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Benefit to Australian Grain Growers in the Feed Grain Market

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					    Benefit to Australian Grain Growers in the
                Feed Grain Market
                                      Project No. JCS00002

                                        A report for the

                Grains Research and Development Corporation

                                          October 2008

                                 Prepared by John Spragg




                                         JCS Solutions Pty Ltd
                                       32-34 Grantham Crescent
                                           Berwick Vic 3806

                                         Phone: 03 9769 7027
                                        Mobile: 0402 831 843
                                  Email: jspragg1@optusnet.com.au


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   1       Benefit to Australian Grain Growers in the Feed Grain Market
CONTENTS
EXECUTIVE SUMMARY                                                          5
1         INTRODUCTION                                                     8
2         AUSTRALIAN GRAIN PRODUCTION                                      10
    2.1            Wheat Production                                        10
    2.2            Barley Production                                       11
    2.3            Oat Production                                          11
    2.4            Dedicated Feed Grains – Sorghum and Triticale           12
    2.5            Pulses                                                  13
    2.6            Irrigated Grain Production                              14
    2.7            Grain Production Variability                            14
    2.8            Regional Grain Production                               15
3         GRAIN END USE                                                    18

    3.1            Export Grain                                            18
    3.2            Wheat use in Flour Milling                              21
    3.3            Wheat use in Ethanol Production                         22
    3.4            Barley use in Malt Production                           23
    3.5            Grain use in Animal Feeding                             25
           3.5.1         Beef Feedlots                                     27
           3.5.2         Dairy Industry                                    28
           3.5.3         Poultry Meat                                      29
           3.5.4         Layer Industry                                    30
           3.5.5         Pig Production                                    30
           3.5.6         Other Feed Grain Use                              31
    3.6            Feed Industry use of the Grain Crop                     31
    3.7            Feed Grain use by Region                                34
4         REGIONAL SUPPLY & DEMAND MAPPING                                 37
    4.1        Northern & Central Queensland                               38
    4.2        Southern Queensland                                         41
    4.3        North Eastern NSW                                           42
    4.4        Western NSW                                                 44
    4.5        Sydney Newcastle NSW                                        45
    4.6        Central NSW                                                 47
    4.7        Murray & Northern Vic                                       48
    4.8        Melbourne & Gippsland                                       50
    4.9        Western Districts & South East SA                           51

    2       Benefit to Australian Grain Growers in the Feed Grain Market
    4.10           Adelaide, Mid North and Murraylands SA                  52
    4.11           Eyre Peninsula & Northern SA                            54
    4.12           South West WA                                           55
    4.13           Central & Eastern WA                                    56
    4.14           Tasmania                                                57
    4.15           Northern Territory                                      58
5       SUPPLY AND DEMAND ANALYSIS                                         60
    5.1      East Coast versus West Coast                                  60
    5.2      Grain Production Normality                                    65
    5.3      Effects of drought on the Feed Grain Supply Chain             67
           5.3.1         Consequences of Drought on Livestock Industries   69
           5.3.2         Impact of Drought on Grain Stocks                 71
           5.3.3         Drought & Regional S&D Hotspots                   73
    5.4            Supply Demand Modelling                                 75
           5.4.1         Australian S&D Data                               75
           5.4.2         S&D Modelling Ideals                              77
           5.4.2         S&D Modelling Observations                        80
6       COMPARATIVE SUPPLY CHAINS – Australia vs Brazil and USA            82
    6.1     USA                                                            84
           6.1.1         Supply Chain Case Study 1                         85
           6.1.2         Differences between the USA and Australia         87
    6.2            BRAZIL                                                  87
           6.2.1         Supply Chain Case Study 2                         88
           6.2.2         Supply Chain Case Study 3                         89
           6.2.3         Differences between Brazil and Australia          90
7         SUPPLY CHAIN ISSUES                                              91
    7.1        Feed Grain Market Position                                  91
    7.2        Market Signals and Grain Prices                             92
    7.3        Trust or Mistrust within the Supply Chain                   94
    7.4        Market volatility                                           95
    7.5        Livestock Industry vs Grain Grower Viability                96
    7.6        Boosting Feed Grain Yield                                   96
           7.6.1         Wheat and Barley                                  97
           7.6.2         Fixing Sorghum                                    97
           7.6.3         Triticale Yield Improvement                       97
           7.6.4         Increasing Pulse Production                       99
           7.6.5         Dual Purpose Cereal Fodder Crops                  99
    7.7            Irrigated Grain Production                              99

    3       Benefit to Australian Grain Growers in the Feed Grain Market
    7.8         Sustaining Growth in Grain Production                     100
    7.9         Increased Understanding and Knowledge                     100
    7.10        Grain Grower Feed Grain Marketing Worries                 101
    7.11        Competing Environmental Challenges                        101
    7.12        Increasing Growth in Livestock Feed Demand                102
    7.13        Regional Growth in Livestock Production                   103
    7.14        Imported Stock Feed Alternatives                          107
    7.15        Length of Supply Chain Relationships                      109
    7.16        Transport Infrastructure                                  110
    7.17        Feed Grain Varieties and Breeding Emphasis                111
    7.18        Plant Breeders Rights and End Point Royalties             113
    7.19        Risk Management Tools                                     114
8       RESEARCH AND DEVELOPMENT IN FEED GRAINS                           116
    8.1      PGLP Overview and Outcomes                                   116
    8.2      PGLP Outstanding Issues                                      117
    8.3      Feed Grain R&D Future Directions                             118
9       REFERENCES                                                        121




    4      Benefit to Australian Grain Growers in the Feed Grain Market
EXECUTIVE SUMMARY
This report looks at Australian feed grains and has identified the following issues facing the feed
grain supply chain and market opportunities for Australian grain growers.

   Wheat and barley production has increased over the last 30 year period, mainly due to increased
   yield.
   Since 1993, dedicated feed grains sorghum and triticale production has not increased, lupin and
   pea production has declined.
   Grain cropping yield from year to year is becoming more variable, with increasing frequency of
   poor production years.
   Over the last decade, domestic grain demand has been increasing, reaching 13.6MMT in 2006/07.
   During this period export volumes have been declining. This narrowing of the supply and demand
   gap is greatest in eastern Australian states.
   Cereal grain for animal feeding at 9MMT is the largest domestic market for Australian grain,
   representing 28% of cereal grain production. Within eastern Australia (Qld, NSW and Vic)
   livestock feeding utilises 43%, flour milling 14% and malt production only 2% of cereal grain
   production.
   Feed grain demand has been increasing at a faster rate than grain production growth. The beef
   feedlot, dairy and chicken meat industries have driven feed grain demand from 5.7MMT in 1993
   to 9MMT in 2007, an average increase of 4.1%/annum.
   The frequency of feed grain shortages has been increasing, with grain prices rising above export
   parity pricing.
   Grain is becoming a more valuable feed raw material relative to other raw materials as energy
   becomes more valuable globally. This increases attention to improving grain utilisation in animal
   feeding.
   Supply and demand mapping identifies the following regions with feed grain deficits:
   o Southern Qld
   o Sydney Newcastle
   o Melbourne & Gippsland
   o Western Districts & SE SA
   o Tasmania
   In addition, the following regions experience competing grain demand from other regions which
   reduces grain availability for livestock operators.
   o Northern Eastern NSW
   o Central NSW
   o Murray & Northern Vic
   Regions with surplus feed grain availability include:
   o Northern & Central Qld
   o Western NSW
   o Adelaide, Mid North & Murraylands SA
   o Eyre Peninsula & Northern SA
   o South West WA
   o Central & Eastern WA


   5      Benefit to Australian Grain Growers in the Feed Grain Market
Based upon existing feed grain demand growth of 4.1%/annum, by 2015 east coast feed grain
demand, at 9.9MMT, will result in 58% of all cereal grain being used for animal feeding. At this
point, grain production falling 24% below average results in an east coast grain deficit. Additional
grain has to be imported from SA, WA and overseas, to compensate for any grain exported.
The consequences of reduced crop production due to adverse climatic conditions are resulting in
greater impact upon feed grain prices as the supply demand equation tightens.
Costs to ship grain from SA and WA, and imported grain quarantine controls result in escalated
grain prices during drought years, thus reducing livestock industries viability.
Consecutive drought affected harvests place both the grains and livestock industries under
extreme economic pressures. Grain stocks remaining within Australia are insufficient to provide
adequate carry-over in the event of consecutive drought years.
Supply and demand data available to the Australian feed grain supply chain is inadequate and
limits stakeholders’ decision making ability. The grains and livestock industries have opportunity
to work with government to increase available supply and demand reporting.
Australia’s livestock industries are disadvantaged relative to competitors in countries like the USA
and Brazil which have dedicated feed grain production systems. The development of dedicated
feed grain production is not due to lower animal feeding demand. Australia’s feed industry is
reliant upon using wheat and barley where price is governed by human consumption pricing.
Animal feeding in other countries is based upon accessing corn and soybeans at more favourable
prices.
Corn and soybean growers in the USA and Brazil recognise animal feeding as their primary market
outlet, with grain being value added into animal protein. Australian grain growers view animal
feeding as a secondary market.
The importance of feed grain demand is becoming more evident within the grains industry, with
this being more readily seen in Qld, Northern NSW and Victoria, as feed grain demand is more
often ahead of supply.
Feed grain buyers collectively provide confused buying signals to the grains industry. The market
is considerably more complex than that applying to flour milling wheat or malting barley. Feed
grain end user flexibility in using alternate raw materials and varying grain specifications is
interpreted by grain suppliers as “quality does not matter” for feed use. The feed end users have
provided poor market signals to the grains industry.
There remains a level of mistrust between the grains and livestock industries. For grain growers,
this is often linked to adverse prior experiences and a reduced desire to market grain to end
users. Grain growers and traders taking an entrepreneurial position have established good
trading relationships with feed grain buyers. At peak industry level, there is opportunity for
greater communication and partnership between the grains and livestock industries.
The Australian feed grain supply chain has a high level of volatility. This level of volatility has
increased with rising feed grain demand and increasing crop production variability. Limited risk
management education between grain growers and livestock producers limits opportunity to
control market volatility.
The livestock industries see whole grain importation and quarantine controls as being excessive
and limiting grain supply security. The grains industry position is based upon controlling grain
importation to stop entry of grain pathogens, weed seeds and insects. From both ends of the
supply chain, imported grain is felt to have a potential impact upon domestic feed grain prices.


6      Benefit to Australian Grain Growers in the Feed Grain Market
Boosting crop yield for both milling grains and dedicated feed grains is highly beneficial to all
stakeholders.
Sorghum utilisation by cattle, poultry and pigs is lower than desired and results in these
industries downgrading prices paid relative to wheat and barley. Available energy is reduced due
to poor starch digestion and fermentability. By addressing this issue, increased volumes of
sorghum would be used and prices to growers increased.
Triticale is not being grown in larger volumes due to lack of yield advantage over production of
milling wheat.
Use of pulses in animal feeding is limited by availability. Increased pulse production would assist
in replacing imported soybean meal. Opportunity exists to develop feed grain pulse production in
Qld and Northern NSW.
Breeding of higher yielding dual hay and grain cereal varieties is required to meet growing
demand for fodder production.
Growers with capacity to increase feed grain production under irrigation require certainty
regarding feed industry demand and security of purchase contracts. With suitable cereal varieties
and growing practices opportunity exists to greatly increase grain production utilising irrigation
resources.
Opportunity is present to expand cereal crop production into higher rainfall regions. Areas such
as the Gippsland, Western Districts Vic and Tasmania have a grain deficit and locally produced
feed grain assists in reducing grain demand from other regions. Development of high yielding
feed grain varieties would encourage potential new crop production activity.
The volume of alternate feed raw materials (non grain) imported into Australia is increasing. The
grains industry needs to take account of where and how these various materials compete with
Australian grain for market share.
With the domestic livestock industries using a higher proportion of the grain crop, less grain is
available for export markets. This is more significant within Qld, NSW and Vic. The grains industry
needs to take account of these market changes and their long term impact upon grain transport
infrastructure requirements.
Wheat and barley variety breeding is focused upon milling wheat and malting barley. Due to
increasing feed grain demand, the grains industry has started to recognise feed end users and
potential needs of animal feeding. It is highly likely that breeding will continue to reflect the
needs of flour and malt production and end use. The livestock industries primary desire is to see
breeding programs increase yield, whether this relates to milling grains or dedicated feed grains.
The adoption of EPR collection by feed grain buyers is seen as being a limitation in supporting
development of dedicated feed grain varieties. Promotion of EPR collection to feed grain buyers
has been limited and the grains industry needs to more actively campaign for voluntary collection
by feed mills, feedlots and larger feed grain buyers.
Further research and development project areas are discussed under the areas of:
  o Feed grain utilisation
  o Characteristics of grain
  o Genetic X environment interaction
  o Breeding and milling and feed grain varieties
  o Unique quality trait characteristics



7      Benefit to Australian Grain Growers in the Feed Grain Market
1 INTRODUCTION
“This is the fifteenth month that has passed since we had the last shower of rain: but never mind! If it
holds off for a fortnight or three weeks longer our maize will be worth thirty shillings a bushel.”
Extract from The Ghost upon the Rail, John Lucas Lang 1859 - set in Campbelltown NSW

This report provides results from a GRDC commissioned project looking at the following areas:
   Research documented information relating to the Australian feed value chain.
   Collate and discuss feedback from feed grain supply chain stakeholders.
   Identify key issues impacting upon the supply chain.
   Identify areas where grain growers can obtain greater benefit from feed grain production by
   means of market opportunities, market access, growth in volumes and increased grower returns.

Over the last 15 years there have been a number of industry funded reports looking at the supply of
feed grains within Australia and the growing demand from the livestock industries. It is important to
review some of the key aspects of these reports relative to what has transpired over this time
period.

The Feed Grains Study completed by the Myers Strategy Group in 1995 identified that 30 percent of
total grain production in Australia was used for animal feeding. It was forecast that growth in the
dairy industry as well as beef and poultry feeding would greatly increase feed grain demand within
Australia. In this 1995 study, use of cereal grains by the Victorian dairy industry was estimated to be
627,000 tonnes, with this forecast to increase by 15% annually through to 2000. Based upon SFMA
Vic survey data from feed manufacturers through the years 1995 to 2005, annual feed volume
growth of 15.4% has been reported for members, with the dairy industry providing the strongest
growth in demand.

The importance of feed grain supply security was recognised in 1996 when the Victorian Feed
Industry Steering Committee (VFISC) was established to coordinate the development of a specialised
feed grain industry in Victoria. VFISC functioned through the late 1990’s and early 2000’s and
fostered the development of feed wheat production in higher rainfall regions of Victoria. It is of note
that a report commissioned by VFISC in 1997 identified that Victoria’s traditional supply of feed
grains from surplus or downgraded human consumption grains provides for an unsatisfactory
growth and investment climate for the livestock and associated industries. It is concluded that a
clear consequence of not expanding the local supply of feed grains is pressure for increased sourcing
of more costly feed grains from interstate, and a consequential decline in the competitiveness of
Victoria’s livestock industries.

Subsequently, more detailed feed grain demand and supply projections have been completed by
ABARE (2000) and (2003). In this work, it was defined that in 1999 under a normal year, (non
drought) Victorian feed grain demand was 24,000 tonnes greater than supply. Thus, at this time
period and under the premise of non drought, grain production in Victoria was sufficient to meet
demand for livestock production. The ABARE 2000 report projected the consequences of drought
upon the feed grain demand and supply equation. It was projected that additional feed grains would
need to be transported from South Australia and Western Australia as well as grain importation to
meet east coast demand.

   8       Benefit to Australian Grain Growers in the Feed Grain Market
The drought conditions experienced through 2002-2003 fulfilled the ABARE 2000 projections. Major
limitations in the supply of grains for eastern Australia resulted in increased movement of grain from
South Australia and importation of US maize and UK wheat to guarantee supply of product for the
intensive livestock industries. ABARE projected an increase in feed grain cost based upon additional
freight. This, however, did not take account of the high increase in supply costs as grain supplies
dwindled, with high prices remaining in place until the first grain import shipments became
available.

MLA commissioned ABARE to use their regional demand model to predict the consequences of the
stages of drought upon livestock feed grain demand and the need for feed grains to be trans-shipped
between regions. This data provided from Yates and Coombs (2003) summarised in Table 1 provides
a prediction of the volumes of stockfeed ingredients required to be shipped into the east coast
states due to severe drought on feed grain supplies.


Table 1: Stockfeed ingredient imports into east coast states
Conditions                SA/WA Transhipment Overseas Importation                  Total Imports

Business as Usual                486,000                    47,000                    533,000

Low Level Drought                733,000                    54,000                    787,000

Severe Drought                  1,687,000                   318,000                  2,005,000

Source: Yates and Coombs 2003

The data generated from the ABARE model identifies a number of key points:

1. Under existing business as usual conditions, the east coast states of Qld, NSW and Vic have
   insufficient raw materials to meet demand purposes. The additional materials utilised are cereal
   grains and pulses primarily moving from SA into Vic and NSW.
2. Under a seasonal low level drought, additional grain would move from SA and WA to meet
   reduced supply.
3. Where a more severe drought occurs which greatly limits grain supply, over 2 million tonnes of
   grain would need to be brought into the eastern states. The largest supply would come from WA
   and SA, with imported feed grains being limited to use within capital city feed mills due to import
   control limitations.

Data generated through the Grains Council of Australian Single Vision Project (Pocknee, 2004)
identified that the domestic feed grain market provides the largest growth in cereal grain volume
usage through the years 2005 – 2020, feed grain volumes reaching 13.1, 14,9 and 16,8 MMT by
2010, 2015 and 2020 respectively.

This report is written in the context of taking account of previous work undertaken in defining
livestock industry grain use which is assessed relative to the grains industries existing grain
production base. Provided within this report are grain supply and demand projections using 2006/07
feed grain demand and the increasing variability in climatic conditions impacting upon grain
production.


   9      Benefit to Australian Grain Growers in the Feed Grain Market
2 AUSTRALIAN GRAIN PRODUCTION
Cereal grain production has played a significant role in Australian agriculture for 150 years, with the
data shown in Figure 1 illustrating the growth in winter cereal crop production from 1861 to 2007.
Since the mid 1970’s crop production has doubled from 15 to 30 million tonnes.

In recent times focus has been placed upon variable crop production due to seasonal growing
conditions. However, changes in crop varieties and production practices including conservation
farming, direct drilling, minimum tillage and crop rotations have enabled the grains industry to
reduce this impact upon cereal crop production, with increasing crop yield and industry production
efficiency.



Figure 1. Winter Cereal Production 1861/62 - 2007/08 (tonnes)




Source: ABS Agricultural Commodities Historic Data and ABARE

2.1 Wheat Production
Wheat as the major winter cereal crop has shown increased production tonnes, this has been
greater than the increase in cropping area as shown in Figure 2. Production yield, Figure 3, has
shown strong increases, with this increase being greatest over the last 30 years, increasing from
1t/ha to almost 2t/ha.

The significant impact drought has had upon wheat production is seen for 2002/03, 2006/07 and
2007/08. A recent ABARE report (Mues et al., 2007) has identified the significant financial challenges
being faced by grain growers due to the consequences of drought. Also reported is the wheat
industries record of productivity growth over a sustained period. Further drought would seem to be
the only major reason why this would not continue in the future, especially as the ABARE reports
there has been a relatively large amount of net capital investment in the industry over the past
decade.

  10      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 2. Wheat Production 1969/70 – 2007/08        Figure 3. Wheat Yield 1969/70 – 2007/08
(tonnes)                                            (t/ha)




Source: ABS Agricultural Commodities Historic Data and ABARE

2.2 Barley Production
Barley production over the last 5 year period has averaged 7.4 million tonnes, with volumes varying
from a low of 3.7 million in 2006/07 to a high 10 million tonnes in 2003/04. The long term trend as
shown in Figure 4 is for increasing barley production. Barley production yield has been increasing
from 1.1 t/ha in the early 1970’s to now be over 2t/ha in a normal production year, Figure 5.



Figure 4. Barley Production 1946/47 – 2007/08            Figure 5. Barley Yield 1970/71 – 2007/08
(tonnes)                                                 (t/ha)




Source: ABS Agricultural Commodities Historic Data and ABARE

2.3 Oat Production
Oat production, as shown in Figure 6, peaked during the 1960’s in terms of cropping area. Apart
from drought years, production has remained in the range 1.2-1.9 million tonnes over the last four
decades.

  11      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 6. Oat Production 1861/62 – 2007/08 (tonnes)




Source: ABS Agricultural Commodities Historic Data and ABARE

2.4 Dedicated Feed Grains – Sorghum and Triticale
Sorghum and triticale are grown as dedicated feed grain crops. With the exception of the 2007/08
sorghum crop, the data shown in Figure 7 identifies that there has been no growth in production of
these dedicated feed grain crops over the last decade. The combination of sorghum and triticale
provides in the order of 2.5 to 3 million tonnes of feed grain for the feed market; of this over 90% is
grown in the eastern states.

Figure 7. Production of dedicated feed grains 1997/98 – 2007/08 (‘000 tonnes)




Source: ABS Agricultural Commodities Historic Data and ABARE




  12      Benefit to Australian Grain Growers in the Feed Grain Market
Sorghum is the major feed grain summer crop with production varying from 2MMT in a normal year
down to 1MMT in dry seasons. Sorghum crop production is spread between Qld and Northern NSW,
Figure 8. The 2007/08 sorghum crop is projected by ABARE to be 2.685MMT. Maize production
averages 380,000 tonnes, with this being utilised for human consumption cereal milling, industrial
applications, petfood and stockfeed.

Figure 8. Sorghum production 1997/98 – 2007/08 (‘000 tonnes)




Source: ABS Agricultural Commodities Historic Data and ABARE

2.5 Pulses
The data in Figures 9 and 10 show a decline in the production of lupins and peas within Australia
over the last decade. Production of lupins and peas is predominantly within WA and SA, annotated
as “west” shown in Figures 9 and 10. There is no significant production of lupins or peas within the
major feed demand states of Qld, NSW and Vic.

Figure 9. Lupin production 1997/98 - 2007/08        Figure 10. Pea production 1997/98 - 2007/08
(‘000 tonnes)                                       (‘000 tonnes)




Source: ABS Agricultural Commodities Historic Data and ABARE


  13      Benefit to Australian Grain Growers in the Feed Grain Market
2.6 Irrigated Grain Production
Cereal grain grown under irrigation was reported to be 260,000ha in 2006/07. The greatest area of
irrigated grain production occurs within NSW, Figure 11. The most significant irrigation areas for
cereal grain production are in the Murray Darling Basin, the area of cereal production represented
almost 20% of irrigated land use in 2006/07. However, this is only 3% of the total area of cereals
(other than rice) being grown within the Murray Darling Basin.



Figure 11. Irrigated cereal grain production area (ha) by State – 2006/07 (excludes rice production)




Source: ABS Water use on Australian farms 4618.0

Cereal grain yield from crops grown under irrigation, within the Southern Murray-Darling Basin
region, average 3.0 and 9.9t/ha for wheat and maize respectively (Toohey, 2006). The existing
average yield is considerably lower then potential yields of over 10t/ha for wheat and 25t/ha for
maize.
Irrigated sorghum at 7-10t/ha is considerably greater than the long term average dryland yield at
2.5t/ha (Qld DPI, 2007).


2.7 Grain Production Variability
It could be assumed that Australia, being a large content with a number of distinct geographic grain
growing regions, would have varying climatic effects upon annual crop production. This would seem
to have been the case until around the year 2000, as shown in Figure 12, with some years resulting
in high crop yield on the east coast during years of lower crop production on the west coast and vice
versa. Since 2000, the effects of either more plentiful rainfall or dry seasonal conditions have been
experienced equally across the continent. Until the last decade, the level of crop production yield
variation has historically been much greater within eastern state cropping areas than that
experienced within WA and SA.

  14      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 12. Wheat yield 1966/67 - 2007/08 East coast (Qld, NSW and Vic) vs West coast (WA and
SA) (t/ha)




Source: ABS Agricultural Commodities Historic Data

The effect of continent wide drought, as seen over the last 10-15 years, has a significant impact upon
Australia’s capacity to supply grain into both the domestic and export markets. Typically, a poor
harvest in the eastern states could be compensated by diverting more export sales from WA and SA,
with added grain being able to move from interstate to east coast end users. With continental
droughts, poor cropping years across the country limit the grains industries’ ability to maintain
supply to both domestic and export markets. The combination of successive low crop production
years as seen in 2006/07 and 2007/08 winter cereal harvests places the entire supply chain under
extreme viability pressure.

Whilst the grains industry has shown significant efficiency improvement in terms of crop yield over
the last 30 years, extreme climatic conditions have limited the industries capacity to achieve
consistent production.


2.7 Regional Grain Production
To provide a greater understanding of the relationship between regional grain production and
demand, Australia has been split into 14 regions. These regions are similar to the 13 regions used by
ABARE within their Regional Feed Grain Supply and Demand Model, with the inclusion of Tasmania
as a fourteenth region.

ABS data has been used to divide cereal grain production into regional figures. Table 2 and Figures
13 and 14 provide average annual production for the 6 years 1999/00 to 2004/05. The graphic
presentation within Figure 13 illustrates the relative volume of grain produced within each region,
South West WA having the greatest and Sydney/Newcastle the lowest grain production.




  15      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 13. Regional Grain Production – tonnes




Figure 14. Regional Grain Production by grain type (tonnes)




Source: Derived from ABS Shire statistical data.


  16      Benefit to Australian Grain Growers in the Feed Grain Market
Table 2. Grain production1 by region 6 year average 1999/00-2004/05 – ‘000 tonnes

    Region                                                        Barley   Sorghum   Maize    Oats   Triticale    Wheat     Total

    Northern & Central Qld                                           15       419     105       0           1      295      835

    Southern Qld                                                   199        747      74       8           2      977     2,007

    North Eastern NSW                                              331        676      50      24           3     1,413    2,497

    Western NSW                                                    149         53       6      66           6     1,430    1,708

    Sydney Newcastle NSW                                              2         0       4       2           1        5        14

    Central NSW                                                    526          4     115     236        179      2,981    4,042

    Murray & Northern Vic                                     1,472             6      20     357        329      3,179    5,363

    Melbourne & Gippsland Vic                                         9         0       6       2           3        8        28

    Western Districts Vic & SE SA                                  200          0       1      79         23       256      560

    Adelaide, Mid North & Murraylands SA                      1,003             0       0      54        101      1,347    2,504

    Eyre Peninsula & Northern SA                              1,000             0       0      58         25      1,929    3,013

    South West WA                                             1,252             1       0     466         33      5,615    7,367

    Central and Eastern WA                                         536          2       1      35           7     2,030    2,611

    Tasmania                                                         26         0       0      11           9       23        68

    TOTAL                                                     6,718         1,909     382    1,397       722     21,489   32,618
Source: ABS Census 2001 / ABS Survey 1999, 2000 & 2002-2004


1
    Regional data utilises ABS published Shire statistical data

     17        Benefit to Australian Grain Growers in the Feed Grain Market
3 GRAIN END USE
The feed grain market operates alongside other markets for Australian cereal grains. Although this
report is focused upon the feed grain supply chain, as buyers of feed grain compete with other
markets outlets, a discussion of these other grain users is provided below.


3.1 Export Grain
Australia is a supplier of grain into export markets, with the export value of cereal grains being in the
range $4.2 – 6.5 billion over the last decade (Australian Food Statistics, 2006). Figure 15 identifies
the level of grain exports over the period 1998/99 to 2006/07. Exports include wheat, rice, barley,
oats, sorghum, lupins, rye, peas, beans, maize & other unmilled cereals.

Figure 15. Cereal Grain Production and Exports 1998/99 – 2007/08 – (tonnes)




Source: Exports - Association of Australian Ports and Marine Authorities Incorporated (Total grain
less canola seed export estimates), Production - ABS Commodity Statistics and ABARE.

Production and exports were reduced in 2002/03 due to drought, with a significant increase the
following year due to more favourable crop growing conditions. Production was again reduced by
drought in 2006/07 with a corresponding reduction in grain exports. Export volumes include grain
being shipped within Australia, for example grain moving from SA and WA to eastern states as well
as grain shipped to Tasmania.

The volume of exports from year to year is seen to be less variable than total grain production. The
data for 2002/03 and 2006/07 indicates that almost the entire grain crop was exported. The
Australian grains industry has historically been able to maintain export demand and met domestic
grain users’ requirements even under poor production years. This has largely been achieved through
the use of carry-over grain stocks held within bulk handling facilities. This mechanism is used to even
out supply to better cope with variable production and maintain export sales to traditional markets
as well as allowing grain marketers to hold grain to take advantage of rising global grain markets.
Grain importation has only been required under extreme countrywide drought events.

The long term average is for Australia to export close to 80% of its wheat production, but since the
mid 1990’s, this level of export has been declining as shown in Figure 16. Whilst Australia remains a


  18       Benefit to Australian Grain Growers in the Feed Grain Market
significant wheat exporter, the proportion of production being used domestically has been
increasing and surplus grain available for export has been declining.

Figure 16: Wheat exports as a percentage of total wheat production 1993/94 to 2007/08




Source: ABS Australian Commodity Statistics

There is significantly more grain exported from WA and SA, this being shown as grain exported from
the west in Figure 17, grain exported from Qld, NSW and Vic has been combined into one figure for
the east. What can be seen is the much greater variation in export volumes occurring within eastern
Australia. Although all grain growing areas were affected by drought during 2002/03 and 2006/07,
the impact on reducing available export volumes was far greater in the eastern states.


Figure 17. Grain exports 1999-2006 east and west coast - tonnes




Source: AAPMA


Figure 18 identifies Fremantle as being the major grain export port, followed by Geraldton, Albany
and Port Kembla. No grain has been shipped from Ardrossan and Thevenard since 1999/00 and
2003/04 respectively. Shipping volumes include bulk and container consignments.

  19      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 18. Grain exports average by port 1998-2006 - tonnes




Source: AAPMA

Wheat and barley account for 85% of grain exported, Figure 19. Based upon Wheat Export Authority
data, wheat exports represent 57 – 75% of the volume of grain exported over the years 1999 – 2006.
Following large harvest years, there is proportionately more wheat exported, conversely during
drought years, there is proportionately less wheat exported. This is likely to reflect both a
proportional reduction in wheat production within drought years as well as greater domestic wheat
consumption in feed use as other grains are less available for use.

Figure 19. Grain exports average 2000 - 2006 – tonnes




Source: Australian Food Statistics 2006

  20       Benefit to Australian Grain Growers in the Feed Grain Market
Export of grain as a percentage of production is identified within Table 3, the majority of the wheat,
barley and pea crops are exported. The largest portion of sorghum, oats, triticale, maize and lupins
are used by the domestic market.


Table 3. Grain production and exports 2000 to 2006 - ‘000t
    Grain                                 Production             Exports             % Exported
    Wheat                                    21,611               15,013                   69.5%
    Barley                                     7,813               5,039                   64.5%
    Oats                                       1,360                 156                   11.5%
    Triticale                                   690                        -                0.0%
    Sorghum                                    1,910                 415                   21.7%
    Maize                                       384                    32                   8.3%
    Lupins                                     1,032                 433                   42.0%
    Field Peas                                  400                  246                   61.4%
    Total                                    37,202               23,335                   62.7%
Source: Australian Food Statistics 2006



3.2 Wheat use in Flour Milling
There has been a long tradition of flour production from Australian wheat, with the primary plant
breeding being directed to selection for grain characteristics favourable to flour milled for baking
purposes. Flour production for human consumption (largely baking), industrial and export markets
are shown in Figure 20. Flour production over the 10 year period 1997-2006 has averaged 2,012,000
tonnes annually. The manufacture of this volume of flour utilises approximately 2,580,000 tonnes of
wheat based upon a 78% flour extraction rate.


Figure 20. Flour production for industrial, human and export market uses 1977 to 2006 - tonnes




Source: Flour Millers Council of Australia

  21        Benefit to Australian Grain Growers in the Feed Grain Market
The Flour Miller’s Council of Australia has provided indicative data relating to the volume of wheat
used for flour production within each state, Table 4. Total wheat use at 2.6 million tonnes is in close
agreement with that forecast by ABARE for 2006/07 at 2.456 million tonnes.

Table 4. Wheat used in Flour Milling – tonnes/annum
Queensland                                     395,000
New South Wales                              1,437,000
Victoria                                       455,000
South Australia                                170,000
Western Australia                              160,000

Total                                        2,618,000
Source: FMCA indicative data, NSW includes wheat use in Tasmania.

Australian Food Statistics (2006) data identifies that in dollar value terms, exports of flour milling
products has been declining since 2000 and exports of bakery products is static. In contrast, imports
of flour and bakery products have been increasing over this same period.
Whilst holding a strong position as an exporter of milling wheat, Australia’s position as an exporter
of products derived from wheat milling would seem to be declining relative to imported products.
From the grains industry perspective, whole wheat is exported and imports of higher value added
wheat based products is increasing. The combined value of imported flour mill and bakery products
exceeds $890M annually.



3.3 Wheat Use in Ethanol Production
There remains only one operating ethanol plant which utilises cereal grains as the feedstock for
ethanol production. The wheat grain used within this plant is incorporated into the data collected by
the Flour Millers’ Council of Australia as shown in Figure 20. A second plant is under construction
and is reported to be a future user of sorghum.
It is noted that a separate GRDC project is being undertaken to define the biofuels industry and
potential impact upon the Australian grains industry. This report does not address the competing
demands biofuel production places within either the global or Australian market place.
The proposition for construction of ethanol plants to utilise grain is that there is a consistent supply
of surplus grain which can be utilised. Proposals to construct new plants to utilise wheat and/or
sorghum have been placed on hold due to the escalation in grain prices. Thus the basic premise that
Australia has a consistent grain surplus which allows the development of a viable biofuels industry is
put in question. Although some parts of Australia do have export grain surpluses, many of the
ethanol plant developments are within regions where there is no genuine surplus grain and
operators will need to compete with existing grain users to source available grain stocks.
The CSIRO (2007) report looking at Biofuels in Australia identified that a growing ethanol industry
based upon utilising grain will affect the supply of feed grain for livestock. This affect will be greater
in drought years when grain importation in the range 2.5 – 5.6MMT would be required for Australia

  22       Benefit to Australian Grain Growers in the Feed Grain Market
to meet both domestic feed grain demand for livestock and an E10 ethanol industry producing
897ML. It is noted that this grain importation would require relaxation of existing grain import
quarantine controls.

3.4 Barley Use in Malt Production
The majority of barley sown is malting varieties. In 2003/04 within WA, SA and Vic malting varieties
comprised over 77% of barley cropping area. There was no one feed barley variety with greater than
6% cropping area market share (Australian Barley Breeding Steering Committee).
From a total crop of 7MMT, the split between malt and feed barley was defined as:
    39% malt varieties graded as malt quality
    39% malt varieties graded as feed
    21% feed varieties
Assuming all barley graded as malt is either used in domestic malt or export markets, barley
available for feed purposes thus comprised 65% downgraded malt and 35% feed varieties. The
proportion of malt to feed varies with seasonal conditions, with downgrading commonly being due
to grain being too high in protein, low in test weight, high in screenings or weather damage affected.
Over the production years 2002 to 2006, feed barley ranged from 57 to 75% of barley production, as
shown in Table 5.


Table 5. Barley use split between malt and feed for domestic and export market destinations –
‘000 tonnes
                                                                                               5 year
                                  2002          2003        2004         2005        2006         Ave
 Malt barley domestic use           789           492         773         836         493        677
 Malt barley exports              1,099         2,135       1,464       2,067         809      1,515
 Total malt barley                1,888         2,627       2,237       2,903       1,302      2,191
 Feed domestic use                1,650         2,100       2,300       2,400       2,784      2,247
 Feed barley exports                885         4,241       2,798       3,191       1,140      2,451
 Total feed barley                2,535         6,341       5,098       5,591       3,924      4,698
 Feed %                            57%           71%         70%          66%         75%        68%
Source: ABARE
Hafi and Connell (2003) provided data, shown in Table 6, relating to the percentage of the barley
crop which was classified as feed barley for each grain production state. It is seen that there is a
much higher proportion of feed barley produced in Queensland, with Victoria being the only state
with greater than 50% production as malting barley.
Farmers elect to plant malt varieties largely due to the price differential between malt and feed. An
analysis of potential gross margin (Australian Barley Breeding Steering Committee, 2005) indicated
that feed yield differential needed to be > 30% to overweigh the perceived price differential, this
gross margin analysis being based upon a $35/tonne price differential and a malting crop yield of
2.2T/ha.



  23      Benefit to Australian Grain Growers in the Feed Grain Market
Table 6. Feed barley as a percentage of barley harvest for each state
Queensland                                        78%
New South Wales                                    57%
Victoria                                           43%
South Australia                                    63%
Western Australia                                  52%
Source: Hafi and Connell 2003

The barley industry through Barley Australia has a co-ordinated focus on defining barley breeding
direction, with this leading to a rationalisation of breeding activity. This change in direction has
placed greater emphasis on breeding varieties better suited to feed production within Queensland
and northern NSW (70% feed and 30% malt), and breeding in southern and Western Australia to also
take greater account of both malt and feed requirements (20% feed and 20% malt).

 A limitation in releasing more barley varieties is the challenge of retaining segregation through the
bulk handling and storage systems, with a preference to limit the number of barley varieties per port
zone.

Barley utilised for malt production for domestic consumption is relatively consistent at 170,000 -
200,000 tonnes annually. In addition, some of the Australian malting plants operate to supply export
markets. The barley used in malt production, as shown in Figure 21, varies due to swings in malt
exports. High barley prices and reduced supply during 2003 and 2006 resulting in lower volumes of
barley being used for export malt production.

Malting plants are located in all states and service breweries located in the major capital cities. The
major export of malt is from malting plants located in WA.


Figure 21. Barley use in malt production 2003 to 2007 - tonnes




Source: ABARE Crop Reports



  24       Benefit to Australian Grain Growers in the Feed Grain Market
Barley use in domestic malt production represents only around 10% of barley production. The
domestic malting industry has a minimal impact upon barley demand. Apart from southern
Queensland and northern NSW; domestic malt demand is not been a major competitor for feed
grains in livestock production.

The big factor impacting on barley availability for the domestic feed grain market would appear to
be the amount of barley exported, either as feed or malting barley. Although Australian grain
growers aim to grow malting barley, only a minority of barley is sold for this purpose, with the
majority of barley being used for animal feeding in domestic and overseas market destinations. It is
of significance that feed barley exported from Australia to China is commonly used for malting
purposes. The Middle East provides the strongest feed barley demand, with a preference for white
grain and large size. Thus the barley market demand is rather confused and has a number of sectors
which can be listed as:

    Market                                               Barley Characteristics
 Domestic Malt Production                            Higher quality malt varieties
 Export Malt Production                              Higher quality malt varieties
 Export Feed used in malt production (China)         Lower quality malt varieties segregated as feed
                                                     barley
 Domestic Feed                                       Either malt and feed varieties
 Export Feed                                         Either malt and feed varieties
                                                     Middle East market higher quality


3.5 Grain Use in Animal Feeding
The practice of more intensive animal feeding developed in Australia through the 1960’s with
chicken meat and layer production. Migration of pig production from dairying regions to grain
growing areas took place to take advantage of grain as the major raw material source. In more
recent times growth in beef feedlot and dairy farming activity has been dependent upon accessing
feed grains to support more intensive feeding and production. Having access to cereal grains has
provided the livestock industries with a raw material source which is successfully value added to
produce meat, milk and eggs.

It is recognised that the Australian livestock industries until 2007 have been through a period of
strong growth, resulting in higher volumes of feed and feed grains being utilised. Figure 22 illustrates
industry growth from 1992/93 to 2007/08. This data has been compiled by JCS Solutions from
published production data and provides an indexed growth rate, base year 1992/93, to demonstrate
the relativity between livestock industries and the grains industry. Growth has been defined in
volume production terms as follows:

    Grain – wheat crop tonnes
    Chicken Meat – tonnes
    Laying hens – flock size
    Beef Feedlot – number turned off
    Pig Meat – tonnes
    Dairy – tonnes grain use (cow herd number X kg grain/lactation)




  25       Benefit to Australian Grain Growers in the Feed Grain Market
Figure 22. Industry growth, indexed from 1993/94




Sources: ABS, Dairy Australia and JCS Solutions estimates for dairy grain feeding.

Total feed use as shown in Figure 23 is 11.9MMT. This volume does not include supplementary grain
based feeds for grazing sheep or cattle; neither does it include fodder intake from grazing, hay or
silage; or petfood manufacture.

The growth in dairy and beef feed use is illustrated through these two industries now representing
over 50% of feed usage. These industries in 1995 were estimated to use only 40% of feed (Grains
Council, 1997). Pig feed use has declined from 20% of feed use in 1995 to 16% in 2007. The
combination of poultry meat and layer feed use has remained relatively consistent at 25%.

Figure 23. Feed use by livestock industry – 2007




Source: JCS Solutions




  26      Benefit to Australian Grain Growers in the Feed Grain Market
3.5.1 Beef Feedlots
The growth in feedlot cattle production is shown with numbers of cattle on feed increasing and
cattle turned off annually exceeding 2,500,000 head in 2006. The industries reliance upon access to
grain feeding is shown in the increase in the proportion of cattle finished on grain exceeding 30% in
2006, after being only 10% in 1993 (MLA). The beef feedlot sector has been the fastest growing feed
grain demand market. The drought during 2002/03 slowed growth; this was however only a short
term reduction as feedlots were restocked once more favourably priced grains became available. It
is noted that the second half of 2007 has seen another significant drop in numbers of cattle on feed
due to high grain prices, refer Figure 24, with numbers starting to increase again through mid 2008.

It is estimated that beef feed volumes exceeded 3.1MMT in 2007, with this volume declining in late
2007 as economics of feeding declined. Queensland and NSW are the major feedlot states, in
combination using 83% of beef cattle feed consumed nationally.

Beef feedlots utilise grains based upon availability and price. Wheat and barley are commonly used,
together with sorghum in summer cropping regions. Larger feedlots utilise steam flaking capacity to
increase grain digestibility and feed conversion efficiency. Grains comprise 65-75% of rations with
use of other raw materials such as milling by-products and roughage sources.

Smaller volumes of feed go into supplementary feeding of breeding and growing stock. The export of
live cattle requires the supply of feeds for use in cattle prior to export and during ship voyage.

Figure 24. Number of Feedlot Cattle on Feed 1999-2008




Source: ALFA/MLA Quarterly Feedlot Surveys

The feedlot industry is dominated by a number of larger operators, with the largest 20 feedlots
finishing over 1,000,000 head annually and utilising in excess of 2.2MT of feed. Feedlots are
concentrated in southern Queensland and northern NSW as 68% of the national beef herd is located
within these states. It is estimated that around 76% of beef feedlot feeds are mixed on site, the
balance being supplied by commercial feed mills.




  27      Benefit to Australian Grain Growers in the Feed Grain Market
3.5.2 Dairy Industry
The second fastest growing feed grain use sector has been the dairy industry, with grain demand
doubling between 1993 and 2008. The dairy industry, as shown in Table 7, has increased milk
production volumes and dairy product exports.

Table 7. Australian Dairy Industry Statistics
                                                    1980          1990          2000         2006

Milk Production (million litres)                    5,432         6,262        10,847       9,582

Dairy Cows (‘000)                                   1,880         1,654        2,171        1,810

Farm numbers                                       21,994        15,396        12,896       8,044

Export share of production                          22%           31%           56%          50%

Source: Dairy Australia


Milk production growth has occurred even though the dairy herd has remained relatively static at
just below 2,000,000 cows. Figure 25 shows how milk production per cow has increased and in part
this is due to increased grain feeding.

Grain and concentrate feed use has increased from around 800kg/lactation in the early 1990’s to
now exceed 1,700kg/lactation. It is estimated by Dairy Australia that around 30% of Australian milk
production comes directly from the feeding of grain. Thus it can be seen that a significant portion of
the industries growth in milk production and dairy exports over the last 15-20 year period has been
the result of adoption of higher levels of grain feeding by dairy farmers.

Figure 25. Dairy industry dynamics - change in milk production, cow numbers and grain use.




Source: Dairy Australia - milk production and cow numbers, grain use derived from Dairy Australia
data.



  28       Benefit to Australian Grain Growers in the Feed Grain Market
The use of grain feeding has become an essential component in dairy farming systems, this being
due to:
    Less reliable pasture production due to droughts and limited irrigation water availability
    Increased intensification with larger herds,
    Higher cost of land for expansion of pasture production
    Installation of automatic feeding systems
    Availability of grain and feed suppliers
    Influence of nutritional consultants
    Confidence in grain feeding economics relative to milk prices


The dairy industry utilises grain within all Australian states, although Victoria, producing 65% of the
national milk volume, is the dominant dairying state. It is estimated that commercial feed mills
supply around 55% of grain used in the form of dairy pellets and mash mixes, with the remainder
being mixed on farm.

The industry shows differing levels of favouritism for grain types by region. Whilst barley and wheat
are the major grains used, some producers favour use of triticale, oats and maize. In Queensland and
northern NSW sorghum is used once prices are favourable relative to wheat and barley prices.
Lupins are sought after by some dairy producers in preference to use of vegetable protein meals
such as canola, cottonseed or sunflower meal.

3.5.3 Poultry Meat
The chicken meat industry has provided the most consistent level of production growth over the last
30 year period. From 1993/94 to 2007/08 the production of chicken meat has increased by 5.2%
annually, Figure 26. Thus the chicken meat industry provides a consistently increasing feed grain
demand, although growth in grain use is tempered by the industries’ gains in feed conversion
efficiency.

Volumes of other poultry meat include turkey, duck and quail. Feed volumes used in the production
of these products are small relative to chicken meat production.

Figure 26. Australian Chicken Meat Production – tonnes/annum




Source: ABS


  29      Benefit to Australian Grain Growers in the Feed Grain Market
The Australian chicken meat industry is highly integrated, operating their own feed mills or having
feed manufactured under contract supply arrangements. The industry has a high reliance upon
accessing wheat in all production regions and sorghum in eastern states. Other grains are used
subject to availability, price and quality.

3.5.4 Layer Industry
In contrast to the poultry meat industry, the layer industry has been relatively stagnant in
production volumes. The layer industry has not increased in terms of laying hens. Growth in egg
production has been achieved through the introduction of new genetic stock with higher production
rates per bird. Construction of environmentally controlled production facilities has also seen a jump
in production efficiency.

Production has become concentrated and under the control of egg marketers, with access to major
supermarket outlets being a key industry driver. Pressure for improved bird welfare and cage sizes
has resulted in production rationalisation, with older metropolitan fringe farms being replaced by
larger environmentally controlled production farms.

These larger production farms either mix feed on site or have contract feed supply with the larger
feed milling companies. Layer feed production has declined in percentage terms as other livestock
industries have expanded. Feed grains in use vary with grain availability and price, with laying hens
having capacity to utilise any of the major grains available. Use of enzyme technology has increased
the industries capacity to utilise higher levels of individual grain types.

3.5.5 Pig Production
Following an increase in pigmeat production through the early 2000’s, Figure 27, the industry has
again contracted with increasing volumes of pigmeat imports. Failure to gain any protection relief
from imported pigmeat is placing pressure upon the industry, with production declines occurring
through 2008. The high grain prices experienced through 2007 has seen a reduction of an estimated
30,000 breeding sows being culled through late 2007 and 2008. This reduction is starting to flow
through to a decline in pig meat production. Pig meat production in August 2008 is the lowest
monthly production since 1994.

Figure 27. Pig meat production – tonnes per annum




Source: ABS

  30      Benefit to Australian Grain Growers in the Feed Grain Market
The Australian pig industry is supplying the fresh pork market for domestic consumption purposes,
with the majority of pigmeat for processing being derived from overseas. Australian pig producers
capacity to compete against overseas producers is subject to Australia’s relative cost of production
and currency exchange rates.

The pig industry has contracted to a smaller number of large scale pig operations, with a shift from
family controlled to corporate farming ownership. The majority of feed is supplied by a small
number of feed milling sites. Major grains in use are wheat and barley, with triticale and sorghum
being used in lesser volumes.

3.5.6 Other Feed Use Industries
The horse industry provides significant feed grain use volumes across the breeding, racing, eventing,
pleasure and leisure sectors. Total horse feed use is estimated to be 315,000 tones or just under 3%
of national feed use. The industry is serviced through manufactured feeds and whole grain suppliers.
Major demand is located around the major metropolitan and regional centres. Access to oats
remains an essential part of the horse feed market, with smaller volumes of barley, wheat and
triticale in use. Adoption of higher levels of feed processing in the form of extruders, micronizers and
pelleting enables horse feed manufacturers to utilise of wide range of raw material sources. There
has been a shift in horse feed manufacture with more dedicated manufacturing sites and increased
levels of product packing and promotion.

The grazing industries utilise grain for supplementary feeding of sheep and cattle. This grain use
being driven by climatic conditions and pasture availability. During favourable pasture seasons, only
small volumes of grain are used in supplementary feeding. In contrast, drought years can result in
large volumes of grain being used for cattle and sheep feeding, estimated to easily exceed 1MMT in
severe drought periods. This includes cattle and lambs moving into opportunity feedlot feeding to
enable them to be finished rather than held on farm with declining pasture supplies.

The sheep sector has seen an increase in numbers of lambs being grain finished. Although still a
relatively small industry, potential exists for this sector to become a greater feed grain user.

The aquaculture industry utilises low volumes of cereal grains. Feed demand is coming from salmon,
trout, prawn and native fish operations.

Pet food manufacture provides further use for lesser volumes of grain. Wheat is commonly in use as
is milling by-products such as millrun.


3.6 Feed Industry Use of the Grain Crop
The growth in animal enterprises has resulted in increasing volumes of grain being used for animal
feeding. There is no statutory collection of data relating to animal feed use within Australia. Various
reports and industry estimates provide an indication that existing feed use is in the range 11 - 13
million tonnes. This figure is total feed including all raw materials such as grains (cereal and pulses),
by-products, fats and oils, molasses, proteins meals, minerals and additives. This excludes pasture
grazing, hay or silage intake.

The amount of grain included within animal feeds varies between animal species and feeding
application. However, it is generally acknowledged that the grain content of animal feeds ranges

  31       Benefit to Australian Grain Growers in the Feed Grain Market
from 70 to 75%. Thus the amount of grain utilised within animal feeds is in the order 7.7 – 9.8MMT.
The limitation in not having available more accurate feed and grain use data for Australia is
addressed within the supply and demand modelling section of this report.

For supply demand analysis, feed grain use has been calculated by JCS Solutions based upon the
following principles:
     Utilising available data
     Published livestock numbers and production data
     Feed use calculated for each livestock feeding sector utilising feed intake and feed conversion
     efficiency estimates
     Data broken down into regional use
     Use of feed mill and feedlot volume estimates to cross check against livestock intake data
     Calculation of grain component of feed consumption

Feed grain demand has been quantified as 9.9MMT for the 2006/07 drought year. For 2007/08 there
has been a decline in grain use, as feed volumes in the beef feedlot and pig sectors have declined,
grain use in animal feeds is estimated to be 9.0MMT. Utilising an “average” national grain crop of
32.6MMT, and a feed grain use of 9.0MMT, the livestock industries utilise 28% of grain produced
within Australia.

Grain use from 1993/94 to 2007/08 as shown in Figure 28 has been split into that utilised for
domestic feed, flour and malt production, retained for seed or available as a surplus for export.

What can be seen is the increasing use of grain by the domestic feed, flour milling and malting
markets, with higher feed grain use during drought the years 1994/95, 2002/03 and 2006/07. The
most significant feature is the effect of drought on grain production and the volume of grain
available for export market destinations. The exportable grain surplus swings from only 2.5 - 4MMT
during drought years to over 30MMT in good cropping years.


Chart 28. Grain use by sector 1993/94 - 2007/08 - tonnes




Sources: JCS Solutions derived from published industry data



  32      Benefit to Australian Grain Growers in the Feed Grain Market
The level of grain production variability from year to year is not translated into variation in export
volumes, with grain marketers utilising bulk handling storage capacity to even out volumes exported
between cropping years as shown in Figure 29. Through 1993 - 2007 there is a trend for a declining
production surplus and reducing grain exports, this is in contrast to increasing domestic grain use.
Export grain volumes will be significantly reduced during 2008 as a consequence of the 2006/07 and
2007/08 poor grain production years.

Figure 29. Grain production surplus vs actual export volume - tonnes




Source: Production surplus based upon ABS data, exports from AAPMA. Data excludes canola.

The global trend to view cereal grains as renewable energy sources has changed the ethos relating
to the potential uses of cereal grains from food and feed to also include fuel. This report recognises
other GRDC project work looking at the potential use of Australian cereal grains within biofuel
production and no attempt is made to review the merits or efficiency of this activity. There is,
however, a need to comment on the potential utilisation of cereal grains as supplying energy for fuel
and the impact it has upon the Australian feed grain supply chain.

In particular, there is seen to be an increasing value being attributed to the energy content of cereal
grains relative to other nutrients within animal feeding. As global energy reserves decline and the
cost of energy increases, there would seem to be a correlation with the value of grain as a source of
energy as opposed to its relative value as a source of protein. In general terms, the cost of energy in
feeding livestock has increased at a faster rate then that of feeding protein.

This shift in the increasing cost of energy is changing the dynamics of livestock production and feed
formulations. Greater emphasis is placed upon feed conversion efficiency and increasing feed
digestion and conversion of energy converted into animal products. The proportional cost of the diet
represented by cereal grains has increased relative to protein meals, minerals and vitamins. This is
shown in Figures 30 and 31 where the relative cost of raw materials in a pig ration is compared for
2000 and 2007.




  33      Benefit to Australian Grain Growers in the Feed Grain Market
Figures 30 & 31. 2000 and 2007 Value of feed raw materials - % of pig ration cost




Source: JCS Solutions

Grain cannot be viewed by the feed industry as a lower cost component in feed rations. Grain is
becoming more expensive and more valuable relative to other raw materials.

The higher cost of grain warrants greater attention being placed upon increasing the efficiency of
grain utilisation. Greater emphasis is placed on maximising grain digestion and supply of energy for
animal production.

3.7 Feed Grain Use by Region

Defining the demand for Australian feed grains has a high level of complexity. Due to the livestock
industries competing with other end users, data for regional demand needs to take account of all
grain use. The demand sectors include:
    Flour – wheat used in flour milling for baking, noodles and starch applications, as well as
    conversion to ethanol.
    Malt – barley malting for both domestic and export brewing operations.
    Feed – used by feed manufacturers, feedlots and home-mix operators.
    Export – grain surplus to domestic requirements, this varying with grain availability.
    Seed – retained for subsequent planting.




  34      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 32. Regional grain use for livestock feeding - tonnes




Grain demand has been analysed for each Australian region, these 14 regions are the same as those
used to define regional grain production within this report. Figure 32 and Table 8 provide the
volumes of grain used within each region by domestic market users. This data has been derived from
available published and commercial data, where such data has been unavailable best estimates have
been used to define grain use. The data presented is based upon 2006/07 use figures.

The graphic presentation within Figure 32 illustrates the relative volume of grain used for animal
feeding within each region, Southern Queensland being the region with greatest feed grain use.




  35      Benefit to Australian Grain Growers in the Feed Grain Market
 Table 8. “Average year” cereal grain usage within domestic demand regions (excludes grain for
 export destinations) – ‘000 tonnes

                                                  Seed       Flour        Malt        Feed       Total
Northern & Central Qld                              22           -           -         357         379
Southern Qld                                        53         250         56        1,798       2,157
North Eastern NSW                                   65         420         56          867       1,409
Western NSW                                         45          25           -          76         146
Sydney Newcastle NSW                                 0         420         44          472         936
Central NSW                                        106         780           -         820       1,706
Murray & Northern Vic                              141         115         60        1,364       1,680
Melbourne & Gippsland Vic                            4         320         63          944       1,330
Western Districts Vic & SE SA                       11           -           -         573         584
Adelaide, Mid North & Murraylands SA                66         200        220          649       1,135
Eyre Peninsula & Northern SA                        79           5           -          18         102
South West WA                                      193         140        313          748       1,394
Central and Eastern WA                              68           -           -          70         139
Tasmania                                             2          15         15          194         225
Northern Territory                                   -           -           -          30          30
TOTAL                                              855       2,690        826        8,981      13,353



 Eastern States (Qld, NSW, Vic & Tas)              449       2,345          294       7,435      10,523
 Western States (WA & SA)                          406          345         532       1,516       2,800
 Source: JCS Solutions estimates from available published and industry data

 The animal livestock industries utilise 67% of the domestic cereal grain consumption. Both the flour
 and malt industries use considerably less grain as shown in Figure 33.

 Figure 33. Domestic cereal grain use by sector – 2006/07




 Source: JCS Solutions estimates from available published and industry data



   36      Benefit to Australian Grain Growers in the Feed Grain Market
4 REGIONAL SUPPLY & DEMAND MAPPING
Each feed demand region has differing livestock industry demand requirements. These are driven by
the location of livestock enterprises and the manufacture of stockfeed within the region. For each
region, grain use has been split between that used for either feed, other uses (flour, malt and seed)
or either exported from or imported into the region to balance against grain production.
Feed grain demand has been generated by JCS Solutions based upon a combination of published and
market intelligence data relating to feed use within regions for 2006/07. Grain use for flour milling
has been estimated from flour milling activity data sourced from the FMCA (Flour Millers Council of
Australia); barley use in malt production is based upon JCS Solutions estimates of barley use within
identified malting operations.
Supply and Demand Scenarios
A summary of regional supply and demand data is contained within Table 9, grain supply is based
upon 1999/00 – 2005/06 average production as identified within an earlier section of this report. In
analysing each region’s grain supply and demand balance, seasonal variation scenarios have been
included. This has included either favourable cropping conditions annotated as a “bumper” year, or
drought conditions shown as “drought” or “extreme drought”.
Average Year – based upon average crop production over the seven years 1999-2006 and fed grain
use for the 2006/07 year.
Bumper Year – factors in a 20% production increase above the average year production supply. The
20% increase for a bumper cropping year is based upon the 2003/04 and 2005/06 grain crops
producing 22% and 18% more grain than the 1999-2006 production average.
The bumper cropping year also factors in more favourable seasonal conditions for pasture
production, thus reducing feed demand across the dairy, beef, sheep and horse industries.
Drought Year – is based upon a 60% decline in grain production below an average year. The 60%
drought production decline is equivalent to grain production resulting from the 2006/07 drought
year.
For the drought year, feed demand has been increased to account for additional feeding due to
reduced pasture and hay and silage production. Additional feed being used by the dairy, beef feedlot
and horse sectors. Additional grain is also used as supplementary feed for breeding cows and ewes.
Extreme Drought Year – includes the same level of grain production as for the drought year. The
variable introduced is a decline in feed grain use due to high grain prices resulting in reduced
livestock industry viability and a reduction in animals on feed. This scenario is equivalent to that
occurring during late 2007 and early 2008 with high grain prices resulting in reduced numbers of
beef cattle on feed and a reduction in pig production.
The data shown in Figure 34 identifies that Australia, in average years has a 19MMT surplus above
grain required for seed retention and use in feed, flour and malt production. During bumper
cropping years the grain surplus jumps to 27MMT. During drought years there remains a surplus of
grain within Australia. This is held within WA and SA, with the eastern states being in grain deficit by




  37       Benefit to Australian Grain Growers in the Feed Grain Market
1.4MMT. This grain deficit is similar the 2.0MMT deficit predicted by Yates and Coombes (2003).
Under extreme drought conditions, rising grain prices result in a decline in feed grain demand
resulting in a balance between supply and demand on the east coast.


Figure 34. Grain surplus or deficit during bumper, average, drought or extreme drought years for
either national, eastern states or combined WA and SA.




The discussion below for each region looks at supply and demand issues affecting each region as well
as the impact of variable seasonal conditions upon the supply and demand balance.



4.1 Northern & Central Queensland



                                                    Grain Supply
                                                    Production of over 500,000t of summer crops,
                                                    sorghum and maize, represent 63% of grain
                                                    grown     within    Northern     and   Central
                                                    Queensland. An additional 300,000 tonnes of
                                                    wheat is grown. There are no significant
                                                    quantities of triticale, barley or oats grown
                                                    within the region.




  38      Benefit to Australian Grain Growers in the Feed Grain Market
Northern & Central Queensland Regional feed grain demand by livestock sector - tonnes




Grain Demand
Livestock feeding provides the major grain demand. There is no flour or malting activity in Northern
and Central Queensland. The region is a smaller feed grain demand region.
Beef cattle feedlot activity provides the largest feed grain use, representing 63% of feed consumed
within the region. This demand is spread through Central and Northern Queensland. Supplies of
molasses provide a lower cost raw material source for supplementary cattle feeding, competing with
grain based supplements.
Central Queensland has historically had a strong presence of pig producers. However this has been
declining in recent years.
The region has a concentration of poultry and dairy operations on the Atherton Tablelands with feed
manufacturers servicing this market. Within Central Queensland there is also feeding activity around
Rockhampton with additional volumes of feed grains used in smaller scale pig and poultry feeding
operations.
                                                      Supply & Demand Balance – Impact of season
                                                      In a normal year, grain supply is 456,000t
                                                      greater then demand. This surplus is available
                                                      to move into southern Queensland or enter
                                                      export markets. Shipping data identifies that
                                                      for the period 1998-2005, grain shipped
                                                      through Gladstone averaged 207,000t and
                                                      Mackay 193,000t per year. During bumper
                                                      cropping years in excess of 650,000 tonnes of
                                                      grain is available for movement out of the
                                                      region.
During lower crop production years there is no surplus grain available for either export or transfer to
southern Queensland. During extreme drought events, declining feed grain consumption, due to
high prices results in a small grain surplus.


  39      Benefit to Australian Grain Growers in the Feed Grain Market
Table 9. Regional Supply & Demand Summary – Average Production Year


                                                 Seed            Flour    Malt   Feed    Total Use   Production   SURPLUS/DEFICIT
Northern & Central Qld                             22                -       -    357         379          835                     456
Southern Qld                                       53             250      56    1,798      2,157         2,007         -          150
North Eastern NSW                                  65             420      56     867       1,409         2,497                   1,088
Western NSW                                        45              25        -     76         146         1,708                   1,562
Sydney Newcastle NSW                                0             420      44     472         936           14          -          922
Central NSW                                       106             780        -    820       1,706         4,042                   2,336
Murray & Northern Vic                             141             115      60    1,364      1,680         5,363                   3,683
Melbourne & Gippsland Vic                           4             320      63     944       1,330           28           -        1,302
Western Districts Vic & SE SA                      11                -       -    573         584          560               -      24
Adelaide, Mid North & Murraylands
                                                   66             200     220     649       1,135         2,504                   1,370
SA
Eyre Peninsula & Northern SA                       79                5       -     18         102         3,013                   2,910
South West WA                                     193             140     313     748       1,394         7,367                   5,973
Central and Eastern WA                             68                -       -     70         139         2,611                   2,472
Tasmania                                            2              15      15     194         225           68          -          157
Northern Territory                                   -               -       -     30          30             -         -           30
TOTAL                                             855           2,690     826    8,981     13,353       32,617                   19,265

Eastern States (Qld, NSW & Vic)
                                                  449           2,345     294    7,465     10,553       17,122                    6,569
Western States (WA & SA)
                                                  406             345     533    1,516      2,800       15,495                   12,695


  40       Benefit to Australian Grain Growers in the Feed Grain Market
4.2 Southern Queensland


                                                     Grain Supply
                                                     Southern Queensland is a significant producer
                                                     of wheat 977,000t and sorghum 750,000t, with
                                                     a smaller volume of barley 200,000t grown.
                                                     Suppliers of these grains are in close proximity
                                                     to major end users. The region benefits from
                                                     having ability to produce both summer and
                                                     winter cereal grain crops.
                                                     The region also has capacity to utilise molasses
                                                     as a lower cost raw material source.




Southern Queensland Regional feed grain demand by livestock sector - tonnes




Grain Demand
With a grain use demand of almost 1.8MMT annually, Southern Queensland is the largest feed grain
use region. The volume of wheat and barley used within flour milling and malt production is around
350,000t.
Beef feedlots utilise 1.25MMT or 62% of grain grown within the region. Feed grain use by feedlots is
dependent upon feeding economics. The industry adjusts cattle numbers on feed as feeding margins
vary; dry seasonal conditions can also result in higher numbers of cattle being fed in opportunity
feedlots.
The poultry meat, pig, layer and dairy industries provide additional significant feed volumes.
The major feed demand is located across the Darling Downs where the beef feedlots operate on-site
feed manufacture. Toowoomba and the surrounding area is also the central point for a number of
commercial feed manufacturers supplying pig, poultry, dairy, beef and bagged feeds. The broiler
  41      Benefit to Australian Grain Growers in the Feed Grain Market
industry is located around Brisbane with feed mills strategically located to service breeding and
grow-out farms.
Supply & Demand Balance – Impact of season
Southern Queensland in a normal year has a close balance between grain supply and demand. In
bumper cropping years there is a surplus of grain available for export or transfer to other regions.
During drought years Southern Queensland presents a major grain deficit, almost 1.2MMT during
early drought stages and declining to 490,000t as drought intensifies and feed grain demand
declines due to unviable grain prices for animal feeding, particularly beef feedlots.
                                                       The port of Brisbane acts as the export
                                                       terminal for southern Queensland and
                                                       shipping data identifies on average
                                                       900,000t of grain being exported from
                                                       Brisbane. This grain is grown in both
                                                       Southern Qld and Northern NSW. Supply
                                                       demand volatility within the southern
                                                       Queensland market is seen through the
                                                       variability in grain exports, with a low
                                                       300,000t shipped through Brisbane port in
                                                       2002/03 and a high 1.52MMT shipped in
1999/00. The present grain production season is anticipated to provide a large grain surplus
resulting from a record 2008 sorghum crop followed by a large wheat crop.
In an average grain production year, Southern Queensland is in grain deficit and requires grain to be
moved from Central Queensland and northern NSW to fill this gap. During poor harvest years the
supply gap widens with the need to access grain from SA, WA or imported feed grains.



4.3 North Eastern NSW



                                                     Grain Supply
                                                     North Eastern NSW includes the major grain
                                                     growing regions around Gunnedah, Moree,
                                                     Narrabri and the Liverpool Plains, as well as
                                                     smaller volumes of grain produced on the north
                                                     coast NSW. Wheat is the major grain produced
                                                     at 1.4MMT, followed by sorghum 676,000t and
                                                     barley 330,000t.




  42      Benefit to Australian Grain Growers in the Feed Grain Market
North Eastern NSW Regional feed grain demand by livestock sector - tonnes




Grain Demand
Although feed grain use of 867,000t is the major demand within the region, there are large volumes
of wheat and barley, totalling 480,000t, used in flour and malt production in Tamworth and
Gunnedah.
The beef feedlots provide the greatest demand for grain at 515,000t. The dairy industry in the
Hunter Valley, Mid Coast and North Coast NSW provide the second largest feed demand
requirement. Production of broiler feeds takes place in Tamworth and Casino. Lesser volumes of pig
and layer feeds are predominately located around the Tamworth area, with these volumes declining
over the last 15 - 20 years.
There are additional volumes of cattle and sheep supplementary feed used on beef and sheep
breeding and production farms. During dry seasons this volume can increase significantly in
maintaining breeding stock and production feeding through opportunity feedlots.
Supply & Demand Balance – Impact of season
There is normally a 1.08MMT surplus of grain within North Eastern NSW. This grain surplus has
capacity to move into a number of other
regional markets as follows:
       Export through either Brisbane or
       Newcastle ports
       Southern Queensland feed use
       Sydney and Newcastle feed markets
       Sydney flour and malting demand
       Southern NSW and Victorian feed
       demand, particularly sorghum use in
       broiler feeds.


  43      Benefit to Australian Grain Growers in the Feed Grain Market
North Eastern NSW is a critical region as it has capacity to deliver both summer and winter crops as
well as being able to provide surplus grains to a number of market locations. It is also critical in
having a presence of large feed volume feed grain users. In bumper cropping years the region can
have a supply surplus of 1.7MMT. Failure of crops due to drought can reduce production supply to
less than 1.5MMT and the region has no surplus grain for export or transfer to other regions. Poor
cropping years in North Eastern NSW has a significant flow-on effect across eastern Australia.

4.4 Western NSW


                                                    Grain Supply
                                                    Western NSW encompasses grain grown
                                                    around Coonabarabran, Walgett, Narromine
                                                    and Warren. Wheat production represents 84%
                                                    of cereal grain grown. Smaller volumes of
                                                    summer crops are produced; this is dependent
                                                    on irrigation water supplies and favourable
                                                    rainfall.
                                                    Western NSW crop production is more variable,
                                                    with poor seasonal cropping conditions
                                                    resulting in significant declines in crop yield and
                                                    total production.




Western NSW Regional feed grain demand by livestock sector - tonnes




  44      Benefit to Australian Grain Growers in the Feed Grain Market
Grain Demand
Western NSW does not have any significant intensive livestock production. Feed demand is low and
focused upon beef feedlot as well as cattle and sheep grazing supplementary feeding.
Feed and flour manufacture is located at Dubbo, with products being supplied into other regions as
well as that used within western NSW.
                                                    Supply & Demand Balance – Impact of season
                                                    Western NSW always has a grain surplus, even
                                                    during drought years. This is principally due to
                                                    having a low animal feeding base in the region
                                                    as well as little flour and no malting activity.
                                                    There is normally a 1.5MMT tonne grain
                                                    surplus within Western NSW. During good
                                                    years, western NSW grows significant volumes
                                                    of wheat, with this being transferred to other
                                                    regions as well being available for export. Feed
                                                    grain     can      be      transported       into
                                                    Sydney/Newcastle, Southern Queensland or
                                                    North Eastern NSW.



4.5 Sydney Newcastle NSW



                                                   Grain Supply
                                                   There is almost no grain supply from within the
                                                   region, with grain demand for all end use
                                                   industries having to be transported from other
                                                   regions.




  45      Benefit to Australian Grain Growers in the Feed Grain Market
Sydney Newcastle NSW Regional feed grain demand by livestock sector - tonnes




Grain Demand
The chicken meat industry is the largest feed grain user within the region; this represents 68% of
feed demand. The manufacture of horse feeds supplying metropolitan and country horse owners
presents a significant demand for feed grains. Volumes of layer and dairy feeds within the Sydney,
Newcastle and Wollongong regions have been declining with rising land prices and urbanization.
There is significant wheat and barley demand for flour and malt production, this requires 470,000t of
grain to move into the region.
Supply & Demand Balance – Impact of season
The Sydney Newcastle region has a negative supply balance, with 922,000t being required to move
from other regions to meet demand. Capacity exists to draw on grain in surplus supply from north
eastern, western and central NSW. This demand is very consistent due to the large chicken meat
feed demand. There is little impact on demand due to either bumper cropping years or drought.
The region benefits from having capacity to draw on both winter and summer crop production from
Northern NSW. Grain can also be readily drawn from western, central and southern NSW.
The ports of Newcastle, Sydney and Port Kembla ship over 3.4MMT of grain annually. The traditional
movement of grain within NSW is from regional growing areas through metropolitan based bulk and
container terminals to export markets. Grains being supplied to feed end users within Sydney and
Newcastle fit this traditional grain movement system.




  46      Benefit to Australian Grain Growers in the Feed Grain Market
4.6 Central NSW
                                                      Grain Supply
                                                      Grain production is spread from higher rainfall
                                                      areas in the Central West through to the
                                                      Riverina. Winter crops predominate with a
                                                      smaller volume of summer crop grown under
                                                      irrigation.
                                                      The production of grain includes larger volumes
                                                      of wheat 2.98MMT and barley 526,000t. The
                                                      region is also a major producer of oats 236,000t
                                                      and triticale 329,000t. The region produces, on
                                                      average, 115,000t of maize annually.




Central NSW Regional feed grain demand by livestock sector - tonnes




Grain Demand
Total grain demand for the region is 1.7MMT. Flour milling operations in the Central West have a
significant milling wheat requirement, 420,000t.
Livestock feed use is spread across beef feedlots, pig, layer and broiler farming operations. There is a
concentration of feed milling activity within the Central West around Young and in the Riverina at
Leeton and Griffith. These mills service intensive broiler, pig and layer production as well as dairy

  47       Benefit to Australian Grain Growers in the Feed Grain Market
feed supply into the South Coast NSW. The region has a demand for supplementary feeding of sheep
and cattle which can significantly increase during dry sessions.
                                                       Supply & Demand Balance – Impact of
                                                       season
                                                       Central NSW provides a 2.3MMT grain
                                                       production surplus which enters the export
                                                       market through Port Kembla, handling an
                                                       average 1.9MMT annually. The region
                                                       supplies feed grains into the Sydney and
                                                       Northern Vic feed demand regions.
                                                       During bumper cropping years additional
                                                       grain is available for transfer from the
                                                       region. During drought years the region
retains a grain supply surplus but this is greatly reduced to only 600,000t and during extreme
droughts will lower feeding demand the surplus increases to 900,000t.



4.7 Murray and Northern Vic
                                                   Grain Supply
                                                   This is the major grain supply region for
                                                   Victoria, with large land areas capable of
                                                   producing winter cereal crops. Grain
                                                   production comes from the southern strip of
                                                   NSW north of the Murray River, Wimmera,
                                                   Victorian Mallee, Loddon, Goulburn Valley and
                                                   Central Highlands of Victoria. This provides a
                                                   grain production base of 5.3MMT annually.
                                                   Wheat 3.18MMT and barley 1.47MMT are the
                                                   major grains grown. There are also significant
                                                   volumes of oats 357,000t and triticale 329,000t
                                                   produced.




  48      Benefit to Australian Grain Growers in the Feed Grain Market
Murray & Northern Vic Regional feed grain demand by livestock sector - tonnes




Grain Demand
Grain use in animal feeding, at 1.37MMT, greatly exceeds that used in flour and malt production
175,000t. The pig industry has a high concentration in breeding farms and grow-out units within the
region. Dairy farms are located within the irrigation areas of the Murray and Goulburn Valleys.
Poultry meat operations around Bendigo and St Arnaud, as well as beef feedlots in Northern
Victoria, provide additional demand for feed grains.


Supply & Demand Balance – Impact of season
The Murray Northern Vic region acts as the major grain supplier for Victorian feed demand. In
average production times, the region has a surplus of 3.67MMT which is transported into the
Western Districts, Melbourne and Gippsland regions.
                                                        Flour milling and malt production is located
                                                        in Ballarat.
                                                        The region has a large number of
                                                        commercial feed manufacturers servicing
                                                        the market which draw on feed grains.
                                                        Within the region there is significant
                                                        movement of grain from Southern NSW and
                                                        the Victorian Wimmera and Mallee into the
                                                        Goulburn Valley area for dairy and pig feed
                                                        production.
Grain from South Australia also moves into this region, particularly the Goulburn Valley for dairy and
pig feeding applications.
Grain from the region entering export markets moves through the ports of Melbourne, Geelong and
Portland. These three ports annually handle 2.15MMT of cereal grains.
The region always has a surplus of grain, even during drought years. There is however a very large
swing in the size of the grain surplus from 4.9MMT in bumper cropping years to only 1.3MMT during


  49      Benefit to Australian Grain Growers in the Feed Grain Market
drought years. During drought years the Murray Northern Vic region becomes a critical region for
grain supply as demand comes from other regions with tighter grain supplies.



4.8 Melbourne & Gippsland




                                                  Grain Supply
                                                  The region has no dedicated grain production
                                                  industry; grain production is limited to smaller
                                                  volumes of wheat and barley grown in higher
                                                  rainfall areas of the Gippsland.




Melbourne & Gippsland Regional feed grain demand by livestock sector - tonnes




Grain Demand
The two dominant demand industries are dairy and poultry meat production, using 551,000t and
464,000t of grain respectively. The broiler industry is serviced by Melbourne based feed mills. The
dairy industry sources feed grains via feed manufacture in Melbourne and Gippsland based mills or
direct to farmers mixing their own feeds. The layer industry provides additional feed demand, as
does horse feeds for the Melbourne metropolitan area.
Melbourne based flour mills and malting plants utilise 380,000t of wheat and barley annually.

  50      Benefit to Australian Grain Growers in the Feed Grain Market
Supply & Demand Balance – Impact of season
The Melbourne & Gippsland region at 1.3MMT has the greatest regional feed grain deficit across
Australia. The supply of feed grain is restricted to that moving into and through Melbourne via road
transport. Grain supplies from the Wimmera and Mallee areas provide the majority of grain being
used. Additional grain is transported from Northern and Southern NSW, including sorghum for
poultry and other feed use, when prices are attractive. Feed grains from South Australia include
grain legumes favoured by some within the dairy industry.
Feed grain demand is consistent during bumper, average and drought years due to the consistent
demand for poultry feeding. Grains demand for the Gippsland dairy industry increases during
drought years as supplies of pasture, hay and silage reduce. However with extreme drought
conditions and rising grain prices, continued high grain feeding rates to dairy cows is affected by milk
prices. Unless milk prices are adequate, dairy farmers reduce grain feeding rates when grain gets too
expensive.

4.9 Western Districts & South East SA


                                                   Grain Supply
                                                   Grain production is in the Keith and Bordertown
                                                   SA areas, as well as higher rainfall Vic Western
                                                   Districts and Barwon areas. The total volume of
                                                   grain grown in the region is 560,000t, most of this
                                                   being wheat and barley. Grain production within
                                                   the region has increased with alternate farming
                                                   systems bringing former higher rainfall grazing
                                                   land into production.




Western Districts & South East SA Regional feed grain demand by livestock sector - tonnes




  51       Benefit to Australian Grain Growers in the Feed Grain Market
Grain Demand
This region has no flour or malt production capacity and the demand for feed grains is dominated by
the dairy industry, using 82% or 636,000t of grain. Feed grain demand by the dairy industry has risen
significantly over the last 10-15 years, with new feed mills being built to service the industry.


                                                       Supply & Demand Balance – Impact of
                                                       season
                                                       Grain demand is greater then production by
                                                       24,000T. Additional grain is supplied from the
                                                       Wimmera and South Australia. Grain from the
                                                       region entering the export market moves
                                                       through either Geelong or Portland.
                                                       Seasonal cropping conditions have a
                                                       significant impact upon the regions supply
                                                       and demand balance. During bumper years
the region has a small 200,000t surplus, swinging to a 400,000t deficit during early stages of drought
as the region has a large demand for dairy feeding.



4.10 Adelaide, Mid North and Murraylands SA


                                                     Grain Supply
                                                     The region produces a large volume of barley,
                                                     1.0MMT, in addition to wheat, 1.34MMT.
                                                     Production of oats and triticale are lower at
                                                     54,000t and 101,000t respectively. SA has
                                                     normally has sufficient lupin and pea
                                                     production to supply regional feed demand.
                                                     Grain production is spread from the Mid North,
                                                     Lower North and Murray Mallee areas.




  52      Benefit to Australian Grain Growers in the Feed Grain Market
Adelaide, Mid North & Murraylands Regional feed grain demand by livestock sector - tonnes




Grain Demand
South Australian flour milling and malt production utilises 420,000t of wheat and barley annually.
Feed use is balanced between demand from pig, dairy and poultry meat production and lesser
volume of layer and horse feeds. There are concentrations of intensive livestock production around
the Murray Bridge and Gawler areas. Over the last 10 years, SA has had a significant expansion in pig
and chicken meat production. This is partly due to greater grain availability relative to east coast
regions.
                                                         Supply & Demand Balance – Impact of
                                                         season
                                                         The region has a 1.37MMT surplus, with
                                                         this grain moving into the export market.
                                                         Grain traditionally moves from the region
                                                         into the Port Adelaide bulk shipping
                                                         terminal. Grain exports from Port Adelaide
                                                         average 1.65MMT annually. Increasing
                                                         amounts of grain are moving from South
                                                         Australia into the Victorian feed market as
                                                         Victorian demand has increased.
During drought years the grain surplus declines to only 300,000t, this lower availability for export
also co-incides with increased demand from the Victorian feed industry. Bumper cropping years
provide a 1.9MMT grain surplus.




  53      Benefit to Australian Grain Growers in the Feed Grain Market
4.11 Eyre Peninsula and Northern SA




                                                   Grain Supply
                                                   The Eyre Peninsula and northern SA is a major
                                                   grain producing region, 1.9MMT wheat and
                                                   1.0MMT barley. There is little production of
                                                   other cereal grains apart from oats 58,000t.




Eyre Peninsula & Northern SA Regional feed grain demand by livestock sector - tonnes




Grain Demand
The region has almost no intensive livestock
feed demand and grain use is limited to
supplementary feeding of cattle and sheep
under grazing situations.
Supply & Demand Balance – Impact of season
The region has a large grain surplus of 2.9MMT
which enters the export market. This surplus
ranges from a high 3.5MMT during bumper


  54      Benefit to Australian Grain Growers in the Feed Grain Market
years to a low 1.7MMT during drought years.
The region has a number of shipping ports through which bulk grain is shipped; these being Port
Lincoln, Port Giles, Wallaroo and Thevenard. The shipping ports of Port Pirie and Ardrossan have not
been used for grain shipping in recent years. Bulk grain from Port Lincoln is at times shipped into
Tasmania.
South Australian grain is also shipped into southern Queensland during drought periods.

4.12 South West WA


                                                     Grain Supply
                                                     The Lower and Upper Great Southern and
                                                     Midlands areas produce the greatest amount of
                                                     cereal grain in Australia, wheat 5.6MMT, barley
                                                     1.2MMT and oats 465,000t. Lupin production
                                                     has declined in recent years and canola has
                                                     increased. Grain produced is supplied to Perth
                                                     based end users and export terminals.




South West WA Regional feed grain demand by livestock sector - tonnes




Grain Demand
Flour and malting operations utilise over 450,000t of grain annually and malt is exported from the
region.
The region utilises 750,000t of grain in animal feeding with the intensive livestock industries being
concentrated in south west WA. The major feed mills are located in Perth. These supply a full range
of animal feeds. Additional feed volumes support the live sheep and cattle export trade.

  55      Benefit to Australian Grain Growers in the Feed Grain Market
                                                       Supply & Demand Balance – Impact of
                                                       season
                                                        South West WA has a 5.9MMT grain
                                                       surplus. The surplus of wheat and barley is
                                                       used     to    service   export    market
                                                       requirements. Fremantle is the largest
                                                       bulk grain handling port, moving on
                                                       average 4.5MMT annually. Albany also
                                                       services this region and handles 1.8MMT
                                                       annually. Grain from Fremantle can also be
                                                       shipped to Tasmania in containers.
Grain also moves into the region from Central & Eastern WA.
The region always has a surplus of grain, with this varying from 7.6MMT in bumper cropping years
down to 2.8MMT in drought years.

4.13 Central & Eastern WA


                                                Grain Supply
                                                This region is a major producer of wheat 2.0MMT
                                                and barley 530,000T. Production in the north is
                                                based around Geraldton and Esperance in the
                                                east.




Central & Eastern WA Regional feed grain demand by livestock sector




  56      Benefit to Australian Grain Growers in the Feed Grain Market
Grain Demand
There is limited feed grain demand within central and eastern WA. The region does not have any
significant intensive livestock activity. Feed grain is used in beef and lamb feedlots and
supplementary feeding of grazing sheep and cattle.


                                                      Supply & Demand Balance – Impact of
                                                      season
                                                      The 2.4MMT grain surplus is supplied into
                                                      export markets through the port facilities at
                                                      Esperance and Geraldton.
                                                      Seasonal cropping conditions alter the size
                                                      of the grain surplus, with bumper years
                                                      providing almost 3MMT for export and
                                                      drought years reducing this to 1.3MMT.




4.14 Tasmania


                                                  Grain Supply
                                                  Tasmania has a limited grain production base
                                                  of 68,000t, of which wheat and barley are the
                                                  main grains grown.




  57     Benefit to Australian Grain Growers in the Feed Grain Market
Tasmanian Regional feed grain demand by livestock sector - tonnes




Grain Demand
The two malting plants in Tasmania utilise both local and mainland barley sources. Together with
flour milling activity, the use of milling grains totals 30,000t.
The Tasmanian dairy industry has shown increased demand for feed grains as feeding rates and level
of milk production have increased. Grain use in dairy feeding utilises 53% of grain used in animal
feeding. The other livestock industries are relatively small in grain use volumes. Total feed grain use
                                                        accounts for 194,000t.
                                                       Supply & Demand Balance – Impact of
                                                       season
                                                       Tasmania has a grain deficit, with 157,000t
                                                       needing to be imported from the mainland
                                                       states in an average year. Grain is brought in
                                                       bulk into Devonport, with grain being shipped
                                                       from Melbourne, Port Lincoln or Esperance.


                                                   Grain transported in containers is shipped
                                                   into Hobart, Devonport, Burnie or Bell Bay. In
addition to grain shipments, some mainland feed manufacturers supply prepared feeds to clients in
Tasmania.
Seasonal conditions have a limited impact upon grain grown in Tasmania. In lower rainfall year’s,
there is increased demand for supplementary feeding of dairy cows and sheep. During drought years
the Tasmanian grain deficit can reach 220,000t.




  58      Benefit to Australian Grain Growers in the Feed Grain Market
4.15 Northern Territory
The Northern Territory has no recognised grain production sector, although potential exists for
sorghum and maize crops.
Feed demand is limited to cattle feeding, either as supplementary feeds for breeding stock or feeds
for live export cattle. Additional quantities of bagged feeds are used for poultry and hobby farming
activity. Feed grain demand is estimated to be 30,000 tonnes annually, with this being supplied as
feed either manufactured in the Northern Territory or transported from feed mills in South Australia,
Western Australia or Indonesia.




  59      Benefit to Australian Grain Growers in the Feed Grain Market
5 SUPPLY AND DEMAND ANALYSIS

5.1 East Coast versus West Coast

Due to geographic distances between parts of Australia, the supply and demand equation can be
viewed as that occurring on the east coast relative to west coast. Whilst grain moves freely between
regions, it is recognised that the cost to move grain from either WA or the Eyre Peninsula SA present
a movement barrier. The following analysis is based upon the principle that the major demand for
grain to satisfy feed, flour and malt production is located within the regions in Queensland, New
South Wales and Victoria.

The data provided within Table 9 and shown in Figures 35 and 36, identifies that for eastern
Australia domestic grain demand from all industries utilises 62% of the grain grown in Qld, NSW and
Vic, of this amount the livestock industries use 43%. It can thus be seen that in an average
production year, domestic grain demand, and particularly feed demand, is a major market
destination for east coast grain production. Domestic use with SA and WA makes use of only 18% of
grain grown.

Figures 35 and 36. Grain market destinations Eastern and Western States




The impact changing feed grain use by the livestock industries have upon overall utilisation of the
grain crop is shown in Figure 37. This identifies the percentage of total grain production that is used
for livestock feeding where feed grain use varies from 5 to 12MMT. The 5MMT use figure equates to
feed grain usage occurring around 1990, the upper figure of 12MMT is allowing for a 33% increase
above current feed grain use. The data illustrates the greater significance of livestock feed grain
demand, in terms of its importance as a market destination for Australian grain production. When
the livestock industries were utilising 5MMT of grain, this represented only 24% and 5% of east and
west coast grain production respectably.

As feed grain demand has increased, now around 9MMT, the increase in conversion of the
Australian grain crop to animal feeding end use is seen to be 43% and 10% in the east and west. A
further 33% increase in feed grain demand from 9 to 12MMT results in the eastern states livestock
industries utilising 58% of all grain produced and the combination of WA and SA increasing to 13%.

  60      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 37. Feed use as percentage of total grain production - effect of variable feed grain demand




Source: JCS Solutions



By overlaying variable crop production on feed demand, an analysis of the percentage of grain being
required for animal feeding during drought and bumper harvest years has been made. The variables
being used are:
    Crop production varying between 70% below to 30% above average production. This level of
    variation reflecting actual production results occurring over the last 15 year period.
    Feed grain demand from 5 to 12MMT.

Figure 38 provides national feed use data, Figures 39 and 40 provide data split between east and
west coast. It can be seen that from a national perspective, based upon current feed grain demand
(9MMT annually) the livestock industries would utilise close to 100% of grain grown when crop
production is 70% below average, however as feed grain demand grows to 12MMT, 100% is reached
with a crop failure of just over 60%. These calculations do not take account of grain being required
for flour or malt production or retention of seed stocks, incorporation of these end uses makes the
breakpoint lower at which feed end users do not have sufficient grain supplies to meet their needs.




  61      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 38. Australian feed grain use as % of total crop production, figures shown in the legend are
tonnes of feed grain used annually - ‘000tonnes.




                                               Average year 28% production
                                                       to feed use




Source: JCS Solutions estimates

Data for eastern Australia provides a very different picture to that seen for national analysis. The
eastern states are considerably more sensitive to variable crop production; this sensitivity increases
as feed grain demand rises. Based upon the current east coast feed grain demand of 7.48MMT, use
of the grain crop increases from 43% to 100% when crop production declines by 60%. With a 33%
increase in east coast feed grain demand to 9.9MMT, there is insufficient grain to meet feed demand
with a 40% decline in grain production. This assessment is based upon no grain being available for
other domestic users and including seed retention. Taking account of other domestic users, with
33% growth in feed grain demand, a crop 24% below average results meets east coast livestock
users demand but provides no surplus grain for export.

During bumper cropping years, where crop production is 30% above average, east coast grain
production has capacity to cater for a much larger livestock industry. Even with a 9.9MMT east coast
feed grain demand, in bumper years feed grain use would remain at around 45% of total grain
production.

What is apparent is the increasing market sensitivity to variable crop production as feed grain
demand has grown. With lower historic feed grain demand, there has been greater tolerance within
the supply and demand equation to cater for lower crop production years. As feed demand has
increased, the market is more often close to being in a short supply position on the east coast.

It is of note that should the livestock industries continue to grow, and climatic conditions result in
crop failure, there will be more frequent time periods when the east coast will be significantly short
of grain for domestic use, this applying for all domestic end use industries.




  62      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 39. East Coast feed grain use as % of total crop production, figures shown in the legend are
tonnes of feed grain used annually ‘000tonnes.




                                                    Average year 43%
                                                  production to feed use




Analysis of west coast (WA and SA) feed demand shows that with a 33% increase in feed grain
demand and a 70% reduction in crop production, feed grain demand is at 44% of production. This
level of feed demand is equivalent to present day normal seasonal feed grain demand on the east
coast.

Figure 40. West Coast feed grain use as % of total crop production, figures shown in the legend are
tonnes of feed grain used annually ‘000tonnes.




                                                    Average year 10%
                                                  production to feed use




  63      Benefit to Australian Grain Growers in the Feed Grain Market
A more detailed analysis of the wheat market is provided in Figure 41, with the scenarios of average,
bumper and drought cropping years being considered. The wheat production scenarios are based
upon actual wheat production achieved through the 1993-2006 period, 2003/04 bumper year and
2006/07 drought year.

Wheat use in animal feeding is currently 4.1MMT (ABARE 2007), it can be seen that in average
production years there is ample wheat available to meet domestic market demand as well as
supplying export markets. The major portions of export wheat volumes are available from the west
(WA and SA).

Under drought years, although production declines there remains a national exportable surplus.
However, when data is separated for east and west coast, during drought years there is an east
coast wheat supply deficit of around 3MMT.

This deficit is made up by the transfer of grain from SA and WA into the eastern states as well as
normal grain carryover in bulk handling stocks. Under extreme and extended drought conditions
grain is also imported from overseas markets to meet east coast demand.


Figure 41. Australian, East Coast and West Coast Wheat Market Use - MMT




  64      Benefit to Australian Grain Growers in the Feed Grain Market
Within the previous analysis, wheat demand has been held constant at 4.1MMT within each
production scenario; however in reality wheat use will vary due to:
    Rising grain prices altering use of grain and other raw materials.
    Grain availability, proportionate use of wheat increasing as other grains are less available during
    droughts.
    High grain prices in droughts limiting feed demand as the viability of intensive livestock feeding
    results in lower feed grain use.
    Higher grain use in drought feeding and opportunity beef feedlot activity.

Based upon data from the last 15 year period, what is occurring within eastern Australia is increasing
grain demand; together with more frequent adverse seasonal conditions with the supply demand
equation tightening. Grain exports from the eastern states are declining and the market needs to
adjust to more frequent supply deficits.



5.2 Grain Production Normality
A challenge for the Australian feed grain supply chain is to be able to define what a “normal” year is.
Grains industry participants refer to average cropping years in defining Australia’s grain production
capacity. The end use industries tend to focus on the poor grain production years whilst grain
growers focus on the better production years. There is considerable debate in both the scientific,
political and general community relating to climate change and the impact of climate upon
Australia’s longer term agricultural systems. To this end, it is questionable what a normal year is and
whether the greater frequency of poor grain production seasons is becoming more the norm and
bumper crop production years are declining in frequency.

This report makes no attempt to review the long terms effects of climate change upon either crop
production or end use demand; however, it is appropriate to take account of the more recent
variability in grain production and this impact upon the feed grain supply chain.

It could be argued that, based upon the last decade, grain production is becoming more variable.
Wheat and barley yield data over the 146 years 1861-2007 is presented in Figures 42 and 43, data
has been analysed using production for each decade since 1898 and presented in Figure 44. The
level of yield variation has increased in the last decade relative to the previous ten decades. The 110
year average standard deviation2 is 0.21 and 0.23 t/ha for barley and wheat respectively, over the
last 10 year period this has increased to 0.47 and 0.44 t/ha. What can also be seen is that the level of
crop yield variation within each decade has also been increasing over the last 3 decades.




2
    Standard deviation is a statistical measure of the spread of values

     65       Benefit to Australian Grain Growers in the Feed Grain Market
Figure 42. Wheat yield (t/ha) 1861-2006




Source: ABS Agricultural Commodities Historic Data

Figure 43. Barley yield (t/ha) 1861-2006




ABS Agricultural Commodities Historic Data

Figure 44. Variation in wheat and barley yield by decade 1898 - 2007




  66      Benefit to Australian Grain Growers in the Feed Grain Market
   As crop yield has been increasing, the variation in yield between good years and poor years has
   become greater. This observation supports the general consensus that Australian grain production is
   becoming more variable as a result of more adverse weather conditions. Efficiency gains generated
   from plant breeding are only realised under favourable crop production conditions. Work initiated
   by the grains industry to foster alternate cropping systems and breeding of drought tolerant grain
   varieties is looking to reduce production variability.
   An added outcome from more frequent dry seasons is an increasing trend for cereal crops to be cut
   for hay and silage when crop yield is deemed to be deteriorating. The relative economics and
   certainty of selling fodder outweighs the risk of having low yielding grain crops. The increased
   demand for fodder by the dairy, beef feedlot and export markets have provided this crop production
   alternative. This marketing option provides greater flexibility for grain growers; it also results in a
   greater reduction in grain production in drier cropping years.

   5.3 Effects of Drought on the Feed Grain Supply Chain
   The impact of drought on Australian agriculture has been widely analysed. Drought is a key
   component of cyclical grain and feedstuff shortages in Australia. The decision cycles in drought and
   livestock industry growth scenarios are different and require different approaches for their
   resolution (Yates and Coombs 2003). Figure 45 identifies the distinction between the impact
   variable growing conditions have upon grain growers and livestock feed end users.

   Figure 45. Feed grain demand scenarios impact of variable growing conditions

                                             “Normal” grain                              Lower grain
                                             production year                          production year –
           Bumper crop
                                                                                       regional deficits
          production year


                                              Export parity
                                                                               Export parity grain pricing +
                Export parity grain              pricing
                                                                                freight from other regions
                     pricing


                                              Livestock Grain                                   Drought
                                                   Users                                     production year
               Depressed grain                                                                – widespread
                                                                   Import parity grain
                prices – under                                                                   deficits
                                                                    pricing and higher
                 specification
                    grains                                                                  Severe Drought
                                                                                            production year
               Wet harvest –                                                                   – national
             downgraded grain                                                                   deficits


PRICING FAVOURS FEED GRAIN USERS                                PRICING FAVOURS GRAIN GROWERS

     67      Benefit to Australian Grain Growers in the Feed Grain Market
The grain and livestock industries have the capacity to share in good and bad times in terms of
experiencing the consequences of variable seasonal conditions. Severe drought conditions put both
grain growers and livestock industries under financial pressure. In contrast, favourable grain
production years can be beneficial to both ends of the supply chain. During a bumper harvest there is
ample grain supply and price is governed by the global market through Australia’s export grain
marketing systems. Years of less than average grain production have an intermediate effect, with
grain prices increasing above export parity values and east coast end users having to source
additional grain volumes from longer distances.

Table 10 provides a summary of the conditions which favour either grain growers or the livestock
industries.

Table 10. Conditions favourable to grain growers versus livestock industries

Conditions                        Grain Growers                      Livestock Industries
Bumper cropping year              Favourable production volumes      Plentiful grain supply
    High crop yield               Higher return per ha               Price capped at export parity
    Large volumes across          High bulk handling capacity        Security of supply for minimum
    Australia                     utilisation                        12 month period
    Export parity pricing         Export marketing opportunities
Wet harvest                       Grain downgraded from milling      Price lower than sound grain
    Downgraded grain              quality                            export parity
    Excess supply to demand       Little export market value         Capacity to dictate buying price
                                  Depressed low price                Increased number of sellers
                                  Limited buyers                     Increased enterprise viability
Normal (average) cropping year    Average yield                      Sufficient grain supply
   Excess supply to demand in     Export parity pricing governed     Grain movement between
   most regions                   by global markets                  regions
                                                                     Global grain pricing availability
Drought year                      Lower yields                       Higher grain prices
   20-25% below average           Prices move above export           Additional costs to transport
   grain production               parity                             grain into deficit east coast
                                  Lower bulk handling capacity       regions
                                  utilisation                        Reduced profitability
                                  Reduced export sales               Increased grain use as pasture
                                                                     and fodder supplies decline
Severe Drought                    Low yield or crop failure          Significant grain shortage
   >50% below average grain       Downgraded quality                 Grain transfer from WA, SA and
   production                     Prices at or above import parity   overseas.
                                  Low bulk handling capacity         Alternate raw material imports
                                  utilisation                        to replace grain use
                                  Loss of export market share        Grain prices inflated
                                                                     Decline in livestock production
                                                                     due to lower viability


The seasonal conditions that create the greatest level of contrast in fortunes, is that experienced
due to wet weather at harvest resulting in significant volumes of grain weather damage. The
significant factor in this scenario is the market being oversupplied with lower value grain.
Downgraded milling wheat and malting barley are no longer of value within export markets. The

  68      Benefit to Australian Grain Growers in the Feed Grain Market
domestic feed market provides the grains industry with an outlet for this grain. Feed grain prices
become depressed until such time as the glut of weather damaged grain is utilised. The feed grain
buyers are criticised for taking advantage of grain grower’s misfortune, however having a viable
livestock industry enables these grains rejected from use within domestic and export milling and
malting to find a use which delivers some value to the grower. The price determinant for
downgraded wheat and barley is what value these grains have in the global marketplace, competing
with US and South American corn. (Refer to the later section on R&D and evaluation of nutritional
value of weather damaged grains).

The impact of weather damage upon grain prices has been tempered in recent years as east coast
feed grain demand has increased. The market has gained a capacity to utilise significant volumes of
downgraded grain, this being seen in the utilisation of lower test weight and smaller grain sizes.
However, this demand capacity is insufficient to cater for years in which there is widespread
downgrading, with price depression remaining in place until stocks of downgraded grain have been
utilised.

5.3.1 Consequence of Drought on Livestock Industries
The greatest influence drought has upon feed users is seen through the escalation in grain prices.
Each of the livestock industries have varying capacity to respond to rising grain costs that occur
during severe drought periods, for each of the main livestock industries these are discussed below.

Cattle and Sheep grazing – reduce stocking numbers, cull less valuable stock first and retain
breeders as long as possible. Longer term impact is a reduction in cattle and sheep available for
future feeding uses. Normally low users of grain, under severe drought, these industries can become
large grain users. For mixed farming operations, grain stocks held on farm for supplementary feeding
are utilised and need to be replaced at the following harvest.

Feedlots – under severe drought with escalating grain prices profitability declines until feedlots
decide to cut numbers of cattle on feed as shown in the ALFA/MLA chart of cattle numbers on feed,
Figure 24. This is achieved by not bringing in new cattle so that the numbers being fed reduce over a
period of weeks. Feedlots have the capacity to restock relatively quickly subject to cattle availability.
There are longer term impacts upon export beef market share and supply contracts where feedlot
beef production is significantly reduced during droughts. Growth in beef feedlot activity was
affected by the 2002/03 drought and this is again seen in 2007/08 as high grain prices have resulted
in reduced cattle on feed and consequent beef exports. It should be noted that during lesser drought
and dry periods, this can lead to increased beef feedlot activity as cattle cannot be finished from
pasture and feedlots can take advantage of lower store cattle prices. In this situation many smaller
beef operators run their own opportunity feedlots.

Dairy – is caught between the effect of drought in reducing pasture production and access to
irrigation water; and the need to buy in more feedstuffs to maintain milk production. Survey data
from Dairy Australia shows that in terms of priority dairy farmers take the following actions in
response to severe drought – refinance or extend debt, reduce milking cow numbers, increase grain
fed, source more hay/silage and/or sell young stock. Increased use of grain feeding is a drought
action many dairy farmers employ. Those farmers electing to cease production in response to


  69       Benefit to Australian Grain Growers in the Feed Grain Market
drought rarely start-up again, this results in a decline in cow numbers, milk volumes and pressure on
milk processing companies and dairy exports.

Dairy farmer’s capacity to increase grain feeding during drought periods is affected by both the cost
of grain and milk prices being received. The strength in global milk commodity prices during 2007
and 2008 has allowed many dairy farmers to continue high levels of grain feeding even though grain
prices greatly increased due to reduced grain availability.

Pig – higher grain costs from drought has a direct impact on the pig industries cost of production.
The pig industry production system depends upon sow reproduction and having pigs in various
stages of grow-out. The pig industry cannot quickly stop feeding and so is more prone to the effects
of drought once costs rise above pig meat returns. Where decisions are made to reduce sow
numbers, it takes almost two years to get back into full production. Piggeries that close rarely re-
open due to various licence and environmental control issues, these operations are lost from the pig
industry. The pig industry is more exposed than other Australian livestock industries due to
competition from imported pigmeats from Canada, USA and Denmark. The impact of drought upon
the cost of pig feed relative to the price of pig meat is shown in Figure 46.



Figure 46. Pig feed cost versus bacon price 2002 - 2007




Source: SFMCA



Chicken Meat – has increased feeding efficiency and integrated operations have reduced the cost
impact of grain upon the chicken meat products marketed. Conversion of chicken meat into higher
value food products also lessens the cost impact grain has upon the end products price. During
periods of high grain prices the industry suffers lower profit levels unless they are able to recover
these higher costs in chicken meat product pricing. With a shorter growing cycle, the industry has
greater capacity to modify production volumes in response to varying feed costs.

Egg Industry – high grain prices during drought has a direct impact upon the egg producer’s viability.
The egg industry has limited ability to cut numbers due to annual production cycles and pre-booked


  70      Benefit to Australian Grain Growers in the Feed Grain Market
breeders and replacement pullet rearing. What can be done is to cull older flocks earlier than
scheduled. During periods of high grain prices the egg industry moves into a loss making proposition
and attempts to gain egg selling price increases to compensate for higher grain costs.

Horse Industry – there is little capacity to pass on cost increases from higher grain costs resulting
from drought. For larger trainers and breeders this is a significant enterprise impediment. It is less
significant for pleasure riders with smaller number of horses and re-weighting of disposable
expenditure on feed relative to other required horse gear.

Many horse owners access pasture grazing, during drought periods horse feed demand increases as
more owners are forced to purchase supplementary feeds.

Stockfeed Manufacturers – this segment of the feed grain supply chain is responsive to market
changes, taking advantage of variable raw material supply changes as well as needing to be
competitive in supply of feeds to end users. During dry periods feed manufacturers can benefit from
increased volumes of feed use by the dairy, beef and grazing industries. Higher grain prices are
translated into higher selling prices with retention of selling margin. Under severe drought
conditions the stockfeed industry suffers from loss of client base as producers reduce or cease
production, increased debt recovery as livestock producers seek increased credit positions and have
lower viability to service feed debt, increased exposure to volatile grain markets and commercial
pressures to recover these cost increases in a competitive market.



5.3.2 Impact of Drought on Grain Stocks
A significant feature of the Australian grains industry is the role bulk handling companies play in
holding grain stocks for market destinations. Unlike the US market, there is limited information
made publicly available that confirms the volumes of grain held within Australia at any point in time.
The livestock industries have in recent years funded the Australian Bureau of Statistics to collect
monthly data relating to the volumes of grain held by bulk handling companies and grain traders.
Data was collected with the co-operative support of private companies over the period December
2002 to December 2003 and again from October 2006 to March 2008. These time periods were
during drought years when the livestock industries had concerns relating to security of grain supply.
Data presented in Figure 47 shows the decline in grain stocks following the 2006 winter cereal
harvest, with October 2007 stocks falling to only 2.5MMT. This low figure compares to 4.3MMT grain
stock held in September 2003. The 2003 low stock position was followed by a record harvest and by
December 2003 there was 31.2MMT of grain held in storage.
The low stock levels in September 2007 increased to 15.6MMT at end December 2007. The tight
grain supply position leading into 2008 has been relieved due to a large sorghum crop.




  71      Benefit to Australian Grain Growers in the Feed Grain Market
Figure 47. Stocks of grain held by bulk handling companies and grain traders




Source: ABS
The significant limitation in data collected by ABS is that it is only provided on a national basis and
there is no indication of volumes already committed to export markets. The data provides a very
limited view of Australia’s grain stock position. The ABS report does not account for grain held on
farm.
There is only limited data available relating to the volume of grain which is held within on farm
storage. ABARE annually completes a farmer survey which gathers data relating to the amount of
grain farmers have on site at 31 December, Table 11 provides data collected for 2006.
Table 11. Stocks of grain held on farm 31 December 2006 – ‘000 tonnes
                NSW           VIC         QLD           SA           WA           TAS         TOTAL
Wheat            530          321          67           346          351           3          1,617
Barley           626          343          32           383          95            4          1,482
Oats             463          96            8           69           258           5           899
Sorghum           13           0           39            0            3            0            55
Triticale         37          70            0           27           94            0           227
Other             86          107          14           107          255           3           571
Total           1,754         937         160           931         1,056          14         4,852
Source: ABARE (Hirad et al 2007)
Utilising the published data for the 2006 winter cereal harvest of on farm and bulk handling grain
stocks, it is possible to estimate the proportion of grain that was held within either bulk handling or
on farm storage facilities, shown in Table 12. For the 2006 harvest year, around 50% of wheat and
barley harvested was within the bulk handling system at end December 2006. The bulk handlers,
during the harvest months, additionally supply domestic end users as well as loading ships for export
markets. These volumes are a part of the “other” grain identified within Table 12, thus the bulk
handlers would have handled in excess of 50% of wheat and barley grown. Additional grain in the
“other” category would be grain held within private storage operated by supply chain participants
and end users as well as grain used directly off harvest supply. There is more barley, at 40% of the
barley crop, held by farmers in on farm storage than wheat at 16%. This difference is potentially a


  72        Benefit to Australian Grain Growers in the Feed Grain Market
function of greater commitment to pooling of wheat as well as a higher proportion of feed barley
being produced during 2006. The higher portion of the barley crop held by growers in on farm
storage may also reflect greater activity in supplying the domestic feed market. On farm grain stocks
also include seed held for subsequent crop planting.
Table 12. Wheat and barley 2006 grain held in on-farm, bulk handling or other end use, based
upon 31 December 2006 published data
                                           On Farm Storage         Bulk Handling           Other
Wheat              '000 tonnes                        1,617                 4,660          3,542
                        %                              16%                   47%             36%
Barley             '000 tonnes                        1,482                 1,941            299
                        %                              40%                   52%              8%
Sources: On farm - ABARE, Bulk Handling – derived from ABS data, Other – estimated wheat and
barley harvest less on farm and bulk handling storage volumes.
The ABARE data indicates that at December 2006 farmers held 899,000 tonnes of oats on farm. The
2006 oat harvest was significantly less at 633,000 tonnes and would indicate either some inaccuracy
in the ABARE data or that farmers use oats as an on farm feed grain reserve with grain being held
over from the 2005 harvest.
On farm storage of triticale represents 76% of triticale harvested for 2006. This is much higher
proportion of on farm storage relative to that of barley and wheat and is an indicator of the
marketing option of growers to hold triticale on farm for later sale within the domestic market
versus delivery to bulk handling systems.
The split between on farm and bulk handling storage takes no account of growers utilising bulk
handling grain warehousing options.



5.3.2 Drought and Regional S&D Hotspots
The regional analysis presented in section 3.7 of this report identifies supply and demand balances
for each of the Australian regions. These regions do not work in isolation, and drought events are
typically seen as occurring across regions.

In particular the demand regions of southern Queensland, Sydney Newcastle, Melbourne Gippsland,
Western Districts Victoria and Tasmania are seen as demand “hotspots” as they are more
susceptible to drought due to their existing regional supply deficits, even in average years, as well as
strong feed demand base. With low grain production years, there becomes a greater drive to source
grains from further distances, with grain buyers then increasing demand in other regions.

Figure 48 illustrates the flow of grain required from other regions during droughts to satisfy these
regional grain demand hotspots. The market typically accesses the lowest cost supply option, with
initial purchasing demand extending to surrounding regions. Transport logistics become more
significant with options of moving grain by road, rail and ocean shipping each being considered.




  73       Benefit to Australian Grain Growers in the Feed Grain Market
Figure 48. Feed grain demand hotspots during drought conditions




Numbers included on Figure 48 is the annual volume of grain deficit occurring within these hotspot
regions during drought years. Arrows indicate other regions or overseas supply required to meet the
grain deficit.

Southern Queensland is forced to compete for NSW grain supplies against both the
Sydney/Newcastle and Victorian feed industry. With higher freight costs to move southern grain into
Queensland, the shipment of WA and SA grains become feasible. Importation of overseas feed grain
is not attractive with the majority of feed grain use occurring on the Darling Downs, with beef
feedlots seeking whole grain which cannot be moved unprocessed away from vessel unloading
ports.

The Sydney and Newcastle region is well placed to utilise grain from all eastern state regions as well
as shipping grain from SA, WA or overseas. With the majority of feed grain use going into pelleted
broiler feeds, this allows the region to utilise overseas grain if and when required due to drought.

Melbourne and the Gippsland region has a high feed grain demand. Grain normally moves from
northern and western Vic into this region. Under drought conditions there is a need to transport
grain from further regions such as southern NSW and SA. Under extreme drought grain supply
shortages, grain can be shipped into Melbourne from either WA or from overseas to metropolitan
based feed mills.


  74      Benefit to Australian Grain Growers in the Feed Grain Market
Western Victoria under drought conditions has a greater grain deficit and utilises greater volumes of
grain from SA.

Tasmania during normal years receives grain from Victoria and SA. With a greater grain deficit
during drought and reduced grain availability from Victoria resulting in grain being shipped from
west coast SA or WA.



5.4 Supply and Demand Modelling
Access to timely data relating to the supply of grain and market demand is recognised as being an
integral requirement for the supply chain to function efficiently. Australia has no regulated system
which provides supply and demand (S&D) data, this being distinctly different to that applying within
the US where the USDA provides reporting services. USDA reports provide S&D data for feed grains
including corn, sorghum, barley and oats. Data is consolidated into monthly figures, with reports
taking account of opening stocks, production, imports, grain used for food, seed and industrial uses,
feed use, exports and closing stocks. Data is made available through a Feed Grains Database which is
accessed via email subscription. Data generated is also provided through monthly Feed Outlook and
annual Feed Yearbook reports.

The advantage held within the US market is the scope of the industry which justifies the resources
required in the collection, analysis and dissemination of feed grain data. Within the USA there are
also established regulatory controls requiring end of month stock reporting by grain companies.

To allow comparisons of feed intake by different animal species, the USDA created an index of grain-
consuming animal units (GCAU). The GCAU index converts all animals to an equivalent number of
dairy cows to account for different species consuming different amounts of grain. The GCAU
statistics are less accurate than using individual species intake data; they are, however, effective in
providing general projections of feed grain intake, thus making their generation and interpretation
simpler for industry use. The reliance is placed upon gaining accurate livestock data which is then
used to calculate a total feed grain intake to feed these animals. Further discussion relating to the US
feed grain industry is contained within this report in a later section.



5.4.1 Australian S&D Data
Within Australia there is no regular Government funded provision of feed grain supply S&D data. The
feed grain supply chain operates with limited pieces of information which stake holders assimilate
into their decision making processes. Due to the feed market accessing the same grain sources as
those used for milling and malting, the S&D position does not just relate to feed grain demand. This
is distinctly different to feed grain S&D as it applies within the North American feed market.

The information being supplied to the Australian feed grain supply chain covers the following areas
in varying degrees of accuracy:

    Climatic data – rainfall received, frost events, temperature.
    Crop Production – area planted, regional trends, yield potential, quality concerns.

  75       Benefit to Australian Grain Growers in the Feed Grain Market
    Pricing – ex farm, delivered end user, pool pricing, quality payments, regional and capital city,
    futures markets, overseas prices, Australian dollar value.
    International Market – production reports, other country crop reports and climatic conditions,
    US futures prices, other market demand and pricing, market influencers affecting import
    controls or restrictions, shipping costs.

The Australian based entities that provide grain reporting services include:

Australian Bureau of Statistics (ABS) – within the area of agricultural statistics, data is collected
relating to crop production, livestock numbers and livestock product production by statistical
division, subdivision and local area. ABS also completes further statistical work supported via
industry funding, including collection of data relating to grain stocks held by bulk handling
companies and traders.

The significant limitation with ABS data is the timing of release, with crop production data not being
released until well after the cropping year has finished eg. 2005/06 cropping data was not released
until July 2007. When seeking data relating to winter cereal production, the crop harvested in Oct-
Dec 2006 will not be released by ABS until around Jun/Jul 2008, over 18 months after harvest has
been completed. The delay in the release of crop production data presents a major limitation for use
of such data in any decision making processes. The ABS data reports provide only historic
information which can be best utilised in looking at production trends.

By way of contrast, data reported for livestock slaughter and meat production is provided in a much
timelier manner. ABS reports this data on a monthly basis, with reporting within two months ie.
August 2007 data is reported in early October 2007. This more timely collection and release of data
provides closer to real time information relating to changes in number of pigs, sheep and cattle
being slaughtered and the volume of meat produced. Data relating to chicken meat production is
reported on a quarterly basis.

Australian Bureau of Agricultural Resource and Economics (ABARE) – provides outlook reports
relating to the Australian grain and livestock industries. Together with the annual Outlook
Conference, regular and periodic reports are generated to support the feed grain supply chain.
ABARE also conducts research projects which have looked at modelling feed grain supply and
demand by region.

The ABARE Crop Report released quarterly assists in filling some of the gap in the delay with ABS
statistical reports. ABARE, within their crop report, includes forecasts of the prior cropping year and
forecasts for the present crop. This is used to estimate 5 year average data for the major winter and
summer cereal crops. Within the Crop Report S&D, ABARE provides data for each cereal grain.

The ABARE Crop Report provides valuable data which is widely utilised within the industry, the
results of the report being captured within most rural media and grains commentary. At the time of
release the accuracy of the ABARE reports is well received, however the relevance of the data is
quickly lost over a 3 month period. Changes in crop conditions can change rapidly with variable
rainfall events and crop forecasts based upon a release date of September may be very different to
the actual harvest results by the time the December ABARE Crop Report is released.



  76      Benefit to Australian Grain Growers in the Feed Grain Market
ABARE has developed a feed grain supply and demand model which has been used to provide a
better understanding of the demand for feed grains under various supply scenarios. Application of
this model is discussed further within the sections below.

State Governments - Crop Reports providing grain production forecasts are generated by some of
the State Government departments, these are compiled from reports from regionally based field
staff.

Industry Reports – information reports are provided by various industry groups via internet and
email to support their constituent members. Of these, the Australian Oilseed Federation provides
an oilseed production forecast report and Pulse Australia reports on pulse crop production.

Private Service Providers – there are various additional sources of information available to the feed
grain supply chain. A number of entities provide information and commentary on a service charge
basis, whilst other entities such as grain marketers provide free information to the market. There is
also market commentary provided through the media, in particular rural papers supplying weekly
updates on the grain market.

It is of note that in response to wheat marketing deregulation, the Federal Government appointed
Wheat Industry Expert Group recommended that ABARE and ABS collect and report on wheat
production, storage and use data. Government funding has been committed for a three year period
to support this work. A limitation with this funding is that it only relates to wheat data collection and
reporting. For the feed industry, S&D data needs to include all cereal grains.




5.4.2 S&D Modelling Ideals
The essential requirements of having a feed grain S&D model can be divided into a number of
sections which are discussed below.

1. Supply data

There needs to be provision of supply data relevant to the major supply regions, with these regions
having linkage to demand regions. Data needs to be separated for each grain type: wheat, barley,
oats, triticale, sorghum, lupins and field peas. The supply data needs to be sensitive enough to allow
the supply chain to assess the relative availability of grain. This data needs to be provided on a
frequent basis, as close to real time as possible.

Supply of feed grains needs to account for:

    Opening stocks - both stocks held within bulk handling and on farm storage. There is presently a
    major limitation in accessing grain stock data. Through grains industry participation and livestock
    industry funding, ABS has been collecting and reporting monthly grain stocks held by the major
    bulk handling and trading companies. This report provides data on the grain held at month end:
    wheat for milling and feed, barley for malting and feed, oats, triticale, oilseeds and other grains
    including sorghum, pulses and feed grains. Data is provided for consolidated Australian stocks,
    due to commercial in confidence reasons data is not split into state or regional volumes.

  77       Benefit to Australian Grain Growers in the Feed Grain Market
     The bulk handling grain stock data makes no recognition of whether the grain is already sold for
     either domestic or export use, or whether it is being held under farmer warehousing
     arrangements. The domestic feed grain supply chain is seeking to access data on grain stocks
     available to the domestic market end users.

     ABARE collects survey data on the volume of grain held within on farm storage, completed
     annually and based upon stock on farm at 31 December.

     Production - volume data by statistical division, equivalent to that reported by ABS in terms of
     area and tonnes harvested for each of the major grains and pulses.

     To use S&D models as a means of increasing supply chain information in supporting an efficient
     market operation, the model needs to use predictive rather than historic data. Opportunity
     exists to link computer climate modelling predictions with grain production projections to better
     define forecasts for grain production. Grain production can be predicted based upon actual
     recent rainfall events as well as forecast rainfall.

     Actual rainfall – rainfall received through the crop growing season has a direct impact on crop
     yield. By accessing rainfall records across regions it is possible to gain a better prediction of crop
     yields, this being utilised to model grain production and supply within a region.

     Forecast rainfall – based upon improving weather forecasting technology, it is possible to predict
     weather and then link this to a projection of this effect upon crop yield for a region. This level of
     modelling introduces an added variable in terms of how accurate weather forecasting is.

     Identifying cropping area is an added variable in predicting crop production. Industry data relies
     upon field reports from various government and commercial crop advisers. Cropping area
     estimates are often based upon assessments of area planted relative to previous seasons.

     The end result is the generation of production forecasts which are best indicators for industry
     use. While commentators may agree or disagree with published crop production forecasts, they
     provide a number against which industry can make its own judgment.

2.    Grain Demand Data

     Retention of seed for subsequent crop planting, this volume is relatively consistent from year to
     year.

     Milling wheat and malting barley utilisation The Australian flour milling industry has a stable
     market for flour use and the volume of wheat milled is relatively consistent. Similarly domestic
     malt demand is consistent and barley used for production of export malt can be estimated based
     upon export data.

     Industrial uses The conversion of grain to ethanol is limited to one operational ethanol plant,
     with the grain use volume being included within flour milling wheat usage. Should the ethanol
     industry expand in Australia with use of cereal grains, S&D modelling will need to account for
     this alternate use of cereal grain.


     78     Benefit to Australian Grain Growers in the Feed Grain Market
Feed use The Australian feed use sector is a relatively complex market. This complexity is added
to through the inadequacy of published data relating to the demand for feed grains. Provision of
demand data is reliant upon accessing livestock statistical information and converting this to a
consumption of feed grains. Such data can take account of the following:

o    Pig and poultry meat production is collected by ABS with quarterly reports providing a
     consistent data set which can be cross checked against ABS livestock number data. Both meat
     production and numbers of sows and broiler chickens can be used to calculate feed required
     based upon assumed feed conversion efficiencies. Feed consumption by breeding stock needs
     to be incorporated into the calculations. The accuracy of data for pigs and meat chicken
     feeding is relatively high due to the reliance of complete feeds by these industries. Additional
     feed volumes for other poultry such as ducks, turkeys and lesser poultry species need to be
     captured.

o    Grain use by the egg industry presents more difficulty with a lack of accurate data on the size
     of the laying flock. Following industry deregulation in the 1990’s, statistical data collection has
     ceased. An estimate of laying hen numbers within each region is matched against typical bird
     feed intake data. The intake estimates need to factor in feed use for breeding hens and
     replacement young stock.

o    The beef feedlot sector publishes cattle on feed data through the Australian Lot Feeders
     Association (ALFA). This quarterly data provides accurate information on the numbers of cattle
     being fed. Assumptions can be made relating to average cattle liveweight which influences
     daily feed intake and the length of time cattle are on feed. Based upon a typical grain inclusion
     rate the consumption of grain within feedlots is estimated. Numbers of cattle on feed can
     change rapidly, with the variables grain cost, meat price, store cattle availability and price all
     having potential to see cattle numbers increase or decline. In addition to the ALFA data
     generated from registered feedlots, opportunity feedlots operate. These feedlots are farm
     based and vary cattle numbers based upon pasture supplies, access to grain and meat prices.
     S&D data needs to capture opportunity feedlot grain consumption in addition to ALFA
     feedlots.

o    The dairy industry has a well defined number of cows, with data published by ABS and
     supported by Dairy Australia survey data. Utilising regional cow numbers and average
     concentrate feeding rates, defined from Dairy Australia surveys, total feed grain use can be
     predicted. Additional feed is consumed by dry cows and rearing replacement heifers. The
     largest variable within dairy feeding is the effect of seasonal condition upon pasture growth
     and supplementary feeding grain use. There is also more incentive for dairy farmers to feed
     higher amounts of grain when milk prices are high and grain prices are low.


o    Extensive grazing of cattle and sheep are not typically large users of feed grains. Grain feeding
     is however used strategically to supplement breeding and young stock or finishing animals in
     key periods through the season. Additionally, larger volumes of feed grain can be used by
     cattle and sheep producers under drought feeding situations. In recent years there has been



79       Benefit to Australian Grain Growers in the Feed Grain Market
       an increase in numbers of lambs being grain finished in feedlots which also need to be
       captured in feed grain demand data.


  o    Export cattle and sheep have feeds manufactured containing feed grains which need to be
       included within demand projections.


  o    Other species – although of smaller volume, feed consumed by horses and other species need
       to be factored into the demand model. This should also account for cereal grains utilised by
       the petfood manufacturing industry.

To adequately define feed grain S&D, the demand side needs to be split by grain type. The method
of defining demand presented above looks at feed intake. This however needs to be subdivided into
the grain content of the feed and each type of grain. The complexity of feed demand is such that
there is no consistent demand for any one grain type. Grain usage varies depending upon relative
grain price and the nutrients supplied from each grain relative to the price of alternate raw
materials. Added to this is varying nutrient requirements for each livestock species as well as age
and production categories within each species.

Thus the demand equation is far from easy to define and is constantly changing. The ABARE supply
and demand model has endeavoured to take this variable into account, through the incorporation of
a least cost feed formulation step which tries to mimic what happens commercially with variable
grain supply and prices.



5.4.3 S & D Modelling Observations
To date there has not been an S&D model providing regular projections for the feed grain supply
chain. The ABARE model has proven to be of value when published. It is not a readily accessible
model and cannot be easily rerun. The ABARE model has not been used to provide regular reports to
industry.
Yates and Coombs (2003) identified the potential use of the ABARE model to update supply and
demand projections based upon May and September crop outlooks. This option has never been
pursued, although the merits of this have been discussed within the Livestock Feed Grains Users
Group and more recently the Feed Grains Partnership. There would seem an issue in terms of
funding such work and the role of industry and government in the provision of a regular reporting
service. Whilst both the grains and livestock industries are exposed with a lack of reliable data, to
date neither side has been forthcoming in funding adequate feed grain S&D reporting.

There is potential for a less complex S&D modelling service provision which can incorporate the
essential features of capturing timely data which is made available to industry. It needs to be
recognised that such a model must gain balance between accuracy of prediction and timeliness of
data provision. It would seem of importance to the feed grain supply chain that it jointly supports
the development and provision of S&D modelling. What is needed is a well defined specification of
what is required from this S&D service. The key features needed being:

   Independence from either grain supply or demand parts of the chain

  80       Benefit to Australian Grain Growers in the Feed Grain Market
   Regularity of reporting, minimum quarterly rerun of the model
   Supply data being linked to rainfall effects upon crop yield predictions
   Data being provided down to regional supply and demand
   Incorporation of bulk handling and on farm stocks
   Available to all parts of the supply chain
   Reduced complexity to reduce potential error and increase ease of interpretation
   Capacity to run “what if” scenarios as required by different parts of the supply chain
   Incorporation of both winter and summer crop production

There are some supply chain participants that would seem to place on overly high expectation on
the benefits of release of more timely S&D information as being a means of addressing the problems
arising from a tighter S&D equation. Increased market information would allow supply chain
participants to react sooner to changes in supply and demand variables; it is debatable whether
access to more S&D data would actually reduce market volatility. Other questions of how mature the
market is in utilising available information and how well information is communicated to industry
participants is of relevance as provision of S&D data may in its own right make little difference to the
peaks and troughs of feed grain pricing.

There is some supply chain sentiment that it is in the interests of some participants to maintain a
level of uncertainty within the market. Those entities holding grain positions, either as sellers or
buyers, have capacity to gain from increased market volatility and increasing supply and demand
knowledge has potential to reduce market volatility. While the Australian feed grain supply chain has
limited available S&D information, participants selling or buying grain have difficulty in
differentiating between perception and reality.




  81       Benefit to Australian Grain Growers in the Feed Grain Market
6 COMPARATIVE SUPPLY CHAINS – Australia vs Brazil and USA
Australia, USA and Brazil are all significant exporters of grain, with Australian exports of wheat and
barley having a major impact upon global grain markets. Figure 49 shows the relative size of grain
production, with the USA being seen as a major producer of corn, wheat and oilseeds. Brazil has,
over the last two decades, shown a rapid rise in grain production, particularly corn and soybeans. In
volume terms Australia has a smaller grain crop, with reduced area planted and lower crop yields.




Figure 49. Grain Production Brazil, USA and Australia – million tonnes, based on typical average
production years




Sources: Brazilian Geography and Statistics Institute (IBGE), USDA ERS FAS, ABS



Both Brazil and the USA have large animal feeding industries which utilise available grain supplies.
Feed International (2006) quotes each countries compound feed volumes as being:

USA compound feed               150.2 MMT

Brazil compound feed            47.2 MMT

Australia compound feed         8.8 MMT

These figures capture compound feed only and do not take account of feed manufactured on farm
or used in more extensive feeding situations. The USA is globally the largest producer of feed, having
a large and affluent population providing significant domestic demand for all animal protein
products as well as providing export of these products. Brazil is the third largest feed manufacturer,


  82      Benefit to Australian Grain Growers in the Feed Grain Market
with China being second largest. Brazil like the USA has a large domestic population; Table 13
provides the relative size of each country.




Table 13. Comparative data Brazil, USA and Australia
                                                               Brazil       Australia        USA
Land area                              sq km                  8,456,510      7,617,930      9,161,923
Arable Land                            %                              6.9           6.2          18.0
Arable land area                       sq km                    586,036        468,503      1,649,146
Population                             million                       189            21            301
Gross Domestic Product                 $ per capita               8,800         33,300         44,000
Agriculture                            % of GDP                       8.0           3.8           0.9
Agricultural labour force              % of total                   20.0            3.6           0.7
Source: CIA The World Fact Book

Both Brazil and the USA have significant intensive livestock industries, with the production of pig and
poultry meats requiring large volumes of feed grains. The relatively small size of the Australian pig
and poultry industries is seen within Table 14. Australia is a more significant player in the global
market for beef, sheep meats and dairy products. There is significant potential growth in Brazilian
beef production with a large beef breeding herd and access to lower cost feed grains. Brazil currently
has only 2 million head finished in feedlots, with the majority of cattle finished on pasture. The
Australian dairy industry (Dairy Australia 2006) has identified Brazil as a future export competitor
due to its large dairy herd and potential to greatly increase milk production from grain feeding.




Table 14. Comparative production pig, poultry meat, beef and dairy – 2006.
                                                    Brazil           Australia           USA
 Pig Meat - '000 tonnes
         Production                                      3,200                370              9,600
         Exports                                           650                 44              1,200
         Export %                                          20%               12%                 13%
 Poultry Meat - ‘000 tonnes
         Production                                      9,280                810             16,060
         Exports                                         2,700                   -             2,200
         Export %                                          29%                 0%                14%
 Beef
         Cattle herd – million head                      180.3               28.6                96.7
         Exports - ‘000 tonnes                           1,005                728                 524
 Dairy
         Dairy cows – million head                          20                 1.9                9.2
         Milk – million litres                          24,000              9,600             83,000
Source: Food and Agricultural Policy Research Institute (FAPRI), ABS, USDA, MLA, Dairy Australia




  83      Benefit to Australian Grain Growers in the Feed Grain Market
Both Brazil and the USA supply higher percentages of their grain production to domestic animal
feeding use, Table 15. This higher demand level fosters the production of dedicated feed grains.
Brazil utilises almost all its corn production domestically, with the rapid increase in pig and poultry
feeding being reliant upon increasing areas of land being cultivated for corn production.



Table 15. Proportion of compound feed volume relative to total grain production

                            Brazil        USA          Australia         Aust. East      Aust. West
                                                                           Coast           Coast
 Feed % of total
                             47%          35%          27%              46%               9%
 grain production
Note: this analysis only accounts for compound feed and does not include grain mixed on farm.
Based upon Feed International compound feed volume as a percentage of total grain production.

Within Australia, although only 27% of grain production is required for compound feed production,
the division of grain production and feed demand between east (Qld, NSW, Vic) and west coast (WA,
SA) identifies that eastern Australian feed grain demand in percentage terms is higher than the USA
and much more like that seen within Brazil.



6.1 USA

The USA has both high feed grain production and demand. It is also a major supplier of feed grains to
global markets, with surplus production of corn being exported. USDA data indicates that US corn
had a 68% global market share in 2006, Argentina was the second largest exporter with 13% market
share.

The four major grains used in 2006 within US animal feeding are shown in Table 16. USA domestic
feed use accounts for only 7.1% of wheat production and wheat exports are 46.8% of production.
Although the USA has surplus production of wheat, access to feed corn provides a more economic
energy source for animal feeding.

Table 16. USA Grain Production and Use in Animal Feeding - 2006

Grain                          Production Volume        % Used in animal feeding

Corn                                 153.7 MMT                     54%

Sorghum                              4.9 MMT                       37%

Wheat                                3.5 MMT                       7%

Barley                               1.1 MMT                       22%
Source: USDA




  84      Benefit to Australian Grain Growers in the Feed Grain Market
The efficiency of the US animal feeding industries are seen to be dependent upon accessing corn as
the major energy source, being used in conjunction with soybean meal as the major protein supply.
Whilst wheat is produced in large volumes, the relative use of wheat in animal feeding is small, with
this grain being used in domestic US milling and export markets.

The advantage access to feed corn has for US livestock producers is seen through the relative price
of wheat and corn, shown in Table 17. Relative to Australian livestock producers who rely upon use
of wheat, availability of corn as a feed grain has provided some level of price protection to US
livestock producers as US and global wheat markets have escalated through 2007.

Table 17. Wheat and Corn Prices, Chicago Board of Trade
                          Wheat ($US/tonne)         Corn ($US/tonne)                  Wheat:Corn
October 2006                     183.61                  119.39                           1.54
August 2007                      254.59                  132.03                           1.93
September 2007                   318.67                  141.19                           2.26
October 2007                     313.69                  140.58                           2.23
November 2007                    319.30                  150.98                           2.11
Source: ABARE 2007

6.1.1 Supply Chain Case Study 1

CHS Inc – headquarters Inver Grove Heights, Minnesota
CHS is a diversified energy, grain and food company, working as a co-operative across the US
agricultural states. CHS sees its strength in “creating efficient links to essential resources within the
areas of energy, agronomy, grain and food products”3. In recent years CHS has expanded with
investments in Mexico and Brazil. CHS net income for fiscal 2007 (ending Aug. 31, 2007) was $US750
million on net sales of $US17.2 billion. Cash returns to member-owners for 2008 is estimated by CHS
to be $US388 million.

CHS Inc. Supply Chain Links

      350,000 producers through 3,000 member owned co-operatives and branch locations
      Supply of crop chemicals, fertilizer, seed, agronomic advice
      Producer financing and risk management
      Grain purchasing - CHS is a major buyer and trader of grains and oilseeds, and operates a variety
      of grain purchasing contract programs.
      Grain handling and marketing - more than 25 MMT of grain moves annually through the CHS
      network of export, inland and barge terminals, strategically located across the United States and
      supported by grain traders and merchandisers. CHS is the third largest exporter of U.S. grain.
      Domestically, CHS sells grain to the feed/livestock industry, as well as the grain processing and
      milling industries. Grain moves through a system of country elevators.
      Grain is also supplied to CHS processing operations as follows:
      o Feed mills – manufacture Payback branded animal feeds, formerly Harvest State Feeds, sold
         through over 500 CHS retail outlets
      o Flour mills – 23 flour mills in USA and Canada
3
    CHS Vision and Mission – “Adding value from field to table” documentation

     85       Benefit to Australian Grain Growers in the Feed Grain Market
   o Soybean processing – 2.3 MMT annually
   o Biofuels production – 30 years of ethanol production, major owner of US Bioenergy, with four
      operating plants and another six plants under construction or in development.
   CHS Transportation operates one of the nation’s largest private truck fleets; transporting 185,000
   loads of bulk products annually, using more than 1,200 pieces of equipment strategically located
   to manage customer transportation needs.

CHS Feed Grain Supply Chain Pilot in Animal Nutrition

In 2005 CHS and Pioneer Hi-Bred International initiated a cooperative pilot project to evaluate
incoming corn grain for more complete information on its livestock feed quality and to develop more
efficient channelling of defined grain to specific end-use customers.

The two year pilot system has incorporated proprietary NIR (near infrared) technology from Pioneer
which measures Digestible Energy (DE) of the grain for monogastric animals such as pigs and poultry.
Use of NIR measurement in this pilot allows corn grain DE to be directly measured and managed in a
commercial grain supply chain. The goal is to provide efficient value delivery to customers through
information management and targeted product development and production of grain.

The system will potentially allow CHS grain handlers to better manage corn shipments to its livestock
customers with DE concentration of the shipment as part of the information package. This will allow
end-use customers to better source input materials for more efficient livestock feeding programs.
The pilot project involves both domestic US as well as export market destinations in Asia and Latin
America where the cost of supplying feed energy has a heightened focus.

In addition, corn growers bringing grain to the facilities will be provided with information that shows
the DE content for the grain they sell, along with standard grade and non-grade factors such as test
weight, damage, foreign material and moisture. The goal is to gain recognition of the amount of
variation in grain nutritional functionality that exists and provide information and management
assistance to make improvements over time.

CHS Grain Marketing see the use if NIR energy measurement technology as:
  “strengthening the relationship with corn growers supplying grain facilities by providing them
  with valuable information on the quality of their corn.”
  "where the industry is moving - analysing grain for specific end-uses at receiving, then managing
  and targeting grain shipments toward end-users where it will provide the most benefit.”
  “a way for Pioneer and CHS to assist downstream grain users, as well as corn growers, to better
  understand the importance of nutrition variation and the positive effect that properly selected
  corn hybrids, coupled with efficient supply chain management, can have on improving nutritional
  value delivery."

Since 1981, Pioneer has evaluated corn grain to determine nutritional differences between hybrids
and to develop grain assay tools that can be utilised in efficient grain supply chains. Hybrids that
produce grain with superior digestible energy are classified as high available energy (HAE) hybrids.
During years of proprietary research, Pioneer has utilised more than 400 diverse and discrete grain
samples to develop an NIR predictive model that directly predicts DE.

Pioneer has characterised nearly every hybrid family that it sells commercially and around 100 of its
hybrids for sale in North America for the 2005 growing season were defined as being high available
energy. The co-operative work taking place between CHS and Pioneer is well progressed and


  86      Benefit to Australian Grain Growers in the Feed Grain Market
potential commercial benefits will be seen in future years.

6.1.2 Differences between USA and Australia
    Scale of production – both US grain and livestock production is far greater in volume terms.
    Strong global export presence with intensive US livestock pig and poultry products.
    Dedicated US feed grain with corn and soybean production supplying soybean meal for animal
    feeding. Corn is a high energy and cost effective raw material source for animal feeding.
    The US livestock industries do not compete with milling wheat end users.
    Reliable US rainfall and soils suited to corn and soybean production.
    Higher crop yields from farming systems.
    Greater transport infrastructure to move grain within USA to domestic end users and to shipping
    ports for export.
    Growth in corn to ethanol production increasing competition for US feed grains and potential
    stimulation of grain production.
    Increasing volumes of wet and dried distillers’ grains from ethanol production offers alternate
    raw material feeding options.
    Access to GM technology to increase cropping yields and reduce costs of grain production.
    Capacity to bring additional land areas into grain production.
    Government support mechanisms favouring farm production.




6.2 BRAZIL
Livestock production in Brazil has increased dramatically, with the country now being the largest
exporter of beef, second largest in poultry meat and fourth largest in pigmeat. Intensive animal
feeding of pigs and poultry utilise 85% of feed consumed. The production of poultry and pigmeat is
characterised by high levels of integration, with processing operations being owned by private
companies and farmer co-operatives. Beef feed demand is low relative to the countries large beef
production due to the low use of grain feeding, with cattle finishing based on pasture feeding.

The growth in livestock production has been in conjunction with a rapid increase in the production
of corn and soybeans. As Brazil has expanded grain production within less developed states, there
has been an expansion of new pig and poultry farming operations. Increasing grain production has
been occurring within the more remote central parts of Brazil, but there is a lack of infrastructure to
transport grain to coastal port locations for export. This limitation has resulted in these grains being
used in locally based oilseed crushing and feed milling operations. Thus feed grains are being value
added into animal protein which is then transported to export ports.

Corn and soybean prices within the Mato Grosso (central Brazil) are only about half those received
by growers in Rio Grande do Sul and Parana states. This price differential is due to the poor transport
infrastructure available to move grain from inland grain production areas. Almost all the grain
exported from Brazil is grown within 200km of shipping ports in the states of Parana and Rio Grande
do Sul. The availability of these lower priced grains and potential for increased grain production has
lead to companies targeting central Brazil for pig and poultry expansion.

  87       Benefit to Australian Grain Growers in the Feed Grain Market
Although Brazil the largest beef exporter, the majority of beef is from pasture grazing and there have
been only limited volumes of grain used in beef feeding. Brazil has a large dairy herd, over
20,000,000 cows. Milk production per cow is low, with feed supply being based upon pasture
grazing. Milk produced is supplied to the domestic market with almost no focus on export markets.

Brazil, since the 1980’s, has developed its ethanol industry based upon conversion of sugar rather
than utilisation of corn. Brazil is the largest sugar cane producing country, operating over 330
crushing plants.

The strategic advantage Brazil holds is through access to low cost corn as an energy source and
soybean meal for protein. The added benefit of lower cost labour results in Brazil being the lowest
cost producer of pig and poultry meat.




6.2.1 Supply Chain Case Study 2

Sadia SA – Headquarters Concórdia, Santa Catarina, Brazil - Large Corporate
Sadia is Brazil’s leading producer of chilled and frozen foods. It is a publicly listed company with 56%
foreign investors and is listed on Sao Paulo, Madrid and New York Stock Exchanges.

Sadia produces over 1.3 million tonnes of protein-based products coming from chicken, turkey, pork
and beef. The company is the largest producer of broilers, turkeys and pigs with 14%, 66% and 12%
Brazilian market share respectively.

    54,500 Employees
    6,600 Integrated poultry farms
    3,600 Integrated pork farms
    644 million Chickens slaughtered annually in 7 processing plants
    23 million Turkeys slaughtered annually
    3.7 million Pigs slaughtered annually in 4 processing plant
    248,000 Cattle slaughtered annually in one processing plant
    9 feed mills in 7 different states
Sadia has invested to increase production and distribution capacity. The company exports both fresh
and frozen meat as well as further processed food products. Sadia invested $US680M in 2006 and a
further $US500M in 2007 in expansion projects within Mato Grosso state, including greenfield start-
up pig and poultry operations. The region has enormous growth potential with improvements being
made in the infrastructure, basic water treatment and energy supplies. The region has capacity to
produce larger volumes of corn and soybeans for poultry and pig feeding.

The Mato Grosso venture will create an estimated 8,000 direct and 24,000 indirect jobs. Around 50%
of Sadia’s sales are directed to the domestic market and the company forecasts for 2007 indicate an
increase of 8% to 10% in sales volume.

The company exports meat products to all parts of the globe, with the Middle East being identified
as a major growth market, Figures 50 and 51. Sadia has well developed supply links with Russian
markets for poultry, pork and beef. During 2006, exports of chicken and pig meats declined due to

  88       Benefit to Australian Grain Growers in the Feed Grain Market
reduced global demand resulting from avian influenza and an oversupplied market. During this
period Sadia was able to divert an increased volume of meat into the domestic population, although
prices received were lower, the large population base allowed Sadia and other Brazilian meat
exporters an alternate outlet for meat products when global markets became unsettled.

Sadia operates based on a highly integrated business model, linking grain grower suppliers through
company owned feed mills, and supply of animals from breeding farms to contract growout farms.
Sadia identifies as having 12,500 grain producers from which it sources corn and soybeans.

Figure 50. Sadia 2006 export market products             Figure 51. Sadia 2006 Exports by region




Source: SADIA



6.2.2 Supply Chain Case Study 3

Coopavel – Cascavel, Paraná, Brasil - Medium Co-operative
Coopavel is a grain grower owned co-operative, membership shares are not transferable and
dividend payments are based on level of support for the co-operative. The more dealings members
have in supplying grain and producing livestock for Coopavel results in higher dividend payments.

Coopavel has integrated livestock operations in Parana State, which are based upon supporting local
grain producers within a 50km radius from the co-operatives operating base. The co-op has a
diversified business activity which is focused upon “transforming vegetable protein into animal
protein”4. Integration extends through to animal slaughter, meat processing and export.

Coopavel activities:
    Soybean Crushing                     270,000 T/annum
    Feed Manufacture                     250,000 T/annum
    Chicken Meat Processing              150,000birds/day
    Pig Meat Processing                  1,500 head/day
    Cattle Processing                    250 head/day
    Milk Processing                      37,000,000 litres/annum

4
    Coopavel corporate promotions

     89      Benefit to Australian Grain Growers in the Feed Grain Market
Coopavel member farms are relatively small, 20-50 hectares and based on family farming systems.
Corn and soybeans are grown for supply to Coopavel for grain drying and storage. There are no
contracts with grain grower members but Coopavel commits to taking delivery of all grain supplied
by members. Contracts are in place for the production of broilers and pigs, with Coopavel supplying
livestock for grow-out production.

Coopavel supports growers with supply of seed, fertilizers and agronomic advice. Financial services
are provided in supporting farmer dealings with banks as the Co-op is the purchaser of grain and
livestock produced. Research and development is conducted by Coopavel in conjunction with state
and federal research institutes.

Coopavel utilises grain within its own oilseed crushing and feed milling operations as well as selling
grain to others. It controls its own export markets with corn, soybean meal, chicken and pig meat
being exported. Coopavel has ability to work with other equivalent co-operatives to meet export
market volume demands.

The production of poultry and pigmeats offers diversity of income for members, with the co-op
paying an annual dividend. Growers are offered opportunity to construct pig and poultry sheds and
operate as contract livestock producers in conjunction with their grain growing activities.

Coopavel has around 12 equivalent sized grain grower co-operatives operating in Brazil. Each works
on a regional basis, developing strong grower loyalty as in many cases the local co-operative has
become the largest employer and offers career opportunities as well as community support
programs. Coopavel also provides financial funding for the operation of local schools and sporting
groups and operates its own tertiary education system providing university degree qualifications.


6.2.3 Differences between Brazil and Australia
    Larger Brazilian industry scale, with strong focus on export markets for livestock products.
    Dedicated feed grain production of corn and soybean production supplying soybean meal for
    animal feeding.
    Smaller grain growing and livestock production farms.
    Rapid growth in feed grain production over the last 3 decades in conjunction with livestock
    industry expansion.
    High levels of integration from grain grower through to meat exports.
    Under the co-operative integration model, grain production has increased with grain growers
    supporting livestock production by diversifying their production base.
    Low costs of production with labour cost advantages.
    Available arable land for cropping expansion in favourable soil and climatic conditions.
    More reliable rainfall patterns and multiple cropping within each year.
    The lead in market development has been taken by both private companies and grain grower co-
    operatives.
    Poor road and rail infrastructure limits grain movement to export ports; this lends itself to
    utilising grain in livestock production rather then export.

  90      Benefit to Australian Grain Growers in the Feed Grain Market
7 SUPPLY CHAIN ISSUES

A series of interview questionnaires were completed as part of this project to gain stakeholder
feedback relating to the major issues faced by the Australian feed grain supply chain. Emphasis was
placed on gaining input from grain growers in addition to other industry stakeholders. The following
issues have been identified from supply chain stakeholders.


7.1 Feed Grain Market Position

Is feed grain a secondary market for Australian grain growers? Grains industry responses to this
question recognise domestic and export markets for milling wheat and malting barley as being the
primary markets for Australian grain. This rationale is based upon:
     History of Australia’s export of milling grains.
     Dominance of export volumes relative to domestic demand.
     Re-inforcement of this position through historic statutory marketing arrangements and single
     desk.
     Higher prices received for milling wheat and malting barley.
     Recognition of higher quality standards defined for milling grains.
     Emphasis on varieties suited to export market requirements.

The domestic feed grain market is viewed as a secondary market by many grains industry
participants and as such is seen as a “lesser market”. The types of negative sentiment expressed
about the domestic feed grain market include:
     Not taken as seriously.
     Not the main market for supply.
     The market supplied when grain does not meet milling specification.
     A lesser market which has lower emphasis in terms of resources for funding varietal
     development.
     Less successful grain growers produce feed grains.
     A lower quality market.

The Australian domestic feed grain market is viewed differently to feed grain markets in many other
countries, in particular countries that have dedicated feed grain production (corn and soybeans)
aimed at supplying both their own domestic and overseas feed demand.

The grains industry view relating to the Australian feed grain market is however not consistent
across the country, and would seem to vary according to the size of feed grain demand relative to
grain production.

     Grain’s industry view - importance of the domestic feed grain market

     Qld & Nth NSW > Sth NSW/Vic > SA > WA
  91      Benefit to Australian Grain Growers in the Feed Grain Market
It could be argued that the domestic feed grain market during periods of grain shortage becomes
more important than the export market for Australian grain. This is more so on the eastern
seaboard. During droughts, the volume of grain exported declines and the domestic feed market
uses proportionately more grain. This is a function of having a reduced surplus for export and the
need for domestic buyers to bid up the grain price to ensure they secure sufficient supply. Once
exported the cost of importing grain is higher and limited by quarantine controls. In effect, the
export milling wheat and malting barley markets are only primary markets when Australia has an
exportable surplus of grain. It could be questioned whether export markets are in fact primary
markets when they do not pay higher prices to secure Australian grain relative to the prices paid by
domestic feed grain users. During a drought, the market that misses out on physical supply of
Australian grain are those overseas, as milling grains are diverted to the domestic feed market to
meet demand.

As the livestock industries continue to grow, and the proportion of grain used in animal feeding also
grows, the importance of export markets declines in significance in terms of exportable grain
surpluses. Over time it could be predicted that unless the Australian grains industry increases grain
production at a rate greater then that of feed grain demand, then ultimately there will need to be a
significant change in mind set to servicing and supplying the domestic feed grain market as a primary
market, at least on equal terms with export market destinations.

It would seem that while many in the grains industry have recognised the growing importance of
domestic feed grain demand, there remains a large part of the grains industry which has not fully
grasped the significance of growth in feed grain demand. With further growth, the grains industry
will be challenged in how it services the domestic feed market relative to export milling grain
markets.



7.2 Market Signals and Grain Prices

A significant limitation within the grain market is a lack of clear signals from feed grain end users.
With the changing global dynamics of tighter world stocks and growing demand from biofuels
production, it becomes more critical that end use industries communicate a clear and loud message
defining their industry requirement.

The flour and malting industries have historically presented a unified voice in terms of defining their
industry needs. Together with paying price premiums, these industries have been able to dictate
their grain needs and gain favourable recognition from the grains industry as an essential raw
material end user.

Should the ethanol industry gain momentum within Australia, it has the potential to greatly
influence the market in terms of defining their needs for grain volume and grain specification. By
contrast, feed grains end users have played a less significant role is working with the grains industry
to gain what they need as a supply chain partner. During periods of ample supply, the feed grain

  92      Benefit to Australian Grain Growers in the Feed Grain Market
buyers are faced with many choices in terms of which grains they will use and the relative
specification applied to grain purchased. During periods of tighter supply and increased demand, this
level of choice reduces, and in extreme circumstances, the feed buyer has to accept what is available
for use. As the frequency of tight grain supply is increasing, there is a shift in the seller:buyer
relationship. Buyers must call on growers to meet supply requirements. From a wider industry
perspective this equally applies, with the feed grain end users needing to present a stronger buying
proposition to the grains industry to ensure that feed grain demand is more adequately fulfilled.

The feed grain end users provide limited market signals prior to grain sowing times. For grain
growers to make decisions to plant dedicated feed varieties, instead of milling wheat or malting
barley varieties, there needs to be stronger signals from buyers regarding demand and price. Grain
growers need to make planting decision based upon price signals and without commitment from
feed grain buyers the risk in growing feed varieties is increased. To this end, some grain growers are
seeking contract commitments prior to planting to ensure they have a market outlet for feed grains
grown. Within regions of tighter supply and demand, use of contract feed grain production is
growing. For example, some feedlots are encouraging local grain growers to increase feed grain
production to ensure they secure a greater portion of their grain requirements.

Feed grain buyers present a “confused” range of sentiments to grain suppliers. This would seem to
be due to the complexity within the use of feed grains by the feed mills and livestock end users.
Grain growers express the view that grain buyers for flour milling and barley malting are easier to
understand, as they are only seeking to buy grain for one end use. Buying signals from flour and malt
end users are much more consistent and easier to comprehend.

Feed grain buyers have differing attitudes based on whether they are trying to beat the market or
alternately lock in margins. They may have a long term view they can average out high and low
buying decisions, based upon the average providing a grain price which is sustainable in terms of its
cost impact upon the production of meat, milk and eggs. For end users, the question becomes at
what point they wish to lock in grain prices through grain buying commitment, relative to the price
received for meat, milk and eggs.

The commercial feed milling sector generally takes a differing approach to prices paid for grain, with
the absolute cost per tonne of grain being less important than the cost relative to competitor buying
activity. Feed prices move in the market with overall raw material cost changes. Individual feed
suppliers are seeking to buy better than their competitors to leverage higher selling margins or
secure greater market share.

In a “normal year” the supply system works well with both larger and smaller end users having good
relationships with grain suppliers and market signals being well recognised. The major buyers try to
purchase direct off farm by working with surrounding local growers as well as maintaining supply
relationships with the larger grain marketers. Smaller end users endeavour to establish direct supply
relationships with grain growers or grain traders.

Grain buying prices quoted at one point in time are influenced by alternate raw material supply and
price. This results in the feed grain buyer either dropping out of the market for a particular grain or

  93      Benefit to Australian Grain Growers in the Feed Grain Market
dramatically reducing their buying price. This can occur over a short time period, leaving potential
sellers without an adequate understanding of what has happened within the market. It is of note
that a number of the grain marketing and trading companies enlist the support of nutritionists. This
is done to try and gain a better understanding of the complexity of the feed grain market. Varying
supply and cost changes in the basket of available raw materials can happen rapidly, with small even
small changes having potentially large impacts upon ingredient value and use.

Feed grain buyers are seeking to gain the best cost feeding options; this is not the same as lowest
cost. For the vast majority of animal feeds, feed formulations are required to meet minimum
nutrient specifications. The competitive advantage lies in accessing the least cost raw material
options to meet these specifications. This methodology allows the use of a lower specification grain
which can be formulated to account for its reduced nutrient content. For example, although an end
user may normally utilise F1 barley, they have the capacity to utilise lower quality barley as long as
they account for the grains lower energy content within each feed ration. This may increase use of
energy dense ingredients, such as tallow or vegetable oil, to ensure the finished ration still meets
specification. The feed manufacturer may also have ability to blend different quality grains to meet
their feed formulation specifications. The grain suppliers see a relaxation of buying specification as
an acceptance of lower quality and thus gain a view that quality does not matter for feed use, with
the conclusion being that “it’s all about price”.

While the feed industry does not readily look at payment of premiums for quality, they are always
looking at the relative value of raw materials for the nutrients (quality) they supply. The use or non
use of a raw material is, in part, governed by its relative value, as well as physical limitations in
having sufficient ingredient silos and processing bins. By using one grain in preference to other
grains, the feed end user is effectively paying a preference to use premium. Wheat is the major feed
grain used within the country. Its use, relative to other grains such as sorghum in feed lotting or
barley and triticale in dairy feeding, is based upon whether the feed mill or livestock farmer wants to
use wheat in preference to these other grains.

There is a view from some grains industry participants that feed grain users will pay a premium for a
variety with a specific quality trait or traits, if these traits remove the need for additional inputs in a
ration. To date there has not been any clear signals from the livestock industries on what specific
traits are needed, nor whether their inclusion in grain would result in the payment of premiums.
Due to the fragmented nature of the feed grain market, there is an inability to define specific quality
traits for different domestic feed market segments. As discussed, the feed grain market is highly
price driven and it is highly unlikely that price premiums will exist for varieties which have been bred
with specific quality attributes. The end result for grains with quality traits may at best be seen as a
usage preference over other grains as opposed to a premium payment.

7.3 Trust or Mistrust within the Supply Chain
At the grass roots level there is reasonable trust between grain growers and feed grain end users.
Many end users, including feed mills, feedlots and livestock producers, have established long term
grain supply arrangements and seek to foster this relationship, to secure grain direct off farm. These
end users look to foster a relationship with grain growers located around their centre of operation.
Benefits are derived in reducing freight costs and avoiding third party profit margins. There needs to
be a relationship of trust where grain growers sell direct to livestock producers. This is based on trust


  94       Benefit to Australian Grain Growers in the Feed Grain Market
that the grain grower will supply and equal trust that the pig, poultry, beef or dairy farmer will pay
for grain delivered.

Trading relationships between grain trader/marketers and end users is generally seen as an
adversarial relationship, with either side trying to ensure they get the best deal by “shopping
around” prior to commitment.

Some grain growers have a distrust of feed grain end users, often due to prior poor experiences.
Growers who are regular sellers to livestock producers recognise the need to work at marketing
their grain and maintaining a relationship with a customer base. This relationship supports grain
supply throughout the year, with growers holding grain stocks for regular client base supply. This
approach is distinctly different to seeking out feed grain selling options at or just after grain harvest.

There would seem to be less trust between the grains and livestock industries at higher industry
levels in commercial organisations and at industry peak body levels. Previous conflicting views
relating to grain marketing controls, access to imported grains and the relative importance of the
feed grain market have resulted in adversarial positions being held. Due to the unsophisticated and
disjointed nature of the feed grain supply chain, there is a lack of strong market signals from
livestock end users to grain growers. To address this limitation, the key stakeholders and industry
peak bodies need to work co-operatively on methods of increasing communication as well as
defining better signals to grain growers. Each industry communicates well internally. There is
however limited cross-industry targeted communication. It can be seen that the grains industry has
better dialogue with the flour and malting industries, than that undertaken with the feed and
livestock industries.

7.4 Market Volatility
In average Australian harvest years there is limited market price volatility; prices are governed by
global market forces and the setting of wheat and barley pool prices. During drought years, when
demand outstrips supply, both sellers and buyers try to second guess market movements.

The reality and psychology of scarcity of grain supply results in market volatility. During dry periods
resulting in grain shortage, sellers hold out for higher prices and buyers bid up limited grain supplies.
Australia has a lack of market depth compared to the US where buyers can utilise both physical and
futures contracts.

Some participants in the Australian market suggest that the feed grain market is more volatile and
vulnerable to “manipulation”. It is also speculated by some, that parts of the feed grain supply chain
prefer to see a lack of transparency in feed grain pricing and that market volatility offers business
opportunities.

The beef feedlot industry was established in areas where there were surplus grain supplies (Darling
Downs and Northern NSW, followed by Southern NSW), these regions are now more often in a grain
deficit. Similarly the growth in dairy production in Victoria has resulted in parts of Victoria now being
in grain deficit even in normal production years.

During periods of grain shortage, grain moves between regions, driven by demand and pricing to
cover freight costs, for example the movement of grain from NSW into Southern Qld and SA into Vic.

  95       Benefit to Australian Grain Growers in the Feed Grain Market
The need to trans-ship grain is being seen more as the norm than the exception. Movement of grain
from WA to eastern Australia is not seen as economically feasible for beef feedlot use. WA grain
supplies are seen as only a last resort as a “shock absorber”, what the livestock industries are
seeking is more grain being available in eastern Australia.

7.5 Livestock Industry vs Grain Grower Viability
More variable climatic conditions are resulting in a narrowing gap between grain production and
usage. Qld is seeing shorter winters and less reliable summer rainfall. Security of feed grain supply
may result in suppressed investment in livestock production from investors, especially in beef
feedlot and piggery operations. From the grain users perspective there is a balance between feed
grain access versus affordability; security of supply versus security of price. In contrast, grain growers
are caught between rising costs of production and grain selling prices being affected by market
factors outside their own control.

Under tight grain supply, the market becomes more volatile, buyers have limited capacity to take
positions on either ASX futures or buy physical quantities of grain, and access to pool wheat is
limited and highly controlled.

As a result of large crop production years, prices received by growers are depressed, with growers
selling feed grade grains being forced to accept lower prices. End users buying grain provide the
most direct price signals to grain growers, for this reason they are often branded as not paying
enough for grain. Against this position, prices paid for grain through grain pools are not clearly
defined and transparency in terms of what these prices equate to relative to end user cash prices is
masked for both grain growers and end users.

Access to imported feed grains is seen by the livestock industries as a significant market limitation.
The grains industry recognises this same issue as a significant grains industry risk from imported
plant disease and insect contamination. The debate over grain importation would not occur if
Australia had a more reliable grain production base relative to grain demand. During drought years
the grain importation issue re-emerges. The frequency of this debate is likely to increase if poor
harvest years become more the norm.


Current importation controls only allow capital city based feed mills, with heat pelleting equipment,
to be approved to use imported feed grains. The chicken meat industry is the main beneficiary, while
the beef feedlot, dairy and pig sectors are not in a position to use imported grain. The restriction on
whole grain being heat processed in metropolitan feed mills allows the potential for a maximum one
million tonnes of grain to be imported into Qld, NSW and Vic.

7.6 Boosting Feed Grain Yield
Increasing yield across all grain varieties has a benefit in increasing total crop production and
reducing the proportionate grain volume required for animal feeding. Additionally, plant breeding
effort directed at increasing feed grain variety yield would also provide greater feed grain supply and



  96       Benefit to Australian Grain Growers in the Feed Grain Market
result in less milling wheat and malting barley being used in domestic livestock feeding, thus
allowing more of these human consumption grains being available for export.


7.6.1 Wheat and Barley
Existing varietal development for wheat and barley directed at increasing yield under lower rainfall is
beneficial to all end use industries. Similarly, work which results in grain production in salinity
affected soils extends the potential area of grain production.

It is noted that within some cropping regions, malting barley varieties often do not meet malt
specifications with higher protein barley being classified as feed. Within these regions it would seem
that growing higher yielding feed varieties would be a better farming option, dependent on
accessing suitable varieties for planting.

The higher rainfall regions of Australia offer potential for expansion of grain production. The
advantage these regions offer is that they are in closer proximity to end use industries, particularly
dairy farmer grain demand. There would be benefits in having higher yielding feed wheat and feed
barley varieties suited to high rainfall regions.


7.6.2 Fixing Sorghum
Queensland and Northern NSW summer crop production could be boosted to assist in meeting
higher feed grain demand. Sorghum has become a less favoured grain for feedlot use, especially
where steam flaking is not in use. Similarly, the chicken meat industry has identified a less than
desired utilisation of starch sorghum. There is opportunity for the grains industry to develop higher
yielding varieties which are also higher in available energy.

In years when there are favourable conditions resulting in a larger sorghum crop, end users will
discount the value of sorghum relative to using wheat, barley or triticale. This price differential could
be reduced with greater breeding emphasis being placed on “fixing” the lower starch digestibility. It
is of note that both the pork and poultry industries have identified sorghum as offering potential to
increase their industries levels of viability if the grain’s characteristics can be changed to better suit
animal feeding applications. Both these industries are funding research projects in an endeavour to
address this limitation.


7.6.3 Triticale Yield Improvement
Triticale is an ideal grain for filling the feed supply gap as it can be grown as a winter crop across all
cropping regions. Based upon ABS statistical data for the years 1997/98 to 2007/08, triticale
production is shown for in Figure 52.
Triticale is recognised as a favoured cereal grain, especially for use in beef feedlot and dairy feeding.
End users purchase triticale as a grain supplying similar energy to wheat. End users have the capacity
to utilise larger volumes of triticale if it was available. There has been no trend for increased triticale
production over the past eleven years, even though there has been a significant increase in feed
grain demand.

  97       Benefit to Australian Grain Growers in the Feed Grain Market
Figure 52. Triticale Production 1997 to 2005 – ‘000 tonnes




                Source: ABS Agricultural Commodities

It would seem that increased production of triticale is not due to a low demand level. Alternate
issues would appear to be limiting triticale production. Figures 53, 54 and 55 provide data on
triticale yield relative to wheat yield for the main triticale growing states NSW, Victoria and SA. What
can be seen is that triticale has provided a yield advantage in some years within NSW, wheat and
triticale yields are the same in Victoria and in SA triticale yields are lower than wheat. This data
provides an indication that growers pursuing the production of triticale are not getting a consistent
yield advantage over the production of wheat. Discussions with growers have indicated that lack of
yield advantage is the main reason why they do not grow more triticale. The reason why triticale is
grown is stated to be more related to cropping rotation and disease breaks within cropping
programs.
Figures 53, 54 and 55. Triticale vs wheat yield NSW, Vic and SA




Source: ABS Agricultural Commodities

Based upon data derived from triticale production, it would seem that the greatest limitation in
increasing feed grain production, is in accessing feed grain crops that provide greater yield
advantage relative to milling wheat or malting barley. Initiatives taken under the National Triticale



  98       Benefit to Australian Grain Growers in the Feed Grain Market
Breeding program, with the release of higher yielding triticale varieties, is seen as an essential aspect
of gaining greater production of triticale for animal feeding end use.

7.6.4 Increasing Pulse Production
The livestock industries have identified supply of pulses as being a limitation to increased usage in
animal feeding. Potential use of pulses could be up to 2 million tonnes or 20% of all stockfeed
consumed (A. Edwards per com.). Existing pulse use is around 5% due to limited availability. Export
competition makes the feed industry a secondary market, and there is a dislocation between pulse
and livestock production. The greatest demand for pulses is within the eastern states and the main
production is from WA and SA.

Pulses are attractive feed raw materials due to their supply of both energy and protein. Their use in
animal feed replaces both cereal grains and other proteins such as soybean, canola, cotton or animal
protein meals. Increased pulse production has the ability to reduce Australia’s reliance upon the
importation of soybean meal.

A significant disadvantage with use of pulses is continuity of supply. As Australia has a small
availability of pulses for animal feeding use, larger feed mills and feedlots have less interest in their
use unless they can secure larger volumes to warrant their ongoing use within feed.

The potential production of pulse crops within Queensland and Northern NSW has been recognised
by both the pig and poultry industries as offering development potential. The pig industry has
initiated funding agronomic studies looking at pulse species to fit within this production area.

7.6.5 Dual Purpose Cereal Fodder Crops
The growth in demand for cereal hay and silage is lending itself to having cereal varieties better
suited to the dual production of either hay or grain. These are potentially higher green matter
production crops where the grower is targeting the production of hay with higher levels of protein
and digestibility. Under differing climatic and market conditions, the grower may elect to not cut the
crop and leave it for a grain harvest. The development of higher yielding dual purpose varieties of
oats, barley, triticale and wheat would result in additional grain being targeted to feed grain
markets.

Increased dedicated cereal fodder production should result in less milling wheat and malting barley
crops from being diverted into this market.

7.7 Irrigated Grain Production
A scoping study completed by Toohey and Associates (2006) has identified the potential to greatly
increase cereal grain production from irrigated growing regions. By focusing on plant breeding, grain
quality, industry relationships and resource sustainability it is projected that irrigated grain
production from the Southern Murray Darling Basin could increase from 1.03MMT to 7.9MMT.
Efficiencies in water utilisation are seen through yield increasing from an average 3t/ha to over
10T/ha. This higher yield being achieved within varietal trials and by a small number of growers.



  99       Benefit to Australian Grain Growers in the Feed Grain Market
Use of irrigation in northern NSW and Queensland for production of both winter and summer feed
grain crops provides opportunity for significant increases in feed grain supply.

The Toohey scoping study identified the demand for livestock feed grains as one of the markets
irrigated grain production should be targeted towards. Additionally the following points were made
relating to the use of irrigation for the production of feed grains:
     Whether there are feed grains with characteristics sought by the intensive livestock industry that
     could only be consistently produced with irrigation.
     Structured supply arrangements may achieve a win:win outcome for both irrigation farmers and
     stockfeed processors.
     Relevant irrigated feed grain production information is required to be developed by co-
     operation between the grains and livestock end use industries.

It would seem opportune for both the grains and livestock industries to work together in increasing
feed grain production from irrigation. The major irrigation regions being ideally suited to supply the
higher feed grain demand regions.

7.8 Sustaining Growth in Grain Production
A critical short and long term need of both the grains and livestock industries is to have continued
growth in grain production. There is capacity to increase cropping area outside traditional cropping
regions, in higher rainfall areas as well as less marginal dry or salinity affected regions. In either case
advances are needed in areas of agronomy, varietal breeding and farming practices.

Australian grain growers have shown a long term trend for growth in grain volumes, this being
driven over the last 25-30 years from varietal breeding combining with changes in farm practices
including minimal till, soil moisture retention, crop rotations, etc.

Continued advances in the efficiency of grain production are seen as jointly favouring both the grain
grower and feed grain users. In a similar manner, the livestock industries will continue to put
research and capital investment resources into improving animal feed systems to increase the
efficiency of converting feed grains into meat, milk and eggs.

7.9 Increased Understanding and Knowledge
There is a lack of understanding and knowledge by the grains and livestock industries of each others
industries and what advances are being made over time. The average grain grower has minimal
perception of how the grain they grow is utilised. Equally, the average pig, poultry, dairy and feedlot
operator pays limited attention to what impacts upon grain growers and how the grains industry
operates.

There needs to be an increased level of active communication between industries to share
knowledge. This has application across both commercial and research activities. With ever increasing
levels of research specialisation, the Research and Development Corporations have a significant role
to play in fostering industry communications and sharing.




 100       Benefit to Australian Grain Growers in the Feed Grain Market
Initiatives such as the Feed Grain Partnership should be actively supported in its endeavour to
promote greater awareness and response to common supply chain issues.

The grains industry would seem to lack a united voice in dealing with feed grain end users. Just as
the livestock industries are fragmented, grain grower representation is spread across many grain
cropping industries, each having their own agendas. There would not seem to be a common grains
industry focal point to which the feed end users can address their supply issues.



7.10 Grain Grower Feed Grain Marketing Worries
It is apparent that there is a strong reluctance by grain growers to grow feed grains; this especially
applies across the traditional wheat and barley cropping areas. The following is a list of the main
concerns growers raise when they look at why they do not plant feed grains:

    Not having a market to sell to - will anyone buy the feed grain and how do they sell it.
    Lack of marketing skills or a desire to find markets for feed grain grown.
    Being dependent upon one buyer - the local feedlot or feed mill may take advantage of local
    growers.
    Lower price paid relative to growing milling wheat or malting barley.
    Loss of security as delivering wheat and barley to major accumulators is easier.
    A wet harvest and down graded wheat and barley makes feed grains worth less.
    A need to store on farm and control stored grain quality.

For many grain growers’ production of feed grains becomes an uncertain activity. It is of note that
for those already producing feed grains, there is seen to be an entrepreneurial skill development.
Growers producing triticale, sorghum and feed barley engage in marketing activity as a means of
increasing grain prices received. Whilst some growers elect to sell through traders or deliver feed
grains into bulk handling marketers, others foster their own feed grain customer base. This takes the
shape of retaining a number of regular clients, with varying degrees of communication and grain
supply arrangements. Feedback from growers operating within the feed grain market segment
suggests that through this entrepreneurial activity they have capacity to gain higher prices and are
rewarded for their marketing efforts.

This level of grain grower feed grain marketing activity is greater within higher feed grain demand
regions, where beef feedlot, dairy and intensive feeding activities are greater.


7.11 Competing Environmental Challenges
The rapid increase in emphasis placed upon carbon trading and minimising greenhouse gas
emissions will have many significant direct and indirect impacts upon Australia’s grain and grain use
industries. This report does not incorporate a review of the impact of carbon trading on the feed
grain market. This will be an increasing issue as both the grains and livestock industries endeavour to
define the potential impact upon their sector. Of particular note is the increasing focus being placed
upon methane production from ruminant animals. Whether this will ultimately be a positive or
negative for grain supply to these industries will only be confirmed over the coming years.
 101      Benefit to Australian Grain Growers in the Feed Grain Market
What is apparent is the opportunity for the grain and livestock industries to work jointly rather than
competing in addressing environmental issues relating to efficiency of grain utilisation in animal
feeding.

7.12 Increasing Growth in Livestock Feed Demand
An underlying question from the supply chain is whether the Australian livestock industries will
continue to grow, and if so, how much more feed grain will be required for animal feeding. Market
conditions during 2007, where grain prices escalated, resulted in reduced pig, beef and lamb
feeding. This resulted in a decline in feed grain demand relative to the previous 12 month period.

Will this be a longer term trend of reduced feed grain demand or only a 12 month blip with further
livestock growth in following years?

Based on previous drought events and high grain prices, it could be assumed that both beef and
lamb feedlot activity will rapidly increase with more favourable conditions providing margins for
feedlot operations. There has been major investment in feedlots and abattoirs and a strong beef
industry desire to retain export market share. It is anticipated that Australia’s beef exports will
continue their growth potential as Australia targets to higher value beef export market sector which
is reliant upon grain finishing.

The average grain feeding rate is approximately 1,700kg/cow/lactation. Farmers have capacity to
further increase grain feeding, with some farmers already using up to 2,500kg/cow/lactation. Higher
grain feeding rates offer capacity for farmers to lift milk production per cow, as well as meet the
higher demands in managing larger herds under more intensive feeding situations. Rising land prices
places further pressure on pasture based systems and it is expected that the level of grain feeding
will continue to rise. Increased intensification of dairy production is supported by higher global milk
prices, with record prices being seen during 2007/08.

The decline in pig production is very different, with piggeries closing down extremely unlikely to
reopen. Any future expansion in pig production will be dependent upon the industry’s capacity to
compete with lower priced imported pigmeat. It should be noted that growth in feed grain demand
over the last 10-15 years has not been due to the pig industry and, as such, future growth in demand
is also unlikely to be greatly influenced by the future of the pig industry.

There is no reason to suggest that the chicken meat sector will not continue to demonstrate its
history of consistent production growth. The egg industry will remain a user of feed grains, although
significant industry growth is less likely than for chicken meat feeding.

Much of future demand for feed grains will depend upon Australia’s competitive position within a
global market. Most of the industries benefit from quarantine controls preventing the importation of
competing meat products. Moves to approve chicken meat importation would have a significant
impact upon the Australian chicken industry, as has been the case with the pig industry. These
intensive industries have limited capacity to compete with far lower cost production countries.

For export market growth, Australia is well placed to expand in beef, lamb and dairy products. A
recent RIRDC (Dalton & Keogh, 2007) report identifies Australia’s favourable position in exporting to


 102      Benefit to Australian Grain Growers in the Feed Grain Market
the Asian market. From this report, for 12 Asian nations included in this research, it is projected that
for the period between 2007 and 2020:

    beef consumption will increase by 50%
    pork consumption will increase by 30%
    chicken meat consumption will increase 40%
    dairy product consumption will increase by 55%.

Australia is well placed to export beef, sheep meat and dairy products to Asian markets. Poultry and
pig meat expansion is less well defined, with Australian producers having limited capacity to export
in competition with lower cost production countries.

The global trend for increasing levels of affluence, with lesser developed countries standards of
living rising, lends itself to increased demand for animal protein. With China, India and other Asian
countries having expanding economies, Australia is positioned to be a supplier into the future.

The question for Australian livestock producers is whether they can remain competitive in the global
market. This calls for ever increasing levels of efficiency, with pressure on input costs to ensure
market share and growth opportunities are not lost. To this end, Australian agriculture must come to
terms with the disadvantage of variable climatic conditions and the limitation this places upon the
reliable supply of cereal grain as the largest input cost in animal feeding. Without a reliable source
of feed grains, the capacity of Australia to expand its livestock production capabilities will be greatly
impeded.

The Dalton and Keogh (2007) report identifies the growing demand for feed grains from Asian
countries. It is noted that, global feed grain and fodder supplies will need to expand at a much faster
rate than has been the case over recent decades, in order to meet the additional demand that the
expansion of animal protein production will generate. Current global feed grain production growth
rates, if maintained until 2020, will only meet approximately one-third of the projected increased
demand.

Thus there is a strong growing demand for Australian grown feed grains, whether these grains are
used for feeding animals in Australia or Asia.

7.13 Regional Growth in Livestock Production
Australian livestock production history identifies a series of changes in terms of the regional
production of animal products. Linkage to the supply of feed raw materials has been an import
factor in where each industry is presently located.

Future industry growth in animal production will continue to be linked to accessing raw material
supplies as the cost of feed and grain is a major cost component in animal feeding. Table 18
identifies factors that have either a positive or negative influence on regional feed grain demand.




 103       Benefit to Australian Grain Growers in the Feed Grain Market
Table 18. Regional feed grain positive and negative demand factors

Regions                 Demand Change Positives          Demand Change Negatives
Southern Queensland      Winter and summer crop           Limited feed grain supply
                         production                       Potential ethanol development
           &             Existing beef feedlot operation  Declining dairy production
                         capacity expansion               Competition for labour with mining
North Eastern NSW        Available store cattle           industry
                         Poultry production expansion
                         Population growth
                         Convenience food demand

Sydney Newcastle          Grain supplied from a number        Limited feed grain supply
                          of regions                          Urbanisation forcing out intensive
                          Population growth and meat          farming and meat processing
                          demand
                          Existing poultry processing
                          capacity
Melbourne                 Population growth and meat          Limited feed grain supply
    &                     demand                              Urbanisation forcing out intensive
Gippsland                 Existing poultry processing         farming and meat processing
                          capacity                            Grain supply needs to move through
                          Better suited to pasture based      Melbourne
                          dairy systems
                          Increasing grain feeding to
                          dairy cows
Tasmania                  Better suited to pasture based      Limited feed grain supply
                          dairy systems                       Limited grain production requires
                          Increasing grain feeding to         importation from mainland
                          dairy cows
Western Districts Vic     Better suited to pasture based      Limited feed grain supply
& SE SA                   dairy systems                       Need to convert pastoral land into
                          Increasing grain feeding to         crop production
                          dairy cows
Central NSW               Beef feedlot expansion              Feed grain demand from other
                          Lamb feedlot expansion              regions reduces availability
                          Poultry production expansion        Decline in pig production
                          with supply into Sydney             Potential ethanol development
Murray & Northern         Beef feedlot expansion              Grain demand from other regions
Vic                       Lamb feedlot expansion              Dairy industry decline
                          Poultry production expansion        Irrigation water availability reduced
                          with supply into eastern states     Decline in pig production
                                                              Potential ethanol development
Northern & Central        Poultry production expansion        Limited grain supply into Atherton
Qld                       Population growth                   Dairy industry decline
                          Convenience food demand             Pig industry decline
                          Beef cattle supplementary           Competition for labour with mining
                          feeding demand                      industry
Adelaide, Mid North       Surplus grain available             Lower State population demand
& Murraylands             Poultry production expansion        Beef store cattle availability

 104       Benefit to Australian Grain Growers in the Feed Grain Market
                         Pig industry processing
                         capacity
                         Beef feedlot potential
                         expansion
                         Lamb feedlot potential
                         expansion
                         Capacity to transport meat
                         products into eastern states
South West WA            Surplus grain available             Transport cost for meat products
                         Poultry production expansion        into eastern states
                         Beef feedlot potential              Lower State population demand
                         expansion                           Beef store cattle availability
                         Lamb feedlot potential              Potential ethanol development
                         expansion                           Competition for labour with mining
                         Export into Asian markets           industry
                                                             Competition for labour with mining
                                                             industry
Western NSW              Surplus grain available             No existing pig or poultry processing
                         Beef feedlot expansion              capacity
                                                             Limited labour availability
                                                             Infrastructure limitations
                                                             Lower regional population demand
                                                             Distance to export ports
Eyre Peninsula     &     Surplus grain available             No existing pig or poultry processing
Northern SA              Lamb feedlot potential              capacity
                         expansion                           Limited labour availability
                                                             Infrastructure limitations
                                                             Transport cost for meat products
                                                             into eastern states
                                                             Lower regional population demand
Central & Eastern WA     Surplus grain available             No existing pig or poultry processing
                         Lamb feedlot potential              capacity
                         expansion                           Limited labour availability
                                                             Infrastructure limitations
                                                             Transport cost for meat products
                                                             into eastern states
                                                             Lower regional population demand
                                                             Competition for labour with mining
                                                             industry


The potential for livestock industry expansion has been identified for South Australia. Primary
Industries and Resources SA (PIRSA) provides the following projections for animal feed demand
within South Australia:

    Significant expansion is occurring in intensive animal production in South Australia.
    Demand for cereal feed grains will increase by 75% to 925,000 tonnes annually by 2010.
    Demand for protein components of feed rations to increase by 80% to 284,500 tonnes annually.



 105      Benefit to Australian Grain Growers in the Feed Grain Market
     Expansion will primarily occur within a 150 km radius of Adelaide close to modern processing
     facilities developing in Murray Bridge, Port Wakefield and Adelaide.
     Fodder demand growth of 6-8% per annum until 2010 in both domestic and international
     markets driven by domestic dairy industry and from Asian and Middle East markets.
     Average seasonal production of feed grains is anticipated to grow from 1.75 million tonnes in
     2003 to 2 million tonnes by 2010 due to yield increases of approximately 1-2% per annum.
     Slow yield growth of 1–2% per annum to continue.
     By 2010 feed grain demand is anticipated to have grown from 25% of available cereal
     production to nearly 50%.
     Demand for pulses to meet the protein component of livestock rations shows that by 2010
     demand will exceed production.

In an analysis of the Western Australian livestock industries completed by WA Department of
Agriculture (Burggraaf 2007), it is identified that WA, like SA, has a surplus of feed grains. This places
WA in a favourable position to expand livestock production capacity. Grain prices within WA are
lower than eastern State prices as they are more often operating at export parity pricing and less
affected by supply shortage relative to demand.

The impact of climatic conditions has had an impact on the Australian dairy industry and areas
within which dairy production is likely expand. The industries strategic advantage remains in having
a low production pasture based feeding system. This lends itself to operating dairy farms in regions
of higher rainfall. The farming areas in Tasmania, Gippsland and Western Vic are seen as those that
will experience greater milk production growth. In contrast, Northern Victorian dairy cow numbers
have been declining with reduced irrigation water availability for pasture production.

Dairy Australia (Little 2007) within its industry surveys has identified that dairy farmers in Tasmania
have indicated they will be increasing grain feeding at a faster rate than any other dairy region. The
Tasmanian increase in grain feeding is forecast to be 25-30% over the next five year period. This
increase is in part attributed to the regions lower base grain feeding rates. The survey data supports
the contention that Tasmania will see increasing feed grain demand and a widening grain supply gap
if Tasmanian grain production does not increase. Other dairy regions are forecast to have feed grain
feeding rate increases in the order of 10%.

The development of ethanol plants utilising cereal grains have been annotated in Table 18 as being
negative to livestock industry expansion. This generalisation is the view held by the livestock
industries. The proponents of ethanol plants argue that the availability of by-products, either wet or
dried distiller’s grains, will lead to the expansion of livestock production. Some of the proposed plant
developments are dependent on the construction of beef and/or dairy feedlot operations in close
proximity to utilise wet by-product production.

Based on available data and industry thinking, there is strong recognition of the further growth
potential in feed grain demand, with this having greatest impact upon east coast states. Figure 56
provides data for grain exports and feed grain use for the eastern states. This shows the trend for an
increasing volume of grain being used for animal feeding and a decline in grain destined for export
markets. Using an average feed grain demand increase of 4.1% per year, volume figures can be
extrapolated so that by 2015 there will no longer be any surplus grain available for export from


 106       Benefit to Australian Grain Growers in the Feed Grain Market
eastern Australia within average years. This scenario is based upon the grains industry failing to
increase grain production above present day production levels.

Figure 56. East coast grain exports vs feed grain use 1998-2006




Source: AAPMA –exports, JCS Solutions – feed grain use



7.14 Imported Stock Feed Alternatives
With declining grain supplies relative to domestic demand, greater attention is being given to the
importation of stockfeed raw materials to replace cereal grains. The criteria which are relevant to
assessing the suitability of raw materials sourced from overseas are:

1. Readily available – commodities which are in surplus supply within the global market. Palm
   kernel meal is one raw material which has been generated in large volumes in Indonesia and
   Malaysia and is available for importation into Australia.
2. Price competitive – when delivered to end users, these imported raw materials need to be at a
   price below the supply of equivalent domestic raw materials. This price competitiveness is
   based on the nutrients supplied by the raw material.
3. Not locally available – insufficient domestic production results in the requirement to access
   overseas materials. Soybean meal and fish meal are not available in sufficient quantity within
   Australia and these materials are imported to meet demand.
4. Usable form – imported ingredients need to be in a form that can be handled through either
   bulk or container shipping systems, with ease of handling and delivery into end user feed
   manufacturing sites.
5. Contamination free – meets Australian standards for prohibited materials. This includes not
   being contaminated with chemical residues, environmental contaminants (heavy metals and
   radionucleotides) and microbiological organisms.
6. Nutrient content – provides a feed source which can be utilised by livestock in supplying energy,
   protein, minerals and vitamins.




 107      Benefit to Australian Grain Growers in the Feed Grain Market
7. Quarantine control approved – has undergone import risk assessment and presents minimal
   risk to Australian cropping and livestock production from disease, pathogen or weedseed
   criteria.

Under normal production years, the feed grains industry should view all imported raw materials as
competing for market share, with import volumes reducing the volume of Australian raw materials
needing to be purchased to manufacture animal feeds. However, during drought years, imported
feedstuffs can act as a relief valve in reducing grain demand to fill the supply gap, thus allowing
milling grains to be exported.

The types of raw materials imported into Australia include the following materials:

    Grains – sorghum, wheat or corn are restricted to importation approval under extreme drought
    conditions. Bulk shipment importation occurred in 2002/03.
    Flour milling by-products – millrun in pelleted form is imported when grain becomes expensive
    and surplus supply is available from overseas markets. Under typical seasons importation of
    milling by-products is limited due to cost constraints. More regular importation into Queensland
    from Papua New Guinea has occurred.
    Corn Gluten Feed – in meal or pelleted form is a lower cost by-product from corn milling and
    suited as a medium protein (18%) raw material which partially replaces grain and protein meals
    in all animal species.
    Dried Distillers Grains (DDGS) – derived from the production of ethanol is available from the
    USA. DDGS is in surplus supply within the USA and is being exported to other feed
    manufacturing countries. Greatest application is in feedlot and dairy feeding. To date there has
    been little access to imported DDG.
    Soybean Meal – regularly imported in large volumes to meet animal protein demand, especially
    for pig and poultry feeding. Access to US and South American soybean meal offers an alternate
    economically priced protein source.
    Palm Kernel Meal – volumes have increased with growing demand from the dairy sector as an
    easy to feed supplementary feed source. Palm kernel acts as a replacement for both grain and
    fibre during periods of high grain and hay prices.
    Tapioca Pellets – acts as a grain replacement supplying a high starch (>65%) level.
    Copra Meal – application as an alternate lower cost mid protein meal with application in horse
    and cattle feeding.
    Soybean Hulls – imported as an alternate higher digestibility fibre source, with specialty use in
    horse feeding at times of high oat grain, hay and chaff prices.
    Fish meal – imported as a high quality protein source for pig and aquaculture feeding.
    Whole canola seed – imported to supplement Australia’s demand for canola oil through the
    oilseed crushing industry. The resulting canola meal is supplied back to the feed industry.

There is a trend for stockfeed ingredient importation to be increasing. This is particularly the case
within eastern Australia with imports into Brisbane, Newcastle and Melbourne.

Future grain importation is dependent upon Australia’s capacity to produce sufficient grain to meet
domestic demand. It is neither in the interests of the grains or livestock industries to import grain.
The ideal situation is for sufficient crop production to generate an export surplus satisfying domestic

 108      Benefit to Australian Grain Growers in the Feed Grain Market
end users. However, due to more frequent poor growing seasons and the increase in domestic
demand, there is growing attention placed upon grain importation and the frequency of Australia
having to access overseas grains.

Debate over grain importation is driven by the livestock industries seeking security of supply, where
grain is their major raw material in use. The question is whether grain importation provides security
of physical supply or security of limiting grain price escalation during drought.

Grain importation quarantine controls limit whole grain use to metropolitan mills with capacity to
steam pellet feeds to control pathogens. This feed milling capacity is largely held by the major
chicken meat companies, with little or no capacity servicing the beef, dairy or pig industries. The
Stock Feed Manufacturers’ Council of Australia estimates that a maximum 1,000,000 tonnes of
imported grain could be used annually within feed mills in Brisbane, Sydney/Newcastle and
Melbourne.

The major concern raised in previous feed grain reports is the potential impact back to back
droughts would have upon grain supply for animal feeding. Under this scenario, grain stocks would
be depleted during the first year and in the second year significant feed grain volumes would need
to be imported to meet existing domestic demand. Should a national wide drought limit grain
production in WA and SA, then Australia would have insufficient grain to maintain its existing
livestock production and existing import control measures would limit access to overseas grain
sources.

7.15 Length of Supply Chain Relationships
Short Supply Chain

Major feedlots and feedmills operating within regional locations, have distinct advantages in forming
close relationships with surrounding grain growers. This direct supply relationship includes purchase
of grain direct off header as well as contracting supply for storage on farm with delivery options
through the year. It is in the interest of both the local grain grower and end user to utilise on farm
storage in preference to having grain delivered into the bulk handling system. End users need to
offer sufficient incentives to attract grain away from major grain accumulators and marketers.

This short supply chain offers the greatest potential for the development of feed grain varieties, with
growers having an established supply relationship with an end user that is agreeable to purchase a
feed variety.

As the short supply chain is dependent upon relationship selling, it can often breakdown whenever
either party feels they have been disadvantaged. The more successful relationships are based on
long term trading with wins and losses in terms of price paid relative to other marketing options. The
buyer should not expect to be able to access future grain supplies if they take advantage of their
local suppliers for short term gain, similarly growers should not expect local buyers to take their
grain if they are not a regular seller.




 109      Benefit to Australian Grain Growers in the Feed Grain Market
Long Supply Chain

This is typically recognised as grain which is delivered into bulk handling facilities and pooled. The
major grain marketers secure grain stocks and retain the capacity to direct supply to more
favourable markets within the domestic and export markets. The strong advantage provided through
this supply chain route is security of accessing larger volumes across a wider supply base. Buyers
have the surety of being able to contract defined volumes, prices and quality to meet their
requirements. This allows buyers to access grain further removed from their surrounding supply
region and does not require the end user to retain relationships with a multitude of grain growers. In
working with major grain marketers, the buyer has greater potential to implement risk management
tools, apply contract swaps, defer delivery or arrange supply from alternate silo locations.

Spot Buying

Many end users operate with limited forward contract supply volumes. In many cases buying in the
spot market to meet their immediate needs. Survey data from Dairy Australia (2007) found that 76%
of dairy farmers buy grain on spot market.

The practice of spot buying offers a number of advantages and disadvantages to individual end
users. For the wider industry it results in increased levels of market volatility when the supply
demand gap tightens. Market commentary suggests that a higher level of spot buying represents a
less mature market where alternate buying strategies are not employed.

Spot Buying Advantages

    Never out of the market as grain is bought on a regular basis.
    Buying price is linked to supply and demand fundamentals
    Limits risk of carrying larger grain stocks
    Limited on site storage as grain accumulation is not a strategy employed
    Ability to choose the lowest cost ingredient option at any time
    Never caught with expensive grain in a falling market

Disadvantages

    Increased exposure to rising prices when grain supply drops
    Greater price volatility
    Supply security when demand exceeds supply
    Dependence upon recovering cost increases from the market through either feed selling prices
    or prices received for meat, milk or eggs.

7.16 Transport Infrastructure
The growth in domestic feed grain demand relative to total grain production ultimately leads to a
number of significant infrastructure issues for the grains industry. As a larger volume of grain is
utilised within eastern state based livestock operations, there is a decline in the volume of surplus
grain moving through export port terminals. Feed grain supplied to feed mills and livestock home-
mix operations is delivered through road transport. There are almost no feed mills that have
retained operating grain bulk rail unloading capacity. The supply of grain via road has proven to be

 110      Benefit to Australian Grain Growers in the Feed Grain Market
more flexible and lower cost than the retention of rail facilities and lack of flexibility in receival of
grain by rail. With the move to greater on farm storage, this grain is predominantly transported by
road direct to end use processing.

A recent review of the Victorian rail freight network (Vic DOI 2006) provides the following
observations which could also apply to rail networks within Qld and NSW. “The grain industry is also
in a state of flux with ongoing deregulation of export grain and industry fragmentation, increasing
containerisation of grain and increased demand in the domestic market. Fragmentation of the grain
industry only makes it more difficult for rail, given the lack of regularity and consistency of demand
required to make it attractive for operators.”

As less grain moves through rail systems the justification for maintaining and upgrading this
infrastructure lessens. This in itself becomes limiting as poorly maintained rail lines experience load
and speed limits further increasing inefficiency and cost relative to road transport.

The Australian grain bulk handling and rail infrastructure network has been oriented to moving large
volumes of grain from country silos to bulk shipping grain terminals. Whilst this infrastructure suits
the larger grain export volumes from WA and SA, the less frequent larger volume exportable grain
surplus within Qld, NSW and Vic have resulted in a decline in volumes being handled.

Due to emphasis on movement of grain from country areas to port shipping terminals, there are
significant limitations in trying to move bulk commodities by rail from port back into country regions.
Added to this are significant interstate shipping costs when grain is moved from WA or SA into the
eastern states. This cost limitation previously identified by Yates and Coombs (2003) is a significant
issue for Australian livestock producers as they are more frequently looking to access grains from
further distant production regions.

7.17 Feed Grain Varieties and Breeding Emphasis
The control of grain breeding resides within the grains industry, with levy funds being used to define
wheat pre-breeding selection programs and other grain breeding. This control is largely driven from
the requirements defined for milling wheat and malting barley, with recognition of feed user
requirements gaining some increased attention in recent years.

Wheat Breeding

The grains industry established the National Wheat Breeders’ Alliance as a means of establishing
priorities for pre-breeding R&D. The key quality traits being addressed within the wheat pre-
breeding program are defined as milling yield, flour water absorption for bread and biscuit
manufacture, improving yield whilst maintaining protein content, protein composition and dough
characteristics, flour colour, dough mixing characteristics and flour swelling volume. It can be seen
that there is no recognition of any animal feeding use quality requirements included within the
Australian milling wheat pre-breeding program.

There are some areas which offer common ground for joint work between the milling and feed
industries, in particular work looking at:

   Increasing milling yield may by default, result in increased starch content and less fibre, this being
   favourable for wheat energy content in animal feeding.

 111       Benefit to Australian Grain Growers in the Feed Grain Market
   Water absorption capacity characteristic affects flour dough production. Water absorption has
   been found to be correlated with grain digestion in monogastrics and ruminants. Selection for
   this genetic trait is expected to have an impact upon wheat digestion by livestock.

Recognition of animal feed use characteristics is only made for dedicated feed wheat varieties. This
recognition has made only tentative steps in accepting the potential role of having feed wheat
varieties suited for either monogastric (pig and poultry) or cattle feeding applications. At this stage
of feed wheat breeding, emphasis needs to be rightly placed upon generating higher yielding feed
wheat varieties.

Barley Breeding

Barley Breeding Australia has defined breeding programs split into three nodes: west, south and
north. The western and southern programs are focussed largely on malt with some focus on feed.
The northern program has been given the charter to focus on high yielding feed varieties. This recent
change in breeding emphasis reflects the significant volume of barley grown in northern NSW and
southern Queensland that is used in animal feeding.

Work is continuing in defining what is needed in northern node feed barley breeding. Industry
workshops have been conducted to better define end users requirements for feed breeding
applications.
Sorghum Breeding
As a dedicated feed grain, sorghum breeding activity is directed to provision of grain for animal
feeding use. Work is focused on yield and disease resistance, with commercial breeding companies
playing an active role in development of new varieties.

Further opportunities exist to address limitations in sorghum starch digestibility in cattle, broilers
and pigs. Work undertaken through industry research has identified limitations in the use of
sorghum which limits the value end users will pay relative to using wheat or barley.

Triticale Breeding

GRDC funding for the National Triticale Breeding Program run by Australian Grain Technologies is
focused on providing higher yielding triticale varieties. The level of breeding activity is limited by
available funds and need to recover end point royalties from feed end users. Feed grain end users
see triticale as a grain which could be utilised in far greater volumes. The market limitation is in
gaining increased production to meet demand.

Pulse Breeding

Pulse Breeding Australia provides breeding co-ordination for field peas, chickpeas, lentils and faba
beans. The priority is given to higher value human consumption pulse varieties.

Opportunity exists to breed suitable feed legume varieties, especially for production in southern Qld
and northern NSW.




 112      Benefit to Australian Grain Growers in the Feed Grain Market
7.18 Plant Breeders Rights (PBR) and End Point Royalties (EPR)
PBR provides the legal rights and therefore opportunity for a breeder or variety owner to recover
the costs of breeding a new variety through royalties.

An EPR is a royalty paid on every tonne of grain produced by growers from that variety. It is a royalty
collection method used by variety breeder/owners that under the PBR Act can fund ongoing
research and the breeding of new improved varieties.

The use of EPR’s is the method by which the grains industry is now funding the majority of grain
varietal breeding work. Whilst the grain grower is liable for EPR payments, their collection is largely
dependent on voluntary collection from grain growers when grain is sold. This collection applies
across all market segments, including grain used in feed applications.

To date there has been a reluctance of feed grain buyers to collect EPR’s. The types of statements
from feed end users as to why they do not want to collect EPR’s include:

    Extra administration work, with existing systems in use not capable of accounting for grain
    variety.
    No existing recognition of variety at purchase time and within contracts – variety is of no
    significance to feed grain users.
    Potential grower reluctance to sell if EPR is deducted relative to selling to someone not
    collecting EPR’s.
    Need to collect across many grains. Unlike flour millers only buying wheat or malting companies
    only buying barley. EPR’s if collected will apply to various grains and pulses being purchased.
    More complex collection and payment than R&D levies – differing amounts for different
    varieties/breeders.
    Not compulsory so why should they collect, unlike R&D levies.
    Collection supports breeding milling wheat and malting barley not necessarily feed. Flour mills
    and malting companies will not be collecting on feed varieties to support feed breeding but feed
    industry would be collecting to support milling wheat and malting barley breeding.
    Feed mills need to compete with farmers mixing their own feeds and they will not be collecting
    EPR’s. This is different to flour mills and malting companies where all competitors can agree to
    take part.

The potential negative for feed end users in not collecting EPR’s, is that it will have the greatest
impact on breeding feed grain varieties. Should the feed grain users not support EPR collection,
there is considerably less interest from grain breeding companies to invest in this part of the market.

Apart from sorghum, cereal grain varieties bred for feed grain use have a smaller potential market
size compared to milling wheat and malting barley. Potential exists to develop feed grains suitable
for different regions, e.g. high rainfall areas, the potential volume of tonnes involved being limited to


 113       Benefit to Australian Grain Growers in the Feed Grain Market
the application and market share of this variety. Without a high level of voluntary EPR collection,
incentive for breeders to pursue varietal breeding for feed grains will be depressed.

The non collection of EPR’s for feed varieties is potentially greater than for milling wheat and malting
barley. Grain sales direct from grower to end user is proportionately higher in the feed market than
that seen in the flour or malting industries. It is highly unlikely that grain grower to end use feedlot,
dairy, pig or poultry farm will see EPR’s collected by the end user or voluntarily paid by the grower.

To date the grains industry has not actively promoted the basis for the introduction of EPR’s to the
feed supply chain. Neither has there been adequate articulation of the benefits derived for end users
in supporting EPR collection.



7.19 Risk Management Tools
Various management actions can be taken to guard against adverse impacts of variable grain supply
or demand due to economic or environmental factors. The price behaviour of feed grains through
the last seven year period, as shown in Figure 57, has highlighted the significant swing in prices
occurring within the Australian market. Increased feed grain demand, together with drought
reduced grain crops, has resulted in significant changes in grain prices over short time periods.


Figure 57. Wheat, barley and sorghum prices 2000 – 2007, feed grain prices average market value
across Qld, NSW and Vic.




Source: SFMCA Pigmeat Inquiry Submission



Australia, through ASX Grain Futures and Options, has seen an increase in the level of risk
management tools which the feed grain supply chain can utilise. These tools are in addition to
Chicago grain futures which have been in use by some end users for many years. By utilising grain
futures, growers, traders and end users can seek price protection. Through active hedging activity,


 114       Benefit to Australian Grain Growers in the Feed Grain Market
futures exchanges can attract speculative activity and further enhance the liquidity of the market
(Hunter 2006).
ASX Grain Futures, as listed in Table 19 are available for use by the feed grain supply chain.
Table 19. ASX Grain Futures Contracts

Contract                                                                      Physical Grade                                                                                  Track Market

                                                                                                APW2
Australian Milling Wheat                                                                                                                                                      Newcastle & Port Kembla
                                                                                  (10% protein)

Australian Feed Wheat                                                                               FED1                                                                      Newcastle & Port Kembla

Australian Feed Barley                                                                                  F1                                                                    NSW, Geelong & Portland

Australian Sorghum                                                                                  SOR                                                                       Brisbane / Newcastle

Australian Canola                                                                                   CAN                                                                       NSW, Geelong, Portland & Port Adelaide


Since its inception in 2003, the volume of ASX grain futures traded has been increasing, Figure 58.
ASX reports that 58% of futures traded are milling wheat, 25% feed barley (no malt barley futures
being available), 13% sorghum, 5% canola and nil feed wheat.


                                                                                                                      ASX Grain Futures & Options
Figure 58. ASX Grain Futures & Options – monthly traded volume
                                         Monthly Traded Volume
                                                                                                             Inception to end September 2007
                            40,000                                                                                                                                                                                                                                                        40,000

                            36,000                                                                                                                                                                                                                                                        36,000

                            32,000                                                                                                                                                                                                                                                        32,000

                            28,000                                                                                                                                                                                                                                                        28,000

                            24,000                                                                                                                                                                                                                                                        24,000
                Contracts




                            20,000                                                                                                                                                                                                                                                        20,000

                            16,000                                                                                                                                                                                                                                                        16,000

                            12,000                                                                                                                                                                                                                                                        12,000

                             8,000                                                                                                                                                                                                                                                        8,000

                             4,000                                                                                                                                                                                                                                                        4,000

                                0                                                                                                                                                                                                                                                         0
                                              Jul-03




                                                                                                    Jul-04




                                                                                                                                                           Jul-05




                                                                                                                                                                                                                  Jul-06




                                                                                                                                                                                                                                                                        Jul-07
                                     May-03


                                                       Sep-03
                                                                Nov-03
                                                                         Jan-04
                                                                                  Mar-04
                                                                                           May-04


                                                                                                             Sep-04
                                                                                                                       Nov-04
                                                                                                                                Jan-05
                                                                                                                                         Mar-05
                                                                                                                                                  May-05


                                                                                                                                                                    Sep-05
                                                                                                                                                                              Nov-05
                                                                                                                                                                                       Jan-06
                                                                                                                                                                                                Mar-06
                                                                                                                                                                                                         May-06


                                                                                                                                                                                                                           Sep-06
                                                                                                                                                                                                                                    Nov-06
                                                                                                                                                                                                                                             Jan-07
                                                                                                                                                                                                                                                      Mar-07
                                                                                                                                                                                                                                                               May-07


                                                                                                                                                                                                                                                                                 Sep-07




                                                                                                                                                    Month
                                                                                                                                     Monthly Volume                          3 Month Moving Average



Source: ASX
A limitation to uptake of futures trading has been lack of knowledge and experience in use of such
risk management tools. ASX, as well as industry participants, have been providing increased
education for grain growers; this education also needs to be more readily extended to feed grain

 115       Benefit to Australian Grain Growers in the Feed Grain Market
end users. The major grain marketing companies have strong risk management skills; in contrast
many end users within the stock feed manufacturing and livestock production area have limited
ability to take advantage of these tools. Due to a lower level of futures market liquidity, many of the
larger grain buyers have been unable to actively use the system to their benefit. As the volumes of
grain being traded on ASX increases, this offers greater liquidity which provides further potential
involvement of some of these larger grain end users.




8 RESEARCH & DEVELOPMENT IN FEED GRAINS
Conduct of R&D is recognised across all industries as a means of delivering improvements in
production, sustainability and profitability. The feed grain supply chain through the GRDC and
livestock industries (APL, MLA, Dairy Australia, ACMF, AECL, RIRDC) have a responsibility to invest in
R&D for the greatest benefit to its stakeholders.

This report was not commissioned to review R&D completed in feed grains, however, it is seen as an
essential area which requires some discussion relating to the feed grain supply chain. From the
grains industry perspective, there has been significant funding of work in feed grains through the
Premium Grains for Livestock Program (PGLP). This program was conducted with the co-operative
support of the GRDC and a number of the livestock industry R&D funding bodies over a nine year
research period. PGLP has over its research period had many supporters as well as detractors.

Due to the size of the PGLP both in terms of funds spent and research conducted, it is appropriate to
confirm some of the key outcomes from PGLP.

8.1 PGLP Overview and Outcomes
    Established as a jointly funded grains and animal industries project.
    Principle objectives of PGLP were to:
         o Identify the characteristics of grains that made them most suitable for different forms of
             animal production.
         o Develop a process, based on the rapid measurement of grain quality, for the rational
             trading of grains for livestock within Australia which provides just rewards to both the
             grain growers and livestock producers.
    Funded by the Grains R&D Corporation, Meat and Livestock Australia, Australian Pork Limited,
    Rural Industries R&D Corporation through the Chicken Meat program, Australian Egg
    Corporation Limited, Ridley AgriProducts and Dairy Australia. Participation from each funding
    body varied through the life of the project.
    Provided increased understanding that the grain characteristics most suitable for production
    vary widely between animal types, the development of rapid near infra-red spectroscopy (NIR)
    calibrations for measuring most of these characteristics and the ability to predict the impact of
    grain type on animal performance so the economic value of any grain sample can be determined
    for each major livestock industry.
    Generation of data relating to grain composition and utilisation by various animal species.
    Publication of over 80 scientific papers utilising PGLP generated data.


 116      Benefit to Australian Grain Growers in the Feed Grain Market
Without doubt, the science behind PGLP has been world class and a leader in terms of defining the
nutritional value of various grains between different livestock species. The development of NIR
calibrations are at least equal or better than any equivalent calibrations being developed in other
parts of the world.

However, there are genuine questions from the grains industry relating to the benefits from PGLP
that flow back to adding value to Australian grain producers. PGLP was initiated on the premise that
there was a need to develop a rational system of assessing feed grain quality, which could be used
within the grain marketing channel as grain moved from grower through the chain to end users.
Thus, PGLP was set-up to assist in developing a better system of defining feed grain quality and
defining the value of grain quality, for the benefit of the feed grain supply chain. In effect PGLP was
to be a market driven program, utilising latest technology in NIR capabilities linked to animal feeding
and grain chemistry research.

PGLP research work was conducted with the intent of gaining a better understanding feed grain
quality; what makes grain vary in its utilisation by different animal species and between different
grain species and samples. This was a major undertaking which utilised large amounts of R&D funds
to generate the data required. The conduct of the scientific research, although time consuming and
detailed, was completed to meet the PGLP objectives.

In hind-sight, it would seem that PGLP was driven from the science perspective and missing from the
projects conduct and management was sufficient supply chain marketing focus. It was not until the
final stages of PGLP that limited funding was made available to look at supply chain case studies.
These were aimed at demonstrating the benefits that PGLP could deliver to parts of the supply
chain. These case studies identified the value of the technology in defining grain quality and the
variation occurring. They also identified limitations in use of NIR technology, as well as barriers
preventing ready adoption of the technology use across the supply chain.

PGLP NIR technology has been taken-up by plant breeders in screening genetic lines to assess the
available energy value of grain samples held within grain breeding programs. This has potential to
fast track varieties which are found to be more favourable in terms of available energy content.

8.2 PGLP Outstanding Issues
There is negative sentiment within the grains industry regarding the PGLP outcomes. There are
however a number of key aspects which the grains industry needs to account for in viewing what
further R&D should be funded in feed grains. The key items of note from PGLP include:

1. PGLP NIR Calibrations – these have been developed to a point where they are being utilised under
research licenses. Industry experience is required to gain further feedback on the potential value of
the technology by supply chain participants. It is understood that commercialisation of PGLP NIR
calibrations is progressing and their commercial release will identify the technologies real value.

The PGLP NIR calibrations require further refinement, with further animal feeding work to improve
the calibrations. The pig calibrations are being improved through funding by the Pork CRC. Other
animal species calibration improvements should be made subject to the financial commitment of the
relevant industry funding bodies.


 117      Benefit to Australian Grain Growers in the Feed Grain Market
It should be noted that the work undertaken by PGLP has parallels in other countries. Refer to CHS
Feed Grain Supply Chain Pilot in Animal Nutrition provided earlier in this report. In both Canada and
the USA, NIR technology is being used to predict grain energy production from fermentation to
ethanol. It would seem that the ethanol industry may fast track NIR energy prediction commercial
application.

2. A major communication and education program would need to be initiated to ensure that NIR
measurement of grain quality becomes the accepted method for specifying and trading grains for
livestock in Australia. This would only be successful with the acceptance of this system by the
majority of feed grain marketers, traders and end users.

3. There needs to be a co-ordinated approach to how the NIR calibrations are used by cereal
breeders to improve the nutritional value and yields of grains for specific types of livestock.
Separate selection criteria need to be established for breeding grains for use by ruminants, pigs or
poultry.



8.3 Feed Grain R&D Future Direction
There is an on-going need for the grains industry to fund R&D in the area of feed grains. Based on
the majority of domestic grain use going to animal feeding, and this proportion projected to increase
into the future, there is greater emphasis being placed on the feed grain market.

Whilst the feed grain end users represented by feed mills, feedlots, dairy, pig and poultry producers
place greatest emphasis on feed grain security, there are also a number of other common interest
areas discussed below which meet the needs of the entire feed grain supply chain.

1. Feed Grain Utilisation – within livestock feeding, as grain is the major feed cost for most species,
there is an interest from livestock producers in better understanding how grain is utilised. This offers
potential to then make changes to increase grain digestion and nutrient utilisation. Such project
work should only have grains industry funding as a supporting partner, and as a lesser funding body.
Grains industry participation is required to ensure project work is conducted for the benefit of the
grains industry. Primary feed grain utilisation R&D work should be driven by the relevant livestock
industry R&D body, where the use of data derived and potential commercial applications are of
greater benefit.

Improving grain utilisation increases the value of grain in animal feeding. It is important for the
grains industry to be able to define this efficiency improvement to enable grain sellers to accurately
define the worth of grain relative to other raw materials.

2. Focus on characteristics of grain and the features of the grain which are of significance for its end
use. This is in effect what already happens in grains industry funding of R&D work in; wheat for flour
milling with end uses in baking, noodles and industrial applications and barley for malting and
brewing. In the same manner feed grains R&D projects should be focused on the end use application
as it relates to the grains inherent characteristics. The grains industry needs to have a complete
understanding of the material it supplies to market destinations and how it is used in further
processing value added products.

A common feature of research work using grains is the understanding of cereal chemistry and
molecular biology. It would seem that there are many similarities in the effects of cereal


 118       Benefit to Australian Grain Growers in the Feed Grain Market
characteristics in wheat for flour, barley for malt and these same grains for feed. In particular, the
baking and brewing industries are seeking to gain greater understanding of grain protein and starch
matrix and how this impacts upon grain use in baking and fermenting processes. The animal feed
industries have an equal desire to better understand the nature of cereal grains to allow better
utilisation in animal feeding. Grains R&D funding has an opportunity to explore the potential for
common projects which have the same or similar objectives. There could be a more integrated
approach to R&D; with this looking at where and how feed grains research may bolt onto milling
industries projects. Feed grains R&D should not be viewed in isolation as separate grains projects.
There would seem to be great benefit in getting cereal chemists more actively involved with animal
nutritionists to share in knowledge relating to the characteristics of grain and what is already
recognised within other non feed industries.

The barley industry has made progress in shifting its focus to look at functional tests to predict
barley maltability. This work includes looking at measuring diastatic power (DP) enzymes such as
alpha amylase, beta amylase and limit dextrinase instead of the straight DP. In effect what is
required is a measure of the potential fermentability of barley. This move in the malting industry has
direct parallels with functional activity of barley when fed to animal species, with the characteristics
of barley affecting rate of digestion in monogastrics and fermentability in ruminants. What would
seem a logical step is for the barley industry to seek out common beneficial characteristics so that in
selecting barley varieties better suited to malt production they also identify beneficial traits for
animal feeding.

3. Genetic X Environment interaction – there are recognised differences from season to season in
how grain performs in animal feeding applications. Greater work is needed in defining the level of
variation occurring as a result of genotype and environmental conditions. Climatic differences
between seasons results in significant differences in grain yield, grain size and screenings as well as
available energy content. Grain downgraded due to not meeting various receival standards is heavily
discounted in value. PGLP work has shown that in most cases this downgrade is excessive and bears
little correlation with how the grain us used by either the animal, or how it is used in the market. It
is noted that the Pork CRC is conducting work in assessing effects of weather damage on grain
quality. The grains industry should be looking at this area to seek means of preventing or reducing
the level of downgrade occurring within the market.

4. Feed grain varieties – Lack of sufficient yield advantage has been identified by grain growers as
the major reason why they do not grow feed grain varieties (wheat, barley and triticale). Growers
generally need to see a minimum 15-20% yield advantage over either milling wheat or malting barley
varieties before they will look to grow feed varieties. For malting barley this required yield
advantage may be closer to 30%.

Lack of higher yielding varieties will continue to limit the development of a dedicated feed grain
production base. If the grains industry is serious about meeting the feed grain needs of the domestic
market and the livestock industries are equally serious about having feed grain security, then there
should be a common interest in seeing the development and release of new higher yielding feed
grain varieties. It would seem that unless both ends of the supply chain are supportive of this
outcome, then there will only be slow progress to this end. In the eastern states, with increasing
feed grain demand, it would seem to be an opportune time for the supply chain to more actively co-
operate in this market development.

5. Milling Grain Varieties – having dedicated feed grain varieties would seem from an animal feed
industry perspective as a good thing. Realistically, wheat breeding for milling and barley breeding for
malt production is likely to remain the primary objectives for the Australian grains industry. The


 119       Benefit to Australian Grain Growers in the Feed Grain Market
increasing volume of milling wheat and malting barley which is being used for pig, poultry and cattle
feeding has in recent years shifted some of the planning within cereal breeding programs. In
particular, there is opportunity to screen existing cereal grain genetic lines looking at available
energy content. This process utilising PGLP NIR calibrations allows the cereal breeder to at least take
into account what is available and eliminate any genetic lines which have obvious low energy
characteristics.

For the feed grain users, the most beneficial feature of milling grain breeding programs is a focus on
increasing grain yield. This emphasis increases grain grower viability and increases grain supply
security. Due to the high proportion of milling wheat and barley grown, this one R&D focus area is
likely to be more beneficial to the feed grain supply chain than work in development of dedicated
feed grain varieties.

6. Unique Quality Trait Characteristics – biotechnology has longer term potential to result in cereal
grains carrying unique quality trait characteristics, which could add greater value to the grain in
specific applications. Whilst many new and novel traits may be possible in the future, the greatest
value for such traits may be within human consumption of cereal grains rather than within animal
feeding. What is of importance is that biotechnology used to produce novel traits, for specific
markets, does not result in unintended consequences for the animal feed end users. For example,
work being undertaken looking at increasing fibre levels of some grains for human health benefits
may be counter productive for animal feeding, should such grains be diverted to animal feeding.
There needs to be consideration of where such unique characteristics fit into the supply chain and
what negative outcomes could result from their development.

This, however, should not limit future work in development of new cereal grain traits which may
offer benefits to the animal industries. Potentials include modification of the amino acids profile of
grains, inclusion of higher levels of selected fatty acids such as omega 3, reduced fibre content,
altered protein starch matrix to change rate of digestion and release of nutrients, provision of
reduced phytate levels or enhancement of vitamin content of grains.

The livestock industries do not currently see these unique characteristics as a high priority.
Nutritionists have capacity to formulate feeds using a wide range of raw materials to deliver the
intended feed nutrient specification. This is very different to many food products which are reliant
upon the single grain being processed.

7. There is a strong leaning for the grains industry to work with the livestock R&D groups to
partnership in project work. While the PGLP project could have been better managed to define
commercial industry outcomes, it has demonstrated that across industry projects can be completed.
These R&D partnership projects need to gain commitment from the highest level within each R&D
entity and need to capture more commercial outcomes.




 120      Benefit to Australian Grain Growers in the Feed Grain Market
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