Maximising Returns To Growers Supplying The National Export Wheat Pool Strategic Review for AWB (International) Limited July 2004 T HE B OSTON C ONSULTING GROUP
Table Of Contents INTRODUCTION... 3 THE INTERNATIONAL WHEAT MARKET... 4 Players in the Global Wheat Market 4 Ongoing Threats to Grower Returns 5 Forces Affecting the Global Wheat Market 7 In Summary 11 AWBI PERFORMANCE... 12 Historical Performance and Basis for Success 12 Recent Changes to AWBI s Positioning 14 In Summary 15 THE WAY FORWARD FOR AWBI... 16 In Summary 17 REINVIGORATING AND STRENGTHENING THE DIFFERENTIATED POSITION... 19 R&D and Crop Shaping 19 Grower Communications 20 Supply Chain 20 Trade Advocacy 20 Sales and Marketing 21 Technical Support 21 Relationship Between AWBI and AWBL 21 In Summary 22 THE BOSTON CONSULTING GROUP 2
Introduction AWB International (AWBI), the wholly owned subsidiary of AWB Limited, is chartered by the Wheat Marketing Act (1999) and the AWB Constitution to maximise net pool returns for growers delivering wheat into the national export wheat pool. In 2003, AWBI commissioned The Boston Consulting Group (BCG) to conduct a comprehensive, independent review of its activities. Our brief was to recommend a strategic direction for AWBI to maximise grower returns into the future, based on our assessment of trends in the international wheat market, as well as our understanding of AWBI s strengths and challenges. The Boston Consulting Group is an international strategy and general management consulting firm whose mission is to help leading organisations create and sustain competitive advantage. BCG has considerable experience in conducting reviews of this kind. In Australia and New Zealand, we have reviewed the strategies and operations of major single desk agricultural exporters and marketers in fulfilment of their legislative obligations. We have also worked with grower organizations and marketers in wine, fruit, sugar, meat, milk and other agricultural products. Internationally, BCG has wide experience in working with world-leading firms in research and development, logistics, sales and marketing, and in customer discovery. We drew on this broad experience in the course of this project. In undertaking the review for AWBI, BCG conducted over 50 international customer and industry interviews across all of AWBI s major wheat markets. We also held discussions with many AWB (Limited) staff members and a comprehensive range of participants in the Australian wheat industry, including growers and government. In addition, we surveyed growers and customers to understand their views on the wheat market and on AWBI s activities. This report first examines the challenging international wheat market, identifying trends that could undermine Australian growers returns, as well as potential opportunities that could play to Australia s strengths. It goes on to describe AWBI s performance in that market and the ways in which it has succeeded in generating good returns for growers. It also evaluates AWBI s current positioning in light of the challenges of an increasingly difficult market. The report then recommends a strategic direction for AWBI and spells out the actions it needs to take to secure grower returns going forward. Execution of the recommended strategy will require significant organisational effort and additional investment, but the projected rewards for growers are substantial. THE BOSTON CONSULTING GROUP 3
The International Wheat Market The international wheat market is highly competitive. AWBI, on behalf of Australian growers, competes with a range of companies and organizations to sell large volumes of wheat into traditional and emerging markets. What are the main dimensions of the international wheat market the strategies of AWBI s main competitors, the impact of policy, and the emerging market forces that will shape AWBI s competitive environment? We discuss below our answers to these questions. First, we examine the main players in the international wheat market and the different approaches they take to conducting their business. We go on to discuss why Australian wheat growers returns are vulnerable in a very difficult market, noting the elements that raise particular challenges for growers and AWBI. Next we describe important trends in the global wheat market. These include some significant threats to Australian growers threats that could drive a dramatic decline in grower returns over the next 5 years. At the same time, there appear to be opportunities on the horizon, although these are less clearly defined. The task for growers and AWBI is to understand and counter the threats, while developing a clear path towards realisation of the opportunities. This is no simple matter, as we go on to explain. Players in the Global Wheat Market AWBI is one of the three main types of marketers and sellers of export wheat now operating in the global market. It is, along with the Canadian Wheat Board (CWB), a source of origin player. Competing with AWBI are the huge, vertically integrated conglomerates like ADM, Cargill and ConAgra, as well as traders such as Columbia Grain. All three types of players work to develop access to markets and maintain customer relationships, but their objectives and the ways in which they achieve them differ in several important respects. THE BOSTON CONSULTING GROUP 4
Figure 1: Dominant Wheat Trade Strategies Milling Capacity III. 'Vertically Integrated Conglomerate' Asset Use / Intensity Supply Chain Assets I. 'Source Of Origin' Asset Light II. 'Trader' Assessment of strategic position Single Origin Multiple Origin Bulk Wheat Offering Customised Source of origin players work to build grower returns Conglomerates are focusing on securing grain supplies to profit from increased asset utilisation and price spreads Traders depend on information advantages, which are declining The source of origin players, AWBI and CWB, represent their country s export wheat growers. Their objective is simple to describe, though not to achieve to ensure that those growers sell as much of their wheat as possible, at the best price they can get, and as efficiently as they can. Because the vertically integrated conglomerates invest heavily in physical assets, often owning silos and mills, they need to keep those assets fully and profitably utilised. They also pursue price spreads through sourcing, trading and blending wheats for their milling customers. These players are consolidating and expanding their international networks. Traders match customers with grain from around the world, relying on information advantages to do so at a profit. In an age where accurate, upto-date information is increasingly available to customers, this position is more difficult to maintain. Pure traders those who do not also own silos or mills are seeing their share of world grain movements declining. Recently, some traders have sold out to conglomerates, while others are building or buying their own mills or silos. Australian growers are highly exposed to world market fluctuations Ongoing Threats to Grower Returns Australian wheat growers face unique difficulties in the heavily competed global wheat market. Compared with growers in other countries, Australian growers are very highly exposed to fluctuations in exchange rates and world wheat prices. Around 79 per cent of the Australian crop is exported, while only 45 per cent of US wheat and 13 THE BOSTON CONSULTING GROUP 5
per cent of wheat produced in the EU goes to international markets (Figure 2). Figure 2: Domestic Consumption as a Percentage of Total Wheat Production, 1995-2000 (%) 87 55 21 30 33 Australia Canada Argentina United States European Union Source: USDA Growers in developed countries outside Australia enjoy significant subsidies In addition, the outside support provided to Australian growers is less than one-tenth of that provided to their competitors in the US and the EU, and under half that provided to Canadian growers. Income support, price support and other implicit subsidies provide Canadian growers with the equivalent of an extra A$25 per tonne, US growers with over A$140 per tonne and EU growers with over A$170 per tonne (Figure 3). Wheat growers in these subsidised markets have expanded production and export volumes, depressing average world wheat prices by an amount we estimate at US$10 per tonne. Figure 3: Wheat Producer Subsidy Estimates, 1999-2001 (A$ per tonne) 170 147 9 25 Export Volumes (Average, million tonnes) Australia Canada United States European Union 16.6 17.3 27.7 13.9 Source: OECD; USDA ; at market exchange rates THE BOSTON CONSULTING GROUP 6
Long-term, prices are declining as global yield improves and demand stays flat Demand and price volatility must be managed year-on-year Other features of the world wheat market are even more challenging. In particular, the long-term price and volume outlook remains unpromising. Driven by global yield improvements and relatively flat global demand, wheat prices have declined by almost 3 per cent per year since 1960 (Figure 4). While traded wheat volumes grew rapidly until the early 1980s, they have grown at only 0.3 per cent per year since then. The story is similar for many agricultural commodities, where we estimate that producers have needed to find productivity improvements of 2-3 per cent per year simply to maintain their margins. Finally, as with any agricultural export, it is difficult to develop customer relationships for wheat, as Australia s and competitors wheat supplies are subject to climatic variations, and major customers demands also tend to be volatile. When the harvest is low, grain must be carefully allocated to maintain important customer relationships; in bumper years new customers must be found. Figure 4: World Wheat Prices (Real), 1960-2002 (Index: 1960=100) 200 180 160 140 120 100 80 60 40 20 US HRW (Gulf) Argentinian Trigo Pan 0 1960 1970 1980 1990 2000 Source: UNCTAD, Handbook of Statistics; US BLS Forces Affecting the Global Wheat Market The world wheat market has always been challenging for Australian growers, but it is not static; further challenges, and some opportunities, are on the horizon. We believe eight major forces will shape the market over the coming 5 years. While their exact impact is still uncertain, some of these forces have the potential to put intense downward pressure on the prices Australian growers earn for their wheat. In the worst case, by 2008 growers could face the Australian dollar equivalent of a US$15-25 price decline from 2003 levels. These downward price forces are already evident, but Australian growers have so far been protected by a combination of external circumstances. Recent poor harvests in Europe, the former Soviet Union and North America have pushed prices above trend, while the Australian dollar traded until late 2003 at significantly below its long-run value. THE BOSTON CONSULTING GROUP 7
Combined, these circumstances benefited Australian growers in 2003 by an estimated US$20 per tonne. This is not to say that the trends are universally negative. Some developments are expected to open new opportunities for Australian growers; others require a watching brief to determine whether they constitute challenges or opportunities, and to understand what action needs to be taken to counter or embrace them. Figure 5: Major Forces Affecting Australian Wheat Exporters 1 2 3 4 Negative Forces Exotics' displacing traditional producers Traditional competitors targeting our core markets Vertically integrated conglomerates drive towards multi-origin wheat Freight advantages eroding Watching Brief GM wheat under development AWBI Position Australian Grower Returns 5 Growth in major markets and in differentiated products 6 Buyers evolving with diverse requirements 7 China emerging as a potential major importer 8 US retreating to domestic supply Immediate Impact Unlikely WTO negotations achieve significant subsidy reduction Exotics likely to displace Australian wheat in some markets and drive prices down Threats As the countries of the former Soviet Union reconstruct their infrastructure and build connections with international markets, wheat volumes from exotic or non-traditional competitors will expand into Australia s Middle East and Asian markets. On average, export volumes from the former Soviet Union and other non-traditional exporters have grown at over 7 per cent per year since 1987, to the point that these exotics now account for over a quarter of world wheat exports in some years in 2002-03 they accounted for almost 40 per cent. Exotic exporters are finding ready customers in the Middle East and Asia, targeting traditional Australian markets and placing increasing pressure on Australian export prices. By 2008, it is likely that countries from the former Soviet Union will be exporting an incremental 5-10 million tonnes. THE BOSTON CONSULTING GROUP 8
Traditional competitors enhancing their varietal products Conglomerates increasingly sourcing wheat from diverse origins Australia s freight cost advantage threatened in some markets Some growth markets for specific, differentiated wheats In a second major threat, traditional competitors are targeting Australia s valuable core markets with enhanced products. In many markets, Australian wheat varieties are highly valued by customers and attract significantly higher prices than competitors products. After many years of AWB product and market development efforts, Australian white wheats, for example, are now highly valued by many Asian noodle producers. But both North American and Asian producers are funding major R&D programs to create and/or enhance their own noodle varieties. Customers report that these varieties, while not yet at Australian standards, are rapidly closing the quality gap. North American hard white wheat production, already at 2 million tonnes per year, is expected to rise to 7 million tonnes by 2008. If Australia fails to maintain its varietal advantage, the price premia Australian growers earn for their product will fall. In addition, the big conglomerates, such as Cargill, Louis Dreyfus, ADM and Bunge, are increasing their share of the world grain trade (their share grew from 62 per cent to 73 per cent in the 5 years to 2003). These huge competitors of AWBI are driving towards a situation where customers buy, as the norm, wheat that comes from multiple countries. Because they are investing in supply chain assets in Ukraine, Kazakhstan and elsewhere, the big conglomerates have both the incentive and the ability to provide customers with wheat from multiple countries of origin. They bring trusted international names to the market and, as they persuade more customers to accept wheat from multiple sources, those customers become less and less willing to pay higher prices for wheat from single, traditional sources. Finally, the substantial freight cost advantage Australian growers have traditionally enjoyed over their North American peers, especially in Asian markets, is eroding as ports are constructed in Asia to receive Panamax and larger vessels. Vietnam recently opened a deep water port that can accommodate these very large vessels, and several similar ports are under construction in Malaysia, while mills are locating nearby. The majority of US corn exports to South Korea are already via Panamax vessels, and wheat may soon follow. Customers with deep water access are bundling North American wheat and other grain into these larger shipments, accessing freight savings and putting additional pressure on Australian returns. Potential Opportunities While worldwide demand is growing slowly, Australian wheat growers may be able to exploit limited but real growth in some major markets, including quality-sensitive markets for differentiated Australian wheats. Markets in South-East Asia, the Middle East and North Africa fall into this category. In addition, demand for noodle wheat is expected to grow at over 7 per cent per year. If Australian growers scale up production of Durum, weak-gluten soft wheats for biscuits and pastries, and stronggluten hard wheats for breads, they are likely to be able to attract continuing good prices in these markets. THE BOSTON CONSULTING GROUP 9
Figure 6: Emerging Areas of Demand for Varietal Wheats 220 AWBI Price 200 (US$/t) 180 3-4MMT 160 in Asia 140 120 100 Low Protein, Weak Gluten, Soft Wheat AS 0.2MMT NOODLE 0.2MMT ASW 5.9MMT APW 2.6MMT AH 3.6 MMT DURUM 0.4MMT APH 0.9MMT 6MMT in Japan, North Africa & Europe Durum High Protein, Strong Gluten, Hard White Wheat 7.5-9MMT in Asia 80 <9% Under attack from Nth American HWW Under attack from NTEs Under attack from Japanese domestic production Protein Content >15% Size of projected 2008 total market Customers prepared to pay additional premia Source: 1998-2002 AWB data; market interviews New customer needs emerging as purchasing arrangements change China a potentially large export market US growers shifting away from production of export wheat Some markets are deregulating, which may also provide opportunities for Australian growers. Private buyers in these markets may seek a more differentiated often higher quality product and service than that accepted by state-owned buyers. Australian growers and AWBI are well placed to meet this need. In less developed markets, some private buyers want collaborative technical assistance and advice on logistics, risk management and finance. In other markets, customers want very specific grain characteristics or support in developing new products. For Australian growers and AWBI, these developments represent an opportunity to be captured, especially as AWBI s competitors are already responding by introducing more specifications and pricing models, merging their marketing and importing functions, and making other changes in focus. Some major growth opportunities may arise for Australian growers, but there is still uncertainty about timing, as well as the eventual level and type of demand. The huge Chinese market is likely to re-emerge as an importer of higher quality wheats, and perhaps also as a major importer of feed and other less differentiated product. Some market analysts are projecting that average Chinese import volumes could rise to 15 million tonnes. The recent 1 million tonne contract for exports to China suggests that AWBI is well positioned to respond to this growth opportunity. Overall, US wheat production and export volumes have been slowly declining as North American growers shift to corn and soybeans, and the main game becomes value-added production for the domestic market rather than commodity production for export. This shift may lead to opportunities for Australian growers to sell into some markets that currently take US-origin wheat. However, many issues remain unresolved, including the eventual attractiveness of non-wheat returns to THE BOSTON CONSULTING GROUP 10
North American growers and the permanence of their shift away from an export focus. GM wheat: an opportunity or threat for Australian growers? Issues that Require Monitoring Some issues in the international wheat market, while clearly important, are not yet at a stage where Australian growers and AWBI can do more than build options from which to select when their value is better known. Among the most pressing of these is around genetically modified (GM) wheat. This remains a live issue for Australian growers because, while Monsanto has recently abandoned its GM wheat program, it has signalled that it may resume activities in this area at a later date. Many consumers in valuable export markets remain opposed to GM wheats, and AWBI s customers are strongly cautioning against early adoption of the technology. If Australia s competitors do adopt GM technology, the result is likely to be downward pressure on all wheat prices. However, as long as customers in key markets remain opposed, there remains the opportunity of a premium for non-gm sources. As a shift to GM would be very difficult to reverse, AWBI should continue to monitor customer sentiment in its markets, while retaining the option to adopt GM wheat in future. A substantial cut in competitor subsidies would help growers but appears unlikely AWBI will also need to continue to promote the economic benefits of a reduction in agricultural subsidies and to actively monitor the outcomes of WTO and bilateral trade negotiations. While Australian growers would benefit substantially from a reduction in subsidies in the major producing regions, most experts believe that they will continue to operate in a heavily distorted global market for many years. In Summary The world wheat market is far from static. Changes that are already evident will put pressure on AWBI s operations and threaten Australian growers returns over the next 5 years. While opportunities are also emerging, responding effectively will require sustained effort in combination with close monitoring of end customer requirements. In this context, it is important to understand how, and how well, AWBI has met its obligation to maximise returns to growers who supply export pools. It is also important to understand whether AWBI s current direction is the best choice for protecting Australian growers returns in an increasingly challenging export environment. THE BOSTON CONSULTING GROUP 11
AWBI Performance Overall, AWBI has competed successfully by focusing on a differentiated, source of origin strategy and has delivered solid returns to Australian growers. It has recently adopted a more commercially disciplined approach, with signs that it is focusing more on short-term returns than in the past. We explore both these issues below. Historical Performance and Basis for Success AWBI has been largely successful in fulfilling its charter to maximise grower returns. Figure 7 compares Australian grower returns with the pre-subsidy returns achieved in Canada and the deregulated export markets of the US and Argentina. Such comparisons are notoriously difficult, given differences across countries in wheat varieties, distances from farm to port and market, grower and customer financing arrangements and on-farm storage, and volatility in crop sizes, exchange rates, and trading outcomes. Figure 7 shows that, based on long-run exchange rates, average Australian farmgate prices before subsidies were stronger than the average farmgate prices achieved in Canada, the US and Argentina between 1999 and 2001. As shown in Figure 3 above, however, Australian growers do not enjoy after-subsidy returns comparable with those achieved in Canada and the US. Figure 7: Farmgate Returns Before Subsidies, Australia Versus Canada & Deregulated Exporters, 1999/00-2001/02 Average (A$ per tonne, long-run exchange rates) 136 130 130 125 AWB CWB US Argentina Note: Australian & Canadian returns include income ( incl profits from acquisitions and swaps) less admin, supply chain an d other off -farm costs; Canada adjusted to average Australian distance to port. US price s are weighted average of HRW (Gulf & PNW ), SRW (Gulf), White ( PNW ) and Durum (Gulf) Source: AWB, USDA, Academic research, RBA, IGC THE BOSTON CONSULTING GROUP 12
AWBI has achieved solid returns for growers in several ways. A higher proportion of high quality Australian wheat sold, with no significant price decline Through the 1990s and into the 2000s, AWBI has worked with growers and the Australian wheat research community to increase the proportion of high quality Australian wheat produced, and has placed it into markets with no significant decline in price spread. Through programs including Golden Rewards, which prices incremental improvements in grain protein, moisture, and other characteristics, AWBI has successfully connected growers with markets that value such characteristics. Figure 8: Change in Australian Wheat Quality Mix, 1991/92-2000/01 20 18 16 14 12 10 8 6 Grade ADR APH AH APW Growth Rate +74.4 (1) +15.3 +52.3 +20.1 (1) 4 2 0 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 (1) ADR and APW growth rates are calculated over the period 1995/96 to 2001 Note: Grades have been ordered by weighted average export price from lowest to highest (bottom up) ASW SFT AGP FEED +6.2-10.6 +22.6 +9.8 We value AWB s responsiveness to our requirements we don t see this from US sources (Customer, N Asia) Effective market and customer presence in traditional and new, high-growth markets Successful adaptation in rapidly changing markets AWBI has also developed new markets for specific types of high value wheat. Among other successes, AWBI has worked closely with millers in Korea and Japan over many years to understand the properties most valued by noodle makers. AWBI s work with the breeding industry and growers to create and supply grain that meets these customers specific needs has created benefits both for growers and for customers. In improving market access for Australian growers, AWBI has developed effective market and customer presence. In markets where Australia has a freight advantage, it has captured strong market share. AWBI has also grown or maintained share in stable markets to protect against demand volatility, while focusing successfully on high-growth markets to move increasing volumes. As buyers in several major markets have privatised and their demands have shifted, AWBI has successfully increased sales to them. It has also maintained Australian wheat volumes in an unstable geo-political environment, under significant threat from competitors, as its successful efforts in Iraq demonstrate. THE BOSTON CONSULTING GROUP 13
Reduction in supply chain costs On the cost side of the equation, and assisted by the efforts of the bulk handlers, AWBI has helped to improve industry productivity. Through negotiations with bulk handlers and freight companies, and taking advantage of AWBL s construction of new silos, AWBI has helped to reduce supply chain costs for growers. From 1996-97 to 2001-02, total wheat supply chain costs fell at an average of 2.6 per cent per year, with more rapid reductions in rail transport costs. Recent Changes to AWBI s Positioning Since privatisation and public listing, AWB Limited has injected greater commercial discipline into its operations, including those conducted for AWBI. The positive effects can be seen across the organization, from better cost control and upgraded IT systems that provide more accurate information about wheat stocks and freight movements, to tight monitoring of achieved prices in the international market. As part of this more commercial approach, AWBI has strengthened its trading capabilities. In tandem with a new commerciality, the organisation now operates under a greater regulatory and reporting obligation than in the past, which has entailed some movement in spending from the frontline to overhead and compliance costs. While the results are difficult to measure precisely, given many other changes in the world wheat market and the rest of the Australian wheat industry, we believe that AWBI s greater commerciality has delivered benefits to Australian growers. However, we believe that this, coupled with uncertainty around the future of the single desk, has probably contributed to lower levels of investment in products, services and relationships that generate longer-term returns to growers. AWBI therefore runs the risk of under-investing in these areas and losing its traditional position as a differentiated source-of-origin supplier. This risk is evidenced in a number of ways, as discussed below. In each case we see significant continuing AWBI strengths and value creation for growers, but also opportunities to improve. AWB s technical support was much better 2-3 years ago (Customer, Middle East) While AWBI has, as discussed, managed to maintain or grow share for Australian wheat in many valuable markets, some customers report that the technical support AWBI has traditionally provided has declined relative to competitors recent efforts. This relative decline may not yet be hurting grower returns, but as competitors win customers and work with them to develop processes and product lines suited to non- Australian wheat, Australian growers returns will be increasingly at risk. Growers will face this risk in the medium term unless an effective response can be mounted. AWBI s grain quality incentives through Golden Rewards, increased site selection practices and enhanced segregations have supported a differentiated offer in the world wheat market, with positive results for growers. In addition, its commercial focus has won good prices for THE BOSTON CONSULTING GROUP 14
Australian hard wheat is not hard enough, soft is not soft enough (Customer, SE Asia) Australian wheat. However, while AWBI has a program for improving receival and storage testing for quality-sensitive customers, it has not been investing heavily or collaborating widely in customer-driven varietal R&D in. AWB s investments and collaborations in the past have helped to build Australian wheat quality, which is still widely prized on the international market. But some important customers are reporting that consistency is not keeping pace with their changing requirements and some even believe there has been a decline in core product characteristics relative to competitor offerings. AWBI s trade advocacy team has been successful in defending the global trade position for Australian growers. However, this critical trade advocacy function now appears under-resourced relative to competitors. In a market heading into a more challenging era than Australian growers have ever faced, it will be important to ensure that the trade advocacy is strong and appropriately resourced. I want a customer relationship, not a spot market relationship (Customer, Italy) AWB has pushed very hard on factor costs that s great, but reinvestment has stopped in trucking, rail, etc. (Industry Player) Customers in some regions are reporting that AWBI s sales and marketing activity has fallen behind, while competitors are ramping up their efforts. Specifically, customers cite limited sales and marketing resourcing, a team that is seen in some regions as too small for the task, and relationship management that has at times fallen below their expectations. In addition, it appears that AWBI has been under-investing in marketing strategy and new business development. Branding and promotional partnerships are pursued more opportunistically than strategically. While AWBI has helped growers to reduce their supply chain factor costs, Australian supply chain infrastructure continues to lag North America s. Growers want the industry to continue reducing supply chain costs, while customers are keen to see increasing levels of responsiveness and flexibility. But it is clear that the industry must work together more effectively than it has in recent years. We believe that it will be essential for AWBI to collaborate closely with bulk handlers in reducing cost and improving supply chain operations. There are signs that AWBI and the industry are addressing many of these issues. Further progress will be essential to deliver increased benefits to growers. In Summary AWBI has delivered good returns to growers through a strategy of building and maintaining a differentiated position for Australian wheat. More recently, AWBI has injected increased commerciality, with tighter cost and revenue disciplines. At the same time, we believe that the balance of AWBI s efforts have shifted somewhat towards securing short-term returns for growers, and away from investing in the longer term. While no decline is evident in grower returns, our discussions with customers suggest that the risk is real. Given the difficult market we have described and the emerging threats and opportunities faced by growers, what is the right direction for AWBI going forward? THE BOSTON CONSULTING GROUP 15
The Way Forward for AWBI In working to identify the best strategy for AWBI to maximise grower returns, we examined five main options. Figure 9 maps these options along the same diagram of industry players seen earlier. One option is to reinvigorate and strengthen its differentiated position, in terms of both product and customer service. A second would be to focus on stripping out costs in an attempt to achieve cost leadership at the commodity end of the wheat market. A third option for AWBI would be to reduce the scope of its activities, becoming a pure originator that outsources marketing, customer technical services and trade advocacy to traders or other third parties. At the other end of the spectrum, a fourth option is to emulate the vertically integrated solution providers by building or buying supply chain assets in other wheat producing regions; a fifth is to pursue downstream integration, buying or operating mills in key markets. Figure 9: Options for AWBI Going Forward Milling Capacity III. 'Vertically Integrated Conglomerate' Asset Use / Intensity Supply Chain Assets Asset Light V. Pursue Downstream Integration IV. Become an Integrated Solution Provider I. I. 'Source Of Origin' II. II. 'Trader' II. II. Become A III. III. Become a Pure Originator of of Cost Leader Australian Wheat I. I. Reinvigorate Differentiated Position Single Single Origin Origin Multiple Multiple Origin Origin Bulk Bulk Wheat Wheat Offering Offering Customised Customised Reinvigorating and strengthening the differentiated position is the best option Adopting the cost leadership position would destroy value for growers We believe that the best response to the coming market challenges and opportunities is to reinvigorate and strengthen AWBI s differentiated position. This would require AWBI to retain its marketing role, but refrain from investing in non-australian origination assets or in mills in destination markets. It would also require AWBI to capture high value wheat opportunities, maintain segregations and site selection, build longterm customer relationships, and lead in in-market technical support. The cost leadership option would also be feasible for AWBI. AWBI could work to reduce pool service charges by simplifying segregations, stepping back from site selection and blending, reducing protein and other grain characteristic pay scales, and cutting back investments in sales and technical relationships. It could then leave wheat breeders to focus on cost-reducing plant characteristics. However, we believe that a THE BOSTON CONSULTING GROUP 16
cost leadership strategy would destroy value for Australian growers by removing parts of the Australian wheat offer for which customers are prepared to pay premium prices. Adoption of such a strategy would not only increase risk for Australian growers but also reverse investment and effort on the part of the industry to achieve the differentiated position that Australian wheat enjoys in many world markets. Pure origination being abandoned around the world AWBI too small to compete as an asset-heavy, vertically integrated player Pure origination is a strategy being abandoned around the world as players in this category struggle to generate good returns. If AWBI were to adopt the pure origination strategy, savings from exiting marketing and trading are likely to be more than offset by price erosion as intermediaries capture the returns that come with market and customer insight. A move in this direction would put Australian growers returns at high risk. We believe AWBI is too small, on a global scale, to adopt the assetheavy integrated solution provider strategies that characterise the conglomerates. These huge companies have grain revenues that average almost 20 times AWBI s, and asset values that are up to 100 times greater than AWBL s. The conglomerates are themselves consolidating, putting further distance between AWBI s starting position and the growth it would have to achieve to compete. A less asset-intensive multipleorigin or multiple-grain trading approach is precisely the model adopted by the traders now being absorbed by the conglomerates. If AWBI were to choose this approach, it would put significant strain on the organization s obligations to Australian growers. Finally, downstream integration, through buying or building milling assets in AWBI markets, would be costly and offer doubtful strategic value. We estimate that a controlling interest in milling assets in AWBI s markets would cost an average of US$46 for every tonne of wheat processed annually. In many markets, millers carry capacity well in excess of processed volumes and compete vigorously on price and quality. This would leave little room for millers to achieve premium prices on Australian wheat, above that warranted by its underlying customer value and the service delivered by AWBI. While fastdeveloping markets may from time to time present (often high-risk) opportunities for AWBI to collaborate with millers, in general buying milling assets is a risky, capital-intensive path that offers little prospect of outperforming Australia s world wheat market competitors. In Summary Of the strategic options available to AWBI, in our view reinvigorating and strengthening the differentiated position is the best alternative, putting it in the best position to maximise grower returns. We estimate that successful execution of the strategy could create US$9.50-16.00 per tonne in grower value, reversing most of the potential price decline we described earlier. THE BOSTON CONSULTING GROUP 17
Successful execution of our recommended strategic direction does not require a 180 turnaround in direction but rather a significant step up in gear in order to succeed in a more challenging world environment. To really get it right in the face of the market challenges we ve described, increased investment and better organisational alignment are required. We discuss this in the next chapter. THE BOSTON CONSULTING GROUP 18
Reinvigorating and Strengthening the Differentiated Position To reinvigorate and strengthen a differentiated position for Australian wheat, action is required from farm to market in R&D and crop shaping, grower communications, the supply chain, trade advocacy, sales and marketing, and customer technical support. AWBI undertakes activities in each of these areas today, but they need to be refocused and better resourced, with improved coordination and clearer overall accountability. Figure 10: Action Required from Farm to Market Industry-best R&D capability with active focus on quality and volume opportunities for high value wheats 'Bullet-proof' traceability Strong trade advocacy function Best practice salesforce with multi-tier customer network based on long-term value and strong in-market presence R&D / Crop Shaping Grower Communications Logistics & Shipping Market Access Sales & Marketing Technical Services Growers rewarded for specific highvalue characteristics Customer demands clearly & accurately communicated to growers Inefficient infrastructure on East Coast closed / upgraded Customers rediscovered and relationships re-established Value locked up by coordination failures released Industry leadership in technical support R&D and crop shaping investment needs to be directed to current emerging market needs R&D and Crop Shaping As the sole export marketer of Australian wheat, AWBI is in a unique position to convey emerging market needs to breeders and growers. Its R&D and crop shaping activities should address those needs. The objective should be to build a best-in-class R&D capability to close some important gaps in AWBI s customer offer, including the volume and quality of hard-gluten bread wheats and durum, and the quality of some noodle wheats and soft wheats. Getting it right will require strong coordination across the industry, including growers, the AWBI, the GRDC and the newly privatised wheat breeding industry. Breeders will need long-term collaborations to invest in specific R&D exercises. Growers will need clear communication and payment scales, varietal loadings and receival testing that reflect the value of specific grain characteristics to important customers. Organisationally, this ambitious approach will require a new focus on end-to-end accountability for all AWBI s R&D related activities. THE BOSTON CONSULTING GROUP 19
Grower communications should help build coordination along the value chain Grower Communications AWBI represents growers interests and it needs grower support for its chosen strategy. Communication to growers should be tailored to growers needs and should be clear, frank, frequent and brief. The strategy we recommend will place new demands on the communication channels between AWBI and growers. AWBI will need both to take market and customer insights back to growers, and to learn from growers about specific regional agronomic constraints. It also needs to provide a clear view on what it is doing to maximise grower returns and its performance in doing so. AWBI should use the programs it already has in place, including Grower Consultative Groups, the Executive Roundtable and Pool Forums as part of a more comprehensive, transparent communication approach. AWBI should also expand its Pool Forum program, with smaller formats in more remote regions. Further opportunities for supply chain efficiency gains Supply Chain Outstanding supply chain opportunities need to be realised to further reduce grower costs. AWBI is already working with AWBL to rebalance its approach, moving towards co-operation in infrastructure investments, closing inefficient infrastructure and making economic pricing decisions. A more co-operative approach will also ensure that the bulk handlers and AWBI have access to the full information they need to make timely cargo decisions and efficient trade-offs between realised price and storage and transport costs. In addition, Australian land transport needs to be upgraded to match competitors. Where possible, ports capable of accepting Panamax vessels should be exploited to maintain the Australian freight advantage. Enhanced segregations will sometimes be required, and AWBI should invest to become a world leader in traceability. A strong trade advocacy function is essential Trade Advocacy Strong trade advocacy is a must in the increasingly difficult wheat market for Australian growers. A properly staffed and resourced trade advocacy function is essential to promote Australian growers interests when competitors are pushing hard on GM crops; to respond appropriately to WTO negotiation positions and bilateral free trade agreements; and to ensure country-by-country import access, as in the potentially large and valuable Chinese market. THE BOSTON CONSULTING GROUP 20
Enhanced sales and marketing will support the differentiated positioning Sales and Marketing If AWBI is to reinvigorate and strengthen its differentiated position, its international sales and marketing activities must clearly differentiate the Australian offer both product and service from that of competitors. It will be important to ensure a deep understanding of what customers need and how those needs should be serviced to benefit both customers and growers. Market developments suggest that AWBI should expand its sales and marketing presence in the Middle East, Africa and parts of Asia. Other initiatives to enable sales staff to meet customers requirements should be considered. These include the development of deeper relationships with selected customers; a doubling in customer-facing time; improved backoffice support; the selective use of third party distribution; the training of sales staff to provide a higher value-added role with customers; and better linkages between frontline sales staff and AWB s R&D and technical capabilities. Customers want technical support that matches or exceeds competitor offerings Technical Support Customers for high value wheat are increasingly demanding improved, more sophisticated technical support. Many major competitors, such as CWB and US Wheat Associates, are doing more than AWB to bring innovations to their customers and to build relationships on the technical side of their business. If AWBI is to match or surpass competitors efforts, it will need to expand its technical team to deliver excellent, relevant technical support to high value customers. This could include provision of a technical service plan as component of all key customer contracts. To support the improved technical focus, AWBI should increase the depth of its training programs in key markets, and ensure close collaboration with the R&D and grower communities to guide wheat production and development. Relationship Between AWBI and AWBL The organization, ownership and structure of AWB have evolved significantly in recent years. To support the recommended strategy, some further evolution may be required. First, funding arrangements for AWBL s service provision may need to change. While detailed funding recommendations are beyond the scope of our assignment, revised AWBL performance contracts may be necessary to fund and incent the reinvigorated differentiated strategy going forward. In addition, we believe that some changes to AWBI s management roles and compensation will help to promote growers interests in dealing with all service providers, including AWBL. In particular, there needs to be one high profile individual who represents AWBI and is clearly seen by growers as both independent from AWBL and acting exclusively in their THE BOSTON CONSULTING GROUP 21
interests. The incentives for those representing I should be clearly aligned with long-term grower returns. In Summary Reinvigorating and strengthening AWBI s differentiated strategy is not a simple matter. However, we believe that this is the response the market demands. We also believe that the threat to growers returns in the evolving global wheat market is sufficient to warrant decisive, united action on the part of the whole industry. AWBI s recent changes to its positioning have been commercially rational and delivered good short-term rewards for National Pool participants. With re-investment and organisational effort, those gains can be converted into longer-term rewards. We estimate that implementing our recommendations will require investment of less than A$10 million each year, while the estimated reward will be an annual A$14-23 per tonne of net benefit to growers. Finally, we recognise that this is a strategy that will be developed and deliver benefits over time. To be successful in other words, to ensure that the returns to growers justify the investment the Australian wheat industry must agree to embark on this journey for at least 5 years. THE BOSTON CONSULTING GROUP 22
Maximising Returns To Growers Supplying The National Export Wheat Pool Strategic Review for AWB (International) Limited July 2004 T HE B OSTON C ONSULTING GROUP