & Development Corporation.

Grains Food CRC

3.5 AWB Pool Price

AWB is responsible for the National Pool Price where it sets as a base price in consideration of international competition and optimal return to its growers. With a declining world wheat price in the past 15 years (refer Figures 24, 25) and indeed in 2 decades (Source: Australian Grain Yearbook 2005. Pg 5), the pressure is on AWB to develop initiatives to increase its base Pool Price to sustain and increase return to farmers. Hence the development of 20 Specialty and Premium varieties to better satisfy its end use customers and differentiate itself in global competition. In the face of competing grain buyers in a deregulated market, Victorian millers – like all others elsewhere - procure wheat at a minimum of the internationally driven AWB base Pool Price and more typically ABOVE the pool price to secure desired wheat parcels specific for their end user requirements


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FFiigguurree 2244.. WWoorrlldd WWhheeaatt PPrriiccee TTrreenndd ((UUSSDD$$//TT)) 11999922--9933 -- 22000044--0055..

FFiigguurree 2255:: AAuussttrraalliiaann WWhheeaatt PPrriicceess:: AASSWW EExxppoorrtt aanndd FFeeeedd WWhheeaatt ((UUSSDD$$//TT)) JJuunnee 22000011--22000055

Source: ABARE eConference Paper 04.9

Impact of Price - 70% of Miller’s Production Cost

As wheat is its only raw material that cannot be substitutable and one that is the significant cost input accounting for 70% of flour production cost, wheat price has the greatest impact on the flour milling industry’s profitability.

Victorian millers need wheat all year round at competitively landed costs.

Having to procure wheat at prices above international wheat prices presents a significant challenge for Victorian flour millers in cost competitiveness in exports where subsidised pricing prevails in international flour trade. The rules set by AWB in its Golden Rewards Premium Choice Varieties may bear no relevance to international wheat prices and add further to miller’s wheat cost.

Access to wheat at least at Pool Price Parity for export flour is key in promoting the industry’s expansion into international flour markets.


It is estimated that the Victorian Flour Milling industry players spend less than 1% of its $230 million turnover (2001-02) on R&D and will continue to be highly reliant on State based RIRDC grants, Food Innovation Grants from the National Food Industry Strategy (NFIS) and GRDC funding to meet its R&D needs. Outcomes are achieved collaborately through Council projects, individual initiatives, or through participation in CRC collaboration. Flour Millers Council members are especially active in wheat breeding quality evaluation and other wheat issues and have representation on the National Wheat Classification Panel.


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The industry tries to find ways to leverage into the $250 million that is spent on grains research in Australia by the Grains Research Development Council (GRDC -the largest funded grains research organisation), universities, governments, CSIRO, CRCs and private consortiums (refer Figures 26-28). With emphasis on agronomy and yield improvements driven by downward long term trend in international wheat price to increase farm productivity, and with increases in yield typically at an expense to quality with regards to decrease in protein content, which is strongly associated with bread-making quality, the milling industry – through its national council - continually strives to ensure a balanced perspective with quality attributes and regional implications is maintained in research objectives. Historically, innovation in the flour Industry has been limited with few products of note introduced. Perhaps the most significant has been Goodman Fielder’s Hi Maize flour released in September 1993 but it is a corn derived starch product with high fibre properties now widely applied in bread and cereals products. FFiigguurree 2266.. GGRRDDCC NNaattiioonnaall GGrraaiinnss RR&&DD PPoorrttffoolliioo AAnnaallyyssiiss--RReesseeaarrcchh FFooccuuss

Source: GRDC- Peter Reading, MD at Grains Week April 2005 FFiigguurree 2277.. GGRRDDCC NNaattiioonnaall GGrraaiinnss RR&&DD PPoorrttffoolliioo AAnnaallyyssiiss--IInnvveessttmmeennttss bbyy

GGRRDDCC,, GGoovveerrnnmmeenntt aanndd ootthheerr RReesseeaarrcchheerrss

Source: GRDC- Peter Reading, MD at Grains Week April 2005


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FFiigguurree 2288.. GGRRDDCC RR&&DD IInnvveessttmmeenntt AArreeaass iinn 22000033--0044

Source: GRDC Annual Report 2003-04 Two major concerns expressed by the industry are:

Ensuring research continues to deliver wheat quality improvements at comparative or better yields to increase market share in a competitive world. Quality attributes for milling and meeting end user needs are critical for ensuring profitability of millers.

Divergence in end user market requirements despite the same application. For example wheat research for bread making application in export markets may not satisfy domestic millers’ needs due to differences in bread making techniques, i.e. sponge and dough method being prevalent in USA and parts of Asia (where USA wheat has established market presence) compared to rapid dough method employed in Australia.

Source: Grain Growers Association, What the World Wants from Our Wheat, July 2004, pg 13.


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Wheat Breeding

In recent years there have been massive structural changes in the wheat breeding industry with new commercial breeders entering the industry and driving breed selection and prioritisation on commercial returns. Prior to release, a new variety has to be classified accordingly in the Wheat Classification system. This is currently a responsibility of the AWB as part of the Wheat Marketing Legislation and in which it tries to balance attributes in breeding programs that satisfy consumer food products (i.e., market growth drivers) versus high paddock yield (i.e., growers’ production drivers, source: Grain Growers Association, What the World Wants from Our Wheat, July 2004, pg 13). Between 20-40 wheat varieties are released each year. Key issues expressed by Victorian and national millers include

A need for a stronger miller / breeder interface in the changed breeding construct. Historically, breeding programs is targeted at varieties suited to all market applications because of high wheat breeding cost: estimated at over $1 million per released variety; and no guarantee of grower acceptance.

Wheat quality in Australia is based on variety, regional factors and the chemical constituents of wheat. The constituent characteristic is thus a combination of variety, i.e. the breeding or genetic base, and the environment. Therefore, wheat breeders need to give grain quality aspects the same importance that they give to yield potential and disease resistance

Much of the past emphasis of the Australian R&D to expand wheat production, has been directed at dry land wheat production with particular emphasis on the development of drought resistant varieties and the increasing of scale of production by overcoming limiting factors such as moisture availability and nutrient deficiencies. This is because Victorian soils relative to northern regions are relatively infertile and dry. Australia may do better to focus R&D in improving yields in selected, favoured locations rather than extensive farming and drier areas.

The growing stockfeed industry has divergent wheat breeding requirements, requiring efficiency of energy conversion as their key yield driver, this thrust is gaining momentum

3.7 Genetic Modification (GM) Technology

Victorian state agriculture policy presently prohibits and restricts use of GM varieties, which is constraining exploitation of those genetic technologies that provide agronomic productivity for grain growers. While its exploitation may provide the industry access to lower cost wheat given wheat is 70% of its production cost, GM Technology to date has yet to be accepted by consumers and some flour export markets. Without local consumer acceptance, the industry is unable to capitalise on the benefits GM technology may offer in lower wheat costs.


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Industry needs to maintain a watch on GM legislation and on both local consumer and target export market consumer sentiments to gauge its potential if and when GM use is allowed.

3.8 Regulations

Victorian flour millers – like the Food Industry - must adhere to various food, health, environmental and safety regulations with non compliance having potentially a material effect on earnings and competitive position with players subjected to civil remedies, administrative penalties, injunctive relief and possible product recalls. There are also costs in complying with public interest government regulation, business costs in GST, workers compensation and public liability insurances, and industry specific compliance costs such as the Food Standard Codes (in place in December 2002 on share of ingredients used), food safety, GMO, occupational health & safety and labeling requirements (in place July 2002 on voluntary labeling of Glycemic Index). Besides these, because of the small number of players in the industry resulting from consolidations and rationalisation, it is also subject to scrutiny by the ACCC, prices surveillance authority and various state government pricing bodies especially on competition.

Impact of Compliance

Regulatory dictates create a large ongoing training cost to the industry. Further, compliance with OH&S and Food Safety has increased costs, an issue similarly shared by the baking industry. Overall however, regulatory burden does not inequitably affect the competitiveness of the industry.

3.9 Human Resource Skills, Training and Development

The key technical competencies required by the flour milling industry are cereal chemistry, wheat and flour processing and technology, milling and process control, grain procurement and supply chain, and commercial and managerial skills in integration of the functional competencies that will ultimately deliver the value add to the grains industry. There is a lack of higher learning institutions in Australia that offers grains and cereal chemistry and technology as a key academic qualification. It is generally covered as part of a Food Science university curriculum. These skills are mainly later developed in industry through short courses at the Bread Research Institute (BRI) and the Royal Australian Chemist Institute (RACI) Cereals Chemistry short courses. Other issues that impact on industry employment and resources stem from mill operations and they are listed below. • Unattractive Industry operating hours

Mill operates 3 shifts per day over 5-6 days each week. Such hours are unappealing to the younger workforce, which raises concerns in recruiting good workers. The younger workforce, irrespective of unskilled or professional, does not find the milling industry to offer an attractive career path.


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• Competing for talent especially in regions

Regional mills like Allied Mills in Ballarat compete with two other multinationals – Mars and McCain’s – for good workers in Ballarat. With Mars remunerating on the upper quartile of manufacturing industry average, wage costs for Ballarat mill are significantly higher than elsewhere to attract and retain good workers.

• Less resources with experienced industry knowledge

On-going industry rationalisation and cost control has resulted in a loss of skills owing to individuals leaving the company/industry without replacement thereby giving rise to a lack of continuity of knowledge representing the industry needs. This is especially evident for competencies in understanding of wheat quality and issues impacting on meeting customer needs.

• Limited Training Support

Insufficient relevant high quality government courses to upgrade skills of low turnover aging workforce to meet industry needs.

Accredited technical training and study has been via the FMCA facilitated distance learning course using the nabim (National Association of Irish and British Millers) flour-milling course. Core competencies have been supplemented with select specialist and optional units from the Australian Food Processing Training Package. Millers have expressed a need for the course structure to be customised to Australian content specifically the local milling industry and OH&S and Safety Laws rather than UK based.

There are also on-going training requirements in OH&S, first aid, etc that are regulatory dictates.

The industry needs ongoing access to a trained and skilled workforce.

Its recruitment must be able to attract skilled labour and hold “good” labour for shift work esp. in city mills.

Relevancy of the NABIM correspondence course for Australian Millers needs assessment.

Potential for apprenticeship program as incentive.

Opportunity to partner with customer industry organizations (e.g., baking, stockfeed) to create and promote a profile and attractiveness of careers in the cereals industry to build for the future.


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3.10 SWOT

The industry’s strengths, weaknesses, threats and opportunities are shown below. It is does not completely reflect an analysis of the industry’s competitive position in the context of the national industry or global environment. It is primarily a list of the industry’s SWOT as seen by industry. It is laid out deliberately with strengths aligning with opportunities to highlight opportunities that may play to industry’s strength and similarly threats that may be amplified by industry’s weaknesses.

Victorian Flour Milling Industry STRENGTHS (Internal Factors) OPPORTUNITIES (External Factors)

∗ Vertical integration of larger players assures internal market for flour in plant bakeries

∗ Toll milling intra and interstate to maximize capacity.

∗ Innovative premixes for industrial and food service markets developed

∗ Potential full capacity utilisation via AusAID flour aid shipments

∗ Niche market development ∗ Flour/sugar/dairy blends and manufactured flour based products as preferred aid provision in AusAID programmes.

∗ Organics flour production in place ∗ Organics – export and domestic market and product development potential

∗ Long standing sponsorship of study tours to enhance communication & relationships between millers, breeders, cereal chemists, researchers and end users to enhance supply chain function

∗ Exports – working with AWB on flour exports, investigate AWB overseas mills as potential customers for specialty flours (e.g. single variety flour) and AusAID program with wheat priced at lower end of Pool Pricing.

∗ Capability in meeting diverse customer product specification and supply logistics

∗ Work with customer industry bodies – Baking & Stockfeed Sectors - to create and promote an attractive cereals industry profile and attract workers to build talent for future

∗ Capacity to meet growth in market demand in short or longer term.

∗ Leverage Victorian Government Next Generation Food Strategy Initiatives

57 ©Poh Len Pek, Strategic International Marketing Consultant


Victorian Flour Milling Industry

STRENGTHS (Internal Factors) – continue OPPORTUNITIES (External Factors) - continue

∗ Vital facilitating link between wheat breeders, grain growers (grain) and food manufacturers converting flour to foods. Strong history of recognized cereal chemists with expertise in wheat & flour technology.

∗ Alliance with overseas millers to supply specialty flours targeted at specific applications, e.g. Japanese noodle – Victorian millers are better able to access specifically segregated variety than overseas millers where imported wheat consists of a large number of varieties.

∗ Long history of industry association participation by milling company members working for god of industry (dating from 1895 in Victoria).

∗ Through chain cooperation fostered by Victorian Government Next Generation Food Strategy Initiatives

∗ Strong domestic demand given base need for core functionality of wheat flour in food manufacture

∗ GM technology to provide product opportunities at consumer level and productivity opportunity across the grains industry

∗ Over 40 years provision of distance learning facility provided through Flour Millers Council for Flour Milling training.

∗ New functional ingredients from wheat flour fractions to increase demand

∗ High barrier to entry, capital and technology of milling ∗ Increased capacity utilisation ∗ History of high standards of product quality and food safety ∗ Through flour millers’ council the industry is routinely sought

for committee representation and involvement in industry issues.

∗ Good consumer perception of grains and cereal foods especially wholegrain and fibre.

∗ Consistent and regular demand for flour provides stability to the industry

∗ Value adding through processing of grain to flour and knowledge application to relate grain properties to conversion of required flour properties




WEAKNESS (Internal Factors) THREATS (External Factors)

∗ Industry contraction from rationalization and fewer milling companies with fewer mills, small critical mass 3 milling companies in Victoria

∗ Mature domestic markets with low growth prospects lacking impetus to sustain industry size. Exit or relocation interstate of major customer companies.

∗ Inability to raise flour price and improve returns. Impacted by larger interstate player (Manildra) with significant scale, surplus capacity and market power to keep domestic prices low.

∗ No additional or new customers left to develop in Victorian market. No significant new entrant. Small and diminishing customer base. Viability of customer base challenged

∗ Unattractive and no industry profile for attracting and retaining talent to build industry future compounded by aging workforce

∗ Further rationalization of baking sector to very high industry concentration keeps margins low

∗ Loss of experienced and skilled workers who understands details of industry and market requirements

∗ Priority access to desired wheat at all times

∗ High barriers to entry – high capital costs and low margins deter new entrants and Greenfield development

∗ Drought and no guaranteed priority availability

∗ Very high industry concentration and structure preclude collaborations in market expansion or removal of surplus flour from domestic market via exports

∗ Industry requirement overlooked or compromised – as small wheat user (18% of Victorian wheat crop) - in a rationalizing grains infrastructure geared to large export scale (larger segregations, larger and fewer storage silos)

∗ Smaller players lack financial and human resources to sustainably compete with larger players.

∗ Surge in grain demand from more rapidly growing Stockfeed and Biofuel industries impacting availability and price hikes.

∗ Uncompetitive on exports thus impeding export focus for growth ∗ Increasing compliance with food safety, traceability adds to cost

∗ Mills compete with alternative employment choices for good younger workers adding to employment cost especially as traditional 3 shift operation unattractive option.

∗ Shortage of shipping containers and higher freight rates impacting on competitiveness.

∗ National industry R&D (BRI, Grains CRCs) and major cereals companies headquartered in NSW. Fewer large cereals Victorian based companies.

∗ Parents of all 3 players are headquartered interstate. Industry expansion or rationalization driven by individual player business strategy who may choose to exit Victoria production.




WEAKNESS (Internal Factors) - continue THREATS (External Factors) - continue

∗ Difficulty in achieving fair margin due to competitiveness in commodity market with overcapacity in industry supply (interstate intrusion)

∗ Flour imports and rising imports of flour manufactured products

∗ Low profile industry that is not well understood by those outside the industry.

∗ Poor quality high yielding wheat grown at expense of good milling and functional quality varieties

∗ The true contribution value of the product in terms of quality, safety and technology employed is poorly recognized

∗ Lessening physical quality standards of grain supplies

∗ Individual mills relatively small buyers of grain compared with export ∗ Need for consistent supply of all grain types throughout the year without interruption as customers demand is constant

∗ Dependant on pull from a mature Victorian bread industry and food manufacturing industry to stimulate domestic market growth

∗ Lack of effective measures to maintain insect free grain throughout the supply chain, resistance to current fumigants and protectants

∗ Poor consumer perception of refined flour and its products such as white bread in lower nutrient value.

∗ Resistance to GM technology may lessen comparative competiveness

∗ ∗ Loss of viability of grain growers as supplier of raw material ∗ ∗ Decrease in per capita consumption of cereal based foods due

to negative consumer perception or preference ∗ ∗ Lack of recognition of value contribution by Flour Milling

industry ∗ ∗ Raw material supply for niche & developing markets (organic)

variable season to season due to immature supply chain development



4 THREATS

There are a number of serious threats impacting on the Victorian milling industry viability and growth.

4.1 Industry Structure & Mature Markets

Firstly, the Victorian flour milling industry is a mature industry operating in mature markets that are lacking in growth impetus from local and national market demand because of low population growth. The industry has contracted in the past 3 years from a combination of industry rationalization and a loss of two major user customers that have exited or relocated interstate. Further, there are no new major food companies entering the market to increase demand and the existing small customer base is expected to continue to diminish from industry rationalisation. Its customers’ industry concentration is also high with on-going rationalization keeping industry margins low. The flour milling industry lacks market power to increase pricing and flour prices have remained static for the past 10 years, and kept low from intense rivalry between national players, key of which is NSW based Manildra who, whilst it does not have integrated or contracted plant bakeries like the two major Victorian players, has the national supply contract of Bakers’ Delight, a major end user. Manildra also has a strong growth outlet in industrial flour processing to starch & gluten that gives it flexibility to optimize its flour milling capacities. It is also the only domestic miller with starch processing facilities and the only wheat starch producer in Australia. Further, it also has an ethanol production facility that could be fuelled by sugar from its sugar milling operations or starch from its starch operations. None of the Victorian players have downstream avenues beyond food manufacturing (primarily baking sector) to maximize flour throughput. The two large Victorian players are vertically integrated in their supply chain where it derives its competitive edge from scale and efficiencies in grain procurement, handling, storage and transportation and market share in bread and cereals food manufacturing markets. There is no Victorian based player in the flour milling industry. The two large players are NSW based. As the industry further rationalizes, it is not known if they may choose to exit Victorian production as part of the business strategy. There is potential in exports but the industry has primarily focused on domestic supply for a number of years. There are cost impediments in competing against subsidized European flour such as international parity pricing of its wheat supply, high sea freight costs and for regional mills, additional inland freight costs to Melbourne port. Its customer industries are similarly domestic focused and lack focus on exports for growth.


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4.2 Drought

As presented in Section 3.2.1 Impact of Drought, the Victorian flour milling industry needs priority and guaranteed access to wheat irrespective of crop size or season, and availability year round to satisfy on-going baking industry demand. Otherwise, there would be serious repercussions to all players in satisfying their downstream bread making operations and bakery customers and potentially forcing shut-downs in mills and customers’ factories. This would jeopardise the $870 million (2000-01) Victorian bread, cakes, pastry and biscuit industries where flour is their fundamental raw material and mandatory for production. Flour imports may ensure continuity of supply to the millers’ customers but it is highly untenable for the milling industry to shut its mills and not keep its assets running.

4.3 Rationalisation in Grains Supply Chain

As detailed in Section 3.3 on the impact of a consolidating and rationalizing grains handling, storage and logistics infrastructure on the flour milling industry, a major threat to the millers – whose requirements are comparatively small (i.e., 18% of Victorian wheat crop), is their requirements may be overlooked or compromised in a rationalized infrastructure geared to large exports scale (i.e., GrainCorp “Super Sites”: larger segregations and tonnages in fewer silos). The ramifications are higher procurement costs in: • Additional storage costs for holding stock exclusively in a silo

• Additional logistics costs in moving wheat daily to mills that would be exacerbated in a climate of high fuel prices and fuel levy impost.

• Other cost penalties from operations conducted under duress and outside of programmed schedule

• Reduced wheat silo choice and procurement locations that could bring on extra freight costs and other quality trade-offs that impact on milling efficiency.

4.4 Biofuel–Ethanol Industry

The production of (corn-based) ethanol accounts for 16% of USA corn consumption and has been growing in double digit since 5% incorporation has been legislated (Source: ABARE Australian Grains 2004/05 October 2004 Pg 4). A similar concept is being pursued in Australia in light of rising global oil prices. The domestic ethanol industry (14 proposed new plants in Australia using grains and sugar as feedstock, refer Figure 29) is pushing for mandatory blending of ethanol at 10% for petrol and 15% for diesel.


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FFiigguurree 2299.. EEtthhaannooll ppllaannttss ((eexxiissttiinngg aanndd pprroobbaabbllee)) iinn AAuussttrraalliiaa..

The increased grain demand - estimated 5MT - on the eastern seaboard would cause ramifications for the comparatively smaller Victorian flour milling industry on several fronts: • Increased competition for wheat from the ethanol and stockfeed industries (the

latter growing strongest in Victoria at 4-5% driven by the dairy industry) with competition intensifying when limited grain supply prevails such as in a drought season.

• A potential permanent increase in wheat price by more than 25% according to a study (refer Centre for International Economics 2005 Impact of Ethanol policies on Australian Feed Grain Users, Meat & Livestock Australia, Sydney). Provided millers are still able to access wheat and pass higher costs through the value chain to customers and consumers it will not pose a key strategic issue. However if industry competition from price leader Manildra limits full cost recovery, this may precipitate further industry rationalization and affect Victorian production.


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• Reduced R&D focus on wheat for baking, shifting instead to focus on wheat for efficient starch conversion to ethanol instead of protein for baking, esp. when growers are rewarded for higher production yield.

• Reduce number of growers focused on varieties specific for domestic flour quality requirements as it is the smallest user of grain domestically compared to stockfeed and biofuel industries.

4.5 Flour and Manufactured Flour Products Imports

Flour imports into Australia have historically been low and not posed a serious threat to millers to date, although it is conceivable that a major flour user could import low cost flour given tariffs are low at 4.25%. Imports of manufactured flour products such as biscuits, cakes and pastry are also low (refer extract below from Table 11), although imports of biscuits (especially shortbreads in the lead up to Christmas) are of emerging concern given rising trends. Segments Import Level Import Trend Flour Low Bread Low Steady Cakes & Pastry Medium Biscuits Medium Cereal Food & Baking Mix Medium

Source: IBISWorld Reports 2005-11-20 “Historically, Australia has been a net-importer of biscuits with imports seasonal and peaking in the lead up to Christmas. Import penetration fell in the past five years as annual value contracted at 1.6% from 1999-2000 to 2004-05 although strong growth in 1999-2000, value fell in the three years to June 2003 that was attributed to a slower local economy. The low exchange rate may have helped curtailed imports but not in the recent two years as imports have risen again”.

5 OPPORTUNITIES

Opportunities exist for industry growth on three avenues; firstly in developing local Victorian and domestic markets for higher value products such as dietary and ethnic breads, niche products incorporating traditional or more grains and organics such as organic premixes, specialty breads, biscuits and noodles. Secondly, as they will primarily replace existing products given mature market with low population growth and a small domestic niche market, the industry could increase the market size by concurrently developing exports with minimum additional effort. Thirdly, it can improve its influence into food aid program such as flour aids in the federal government’s AusAid scheme. The industry could pursue these developments for expansion by leveraging into The Victorian Government’s Next Generation Food Strategy initiatives directed to capturing a better share of global food market competitively, innovatively and sustainably.


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5.1 Dietary & Ethnic Breads, Niche Products & Use with Other Grains (Oats, Barley)

In breads, players have attempted more product development in the past 5 years than previously to introduce functional (enriched or fortified) breads with the differentiated premium functional bread market now worth $320 million per annum (2001) and growing at 10-15% per annum. There is considerable scope for further market development given 62% of the national bread market remains dominated by white bread with wholemeal and grain breads accounting for only 15% and 5% of bread sales respectively. As consumers increase in awareness of health benefits of high fibre diets, there is scope for the industry to help promote consumer knowledge and awareness and perception of high fibre breads as a key contributor to daily dietary intake. Some potentials include:

White 100% whole wheat specialty flour for whole grain breads, crackers and pasta of lighter colour than traditional whole grain colour owing to reduced visibility of bran by a new milling technology. The innovation was recently commercialized in USA (refer Food Business News, “Flour Technology Powers Whole Grain Shift”13 September 2005, p 36). An Australian startup at Tamworth is of interest.

Gluten free wheat flour for coeliac intolerant consumer, a niche market that is growing.

Dietetic breads that are low salt and yeast-free

Low Glycemic Index breads incorporating oats and barley, rice bran, quinoa and other grains

More nutritious multi-grain bread products with increased incorporation of grains such as rye, buckwheat, millet, sorghum, etc

Sprouted grains and spelt (presently commands thrice baker’s flour price)

Development of spelt would need good communication of its potential to growers to increase growing acreage and supply.

5.2 Organics

Organics represents an area for differentiation for the Victorian industry, both in domestic and export markets. The global organic industry is increasing with organic retail sales in EU estimated at US$11 billion, US$13 billion in USA and US$450 million in Japan. The Australian organics industry is still at infancy and behind in market development compared to New Zealand. Organic baked goods like bread or noodles have little market presence unlike in UK and Europe where it has gained momentum and is growing strongly. There are 2,100 organic producers in Australia (2003) of which 200


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are certified grain producers (2001) and within which 40% grow wheat for either the domestic or export market. AWB keeps a register of organic wheat growers. Domestically, the majority of organic wheat is processed into flour for bread and bread mixes, cake and biscuit mixes and noodles. Certified Organic Vita Brits produced by Uncle Toby’s were one of the first mainstream products using organic wheat. There is a small but growing exports of organic flour, noodles and wheat (refer Table 25). Organic wheat exports are expanding rapidly, primarily in non-traditional wheat markets in Europe such as Italy, Switzerland and UK. There is scope to target export markets such as Japan, where the government has officially recognised four Australian organic certification agencies and only one other from the rest of the world. TTaabbllee 2255.. EExxppoorrttss ooff oorrggaanniicc wwhheeaatt,, nnooooddlleess aanndd fflloouurr:: 11999999--22000011..

Commodity (MT): 1999 2000 2001 Wheat 156 7842 20,777 Noodles 0 19 927 Flour 119 2735 2627

Source: AQIS 2001 Indications on organic wheat pricing and companies engaged in organics – are available from NRE Agribusiness (Stuart Clarke, Tim Ada) and this suggest premiums of $30 to $150 over the price for equivalent quality non organic grain. There are a number of impediments to the development of a competitive organics wheat flour market in Victoria. Lack of certification legislation and uniformity from the 7 existing bodies in a

fragmented industry of diverse commodities, philosophies and groups.

Lower flour milling yields

Lower wheat yields deter growers

Organic wheat production requires attention to soil fertility, rotation, agronomy and segregated grain storage. Lack of knowledge on sustainable organic farming practices.

Growers must have on-farm storage for segregation

Geographically diverse plots that lacks scale impairing efficient procurement of sufficient and consistent parcels

Unreliable supplies and inconsistent product quality from small number of growers

Poor supply chain direction and signals to attract more wheat growers

National coordination in supply of organic wheat is required but AWB needs a huge price premium e.g. 75-100% over normal wheat to secure interest to coordinate segregation and supply chain


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Slow uptake in domestic baking industry with only 2-3% of bakers embracing organics due to a lack of certification uniformity and availability of processing facilities on raw material inputs.

Lack of availability of other organic ingredients such as milk powder, butter and especially organic sugar that is in short supply.

Increased marketing costs from market research and certification expenses for the industry and its customers.

5.3 Exports

Exports represent a key growth avenue for the industry. Historically until 15-18 years ago, exports had been a coordinated activity for national members through the Flour Millers Council of Australia who negotiated export contracts and allocated pro-rata by capacity to members, through whom they serviced the Mauritius market of 15-20,000 MT per annum and bilateral flour food aid of 3,000 MT (discussed in the next section). In recent times, Australia had typically exported about 10% of flour produced mainly via commercial trade. The potential for commodity flour exports from Victoria exists but the following impediments affect its competitiveness: Exchange rate

Raw material (wheat) costs at international pricing which facilitates opportunistic exports primarily in times of global wheat shortage. This does not enhance industry reputation for reliability nor build market loyalty in premium markets like Japan.

The single desk wheat marketing disadvantages domestic millers in flour export markets as the domestic wheat price is effectively related to the AWB pool price that consists of some higher and some lower priced markets. If the industry could procure wheat for flour export at the lower end of exported wheat prices it could be more competitive in international flour markets.

Sea freight costs. A difference of $20/MT is significant because of the low value of flour and flour based products.

Rising demand for international trade with China has significantly impacted on global container availability and increased freight rates could negate the already low margins in exports, as has occurred in USA where shipping rates have doubled in the past 5 years and curtailed flour exports to its lowest level in their industry’s modern history (refer Milling & Baking News, 6 September 2005, pg. 9)

Shortage of shipping containers due to demand from other growing local industries and increased imports into China.

Regional mills are further disadvantaged by additional freight costs of $20/MT to Melbourne. Incentives such as freight rebate for regional mills to engage in exports when other factors may assist in its competitiveness.

Flour import duties in many Asian countries have reduced significantly in the past 3 years following bi-lateral trade agreements. Larger players have some resources to develop knowledge of such opportunities and are exporting albeit may not be supplied from their Victorian plants.


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The structure of the industry and ACCC constraints hinder collaboration between the 3 Victorian players in collective development of export markets. Export opportunities that the industry could investigate include:

Noodle and Bread pre-mixes into Japan and Middle East markets.

Nutritional formulated (higher extraction) flours and multi-grain (soy, corn, rice, oats) blended mixes.

Supply of specialty flours (single or targeted varieties) for specific unique applications to AWB overseas mills.

Alliances with overseas millers to supply specialty flours for specific applications, e.g. Japanese noodle where Victorian millers are better able to access specifically segregated variety than overseas millers where imported wheat consists of a large segregation of varieties.

5.4 AusAid Flour

While industry structure (and overseas owners) obstructs industry cohesion in tackling global flour markets, this avenue represents a good opportunity for industry to collaborate in regular export quantities that would absorb remaining milling capacities and more importantly remove surplus flour from domestic market. This is critical in sustaining a viable market for players in a low growth mature domestic market. To date, the mechanics of exploiting the Australian Government Aid Program has been via the national body, FMCA working with AusAID to maintain an updated database of contacts, available flour aid tenders and pursuing opportunities. A key issue for the industry is in influencing AusAID to provide flour and manufactured flour products as aid shipments instead of grains as the current preferred form as most aid countries have a growing milling and livestock industries for mill by-products. Further wheat cost in the AusAID formula disadvantages millers’ ability to supply flour competitively to the agency. Without changes to the wheat cost sourced from AWB, grain will remain more competitive to flour for this avenue.

6 INDUSTRY ISSUES

The Victorian flour milling industry faces a large number and wide range of issues. Industry members were asked to rate their priority and urgency for address. Their response is collated in Appendix 1. In general, there is some divergence in the importance and priority of issues faced by industry members. This is not surprisingly as the 3 players operate from different competitive positions and thus focus.

Within the major categories of strategic importance there are five common issues rated of high importance and priority shared by at least two industry members.

Reliable and consistent supply of soft wheat


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Limited interest from AWB in supporting soft wheat on the east coast

Ability to obtain suitable consistent supply from bulk segregations when comparatively smaller quantities are sought within a consolidating grains handling & storage infrastructure geared to larger volume and segregations for exports

Ability to have separate supply chain for organics, GM-free, pesticide-free, etc

Procurement zone restricted to within 300-400km of mills due to fuel costs & fuel levy when road transportation is the only mode of logistics. Rising fuel costs adversely impact on margin

A list of 28 issues rated highly important by at least by one member is tabulated in Table 26 with time frame for address. Another list of 27 issues rated as medium importance by at least by one member, and the time frame for address is shown in Table 27. The industry to date have been adept at managing a variety of issues and impediments that are within its capacity to control and over the years it has managed to exercise differing levels of control and initiatives to mitigate the threats and risks, usually action through its national body, the Flour Millers’ Council of Australia (FMCA). For example, it has successfully to date exerted its influence to ensure the wheat quality attributes prized for milling efficiency and meeting its varied and many customer demands are met. Initiatives included are: • Participation in various state committees under the old breeding regime in

Australia by analyzing and engaging in evaluation meetings with breeders, cereal chemists, AWB etc. to consider merits of potential new varieties.

• Under the new Wheat Breeding regime, Flour Millers Council of Australia will meet at least annually with each breeding company for discussion on the merits of new varieties and those developmental progressing through the breeding program.

• The Flour Millers Council of Australia has representation on the Wheat Classification Panel set up by AWB to evaluate breeder and other data submitted to support classification of new wheat varieties. This ensures a domestic industry consideration of new varieties. Candidate varieties must be supported by two years of quality data (laboratory and end product testing) meeting the protocols required to be considered by the Classification committee.


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TTaabbllee 2266.. IIssssuueess ooff HHiigghh IImmppoorrttaannccee ttoo IInndduussttrryy aanndd TTiimmee FFrraammee ffoorr AAddddrreessss.. Raw Material Supply Time frame 1. Reliable and consistent supply of soft wheat Now 2. Limited interest from AWB in supporting soft wheat on East Coast. Now 3. Non substitutable raw material and thus a need for sustainable wheat

supply Med to Long term

4. Wheat variety availability &suitability in meeting domestic market demands

On-going

5. Ramifications and threats of a grain based biofuel industry and higher wheat price as a consequence.

Now

6. Industry inability to fund wheat breeding programs Now 7. Direct relationships with wheat growers and developing relationships

for specific variety needs Now

8. Adequacy of wheat receival standards based on quality of wheat receivals at mills

Now

9. Ability of grain growers to store and supply grain to domestic mill requirements

Now

Food Industry Demand Time frame 10. Shrinking local customer base and consumer demand from low

population growth and customers exiting or relocating interstate Now

11. Lack of growth drivers in domestic market Now 12. High dependency on bakery industry Now 13. Inability to increase market size and difficulty in cooperation to increase

size Now

14. Potential for increased farm traceability from farm gate to plate Med to Long term

Grains handling, storage, and logistics infrastructure Time frame 15. Ability to obtain suitable consistent supply from bulk segregations Now 16. Need for insect-free supply and current lack of alternative fumigant Now 17. Ability of wheat industry to have separate supply chain for organics,

GM-free, pesticide-free, etc Now

18. Fuel costs & levy restricts procurement to within 500km of mills when road transportation is the only mode of logistics. Rising fuel costs erodes margin.

Now

19. Deficient rail system Now 20. Location of city mills and pressure to re-locate Med -Long

term 21. Reliance on road transportation into and out of city mills and reduced

efficiency in truck turnaround from city traffic compared to regional mills Medium

22. Shortage in container and rising sea freight rates nullify attractiveness of exports

Medium

Cost Impact of Margin Time frame 23. Inability to extract higher domestic flour price Now 24. Rising regulatory dictates erodes low margin Now Training & Skilled Workforce Time frame 25. Recruitment, ability to attract good skilled labour especially in city Now 26. Apprenticeship programmes Now 27. Industry perceived as unattractive for a career by younger people Now Growth Time frame 28. Ability to compete viably in commercial exports Now


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TTaabbllee 2277.. IIssssuueess ooff MMeeddiiuumm IImmppoorrttaannccee ttoo IInndduussttrryy aanndd TTiimmee FFaammee ffoorr AAddddrreessss.. Raw Material Supply Time frame 29. Wheat Price – international parity Pool price Medium 30. R&D – divergent needs in wheat breeding to export market

requirements (sponge & dough fermentation in bread manufacture) and livestock & biofuel industries requirements (efficient energy conversion versus protein)

Medium

31. Balancing supply with demand – no wheat breeding program to replace desirable old soft wheat variety like Rosella when yields are becoming uncompetitive and could potentially become obsolete

Medium

32. Wheat quality at receivals are driven by AWB to exports markets which may differ to quality requirements of local millers

Medium

33. Prohibition in GM Technology Medium Food Industry Demand Time frame 34. By product Demand Medium 35. Increasing costs from increasing stringency in Food Safety & QA

standards Now to medium

36. Adequacy of R&D capability and capacity in the milling industry Medium to Long term

37. Imports in manufactured flour products such as biscuits Medium Grains handling, storage, and logistics infrastructure Time frame 38. Port access (Dredging of Port Philip Bay) Medium to

Long term 39. Perceived declining service from Bulk Handlers Now - Long 40. Global competitiveness of mills Medium Training & Skilled Workforce Time frame 41. Relevancy of NABIM correspondence course for Australian millers Now 42. Customisation of industry course structure to Australian content in

areas like OH&S, Safety Regulations and Australian Milling history. Medium

43. Partnerships with customer industry organizations (baking, stockfeed) to promote profile and attractiveness of careers in cereals industry

Med to long term

Growth Time frame 44. Competition from interstate flour Now 45. Organics Now 46. Niche products, spelt, sprouted grains Med to long

term 47. Milling of other grains (e.g. oats, barley) Medium 48. Food Aid Med to long

term 49. Freight rebate for regional mills to recover additional freight costs to

truck to Melbourne for exports Medium

50. Lacking in knowledge of Asian market opportunities Medium 51. Lack resource to gather export market intelligence and opportunities Medium 52. Opportunities in pre-mixes to Japan and Middle Eastern markets Medium Industry Profile Time frame 53. Opportunity to create better understanding of industry position in

supply chain Now

54. More collaborative projects with supply chain partners on specific areas of mutual interests

Med to long term

55. Recognition of industry as supplier of high quality products Medium


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7 STRATEGIC ISSUES

There are issues that the Victorian flour milling industry has limited or no capacity to mitigate and those, which although within millers’ ability to manage and control to varying degrees, nevertheless pose serious strategic threats to industry viability. These issues as presented have been prioritized on two aspects affecting industry strategically, i.e. those promoting industry viability and mitigating threats and those highlighting impediments to sustainability. These priorities form the basis to address the Industry Sector Plan, and are recommended to industry as their Sector Plan Objectives and Strategies. This is detailed in the section that follows.


Wheat is the mandatory raw material for the Victorian milling industry. It cannot be substituted with other grains as the facilities are specific for wheat milling that differs from rice or oat milling. As such the industry needs an assured supply of wheat meeting its requirements for milling. To that end, it depends on a viable local Victorian farm sector for wheat supply in the quantity and quality it requires and at competitive prices. Access to a full range of desirable wheat quality to satisfy its customers various and different demands, and continuity in supply throughout the year from one harvest to the next irrespective of wheat crop size, is compulsory for the industry to routinely and satisfactorily service its Victorian bread, baking, biscuits and other cereal based food manufacturing customers. With potential imminent intense competition for wheat on the east coast from a comparatively faster growing Victorian livestock and emerging biofuel-ethanol industry, the Victorian flour milling industry – far smaller in its wheat off-take comparatively (18% of Victorian wheat crop and $150million turnover) – could be disregarded as an important stakeholder in the wheat and grains value chain. It will need to promote its value add and contribution as a stakeholder in the wheat value chain. It may need to form strategic partnerships with other members of the value chain to increase its visibility and profile within the value chain. With some players already having strategic holdings within the rapidly consolidating grains industry infrastructure, it will be a challenge for industry to agree on the mechanics of a strategic partnership that is within their business strategy and ACCC. Under a scenario of increased competition for wheat which may limit the wheat procurement trade-off options exercised by the industry successfully to date, its more strategic concern other than having access to sought after available wheat, is the impact on the resultant wheat price hike (25% postulated in one study). This has significant ramifications for the smaller flour milling industry in a mature and potentially declining market, and where wheat price represents 70% of its cost. It may precipitate further industry rationalization should it be unable to competitively access wheat that it needs or unable to fully pass on higher costs to the bread and other cereals food manufacturing customers partly from strong push-back from consumers in higher price for these food products. As wheat is its non substitutable raw material that constitutes 70% of its production cost, the stakes are high for the


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industry under a dominant grain based biofuel industry scenario, or any scenario that significantly threatens wheat availability and results in wheat price hikes. Soft wheat in particular pose a strategic concern for Victorian millers as the state wheat profile is being transformed towards higher protein Premium Whites earmarked for international markets (refer Section 3.4.4). While this poses a continuing challenge, opportunity exists to develop alternative procurement strategies that can provide for longer term ability to more readily meet industry requirements. Any issues impacting on miller’s ability to access available wheat year round, at a quality meeting milling efficiency and customer quality (processing and end product quality attributes) at an economical cost are key strategic concerns more so in a climate of a globalised and consolidating grains industry.

High priority strategic issues – immediate address

Dependency on a viable Victorian farm sector and grains infrastructure for sustainable local wheat supply.

Priority access to local wheat at all times irrespective of local crop size to meet continuous local customer demands

Suitable wheat varieties to meet the various domestic cereals food manufacturing customers’ requirements (process ability and end product quality)

Reliable and consistent Soft Wheat supply constrained by limited interest from AWB in supporting soft wheat on East Coast

Direct relationships necessary with wheat growers in developing relationships for specific variety needs and organics

Adequacy of wheat receival standards - driven by AWB to exports markets - based on quality of wheat receivals at mills.


Research and development and innovation are critical to the viability of the mature Victorian flour milling and cereals based food manufacturing industries. A comparatively smaller industry to others in the wheat value chain necessitates collaboration in a united voice in matters of shared interest in the grain value chain, for example in wheat breeding and support of varieties that allow millers to continuously satisfy its customer needs. More so when the industry alone is unable to fund its wheat breeding programs to propagate the varietal attributes it need. It has to date successfully leveraged into GRDC and other research organizations’ research programs as an active stakeholder in the outcomes. Through the national Flour Millers Council, industry members are regularly sought in evaluations of wheat breeding quality and have representation on the National Wheat Classification Panel to ensure its industry requirements are identified in the system. Victorian miller representatives combine to define preferences for the Victorian domestic industry and to convey this information to


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breeders, growers, AWB and other industry participants. Further to this individual members undertake involvements to meet specific organizational objectives. Wheat breeding R&D is typically focused on agronomy and yield efficiencies that are fundamental to varietal acceptance by growers (which may be at the expense of quality attributes), or in quality attributes directed at export markets. The focus does not always align with domestic miller’s focus on quality and end customer’s requirements. As such, millers face considerable challenges influencing these avenues to consider its needs. To that end, key R&D issues impacting on the Victorian flour milling industry are:


Inability to self-fund an industry R&D program

Ensuring research continues to deliver wheat quality improvements to increase market share in a competitive world at comparative or better yields. Quality attributes for milling and meeting end user needs are critical for ensuring profitability of millers.

No wheat breeding program in existing national or state R&D programs to replace desirable old soft wheat variety like Rosella as its yields are becoming uncompetitive and could potentially be obsolete

Flour for domestic use is specific to local processing conditions, and divergent to those for export, biofuel and livestock industries. E.g., rapid dough breadmaking in Australia Vs sponge & dough in export Asian markets and energy conversion from starch in livestock & biofuel industries Vs protein for breadmaking.

Stronger miller / breeder interface in the changed breeding research and commercialisation structure.

Prohibition in GM Technology. The industry’s position is to support development and science of GM technology to ensure international grains industry competitiveness whilst respecting the market position and readiness for the technology. Industry to maintain a watch on legislation and on both local and export market consumer sentiments.

Victoria is no longer the national centre of biscuit manufacture aligning with the change in state’s wheat variety profile away from dominance in soft wheat towards a combination of higher protein hard wheat. The industry has yet to capitalize on the change and define an industry product centre of focus that best aligns with changed Victorian wheat crop profile.

Assess use of Victorian wheat crop – for example in AWB Ltd target export markets - available within its procurement zone, to identify new product opportunities for local and export markets that is beneficial for all players

Explore in conjunction with other members of the value chain and leverage into the Victorian Government’s Next Generation Food Industry Strategy.


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New Product Innovation

This has been primarily a domain of individual players in their own R&D programs or in partnerships with customers and members of the supply chain through the various federal and state government funding initiatives. Generally new product development is conducted co-operatively between the food manufacturer and the miller to establish an optimum flour product to meet a specific process requirement. In this way the miller can establish customer loyalty if he is able to continue to meet the customers requirements.

As an outcome of the above, investigate and assess potential in industry cooperation on development of a new product targeted for exports.


Efficient logistics and grains handling, storage and transportation infrastructure are two major components impacting on millers’ wheat procurement costs and competitiveness for exports. They are major elements within millers’ capacity to control costs and improve margins. Hence, the interests of players in forward and horizontal integration within the value chain. Several outcomes to date and potential trends from the rapidly changing infrastructure landscape are threatening the viability of the industry. Any interference to on-going access to wheat of various desired grades from preferred cost effective locations is a threat to cost. For example, a large cost impost is incurred by millers when it has to source wheat from sites remote to preferred local sites. Small distances could add $5/ MT freight cost penalty, i.e., 2.5% onto cost based on wheat price of $200/MT. This could further compound margin squeeze when alternative supply sites deliver lower than desirable quality wheat.

Rising fuel costs and levies could rise to a point of serious concern as they impact on wheat cost, especially where procurement is outside of the “efficient infrastructure geared for large exports volume”. Road transportation is the primary and often only mode for the industry.

On going rail transport deficiencies and lack of a deep harbour facility for long term planning of future mill locations may result in some players relocating out of Victoria in the longer term, with direct adverse impact (further contraction) of the local milling industry.

Consistency of bulk segregated wheat for specific purpose

Suitability of wheat sought by domestic millers in bulk segregations. Need for insect free and concern on lack of alternative fumigant in these situations.

Mills may become more reliant on growers to store and supply grain to domestic mill requirements, such as segregations for organic and specific variety not conforming to AWB segregations. Growers will need to invest in storage and transportation facilities.


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Reduced capacity for millers to differentiate on process and product quality with infrastructure moving towards pooling and bulk handling and larger segregations.

Strong direct relationships with growers who do not always respond to AWB premium varieties for specific variety needs, i.e., those in marginal Victorian growing areas where achieving higher protein to make into the hard grade is difficult.

7.4 Wheat Price

In the face of competition for grains intensifying in a deregulated market, Victorian millers – like all others elsewhere - procure wheat at a minimum of the internationally driven AWB base Pool Price and more typically ABOVE the pool price to secure desired wheat parcels specific for their end user requirements. This is a major industry issue given 70% of its cost is in its wheat price and this is the single largest factor impacting on its viability. Having to procure wheat at prices above international wheat prices presents a significant challenge for Victorian flour millers in cost competitiveness in exports where subsidised pricing prevails in international flour trade. The rules set by AWB in its Golden Rewards Premium Choice Varieties may bear no relevance to international wheat prices and add further to miller’s wheat cost.

Wheat Price – International parity Pool price

Access to wheat at least at or lower end of Pool Price Parity for export flour is key in facilitating industry’s expansion into international flour markets or developing AusAid opportunities.

7.5 Market Growth & Food Industry Demand

Shrinking local consumer demand from low population growth and on-going food industry consolidation and rationalisation have meant high levels of concentrations in its user industries and a reducing and smaller customer base with customers shifting interstate or exiting the industry. There have been no new entrants or new domestic Victorian customers to develop. The lack of growth impetus from the local food manufacturing and consumer base reinforces the Victorian flour millers need to strongly maintain support for and collaborate with existing Victorian food manufacturers especially the cereals based sector to maintain current and stimulate new domestic demand for flour products. In doing so, the industry will need to address and mitigate rising production costs from compliance with increasingly stringent Food Safety & Quality Assurance Standards and product traceability from farm gate to plate, more so when country of origin labeling is mandated in some export markets. The high dependency on the local mature bakery Industry with little export intent and inability to increase domestic market size meant that growth avenues domestically will be small niche markets which may not support the costs required for development. Thus in developing niche markets, millers and its customers will require strong support in the early developmental phase to realise growth potential.


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Strong support in the early developmental phase of developing niche products and local markets to realise growth potential in domestic markets. For example, a through-chain support for organic grains and for export, such as through collaboration with AWB on Flour Aid.

Extend support for export market development.

7.6 Skills & Training

The industry has a need for ongoing access to a trained and skilled workforce and requires recruitment to attract employees to the industry and build for the future.

Trained and skilled workforce.

Assess relevancy of the NABIM correspondence course for Australian Millers and explore adaptation to Australian industry conditions.

Recruitment to attract young employees, skilled labour and hold “good” labour for shift work esp. in city mills.

Potential for apprenticeship program as incentive.

Opportunity to partner with customer industry organizations (e.g., baking, stockfeed) to create and promote a profile and attractiveness of careers in the cereals industry to build for the future.


Much experience has been lost from the industry post industry consolidation and rationalisation, which exacerbates the training and building of new talents for the industry’s future. Further, the industry is beset with poor perceptions of career paths and unattractive working conditions, which add to its difficulty in retaining existing talent and attracting talent for the future.

Address industry attractiveness for recruitment, talent retention and training.

Maintain a strong profile and presence in the grains value chain. Increase understanding within the value chain of the industry’s value add and collaborate with user industries such as the stockfeed and baking sectors in promoting a collective attractive industry profile for employment and career development

Promote recognition of the industry as a supplier of high quality product to the value chain and consumers.


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8 OBJECTIVES & STRATEGIES

To ensure the viability of the Victorian flour milling industry, its foremost objective is to secure access to its mandatory raw material, wheat and ensure availability to mills at all times. This necessitates priority access especially in times of wheat shortage such as in a drought season or intense competing demands from a biofuel-ethanol industry, etc.


A prerequisite for wheat availability is a viable farm sector supported by a competitive grains handling storage and transportation infrastructure.

O 1. Viable Victorian farm sector and grains infrastructure for sustainable local wheat supply.

S 1. Work with Victorian Government’s Next Generation Food Strategy Initiatives to promote factors supporting a viable farm sector and development of a globally competitive grains infrastructure.

O 2. Secure access year round to suitable and available wheat.

S 2. Regularly communicate industry broad needs to industry forums and key organizations like AWB Ltd and Bulk Handlers etc

S 3. Negotiate specific supply contracts, individual millers with marketers as part of strategic procurement options.

S 4. Seek cooperation and support from Victorian Farmers’ Federation.

O 3. Priority access especially in times of wheat shortage.

S 5. Gain formal acknowledgement from AWB Ltd for Victorian millers’ priority access to wheat in times of supply duress (drought) [Maintain watch on harvest conditions]

S 6. Provide information to biofuel ethanol debate on ramifications to milling industry.


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8.2 Wheat Quality for Milling & End User Requirements

Wheat quality is based on variety, regional factors and chemical constituents of wheat and represents an important factor within Miller’s control that impacts directly on profitability. Wheat quality specific to local flour milling and food processing requirements may differ significantly to those for exports, biofuel and livestock industries. These differences need to be visible within the value chain and R&D community. Industry needs to exert its influence to ensure there is adequate representation on quality needs to balance strong grower focus in yield improvements.

O 4. Suitable wheat varieties available for existing and future milling needs

S 7. Appraise varieties grown in Victoria against the industry collective quality needs to ascertain suitability in meeting current and future demands.

S 8. An (updated) Domestic Wheat Quality Objectives document disseminated and communicated in one on one meetings with wheat breeders in individual breeding programs.

S 9. A Victorian Domestic Industry Preferred Varieties document disseminated to millers, grain growers (VFF Grains Group Conference), AWB Ltd, Department of Primary Industries Annual Varieties Guide to Growers and interested parties.

S 10. At least an annual meeting with each breeding program to discuss industry needs, consider crossbreds under development and provide feedback to breeders on merit from industry.

S 11. Participate in the annual AWB Ltd Breeders Forum and present on behalf of the domestic industry.

S 12. Facilitate the traditional FMCV Wheat Study Tour to encourage supply chain communications to breeders, cereal chemists and researchers, and build high level of co-operation for mutually beneficial outputs

S 13. Active participation in industry forums and working groups for appropriate representation of industry position.

The Victorian wheat profile has changed considerably in the past decade with introduction of Premium Whites in 1995-96 and halving of certain ASW varieties through establishment of the Australian Premium White Class important to domestic and export markets.

O 5. Reliable and consistent Soft Wheat supply

S 14. Appraise the change in Victorian soft wheat profile and all existing commercial and non-commercial breeding programs against industry’s existing and future needs to ascertain gap and size of gap for action such as those for Rosella variety

S 15. Support soft wheat growing areas with natural advantage and critical mass such as Bordertown area SA and Murrumbidgee Irrigation area in southern NSW.


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S 16. Support individual company development of direct relationships with growers for specific variety needs by maintaining general awareness of industry supply / demand balance.

S 17. Encourage breeders to identify and promote promising crossbreds from their programs which could suit niche requirements but would otherwise be culled due to concentration on high volume markets.

S 18. Work with AWB Ltd to negate factors which discourage growers from growing soft wheats, such as revisions in receival standards to those proposed by the domestic industry to ensure that marginal standard is not downgraded to feed payment scale.

O 6. Adequacy of wheat receival standards based on quality of wheat receivals at mills.

S 19. Meet with AWB Ltd annually to discuss and negotiate proposed wheat receival standards for the subsequent wheat harvest.

S 20. Monitor wheat receival standards as reflected by testing of wheat received at the mills, and compare with historic records to ascertain variation from past acceptance.

S 21. Maintain consultative discussions with AWB Ltd to research apparent deterioration in wheat receival standards despite minimal change in actual published standards, (a multiple of possible considerations have been identified, changes in harvest technology, golden grain rewards where some growers rather than aiming for premium are prepared to suffer discount and deliver lower standard, commercial flexibility of bulk handlers to work to bin average, effectively minimum acceptable standards).

8.3 Wheat Price

The price of wheat delivered to mills is the single most important factor impacting the industry profitability as it constitutes 70% of miller’s cost of producing flour. Millers pay above AWB (International) Pool Price to secure the quality it needs. This has been detrimental to its competitiveness in international flour trade dominated by subsidised flour and AusAid flour aid shipments.

O 7. Wheat Price at least at lower end of Pool Price Parity for Export Flour

S 22. Negotiate with AWB on concept of improving wheat access and price specifically to be more competitive in export markets and in so doing have higher level of value adding manufacture retained in the local economy.


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R&D is vital to sustaining the Victorian milling industry in a rapidly changing and globalised competitive environment. R&D is focused on 3 areas. Firstly, wheat breeding to ensure propagation of varietal attributes for current and future milling needs. Secondly through chain efficiencies as they are elements within millers’ capacity to improve profitability, and finally in Process and Product Innovations that are crucial to sustaining demand in a mature marketplace.

O 8. Research continues to deliver wheat quality improvements at comparative or better yields.

S 23. Representation through Flour Millers Council (and individual company) in GRDC and other research organization research programs.

S 24. Regular dialogues with commercial breeders, (see previous).

S 25. Increase research community’s understanding of quality characteristics and impact on processing within chain, (see previous)

O 9. Wheat Breeding Programs in place for replacement of potentially obsolete desirable old soft wheat varieties. E.g. Rosella variety whose yields are becoming uncompetitive.

S 26. Increase miller / breeder interface in the changed breeding research and commercialisation structure.

S 27. Appraise adequacy of replacement potentials to varieties under threat like Rosella.

S 28. Monitor commercialisation of new varieties in millers’ preferred procurement zones to ensure choice and availability of quality varieties.

O 10. New Product Development with Food Manufacturers

S 29. Foster industry cooperation with Victorian food manufacturing industry to identify specific new product opportunities.

S 30. Leverage into Victorian Governments Next Generation Food Strategy Initiatives in Regional Innovation Cluster Programs.

O 11. Efficient industry through chain

S 31. Explore potential for a through chain project that assists in development of a new product, the developing organic industry represents an opportunity for this.

S 32. Investigate potential and mechanics for cooperation with the Organic Federation of Australia and AWB Ltd who are developing this market.


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O 12. A New Industry Product for Export

S 33. Leverage into Victorian Government’s Exports Development and Promotion Initiatives to explore industry cooperation on development of a new product specific for industry exports

O 13. GM Technology

S 34. Support development and science of GM technology to ensure international grains industry competitiveness

S 35. Maintain a watch on legislation and market readiness for the technology.


It is in millers’ interest to support a competitive grain handling infrastructure and the changes towards pooling, bulk handling and larger segregations. In as much as there would be opportunities to reduce cost in the changed environment, there are also threats in industry’s reduced capacity for process and product quality differentiation and cost increase when its requirement are exceptions to the larger flow. Rising fuel costs and levies are of serious concern as they impact directly on wheat cost, more so when procurement is outside of the “efficient large export volume geared infrastructure” and roads are industry’s primary and often only mode of transportation. There is no alternative in rail transportation. The on going rail transport deficiencies and lack of a deep harbour facility in Victoria for long range planning of future mill locations may result in some players relocating out of Victoria in the longer term, with direct adverse impact (further contraction) of the local milling industry.

O 14. Suitable wheat for domestic millers in bulk segregations.

S 36. Monitor varietal mix and segregation availability to meet domestic industry requirements so that concerns can be raised with AWB and bulk handlers.

S 37. Encourage growers in preferred procurement zones for the domestic industry to invest in adequate storage if they want to engage in this supply line.

S 38. Highlight industry’s quality needs for approved protectants and pesticide free requirements when negotiating harvest treatment protocols with AWB Ltd annually.

S 39. Maintain domestic industry voice in the general grains industry forum on concerns of lack of alternative fumigant to phosphine for the industry.


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O 15. Consistency in bulk segregated wheat for specific purpose.

S 40. Monitor consistency levels and highlight outcomes to grain handlers, individual companies with contractual issues, Flour Millers Council with issues of generic concern.

O 16. Strong direct relationships with growers who do not always respond to AWB premium varieties for specific variety needs, i.e., those in marginal Victorian growing areas where achieving higher protein to make into the hard grade is difficult.

S 41. Develop a list of potential growers and investigate interest.

O 17. Competitive storage, handling and transportation costs

S 42. Initiate a study comparing bulk handling and transport charges between Australian states to ascertain competitiveness of a Victorian mill to elsewhere and current cost gaps to interstate mills

8.6 Market Growth & Demand

The Victorian and national demand for flour and flour products does not provide impetus for growth in what is a contracting Victorian milling industry. The Victorian milling industry has 3 potential growth avenues to develop. Firstly, niche products for local markets which could be extended to international markets, secondly facilitate demand for organics and capitalize on growing local and international demand, and thirdly better leverage into AusAID opportunities in flour aid shipments to maximize milling capacity.

O 18. Gain strong support in development of niche products at an early stage

S 43. Niche Products and Market Development.

S 44. Active engagement in various grains industry CRC’s, CSIRO programs, GRDC New Products program etc. to identify alternative and new market potential such as functional foods.

S 45. A through-chain support for organic grains and for export, extend support for export market development.

O 19. Development of an organic flour and manufactured products from organic flour industry.

S 46. Develop a Victorian industry position on organics and explore potential synergy with a national flour milling industry approach.


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S 47. Work with “The Victorian Directory of Organic Producers’, a Victorian Government’s Next Generation Food Strategy Initiative to address impediments to development of a Victorian organic industry.

S 48. Identify growers receptive to segregations for organics and specific wheat variety not conforming to AWB segregations.

S 49. Work with AWB’s existing registry of organic wheat growers

S 50. Encourage growers’ investment in storage facilities for organic wheat.

S 51. Gain support from AWB in developing an organics through chain specific for Victorian cereals industry.

O 20. Increase Exports

S 52. Support individual member pursuit of commercial export initiatives by lobbying AWB Ltd for improved wheat price basis for exports

S 53. Support individual member pursuit of commercial export initiatives by exploring government initiatives to encourage exports

S 54. Encourage food manufacturers to export to create demand for domestic flour sales

O 21. Increase use of AusAid opportunities to maximize Victorian industry’s milling capacity

S 55. Lobby AusAID to increase aid shipments in form of flour and manufactured flour products rather than grains.

S 56. Collaboration with AWB on wheat priced competitively such as at low end of Pool Price for flour aid shipments.

S 57. Collaborate with dairy and sugar industries in lobbying for flour/sugar/milk powder mix in Aid shipments.

8.7 Human Resource - Skills, Training and Development

Resource development in four competencies within the grains value chain is critical to the industry future. These capabilities are: - Cereal Chemists with expertise in wheat and flour milling technologies - Mill Operatives with milling and process control expertise, - Grain Buying & Procurement Specialists with commercial and supply chain expertise, and - Managerial capability in effective integration of these functional capabilities to add value to the grains industry. Operationally, there is ongoing training and skills upgrade to keep pace with increasing automation in use of computers and software and improvements in


84


process sophistication from technological advances. Notwithstanding milling is an art gained through experience. Industry has a dual need to train older employees (millers) – typically in their 40s and 50s - in increasing their skills in use of “modern” technologies and younger recruits into the practice of milling. There are on-going training needs such as Occupational Health & Safety practices.

O 22. Trained and skilled workforce for future.

S 58. Investigate the opportunities for development of cereal chemists through Universities, Bread Research Institute, Grains Industry CRCs, Royal Australian Cereals Institute- Cereal Chemistry Short courses

S 59. Assess relevancy of the NABIM distance learning course for Australian Millers and explore adaptation to Australian industry conditions.

S 60. Explore FMCA vocational training programs for mill employees.

S 61. Maintain scholarship and work experience programs.

S 62. Explore potential for an Industry Induction Program for new recruits into industry

S 63. Consider Mentoring Programs aligning older millers with younger employees.

O 23. Talent retention

S 64. Assess incentives such as Industry Apprenticeship Program, Industry Regional Cadetship programs, Mentoring Programs and in conjunction with other sectors, e.g. Baking Sector.


O 24. Attractive Victorian milling industry with career path into wider Victorian cereals food manufacturing sector.

S 65. Create and promote a profile highlighting attractiveness of careers in the Victorian cereals industry within the cereals sectors and to school leavers. [e.g., develop and publish information brochure/project sheets profiling industry and career opportunities to senior, primary, late secondary and tertiary students]

S 66. Assess collaborative partnerships with customer industry organizations (e.g. baking, stockfeed) on state or national level

O 25. Recognition of industry’s value add in value chain.

S 67. Develop a strong profile and presence by increasing communication of industry’s value add in the grains value chain.


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9 IMPLEMENTATION

The Flour Millers’ Council of Victoria has commissioned this sector plan and the members will be the key drivers of the plan. It is clear that many elements of this plan in accord with the normal competitive nature of business will best apply to and be relevant to an individual business. Elements of this plan will have different relevance and priority for individual companies. Some strategic initiatives may overlap with the national issues and be shared with Flour Millers’ Council of Australia input. Members of FMCV will determine the issues, timeframe and method of activating identified priorities. The Sector Plan sets out the recommended Objectives and Strategies for the Victorian Flour Milling Industry for the next 5 years. As with any plan this is a working document and is subject to review by FMCV members as information or priorities suggest this to be appropriate. The Executive Officer will monitor impediments and progress of implementation in conjunction with members to achieve the agreed industry goals.


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Victorian Flour Milling Industry Sector Plan APPENDIX Sector Plan 2006-2010

10 APPENDIX

10.1 Consultations

The following people were consulted in the course of developing the Sector Plan. Name Company Position Denis Gerrard Weston Milling Regional General Manager Richard Harford Allied Mills Operations Manager Roger Laubsch Laucke Flour Mills Site Manager Tony Payne Allied Mills Southern Region Hub

Manager Mark Laucke Laucke Flour Mills Managing Director John Spragg Stockfeed Manufacturers Council of

Australia Executive Officer

Robert Parkes Ridley AgriProducts National Technical Manager Cheryl Downie Baking Industry Association of Victoria Executive Officer Norm Alexander N.G.Alexander & Co. Pty Ltd Managing Director Andrew Lee Lee Consulting

(formerly Exec. Officer FMCV) Consultant

John Underwood Centurion Mills Victorian Operations Manager

Robert Nelson Toshoku Ltd General Manager Graeme Rogers Retired (formerly Bunge Australia) n/a Steve Burt Australian Wheat Board Australia Trading Manager

10.2 References

ABARE eConference Paper 04.9 – Leanne Lawrence ABARE eReport 0.5.3 Comparison in Australian, USA and Canadian Wheat Yields from 1960-61 to 2000-01. ABARE Fram Statistics in the Wheat-Sheep Zones 2001-02 ABARE 2003 Crop Report, September 2005 Crop Report, ABARE, Canberra ABARE Australian Grains 2004-05 October 2004. ABARE Commodities Australia's food industry: recent changes & challenges: R Delforce, A Dickson & J Hogan, Product Code: 13169, June 2005 ABARE, S Hooper, P Martin, G Love & B Fisher, Farm Size & Productivity, September 2002 Angela Clough, Bread Wheat – Rosella, Wheat Varieties 2005 AG1159, Department of Primary Industry, Ballarat, February 2005. http://www.dpi.vic.gov.au Australian Bureau of Statistics, Apparent Consumption of Selected Foodstuffs, Australia, Preliminary (Cat. no. 4315.0)-November 1998


87

http://www.dpi.vic.gov.au/

Victorian Flour Milling Industry Sector Plan APPENDIX Sector Plan 2006-2010

Australian Bureau of Statistics The Wheat Industry: Statistical bulletin. Australian Government Wheat Export Authority, The Growers’ Report 2004 Australian Grain Yearbook 2005. Australian Wheat Board Limited (AWB) “ Business Statistics” Table 3: Percentage of Wheat Receivals by Class. Australian Wheat Board Limited Investor Fact Book 2004 Australian Wheat Board Limited Website September 2005– AWB Wheat Quality Standard & Golden Rewards-Premium Choice Varieties Australian Wheat Board Limited Website September 2005 Australian Wheat Growing Areas Australian Wheat Board Limited Winter Wheat Sowing Guide 2005 Australian Quarantine Inspection Services, Organics Export Trend, 2002. Biofules Taskforce 2005 Report of the Biofuels Taskforce to the Prime Minister, Commonwealth of Australia, Canberra. Dept of Agriculture, Fisheries and Forestry, The Australian Baking Industry – A Profile, BRI Australia Ltd, 2003 Essential Services Commission: Review of Export Grain Handling Regulation - Final Report - 25 October 2002 - Map 3: VicGrain Catchment Area Flour Millers’ Council of Australia (FMCA) Flour Millers’ Council of Victoria (FMCV) Grains Research Development Council, Peter Reading, MD at Grains Week April 2005 Grains Research Development Council Annual Report 2003-04 IBIS World Report C2163 Biscuit Manufacturing in Australia, August 2002 & 10 August 2005 IBIS World Report G5124 Bread Manufacturing in Australia – 2 November 2005 IBIS World Industry Report: Flour Mill Manufacturing in Australia 30 September 2005 IBIS World Report G2152 Cereal Food and Baking Mix Manufacturing in Australia 10 August 2005 Kronos Corp. Pty Ltd. Directory of Linkages in the Australian Grains Industry February 2004. Margaret Hillman & Ian Smith Growing Wheat, Bendigo, Department of Primary Industry Victoria, 1996 National Australian Bank Global Grain Outlook 2005 National Australian Bank Wheat Outlook October 2004


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Victorian Flour Milling Industry Sector Plan APPENDIX Sector Plan 2006-2010 Strategic

Areas Explanation Issues Time

frame Relative

Importance Short, Med, Long Low, Medium,

High

10.3 Consolidated Industry Feedback on Industry Issues

Raw Material Supply (Wheat & other grains ?)

Wheat is the obligatory raw material for the industry, without which there is no flour milling industry. During the 2002/03 drought, domestic millers had to keep its needs to the fore of the wheat industry due to export and feed competition. Victorian mills only utilise ~18% of the ~2 million tonnes Victorian wheat crop. In drought the stockfeed industry competes for wheat, esp. when there is not enough feed grain on the eastern seaboard. Soft wheat from WA costs $80/t to bring into eastern seaboard. Wheat typically represents 70% of flour production costs and has a major impact on profitability of a low margin industry. The International long term trend in wheat price is downwards placing increased cost on need for productivity increase on farm. Wheat price is set by AWB pool price that reflects international pricing and establishes optimal returns to AWB’s stakeholders, the wheat growers. Millers need to pay ABOVE pool price to secure attractive wheat parcels specific for their end user needs.

Wheat as mandatory raw material, not substitutable Wheat supply sustainability -reducing farm gate returns -water availability -climate change Wheat Price (international parity based on pool price) Wheat Variety availability and suitability to meet demands of domestic market Soft Wheat; reliability & consistency Ethanol ramifications Livestock lobbying for more feed grain Divergent needs in wheat breeding towards export sponge & dough & livestock Unable to fund breeding programme even on national basis, (requires support from GRDC investment) Developing direct relationship with growers on specific variety Limited interest from AWB to support soft wheat interest on east coast Adequacy of Wheat Receival

Med Med, L Med, M Med, Ongoing, M Med, S,S Med/Long, M, L Med, M, M Med, M, M Med, S Med, L,S Short/Med, S,M

High Med, H Med, M Med, Ongoing,H Med, H,H High, M, H High, M, H Med, L, M Med, H High, M, M High, H, M


89



frame Relative


High

AWB also sets rules for implementation of costs above the basic price – eg Golden Rewards – that may bear no relevance to international wheat prices but can add significantly to miller’s cost of wheat purchase. Variety is a major determinant of milling efficiency and flour suitability and can be a component factor within the miller’s control to achieve best procurement value. Millers convert their knowledge of flour requirements for end-user needs into wheat quality specifications used to determine preferred varieties to procure and to establish breeder objectives. Victoria is suited to growing soft wheats of the varieties required for producing Asian noodles, biscuits and cakes. Historically millers have cooperated to maintain availability of specific varieties but increasingly over time industry rationalisation has limited this. Millers still have concerns on soft biscuit wheats and soft ASW Rosella:- reliability and consistency when available. There is concern over diminishing availability of Rosella that yields excellent Japanese noodles. Balancing supply with demand. Economics are challenged by growers. Eg Rosella is uncompetitive in yield and is an old variety that has no replacement in the breeding program. Massive changes in commercial orientation of the breeding industry structure makes it difficult to concentrate on a category that represents only 10% of wheat requirements Downgraded Soft wheat was classified as feed for payment purposes by AWB proving poor incentive to growers to retain interest. The domestic industry have focus on soft biscuit characteristics in contrast to AWB in ASW soft wheat

Standards based on quality of wheat receivals at mill. Ability of grain growers to store & supply grain to domestic flour miller requirements Other (please add)

Med,L,S Med,L,S Med.

Med,M,H Med,L,H Med.


90



frame Relative


High

characteristics. Receival quality standards are set by AWB who are driven to meet its export market requirements, these may not always align with local millers’ needs. The production of (corn-based) ethanol has been growing in double digit in USA since 5% incorporation has been legislated and a similar concept is being pursued in Australia. If ethanol is legislated into fuel at 10% [6 ethanol plants on drawing board by farmer cooperatives], the increased grain demand on eastern seaboard would cause wide ramifications for the comparatively smaller Victorian flour milling industry. The ramifications could be: Higher domestic wheat price as 5MT wheat (or other grain) is consumed in ethanol production @10% incorporation. Reduced focus on wheat for baking as focus shifts to varieties with higher yield and starch content for ethanol instead of protein for baking, esp. when growers are rewarded for higher production yield. This will reduce the number of growers focused varieties specific for domestic flour quality requirements. Increase competition from stockfeed industry for balance of wheat supply as stockfeed industry is growing strongest in Victoria at 4-5% driven by dairy industry. State policy prohibits and restricts use of GM varieties, thereby constraining exploitation of genetic technologies that provide agronomic productivity for grain growers. Currently consumers and the end user market reject GM. The current Wheat Classification system a responsibility of the AWB as part of the Wheat Marketing Legislation enables balance from breeding programmes for variety

Med. Short/Med Med

Med. High Med.


91



frame Relative


High

attributes that satisfy consumer food products (ie market growth drivers) versus those derived to provide high paddock yield (growers’ production drivers) The high cost of wheat breeding estimated at over $1 million per released variety which may only gain limited if any grower acceptance means that the industry is reliant on the success of the breeding programs to produce varieties suited to all market needs. This has been the case historically in Australia. A different breeding construct in Australia makes it more important for strong miller / breeder interface. The growing stockfeed industry has divergent wheat breeding requirements, requiring efficiency of energy conversion as their key yield driver, this thrust is gaining momentum

Med Med

Med. Med.

Food Industry Demand (Consumer influence)

Somewhat mature per capita consumption with limited growth potential owing to low population growth. Bread, cakes, pastry and biscuit consumptions have reached somewhat of a saturation point. Growth here – whilst 2-3%pa wrt production – is insufficient to provide impetus to the industry. Bread market consumes a high portion of Victorian flour production. Trends towards (retailer) private label breads selling at 30-40% discount to branded bread, results in cost pushback to millers for lower flour prices resulting in further pressure on milling margin. In a mature bread market (low population growth) with market share keenly fought between chain and independent hot bread shops (“600” in Victoria) together with branded and in-store breads serves to drive flour prices lower.

Shrinking Local Consumer Demand Low population growth Reducing Customer base (Food Mnfs) Customers shift interstate or exit No customers left to be developed By-product demand (consistency & seeds quality issue) Stockfeeders moving towards specifying quality parameters High dependency on bakery Industry Inabilty to increase market size

Med / High, M,S Med,L,S Med,L Med,L Med,L Med,L Med,M,M Med,M,S

High,L,H Med,L,H Med,L High,L High,M Med,M,L Med,L,M High,L,M


92



frame Relative


High

The largest bakery customer (outside of branded and in-store bakeries is Bakers’ Delight (13% national bread market share), flour for this contract is currently provided from outside of Victoria Major flour consumption has been lost to Victoria in recent years as processing has been transferred interstate; Closure of a large industrial use of flour @ 100,000 tpa or ~ 30% of industrial flour consumption by the last remaining wheat starch processing plant in Victoria. Capacity has shifted to Manildra’s NSW starch plant supplied by its NSW flour mills. Arnotts nationally requires 80-100,000 kt of flour but it has no Victorian plants having closed two in Victoria, most recently Burwood in 2002 with production transferred to Brisbane. A new concern for the industry is competition from imports into Australia of manufactured foods previously produced locally using flour. An example of this new competition is in the Biscuits industry with shortbread imports over the Christmas season. Previous attempts to increase market size (promoting consumption) have failed due to inability to achieve cooperation across broader industry. Under duress the USA Baking & Milling sectors have joined forces to fund promotion of cereal product consumption in a concerted effort to reverse a major downtown.

Food Safety & QA standards become increasingly stringent Potential for increased product traceability from farm gate to food at consumption Adequacy of R&D capacity & capability in milling industry Other (please add)

Med,L,S Med,M,S Med,L,M Med,L,M Med Med

High,L,M Med,M,M High,M,M Med,L,M Med High

Logistics & Infrastructure

Deregulation and rationalisation has resulted in wheat storage and handling dominated by one player in Victoria, ie Graincorp.. Given AWB optimise wheat supply chain to

Logistics, rail system deficiencies Port access, Port Phillip Bay

Med,L,S Med,L

Med,M,H Med,L


93



frame Relative


High

export customer requirements, and with GrainCorp focusing on larger tonnages in silos, local millers may be unable to access smaller required parcels when required to maintain continuity of supply. The reduction in silo choice (and location) further limits availability of millers wheat supply options and can incur additional costs in transport or penalties due to operations conducted under duress and outside of program schedule. Storage availability for segregated variety required by local millers in comparatively smaller quantities to export becomes an issue when storage is geared towards pooling export varieties. Separate supply chain specific for organics, GM or identity-preserved varieties have yet to fully develop to offer a viable integrated solution. Deregulation of rail industry in eastern seaboard has not benefited the grains and milling industry as infrastructure and work practice deficiencies means that the rail system can not meet industry needs, and the export demand has precedence. With key wheat growing regions in NW Victoria and storage silos near rail lines, the Victorian flour milling industry in general is unable to exploit efficiency gains in an infrastructure geared towards large export volumes. Road is the primary and for most players the only mode of transporting wheat into millers’ factories as well as outbound bulk/+ packaged flour to end-users. As mentioned above even where access is available it is used in limited way. With need to move large quantities of material in and out of the milling site the volume of road

dredging Metropolitan locations, Mills located in residential development zones (Pressure will start in 10 years) Perceived declining service from Bulk Handlers Ability to obtain suitable consistency in supply from bulk segregations Need for insect free supply of grain, current lack of alternative fumigant for the industry) Global competiveness of our mills, (capital intensive) Cost restricts grain procurement to a defined area, say within 500km of mill => fuel costs, fuel levy Ability of industry to satisfy separate supply chains, organic, GM free, pesticide free, etc. Other (please add)

Med,L Med,L,S Med,S,S Med,M,S Med,M Med,S,L Med,S,L Med

High,L Med,M,M Med,H,H Med,M,H Med,L, High,M,H High,M,H High


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frame Relative


High

freight is high. This has implications both in terms of trucks in neighbouring residential areas but also in eventual cost due to poor time efficiencies of trucks caught up traffic congestion. The wheat procurement areas for millers completely reliant on trucks are restricted to within 300-400km of its mills. Further, rising fuel costs and levy also threaten millers’ already low margins. Allied Mill Kensington and George Weston North Melbourne mills reside in emerging industrial to residential land conversion areas that have potential residential issues in noise pollution from flour transportation into mills. Pressure to relocate will start in 10 years hence. A new mill costs $20-50 million and the historically low margin deters investment by new entrant or smaller players lacking in capital. Increasing global demand for sea freight driven by China’s import requirement has caused a shortage in container availability and increased rates impact severely on low margins in exports.

Med Short/Med Short/Med Med

High High High High

Cost Impacts on Margin

Typical of regulation impact on industry is the Federal Government initiative to be implemented in Victoria later in 2005 where all parties in the freight chain have potential liability for trucking prosecutions. Regulatory dictates create a large ongoing training cost to the industry. Also compliance with OH&S and Food Safety has increased costs, an issue similarly shared by the

Flour Price (static over 10 years) Costs erode already low margin Federal Initiative “Chain of Responsibility” impact (to be implemented Victoria end year) The overall regulatory burden does not inequitably effect the

M,S L,S S,M Med,L

M,H L,H L,L Med,L


95



frame Relative


High

baking industry.

competiveness of the milling sector Other (please add)

Trained & Skilled Workforce

Mill operating hours – 3 shifts/day over 5-6 day/week unappealing to younger workforce and concerns on recruiting good workers. Regional mills like Allied Mills Ballarat compete with two other local multinationals – Mars and McCains – for good workers. As Mars remunerate on the upper quartile of manufacturing industry average, this impacts wages cost for Ballarat mill. Availability of accreditated training /study only via FMCA. Insufficient relevant high quality government courses to upgrade skills of low turnover aging workforce to meet industry needs. Younger workforce – unskilled or professionals - does not find industry an attractive career path. Existing format needs refinement to better service industry needs. Industry course structure needs to be customised to Australian content as some existing components not tailored to the Australian industry eg OH&S and Safety Laws and milling history. The need for continuing industry cost control and rationalisation has resulted in loss of skills from individuals leaving the company/industry and not replaced giving rise to lack of continuity of knowledge representing industry needs. His is especially evident in traditional key competency of wheat quality to meet customer demand.

Recruitment -Ability to attract skilled labour -Ability to attract & hold “good” labour for shift work esp. in city Relevancy of nabim correspondence course for Australian Millers Potential for apprenticeship program Opportunity to partner with customers (eg., baking, stockfeed) to promote profile and attractiveness of careers Other (please add)

Med,M,S Med,M,S Med,M,S Med,L,M Med Med Med

High,M,M Med,S,M Med,L,H Med,L,M Med / High Med Med


96



frame Relative


High

Market Growth

Key issue with developing niche markets is that the local population is not large enough to sustain niche segments unlike in USA or EU Growing markets that may offer growth and sufficient returns require lengthy support to develop a sustainable supply chain that provides some certainty for the participants to continue to supply the market demand consistently. Key issues in developing the organics market are: Certification and its lack of uniformity Lower wheat yields deter growers Lower milling yields No consistency of supply, not enough growers due to lack of supply chain direction and signals. Growers may be unaware of potential/markets. Requires national coordination in supply of organic wheat, such as by AWB who needs huge price premium eg 75-100% over normal wheat to secure interest to coordinate segregation and supply chain. Slow uptake in domestic baking industry, only 2-3% of baking industry members embrace as certification for other ingredients is an issue for bakers. Geographically diverse plots with no economy of scale. Growing interest in spelt which commands 3x baker’s flour price (and sprouted grains) but key issue is how to communicate to growers on spelt potential to increase growing acreage.

Flour from Interstate part of competitive market. Demand/Market/Opportunities Organics Certification, low yields, No consistency of supply, Not enough growers aware of potential, Slow uptake, Geographically diverse, no economy of scale Too small in Aust, 2-3 yrs behind NZ Demand/Market/Opportunities Niche products Spelt, sprouted grains Population/ local (national) market lacking critical mass Milling of Other Grains (oats, barley) Food Aid Opportunity to replace grain with flour. Opportunity for higher value more nutritious product, higher extraction or commodity blend, (USA corn/soy blend) Commercial Exports

Med,L,M Med,L,S Med,L Med Med,L

Med,M Med,M,M Med,M Med Med,M


97



frame Relative


High

Gluten free wheat flour for coelic intolerance consumer. Historically, FMCA coordinated, negotiated and allocated pro-rata by capacity export contracts such as those to Mauritius (15-20,000 tpa) or bilateral flour food aid (3,000t). These processes are no longer appropriate. FMCA works with AusAID to maintain up to date database contacts for the few tenders called for and continues to press for flour aid consideration rather than aid in the form of grain which has been preferred recently. Australia has typically exported about 10% of flour produced for a number of years, mainly commercial trade. Potential for commodity flour export from Victoria exists but the following issues impact on competitiveness: exchange rates, raw material costs (can only supply when global shortage of wheat), sea freight costs (a difference of $20/tonne is significant) lack of availability of shipping containers. Regional mills are further disadvantaged by additional freight costs ($20/tonne) to Melbourne. In 2003 following implementation of AFTA, flour import duties in Asia has fallen to 5% from previously high barriers e.g. 65% in Thailand. Without tariff protection, some Asian millers may be uncompetitive which may create export opportunities for Victorian flour millers. Opportunities for pre-mixes are strong into Asia (especially Japan) and some Middle East markets. The market in USA has experienced a decline in flour

Exports, ability to compete (FX, freight, wheat price, shortage of containers) No incentive to do exports; freight rebate? esp,. for regional mills where costs $20/t to truck to port Not enough knowledge of Asian market opportunities Duty rates have reduced significantly in some SE Asian markets. No resource to gather market intelligence Other (please add)

Short/Med Med,M Med Med Med Med Med Med

High Med,M Med Med Med Med Med Med


98



frame Relative


High

production over the past four years and while this trend has not impacted the Victorian and Australian market the factors considered relevant should be noted; erosion of consumer confidence in wheat based products as part of a healthy diet and its role in obesity & weight control increased imports of flour based consumer products decrease in commercial flour exports. decrease in flour food aid budget

Med

Med

Industry Profile

Milling industry has long history of independence and going about meeting its needs by working with other parties in the supply chain.

Opportunity to create better understanding of the industry position in the supply chain More collaborative working with supply chain partners on specific areas of interest Recognition of the milling industry as a supplier of high quality product Other (please add)

Short/Med,M,M Med,M,L Med,M

Med,L,L Med,M,L Med,M,M


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plp flour miller's council strategic plan 13dec2005

Documents

victorian industry

industry development

industry issues

industry players

industry concentration

industry expansion

sector plan objectives

present industry position