Economics and Vegetables - Beyond the Farm Gate

Economics and Vegetables- Beyond the Farm GateAddress to East Gippsland Vegetable GrowersIan JamesIndustry Data Economic AnalysisEconomics Sub-ProgramVegetable Industry Development ProgramLindenowJuly 7, 2010Economics in the vegetable industryEconomics is a sub‐program of the Vegetable Industry Development Program(VIDP). My role is to:• Increase grower understanding of economic, business and market issuesoccurring beyond the farm gate that affects their operations.• Undertake economic research on key issues for vegetables.• Provide data on the industry that assists in its promotion and policyformulation and is communicated through the knowledge management subprogramof the VIDP.• Assist in the development of a new generation of entrepreneurs and leadersin the industry linked to the people development sub‐program of the VIDP.• Promote a one industry outlook focused on markets with strong interplay withthe consumers and markets sub‐program of the VIDP.

It’s the economy stupid?(Ex US President Bill Clinton)The global economy• Globalisation shaping the Australianeconomy.• Australia dependent on foreign incomeand foreign borrowings.• World policy dilemma ‐ debt repaymentv’s economic stimulus with majorplayers in conflict burdened by history.• At present a huge wave of uncertaintydriven by fears that policy makers willget it wrong.

Australian economy• World factors impacting on confidence levelsin Australia.• Consumers are cautious and seek value formoney as households are highly indebtedand sensitive to interest rate rises and loss ofincome.• Some sections of small business doing ittough and credit conditions remainrestrictive creating cash flow problems.• However corporate Australia is in greatshape well capitalised, high profits, low debtand beginning to invest.• Unemployment is low and the economy isriding a mining boom.• Economic growth is accelerating.Industry economic profile

Business sustainabilityYearVegetablegrowers withnegativecash income%Averagecash incomeper farm $Vegetablegrowers withnegativebusiness profit%Average profitper farm $2005-06 18 128 049 54 46,0432006-07 17 171,994 59 82,2922007-08 13 166,097 56 74,889Source: ABARE Survey of Vegetable FarmsThreats to profitability

Imports$M800.0600.0400.0200.00.0Exports Imports Trade BalancePeru -Belgium -India -Canada -Turkey -Thailand -Netherlands -‐200.0United States -‐400.0‐600.0Year to April2006Year to April2007Year to April2008Year to April2009Year to April2010Italy -China -New Zealand -0 20 40 60 80 100 120Source: World Trade AtlasPricing% increase in retail prices September1989 to December 2009%200150100500Bread Lamb SweetsMilk Fast Food FruitAll Food All Groups BeefVegetablesSource: Australian Bureau of Statistics• Vegetables are dirt cheap and longterm retail prices have not kept pacewith other food and goods in theeconomy.• Vegetable growers can provide endlesssupplies of vegetables at cheap prices.• Vegetable growers operate in aclassical economics free market wherethe market determines price.• If anything vegetable growers aresqueezed between a concentratedretail sector and near monopoly controlover inputs.• So vegetable growers need to lookclosely at markets in order to get betterrates of return.

Economic issues for the industryMarket access• Increasing globalisation increases the threat of the incursion of an exoticpest or disease.• Changes in bio‐security regulations in overseas countries can impact onexports e.g. carrot export market to Taiwan.• While there is open access to vegetable imports tariff barriers apply to ourexports.• The industry needs data to maintain market access, open up new marketsand protect existing markets.

Key inputs – water and labourProduceCash receipts($/ha)Cash costs($/ha)Returns($/ha)Dairy 4,636 4,741 ‐105Pome fruit 17,242 9,580 7,662Stone fruit 10,286 9,411 875Citrus 7,920 4,634 3,287Wine grapes 9,969 5,766 1,148Table grapes 5,355 4,207 4,202Vegetables 14,744 10,381 4,364Cotton 3,696 4,982 ‐1,286Rice 2,874 3,896 ‐1,022Irrigated wheat 822 965 ‐144• The vegetable industry has someeconomic clout on the water issueas rates of return per mega litre ofwater is high for vegetables.• It has less clout on the labourissue but maintaining flexibility inlabour arrangements is critical forbusiness viability.• In the longer term there has to bea concentration on driving downlabour costs through judicial useof mechanisation and technology.Source: ABARE survey of irrigation farms in the Murray‐Darling Basin 2006‐07Climate change and the carbon issue• Forget the politics and own views on climate change. From a businessperspective this is a risk management issue.• Vegetable production has low carbon emissions although this variesdepending on the nature of operations –field, greenhouse, packing houses,processing.• If a price is put on carbon most of the impact on grower operations will bethrough higher input costs.• Vegetable growers need to think about reducing carbon emissions and thepotential to increase profitability by doing so.• Carbon foot printing is likely to be an increasing requirement by retailers andconsumers.

Consumers right to know• The fundamental economic underpinning of an efficient market is theassumption of informed consumers.• The vegetable industry is fighting hard to have proper labelling ofvegetable products so that consumers know the source of the vegetablethey are buying.Economics of marketing• There is a mismatch between supply and demand in the vegetable markets.• Greater understanding of markets is required if growers are to receive betterrates of return.• Vegetable growers will gain most by a whole of supply chain approach thatpromotes the vegetable industry.• At present only 10% of the population intake the recommended 5 vegetablesper day, with the national average closer to 2 vegetables per day.• Growing obesity and declining health provide a great market opportunity forthe promotion of fresh vegetables.• Vegetables are not sexy and the industry needs to promote cultural change andto consider how to do this in conjunction with health authorities which have avested interest in promoting vegetables.• Understanding the consumer and targeting markets will assist returns –demographics, organic, local.