A review of opportunities to promote Australian wheat in export markets

Field: Economics, Econometrics and Finance (Social Sciences)

The purpose of this review is to consider the case for expanded promotion of Australian wheat on export markets. The conclusion is that there is no convincing case for expanded export promotion.
A major aim is to elaborate the concept of promotion in all its dimensions. An essential unifying theme surrounding promotion, and marketing in general, is the provision of information that is useful to buyers in making their purchasing decisions. Like successful advertising, effective promotion reduces transaction costs, enhancing the role of prices and the working of the market. Understanding promotion therefore requires contemplation of the nature of wheat as a product and existing marketing arrangements for export wheat. In addition, the respective roles of government and industry in financing and organising promotion and the distribution of the benefits and costs of promotion need to be considered. Role of government/industry questions are complicated by the large numbers and diverse functions of the public and private institutions and firms already involved in activities that fall within the ambit of promotion.
Wheat is a product whose characteristics are mostly well known to sellers, buyers and traders. The principal method of economic coordination is the price mechanism in terms of average prices and the margins reflecting transport costs and so on. While wheat can be differentiated according to quality and end-use, its major characteristics can be accurately described and incorporated into contract specifications. The intrinsic price-driven nature of the world wheat trade is demonstrated in an appendix by illustrating the close correspondence between the prices received and the unit values of exports for the major wheat exporting nations. Unlike agricultural commodities like meat and fresh fruits and vegetables that can be promoted directly to final consumers, wheat is consumed in forms vastly different to that in which it is traded. Wheat is much more like an industrial raw material than an agricultural product in its behaviour in international trade. Promotion of wheat, at the retail level, is not a consideration. Not much can be gleaned about export promotion of wheat from the experience of promotion of other agricultural commodities in Australia or other countries.
Regarding institutional arrangements, the marketing of Australian wheat has changed significantly since the deregulation that followed the long period during which export wheat marketing was conducted by the Australian Wheat Board, and its successor AWB Ltd. Key changes include the entry of the established large international grain trading firms to the Australian market and the emergence of Australian grain marketing firms that have their origins in previous statutory organisations engaged in grain handling, storage and transport. These firms have successfully extended their expertise in domestic logistics downstream to domestic and international grain trading operations. More nuanced arguments apply at the level at which wheat is actually traded. Different circumstances apply for established and new markets. The case for promotion is strongest in new markets where trade connections are developing and market knowledge is limited for buyers and sellers. It is argued that existing major grain marketing firms have both the experience and resources to invest in developing markets. Moreover, much of the grain trade is opportunistic because of fluctuations in supply in exporting and importing countries. Large parts of the international grain trade are driven by transport costs. There is no case for export promotion in either of these circumstances, beyond that provided already by grain trading firms. Further, although the idea of country of origin as a basis for export promotion would have had some currency in the AWB era, this is no longer the case. This is again due to the product attributes of wheat as an industrial raw material, distant and distinct from the final products sold to consumers, and the existence of a sophisticated international grain trade.
It is also argued that more important questions than export promotion concern the collection of market intelligence, and market and competitor analysis. The collective action required to improve knowledge of new markets, and strategic structural changes in existing markets, is best organised via existing industry bodies like the Grains Research and Development Corporation (GRDC). It is emphasised therefore that a sense of perspective is required. Any role for promotion would be small vis-a-vis the major economic and climatic factors affecting the domestic and international competitiveness of the Australian wheat industry.
There is, however, an unambiguous case for government involvement in trade diplomacy intended to improve market access. Given the technical dimensions of the wheat trade, such efforts need to be supported by industry input. It is suggested that Austrade and state-based trade organisations might consider developing services to the benefit of the grain industry post-AWB, particularly in parts of the country where the grain industry is dependent on exports.
A major part of the review is concerned with the export promotion activities of other important grain exporting countries – the United States, Canada, France and Ukraine. Apart from the Ukraine, the export promotion activities of these countries are supported by subventions from government, something that is not in prospect for Australia. Widely circulated claims concerning the success of US efforts in export promotion of wheat are evaluated in an appendix, and found to be exaggerated.
At a more practical level, deregulation has reinforced the bifurcation of the Australian wheat industry into strongly export-dependent states like Western Australia and South Australia, compared to other states in eastern Australia, where the domestic market is of far greater relative importance. The farmers who are part of the latter component are much more likely to be engaged in direct marketing activities on their own account, particularly with clients in grain-feeding livestock industries. This substantial diversity within the Australian grain industry effectively precludes the development of a uniform approach to promotion across the industry as a whole. There are no obvious criteria by which projects could be selected and funds could be dispersed for any large-scale promotional campaign to Australian firms who are already mostly well placed to make their own decisions about export marketing.