Ag trade a blunt tool to ensure compliance

24/09/2020 - 08:00

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Australia’s primary producers are exploring new export markets and defending their reputation amid rising political tensions.

Ag trade a blunt tool to ensure compliance
Farmers could switch to growing grains other than barley. Photo: Department of Primary Industries and Regional Development

Australia’s relationship with China has become increasingly challenging during the past decade, and never more so than right now.

According to Curtin University associate professor Alexey Muraviev, Australia has managed to walk a tightrope in terms of its biggest trade partner, maintaining good relations as an economic ally while simultaneously recognising the strategic challenge China poses.

That high-wire act appears increasingly unsteady, however, given the breakdown in goodwill following Australia’s call for an inquiry into the origins of COVID-19, and retaliatory tariffs, bans and investigations imposed by Beijing on barley, beef and wine imports.

“On one hand we want to have a really close economic relationship with China,” Dr Muraviev said.

“We want Chinese investments, we want Chinese tourists, we want Chinese students, we want to do business in China; but at the same time we are concerned about China’s behaviour as a rising superpower, as a growing military power … effectively considering China to be our future strategic threat.”

In 2019, 34.3 per cent of total Australian exports, worth $169 billion, went to China, according to statistics from the Department of Foreign Affairs and Trade.

Australia’s next largest trading partner was Japan, which took $60.6 billion of exports.

Tension between the Australian and Chinese governments has been rising during the past decade over territorial disputes in the South China Sea, infrastructure competition in the Pacific, and more recently political interference in Hong Kong.

Dr Muraviev said the tipping point in the relationship came in April, when Australia called for an independent inquiry into China’s handling of COVID-19.

In April, Chinese ambassador Cheng Jingye told The Australian Financial Review tourists may have second thoughts about visiting Australia, parents could rethink sending their children to study, and people might question their decision to drink Australian wine or eat Australian beef.

Subsequently, tariffs were applied to Australian barley, and beef imports were suspended due to issues with labelling and health certificate requirements.

In August, China announced a decision to investigate claims of wine dumping by Australia, while barley imports from Western Australian grain cooperative CBH Group were later banned due to alleged pest infestations.

Perth USAsia Centre research director Jeffrey Wilson said agriculture was an easy target because China could source products from other countries.

“It can buy beef from other countries that it can’t do for iron ore at present, or many other natural resources commodities,” Dr Wilson told Business News.

“It is a way to sanction Australia that maximises pain on our side and minimises pain on the other side.”

A report authored by Dr Wilson and his colleague Gemma King, Political Risks for the Australia-China Agriculture Trade, said calls for sanctions against education and travel had only a symbolic effect while international borders were closed, so agriculture had taken the biggest hit.

Agriculture was also a prime target because it provided an avenue to implement a de facto political sanction without it appearing political, given the nature of agriculture trade, Dr Wilson said.

“It is remarkably easy to write-up an anti-dumping case that’s without merit, but prima facie looks like it has,” he said.

Dr Wilson said making agriculture exports a target wasn’t necessarily about hurting Australia economically.

“They are not trying to destroy the Australian economy, they are trying to rile up Australian businesses to advocate for a less confrontational approach towards China,” he said.

The CBH ban was a good example of this, he said. After undertaking anti-dumping and anti-subsidy investigations into Australia’s barley, China imposed an 80.5 per cent tariff on it in May.

As a result, Australian barley was no longer competitive in China, and most of the trade stopped.

Rather than having any material effect, therefore, the decision in early September to ban grain from CBH was intended as another shot across the bow.

“That SPS ban against CBH means absolutely nothing in material terms because we are not selling barley to China anytime soon, but what it does say is, ‘We can keep doing this’,” Dr Wilson said.

“It was a kind of demonstration, ‘If you upset us, we can use food safety regulations or dubious anti-dumping or give travel advisory saying you shouldn’t come because you will get beaten up in the streets’, which isn’t true.

“The ultimate goal for China is not to cause economic harm, but to get Australian industries to squeal.”

Adding to Australia’s agriculture trade woes, the US and China signed the Phase One trade agreement in January to end their trade dispute, which began soon after Donald Trump took office.

The new agreement includes a commitment not to impose additional tariffs, and a pledge by China to increase total imports of all US products in 2020 and 2021.

The Perth USAsia Centre report said China agreed to a base commitment of $US80 billion of agricultural imports from the US over 2020 and 2021, double the value of its current imports.

While the deal has been made, the report said it was unlikely the target would be met in the near term, and the Chinese trade administration would come under increased pressure to direct market access to US exporters in coming years.

The report said Australian agribusiness faced four risks: the diversion of trade due to an established US presence; reduced competitiveness due to new trade preferences for the US; consumer boycotts of products that can be sourced from other countries; and risks of future Chinese trade sanctions.

It found wool was one of the only products not subject to these risks, as Australia provides China with a majority of its wool and New Zealand is the only alternative supplier.

Dr Wilson said dairy could be a target.

He calculated the $644 million industry was exposed because dairy was part of the US-China Phase One agreement and could be sourced from a number of other countries.

The report said Australia’s $952 million seafood export industry was at a particularly high risk, as China had previously imported seafood from a number of different countries including the US, Russia, Canada and Vietnam.

This could potentially be an issue for WA western rock lobster exporters, who send 95 per cent of their produce to China.

Solutions: Geopolitical

Curtin University’s Dr Muraviev said it was unlikely the Australian government would reach out to repair the relationship with China.

“In this situation, I can’t possibly see the Morrison government trying to engage in damage control and trying to appease the Chinese,” Dr Muraviev said.

“Even if they would, first of all they would come under severe criticism because of what the Chinese did to protesters in Hong Kong, but it would be very difficult for Morrison to do it at home without it having a backfiring effect.

“Certainly, he would come under serious pressure from Washington.”

Solutions: Wine

Australia’s wine industry is pushing back against Chinese investigations into allegations of subsidies and product dumping.

Australian Grape & Wine chief executive Tony Battaglene said the Australian wine industry disagreed with the premise of the investigations, and was working hard to provide evidence to disprove China’s claims.

“We think that will demonstrate that there are no problems; if the process works then we shouldn’t have any problems,” Mr Battaglene told Business News.

“If, however, like in barley, there are tariffs put in place, then that will have a massive impact, depending on what those tariffs are.”

He said the industry was taking the investigations seriously and was seeking to diversify into other markets.

Australia exported $2.84 billion in wine during the 2020 financial year, $1.18 billion of which went to China. Australia’s second biggest export market, the US, imported $430 million of wine.

Wine Australia has spent the past few years marketing wine to China and the US as part of the $50 million Export and Regional Wine Support Package.

The third biggest market in 2019 was the UK at $370 million, followed by Canada at $200 million.

Mr Battaglene said the US market presented the biggest opportunity.

Australian wine exports to the US were strong until the GFC, when the Australian dollar held firm while other currencies weakened, he said.

“We were once a billion dollar market to the US; we are now about half that,” Mr Battaglene said.

“It’s got massive potential for us.”

He said South-East Asia remained a good prospect, as well as the UK, especially following Brexit.

“It’s always been a big market, it’s about second by volume, third by value, it’s got potential to become much bigger with Brexit,” Mr Battaglene said.

“We have got irons in the fire, it’s just about getting out and getting those brands identified in those markets.”

He was hopeful that Chinese consumers and businesses involved in distributing wine would defend Australia’s produce.

“The other thing is that we have a real job in making sure that Chinese consumers speak out in our favour,” Mr Battaglene said.

“There’s a public relations issue here.

“We know that they love our product and we know that they want to be able to buy it.”

Solutions: Barley

Grain Industry Association of Western Australia chief executive Larissa Taylor said because the Chinese tariff announcement happened during seeding, some growers were able to change their programs and decrease the amount of barley they grew.

“We are expecting growers who do still grow barley to focus on feed barley varieties rather than malt barley varieties,” Ms Taylor told Business News.

“There will be a swing into wheat or pulses or oats or canola, depending on prices and seasonal conditions.”

The Grain Industry Association of Western Australia’s Q2 crop report found a 17 per cent decline in barley hectares year-on-year after the tariffs were implemented, and Ms Taylor said she expected that to drop further.

The association’s recommendations for the 2021-22 harvest included favouring the production of barley with a yield-focus rather than a malt-focus (for beer), and to reduce the total area sown to barley in 2021.

“The industry is revising its market focus for barley and increasing efforts in new markets like the Thai feed barley market, the Indian malt barley market and the Indonesia feed barley market,” Ms Taylor said.

“But it takes time to develop new markets.

“We are already doing business there so we are increasing our efforts into new market development and market diversification.”

CBH Group general manager marketing and trading Jason Craig said the organisation had been seeking other markets for its barley since the tariffs were introduced in May, including Thailand, Japan, and Saudi Arabia.

The Department of Agriculture, Water and the Environment’s agricultural outlook September quarter report said overall barley exports had remained stable as a result of increased exports to Japan, Qatar and Thailand.

It said as China’s purchases from other barley sources increased, Australia could seek to fill the shortfalls arising in other countries.

However, Thomas Elder Markets analyst Andrew Whitelaw said moving the barley for the same financial return would be a challenge.

“Saudi Arabia is a top importer of barley, followed by China and Iran,” Mr Whitelaw said.

Aside from those countries, there were few other large markets to tap into.

“They can’t export to China, we have issues exporting to Iran because of sanctions, and so really you are talking about all the people below that go from an average of 2 million [tonnes] to suddenly 1 million [tonnes] and below.

“Trade flows change, but the thing that changes the trade flows is the price.

“You can always sell something; how much you want to sell it for is a problem.”

Solutions: Red meat

Back in May, four Queensland abattoirs had their export licences suspended due to labelling issues and health certificate requirements.

Thomas Elder Markets analyst Matt Dalgleish said Australian abattoirs had been subject to suspensions like this before but, given the context, the move seemed politically motivated.

He said Chinese demand for Australian meat had dampened slightly, as other exporters had increased their market share at a time when China’s local supply of red meat had dwindled.

Mr Dalgleish said China had been forced to import more meat protein throughout last year due to ongoing concerns about African swine fever in its pig herd (see page 70).

Australia’s beef export market remained fairly diversified, with about 24 per cent exported to China in 2019, according to Meat & Livestock Australia.

Mr Dalgleish said China was too big an export market to ignore, but not a big enough slice to cause concern for the health of the local industry.

“In saying that, the prospects would be far better if China was on side,” he said.

V&V Walsh is a meat processor and exporter with a strong relationship with China.

Chief financial officer Brent Dancer said further sanctions or bans from China would have a significant impact on business.

“We have spent over 30 years creating strong business relationships up in China and it is a slow burn to create those relationships,” Mr Dancer told Business News.

“It’s a little bit disappointing in terms of some of the comments that get made about going to find other markets; it’s not like we are sitting here not looking at other markets, but China is the strongest market for us at the best price for the whole ag supply chain.”

He said it would be difficult to find other markets to sell meat during the COVID-19 pandemic, citing falling consumption of meat in areas hit hardest by the virus and the shortage of transport options.

Perth USAsia Centre’s Dr Wilson said while finding new markets was imperative for agricultural industries, it was hard to do.

“That’s really hard to do in the current context because it means developing new trade and investment relationships at a time when the country’s borders are closed to the outside world and the state’s borders are closed to the rest of the country,” he said.

“If you are a barley farmer and you can’t sell your product to China at the moment, how on earth do you sell it to an alternative buyer in Vietnam or Indonesia if you can’t literally go and show them samples and develop the relationship?

“You can’t sell barley on a Zoom call.

“Everything we thought we knew about trading with Asia has changed.”

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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