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Tuesday, March 15, 2016

How do Ag commodity supply chain costs compare?

By Andrew Woods  |  Source: AWI, AEGIC, NSW DPI, Holmes Sackett, ICS

Key points

  • Different logistic requirements mean that supply chain costs vary between commodities.
  • It costs around 28% of the grain farm gate price to move grain from the farm to a ship in Australia and around 14.5% for wool.
  • The total cost of selling beef and lamb is in the order of 7-8%, which is comparable to the cost of selling wool (when the larger wool tax is allowed for.)

2016-03-15 Supply Chain Costs Fig 2

The Wool Selling Systems Review (WSSR) initiated by AWI was charged with casting a critical look at the way wool is sold in Australia. In hindsight one glaring omission in the WSSR final report was a comparison of selling costs incurred by the major extensive agriculture commodities in Australia, to provide some benchmark costs. This article looks at the costs of selling wool, grains, lamb and beef and in Australia.

Table 1 (below) provides a comparison of selling costs between the main extensive agricultural commodities in Australia. The costs have been broken into costs applicable in getting the commodity to the port zone for wool and grains, and simply to the seller for lamb and beef, industry fees and levies and port zone costs (for wool and grains). The costs are expressed as a proportion of the farm gate price.

Some details in the selling costs vary across the country, such as state based levies for grains. End point royalties (1.2%) for grains have been rolled into the transport/marketing/logistics costs.

So, what does the table tell us? It costs in the order of 29% of the farm gate price to put grain onto a ship and around 15% to put wool onto a ship. The high volume of grains requires a substantial investment in bulk handling facilities, which accounts for the relatively high cost of moving grain off farm onto a ship.

Wool has a requirement for warehousing and testing that beef and lamb don’t. This infrastructure underpins the greater logistic component of selling wool in comparison to beef and lamb. Table 2 breaks up the costs of selling wool in Australia. One of the issues in the wool industry is the post-sale charge levied by wool brokers on exporters. Table 2 shows this amounts to 2.3% of the farm gate price (it is included in the port zone costs in Table 1).

The dream to ship wool direct from farm to mill envisages a large part of this warehousing and selling cost being cut from the supply chain. What is often overlooked is that the spot (auction) market provides a blending function where farm lots are transformed into mill consignments. In addition the warehousing system underpins the quality of the Australian clip by ensuring wool is shipped that matches the description on the accompanying documentation. Any changes to the system need to address these two important functions.

Wool has the higher industry fees and levies with the wool tax accounting for 2% and AWEX fee accounting for 0.1%. (When revenue from other services is allowed for AWEX costs the industry around 0.18% of the value of the clip.) The port zone costs for wool and grain are comparable, around 6-8%.

The indicative costs of selling beef and lamb is 5.5% to 7% plus industry fees and levies.  A look at the Holmes Sackett AgInsight farm benchmarking data shows that selling costs (all costs) for lamb and beef are around 7-8%, which matches the NSW Department of Agriculture budgeted costs.

What does this mean?

The cost to farmer to sell wool in Australia is on par with the cost of selling beef and lamb, especially if the higher industry cost of the wool tax is allowed for. Post sale charges levied by brokers on exporters remains an issue in the wool industry, although there is an argument that the warehouse requirement for handling wool will require additional costs.

From a port zone cost perspective the costs for wool do not look outrageous in relation to grains. The Wool Selling System Review point about improved transparency of broker charges would help greatly in keeping this cost under control.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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