Food industry standing up to challenges

As our largest manufacturing sector, the Food And Grocery business is a vital contributor to the wealth and health of Australia. Alan Johnson reports on the outlook for this sector.

The Australian Food and Grocery industry accounts for over one quarter of total manufacturing and is one of the best performing sectors of the manufacturing industry overall.

The Australian Food and Grocery Council’s (AFGC) CEO, Gary Dawson (pictured), says it’s a slightly better picture for the food and grocery industry than general manufacturing, and pointed to the organisation’s recent annual report.

“While not as current as the monthly PMI survey, our annual report does show a picture of considerably more resilience than the overall manufacturing sector,” he told Manufacturers’ Monthly.

Key facts from AFGC’s State of the Industry 2014 report on the food, beverage and grocery sector showed:

  • Industry turnover $114bn, up 0.9%; 2012-13 data
  • Direct employment 299,731, down 2,571; 2013-14 data
  • 45% of jobs are in rural and regional Australia; 2013-14 data
  • Industry made up of 27,469 businesses; 2013-14 data
  • Industry value-add $31.3bn; 2012-13 data
  • R&D spend of $541.8m per annum; 2011-12 data
  • Total international trade $55.9bn (up 7.3%); 2013-14 data
  • Food and beverage exports $21.9bn (up 13.5%). 2013-14 data

While there was a big contraction in the industry in 2010-2011, around 7% in a single year, Dawson said it has bounced back slightly.

“Although there’s not strong growth there, none-the-less it’s a picture of some resilience, and is certainly not a sector that is

contracting at the moment,” he said.

Dawson said there is a lot of structural change happening at the moment, driven both by external factors and sector specific factors such as enhanced retail competition which is driving structural change right up the supply chain.

On a positive note, Dawson said exports were up in the two largest sub-sectors, meat and dairy. Driven by the depreciation of the Australian dollar in the past 12 months, they rose by 24.5% and 19% respectively.

“These are impressive numbers, with great potential to deliver jobs and growth in the future,” he said.

“Dairy prices have been historically high and are starting to come off a bit which would have boosted the value of dairy exports.”

In the meat sector, Dawson said the single biggest boost to exports was of processed meat, which reflected meat supply shortages in the US.

“There are a range of factors there, but overall the trend now is

a positive one, with the data showing exports in 2013-14 across the sector were up by more than 8%.”

Dawson said the trade surplus for the food and beverage is around 9% per annum, and has been for each of the past four years, which is compounding growth.

“There is now solid evidence that the industry’s trade performance has turned the corner, and we believe there is considerable upside there still, and that’s going to focus attention on competitiveness,” he said.

“However, we won’t realise our full potential unless we address some of the competitiveness issues in the domestic manufacturing scene, such as the key cost drivers; labour, utilities, transport and regulatory costs. These are all barriers to competitiveness.”

Dawson believes the future for Australian food industry on the export front is through value adding and a premium product, rather than bulk commodity products.

“In value added premium products there is a capacity to charge a premium price to reflect the higher manufacturing costs here,” he said.

“But not withstanding that, there will continue to be pressure on manufacturers to improve productivity and improve their overall competitiveness in order to compete effectively even in those premium categories.”

Like many other Australian manufacturers, the food industry is a big user of natural gas and Dawson said the ever increasing price rises are threatening many companies’ competiveness.

“This is a massive hit, and comes at the very worst time for the food industry,” he said.

“We have had some relief on our electricity prices with the abolition of the carbon tax, which was very welcome. The tax was always lead in the saddlebag for food manufacturers.”

However, he said the impact of higher gas prices will far outweigh the benefit of the removal of the carbon tax.

Rather than call for quarantining gas, Dawson believes the answer is a combination of unlocking more gas supplies, by putting in place robust environmental safeguards to enable more gas supplies to be brought to market, and also addressing the problem of gas suppliers sitting on reserves through retention leases and not bringing them to market.

He said both these issues need to be addressed urgently, along with market reforms to create a more transparent gas market on the east coast.

“There is plenty of gas; it’s just a matter of bringing it to market and users being able to access it,” Dawson said.

He said another major issue for the food industry is the ever increasing number of Free Trade Agreements (FTAs) Australia has signed

“If you look at the FTAs that we have had for a while, with Thailand for example, they have been a positive,” he said.

“Plus the agreements we have made with Japan and South Korea will be net positive for the food sector, and China is still being negotiated and has great potential.

“If we can achieve a good outcome with real commercial benefits in an agreement with China, then it will have broad and lasting benefits for the food sector in Australia.”

China is an extraordinary market for Australian exporters, however Dawson said we have been losing market share there.

“Australia’s share of food imports has dropped by close to half over the past decade reflecting China’s highly competitive market. Every food exporter in the world is trying boost their exports there because of the growth in demand; unfortunately Australia is presently losing out to these other countries,” he said.

“So we need a good outcome from the China FTA to improve market access to reverse that contraction in our market share. There is considerable upside if we can achieve that.”

Overall, Dawson said there are positive signs within the food and grocery manufacturing industry; he is optimistic 2015 will be positive for the industry.

“It’s a sector that remains under intense competitive pressure, but there are many positive signs. In the medium to long term Australia has a competitive advantage in food production and the opportunity to value add in food processing in Australia is enormous, and in the medium to long term is a huge opportunity,” he said.

“So we remain positive about the medium to long term prospects for the industry, even though it is immediate financial pressures are intense.”