Forgoing productivity gains for premium markets is absurd
|September 25, 2015||Posted by Tim_Gardner under Agribusiness, hot tips|
Abstract: Chasing premium markets at the expense of pursuing productivity is a deplorable strategy that will ultimately lead to increased global food insecurity. It has been widely accepted that food production must double by 2050 to meet global demand. If Australian agriculture abandons its focus on production improvements where will the necessary yield gain innovation come from? Diverting resources to serve premium markets may reap higher returns for some but what about the many? There are significantly more opportunities to collect Schumpeterian rents on innovations in productivity gains comparative to the exploitation of premium markets. Premium markets require defensive manoeuvring to preserve and ultimately benefit only a select few. Australia should maintain its contribution to global food security by becoming an agricultural productivity innovation incubator, exploiting its world class research universities and historical culture of localised ingenuity.
A young farmer entering the agricultural industry today would need to have doubled productivity by retirement just to meet rising demand from population growth. It is likely that young farmer’s fate to fecundity may also now be condemned by government policy to meet that impending target; Queensland has an agriculture strategy to double agricultural production by 2040 (DAFF 2013). Now compound that scenario with contemporary issues that farmer will likely face. Climate variability and the subsequent exposure to extreme weather events. Increased competition for scarce resources such as water, capital and land tenure. Stricter operating conditions imposed by a figurative apparitional social license. Add to that, future predictions of peak phosphorus and the occasional biosecurity scare in addition to exposure to the volatility of the markets that that farmer is enslaved to. The trends tell us, farmers need to do more with less to ensure we all have enough. Increases in agricultural productivity are an absolute obligation. If Australian agriculture were to abandon the pursuit of productivity to chase premium markets, what exactly would that entail?
Yogic agriculture: a laudable solution?
Australian chickpea exports to India have tripled in the last decade and it is not necessarily because Indians are partial to paying the premium for imported Australian chickpeas. It is because they are desperate. India must import chickpeas to maintain food security. The recent response from the Indian agriculture minister to increase domestic food production is a novel idea, albeit innocuous as it sounds – yogic agriculture. Whilst I do not profess to be an agricultural expert, (yet) I fail to see how encouraging farmers to feed soil, tackle pests and promote growth with yogic “peace vibrations” is going to stop potential food scarcity riots erupting in India. It is not an altruistic notion to increase productivity through shared invention and forego the quick buck that a premium market may provide. Australians have made fantastic contributions to agricultural production innovation and if that were to cease, it could lead to catastrophic consequences for some. After Norman Borlaug’s green revolution, Australian invention rounds out the all-time top five in terms of global agricultural productivity impact; the Ute, the combine harvester, the stump-jump plough and more recently the permaculture concept. Why stall the propensity for this historical Aussie ingenuity to perpetuate and instead focus solely on serving premium markets?
The absurdity of premium markets
Premium markets are a fallacy and their invention is only limited by the creativity and tenacity of the marketer chasing them. Take for instance a typical Australian commodity such as wheat. Differentiate a proportion of that production by cultivating and harvesting with the use only of pink or rainbow coloured equipment. Think mardis gras float inspired tractor decoration powering production through dusty paddocks. Think place as that colourful oddity of human zoo Oxford Street, Sydney. Now package that wheat in a pink sack with a rainbow flag. Now you have a fully differentiated niche product – LGBT friendly wheat. Promote it as such. Double the price and then congratulate yourself for exploiting an untapped premium market. Enjoy your gay pastries. Welcome to the absurdity of niche markets. There is ample opportunity to take any commodity and tweak it for a premium market. Any product can become premiumised if it is promoted as such. What cannot be guaranteed is continuous supply of product and more so, agricultural products. There are too many externalities that affect supply. For example, drought. The Americans are picking up a larger proportion of Australian beef exports because drought has decimated their herd. Commodity diversions such as this will become more common as the world gets hungrier and farming gets predictably less easy. Market diversions are inevitably fine, if the market can afford it. Never mind the hungry poor who will literally fight to the death over scraps. Diverting resources to exclusively service premium markets will not end well in the long term. Would genetic innovation in drought tolerant cattle be possible in a premium only focused market that sucked up all supply availability and resource capacity? Does that genetic ingenuity then become potentially an additional premium market to exploit in itself? A single bull with the right genetics can fetch up to $150,000 these days…
Productivity gains are premium markets
The bestselling vehicle in the United States for the past 32 years was derived from an innovatory Australian idea to cart pigs to market. Behold the Ute. Technological advances in productivity create new markets and the opportunity to collect Schumpeterian rents. Imagine holding a patent on the Ute design and collecting a royalty every time one was sold since 1932! There are numerous examples of this rent collecting phenomenon and the propensity to disrupt the economic equilibrium and collect margins on technological breakthroughs is advancing rapidly. For example, prawns can now be grown 20-30 per cent faster courtesy of Novacq, a prawn feed developed by Australia’s public scientific research agency the CSIRO. Novacq was patented, commercialised and is now manufactured under license by some of the world’s largest producers of farmed prawns. New markets are created by focusing on productivity gains.
Research + Development = Productivity Gains
Sheng at el. (2011) found that ‘stagnant public R&D investment since the late 1970s has played a role’ in a decline in agricultural production in Australia since the mid noughties and there is a ‘strong link between public R&D and agricultural productivity growth’. The Australian government has made investment commitments towards research and development in the recently released Agricultural Competitiveness White Paper, however, it is investment from the private sector that will ultimately determine how that R&D is deployed and how successful it will be. A pledge from Coles to establish a $50m nurture fund to assist Australian farmers and manufacturers to innovate is an encouraging proposition for an R&D resurgence. It is becoming sexy again to invest in agriculture and after the move by Coles it is no doubt other players such as Woolworths will mimic the strategy. There is also now a growing trend for venture capital to fund early stage agtech startups. A labour matching startup AgTasker just received $40,000 from a Westpac seed fund competition in collaboration with Sydney based tech accelerator BlueChilli. US based companies are taking the lion’s share of agtech investment but the trend is to maturing and Australian startups will emerge. According to a report by online equity crowdfunding platform AgFunder, private agtech funding to mid-2015 ($2.36B) has almost eclipsed the entire investment for 2014 ($2.06B). Half of that investment is in water and ecommerce technologies. Solving the drought problem in California has been a major focus for agtech entrepreneurs and implications of this work will have global benefits, especially in Australia where extreme drought conditions have been predicted due to the recent consolidation of an El Niño weather pattern. Investment in R&D and eventual deployment has global implications and there is an increased opportunity to attain a return on investment. Australia is well positioned to consolidate its position as a global agricultural R&D hub given the right policy settings. As a postgraduate agribusiness student at the University of Queensland it is alarming to see the complete lack of interest from domestic students to undertake agriculturally related fields of study. There should be a greater response from policy makers to promote agriculture to potential students. Universities cannot sustain agricultural courses if student interest is low. Progression of the agricultural sector will be severely retarded if a suitability skilled labour force is not sufficiently trained. A plethora of research and development activities will need to be undertaken if Australia is to maintain and expand competitive advantage.
Are premium markets sustainable anyway?
Due to the highly iterative nature of agriculture, it typically is not long until a competitor pivots to your premium market, snatching market share. There is always a degree of defensive positioning in premium markets to maintain sustainable competitive advantage. The chia market is a recent example. Via his Chia Co venture, John Foss practically created an entire supermarket category need by marketing chia seeds. Now other players have entered the chia seed market. Coles is selling its own brand chia seeds on a private label, undercutting the Chia Co with the typical cost leadership strategy of supermarket giants. Inevitably, profit margin must be diverted to maintain positioning in premium markets. At the end of the day, engaging in promotional activities to defend market share is a really unnecessary strategy and should be avoided. Are defensive promotional activities a useful allocation of resources or would it be better spent on yield research and development to productivity gains? Defending the value proposition from competitors may also alienate the market if they see a wasted allocation of resources.
Your premium is not enough. Aim higher
Premium markets will always exist because it is human nature for some to want more and want better than others. The significance of premium markets to producers should not be understated but if producers aspire to collect higher returns for produce, they should aim higher than premium. Much higher. Bypass the premium market and moon-shot for the super high and ultra-premium markets. Servicing these potential markets will take the full gamut of purchase experience creation. There is ample precedence of this strategy. A resurgence in small scale artisanal production and the actual purchase experience can be augmented by aligning production much closer to the producer and integrating an unforgettable experience into the purchase process. This concept has been successfully deployed by the wine industry for a number of years; Penfolds has pioneered this process, it is a means to justify the higher priced products in its mix. Exclusivity, invitation only opportunities to purchase inflate perceived value because the concept of scarcity is highly seductive to some. An emerging Tasmanian whiskey industry is successfully adopting this strategy; all Tasmanian producers will eventually benefit the repercussions of this development as the co-branding effect trickles down. Brand exploitation of production origin is manifesting itself, exemplified in the growing local gourmet food and wine events that are happening every other weekend.
Australia has historically been a world leader when it comes to increasing agricultural production in challenging environments. Deploying ingenuity to solve problems and thrive has historically been the Australian forte. In the food scarce world potential of the future there will be a premium placed merely on a supply continuity guarantee. Forgoing the pursuit of productivity may sacrifice the ability to maintain consistent delivery of quality food. There is a moral obligation to increase productivity and the opportunities for premium markets will open up for Australia by default. That process will be expedited by continuing to support students who choose to study agriculturally related fields.
Department of Agriculture, Fisheries and Forestry 2013 Queensland’s agriculture strategy A 2040 vision to double agricultural production, Department of Agriculture, Fisheries and Forestry, Brisbane, viewed September 17 2015, http://www.burdekin.qld.gov.au/wp/media/downloads/2014/07/Queenslands-Agriculture-Strategy.pdf
Sheng H, Mullen JD, Zhao S 2011 A turning point in agricultural productivity: consideration of the causes, May 2011 ABARES research report 11.4.