38 Outlook 2015 Wed 0900 ALAN OXLEY
Now, I've been asked to address what the impact is of the rash of trade agreements that we know
are around and in fact have actually changed the landscape. But let me do a little bit of
background for this first. Our traditional view about Australian agriculture is that we're a
competitive exporter. Around 2/3 of our output is exported with low tariffs-- that average is
1.2%-- and low subsidies. We're competitive, we can compete, and we have close proximity to
Asian markets. That's been the standard line. But that's actually not going to deliver the goods in
terms of what's going on now.
We've also had in the last few years a great deal of attention in Australia about the fact that we're
close to Asia, that it's a great opportunity, and we've been told for over a decade that they're just
at our doorstep. But I think sometimes we forget our geography. Here's some simple numbers.
They're a little out of date because of the change in the exchange rate with the Australian dollar
going a little bit south.
But I wanted to do some comparisons of how easy it is and how costly it is to transport goods
from, say, Melbourne to Shanghai. So there's the flying time and the costs out of Australia.
You'll see that it's cheaper from Los Angeles. It's about the same flying time, not much different- cheaper. And from Rotterdam, it's about the same flying time-- a bit cheaper.
In other words, we are actually in a competitive environment. Asia is not an easy step for us. It's
distant. We've always tended to overestimate actually how far it is away from us, and that's a
really major consideration to take into account.
Now, you'll see I've got our trade minister there. He's very photogenic, as you'll see from some of
the slides that I've selected. He's had a very good time since becoming trade minister.
First, he completed negotiations for a trade agreement with South Korea. And that was
important, because it provided extra access to the Korean market-- but over time. Now normally,
we've had-- I'm going to come back to this a little bit later-- little success, over 50 years of
battling, to try and get agriculture trade barriers down. On trading goods in the global market,
there's really little to talk about. Tariffs on average around the world are quite low-- except in
agriculture, which we know very well.
In the South Korean agreement, the Koreans agreed to open up their markets. But of course, the
farmers correctly grumbled that this was pretty slow and would take too long. But I think they've
actually forgotten how long trade liberalisation takes. I'd like to remind them that it took us 20
years to reduce the tariffs on our cars. So if you expect other countries to reduce tariffs in
difficult areas, you should expect it'll take a little bit of time. But that's an important factor and
an important agreement, but no immediate access.
Then he did the agreement with Japan. This was even more important, because unexpectedly-and there he is shaking hands with the Japanese trade minister-- a very good result. Similarly,
those changes there in both Japan and Korea were quite significant, because their farm
populations are ageing. And for the first time, they're actually starting to open up their markets
because the power of the farm lobby is shrinking. And of course, Japan's always been one of our
biggest markets. So that's really been quite an important achievement.
And then we move onto his next one, which was China. And for a long time he was telling us
we're only going to get a little bit, and the media captured that picture. But by the time that
agreement finished, what was revealed was very good access, and I think better access than was
expected.
Yet some of the commitments have got long-term phase ins, but what the China agreement has
done is fixed the attention on the nature of the markets. That's what I'm going to come back to. I
know it's been featured in these discussions. And my basic message is going to be-- which I'll
come to in a moment-- it's the nature of the markets which determine how much we can trade,
not actually the way in which the trade barriers have been reduced. And I'll come back to that in
a moment.
And now, he's wanting to do a trade agreement with India. I'm not bullish on India. If you look at
how that economy runs and who organises it, I don't think we're going to get much from an
agreement that we wouldn't get already if the Indians wanted to trade with us with what they
would get.
But there's something else that's quite big which is looming, and this is the Trans-Pacific
Partnership. And of course, our trade officials are deeply engaged in that. Why is that so
significant? The government's had difficulty explaining it.
I think one of the reasons is it's a long-term agreement. One of the reasons is it doesn't offer any
immediate new market access. But what it does do is lay the foundation for a bigger free trade
agreement among all APAC countries, which is now on the agenda. They'll finish the TransPacific Partnership first. It's only 12 countries. Not all of them are in APAC. The difference,
however, the changing dynamic in this is that China has shown interest in joining these
agreements, and that's a first.
So what we're actually looking at in the long run is development of a huge Asia Pacific free
market. It'll be the world's biggest. And the political dynamics of this, it'll be the first time the
United States and China have engaged in attempting to negotiate an arrangement. And that'll be
the politics which will drive that agreement. But the market is huge. The prospects are
significant. And for us, it offers very significant changes.
But underneath it, I made the point before about lower tariffs being not so important. What's
going on in the Asia Pacific region which will be another imperative for the Chinese to want to
negotiate this agreement and to participate in it is the emergence of global supply chains. And I
think that's one of the reasons why the Chinese are nervous about not being in the Trans-Pacific
Partnership agreement.
Because if you take electronic products-- one of the famous cases is the iPhone-- these products
now are manufactured by inputs from a number of economies. So the iPhone is manufactured
with IT from the United States. The iPhone sells wholesale for about $175. The Chinese valueadded input to that is $6. In other words, it's assembled in China. But the value add is in the rest.
So Korea makes certain parts. Japan makes certain parts. It's assembled in one place. The IT
comes from somewhere else. These are global supply chains which have been driving growth in
the region. Now, they are the things that will be the background which will also shape all trade in
the region, including agriculture, and that implies some significant differences for us.
One other point. I mention that now in world trade barriers to trading goods are fairly low. These
new agreements are all about liberalising investment and services. And this is very important for
the Asian region, because by and large those economies are laggards in that area.
People often wonder why we in Australia don't invest more in Asia. If you look at our patterns of
outward investment most of our foreign investments are in the United Kingdom, Europe, the
United States. Little in Asia, and the reason for that is that the rules for foreign investment in
most Asian economies are poor. Risk is high, and they're bad investments. So that's the broader
significance of this activity to open up a broader trade agreement in the region which liberalises
services and investment, because that'll be the basis for growth for these economies. If they don't,
growth in Asia will slow.
Now, I wanted to talk about the drivers of demand for food. I've talked about the trade
agreements in expanding markets, and what I'm going to contend is that they're actually more
important than trade liberalisation. Now, that's a Shanghai supermarket on the top, and that's
really now where the focus should be for trading products, the end-branded, good, high-quality
product. I'm going to come back to that.
Of course, in Geneva-- that's the WTO headquarters on the edge of Lac Leman. It's quite a
beautiful place. It's no wonder it takes so long to negotiate agreements. Who wants to leave?-But the reality in the short term is that the Chinese markets and the growth in the Asian markets
are what are driving our opportunities. Not this trade liberalisation, because that's long term and
further down the track.
Now, we're seeing some very significant changes in these rapidly-changing Asian markets, and
the biggest one is the rise of the middle class. There's staggering numbers around. The head of
the Singapore foreign ministry estimates that they're going to grow from 500 million today to
1.75 billion by 2020. It seems pretty fast to me. But even if he's half wrong, it doesn't matter.
And of course, what he's taking into account here is not China, but India as well. And Indonesia,
we should not forget Indonesia. Indonesia's had a wealthy middle class for a long time.
And the other things that are happening, we're seeing changes of taste. There's a shift to a
demand for more protein, more meat, and even a shift in some countries from rice to wheat. And
we're seeing that in Indonesia. Niche markets matter, and there is a very significant rising
demand for high-quality fruit. Chinese consumers don't like poisoned berries either.
I don't think we need to worry too much about the fact that we need to regulate. The Australian
consumer will decide whether they want an Australian frozen berry or a Chinese one. But in
China recently a dairy farmer was boasting that he was selling milk in China for eight times the
standard price because it was considered safe.
This is the new market opportunity that we're having. And as I say, the concerns about health and
safety among the middle class are very high. They know better than us the problems with their
food. And of course, we've got a fabulous reputation for high-quality foods.
So what's involved in servicing these markets? So back to my proposition, it's growth in the
region that will drive it in the short term and medium term, not the trade agreements. So how do
producers get into these markets? This is a challenge for the farmers. The big farmers know it,
and I think it's important for the small farmers to have to focus on how they can operate in this.
In other words, to succeed in these markets they've got to identify the high-value products, not
just manufacture off the farm whatever they can grow. Learning what that high-value product is
and where to market it is very difficult, and that's what I want to come back to.
To partly achieve that, they have to invest in high-quality niche production. They need to locate
the traders and retailers in those markets. Now for China, this is a huge difficulty. In China,
there's 20 cities of more than 5 million and 34 between 2 and 5 million.
So how does a farmer decide to reach those markets? That's a really big challenge. Strategies
which are being pursued by some farmers are form joint businesses, research the markets, and
get Chinese investment and trading partners.
And I must say, I think of all the debate that's going on about investment, one of the silliest
propositions that's running around is that we shouldn't have foreign investment in the farm
sector. I mean, if you want to do business in Australia and you want to connect your business
with some other business, a common way to do that is to form a common business interest and
common investment interests. I don't think there's anything different in the foreign markets.
Now that said, my proposition there is that it's understanding the commercial realities of the
market which is now necessary for us to get the fact there's an opportunity. But in doing the
research-- my basic message is that the farmers have to look past the farm gate-- I came across
something else which I think is significant, and that is our capacity to supply. Because there is
another challenge to the government which people have been talking to me about. When I did
some research for this preparation, I thought it was something of a gobsmacker.
Here's an optimistic chart about Australia. This shows that productivity has been rising, which is
positive. Except it's not a very high rate. It's only about 1.3%. This is a map which shows the
distribution of total productivity growth around the world, and you'll see that New Zealand's
characteristically had more than 3% productivity growth. In Australia, it's divided. The west and
the north, it's been between 1% and 3%. In the east, it's been less than 1%. This is a worry.
Now, here's a second source of worry. Between 1990 and 2011, this is the rate of growth of
volume of output. And that's flatlined. If we've got actually rising productivity and flatlining
volume, something's wrong. Now to be fair with statistics, here's the chart if you go through to
2013. So a little bit of growth in the last gives you a rising trend. But I wouldn't take too much
comfort from that, because I think this is the sobering number and we'll need to wait and see
whether it's actually on the rise.
Whichever way we look at it, volume is flat. Now, we've had an Australian economy that's been
growing at an average of 3% to 4%, flattened-- well, that was even fairly good. The rate of
output of agriculture is below the national growth rate even.
Here is the real issue, I think, in all of this, which in a sense maybe explains why we've got this
situation. Now this, I think, is a very alarming chart. It shows that the agricultural land use-- in
other words, the amount of land which is being farmed-- has shrunk by about 15% in the last 12
years or so.
Now, how on earth did that come about? Well, governments have reduced the national farmer
state. I don't think it's been an organised or deliberate policy, but it's been the effect of their
activities. One of the things which all you farmers will be aware of is the campaign to protect
native vegetation and how several years ago the state governments took action which, according
to the Productivity Commission, removed the property rights of landowners by restricting the
ability of farmers to clear native vegetation on their land. And that's actually quite significant.
There's campaigns to reduce access to the rangelands, and I'm going to come back to that. Water
entitlements in the Murray-Darling Basin were cut by a third. We know the history of that was
actually, for those who bothered to look at the numbers, very poor economics, guesswork as to
how much flow was needed for the environmental flows. The Productivity Commission wrote a
very scathing report. Now that we've recovered from the drought, I don't actually see why the
government doesn't sell the entitlements back to the farmers. But there are reports which show
that cutting the water by a third did materially affect the way in which farming occurred around
that area.
The final one has been a significant increase in conservation areas right across the country. So
just to remind, in a sense, who is driving this. Well, it's the environmental groups. That top
picture shows an Australian wildlife conservancy reserve which they own, the MorningtonMarion Downs in the Kimberley. It's sensible to have these conservation areas.
But the question is what we're seeing now is a trend to expand them without any technical regard
to what species are being conserved or not. And what we now actually have is the World
Wildlife Fund arguing that in Australia, as well as in the rest of the world, land for farming
should be reduced. Because if you look at the WWF literature, you'll actually find they argue that
the world is consuming too much. And they've actually got a long-term campaign to reduce
farming, which they're pressing in Australia. They've had a long-term policy to reduce the
rangelands. They're trying to restrict the sugar industry, and they've had a crack at trying to
restrict the beef industry.
So these are the series of forces at work. And I'm sure the federal and state governments had no
intention to shrink the farmer state. But by neglecting and ignoring the implications of this
broader push, it's the effect that we've had. So Australia's agricultural future-- action required.
Thank you.