When all the power lies at the top of the supply chain the country loses

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I have reprinted this great post from Jan Davis CEO of Tasmanian Farmers and Graziers found here

Farmers fight for balanced diet

August 23, 2013

Wesfarmers, owner of the Coles supermarket chain, last week announced a $2.26 billion net profit for 2012/13, aided by Coles’ contribution of $1.53 billion, 13 per cent up on the year before.

That’s good. We want to see Australian companies making healthy profits.

However, I’m bemused by the comments made by the bosses of both Coles and Wesfarmers that, despite their Down Down, Prices are Down campaign that has seen food inflation as low as 1.1 per cent, Australians are still paying too much for our food. They intend to cut prices more.

If you look at where we stand internationally, the argument is unsustainable. In Australia, we now spend about 10 per cent of our incomes on food – which is one of the lowest levels in the world. According to a study undertaken by the Washington State University, this is less than consumers in Scandinavia, where people spend an average of 11%. In China, consumers spend 39 per cent of their earnings on food; the figure is 44 per cent in Indonesia. If you lived in Azerbaijan, you would spend 48.5 per cent of your income on food.

Even more importantly, the proportion of our income that we spend on food has continued to fall each year in Australia, whilst our average incomes have risen. According to government surveys, our proportionate spending has halved in thirty years.  People now consider to be basic essentials that previous generations could only dream of – flat screen TVs, brand new cars, overseas holidays, private school education etc etc – and that means there is less money directed to food spending.

I understand these are average figures, and some Australians are worse off than others, but we are not exactly at risk of starving, are we? At some point, we need to recognise the unalterable fact that you get what you pay for – and it is simply not possible for Australian farmers to produce safe, nutritious, quality food at ever-diminishing prices.

It’s not rocket science to work out that Australian farmers can’t defy the forces of gravity – they can’t continue to survive with increasing input costs and decreasing farm gate returns. Everyone knows that $1 per litre milk is not sustainable.  The only way retail food prices in Australia can continue to fall is if supermarkets import more and more cheap foreign products that don’t meet the standards we expect in terms of safety and quality. Is that what we want?

The Australian Competition and Consumer Commission seems to be in a constant state of scrutiny of the supermarket behaviour: whether they exercise unfair market domination for groceries and petrol, or their alleged bullying demeanour towards suppliers. Yet nobody seems to be able to address the real issue – that the Australian grocery marketplace is distorted because of the Coles and Woolworths’ duopoly. 

We all know that increased profits for the supermarkets, and cheaper food prices for consumers, come at a cost. And we all know that it is Australian farmers who end up paying these costs in food prices.

Our beef is that, at the bottom of the food supply chain, it is Australian farmers who are getting screwed on price. Studies show that, while we live in an affluent society that pays less each year for food, 86 per cent of shoppers are still driven by price.

We need a reality check here. There has to be an equitable balance between returns to farmers, the prices that retailers charge consumers, and the profits that those retailers make.

Profit is not a dirty word. It is good for Australian companies – including supermarkets – to make a profit. However, farmers run businesses too – and they should be able to expect to make a reasonable living in return for their hard work and investment.

Contact Jan Davis
0409 004 228

Author: Lynne Strong

I am a 6th generation farmer who loves surrounding myself with optimistic, courageous people who believe in inclusion, diversity and equality and embrace the power of collaboration. I am the founder of Picture You in Agriculture. Our team design and deliver programs that inspire pride in Australian agriculture and support young people to thrive in business and life

4 thoughts on “When all the power lies at the top of the supply chain the country loses”

  1. Lynne, I’d like to respond to Jan’s blog posted in this forum. It’s heartening to hear the continued talk about farmer profitability. Particularly from the CEO of a SFO. It’s even more encouraging the recognition this Nation is not about to run out of food.
    Recognition of those two key points will enable agriculture, and its leaders, to take the next step. Part of that step is an acceptance from agriculture, and our leaders, there is no compulsion to supply. Profits aren’t a right, they are earned. If prices don’t provide an adequate return then we should not supply. It is not mandated we must supply. Coffee shops do not continue to operate at prices below the cost of production over the long run. Why is agriculture any different?
    However people want to view agriculture, we are a commercial business generally supplying a commodity. That commodity is generally over supplied. While we farmers over supply the supermarkets will always have the greatest market power.
    If the oversupply continues then either one of two things is occurring; 1) Some supplying are profitable and those not profitable see a return to profit possible in the short run or 2) factors other than profitability drive the production business.
    Thanks for the opportunity to respond. This is a discussion agriculture needs to continue having

    Corey Blacksell

  2. In principle, of course you’re right, Corey.
    There are a few ‘buts’, though, that make the text book principle difficult to manage in the real world.
    The first ‘but’ is the economists’ phrase ‘ceteris parabus’ – other things being equal.
    If Australian farmers can compete on a level playing field, then we know they will not be priced out of the market because they have demonstrated their ability to produce competitively. If their costs of production are increased by imposts enforced by government – for whatever reason – then the playing field is no longer level. Farmers have no control over those costs, nor in most cases can they simply pass them through to the consumer as happens in other market sectors.
    Which brings us to the second ‘but’ – a really nasty double whammy.
    Not only do governments impose non-market-based costs on farmers, they also actively interfere in marketplaces to drive the retail price of food down to keep the punters happy. If food prices increase, then people get agitated. In some countries even in recent times there have been food riots – in Italy, for example, when the global wheat crop failed a decade ago and pasta prices went through the roof. And who can forget then Treasurer Peter Costello standing on the steps of Parliament House telling voters that interest rates had increased and their mortgage payments would be going up because the price of bananas had increased after Cyclone Larry? This attitude has been one of the key drivers behind Australia’s relentless and unthinking adoption of a purist approach to free trade. We’re a laughing stock internationally on this account, as other countries think of us as naive and a soft touch in trade negotiations.
    Which is a direct pathway to the third ‘but’ – food is not like anything else.
    Almost every other country in the world recognises the need to be able to feed their own people from their own resources. There are a plethora of adjustment measures to ensure the continued existence of domestic food sectors in other countries – because they understand the crucial importance of self-sufficiency in food. But here we assume access to food is a given, and we accept policy settings that say it doesn’t matter if all our farmers came to their senses and decided to walk away from a low-return high-risk industry. I have sat in the offices of state and federal leaders and been told it doesn’t matter if Australian farmers can no longer afford to farm – we live in a global economy and we can import all the food we need. Not a thought is spared for the consequences of interruptions to imported food supply through international political disruptions, health pandemics or a sovereign nation deciding to cease exporting food for internal political or social reasons.
    This is even more gobsmackingly stupid, when governments of all colours and at all levels are falling over themselves to provide massive subsidies to ensure Australia maintains a domestic car manufacturing industry. A total of 39 countries in the world produce cars; at #29, we account for just 0.3% of world production. In the last decade, experts estimate that the three local car manufacturers have received more than $4 billion in subsidies from the taxpayer and a seemingly open chequebook into the future.
    We all need food – and we expect it to be produced in a safe, ethical and environmentally sound manner. Our policy makers clearly value locally produced cars over locally grown food. In the not too far distant future, we may learn the hard way the bleedingly obvious fact that we can’t eat cars.
    So let’s bring on that level playing field – and then the principles we learn in Economics 101 may well hold true.

    1. Wow some great discussion here Corey and Jan. Bring it on
      Agriculture today is so much more than farming. It is part of a really important value chain that goes beyond the farm gate and into everyone’s homes and we want government to see it in this light.
      Neither of the major parties has genuinely outlined their policies for agriculture
      Agriculture wants a government that recognises and invests in our culture that aspires to excellence.
      If Australia is to be the food bowl of the 21st century then we need to move beyond the rhetoric and invest in it
      Farming is tough and our farmers are doing it tough there is no denying this and we can’t expect them to produce food and fibre for the world for nothing
      We need serious investment in innovation and research and development that deliver a fair return for farmers in the shortest turnaround time
      Food and fibre is produced by people and we need a government that is committed to investing in our farmers and their support networks
      All of the power lies at the top of the supply chain in this country. If we are going to level the playing field we need smart young people farming. We need to identify them, engage them and provide them with the skills and knowledge to actively participate in, and extract greater value from the fibre to fabric and paddock to plate supply chain.

  3. I support largely what Jan is saying – however, I would have serious concerns about an increased competitive market with more supermarkets in the game.

    We know the duopoly, we understand the issues and the restrictions and through forums and direct meetings, issues can be raised with key senior management. Try that with ALDI or COSTCO where predominantly the food items are Asian produced. For me plainly, it is better the devil one knows than wishing for increased competition – I don’t particularly like it but I understand it as increased competition would be a foreign chain not an Australian chain as those days are long gone.

    The levels of accountability applied through various media direct to Coles and Woolworths is incredible. I recall the dairy farmer’s wife posting on Coles FB page and receiving something like 74,000 responses before Coles pulled the post, faced a wave of public criticism and reposted it.

    Public opinion is recognised by these chains and they do mostly respond – not always in a positive way for farmers but they do respond. Don’t think the German owners of ALDI would be so accessible nor responsive to criticism. As we don’t have ALDI in my State how do they actually deal with farmers?

    Where agriculture fails is in its image – farms aren’t viewed as small businesses and there is little education for those in larger population centres. Thinking back, I have never seen the respective lobby groups looked at marketing to simply promote agriculture as a career – yet a colour television and farmer’s coop ad does. Never seen a career adviser in a Tas school selling an ag career either. Build image, build reputation, build political, corporate standing and career options.

    Large organisations advertise in rural media (such as Defence) but as Defence downsizes post Afghanistan, Timor and Solomon Islands, agricultural businesses aren’t advertising in Defence or ex-service media, despite the desperate skills shortages and increasing average age of farmers, to gather up potentially the best trained young people this country can provide.

    There are ways to be smarter – but first thing I identify are too many lobby and representative groups. Easy for Governments to divide and conquer as they do in other areas. So let’s talk more about the successes of agriculture, diminish the rural-urban gap with solid stories in mainstream media and show the positive future of agriculture in Aust – anything positive makes the politicians always willing to get on board and sometimes it is ok to sell your soul ………… a little bit!

    Jan – love your writing.

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