road and rail systems currently under ... -...

Australia’s wheat supply chainsInfrastructure issues and implicationsNga Nguyen, Richard Green, Kenton Lawson and Tim Goesch

Research by the Australian Bureau of Agriculturaland Resource Economics and Sciences

Research Report No. 15.1March 2015

© Commonwealth of Australia 2015

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Nguyen, N, Green, R, Lawson, K and Goesch, T, 2015, Australia's wheat supply chains: infrastructure issues and implication, ABARES Research report no. 15.1, Canberra, March. CC BY 3.0.

ISSN 1447-8358ISBN 978-1-74323-222-4ABARES project 43434

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Australia's wheat supply chains: infrastructure issues and implications is available at daff.gov.au/abares/publications.

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The Australian Government acting through the Department of Agriculture, represented by the Australian Bureau of Agricultural and Resource Economics and Sciences, has exercised due care and skill in preparing and compiling the information and data in this publication. Notwithstanding, the Department of Agriculture, ABARES, its employees and advisers disclaim all liability, including for negligence and for any loss, damage, injury, expense or cost incurred by any person as a result of accessing, using or relying upon information or data in this publication to the maximum extent permitted by law.

Cover image

Third from top: GrainCorp Carrington Terminal and Newcastle Agri-Terminal in April 2014.

Acknowledgements

The authors thank ABARES colleague Bill Binks for research assistance in summarising the consultation notes. The authors appreciate the helpful comments on the report from ABARES Assistant Secretary Peter Gooday and Executive Director Karen Schneider. Comments and assistance from Des Naughton, Tom Parnell, and Roxy Auld and others in the Agricultural Policy Division of the Australian Department of Agriculture, as well as ABARES colleague Chris Price were greatly appreciated. The authors thank stakeholders in Canberra, Sydney and Perth for the information on the two wheat supply chain case studies in this report.

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Australia’s wheat supply chains: Infrastructure issues and implications

ContentsSummary 1

1 Introduction 4

2 Background 5

Australia’s wheat supply chain 7

Wheat producing farms 7

Domestic wheat consumption 11

Bulk handlers 11

Export destinations 14

Infrastructure 15

Opportunities to expand production and exports 16

Choice of case studies 19

3 Wheat supply chain and supporting infrastructure in Western Australia 20

Western Australian wheat industry 20


Bulk handlers 23


Infrastructure 28

4 Wheat supply chain and supporting infrastructure in New South Wales 34

New South Wales wheat industry 34


Domestic markets 39

Bulk handlers 41


Infrastructure 47

5 Estimates of supply chain costs 54

Transport and handling costs in Australia 54

Shipping costs 59

Examples of breakdown of post farmgate costs 60

On-farm costs of production 63

6 Freight movement simulation and implications 64

Simulation 64

Pricing, funding and investment 66

7 Conclusion 70

Appendix A: Road maintenance costs and pricing 73

Costs of road maintenance 73

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Road pricing 74

Appendix B: Freight movement simulation—Scenarios and results 76

Methodology and data 76

Scenarios 78

Results and Implications 82

Policy implications 95

Future work 96

Appendix C: List of stakeholders consulted 97

References 98

TablesTable 1 Major bulk handlers 12

Table 2 AEGIC (2014) breakdown of post farmgate costs, by State, 2013 – 201460

Table 3 Goucher (2011) breakdown of transport costs – 200 tonnes of wheat from Western Australia to Alexandria, Egypt 61

Table 4 Goucher (2011) breakdown of transport costs – 200 tonnes of wheat from New South Wales to Yokohama, Japan 62

Table 5 Freight volume change by mode, by percentage and tonne-kilometres65

Table B1 Scenarios 78

Table B2 Freight volume results by mode, for production scenarios 83

Table B3 Percentage of Local Government Areas with changes in road usage, for production scenarios 83

Table B4 Freight volume results by mode, for infrastructure scenarios 87

Table B5 Percentage of Local Government Areas with changes in wheat road freight, for infrastructure scenarios 92

FiguresFigure 1 Total area cropped to wheat and number of farms producing wheat 5

Figure 2 Australia wheat production and exports 5

Figure 3 Generic wheat supply chain 7

Figure 4 Wheat industry indicators by state, 2012−13 8

Figure 5 Characteristics of wheat producing farms by state, 2012−13 8

Figure 6 Specialisation in wheat, 2012−13 8

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Figure 7 Rate of return on capital on wheat producing farms, 2002−03 to 2012−139

Figure 8 Storage options by state, 2009−10 10

Figure 9 Proportion of farmers storing grain on farm by storage option, by GRDC region 10

Figure 10 Domestic uses of Australian wheat, 2002−03 to 2011−12 11

Figure 11 Wheat exports by state, 2012−13 13

Figure 12 Proportion of wheat as grain exports in non-bulk form 14

Figure 13 Major destinations for Australian wheat, 2012−13 14

Figure 14 Transport by state 15

Figure 15 Western Australian wheat production and exports 20

Figure 16 Western Australia's grain supply chain 21

Figure 17 Aggregate and farm level wheat production in Western Australia, 2002−03 to 2012−13 22

Figure 18 Western Australian wheat farm cash receipts and cash incomes, 2002−03 to 2012−13 23

Figure 19 Western Australian grain ports, in thousand tonnes25

Figure 20 Major destinations for Western Australian wheat, 2012–2013 27

Figure 21 Shipping time from Kwinana in days 27

Figure 22 New South Wales wheat production and exports, 2002−03 to 2012−1334

Figure 23 New South Wales wheat production and yield, 2002–03 to 2012–1335

Figure 24 New South Wales wheat exports and stock feed prices, 2002−03 to 2012−13 36

Figure 25 New South Wales grain supply chain 37

Figure 26 Aggregate and farm level wheat production in New South Wales, 2002−03 to 2012−13 37

Figure 27 New South Wales wheat cash receipts and cash incomes, 2002−03 to 2012−13 38

Figure 28 New South Wales and Australian animal feed use, thousand tonnes, 2011−12 40

Figure 29 New South Wales receival sites over time, and by handler 43

Figure 30 New South Wales grain export ports, thousand tonnes 44

Figure 31 New South Wales grain export volume, in bulk and containers, 2002−03 to 2012−13 45

Figure 32 Major export destinations for New South Wales wheat, 2012–13 46

Figure 33 Shipping times from Port Kembla in days 47

Figure 34 Prices and distances for CBH receival sites, by port zone 56

Figure 35 CBH's freight rates for road and rail sites 57

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Figure 36 Rail freight for GrainCorp receival sites to New South Wales bulk ports58

Figure 37 GrainCorp rail sites and road formula 58

Figure 38 Cash costs of producing grain per tonne, by region, 2010−11 to 2012−1363

Figure A1 BITRE road construction and maintenance price index and ABS producer price index 74

Figure B1 Western Australia's wheat production levels in scenarios 79

MapsMap 1 Australia's wheat production areas 6

Map 2 Western Australian wheat production 2011–12, by statistical local area21

Map 3 CBH receival site and rail network, and new third party loaders 24

Map 4 Rail lines in Western Australia 29

Map 5 DAFWA wheat projected increases in production to 2035, high estimate31

Map 6 New South Wales grain production and consumption, by statistical local area35

Map 7 GrainCorp grain storage in New South Wales 42

Map 8 New South Wales Country Regional Network 49

Map 9 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario, without Tier 3 (DPPL−no−Tier3)

65

Map B1 Wheat intensity by Local Government Area in the baseline scenario 79

Map B2 Wheat intensity by Local Government Area in the maximum production level scenario 80

Map B3 Wheat intensity by Local Government Area in DAFWA projected production level scenario 81

Map B4 Wheat road freight by Local Government Areas in the baseline scenario84

Map B5 Increase in wheat road freight, by Local Government Areas for the maximum production level scenario (MPL)85

Map B6 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario (DPPL) 86

Map B7 Freight volumes on rail and road for the baseline scenario with Tier 388

Map B8 Freight volumes on rail and road for the baseline scenario without Tier 389

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Map B9 Freight volumes on rail and road for the maximum production level without Tier 3 90

Map B10 Freight volumes on rail and road for the DAFWA projected production level without Tier 391

Map B11 Increase in wheat road freight, by Local Government Area for the baseline scenario without Tier 3 (APL−no−Tier3) 92

Map B12 Increase in wheat road freight, by Local Government Area for the maximum production level scenario without Tier 3 (MPL−no−Tier3)

93

Map B13 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario, without Tier 3 (DPPL−no−Tier3)

94

Map B14 Population density in Western Australia, 2011 95

BoxesBox 1 Australian wheat export regulation 12

Box 2 Domestic and trade policies for wheat in Asia 18

Box 3 Bruce Rock Shire Council 32

Box 4 GrainCorp 42

Box 5 Classification within the CRN 49

Box 6 Condition and cost recovery on branch lines 50

Box 7 Allowable mass limits on New South Wales roads 51

Box 8 Prior studies on wheat supply chain costs 54

Box 9 Australian Agricultural and Grazing Industries Survey data 55

Box 10 New heavy vehicle price determination 67

Box 11 COAG Road Reform Plan and Heavy Vehicle Charging and Investment Reform 68

Box 12 Options considered by the COAG Road Reform Plan feasibility study 69

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SummaryIncreasing populations and incomes in Asia are expected to lead to increases in world food demand over the medium term. While Australia is already a major food exporter to Asia, the extent to which Australian producers can take advantage of emerging opportunities will be influenced in part by the efficiency of the supply chains used to deliver their products.

Previous ABARES analysis has identified wheat as one commodity where Australian producers may benefit from increases in demand (Linehan et al. 2012). This study provides a detailed analysis of the supply chains in Australia’s two largest wheat producing states, Western Australia and New South Wales. The study’s focus is on:

providing a snapshot of the existing wheat supply chains in these states, including estimates of supply chain costs

identifying current infrastructure impediments affecting the movement of wheat from farm to port

illustrating the potential impacts of increasing wheat production and rationalising the rail network on the shares of wheat transported by road and rail and the spatial pattern of road and rail use.

The study involved consultation with industry representatives and government agencies.

While there are differences in wheat supply chains in the eastern and western states, the main impediments to moving wheat from farm to port are similar, and relate mainly to transport. However, stakeholders in consultations also identified other aspects of the supply chain as potentially important. Some stakeholders identified a lack of mobile phone coverage as a problem that could potentially restrict grain marketing activities during harvest, a period when most farmers are in the field. Others identified the allocation of access to grain loading facilities at ports. In relation to this issue, in June 2014, the Australian Government sought views from stakeholders on the regulation of port access for bulk wheat exports. One of the purposes of the consultation process was to ‘identify potential changes that could improve the fair and transparent provision of access to port terminal services for bulk wheat exporters’ (Department of Agriculture 2014a). A new mandatory port access code was developed and released on 19 September 2014, and commenced on 30 September 2014. The code commenced on 30 September 2014, however, it contains transitional provisions, which delay its application for up to 12 months, to allow industry adjustment to the new regulations and ensure port services are not disrupted during implementation (Department of Agriculture 2014b, 2014c).

Road and rail systems currently under pressureThe most significant impediments to the efficient movement of wheat in the wheat supply chain appear to be in transport, and the costs of these impediments are likely to increase as production increases. Engineers Australia (2010) indicates that much of Australia’s road and rail networks are in poor condition, especially some local road and rail networks. The deterioration in condition of parts of the rail network has led to the imposition of speed and weight restrictions on some branch lines, and the closure of other lines.

It is likely that competitive pressures that have led to the rationalisation of branch lines, that currently carry low volumes and are largely dedicated to grain, will continue. This would put more pressure on the road network, already assessed as in poor condition. Any increase in wheat production would be likely to place additional pressure on road networks.

1


Pressure on road network likely to increaseSimulations undertaken by ABARES using a wheat freight movement model suggest that road use could increase significantly in the future because of increasing wheat production, and that the rationalisation of rail branch lines mainly dedicated to wheat could put considerable additional stress on the road network.

One scenario modelled by ABARES is based on projections by the Western Australian Department of Agriculture and Food (DAFWA) that indicates wheat production in Western Australia could increase by 63 per cent by 2035 (DAFWA 2009). These projections factor in expected increases in wheat yields driven by improved genetics, as well as the effects of climate change on rainfall, temperature, evaporation and the incidence of frost. They also take into account soil types and changes in land use, such as a shift away from livestock to cropping and an increase in tree plantations in response to greenhouse gas emission mitigation policies (DAFWA pers. comm. 2014, DAFWA 2009).

The model results indicate that a 63 per cent increase in wheat production in Western Australia could lead to wheat road freight increasing by around 80 per cent and wheat rail freight by around 40 per cent, and to a doubling in road freight if this increase was accompanied by the closure of Tier 3 rail lines (minor lines largely dedicated to wheat). The modelling results also show that road transport increases significantly in regions where there are few rail branch lines, including in regions around Esperance and Geraldton, as well as on roads in regions that rely heavily on Tier 3 lines, such as those surrounding Albany.

These results highlight the importance of taking an integrated approach to planning and investing in different modes of transport, with decisions on investments in the rail network affecting road use. According to the National Transport Commission, there is limited integration in planning and investment across transport modes in the grain supply chain despite the interdependencies between road and rail investment and investments in land transport and ports. The modelling exercise undertaken in this study is an example of the type of analysis that could be used to guide where future investments in the road network may be needed. The results also highlight that much of the anticipated increase in road use will occur on local roads that are largely dedicated to servicing grain farmers. These farms are often located in areas that have a low population density, which has implications for the funding of road maintenance as the rates base of local councils is often narrow and, in some cases, declining.

Inefficient pricing and investmentThe provision and maintenance of transport infrastructure is problematic because the pricing regimes currently applied to road and rail infrastructure do not reflect the true costs of provision, potentially distorting funding and investments within and across road and rail infrastructure.

Currently, some rail services used to transport wheat are heavily subsidised, and cost recovery on some roads is low. Commercial pressures to increase cost recovery on rail lines since deregulation of the rail sector have been constrained by the price of road transport. This has in turn limited investment in the rail sector, and contributed to some rationalisation of the rail network.

The current road charging and funding allocation system used in Australia is unlikely to be very responsive to increases in the volume of wheat transported by road. That is, the current system will not necessarily result in funds being allocated in a way that adequately reflects potential increases in maintenance costs on these roads.

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The first step to addressing this inefficiency is to collect data on road use, road condition and the cost of maintaining or upgrading roads so that road funding can be allocated in a way that more accurately reflects where use and damage occurs. It would also aid the introduction of a user pays system similar to the mass-distance-location pricing model recommended by the Productivity Commission, the National Transport Commission and more recently, by the National Commission of Audit and the National Competition Policy Review (PC 2014; NTC 2009a; NCA 2014; CPR 2014).

User pays an option but needs further investigationA user pays system that appropriately charges for the use of road infrastructure, accompanied by a funding system that returns funds to where damage occurs, is theoretically the most efficient road pricing system. However, a number of issues will affect the feasibility and practicality of introducing such a system. For example, there will be distributional effects (winners and losers) in moving from the current road charging/funding allocation model. Additional research is needed to identify the extent of any gains and losses for different users as this will influence the acceptability of such a scheme to industry and the wider community.

It would also be useful to demonstrate how a user pays system could increase productivity by directing investment to where damage occurs and to relieve constraints on roads that currently restrict access to higher productivity vehicles. While some users would pay more under a user pays system, they could also receive significant benefits, including better quality roads that reduce travel times and damage to trucks, as well as increased access to the road network for higher productivity vehicles. Increased access could stimulate investments in higher productivity vehicles, which could reduce the unit costs of road freight over the long term.

Other researchIdentifying the impact of any further rationalisation of the network of receival sites used by bulk handlers is also potentially important. GrainCorp currently has around 180 receival sites in New South Wales, but is planning to operate only 96 sites in 2015−16. Continued rationalisation will increase road transport costs for some farmers as they are forced to transport wheat further. However, the increased utilisation of larger more efficient receival sites could result in lower bulk handling costs and lower charges for rail transport. The net impact on users will vary depending on where they are located, with farmers forced to transport wheat further by road facing higher road transport costs than in the absence of closures, while users located closer to larger receival sites would benefit most from more efficient facilities.

It may also be worthwhile considering how a change in the composition of Asian food demand could affect Australian supply chains. According to ABARES, rising incomes in Asia have shifted food consumption patterns away from traditional diets of starchy staples to more varied diets with higher protein foods such as meat and milk (ABARES 2013). This trend is projected to continue. The increase in demand for higher protein foods could in turn divert some wheat from the export market to the domestic feed grain market as Australian producers increase production of beef (using feedlots) and dairy products. This would have implications for the wheat, beef and dairy supply chains, and the mode and pattern of transport.

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1 IntroductionIn 2009, the Food and Agriculture Organization (FAO) of the United Nations released a discussion paper indicating that world food production would need to increase by around 70 per cent by 2050 largely as a result of population growth (FAO 2009). Asian countries are expected to be the main source of this increase in demand.

In 2013, ABARES released a scoping study that investigated the potential to increase production and exports of key Australian agricultural commodities (wheat, beef, sheep meat, dairy and sugar), and identified a number of factors that could constrain this growth, including economic infrastructure (Nguyen et al. 2013). Previous research by ABARES has identified wheat as one commodity where Australian producers may benefit from a significant increase in global demand (Linehan et al. 2012). This study further investigates Australia’s wheat supply chains using case studies in New South Wales and Western Australia.

Wheat is a major Australian grain crop and export commodity. In 2012−13, Australia exported $6.3 billion of wheat. Australia’s proximity to Asia suggests that it is well placed to take advantage of any increase in demand for wheat in this region. There have been significant productivity gains in the Australian wheat supply chain, with off-farm supply chain costs falling by around a third since the 1980s (AEGIC 2014a). However, the increasing competitiveness of some exporters, particularly those in the Black Sea region and South America, means that Australia will need to address any inefficiencies within its supply chain if it is to take full advantage of these opportunities.

This study provides a detailed analysis of the supply chains in Western Australia and New South Wales, with a focus on:

providing an overview of the existing wheat supply chains in these states, including estimates of supply chain costs

identifying current infrastructure impediments affecting the movement of wheat from farm to port

illustrating the potential impacts of increasing wheat production and rationalising the rail network on the shares of wheat transported by road and rail and the spatial pattern of road and rail use.

The report begins with some background on the Australian wheat industry, its generic supply chain and a description of the main supporting infrastructure (Chapter 2). This is followed by the Western Australia case study (Chapter 3), which shows Western Australia to be heavily focused on the export market. In contrast, the New South Wales supply chain is more focused on the domestic market (Chapter 4). Chapter 5 contains some estimates of supply chain costs in Western Australia and New South Wales, while the potential effect of increasing wheat production and constraining investment in rail infrastructure is illustrated in Chapter 6. The implications of different infrastructure pricing and funding allocation models are also discussed in Chapter 6. Chapter 7 provides some concluding comments and identifies some areas for future research.

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2 BackgroundWheat is the largest grain crop by volume and value in all states, with only Tasmania’s barley crop rivalling its relatively small wheat crop (ABARES 2014). Wheat has been grown in Australia for more than 200 years, with production increasing to around 1 million tonnes by Federation and 5 million tonnes by 1960 (ABS 2012). A major catalyst for this increase was the introduction of new wheat varieties that facilitated expansion into new areas, particularly in Western Australia. Since 1960, increases in production have mainly come from improvements in plant genetics, advances in farm technologies, consolidation of businesses into larger more efficient farms (Sheng et al. 2011; Nossal et al. 2009) and an increase in the area cropped (see Figure 1).

Figure 1 Total area cropped to wheat and number of farms producing wheat

area

farms

0

10

20

0

8

16

Num

ber o

f whe

at p

rodu

cing

farm

s(t

hous

nads

)

Area

und

er w

heat

culti

vatio

n(m

illio

n he

ctar

es)

Note: Farms in this category also produce crops other than wheat and may run livestock. Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABARES AAGIS 2014

Exceptional conditions in 2011−12 resulted in production peaking at nearly 30 million tonnes, following a decade where yields were heavily affected by drought (2002−03, 2006−07 and 2007−08) (Figure 2). In 2012–13, this fell to 22 million tonnes, compared with an average production of around 21 million tonnes over the period between 2002−03 and 2012−13.

Figure 2 Australia wheat production and exports

0

15

30

mill

ion

tonn

es

ExportsProduction

a

Note: p ABARES projections. a Marketing year from 1 October to 30 September.Sources: Nguyen et al. 2013, ABS Agricultural Commodities, Australia cat no. 7121.0, ABS International Trade, Australia, cat. no. 5465.0, ABS Principal Agricultural Commodities, Australia, Preliminary, cat. no. 7111.0; ABS Agriculture, Australia, cat. no. 7113.0

The Grains Research and Development Council (GRDC) defines three broad wheat producing areas (Map 1). These differ by seasonal rainfall, weather patterns and soil (Valle et al. 2013).

5


Map 1 Australia's wheat production areas

Source: Derived from Valle et al. 2013

The Northern region covers northern New South Wales and southern Queensland. This region is characterised by a tropical and subtropical climate, high inherent soil fertility, diversified crop choice and high potential yields. Yields in the region depend largely on the conservation of soil moisture from summer rainfall.

The Southern region covers the remaining areas of New South Wales, Victoria and South Australia, and is characterised by a temperate climate, relatively low soil fertility and diverse production patterns. Yields in the region depend largely on reliable spring rainfall.

The Western region covers the south west of Western Australia, and is characterised by low soil fertility and a relatively small range of crop growing operations. Yields in this region depend on good winter rains because spring rainfall tends to be unreliable.

The large size of these regions means there is significant variation within each region.

Some regions are more likely to produce certain wheat varieties than others. For example, farmers in northern New South Wales and southern Queensland can produce Australian Prime Hard Wheat. This wheat has guaranteed minimum protein levels of 13 and 14 per cent, has exceptional milling quality, and is used to produce high protein, high volume breads and alkaline noodles such as ramen (AWB 2013). There are also specialist noodle wheats grown in some regions, with wheat for alkaline noodles grown in northern New South Wales and southern Queensland and wheat for white noodles grown in Western Australia. Other more standard varieties include Australian Standard White (ASW) and Australian Premium White (APW). APW is used to produce noodles, Middle Eastern and Indian style breads and Chinese steamed bread,

6


while ASW is used to produce Middle Eastern, Indian and Iranian style flat breads, European style breads and rolls and Chinese steamed bread (AWB 2013).

Australia’s wheat industry is highly dependent on the export market. In 2012−13 marketing year, Australia exported 18.7 million tonnes of wheat, or around 85 per cent of the volume of wheat produced that year (Figure 2). There are, however, significant differences in market orientation between states. For example, growers in the eastern states tend to have more options than growers in the west, where the export market dominates. A significant proportion of wheat in eastern Australia is consumed in the domestic market, with most of this wheat being used for human consumption or as a feed grain for domestic livestock.

Australia’s wheat supply chainThe Australian wheat supply chain is illustrated Figure 3. The farm is the first stage in the supply chain, with other major supply nodes including up-country receival sites, ports as well as domestic and international markets. The supply chain uses a range of infrastructure, including transport, energy, water and telecommunications. While the focus of this report is the wheat industry, other grains industries use a similar supply chain to transport grains from farm to port for exports and to domestic markets.

Figure 3 Generic wheat supply chain

Source: Nguyen et al. 2013

Wheat producing farmsABARES farm surveys information indicates that around 9 360 farms produced wheat in Australia in 2012−13 (ABARES AAGIS 2014). The two largest wheat producing states were Western Australia and New South Wales (Figure 4). South Australia and Victoria also produced significant volumes, while Queensland and Tasmania were relatively small producers.

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Figure 4 Wheat industry indicators by state, 2012−13

0

20

40Total wheat produced

(million tonnes)

0

4

8Estimated value of

production ($billion)

0

4

8

12

16 Area under cultivation (million hectares)

Source: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS Historical Selected Agriculture Commodities, by State (1861 to Present), cat. no. 7124.0; ABS Value of Australian Commodities Produced, Australia, cat. no. 7503.0

In Australia, wheat is usually produced on mixed farms that also produce other grains or livestock products. While wheat tends to be a major source of income on many of these farms—in 2011−12 wheat accounted for more than a third of all the cash receipts received by wheat producing farms (Valle et al. 2013)— there are differences in the scale and intensity of wheat farming activities across Australia. For example, there are fewer but larger farms in Western Australia producing relatively large volume of wheat. Figure 5 shows that the average wheat producing farm in Western Australia plants significantly larger area of wheat than those in other states.

Figure 5 Characteristics of wheat producing farms by state, 2012−13

0

5

10Estimated no. of farms

(thousands)

0

2

4

6Average farm cash income

($ hundred thousand)

0

1

2

3 Average area sown to wheat (thousand hectares)

Note: Farms may produce wheat alongside other crops and livestock. Includes farms sowing less than 40 hectares to wheat. Figures for Australia also include Tasmania. Cash income is in 2013–14 dollars.Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS Historical Selected Agriculture Commodities, by State (1861 to Present), cat. no. 7124.0, ABARES AAGIS 2014

Figure 6 Specialisation in wheat, 2012−13

0

50

100 Proportion of area allocated to wheat production

(per cent)

0

50

100 Proportion of farm receipts from wheat sales(per cent)

8


Note: Includes farms sowing less than 40 hectares to wheat.Source: ABARES AAGIS 2014

Western Australian wheat producing farms also tend to be more specialised in wheat production (Figure 6), while farms in the eastern states tend to be smaller and more diverse (Valle et al. 2013).

There are also differences in farm performance between states, with wheat producing farms in Western Australia and South Australia earning higher average farm cash incomes (cash receipts less cash costs) in 2012−13 than other states. They also earned higher rates of return on capital invested than farms in the eastern states between 2002−03 and 2012−13 (Figure 7).

Figure 7 Rate of return on capital on wheat producing farms, 2002−03 to 2012−13

1.5%

- 4

%

4

8

12 New South Wales

2.3%

- 4

%

4

8

12

2002–03

2004–05

2006–07

2008–09

2010–11

2012–13South Australia

2.0%

- 4

%

4

8

12 Victoria

3.1%

- 4

%

4

8

12

2002–03

2004–05

2006–07

2008–09

2010–11

2012–13

Western Australia

2.3%

- 4

%

4

8

12 Queensland

2.1%

- 4

%

4

8

12

2002–03

2004–05

2006–07

2008–09

2010–11

2012–13

Australia

Note: The rate of return on capital is calculated for farms devoting more than 40 hectares to wheat. The rate of return does not include capital accumulation. State rate of return averages between 2002−03 and 2012−13 are shown in dotted lines.Source: ABARES AAGIS 2014

On-farm storageAfter wheat has been harvested, farmers can sell it directly to domestic markets (human consumption, feedlots and the biofuels industry), deliver it to the bulk handling network or store it on-farm in anticipation of a future sale or for future delivery. In some cases, it is delivered directly to port for export.

At the end of the 2009−10 financial year, ABS estimated that Australian growers had the capacity to store more than 14 million tonnes of wheat on farm (Figure 8), around two thirds of average production for the decade to 2012−13.

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Figure 8 Storage options by state, 2009−10

0

10

20 On farm storage capacity(million tonnes)

0

250

500

750 Number of up-country receival sites

Note: Storage capacity estimated as of 30 June 2010.Sources: ABS 2010, Productivity Commission 2010

Figure 4 and Figure 8 show that total on-farm storage capacity does not appear to be correlated with the level of production in a state. For example, on-farm storage capacity in Western Australia is relatively small compared with other states. There are a number of possible reasons for this.

A greater proportion of grain produced in the eastern states is destined for domestic feedlots and mills. This wheat tends to be stored on-farm before being trucked directly to consumers.

There are more marketing options available in the eastern states (domestic markets, export markets, multiple export agents, bulk and non-bulk exports), and storing wheat on farm gives farmers greater flexibility to explore these options (AEGIC 2014b; DAFF 2012).

Off-farm storage provided by Co-operative Bulk Handling Limited (CBH) in Western Australia is more cost effective and of better quality than elsewhere in Australia. This was a view expressed by stakeholders in ABARES' stakeholder consultation process. In addition, charges for the use of CBH storage facilities are incorporated into other charges, meaning farmers do not face additional storage costs for the first year should they decide to use CBH's transport services.

According to a recent survey by the GRDC (2013a), the average on-farm storage capacity of surveyed farms in 2013 was around 1 600 tonnes. In addition, 81 per cent of the farms surveyed stored grain on-farm. Of these farms, 87 per cent stored grain in unsealed silos, 59 per cent in gas-tight sealable silos, 32 per cent in bulk grain sheds, 13 per cent in sausage bags and 7 per cent in bunkers (Figure 9).

Figure 9 Proportion of farmers storing grain on farm by storage option, by GRDC region

87% 88% 81% 87%

51% 56%

82%

59%

31% 31% 36% 32%12% 15% 7% 13%8% 6% 7% 7%

Northern Southern Western Australia

unsealed silos gas-tight sealable silos bulk grain shed sausage bags bunkers

Source: GRDC 2013a

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Domestic wheat consumptionIf farmers choose not to store wheat on farm, they can sell it directly to domestic consumers or to grain traders who utilise the bulk handling system. Grain traders can in turn sell wheat to domestic or international customers. The domestic market is more important for producers on the east coast. Domestic demand in Australia mainly consists of milling wheat for livestock, human consumption and industrial uses.

Figure 10 shows a breakup of the volumes of wheat used for domestic purposes between 2002−03 and 2011−12. Volumes used for seed and flour were quite stable over this period, whereas 'other' uses, including stock feed, varied greatly. The demand for stockfeed will vary depending on a number of factors, including seasonal conditions and feed grain prices.

Figure 10 Domestic uses of Australian wheat, 2002−03 to 2011−12

total a

flour

feed b

seed

0

2

4

6

8

mill

ion

tonn

es

Note: a October–September year. b In principle, calculated as a residual: production plus imports less exports less any reduction in stocks and less seed and flour use.Source: ABARES 2012

Bulk handlersFarmers can deliver wheat to an up-country receival site owned by a bulk handling company if they choose not to sell directly to domestic consumers. The bulk handling network consists of up-country receival sites located near wheat farmers that are connected by rail or road to domestic users and bulk export facilities (PC 2010). Major bulk handlers operate integrated networks of up-country receival sites as well as their own port facilities. Services at these sites include storage, pest control and the separation of wheat into various grades. Collectively these are referred to as up-country services. The number of receival sites operated by bulk handlers is roughly proportional to the volume of grain produced in a state (Figure 4 and Figure 8). There has, however, been some rationalisation towards fewer, more efficient sites in recent years, and this trend is likely to continue (PC 2010).

The largest five bulk handlers in Australia (Table 1) tend to be the successors of state owned handling monopolies. GrainCorp on the east coast is one such entity. An exception is CBH in Western Australia, which is a farmer owned cooperative. AWB GrainFlow is the successor of the former export marketing monopoly (Box 1). Some of these firms have expanded beyond their original state borders. For example, GrainCorp has expanded beyond New South Wales into

11


Queensland and Victoria, while CBH has invested in the Newcastle Agri-Terminal in New South Wales. There have also been some new entrants into the industry. The largest bulk handlers also own the majority of bulk loading capacity at ports in Australia.

Bulk handling services are distinguished from grain marketing services, which involve buying and selling grain. Marketers buy grain from farmers to sell to domestic or overseas customers. While some bulk handlers may operate marketing services as another branch of their business, other marketers pay bulk handlers for use of their facilities, including storage and port facilities.

Table 1 Major bulk handlers

Name States served by receival network

Co-operative Bulk Handling (CBH) Western Australia

Emerald Logistics New South Wales, Victoria

GrainCorp New South Wales, Queensland, Victoria

Viterra South Australia, Victoria

AWB GrainFlow South Australia, Victoria, New South Wales, Queensland

Note: Smaller new entrants are not included. Handlers may have interests in facilities in states where they do not operate a network. Sources: Department of Agriculture 2014b, PC 2010

Box 1 Australian wheat export regulation

Wheat exports were highly regulated until the mid 2000s. Wheat exports were marketed under a 'single desk' arrangement whereby farmers were required to sell grain to the Australian Wheat Board (AWB) and its privatised successor AWB Ltd. Non-bulk exports were subject to an AWB veto if they competed with the single desk arrangements.

The single desk marketing arrangement ended in 2006. AWB's right to veto non-bulk exports was removed in 2007. After a period where exporters were licensed under the now defunct Wheat Exports Australia, producers are now able to sell wheat to any one of a growing number of traders.

Because the major bulk handling companies offer integrated up-country receival, transport and grain loading services at ports, bulk handlers could potentially prevent other exporters from using their loaders unless the wheat has been through their up-country system. As such, bulk loaders were subject to an access test administered by the Australian Competition and Consumer Commission (ACCC) to prevent operators from abusing regional monopoly power and to ensure fair and transparent access for other exporters.

Operators agreed to 'access undertakings' with the ACCC. These access undertakings differed from operator to operator. In particular, bulk handlers in Western Australia have auction systems and those in New South Wales maintain ‘first come, first served’ and long-term agreement systems. These are discussed in detail in the case studies.

Individually assessed access tests ceased in September 2014 when a mandatory code of conduct to protect third party access was adopted. The Minister for Agriculture released a mandatory code of conduct on 19 September 2014 (Department of Agriculture 2014a, 2014b, 2014c) to govern allocation systems of all loaders. The code commenced on 30 September 2014, however, it contains transitional provisions, which delay its application for up to 12 months, to allow industry adjustment to the new regulations and ensure port services are not disrupted during implementation (Department of Agriculture 2014b, 2014c).

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Export facilitiesThe Australian wheat industry is highly export orientated, exporting around 85 per cent of total wheat production in 2012−13. Where wheat is exported, it is most likely to be exported using the bulk handling network. Figure 11 shows that bulk exports dominate in all states, although a significant proportion of exports from the eastern states are non-bulk.

Figure 11 Wheat exports by state, 2012−13

0

4

8

Wheat exported (million tonnes)

0

1

2

Value of exports($billion)

0

50

100

Exports in bulk form (per cent)

Note: Export figures reflect the state of export, not the state of production.Sources: Ports Australia 2013, ABS Wheat Stocks and Exports, Australia, cat. no. 7307.0, ABS International Trade, Australia, cat. no. 5465.0

Bulk export facilitiesBulk exporters use bulk loading facilities to transfer wheat directly into a ship's hold. These loaders are usually owned by the major bulk handling firms, although some smaller firms have recently begun building new facilities. The location of bulk export terminals is shown in Map 1. Many of these terminals are located in or near urban areas.

Non-bulk export facilitiesNon-bulk wheat exports are mainly exported in shipping containers, although in some cases they are exported in bags. Containerised exports require access to container terminals, which tend to be located in urban areas close to domestic import markets. Intermodal facilities are often used to transfer containers from road to rail in congested urban areas (booz&co. 2009).

The rise in the proportion of wheat exported in non-bulk form has been a relatively recent phenomenon (Figure 12). Non-bulk exports are more dominant in eastern states than in Western Australia and South Australia. There are several possible reasons for this. One possibility is the imbalance between containerised imports and exports. A significant proportion of containers used to import goods into the eastern states are exported empty—some 40 per cent nationally and 60 per cent at Port Botany in 2012−13 (Ports Australia 2013). This creates an incentive for logistics firms to offer competitive rates to exporters in Australia seeking access to containers. Some stakeholders consider that there is more incentive to bypass the bulk handling network and pursue alternative marketing options in New South Wales than in Western Australia.

There have also been significant regulatory changes in wheat export marketing arrangements in recent years that may have stimulated non-bulk exports (see Box 1). Prior to deregulation, AWB Ltd. had the right to veto any non-bulk exports. This market was deregulated in 2007, which coincided with a sharp spike in non-bulk exports. While this spike quickly subsided, the proportion of non-bulk exports is currently higher than before deregulation (Figure 12).

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Non-bulk exports are not just a substitute for bulk exports. In some cases, they are the only option for countries that do not have facilities to unload bulk wheat. In some other cases, they may be the only option for importers seeking access to highly specialised wheat varieties.

Figure 12 Proportion of wheat as grain exports in non-bulk form

100.0%

NSW

16.9%20.5% WA

1.0%

29.3%

Australia9.2%

0%

50%

100%

Note: Includes containers, bags and unspecified. In 2008, New South Wales did not bulk export any wheat, in part because of a drought affected harvest and strong domestic demand for feed. Source: ABS International Trade, Australia, cat. no. 5465.0

Export destinationsThe main destinations for Australian wheat exports include South East and North East Asia (Figure 13) where Australian exporters enjoy a shipping time advantage compared with some other major wheat exporting countries.

Exports to countries such as Japan, Republic of Korea and Malaysia are relatively stable whereas exports to other countries, including China, Thailand and Bangladesh, tend to be less stable. For example, exports to China fell from 1.9 million tonnes in 2004−2005 to 2 000 tonnes in 2007−2008 before returning to more than 1.2 million tonnes in 2012-13.

Figure 13 Major destinations for Australian wheat, 2012−13

4423

1771 1496 1292 1288 1235 1173 979 855 722

Imports of wheat as grain from Australia(thousand tonnes)

Source: ABS International Trade, Australia, cat. no. 5465.0.

Some destinations receive a relatively high proportion of wheat from Australia in containers. Unpublished ABS data show that containerised exports accounted for 30 per cent of exports to Vietnam, 23 per cent to Malaysia, 98 per cent to Myanmar and 100 per cent to Taiwan and Cambodia in 2012−13.

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InfrastructureThe Australian wheat supply chain uses a range of infrastructure. The transport and handling of wheat between farms and up-country receival sites to domestic users and ports are the longest and costliest legs of the supply chain within Australia.

TransportIn Australia, wheat is transported to domestic users or ports by rail or road. Farmers selling wheat directly to domestic consumers or to grain traders using the bulk handling network deliver this grain by road. Domestic consumers purchasing wheat from traders using the bulk handling system may be able to receive wheat from road or rail, depending on whether they are connected to the rail network. For example, grain purchased by feedlots is more likely to be delivered by road since most feedlots are not connected to the rail network, while some larger flour mills are connected to the rail network, allowing them to receive wheat by road or rail.

Most wheat in Australia is destined for export using the bulk handling system. Most of this wheat is transported by rail after being delivered to up-country receival sites by road. The share of wheat transported from receival site to port by rail increases when measured by tonne-kilometres (as opposed to volume) (Figure 14), suggesting that rail has an advantage over road on longer journeys (NTC 2009b).

While estimates are somewhat dated, Single Vision Grains (2007a) suggests that wheat grown in the eastern states (particularly in New South Wales and Queensland) is more likely to be transported to port by rail than in the western states (Figure 14).

Figure 14 Transport by state

0

50

100

Estimated share of rail by volume(per cent)

0

50

100

Estimated share of rail by tonne kilometres (per cent)

0

300

600Average distance freighted - export grains

(kilometres)

0

0.06

0.12

Estimated rail freight costs($ per tonne kilometre)

Sources: SVG 2007a, NTC 2009b

The National Transport Commission (2009a) attributes the lower share of rail in Western Australia to flatter topography and the ability of large vehicles to access some ports. Shorter distances between wheat growing regions and ports (Figure 14) are also likely to improve the competitiveness of road transport in Western Australia. During industry consultations, New

15


South Wales stakeholders noted that the Great Dividing Range made road transport less attractive than rail.

Another factor influencing the mode of transport used to transfer wheat has been the rationalisation of up-country receival sites and the rail branch line network. Competitive pressures in the bulk handling network since deregulation have led to the closure of some inefficient sites. This has resulted in an increase in road transport, at least as far as the next receival site. Increasing pressure to recover the costs of maintaining or upgrading the below-rail network has also led to the closure of some branch lines largely dedicated to grain, and an increase in road transport.

Other transport related issues include competition for rail access in areas where minerals use the same line, road congestion in and around ports, and access to ports by heavy vehicles. Many bulk loaders on the east coast, such as at Port Kembla and Newcastle, are surrounded by urban areas where congestion can occur and where the movement of large capacity vehicles is restricted (Roads & Maritime 2014).

Port access and capacity While the capacity of bulk grain loading facilities in Australia is significantly higher than annual exports (see Chapters 3 and 4), demand for access to these facilities is highly seasonal.

Stakeholders report that large grain traders use 'just-in-time' purchasing strategies. Rather than stockpiling wheat, grain traders have organised their systems to buy wheat primarily from regions that are harvesting at the time. This means their purchases of Australian wheat are almost entirely in the Australian summer. AEGIC (2014b) describes this as a 'marketing window' bottleneck.

This ‘marketing window’ bottleneck means that there can be excess demand for grain loading facilities during this period. The highly concentrated ownership of grain loading facilities at ports has resulted in the Australian Competition and Consumer Commission (ACCC) imposing regulations on owners designed to ensure third party access to these facilities (see Box 1). These access arrangements can have a significant impact on the efficiency of port operations. In consultations, the Australian Grain Export Association (AGEA) stated that imperfect access arrangements are the greatest single area of concern in the grain supply chain.

Stakeholders were generally of the view that converging freight on rail and road infrastructure coming into port created more pressing bottlenecks than the physical capacity of port facilities themselves. This was because of congestion and limited road access by heavy vehicles in urban areas. Stakeholders also noted that energy is essential for loading grain, but did not express concerns about the capacity of existing energy infrastructure.

Opportunities to expand production and exportsABARES' projections suggest that Australian wheat production could increase by around 40 per cent and exports by around 50 per cent by 2050 from average volumes produced and exported between 1993−94 and 2011−12 (Linehan et al. 2012, Nguyen et al. 2013).

Although this projected increase is substantial, it is lower than production has been in exceptional years. However, production in a good season is likely to be significantly higher than the average between 1993−94 and 2011−12.

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The projections imply that Australian wheat production would need to increase by 0.9 per cent a year between 2011 and 2050. This is lower than the average annual rate of growth in Australian production between 1993−94 and 2011−12 (1.5 per cent). The largest increases are likely to occur in regions that already produce the majority of Australian wheat (Linehan et al. 2012, Nguyen et al. 2013).

ABARES modelling also projects that the main source of growth in wheat imports in Asia will be from India. The real net value of Indian wheat imports is projected to be around US$1.5 billion in 2050 (ABARES 2013). India is not currently a major destination for Australian wheat (Figure 13). South East Asian markets are also projected to have strong import growth to 2050, while low population growth will lead to negligible increases in consumption in Japan and the Republic of Korea. Continuing trends in China towards more protein rich diets and away from traditional staples, such as wheat and rice, are expected to result in insignificant increases in grain consumption in this market.

Australia’s share of grain exports to the Middle East is being challenged by increased exports from countries in the Black Sea region (AFR 2014), which are closer to these markets.

Stakeholder views on Australia’s potential for expanded wheat productionThe general view of stakeholders interviewed for this project is that increases in Australian production are plausible, but contingent on several factors. The first factor is weather and climate in Australia, including increasing intensity and frequency of adverse weather events.

Another is whether global wheat prices will support an increase in wheat production. Stakeholders consider that Australia is likely to face strong competition from producers from the Black Sea region and from South America. GRDC, for example, considers that these producers are likely to have significant potential to increase efficiency, which could limit the extent of any increase in the price of wheat.

A third factor is whether Australian wheat producers can gain and maintain access to foreign markets, especially when some countries, such as China, are pursuing self-sufficiency policies in the production of wheat (see Box 2).

In the event of strong prices and favourable climate conditions, stakeholders generally consider there is scope for Australia to increase production in line with these projections. While Australian producers are close to production limits under current technologies, stakeholders identified a number of potential options to increase production, including:

technological progress, including increased automation of harvesting and spraying equipment

continued development of wheat varieties

potential expansion into marginal land

conversion of high rainfall grazing areas and land used for other crops to wheat production

continuing consolidation of farmland into larger and more technically efficient operations, perhaps bolstered by the transition to a younger generation of operators.

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Box 2 Domestic and trade policies for wheat in Asia

Asian countries operate a variety of domestic support and trade policies that influence wheat production and imports.

China — Recent Chinese wheat policies aim to secure domestic grains supply and reduce food price inflation. The Chinese Government has an evolving minimum price support policy for grains, replacing a direct payments system, and operates the State Grain Reserve Bureau. Minimum support prices for wheat have increased annually since their introduction in 2006.

Chinese imports of wheat are subject to a tariff quota of 9.6 million tonnes with an in-quota tariff of 1 per cent and an out-of-quota tariff of 65 per cent. Ninety per cent of the tariff quota volume is reserved for state-owned trading enterprises. Chinese wheat exports are subject to export quotas.

India —Indian Government grains policy aims to support farmers’ incomes, and increase national food security and food self-sufficiency. The government uses input subsidies and minimum support prices for producers (which began rising at an accelerated rate in 2005) and subsidised food prices for consumers.

The Indian Government’s wheat trade policy over the past decade has been ad hoc or in response to fluctuating market conditions. For example, a nominal wheat import tariff of 100 per cent can vary with inconsistent government responses to market conditions. Non-tariff measures are also ad hoc. For example, rising wheat prices and declining domestic stocks in 2006−07 led to a wheat export prohibition between February 2007 and September 2011.

Japan — Japanese government policy supports domestic wheat producers, but does not have clearly stated self sufficiency goals and as such Japan is expected to remain a net importer of wheat. The government subsidises wheat production on land traditionally used to produce rice. There is a combined tariff quota of 5.74 million tonnes for wheat, meslin, triticale and their processed products, with no in-quota tariff for wheat and an out-of-quota tariff of 55 yen per kilogram.

Japanese wheat imports are controlled by the Ministry of Agriculture, Forestry and Fisheries (MAFF) through the state trading system. Generally, MAFF purchases wheat on the international market and sells it to domestic flour millers at an inflated price set by MAFF. However, MAFF allows domestic flour millers to import wheat independently if they export an equivalent amount of wheat flour.

Republic of Korea — The Republic of Korea has an ambitious target of 57 000 hectares planted to milling wheat by 2015, compared with 5 000 hectares in 2009 and 13 000 hectares in 2011. Government support includes providing handling facilities and loan schemes to finance the buying of domestic milling wheat.

Trade agreements, including those with the United States, Canada and Australia, have or will eliminate tariffs on wheat imported from those countries.

Association of South East Asian Nations (ASEAN) — No ASEAN nation produces significant amounts of wheat, and there are no major domestic policies.

The ASEAN−Australia−New Zealand Free Trade Agreement allows wheat imports from Australia to be admitted duty free for most ASEAN member states. Australia’s major competitors for wheat into South East Asia are Canada and the United States, which do not have free trade agreements with any major wheat importing ASEAN member states.

Source: ABARES 2013

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Choice of case studiesNew South Wales and Western Australia have been selected as case studies in this analysis. They are the two largest wheat producing states with distinct differences in their supply chains.

New South Wales has greater contestability in its supply chain because of a large domestic market and a number of competing bulk handlers. Moreover, it transports almost all its bulk grain exports by rail, and exports a significant proportion of non-bulk wheat.

Western Australia is dominated by a single bulk handler that exports almost all its wheat in bulk form. A sizeable proportion of bulk wheat exports in Western Australia is transported by road.

The discussions are also broadly relevant to other wheat producing states, with the supply chain in New South Wales being similar to that in Victoria and Queensland, whereas Western Australia's supply chain is similar to that in South Australia.

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3 Wheat supply chain and supporting infrastructure in Western Australia

Western Australia is likely to be a major contributor to any future increases in Australian wheat production and exports, so resolving any inefficiencies within its supply chain will be important if Australia is to take full advantage of the increase in global demand for wheat. This chapter describes the Western Australian wheat industry and discusses the state's supply chain and its supporting infrastructure.

Western Australian wheat industryWestern Australia is Australia's largest wheat producer and exporter, with significant expansion in production following the introduction of new wheat varieties that suited Western Australia’s Mediterranean climate (Wrigley 1981). Most wheat is produced in the southwest of the state in a region known as the 'wheat belt' (Map 2), which stretches in a crescent from Geraldton, through the hinterland of Perth and encompasses parts of the south coast from Albany to Esperance. This is also the region where stakeholders expect future expansion will occur.

One of the characteristics of the Western Australian wheat industry is its variability, mainly because of variable seasonal conditions. From 2002−03 to 2012−13, for example, there were large variations in production and exports (Figure 15). Poor harvests in 2002−03 and 2010−11 were followed by record harvests the following years. The average harvest during this period was around 7.5 million tonnes.

Figure 15 Western Australian wheat production and exports

0

4

8

12

mill

ion

tonn

es

Exported as grainWheat produced

a

Note: as grain can be exported in years other than the one in which it is harvested, exports can be greater than production in any given year. a Marketing year from 1 October to 30 September.Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS International Trade, Australia, cat. no. 5465.0, ABS Principal Agricultural Commodities, Australia, Preliminary, cat. no. 7111.0; ABS Agriculture, Australia, cat. no. 7113.0

The Western Australian wheat industry is highly export oriented (Figure 15). Because of this strong focus on overseas markets, this case study discusses wheat exports. The New South Wales case study provides more insights into wheat consumed in domestic markets.

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Map 2 Western Australian wheat production 2011–12, by statistical local area

Note: SLAs with less than 1000 tonnes of production have been excluded.Sources: Derived from ABS, ABARES

The Western Australian wheat industry’s export orientation means that almost all of its production is supplied through the bulk grain supply chain with some individual farms opting to bypass the bulk handling system using their own road transport, as illustrated in Figure 16. This supply chain is relatively straightforward, starting with farm production, followed by a network of up-country receival sites connected by road or rail to export terminals. The network of up-country receival sites and port facilities is dominated by a single bulk handling company, CBH. Despite the dominance of CBH, new entrants have recently introduced some competition into the grain handling industry in Western Australia. Grain marketers use sea freight to transport wheat from port terminals to final destinations.

Figure 16 Western Australia's grain supply chain

Rail

Farm Up-country receival sites

Export terminals

Export markets

Road

Road

Ship

Road

Source: Adapted from NTC 2009b

21


Wheat producing farms Around 1 500 farms produced wheat in Western Australia in 2012−13. These farms tend to have larger cropping areas, produce more grain and have higher cash incomes than those in other states. They are also more specialised than those in the eastern states. Over the decade to 2012−13, they produced on average 7.5 million tonnes of wheat each year on an average area of 4.7 million hectares (Figure 17).

Figure 17 Aggregate and farm level wheat production in Western Australia, 2002−03 to 2012−13

0

4

8

12Total wheat production

(million tonnes)

0

5

10 Total area cropped to wheat (million hectares)

0

1

2

3

4

5

Average wheat production per farm (thousand tonnes)

0

1

2

3 Average area cropped to wheat per farm(thousand hectares)

Note: Includes farms operating less than 40 hectares to wheat. Averages for the period between 2002−03 and 2012−13 are shown in dotted lines.Sources: ABS Agricultural Commodities, Australia (cat. no. 7121.0), ABARES AAGIS 2014

Between 2002−2003 and 2012−2013, there was a slight trend towards fewer farms with higher output (Figure 17). Stakeholders consider that while this process of consolidation could continue, Western Australian wheat farmers are already operating close to the feasible limits of efficiency given current technologies.

Western Australian wheat farms also have higher cash incomes and returns on capital than wheat farms in other states do. Between 2002−2003 and 2012−2013, farm cash incomes averaged $262,000 (Figure 18), while the rate of return on capital invested averaged 3.1 per cent. Cash receipts from wheat sales averaged around $660, 000 for the same period.

As in other states, many Western Australian wheat producing farms produce other grains and sometimes run livestock. However, ABARES farm survey data indicate that wheat receipts are the largest source of income for farms producing wheat in Western Australia (Valle et al. 2013).

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Figure 6 shows that wheat receipts make up a higher proportion of total income in Western Australia than in other states, and that Western Australian farms devote the highest proportion of the area they operate to wheat production of any state.

Figure 18 Western Australian wheat farm cash receipts and cash incomes, 2002−03 to 2012−13

wheat cash receipts

0

4

8

$ hu

ndre

d th

ousa

nds

cash income

Note: Farm cash income is equal to all cash receipts minus all cash costs, and does not include the estimated value of family labour. Farms sowing less than 40 hectares to wheat are included. Averages are shown in dotted lines. Figures are in 2013–14 dollars.Source: ABARES AAGIS 2014

On farm storageWestern Australian producers have invested less in on-farm storage capacity than producers in other states. Stakeholders note two reasons for this. First, they consider that the CBH storage network is a high quality and cost-effective option—especially since there is no additional cost if CBH transport is already being used. Second, they consider that there are fewer alternative marketing opportunities in Western Australia than in the eastern states where domestic markets consume significant volumes of grain.

Despite investing less in on-farm storage capacity, a GRDC survey (GRDC 2013a) indicates that Western Australian grain farmers are more likely to invest in high quality gas tight silos than their interstate counterparts. These silos can maintain grain at a quality (GRDC 2013b) as high as that required for human consumption in export markets.

Bulk handlersThe bulk handling network in Western Australia is effectively a monopoly owned and operated by CBH. This network handles wheat as well as other grains. CBH owns 197 up-country receival sites and four exporting facilities (Map 3). Similar to other large bulk handlers, CBH offers an integrated bulk handling option from receival site to port. It also has a wheat marketing arm that accounts for a significant proportion of wheat export sales and has invested in processing capacity overseas. As a farmer owned co-operative, CBH does not pay dividends. What would be profits in a private firm are returned to customers in the form of lower charges or special rebates (AEGIC 2014b), or are reinvested in the network or in other assets.

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As of 2014, two other firms (Bunge and VicStock) have announced their intention to build limited bulk handling facilities. This is discussed in more detail in the section on port infrastructure.

Up-country receival sitesAccording to CBH, this receival network has received up to 500 thousand tonnes of grain in a single day (CBH pers. comm. 2014). The capacity of these receival sites varies widely, with some individual facilities able to take up to 20 thousand tonnes a day. The largest seasonal receival of grain into the CBH network (including crops other than wheat) was 15.9 million tonnes of grain (CBH pers. comm. 2014). The Productivity Commission (2010) has estimated that total storage capacity for all grain types at CBH receival sites is 15−20 million tonnes. This figure has been confirmed by CBH (CBH pers. comm. 2014).

Map 3 CBH receival site and rail network, and new third party loaders

Note: Not all rail lines shown are used for grain or currently operational.Source: Derived from cbh.com.au

CBH has been consolidating the operation of its receival sites since 2008 (PC 2010). While there have been some permanent closures in receival sites, these closures have been more prevalent in New South Wales than in Western Australia (see Chapter 4). CBH also continues to maintain some marginal sites in case of bumper crops.

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Export facilitiesAlmost all wheat produced in Western Australian is exported. Despite a transient spike in containerised exports immediately following deregulation in 2007, Western Australian wheat is exported almost entirely in bulk. Non-bulk exports in containers are largely restricted to niche products, which usually involves a specific agreement with an end user.

As of late 2013, almost all bulk exports from Western Australia were handled by the CBH network. Under the system operated by CBH, up-country receival sites are classified into zones, with each zone feeding a particular bulk grain export loader. There are four bulk export loaders owned and operated by CBH. They are located at ports in Fremantle (Kwinana), Albany, Geraldton and Esperance (see Map 3).

Port facilities provide both loading services—putting grain on ships—and storage services for grain that is yet to be loaded. The latter is a complement to up-country and on-farm storage options discussed earlier, and as such are only a fraction of the amount that can pass through a port (Figure 19).

CBH has considerable port loading capacity. The grain loader at Kwinana has the largest throughput of any grain loading facility in Western Australia (Figure 19), as well as in Australia as a whole. CBH's facilities at the ports of Geraldton, Albany and Esperance are also large by national standards. The Kwinana loader is the fastest in Australia, able to load up to 5 thousand tonnes an hour. The loading rate at each of the other three ports is around 2 thousand tonnes an hour (Figure 19). All four ports in Western Australia have significant variation in annual throughput (Freight and Logistics Council 2009).

Figure 19 Western Australian grain ports, in thousand tonnes

2327 1797

54352994

12553

Albany Esperance Kwinana Geraldton Total

Maximum historical annual throughput

474 246>1200 a >1000

>2500

Albany Esperance Kwinana Geraldton Total

Storage capacity at port

2 2

5

2

Albany Esperance Kwinana Geraldton

Loading rate an hour

Note: a including 200 thousand tonnes at the Metro Grain Centre.Sources: Ports Australia 2013, CBH pers. comm.2014, Bunge 2013, GIG 2008

25


According to estimates provided by CBH, its port facilities at Geraldton, Albany and Esperance each have an annual port loading capacity of around 8 million tonnes, whereas Kwinana’s annual port loading capacity is around 24 million tonnes (CBH pers. comm. 2014).

These estimates are for total annual port loading capacity – the maximum amount that could be loaded by the facility over the course of the year. While these estimates are significantly greater than the recent bumper harvest in 2011−12, and are well above export levels, they do not account for the seasonality of demand for access to grain loading facilities, which peaks during and just after harvest. As discussed in Chapter 2, ‘just in time’ purchasing strategies by international grain buyers limits the scope to sell wheat outside the southern hemisphere harvest season.

Historical data show that the maximum volume of grain exported by CBH port facilities in any one year was around 12.5 million tonnes (Figure 19). This may better reflect the 'effective' loading capacity given the grain ‘marketing window’ bottleneck.

Apart from port loading capacity offered by CBH, VicStock and Bunge have invested in new port capacity in Western Australia, beginning in 2013. These firms have developed new facilities to secure access to port infrastructure during the peak ‘marketing window’ (ABC 2014), and have also begun developing limited up-country infrastructure.

Bunge operates a bulk loading facility at the port of Bunbury. This facility was completed in June 2014 and began loading grain shortly afterwards (Garnett & Fitzgerald 2014).

The Victorian based firm VicStock is planning new loading operations using existing bulk woodchip facilities at the Port of Albany. VicStock intends to load grain grown on farms it owns, but the volume it will produce is not expected to provide the scale necessary to make the loader viable. As a result, the firm is preparing to sell some grain loading services to other parties (ABC News 2013a, Hinkley 2014).

At this stage, Bunge and VicStock are offering only a relatively modest increase in port loading capacity in Western Australia (around 500 thousand tonnes for their first year of operation) (ABC News 2013a, Bunge 2013). Despite these modest volumes, these developments have the potential to increase competition in the bulk handling industry, especially at the point at which grain is loaded onto ships.

It is also possible that grain exported in containers could increase total grain export capacity in Western Australia. Currently, these exports account for around 1 per cent of the state's wheat exports. Any increase would be likely to require a larger number of containerised imports and/or a significant increase in the cost of exporting bulk wheat. In the absence of any increase in containerised imports or the costs of bulk export, any increase in non-bulk grain exports is likely to be restricted to niche products.

26


Export destinationsThe destinations of Western Australian wheat exports are similar to those for Australia as a whole (Figure 20). The state's destinations tend to reflect its proximity and shipping times to South East Asia, North East Asia and Middle Eastern markets on the Indian Ocean.

Figure 20 Major destinations for Western Australian wheat, 2012–2013

1676

1232910 865 756 695

489325 322 222

Imports of wheat as grain from Western Australia(thousand tonnes)

Note: Only wheat as grain is included. Source: ABS International Trade, Australia, cat. no. 5465.0

Of Western Australia’s current major export destinations, only South East Asian markets are projected to have strong import growth to 2050 (ABARES 2013). International traders have noted the shipping time advantage of Western Australian exporters in South East Asian markets. For example, Sumitomo has flagged sourcing Western Australian wheat for new grain milling investments in Vietnam (West Australian 2014). In contrast, wheat producers in the Black Sea region have a shipping time advantage to Middle Eastern markets.

Figure 21 Shipping time from Kwinana in days

16.25

19.25

8.25

13.5

11.8

11

5.25

Umm Qasr, Iraq

Alexandria, Egypt

Ho Chi Minh City, Vietnam

Yokohama, Japan

Shanghai, China

Kolkata, India

Jakarta, Indonesia

Note: The differences in shipping times from other ports are approximately as follows: Geraldton: -0.4, Albany: +1, Esperance: +1.5.Source: Searates.com

27


ABARES projections suggest that the greatest growth in import demand for wheat will occur in India (ABARES 2013). India is not yet a major destination for Western Australian wheat, however, Western Australia’s location means that the shipping time to this market is relatively short (Figure 21), making it well placed to take advantage of any increase in demand in India. Shipping times from Western Australia to India are less than those from North America and similar to those of countries in the Black Sea region.

InfrastructureThe road and rail network in Western Australia is used to deliver inputs to farms to facilitate production and to deliver grain from farms to up-country receival sites and ports. More specifically, road is used to deliver inputs to farms and wheat to up-country receival sites, whereas road and rail are used to transport wheat to ports. However, the CBH receival network is closely interlinked with the existing rail network, with rail accounting for around 70 per cent of the volume of wheat transported from up-country receival sites to ports in Western Australia in 2012−13 (CBH pers. comm. 2014). Despite the dominance of rail, estimates indicate that road transport accounts for a larger proportion of grain export freight in Western Australia than in other states.

The relative shares of road and rail may change in the future. Decisions by CBH, including whether to rationalise receival sites, its willingness to pay for rail investments, and government policies on road and rail infrastructure pricing and investment have the potential to influence the future shares of road and rail in transporting wheat.

RailRail networks used to freight grain in Western Australia have been separated into 'above-rail' and 'below-rail' functions that are operated by different entities. The below-rail network—the infrastructure upon which trains run, such as rail tracks and sleepers—used for grain freight is under a long-term lease from the state government to Brookfield Rail (after acquiring WestNet Rail). Above-rail operations—the rolling stock and their running and maintenance—have been conducted by the American based firm Watco Companies under contract to CBH using CBH owned rolling stock since 2010.

Although the Western Australian rail network operated by Brookfield moves considerable volumes of mineral exports and domestic freight, some lines used for wheat are only rarely used for non-grain purposes, or for any freight outside the harvest season. Brookfield indicates that these lines make up around 50 per cent of the network by length, but less than 10 per cent of freight by mass. The rest of the network is used to transport mineral commodities for export and containers from the eastern states.

The rail network in Western Australia has been classified into several tiers by the Freight and Logistics Council of Western Australia (2009) based partly on a line's competitiveness with road transport (Map 4). Tier 1 and 2 lines carry the bulk of the state's grain and are either cheaper (Tier 1) or competitive (Tier 2) with road freight. Tier 3 lines or branch lines, however, are not currently competitive with road freight. Brookfield’s estimates of the proportion of grain transported on Tier 3 lines range from 4 per cent (Trigger 2014) to 8 per cent (in consultations). Tier 3 lines are usually minor lines with low volumes of traffic, while some also use different gauges connecting to main lines which are Tier 1 and 2 rail lines (for example, at Merredin). Transport to ports by Tier 3 lines is also less direct than transport by the road system. These characteristics limit the size and efficiency of Tier 3 lines relative to main lines, which has

28


limited investment in branch lines. This has led to track deterioration which, in turn, has decreased speeds and further reduced the competitiveness of these lines.

Map 4 Rail lines in Western Australia

Source: Derived from Grain and Logistics Council 2009

The future of parts of the Western Australian grain rail network is contentious. In the decade to 2014, stakeholders and policymakers have debated the future of Tier 3 lines (Freight and Logistics Council of WA 2009). If any of these lines are closed, any grain taken in by a receival site on these lines is expected to shift to the road network, if only as far as the nearest operating rail site.

In 2008, the Grain Infrastructure Group, which consisted of key investors in the grain supply chain, advocated $800 million of investment in road and rail, including $200 million on re-sleepering, to ensure all lines remained operational (GIG 2008). The Commonwealth Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG) commissioned a report which determined that the costs of the proposed investments would exceed the benefits and recommended further analysis (DITRDLG 2009a). The Freight and Logistics Council of WA (2009) also determined that the capital expenditure required to maintain Tier 3 lines exceeded the benefits. In January 2011, the Australian Government announced that funding would be provided for the upgrade of Tier 1 and 2 lines (Albanese 2011).

In late 2013, the Western Australian transport minister declared that the continued operation of Tier 3 lines was a decision between Brookfield Rail and CBH, with no role for policy makers. In 2013, Brookfield announced that two branch lines—from York to Quairading and from Merredin to Trayning—would not operate from October that year after it failed to reach an agreement

29


with CBH, the sole user of those lines (ABC News 2013b). The remaining four Western Australian Tier 3 lines were placed in non-operational ‘care and maintenance’ before the 2014−15 harvest. The Western Australian Economic Regulation Authority was to arbitrate between CBH and Brookfield as they negotiated a new access agreement, but as of February 2015 no agreement has been made after negotiations were postponed for the 2014–15 harvest (Fitzgerald 2015a).

In October 2014, the Economics and Industry Standing Committee of the Western Australian Legislative Assembly (EISC 2014) released a report with detailed findings and recommendations for the Western Australian Freight Network. The Western Australian Government has not yet provided a response to the report (Fitzgerald 2015b).

Upgrading Tier 3 lines to allow greater speeds would require replacing existing sleepers with new wooden sleepers or with more expensive and longer lasting concrete sleepers. Brookfield estimates that the cost of re-sleepering is between $1 million and $2 million per kilometre for wooden sleepers. This expenditure is unlikely to be recouped with current levels of traffic and rail access prices, while any increase in these access prices would make rail less competitive with road transport. Brookfield has indicated that continued operation of the Tier 3 lines would require co-investment by the Western Australian Government (Fitzgerald 2015a).

There are other potential emerging constraints in the Western Australian rail network. One challenge will be the increasing frequency and intensity of extreme weather events (Commonwealth of Australia 2014). Grain exports occur mainly in the summer harvest season when very hot days can reduce the capacity of the network by lowering the speed at which trains can operate safely. One option being used to manage this constraint is transporting grain at night (AFR 2014). DAFWA expressed concern in consultations that any increase in the frequency of very hot days will lower the capacity of the network at peak periods, by either creating supply bottlenecks or shifting freight onto roads. Brookfield and major customers such as CBH will have to consider whether the costs of investing in rail infrastructure that can withstand such days is worthwhile, or whether CBH should pursue other options such as delaying freight by storing grain until extreme heat subsides or by using the road network.

RoadWhile the majority of wheat in Western Australia is transported by rail, a higher proportion of Western Australian wheat is transported by road to port than in the eastern states. This is because of several factors.

Western Australia has port facilities that are accessible to larger vehicles. In other states, roads around ports are restricted to B-doubles (up to 62 tonnes). Three Western Australian ports, however, can accept larger vehicles (exceeding 100 tonnes). Subsequently, these three ports have higher proportions of road transport: 50 per cent at Albany, 50 per cent at Geraldton and 90 per cent at Esperance, compared with only 10 per cent at the urban port of Kwinana (Mainroads Western Australia 2013 and SVG 2007b).

Western Australia is flatter than the eastern states, which improves the relative competitiveness of road, as suggested by National Transport Commission (2009a).

Western Australian wheat is produced in areas that are closer to ports. Road is more competitive over shorter distances, especially in some areas where road routes are more direct than rail lines.

30


In addition, the consolidation of the CBH up-country network means that some farmers have to transport wheat for longer distances by road to deliver wheat from the farm to a receival site (AEGIC 2014b). This consolidation is likely to continue in the future (PC 2010).

Future road and rail sharesThe share of road and rail used to transport wheat now and in the future will be affected by government policies on road pricing and expenditure and investment decisions by CBH and Brookfield. There are a number of reasons to expect that the share of grain transported by road in Western Australia will increase in the future. These include:

the areas where DAFWA is projecting the largest increases in production are in the three zones least reliant on rail transport. At the same time, the rail dependent Kwinana zone has become relatively less important as a wheat producing area (see Map 5)

CBH is moving away from fixed network prices to grain handling prices that differ by up-country receival site. The removal of cross subsidisation is increasing the competitiveness of receival sites serviced by road relative to a number of marginal rail receival sites, which are closing (PC 2010)

there are no plans to build new rail lines. Capacity constraints on major lines will remain binding in the absence of major new investment. In contrast, the existing road network is not near capacity (DTRDLG 2009a)

new entrants without long-standing access to rail infrastructure, such as Bunge, plan to move all their grain by road (The Land 2013).

Map 5 DAFWA wheat projected increases in production to 2035, high estimate

Sources: Derived from DAFWA via DITRDLG 2009a, Freight and Logistics Council of WA 2009, ABARES

31


Any changes in the method used to charge for road use could affect the relative shares of road and rail transport. While Brookfield is moving towards full cost recovery for its rail network services, there is some question as to whether road costs are fully recovered. Increased road freight can increase the costs of traffic and safety externalities, and require greater expenditure on road maintenance. In some areas, unsealed roads may need to be sealed, and greater traffic will require more frequent repairs, often by local councils (see Box 3). Brookfield is reported to have said that the lack of full cost recovery for roads has prevented Brookfield from remaining competitive and charging rates on Tier 3 lines that reflect the cost of operating the lines (Trigger 2014). The National Competition Policy Review draft report has noted that road pricing can distort the choice between road and rail freight (CRP 2014).

Box 3 Bruce Rock Shire Council

Many roads used to transport wheat are the responsibility of local governments. As such, any increase in road freight has implications for the financial position of local governments in the wheat belt (EISC 2014, Finding 31).

In May 2014, the Bruce Rock Shire Council claimed that property rates would need to rise by 10−15 per cent annually in order to cover increased maintenance costs if the Tier 3 line to Merredin was to close. Only two roads in the shire—Shackleton-Bruce Rock Road and Merredin-Bruce Rock Road—were the responsibility of the state government. All other roads used to freight wheat would impose costs on the shire council.

The shire council also expressed concern about other effects of road transport, including truck freight where children are prevalent, such as in school areas or on school bus routes (Merredin-Wheatbelt-Mercury 2014).

Road maintenance costs may not be fully factored into the registration and fuel levies paid by road users. In 2014, the National Commission of Audit (NCA 2014) recommended that Australian governments work to ‘develop mass-distance-location charging reforms’ with a view to universal road user charging for vehicles. These issues are discussed further in Appendix A.

Some stakeholders also raised the possibility that population growth in the eastern states could increase the demand for wheat to the point where it outstripped production in these states. In this instance, there could be a market for Western Australian wheat in other states. This would require decisions between rail, road or coastal shipping. This scenario is not considered further in this report.

Access and congestionThere are several access and congestion issues within the Western Australian wheat supply chain that have the potential to reduce efficiency. Some of these can be addressed privately whereas others may warrant government intervention.

An example of the former is queuing at receival sites. At harvest time, there can be excess demand for storage at particular receival sites that can lead to queuing. At these times, there can also be a shortage in rail loading capacity at some sites. CBH has several options to manage this, including adjusting prices between sites, utilising road transport instead of rail, extending operating hours and adopting automation and other technologies to increase capacity.

The ownership of port facilities and the grain ‘marketing window’ bottleneck during and just after the Australian harvest season means that there is potential for CBH to restrict other exporters from gaining access to its port facilities. Given this, prior to 30 September 2014, CBH was subject to an access undertaking with the ACCC to ensure third party access to its ports. Under this access undertaking, CBH uses an auction system to allocate access to loader capacity. Exporters bid for a 'shipping slot' to load a given volume of grain at a given time. Exporters pay their bid, but if they secure grain and use the capacity in the slot, they are entitled to a rebate

32


equal to the average premium that was bid in the auction pool. This means their effective payment is the base price plus the amount in excess of the average premium offered in the auction. This auction system is designed to allocate access to those exporters that are most willing to pay for access during peak periods.

Feedback from some stakeholders suggests that the management of this auction system is a major concern for some grain traders. AGEA has specific concerns, including:

a lack of flexibility to change slots that have been secured. This inflexibility does not allow for uncertainty about when grain will be harvested and delivered or when ships will arrive. Opportunities to on-sell slots that are secured but no longer needed are limited

an inability to book loading capacity over the long term (known as long term access agreements), for example, several years in advance. This is a source of uncertainty and limits the ability of exporters to plan ahead and manage logistics efficiently

high transaction costs associated with using the auction system limit the involvement of smaller exporters.

AGEA considers imperfections in access arrangements are the largest impediment to the efficient operation of ports, and is more concerned about these arrangements than the prospect of reaching physical capacity constraints.

According to Bunge, its investment in grain loading capacity at the Port of Bunbury is driven by a desire to have more certainty about loading slots than thought was available under the CBH system (ABC 2014). In consultations, CBH acknowledges there are imperfections in the current auction system, but considers it the best possible option under the access undertaking then in place.

In March 2014, CBH announced that it would seek permission from the ACCC to sell exporters long-term access arrangements for up to 64 per cent of its loading capacity. The remaining loading capacity would continue to be sold under the auction system. CBH claimed that this would increase effective loading capacity from 12.7 million tonnes to 15 million tonnes. Its long-term goal is 18 million tonnes of loading capacity (CBH 2014).

In September 2014, CBH withdrew its proposal to adopt long-term access arrangements after a process of review (Farm Weekly 2014). For the 2014–15, it has reverted to the existing access undertaking, that is the auction process.

Energy, telecommunications and water infrastructureThe Western Australian wheat supply chain uses other economic infrastructure, including energy, telecommunications and water. Access to water infrastructure is not likely to constrain wheat production as the vast majority of wheat in Australia is grown on dryland farms. While stakeholders identify energy as an important input, especially in the handling of grain, they do not identify it as a constraint on production. They do, however, identify limited mobile phone coverage as a constraint in some areas, especially when attempting to sell wheat during the ‘marketing window’ while harvesting in the field.

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4 Wheat supply chain and supporting infrastructure in New South Wales

New South Wales is the second largest wheat producing state in Australia. It is, therefore, important to understand the unique characteristics of the New South Wales supply chain. This chapter identifies these characteristics as well as some of the infrastructure bottlenecks that have the potential to limit current levels of production and exports, and any expansion in production and exports over the period to 2050. Estimates of on-farm and off-farm supply chain costs, including production, storage and handling, freight and port costs are presented where the data are available in Chapter 5.

New South Wales wheat industry Wheat production in New South Wales is variable (Figure 22). While New South Wales produced on average 6.3 million tonnes of wheat a year between 2002−03 and 2012−13 (Figure 23), some years were severely drought affected (2002−03, 2006−7 and 2007−08), with production falling well below this average. In other years, significantly improved seasonal conditions resulted in production rising well above this average (2010−11, 2011−12 and 2012−13).

Figure 22 New South Wales wheat production and exports, 2002−03 to 2012−13

0

4

8

12

mill

ion

tonn

es

Exported as grain

Wheat produced

a

Note: a Marketing years from 1 October to 30 September.Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS International Trade, Australia, cat. no. 5465.0, ABS Principal Agricultural Commodities, Australia, Preliminary, cat. no. 7111.0; ABS Agriculture, Australia, cat. no. 7113.0

The majority of grain grown in New South Wales is harvested from winter crops such as wheat. The exception is sorghum, which is an important summer crop in the northern areas where livestock feed demand is high (Sd+D 2008). Most grain in New South Wales is grown on the western slopes and plains that run between the Queensland and Victorian borders (DITRDLG 2009b and refer to Map 6).

34


Figure 23 New South Wales wheat production and yield, 2002–03 to 2012–13

0

4

8

12Total wheat production

(million tonnes)

0

1

2

3Yield

(tonnes per hectare)

Note: Averages for the period between 2002–03 and 2012–13 are shown in dotted lines. The average volume of wheat production between 2001–02 and 2012–2013 was 6.3 million tonnes and average yield for the same period was 1.7 tonne a hectare.Source: ABS Agricultural Commodities, Australia, cat. no. 7121.0

Map 6 New South Wales grain production and consumption, by statistical local area

Source: Derived from DITRDLG 2009b

35


While New South Wales grain is grown to supply both the export and domestic markets, there has been an increasing focus on the domestic market in recent years. Domestic demand for New South Wales grain includes milling wheat for human consumption, domestic livestock, industrial starches and biofuels (Sd+D 2008 and DITRDLG 2009b). A large part of New South Wales grain production is consumed by its domestic markets because of the size of its population and an expanding livestock sector (Sd+D 2008). Domestic demand for human consumption is likely to only grow slowly, however, because of slow population growth. An increasingly important component of domestic demand has been demand for stockfeed, including but not confined to increased demand from feedlots (DITRDLG 2009b). Map 6 shows significant volumes of grain are consumed within grain growing areas, although some consumption occurs close to Sydney. Much of this grain is likely to be used in feedlots and dairies and for intensive livestock activities such as pig and poultry farming. There has also been an increase in demand for grain for industrial uses and biofuels in recent years.

Between 2002−03 and 2012−13, New South Wales exported on average 2.3 million tonnes of wheat a year. However, these exports ranged from 236 thousand tonnes in 2007−08 to around 4.4 million tonnes in 2011−12. In 2012−13, wheat export volume in New South Wales declined to 3.8 million tonnes (Figure 24). Figure 22 and Figure 24 show that when domestic supply is low domestic stock feed prices tend to be high, with New South Wales exporting relatively low volumes of wheat during these periods, and vice versa.

Figure 24 New South Wales wheat exports and stock feed prices, 2002−03 to 2012−13

export volume

stock feed price

$

100

200

300

400

0

1

2

3

4

5

Stoc

k fe

ed p

rice

(per

tonn

e)

Expo

rts (

mill

ion

tonn

es)

Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS International Trade, Australia, cat. no. 5465.0 and reported stock feed prices in The Land over the relevant period.

There have been some important changes in the structure of international demand for New South Wales grain in recent years. One change is a shift by some toward viewing grain as a specialised product that is produced and marketed to consumer specifications. The second is a shift in the geographical focus of New South Wales wheat exports—away from the Middle East towards South East and North East Asian markets. The third change is a marked increase in the use of containers to ship grain (DITRDLG 2009b).

The rest of this chapter outlines the specifics of the New South Wales grain supply chain (Figure 25). Facts and figures are presented for all of the New South Wales grains industry because many grain crops share the same handling system. Where possible, New South Wales wheat specific information is provided.

36


Figure 25 New South Wales grain supply chain

Rail

Road/Rail

Road

Farm (on farm storage)

Up-country receival sites

Export terminals

Export markets –Bulk/ Non-

bulk

Flour millsDomestic market –

Human food

Domestic market –Feedlots

Road

RoadRoad

Road Road

Road

Ship

Ship

Domestic market –Biofuels

Road Road

Source: Adapted from Sd+D 2008

Wheat producing farmsMore than 2400 farms produced wheat in New South Wales in 2012−13 (ABARES AAGIS 2014). Wheat producers in New South Wales tend to operate highly diversified farm businesses, and are often involved in cropping and livestock activities. They also tend to produce a range of crops, and in some cases can grow winter and summer crops (Hooper 2010). Between 2002−03 and 2012−13, around 24 per cent of the area of an average wheat producing farm was devoted to wheat (ABARES AAGIS 2014).

Figure 26 Aggregate and farm level wheat production in New South Wales, 2002−03 to 2012−13

0

2

4

6Toal area cropped to wheat

(million hectares)

0

1

2

3

Average farm wheat production('000 tonnes)

0

500

1000

Average farm area cropped to wheat(hectares)

Note: Includes farms growing less than 40 hectares to wheat. Averages are shown in dotted lines.Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABARES AAGIS 2014

According to ABARES farm survey data, a typical mixed cropping farm in New South Wales planted on average 576 hectares of wheat and produced on average around 1000 tonnes a year between 2002−03 and 2012−13. The volume of wheat produced on these farms fluctuated over this period, following a similar pattern to state production (Figure 23 and Figure 26).

37


Similar to Western Australia, there has been a trend in New South Wales towards fewer farms with higher output. This has been reflected in an increase in the average area devoted to wheat, although the total area has remained steady, averaging around 3.8 million hectares (Figure 26).

Between 2002−03 and 2012−13, the average wheat farm in New South Wales received on average more than $263,000 a year in cash receipts from wheat and earned on average $148,000 in farm cash income (Figure 27). The average rate of return on capital invested over this same period was 1.5 per cent, significantly less than in Western Australia (3.1 per cent) (Figure 7).

Figure 27 New South Wales wheat cash receipts and cash incomes, 2002−03 to 2012−13

0

2.5

5

$ hu

ndre

d th

ousa

nds

wheat cash receipts

cash income

Note: Farm cash income is equal to all cash receipts minus all cash costs and does not include the estimated value of family labour. Farms that dedicated less than 40 hectares to wheat are included. Averages are shown in dotted lines. Figures are in 2013–14 dollars.Sources: ABARES AAGIS 2014

On-farm storageNew South Wales farmers have more on-farm storage capacity than farmers in Western Australia. In 2008−09 and 2009−10, New South Wales farmers had the capacity to store more than 6.2 million tonnes of wheat, equivalent to 90 and 117 per cent of production in each of these years (PC 2010). According to a recent survey by the GRDC (2013a), 88 per cent of farmers surveyed in New South Wales store grain on farm. Of these farms, 89 per cent store grain in unsealed silos, 52 per cent in gas-tight sealed silos, 38 per cent in bulk grain sheds, 15 per cent in sausage bags and 9 per cent in bunkers.

38


There is a growing national trend toward increased on-farm storage (PC 2010; AEGIC 2014b) that appears to be more pronounced in the eastern states than in Western Australia. The New South Wales Grain Freight Review highlighted four possible reasons as to why there has been an increase in on-farm storage in New South Wales since deregulation. These are:

preserving the identity of individual grain parcels to capture market premiums

deferring the decision on when and who to sell grain to for as long as possible so as to maximise price

reducing the risk of post-harvest weather damage to grain—access to on-farm storage may assist in getting grain into store quickly

avoiding the costs of using the centralised handling system unless this is a necessary consequence of the sale decision (DITRDLG 2009b).

Other reasons for this increase are likely to include the nature of domestic demand for wheat and growth in demand for non-bulk wheat exports (PC 2010; AEGIC 2014b). Being able to store wheat on-farm is an important factor in being able to service domestic markets. For example, feedlots and domestic millers are likely to have limited storage capacity, and are likely to prefer grain to be delivered when needed. As a result, it may be more cost-effective for a farmer to store wheat on-farm than in a bulk handling system where bulk handlers charge a fee for depositing, storing and withdrawing wheat. The relatively new market for non-bulk exports also allows producers to bypass the up-country receival system by delivering wheat directly from farm to port. On-farm storage also provides producers selling wheat into this niche market with the opportunity to segregate wheat instead of putting it into pool storage.

During consultations, stakeholders suggested that on-farm storage provides growers with more marketing options and an opportunity to receive better prices for their grain. However, on-farm storage can require significant capital investment, ongoing insect and pest management and measures to manage grain loss.

Domestic markets The New South Wales wheat market is more evenly distributed between domestic and export demand than in Western Australia. In an average year, domestic demand for grain in New South Wales accounts for about 56 per cent of total grain production in the state (DITRDLG 2009b). New South Wales domestic demand consists of milling grain for livestock (2.5 million tonnes of various grains), human consumption and industrial uses (2.2 million tonnes of wheat combined) (GrainCorp 2011). While there is a difference between wheat and other grain, this section refers to New South Wales domestic consumption of grain in general. It specifies wheat consumption where possible.

Livestock Animal feed accounts for around 23 per cent of total New South Wales grain flows in an average year (DITRDLG 2009b). The demand for grain as a feed for livestock comes directly from feedlots, sheep and cattle farms and stockfeed manufacturers who process grain for a range of livestock activities, including pig and poultry farms. A rough estimate indicates that animals consume about 3 million tonnes of grain in New South Wales in a typical year (Spragg 2008, 2010 and 2012).

39


Figure 28 shows the composition of animal feed demand by industry sector for New South Wales and Australia. In New South Wales, the poultry industry (both meat birds and layers) is by far the largest consumer of feed grain (around 1.2 million tonnes), followed by the beef (810 thousand tonnes), dairy (389 thousand tonnes) and pig (342 thousand tonnes) industries.

Stockfeed manufacturers in central and northeastern New South Wales are the main consumers of feed grain, although significant volumes are also consumed in mills manufacturing feed for the poultry industry located in Newcastle and Berrima in the Southern Highlands (Sd+D 2008 and see Map 6).

A significant volume of feed grain is also consumed on farms where it is produced (Sd+D 2008). In New South Wales, wheat tends to be produced on mixed farming enterprises located in the wheat/sheep belt. Many of these farms keep grain to feed livestock and as seed for the following year’s crop. Up-country receival sites can also supply grain to nearby livestock producers when needed (Sd+D 2008).

Figure 28 New South Wales and Australian animal feed use, thousand tonnes, 2011−12

141

117

323

204

2706

2988

1466

817

2901

38

15

120

18

810

389

342

253

946

Other

Aquaculture

Horse

Sheep

Beef

Dairy

Pork

Egg production

Poultry meat

NSW Australia

Source: Spragg (2012)

The feed grain sector is becoming increasingly important in New South Wales, with any future increases in global demand for beef and dairy products likely to be reflected in increased demand for feed grain. This could divert some wheat from the export market to the domestic feed grain market.

Human consumptionHuman consumption constitutes the second largest share of New South Wales grain flows after animal feed, accounting for around 15 per cent of New South Wales grain flows in an average year (DITRDLG 2009b).

It is estimated that Australian flour mills manufacture around 2.3 million tonnes of flour from 2.85 million tonnes of wheat a year (Spragg 2010). New South Wales is the major flour milling state, accounting for 62 per cent of Australian flour production. New South Wales typically mills

40


around 1.7 million tonnes of wheat for flour a year (Spragg 2008), although these estimates are somewhat dated.

There are seven major flour mills in New South Wales. The largest of these is owned by the Manildra Group, and is located at Manildra in central western New South Wales. It currently consumes more than 700 thousand tonnes of wheat a year. The other six mills each consume between 100 and 200 thousand tonnes a year. Of these, two are located in Sydney, and one each in Tamworth, Gunnedah, Narrandera and Wagga (Sd+D 2008).

Industrial usesWheat is also suitable for non-food and industrial uses. For example, wheat gluten is useful in the production of adhesives, coatings, polymers and resins while wheat starch can be used in the production of cosmetics and pharmaceuticals, and to strengthen paper (Kansas Wheat 2014).

There is also an emerging market in the use of wheat and other grains in the production of biofuels. This is in part because of the introduction of policies by the Australian and New South Wales governments that support biofuel production (DITRDLG 2009b). The New South Wales government has set a mandate requiring 6 per cent of the total volume of petrol sold in New South Wales to be ethanol and 2 per cent of the total volume of diesel sold in New South Wales to be biodiesel (New South Wales Office of Biofuels 2014). Most grain-based biofuel production in New South Wales uses the by-product from milling grain to produce ethanol. It is unlikely that the demand for biofuels will have a significant impact on future grain production and consumption, however, as the viability of grain-based ethanol production is highly dependent on the level of government support. This support is scheduled to decline over time. In addition, the long-term future of biofuel production would appear to lie in the use of alternative, 'second-generation' feed stocks (DITRDLG 2009b) such as biomass from crop residues, other non-food energy crops, wood/forestry residues and algae (Carriquiry et al. 2010).

The Manildra Group is the main producer of industrial starches and biofuels in New South Wales. It has mills at Manildra, Narrandera and Gunnedah that produce a variety of flour products for human and industrial uses (Sd+D 2008). The Manildra Group also has an ethanol plant at Nowra in New South Wales. This plant is being expanded to increase its on-site flour milling and ethanol production capacity. The site currently uses wheat as a feedstock, but has the capacity to use sorghum subject to availability and price relative to wheat (Spragg 2012).

Bulk handlersSimilar to other states, there is one company that dominates the provision of bulk handling services in New South Wales. This company is GrainCorp, which owns and operates the majority of up-country receival sites and port loading facilities in New South Wales, and on the east coast more generally (see Box 4). Similar to CBH in Western Australia, GrainCorp offers an integrated bulk handling option from receival site to port.

Despite GrainCorp’s dominance of the bulk exporting supply chain in New South Wales, there is more contestability in this supply chain than in Western Australia. This is because there are other grain handlers with bulk storage assets in New South Wales such as AWB GrainFlow (acquired by Cargill in 2011) and Emerald Grain. Moreover, there is growing investment in on-farm storage systems that can effectively compete with the centralised storage system provided by GrainCorp (DITRDLG 2009b).

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Box 4 GrainCorp

GrainCorp Limited is the largest bulk handling company in New South Wales. It has gone through many changes since its establishment as a state-owned entity known as the Grain Elevators Board in 1917. In the mid 1980s, its name was changed to the Grain Handling Authority. It was also one of the first government organisations to be privatised in Australia, and in 1992 became GrainCorp. In 1996, it established a grain marketing business, and was the first bulk handler to also trade grain in Australia. In 1998, GrainCorp listed on the Australian Stock Exchange and is now an ASX listed top 100 company.

Subsequent amalgamations with other grain handling operations have further established GrainCorp’s position as a major grain handler in eastern Australia. Acquisitions include Vicgrain (Victoria) in 2000, Grainco (Queensland) in 2003 and Hunter Grain (New South Wales) in 2007.

As well as the grain marketing business, GrainCorp has diversified its operations into grain processing and into the American and European markets through several purchases. These include the acquisitions of Allied Mills as a joint venture with American agribusiness Cargill in 2002, United Malt Holdings in 2009 and German Schill Malz and a Western Australian malt plant in 2011.

Source: GrainCorp 2014a

Up-country receival sitesGrainCorp operates 186 up-country receival sites across the eastern states in a normal year for all grain types, not just wheat. The nominal capacity of this storage network is close to 20 million tonnes (GrainCorp pers. comm. 2014). GrainCorp has stated (prior to the most recent consolidation discussed below) that 20 per cent of receival sites handled 80 per cent of the grain delivered to GrainCorp’s bulk handling system.

Map 7 GrainCorp grain storage in New South Wales

Source: Derived from graincorp.com.au.

Prior to recent consolidation, 180 of GrainCorp’s sites were located in New South Wales, including those linked to the Victorian rail network (see Map 7 for the locations of GrainCorp's storage at receival sites in New South Wales). One hundred and fifty of those sites had rail

42


access. This up-country receival network is supported by six sub-terminals (DITRDLG 2009b). There are also some smaller companies, including AWB GrainFlow and Emerald Grain that have up-country receival facilities in New South Wales (Figure 29).

Prior to deregulation of the Australian wheat market, storage and handling charges tended to be similar across storage sites, with more efficient sites cross subsidising less efficient sites. This model of charging is called network-based pricing. Since deregulation, bulk handlers have moved more towards site-based costing, differentiating charges by up-country receival site, and have begun closing down uneconomic sites (PC 2010). Figure 29 shows that there was a significant reduction in the number of storage sites operated by GrainCorp between 1998 and 2014. While the tendency for bulk handlers to close and reopen sites based on the size of a harvest may explain why there was an increase in the number of GrainCorp sites in 2010, over the longer term there seems to be a clear trend towards fewer storage sites because of the rationalisation of bulk storage facilities.

In 2014, GrainCorp announced Project Regeneration, which involves rationalising the up-country receival network. Under Project Regeneration, GrainCorp plans to operate only 96 receival sites in New South Wales in 2015−16 (GrainCorp 2014b). GrainCorp expects this to reduce annual intake by approximately 10 per cent (GrainCorp pers. comm. 2014).

Figure 29 New South Wales receival sites over time, and by handler

256

0 0 0

256

145

3 10 0

158173

4 10 0

187

129

6 10 3

148

GrainCorp Emerald Grain AWB Limited Louis Dreyfus Total

1998 2006 2010 2014

Note: GrainCorp only quoted prices for 104 of their New South Wales sites in 2013−14. Emerald Grain was formerly known as Australian Bulk Alliance (ABA). In 2011 Cargill acquired the AWB GrainFlow business of AWB Limited.Sources: PC 2010, websites of GrainCorp, Emerald, AWB and Louis Dreyfus

The Productivity Commission report into wheat export marketing arrangements (PC 2010) states that all bulk handling companies are likely to continue closing selected bulk receival sites. The fact that the rationalisation of these facilities has occurred mainly on the east coast suggests there might be greater competition and/or economic pressures for efficiency (given volatility of production and exports) in the eastern states than in South Australia and Western Australia. In particular, lower contestability in bulk storage in Western Australia may limit pressure on CBH to rationalise its receival sites (PC 2010). Moreover, greater disparities in site-based pricing may be less appealing in the cooperative structure of CBH, potentially limiting rationalisation in Western Australia.

Despite the on-going rationalisation of inefficient receival sites, there seems to be sufficient storage capacity on farms and within the up-country storage network in New South Wales to accommodate foreseeable expansion in wheat production and exports. GrainCorp has stated that current utilisation of its up-country storage capacity is around 50 per cent of its total storage capacity.

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Export facilities In an average year, exports account for around 44 per cent of total New South Wales grain production, of which around 2.3 million tonnes is wheat (DITRDLG 2009b). However, exports can vary substantially and are highly dependent on seasonal conditions. For example, the state's wheat exports fell to around 236 thousand tonnes in 2007−2008 because of drought. This was about one tenth of the average export volume between 2002−03 and 2012−13 (Figure 22 and Figure 24).

The majority of New South Wales wheat exports are bulk exports. The main wheat exporting ports in New South Wales are Port Kembla and the Port of Newcastle. The main grain loading facilities at these two ports are owned and operated by GrainCorp, although two new facilities recently opened at Newcastle. These are Newcastle Agri-Terminal, which is jointly owned by CBH, Olam and Glencore (Thompson 2014), and the Louis Dreyfus Commodity Terminal, which is jointly owned by Louis Dreyfus and Mountain Industries (GrainCorp 2013). In March 2014, Qube Holdings announced that it will invest $50 million in a joint venture with Hong Kong based agricultural group Noble to build a new export grain terminal at Port Kembla, which will be known as Quattro Grain (AEGIC 2014a). In a normal year, Port Kembla and the Port of Newcastle handle around 70 per cent of New South Wales grain exports. New South Wales wheat is also exported through ports at Brisbane (Fishermans Island) and Melbourne.

Figure 30 New South Wales grain export ports, thousand tonnes

18042924

1003

5731

Newcastle Port Kembla Sydney Total New South Wales

Maximum historical annual throughput

164 260 NA 424


Storage capacity at port

4 5

NA NA


Loading rate an hour

Note: Grains exported include wheat, rice, barley, oats, sorghum, lupins, rye, canola, peas, beans, maize, and unmilled cereals. Because of measurement issues, totals may not match export statistics used elsewhere.Sources: Ports Australia 2013 and GrainCorp 2012

The facility at Port Kembla is newer than that at Newcastle, has double the enclosed storage and can load grain 20−25 per cent faster than at Newcastle (DITRDLG 2009b). Port Kembla is located just south of Wollongong, and is primarily used to service the local coal industry. It also exports grain, other bulk products and steel. In 2008−09, Port Kembla's throughput was more than 26

44


million mass tonnes, of which coal exports accounted for around half (Engineers Australia 2010). Grain competes for port access with other commodities, especially at peak times. In 2012−13, Port Kembla exported around 2.6 million tonnes of grain (Ports Australia 2013), slightly less than its maximum grain export throughput in 2000−01 (Figure 30). In 2013, the New South Wales Government granted a 99-year lease of the port to the NSW Ports consortium. The consortium includes Industry Funds Management (IFM), Australian Super and Tawreed Investments Limited, a wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA) (Baird 2013).

The Port of Newcastle is New South Wales' largest port by throughput and the world's largest coal export port. In 2008−09, the Port of Newcastle facilitated 95.8 million mass tonnes of trade, with 90.5 million mass tonnes of this trade being coal exports (Engineers Australia 2010). In 2012−13, the Port of Newcastle exported approximately 1.7 million tonnes of grain (Ports Australia 2013), slightly less than its 2004−05 maximum grain export throughput of 1.8 million tonnes (Figure 30). In April 2014, the New South Wales Government announced the port would be leased for 98 years to Port of Newcastle Investments, a consortium comprising Hastings Fund Management and China Merchants (Baird 2014).

New South Wales non-bulk wheat exports have also increased in the past decade. Between 2002−03 and 2012−13, the share of containerised wheat exports in New South Wales increased from around 6 per cent to 21 per cent. The increase was particularly noticeable after deregulation of non-bulk exports in August 2007, with the volume of these exports increasing from 236 thousand tonnes in 2006−07 to 650 thousand tonnes in 2012−13 (Figure 31).

Figure 31 New South Wales grain export volume, in bulk and containers, 2002−03 to 2012−13

containers

bulk

0

1

2

3

4

mill

ion

tonn

es

Source: ABS International Trade, Australia, cat. no. 5465.0

Unpublished ABS data also show that exports in bags (not shown in Figure 31) increased following deregulation. In 2007, no wheat was exported in bags. However, these exports increased to 18 thousand tonnes in 2008. They remained around 10 to 12 thousand tonnes in the two years that followed, before declining to 2 thousand tonnes in 2012.

Containerised wheat exports are more prevalent in the eastern states than in Western Australia (see Figure 11 in chapter 2). As explained in chapter 2, one reason for this trend may be because the eastern states receive high volumes of imports in containers. Logistics firms may seek to

45


off-set the cost of re-exporting these containers by ‘back loading’ with wheat. The price offered by these firms may be sufficiently low to make exporting wheat in containers financially viable, especially to satisfy niche markets. In addition, exporting in containers allows growers and exporters to avoid using the bulk handling system. However, during consultations most stakeholders commented that exporting wheat in containers would probably remain a niche market, even if there is a significant expansion in exports in the future.

Export destinationsThe main export markets for New South Wales’ wheat in 2012–13 include North East and South East Asia and the Middle East (Figure 32).

Of the top 10 importers of New South Wales wheat, three are located in North East and South East Asia. The established relationships with these trading partners are likely to play an important role in creating more export opportunities for the Australian wheat industry as food demand in Asia increases.

ABARES’ projections of wheat consumption and trade indicate that the ASEAN countries, Japan, the Republic of Korea and India will continue to be net importers of Australian wheat in 2050. Currently, China is a net importer or net exporter depending on its production and consumption in any given year. However, it is predicted to be a net exporter by 2050 (ABARES 2013).

Figure 32 Major export destinations for New South Wales wheat, 2012–13

620

332257 237 234 224 195 176 144 131

Imports of wheat as grain from New South Wales(thousand tonnes)

Note: Only wheat as grain is included. Financial years.Source: ABS International Trade, Australia, cat. no. 5465.0

One of the reasons why South East and North East Asian countries are likely to continue to be major destinations for New South Wales wheat exports is the relatively shorter distance to these destinations (Figure 33).

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Figure 33 Shipping times from Port Kembla in days

22.25

25.15

13

13.25

14.1

17.25

11.5

Umm Qasr, Iraq

Alexandria, Egypt

Ho Chi Minh City, Vietnam

Yokohama, Japan

Shanghai, China

Kolkata, India

Jakarta, Indonesia

Note: Shipping times are denoted in days. The shipping time differential for Newcastle is approximately -0.2.Source: Searates.com

InfrastructureAs in other states, the production and movement of grain in New South Wales requires access to various forms of infrastructure. Similar to Western Australia, the main infrastructure bottlenecks within the New South Wales supply chain relate to transport and port infrastructure, although a lack of mobile phone coverage in some areas was identified in stakeholder consultations as a potential constraint for marketing wheat during harvest. The focus of this section is on transport and port infrastructure.

The New South Wales supply chain is somewhat different from Western Australia in that New South Wales consumes a significant proportion of the wheat it produces. Much of this wheat is delivered directly from farms to domestic customers, while wheat delivered to the bulk handling network is distributed to either domestic customers or ports.

RailThe rail system plays an important role in delivering wheat produced in New South Wales to domestic markets and export terminals. It is estimated that rail delivers around 2 million tonnes of grain a year to domestic mill consumers. While large feed grain consumers receive grain by rail and road (for example, poultry feed mills operated by Inghams Enterprises and Bartter Enterprises), much of the grain delivered to flour mills from up-country receival sites is delivered by rail (Sd+D 2008; DITRDLG 2009b). Rail also handles significant volumes of processed products, including 450 thousand tonnes of bulk flour for the domestic market and around 300 thousand tonnes of export flour for Manildra Group each year (Sd+D 2008). Many of these movements are long haul and account for a significant share of the regional freight task. Some of the smaller mills receive grain from farmers, major up-country bulk handling receival sites and private storage sites using the road network (Sd+D 2008). In 2014, GrainCorp estimated that 30 per cent of the volume of grain transported to domestic markets was by rail, but that this is expected to fall in the short term (GrainCorp pers. comm. 2014).

Rail dominates the transport of grain destined for international markets. The Productivity Commission (PC 2010) found that around 95 per cent of New South Wales export grain (measured by volume) was transported by rail in 2007. According to AEGIC, this had fallen to 85

47


per cent in 2013 (AEGIC 2014b). This is still significantly higher than in Western Australia. GrainCorp estimates that 2 million tonnes of export grain has shifted from rail to road over the past decade but that the company aims to return 1 million tonnes of that back to rail freight (GrainCorp pers. comm. 2014).

In 1996, above-rail operations in New South Wales were vertically separated from the management of below-rail infrastructure (GIAC 2004). The New South Wales Grain Freight Review found that while above-rail infrastructure and services were deemed adequate, the condition of below-rail infrastructure in the Country Regional Network’s grain line network was poor (DITRDLG 2009b).

Above-railThe main companies currently providing above-rail grain freight services in New South Wales include Asciano (through its Pacific National division), Aurizon and Qube Logistics. These companies provide services to GrainCorp, AWB GrainFlow and Emerald Grain.

Above-rail grain freight service providers in New South Wales negotiate access with below-rail track owners for their rail transport operations.

Below-railMap 8 shows the Country Regional Network (CRN) that handles freight and passenger services in New South Wales. This network consists of the CRN Grain Network that comprises Class 3 and Class 5 branch lines that transport wheat, barley, other cereals and oilseeds and the Mainline Network (Classes 1, 2, 3 and 5 main lines) that handles both freight and passenger services (DITRDLG 2009b) (see Box 5).

The Country Regional Network is comprised of 2 700 kilometres of operational and 3 200 kilometres of non-operational track (Transport for New South Wales 2012). The CRN Grain Network consists of 1 118 kilometres of track (1 093 kilometres operational) spread across 17 rail lines (Engineers Australia 2010; IPART 2012).

The below-rail network used in the grain supply chain is government owned and managed. The management of the rail network is split between the Australian Rail Track Corporation (owned by the Commonwealth of Australia), CityRail (RailCorp, state-owned) and Transport for New South Wales (state-owned).

The Australian Rail Track Corporation has control over interstate track and some other major corridors such as the Hunter Valley route.

CityRail manages the Sydney metropolitan network, which carries some freight, including grain destined for domestic markets (Sd+D 2008).

Transport for New South Wales owns the Country Regional Network but John Holland Rail is contracted to manage the operation and maintenance of this network. As the infrastructure agent of Transport for New South Wales, John Holland Rail is also the first point of contact for third party access to the network (Transport for New South Wales 2014).

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Map 8 New South Wales Country Regional Network

Source: DITRDLG 2009b

Box 5 Classification within the CRN

Forty-seven per cent of the CRN is designated as Class 1 or 2 lines (not distinguished on Map 8), 27 per cent as Class 3 lines and 26 per cent as Class 5 lines. The Class 3 and Class 5 branch lines are dedicated to grain freight while Class 3 and Class 5 main lines are for both passenger and freight (other than grain).

The axle limit on Class 3 and Class 5 branch lines is 19 tonnes, compared with the axle limit on main lines of 21 tonnes.

Class 3 branch lines are generally adequate for light axle loads at up to 80 km/h or heavier wagons at lesser speeds.

The design speed of Class 5 lines is 50 km/h empty and 20−30 km/h loaded depending on the type of wagon. A considerable portion of the Class 5 lines have speed restrictions of less than 30 km/h because of poor condition.

Source: Engineers Australia 2010

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Road The road network also plays an important role in transporting grain in New South Wales. The domestic stockfeed market is almost entirely road based because there are multiple customers that are spatially fragmented. As such, few of these customers can be serviced by rail. Moreover, feedlots are usually located in areas close to grain and livestock properties, so the trip from grain supplies to feedlots is relatively short. Road is also vital in transporting grain from farms to up-country receival sites (Figure 25). Road transport complements the role of rail in some of these market segments. Furthermore, road transport has a role in managing the overflow of export grain in periods or years when exceptionally high volumes of grain need to be moved (DITRDLG 2009b).

Transport infrastructure issuesThere are a number of inefficiencies within the transport system that have the potential to increase costs and reduce the competitiveness of wheat produced in New South Wales. Similar to the grain industry in Western Australia, these issues mainly relate to:

the condition, access and capacity of transport infrastructure

transport infrastructure pricing and investment.

Infrastructure condition, access and capacityMuch of the rail network used to transport wheat in rural areas is in poor condition. Class 5 and some Class 3 branch lines that carry very low volumes of freight have been the subject of two major reviews over the past 10 years (see Box 6). Both reviews found that cost recovery on these lines was very low, between 3 and 6 per cent. Following the Grain Infrastructure Advisory Committee review (GIAC 2004), four branch lines were closed down, while significant weight and speed restrictions were imposed on some of the remaining branch lines (DITRDLG 2009b).

Box 6 Condition and cost recovery on branch lines

The future of Class 5 restricted branch lines and a small number of Class 3 branch lines that carry very low volumes of freight were the focus of a Grain Infrastructure Advisory Committee review (GIAC 2004) and the New South Wales Grain Freight Review (DITRDLG 2009b). These reviews used cost benefit analysis to determine the viability of these branch lines. Both reviews found cost recovery to be very low, 3 per cent on average for the 15 lines examined in the GIAC review and around 6 per cent for the lines examined in the New South Wales Grain Freight Review.

Following the recommendations in the GIAC review, the New South Wales Government responded by suspending services on 4 of the 15 lines examined and committed $69 million over 3 years to keep the remaining lines open.

In 2008, the NSW Government announced that services on another five lines were to cease. However, this decision was delayed pending the outcome of the New South Wales Grain Freight Review (IPART 2012). In 2009, the New South Wales Grain Freight Review (DITRDLG 2009b) recommended that the majority of the branch lines be retained at a fit-for-purpose standard, as the total costs of increased grain traffic on the road network would outweigh the costs of keeping the lines open.

The New South Wales Grain Freight Review also recommended that the New South Wales Government consider future rail access charges to determine an appropriate user contribution to the costs of on-going maintenance of these lines. IPART conducted a review of access pricing on the New South Wales grain line network in 2012 and recommended an increase in the grain line access price from $2.61 to $5.22 per thousand gross tonne-kilometres over a two-year period following the review. Prices should then be increased in line with the change in CPI for the remaining 3 years of the 5-year period under review (from 2012−13 to 2016−17) (IPART 2012).

In August 2012, the New South Wales government accepted IPART's recommendations and John Holland implemented the price increase. For more information, see John Holland (2015).

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The rationalisation of these branch lines, as well as the rationalisation of some up-country receival sites has led to an increase in road transport. The use of roads to deliver wheat from farms to receival sites and to domestic markets and ports imposes costs on the road network. Many local roads are already in poor condition, and are highly susceptible to damage from heavy trucks. While grain is likely to be one of many different types of freight transported on highways, it can represent a major proportion of traffic on some local roads (GIAC 2004, DITRDLG 2009b). In order to limit the damage caused by trucks, the New South Wales government imposes mass limits on trucks using New South Wales roads (Box 7). The government also imposes restrictions for other reasons, including to reduce congestion and to protect amenity in urban areas.

Box 7 Allowable mass limits on New South Wales roads

General Mass Limits (GMLs) specify the maximum mass limits at which a heavy vehicle may operate at under the Heavy Vehicle National Law. GML vehicles are allowed to run on all New South Wales roads. These vehicles must be no longer than 19 metres, no higher than 4.3 metres and no wider than 2.5 metres (Transport for New South Wales 2013).

Eligible vehicles that meet the requirements of the National Heavy Vehicle Accreditation Scheme have access to Concessional Mass Limits (CMLs). CMLs are set at up to 5 per cent above existing GML, subject to:

(i) a maximum of 1 tonne for a vehicle or vehicle combination with an allowable gross mass not exceeding 55 tonnes

(ii) a maximum of 2 tonnes for vehicle combinations with an allowable gross mass exceeding 55 tonnes (National Heavy Vehicle Regulator 2014).

Higher Mass Limits (HMLs) are the highest level of mass that road freight vehicles are able to carry on New South Wales roads. HMLs are available to eligible vehicles on certain roads and require enrolling in the Intelligent Access Program (Transport for New South Wales 2013).

While poor roads can increase transport costs through damage to trucks and slower delivery times, road transport mass restrictions can also increase transport costs. In particular, ‘first mile’ or ‘last mile’ problems can occur when different quality roads connect. For example, a ‘first mile’ problem can occur if a lower quality local road connects to a high quality arterial road while a ‘last mile’ problem can occur when a high quality arterial road connects to a local road. Lower quality roads are not made to carry high mass vehicles. Mass restrictions can affect the efficiency of high productivity vehicles (HPVs) if they lead to longer journeys on alternative routes to avoid restrictions on local roads, downsizing of vehicles for the entire journey to avoid HML bottlenecks or downsizing of HPVs to smaller configurations at the start or end of a trip to meet local road restrictions (ATA 2013).

Similar to other states, the New South Wales Government has introduced the New South Wales Grain Harvest Management Scheme to relax the mass limit restrictions during the harvest season (Transport for New South Wales 2013). The scheme was trialled in the 2013–2014 season and approved for use in the 2014–2015 and 2015–2016 seasons (Roads & Maritime 2015).

The annual variability in wheat production in New South Wales can also pose significant challenges for grain freight logistics. These challenges include the unpredictability of annual demand for transport infrastructure because of seasonal variations in production, as well as more predictable increases in demand around harvest time and during the grain ‘marketing window’ as growers seek to maximise returns by exporting grain just after harvest (DITRDLG 2009b).

While bumper seasons and seasonal increases in demand can create excess demand for transport infrastructure, investing in additional infrastructure, including additional rolling stock

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or loaders to meet these peaks may not be warranted, especially given the existence of significant excess capacity during other times of the year. This view was expressed by most stakeholders in consultations. The New South Wales Grain Freight Review Task Force identified a number of alternatives for dealing with these peaks, including (DITRDLG 2009b):

ensuring that there are no restrictions on 24-hour rail operations into port terminals

improving the rate at which grain can be loaded from rail at Newcastle

refining operations to maximise the number of train paths available at critical points in the network

harmonising technical and safety standards between the states to facilitate the relocation of equipment

introducing peak period pricing on rail to smooth demand throughout the year.

Increasing the use of on-farm storage is also a possible strategy to smooth demand for transport infrastructure. For example, a portion of a bumper crop could be stored and carried over into the next harvest year to avoid the high cost of transport.

It might also be inevitable that a higher proportion of the grain freight task will be carried by road in periods or years when exceptionally high volumes of wheat are to be moved. The implication of higher road usage is higher road damage costs, which will be essential for governments to manage.

There is also an issue with rail capacity and access in some regions. For example, congestion can occur on the rail network leading to Newcastle, particularly in the Hunter Valley because of competition for access to the port terminal between coal and wheat. There are also restrictions on the transport of containers to the Port of Sydney because of a curfew on these movements that has the potential to affect containerised wheat movements (DITRDLG 2009b).

Pricing and investmentOne of the problems facing rail and road infrastructure in New South Wales and Australia more generally, is inefficient pricing, which in turn can lead to inefficient investment in infrastructure. A major problem for rail is the low level of cost recovery for the below-rail network. A significant proportion of the rail network in rural New South Wales is used to transport grain and little else. According to IPART, 95 per cent of all traffic on grain lines is grain, with general freight, minerals and some passenger traffic accounting for the remaining 5 per cent (IPART 2012). This concentration of use by the grain sector and the relatively low levels of utilisation have implications for cost recovery, with the grain line network recovering only 2.3 per cent of the costs incurred in operating and maintaining the network through access revenue in 2010−11 (IPART 2012). It would also appear that rail freight rates are constrained by road freight rates, with road freight rates generally setting a cap on rail freight rates (Sd+D 2009).

Rail track maintenance and upgrades are expensive. According to IPART, in New South Wales, the state government subsidies 97 per cent of the cost of providing a 'fit-for-purpose' standard for the grain branch lines (IPART 2012). In 2012, IPART recommended a 100 per cent increase in rail access prices between 2011−12 and 2012−13, and increases in line with the consumer price index for the following three years. The main reasons for the recommendation included:

current levels of cost recovery are unsustainable

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the government subsidy does not reflect net external benefits

other options are unlikely to achieve cost recovery (IPART 2012).

Given the level of this subsidy, and pressures on public finances in Australia, it is likely that pressures to increase cost recovery will continue, which could lead to more branch line closures. There are also questions about the extent of cost recovery in the road sector in New South Wales. This issue is common across Australia and is discussed in more detail in Chapter 6.

Port accessAnother infrastructure issue within the New South Wales wheat supply chain is GrainCorp’s dominance of port loading facilities. Until recently, GrainCorp was the sole owner of grain exporting facilities at Newcastle and Port Kembla. Because these port terminals account for the majority of New South Wales wheat exports, an access test was applied to these facilities so as to prevent GrainCorp from favouring its wheat export marketing operations at the expense of third parties seeking access to its grain loading facilities (DITRDLG 2009b; PC 2010). Similar to Western Australia, there is a grain ‘marketing window’ bottleneck that can lead to excess demand for grain loading facilities at peak periods. Prior to 30 September 2014, bulk handlers in New South Wales were subject to the same requirements to pass an access test that governed access to ports where bulk handlers have the potential to restrict access. On 19 September 2014, the Minister for Agriculture released the mandatory code of conduct to replace the previous access undertaking arrangement. The mandatory code of conduct took effect from 30 September 2014, however, it contains transitional provisions, which delay its application for up to 12 months, to allow industry adjustment to the new regulations and ensure port services are not disrupted during implementation (Department of Agriculture 2014c). During this transitional period, the ACCC will determine the appropriate level of regulation under the code for each bulk wheat export port based on a number of factors including competitive restraint.

Under GrainCorp’s access undertaking arrangement, it allocates 50 per cent of the capacity at its port facilities (receival, storage and ship loaders) on a first-in-first-served basis and 50 per cent by a system of long-term agreements (GrainCorp pers. comm. 2014). These long-term agreements are not tradeable. This capacity allocation system is different from the auction system currently used by CBH in Western Australia.

In June 2014, the ACCC accepted GrainCorp's application to vary the Port Terminal Services Access Undertaking at its Newcastle bulk grain facility (ACCC 2014). The reason GrainCorp sought this variation was because of competition from two new bulk exporting operations at the Port of Newcastle. These new entrants are Newcastle Agri-Terminal and the Louis Dreyfus Commodity Terminal (GrainCorp 2013). These new bulk wheat export terminals are not subject to access regulations (ACCC 2014).

The decision to invest in new grain loading facilities may suggest that access arrangements currently in place are not allocating access to GrainCorp facilities efficiently, especially during peak periods.

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5 Estimates of supply chain costsThe price of Australian wheat is largely determined in international markets. As a result, the competitiveness of Australian wheat is driven by the costs of producing and exporting wheat. Any inefficiency within the Australian wheat supply chain will be reflected in higher costs, which will reduce the competitiveness of Australian wheat. This chapter contains estimates of costs in Australian wheat supply chains. Although estimates from previous studies are not directly comparable because of differences in the methodologies employed, they provide an indicative range of supply chain costs across the country.

Transport and handling costs in AustraliaDifferences in the definition and aggregation of off-farm costs can make comparisons of various segments of the supply chain difficult. This section uses available data to estimate a range of costs, including the cost of transporting wheat from farms to receival sites and to ports, as well as costs incurred at up-country receival sites and ports. Shipping costs are also discussed.

While off-farm supply chain costs have fallen by about a third since the mid 1980s when the wheat industry was more regulated (AEGIC 2014a), they are still substantial.

Freight to receival siteFarmers can use their own trucks to deliver wheat to up-country receival sites or domestic customers or contract these services out. Where these services are contracted out, freight rates tend to be negotiated privately between farmers and trucking firms, so they can vary from property to property and by receival site.

Box 8 Prior studies on wheat supply chain costs

This chapter draws heavily on two previous studies of wheat supply chain costs.

The first is 'Transport costs for Australian agriculture', undertaken by Goucher (2011) for the Australian Farm Institute. This study estimates the off-farm supply chain costs of moving 200 tonnes of wheat from farms in Western Australia and New South Wales to two export destinations. The New South Wales case study estimates the cost of moving wheat grown at Come by Chance to Yokohama, Japan, via the Burren Junction receival site and the GrainCorp terminal at Newcastle. The Western Australian case study estimates the cost of moving wheat grown at Tampu to Alexandria, Egypt, via the Bonnie Rock receival site and CBH's Kwinana terminal. The estimates were derived using published costs and quotes from transport firms. Although the Consumer Price Index increased by 7.5 per cent between 2010-11 and 2013-14 only nominal estimates are quoted here. Related Producer Price Indexes increased by 10 to 15 per cent over the same period.

The second study is the Australian Export Grain Innovation Council's information paper ‘The cost of Australia's bulk grain export supply chains’ (AEGIC 2014b). This study estimated supply chain costs of delivering wheat to a site 200km to port in all wheat producing states in Australia.

Publicly available estimates of the average rate paid by producers in Western Australia to transport wheat to receival sites are relatively consistent, and in the range of $10 to $20 a tonne (Hooper 2010; Valle 2014; DITRDLG 2009a; Goucher 2011 and CBH pers. comm. 2014). Hooper (2010) estimated the average cost of freight in the Western region (Western Australia) to be around $13 a tonne in 2008−09, while Valle (2014) estimated $11 a tonne for the three years to 2012−13. Although these figures may include the freight of materials to the farm, these estimates are similar to that estimated by Goucher (2011). In this study, Goucher estimated the cost of transferring 200 tonnes of wheat from Tampu, Western Australia to Bonnie Rock receival site (60 kilometres) to be $12 a tonne (see Box 8). According to CBH, the cost of transporting

54


wheat by road from farm to receival site is a flat rate of $10 a tonne for the first 30 kilometres, with additional costs of 15−18 cents a tonne for each additional kilometre (CBH pers. comm. 2014). Using this formula, the cost of transporting wheat from Tampu to Bonnie Rock would be between $14.50 and $15.40 a tonne. This is similar to the $16 a tonne estimate used by SAHA International in its report for DITRDLG (2009a).

There are fewer estimates available for New South Wales. The study by Hooper (2010) estimated these costs to be around $9 a tonne in the Southern grain region and $5 a tonne in the Northern grain region. Valle (2014) estimated values of $6 and $8 a tonne in the Southern and Northern grain regions, respectively for the three years to 2012−13. However, care must be taken when using these estimates as the study was designed to examine on farm practices and costs rather than the costs of off-farm activities such as transport (see Box 9). These estimates are much lower than those provided by Goucher (2011), which estimated the cost of moving grain from Come by Chance, New South Wales, to the Burren Junction receival site (78 kilometres) to be $22.50 a tonne.

Box 9 Australian Agricultural and Grazing Industries Survey data

The annual ABARES Australian Agricultural and Grazing Industries Survey (ABARES AAGIS) collects cost and other financial data from Australian farm businesses. Since many farm businesses produce a range of outputs it is difficult to disaggregate estimates of specific grain or wheat costs. In the survey estimates, wheat producing farms are grouped with other crop producing farms, which may produce other grains and oilseeds and also carry some livestock.

Since 2009, ABARES has conducted several supplementary surveys on behalf of GRDC to determine costs of grain production across the three GRDC regions. The businesses were asked to attribute proportions of each cost category to grain production. Hooper (2010) presents data for 2008–09 while Valle (2014) presents results for the three years from 2010−11 to 2012−13.

This survey provides estimates of costs per tonne for various inputs, but with important caveats. The attribution of costs is usually an approximation by the farm business. However, some cash costs such as those of water, freight, administration, handling and marketing are estimated by the ratio of total grain receipts to total cash receipts. The survey is primarily designed to study farm practices and their relation to cost, and does not focus on costs of activities beyond the farmgate, such as transport. As such, the transport costs of inputs to the farm or of some outputs to end uses may be included. Furthermore, overhead costs are spread across other farm enterprises.

Ideally, it should be possible to estimate the full costs of the domestic supply chain from such farm finance data. However, the grain supply chain is unusual in that freight, handling and marketing costs are incorporated into the farmgate price. This is because farmers sell their wheat to traders directly, and farmers pay other firms for the services of transport, freight, handling and marketing. Therefore, unless the full transport and handling costs of wheat from farm to port are accounted for in farm finances, it is not possible to estimate transport costs by comparing farmgate and export prices, nor is it possible to derive transport costs directly from existing survey data.

Costs charged by bulk handlers The transport of grain from receival site to port is the most infrastructure intensive link in the supply chain. The cost of transporting wheat from an up-country receival site to a port depends on a number of factors, including distance to port, demand levels across the transport system, which can vary with seasonal conditions, and the mode of transport used. The variation in transport costs has increased since bulk handlers have introduced differential pricing for receival sites with varying costs.

Bulk handlers charge for related services, including storage and handling, grading and quality control. If the bulk handler is also the exporter, it will charge a marketing fee. Pricing structures can vary significantly between bulk handlers, so comparing the costs of using different handlers is difficult. This is particularly so when services are bundled, for example, a flat receival fee of

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$10 a tonne charged by CBH includes storage until October the following year, whereas GrainCorp customers pay a monthly storage fee of $1.50 a tonne on top of a lower receival charge of $6.90 per tonne.

As such, the costs quoted by different bulk handlers are not directly comparable. The freight rates charged by CBH in Western Australia and GrainCorp in New South Wales, together with ABARES calculations of the distance from each site to port, are discussed below.

CBHCBH quotes a flat rate per tonne from each receival site to the port to which the receival site is assigned. Figure 34 presents data derived from these publically quoted freight rates. The lowest quoted price for transport from a receival site in a port zone is always the closest to port, while the most expensive is the most distant from port and is never located on a railway line. Additionally, these most expensive and distant sites are surge receival sites—designated as an alternative to be used when primary and secondary sites are at capacity.

The median cost per tonne-kilometre across the relevant receival sites is higher for road than for rail in three of the four port regions; however, the distance to port from road sites is shorter than that from rail sites (Figure 34). The heavily rail dependent Kwinana zone (in which the Tier 3 lines discussed in Chapter 3 are located) has lower per tonne-kilometre charges for rail than for road.

Figure 34 Prices and distances for CBH receival sites, by port zone

$0.07

$0.10$0.08

$0.07$0.09

$0.08$0.10

$0.08

Albany Esperance Geraldton Kwinana

Median per tonne kilometre cost from site to port

323 km

46 km

190 km

295 km

198 km 225 km

87 km

284 km


Median site distance to port

Median rail site Median road site

$7.75$1.31 $0.88

$10.64

$27.71 $25.47 $25.15$28.73


Range of site prices to transport 1 tonne to port

Least expensive site offered Most expensive site offered

Note: Derived from CBH (www.cbh.com.au) offered freight rates and ABARES analysis. Costs do not include GST.

Figure 35 shows that prices per tonne-kilometre tend to be higher for road sites than rail sites, but that both have lower per kilometre costs as wheat is freighted further.

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Figure 35 CBH's freight rates for road and rail sites

Rail

Road

$0.00

$0.04

$0.08

$0.12

$0.16

0 200 400 600

Cost

per

tonn

e ki

lom

etre

Distance to port (km)

Note: Costs do not include GST.Source: from CBH (www.cbh.com.au) offered freight rates and ABARES analysis

Previous research on Western Australian wheat supply chains (see Box 8) has estimated freight costs within a similar range. The Australian Farm Institute's Western Australian case study (Goucher 2011) estimated that it costs $29.72 a tonne to transport wheat from Bonnie Rock to Kwinana in 2010−11—slightly higher than the $27.63 a tonne quoted by CBH for the 2013−14 season for the same distance.

GrainCorpGrainCorp's freight task to port is mainly conducted by rail, and there are different pricing systems for road and rail. Therefore, the two modes cannot be directly compared, but there are notable differences between the Port of Newcastle (referred to by GrainCorp as Carrington) and Port Kembla zones that reflect the issues discussed in the case study chapter.

As with CBH, GrainCorp charges a flat price per tonne from a given rail site to port. Although prices for transporting grain from sites in the Newcastle zone tend to be cheaper per tonne, this seems to reflect shorter distances travelled—the cost per tonne-kilometre is cheaper in the Port Kembla zone (Figure 36). While costs per tonne-kilometre are similar in New South Wales to Western Australia, the total cost for transporting wheat from up-country receival sites to ports in New South Wales is significantly higher because of the significantly longer distances to ports in New South Wales.

Road freight charging in New South Wales is not site-based but varies directly by distance to port. A different price is cited for each kilometre, rather than using a formula, but the increase per kilometre is constant. The charges differ between the two New South Wales port zones. The prices are higher in the Newcastle zone compared with the Port Kembla zone, both for the minimum ‘flag fall’ charge ($7.69 versus $5.59) and rate per tonne-kilometre (10 cents versus 9 cents) (estimated by ABARES). This means the cost difference grows as grain is freighted further. There are no quoted figures for transport costs to domestic market destinations. However, it is reasonable to expect that the transport costs to domestic users are similar to the above per tonne-kilometre costs.

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Figure 36 Rail freight for GrainCorp receival sites to New South Wales bulk ports

$25.40$31.84

$42.75 $44.42$49.16 $52.69

Newcastle Port Kembla

Price to transport 1 tonne from site to port

Minimum Median Maximum

$0.08 $0.07$0.09 $0.08

$0.14$0.12


Cost per tonne kilometre from site to port

214km304km

473km535km

693km 700km


Distance to port

Note: Derived from GrainCorp (www.graincorp.com.au) prices and ABARES analysis. Costs do not include GST.

Figure 37 shows the derived prices per tonne-kilometre for road freight and rail sites in each zone. As with CBH’s network, the cost per tonne-kilometre for both modes decreases as grain is freighted further, and road is more expensive. Although the two systems are not readily comparable, the difference between road and rail pricing appears larger in the GrainCorp network than the CBH network (Figure 35), which may contribute to the greater use of rail in New South Wales. Rail sites in the Port Kembla zone are more distant, but tend to have lower costs per tonne-kilometre for a given distance from port, at least for distances below 550 kilometres from port.

Goucher (2011) estimated rail freight costs at $42.40 a tonne from Burren Junction to the Newcastle terminal. These costs are lower than the $46.41 a tonne charged by GrainCorp in 2013−14 for the same trip.

Figure 37 GrainCorp rail sites and road formula

Newcastle road

Port Kembla road

Newcastle and Port Kembla rail sites

0

0.04

0.08

0.12

0.16

0 250 500 750

Cost

per

tonn

e ki

lom

etre

Distance to port (km)

Note: Derived from GrainCorp prices (www.graincorp.com.au) and ABARES analysis.

Transport costs within AustraliaThe case study approach used by Goucher (2011) allowed estimates of the proportion of off-farm costs attributable to transport. In the Western Australian case study, domestic transport costs account for 36 per cent of the off-farm supply chain costs when exporting wheat

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to Alexandria in Egypt, and 68 per cent when combined with storage, handling and loading costs. In the New South Wales case study, domestic transport costs comprise 48 per cent of the off-farm supply costs when exporting wheat to Yokohama, and 70 per cent when combined with storage, handling and loading costs (Goucher 2011).

Care should be taken when applying the proportions from these specific case studies to other locations.

Loading and other port costs Ship loading fees vary between states and bulk handlers because of differences in access undertakings with bulk handlers—auctions in the case of CBH and a mix of ‘first come, first served’ and long-term agreements for GrainCorp—and differences in pricing structures.

In 2013−14, CBH charged a base loading fee at all ports of $15.30 a tonne, and a $4 a tonne booking fee. As described in the case study, the auction system means exporters pay a premium above this based on how much they are prepared to bid to access the slot. However, this is partially rebated as described in the case study. GrainCorp charged a $3.49 a tonne loading fee with an $8 fee for booking a slot at its Port Kembla facility. While there appears to be a large difference in loading fees, GrainCorp also charges separate fees for other services (rail intake, quarantine inspection and storage) that CBH incorporates into its main charges. When this is taken into account, the difference in total port costs is relatively small. AEGIC (2014b) estimates a base cost of $21.90 a tonne for using CBH port facilities and $20.99 a tonne for using GrainCorp's Port Kembla facility.

Goucher (2011) estimated the total costs of loading 200 tonnes of wheat, including miscellaneous charges such as port fees and slot booking costs, to be $18.79 a tonne at CBH's Kwinana facility and $17.42 a tonne at GrainCorp's Carrington terminal at Newcastle. Allowing for the fact that these estimates are somewhat dated, they are broadly consistent with the more recent AEGIC estimates.

Loading containers is more expensive than bulk loading. GrainCorp provided a rough estimate of $15 a tonne for packing containers, with total loading costs of $24 to $30 a tonne. For its minor volume of non-bulk exports, CBH charges a similar fee of $28 a tonne for packing and loading containers, and $48 a tonne for loading bags into containers.

Shipping costsBulk shipping costs are largely determined by distance and global supply and demand for dry bulk shipping capacity. The cost of bulk shipping capacity is variable and grains such as wheat compete with dry mineral commodities such as coal and iron ore. The Baltic Dry Index is a recognised indicator of relative changes in the global price of these services. The index increased markedly and showed greater volatility during the ‘resources boom’ of the 2000s, reaching a high of 11 000 points in 2008. However, a significant downturn in world economic activity after 2008 resulted in surplus shipping capacity and the index fell below 2 000 by 2011, similar to levels observed in the 1990s (Goucher 2011). These falls have continued; in June falling to 906 points (PortNews 2014) and reaching 540 by February 2015 (DryShips 2015). Shipping rates paid for Australian grain are also affected by other factors, including the demand for shipping of other commodities, the ability to backload ships with cargo and fuel costs.

Goucher (2011) derived the average November 2010 to May 2011 price of shipping grain using a Panamax (60 000 deadweight tonnage) vessel from Western Australia and New South Wales. This study estimated the cost of shipping wheat from Kwinana to Alexandria via the Suez Canal

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to be $35.41 a tonne (30 per cent of total off-farm costs), and from Newcastle to Yokohama to be $36.69 a tonne (27.4 per cent of total off-farm costs).

Examples of breakdown of post farmgate costs Previous studies have presented breakdowns of post farmgate costs. These breakdowns include various cost components discussed in previous sections of this chapter. Table 2 presents the AEGIC's (2014b) breakdown of post farmgate costs for Western Australia and New South Wales in 2013–14 while Table 3 and Table 4 show Goucher's (2011) breakdown of transport costs from Western Australia to Alexandria, Egypt and from New South Wales to Yokohama, Japan, respectively. It is important to note the caveats and assumptions underpinning these estimates. As the approaches and case study examples employed in these studies are different, the estimates are not directly comparable. However, when port charges at destinations, exporting fees and shipping costs are excluded from the calculation of transport costs, the estimated supply chain costs in the AEGIC's report are $58.42 and $69.38 a tonne for the case studies of Western Australia and New South Wales, respectively. The corresponding estimates from Goucher (2011) are $61.26 a tonne and $86.87 a tonne, respectively.

Table 2 AEGIC (2014) breakdown of post farmgate costs, by State, 2013 – 2014

Cost category WA –CBH

($/ tonne)

NSW – GrainCorp

($/ tonne)

FOB price (assumed same at all ports) 320 320

—Port charges* 21.90 20.99

FIS price 298.10 299.01

—Up country receival and shrinkage* 11.49 15.18

—Storage for three months* - 4.50

—Rail freight — 200 km* 19.00 23.00

—GRDC levy* 2.73 2.71

—State research and biosecurity levies* 0.30 -

—End point royalties* 3.00 3.00

—Other*

Total supply chain cost before rebates 58.42 69.38

—Potential rebates from bulk handler -1.75 -

Supply chain cost after rebates 56.67 69.38

Farmgate price 263.33 250.62Note: Extracted estimates for Western Australia and New South Wales.FOB price is the free-on-board price. FIS price is the free-in-store price. * denotes the costs included in the total supply chain cost before rebates.Source: AEGIC 2014

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Table 3 Goucher (2011) breakdown of transport costs – 200 tonnes of wheat from Western Australia to Alexandria, Egypt

Transport Segment Rate per tonne

Percentage of total transport cost

Road: Tampu to Bonnie Rock* $12.00 10.3

Receival into CBH storage at Bonnie Rock* $11.05 9.5

Up-country storage* $8.00 6.9

Rail: Bonnie Rock to Kwinana terminal* $29.72 25.6

Marketer fee to book loading capacity $3.00 2.6

Grain export fee $14.10 12.1

Wharfage fee at Kwinana $1.20 1

Port charges*:

—Tonnage rate $0.420 0.4

—Mooring and unmooring $0.045 0

—Pilotage $0.026 0

Sea freight: Fremantle to Alexandria, Egypt $35.41 30.5

Port charges: Alexandria $1.318 1.1

TOTAL $116.29 100

Estimated pool return 2010/11, APW 1 delivery Fremantle (CBH) $340.00

Estimated pool return less transport to terminal $279.23

Transport cost as a proportion of estimated pool return at farmgate 40.5

Note: Western Australia – Bonnie Rock to Alexandria. * denotes the costs included in the total supply chain cost.Source: Goucher 2011

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Table 4 Goucher (2011) breakdown of transport costs – 200 tonnes of wheat from New South Wales to Yokohama, Japan

Transport Segment Rate per tonne

Percentage of total transport cost

Road: Come by Chance to Burren Junction* $22.50 16.8

Receival into GrainCorp storage at Burren Junction* $6.35 4.7

Up-country storage* $5.52 4.1

Rail: Burren Junction to Newcastle* $42.40 31.7

Rail intake to Newcastle terminal* $7.50 5.6

Terminal storage* $1.10 0.8

Vessel nomination fee $5.00 3.7

Vessel loading fee $2.50 1.9

Port charges*:

—Navigation service charge @ $0.431 0.3

—Wharfage@ $0.787 0.6

—Pilotage@ $0.082 0.1

—Port security and ships utility charges $0.023 0

Sea freight: Newcastle to Yokohama, Japan $36.69 27.4

Port charges: Yokohama $3.019 2.3

TOTAL $133.91 100

Grain Corp estimated pool return, APW 1, 2010/11, delivery Newcastle

$355.00

Estimated pool return less transport to terminal $270.73

Transport cost as a proportion of estimated pool return at farmgate

48.5

Note: New South Wales: Come by Chance to Yokohama. * denotes the costs included in the total supply chain cost.Source: Goucher 2011

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On-farm costs of productionAccording to ABARES farm survey data (Figure 38), the largest on-farm costs for grain producers in the three years to 2012−13 were fertiliser and chemicals (Box 9 describes the survey from which these costs were derived). On average, these two costs accounted for around 45 per cent of the total cash costs of grain production in the Western region, and 37 and 28 per cent in the Southern and Northern regions, respectively. In general, the Western region has less fertile soils, which require more fertiliser (Valle et al. 2013). Differences in cash costs per tonne of grain produced partly reflect differing seasonal conditions and quantities of grain produced. For example, the grain yields achieved in 2011-12 in the Western region were approximately double those in 2010-11.

With estimates of transport costs ranging between around $58 and $61 a tonne in Western Australia and around $69 and $87 a tonne in New South Wales, transport costs are at least as substantial as the largest on-farm costs (fertilisers and chemicals) (Figure 38).

The average farm cash costs of producing grain for the three regions were estimated to be around $220 a tonne for the Western region, around $160 a tonne for the Southern region and around $180 a tonne for the Northern region. However, depending on seasonal conditions, the ranking of total cash costs of producing grain across the three regions varies from year to year.

Figure 38 Cash costs of producing grain per tonne, by region, 2010−11 to 2012−13

16

20

28

27

38

40

74

36

67

29

26

38

21

28

28

47

24

49

20

21

25

16

21

24

29

15

28

19

20

25

15

19

22

26

12

24

91

77

92

55

62

77

85

59

81

2010–11

2011–12

2012–13 p

2010–11

2011–12

2012–13 p

2010–11

2011–12

2012–13 p

Nor

ther

nSo

uthe

rnW

este

rn

Fertilisers Crop and pasture chemicals Fuel, oil and grease Repairs and maintenance Other

Note: p Preliminary estimate. Values are average per farm, in 2013-14 dollars per tonne. Cash costs do not include family labour. See Box 9 for important caveats.Source: Valle 2014

ABARES Australian Agricultural and Grazing Industries Survey (AAGIS) data also show that electricity, telecommunications and water charges account for a relatively small proportion of total costs—less than 1 per cent in 2011−12. This is to be expected given that most wheat produced in Australia is produced on dryland farms, and that, apart from the use of fuel and oil, wheat production is not an energy intensive activity. While telecommunications would be expected to be important for purchasing inputs and marketing wheat, they are unlikely to represent a significant cost of producing wheat, although some stakeholders suggested that a lack of mobile phone coverage was a constraint in some instances, especially when marketing wheat during harvest.

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6 Freight movement simulation and implications

The previous discussion indicates that transport infrastructure is a potentially significant constraint within the wheat supply chain. Research by Engineers Australia (2010) indicates that much of Australia’s road and rail networks are in poor condition, especially some of the local road and rail networks.

The deterioration in the condition of the rail network has been reflected in the imposition of speed and weight restrictions on some branch lines, and the closure of other lines. This has put more pressure on the local road network, much of which is currently assessed as in poor condition. Any increase in wheat production would, therefore, be expected to place additional pressure on road networks.

SimulationIn order to illustrate the potential impacts of increasing wheat production and rationalising the rail network, ABARES has undertaken a number of simulations using a wheat freight movement model that distinguishes between rail and road wheat freight in Western Australia. The simulations use different assumptions about future increases in wheat production in Western Australia and about decisions on whether to retain or close Tier 3 branch lines used to transport grain (see Appendix B for a detailed description of scenarios, assumptions and results). Brookfield Rail announced in 2013 that two Tier 3 branch lines—from York to Quairading and from Merredin to Trayning—would not operate from October 2013 after they failed to reach an agreement with CBH on these lines, and that the remaining Tier 3 lines would be placed in non-operational ‘care and maintenance’ before the 2014−15 harvest.

The objective of the modelling is to identify the least cost pathway for wheat freight from farm to port in Western Australia. There are two stages in the modelling. The first stage involves modelling the transport of wheat from farms to receival sites by road, while the second stage involves modelling the transport of wheat from receival sites to one of the four ports exporting wheat from Western Australia using the road or rail network.

The scenarios used in the simulation are summarised below.

The baseline scenario (or APL scenario) assumes that wheat production by local government area (LGA) is equal to the average of wheat production between 1991 and 2011, and that all rail lines are available for wheat haulage.

The two production scenarios use different assumptions about the extent of the increase in wheat production and the spatial distribution of this increase across the Western Australian wheat belt.

o The first production scenario is intended to reflect the maximum production in Western Australia (MPL scenario) in the agricultural census years between 1991 and 2011. The production level assumed in this scenario is equal to a 49 per cent increase above average production between 1991 and 2011.

o The second scenario assumes a 63 per cent increase above the average, and is based on projections to 2035 by the Western Australian Department of Agriculture, Fisheries and Forestry (the DPPL scenario).

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The infrastructure scenarios assume that Tier 3 lines would be closed. The production levels are the same as those in the two production scenarios.

The modelling results are summarised in Table 5 and full results are presented in Appendix B. They indicate that increasing production by 63 per cent under the DPPL scenario will lead to a 79 per cent increase in the use of road transport and a 42 per cent increase in the use of rail transport for wheat. When Tier 3 lines are assumed to be closed, road transport increases by 101 per cent while rail use increases by 33 per cent. The results suggest that road use will increase significantly even in the absence of branch line closures although these closures would put considerable additional stress on the road network.

Table 5 Freight volume change by mode, by percentage and tonne-kilometres

Mode road rail

MPL % million t-km % million t-km

—with tier 3 57 165 45 650

—with no tier 3 76 218 37 536

DPPL

—with tier 3 79 226 42 601

—with no tier 3 101 290 33 470

Note: t-km denotes tonne-kilometre.

Map 9 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario, without Tier 3 (DPPL−no−Tier3)

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The modelling results also identify the spatial pattern of potential changes in road transport. The spatial patterns of road and rail freight are highly dependent on where increases in production are assumed to occur and what transport infrastructure is available. Under the DPPL scenario, most increases in wheat production occur in high rainfall areas closer to ports. Some of these areas also tend to be heavily serviced by Tier 3 lines. Map 9 shows how an increase in wheat production under the DPPL scenario assuming no access to Tier 3 lines could affect the spatial pattern of road transport. In particular, it shows a significant increase in wheat traffic on roads in regions where there are few branch lines, including regions around Esperance and Geraldton, as well as on roads in regions that rely heavily on Tier 3 lines, such as in the central wheat belt and in regions surrounding Albany.

The type of analysis undertaken in this study could be extended to other states to identify how changes in production and access to grain lines could influence road traffic volumes in certain regions, providing some information to decision makers on where future investments may be needed to maintain or upgrade roads. Other useful research could include identifying the potential effects of changing the relative prices of road and rail services, or estimating additional road maintenance costs from increased road use by heavy vehicles, if these cost data were available.

Pricing, funding and investmentThe main issue with the provision and maintenance of transport infrastructure in Australia is that the pricing currently applied to road and rail infrastructure does not reflect the true cost of providing the infrastructure (CRRP 2011). This has the potential to distort investments within and across road and rail infrastructure. Given that pressures to further rationalise receival sites and rail branch lines are likely to continue, and that some of these decisions may be irreversible and affect road transport, it will be important for policy makers to make investment decisions using prices that reflect the true cost of provision and the potential impacts on road use.

Below-rail services are heavily subsidised, with access fees only covering a small proportion of the costs of operating and maintaining some poorly utilised branch lines largely dedicated to transporting grain. Two major reviews into the grain industry in New South Wales have found cost recovery for Class 5 branch lines and some Class 3 lines that carry very low volumes of freight is around 5 per cent. These lines tend to have low levels of utilisation and be mainly dedicated to transporting grain. Cost benefit analysis of Tier 3 branch lines in Western Australia found that the capital expenditure needed to maintain these lines was greater than the benefits. Brookfield Rail has estimated that lines used to transport wheat in Western Australia make up 50 per cent of the rail network by length, but less than 10 per cent by freight mass. The ability to increase access fees to reflect the cost of investing in these lines is limited by the cost of road transport. These pressures have led to the closure of some branch lines in New South Wales and Western Australia, with others being subject to speed and weight restrictions, which further reduce the competitiveness of these lines. The end result has been an increase in the use of the road network to transport grain.

The impact of rail line closures on road transport is demonstrated in the modelling results, and highlights the importance of taking an integrated approach to planning and investing in different modes of transport. According to the National Transport Commission, there is limited integration in planning and investment across transport modes in the grain supply chain despite the interdependencies between road and rail investment and investments in land transport and ports. The decision to close a branch line has implications for road use, and hence, road maintenance costs, so governments will need to take into consideration the impact of any plans

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to close branch lines on road maintenance costs. Similarly, decisions on investments in the grain rail network should be linked to the decisions by operators of grain terminals. For example, decisions by GrainCorp on the future of its grain terminal at the Port of Newcastle should be considered when making decisions on investments in the up-country grain rail network.

There are also issues around the extent of cost recovery in the road sector. Trucks are currently subject to the pay-as-you-go (PAYGO) pricing model that was introduced in Australia in 1992 and administered by the National Transport Commission. These charges are designed to recover the marginal costs of road wear and tear from heavy vehicle activity and to contribute to the common road costs benefitting all road users (NTC 2014a). The charges currently applied to heavy vehicles in Australia for road use include fixed annual registration charges and fuel-based road-user charges (HVCI 2014). The National Transport Commission (formerly the National Road Transport Commission) determines levels of registration fees for major vehicle classes, including trucks. This revenue is added to the revenue from State-based driver registration fees and a proportion of Commonwealth levied fuel taxes to closely match road system costs attributed to each vehicle class (GIAC 2004). New charges are planned (Box 10).

The construction and maintenance of roads are in turn the responsibility of Local, State and Commonwealth governments. Funding for each class of road is determined by a 'needs' formula which is independent of the amount of revenue generated by fuel taxes and registration fees for the use of specific roads (GIAC 2004).

Box 10 New heavy vehicle price determination

In February 2014, the National Transport Commission was asked by the then Standing Council on Transport and Infrastructure (SCOTI) to conduct a new heavy vehicle charges determination, and to provide recommendations for ministers to consider. A ‘determination’ is a process that provides recommendations on registration and road user (fuel) charges for heavy vehicles (NTC 2014b).

In May 2014, transport ministers announced that they had decided to increase heavy vehicle registration charges by 1.3 per cent a year from 1 July 2014. Ministers also announced that from 1 July 2016 new charges will be implemented, based on recommendations of the National Transport Commission.

Source: NTC 2014b

The spatial results of the wheat freight simulations identify where road freight volumes may increase in Western Australia because of increases in production and changes in access to rail infrastructure. They also highlight that much of the anticipated increase in road use will occur on local roads that are largely dedicated to servicing grain farms. These farms are often located in areas that have a low population density, which has implications for the funding of road maintenance, as the rates base of local councils will be narrow and, in some cases, declining.

The current road charging and funding allocation system used in Australia is unlikely to be very responsive to increases in the volume of wheat transported using road. That is, the current system will not necessarily result in funds being allocated in a way that adequately reflects potential increases in maintenance costs on these roads.

An inquiry by the Productivity Commission (PC 2006) found that heavy trucks as a group were covering the network-wide costs attributable to them under the PAYGO system (under PAYGO, capital spending is recovered in the period in which it occurs), which is administered by the National Transport Commission. However, the Productivity Commission also stated that heavy vehicle road pricing and regulatory arrangements do not support the efficient use and provision of the road network. A major problem is the current method of road charging that averages costs and charges under PAYGO and the allocation of funding that is not directly related to road use.

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As such, there is a risk that any increase in road use to transport wheat will not be reflected in an increase in funding to maintain these roads, especially on country roads where most damage is likely to occur.

The National Transport Commission (NTC 2009a) has also highlighted the importance of accurate pricing within and across transport modes, recommending the introduction of incremental pricing and mass-distance-location pricing for roads and the development and adoption of pricing and investment return frameworks for rail related government owned corporations. An incremental pricing scheme would charge vehicles road use prices based on the weight of the vehicle and the road in question rather than using blanket regulations to permit or prohibit certain classes in different areas. Incremental pricing would be an important first step towards the potential development of a comprehensive mass-distance-location based charging model (NTC 2009a). Mass-distance-location pricing involves a charge for road use based on the mass of the truck as it travels, the distance travelled and the location of road use (NTC 2009a).

There has been some recent momentum to improve the efficiency of the road charging and funding system in Australia. For example, following recommendations contained in the Productivity Commission's report, the Heavy Vehicle Charging and Investment (HVCI) reform project was established by the Council of Australian Governments (COAG) to design a more efficient approach to charging and road provision for heavy vehicles (see Box 11). According to the Productivity Commission, a guiding principle of this project is that user charges should be based on forward-projected expenditure, applied based on actual road usage and cost, with the resulting revenue used to fund road expenditure related to heavy vehicle use (PC 2014). To date, various pricing options have been considered, including a national fuel-based price, kilometre-based distance price, distance-location-based price, mass-distance-based price and a mass-distance-location-based price (see Box 12).

Box 11 COAG Road Reform Plan and Heavy Vehicle Charging and Investment Reform

In April 2007, COAG set up the COAG Road Reform Plan (CRRP) to conduct a review of current heavy vehicle user charges and to investigate the viability of alternative charging models for heavy vehicles.

A Feasibility Study into other charging and funding arrangements for heavy vehicles was conducted by CRRP in 2011 (CRRP 2011). The main finding of the study is that reform is feasible if charges are directly linked to road funding and investment changes. New direct charging arrangements were recommended to be developed for COAG consideration by December 2012.

In July 2012, COAG noted the recommendations of the Feasibility Study and approved the implementation of the reform project. The CRRP was then renamed the Heavy Vehicle Charging and Investment Reform (HVCI) with broader scope.

The HVCI project has proposed an integrated charging, funding and investment framework and has identified the processes needed to implement the reforms. In May 2014, the Transport and Infrastructure Council, formerly SCOTI, considered a draft implementation plan for the reform. In December 2014, the Council prepared advice on the next steps of longer term reform for consideration by COAG. Ongoing work on the reform involves collaborative working arrangements between the Commonwealth, State and Territory governments. For more information, see HVCI (2014).

Source: HVCI 2014

The first step to addressing any inefficiency in the road charging/allocation system will be to collect data on road use, road condition and the cost of maintaining or upgrading roads. This type of data is needed if road funding is to be allocated in a way that more accurately reflects where use and damage occurs. It would also help facilitate the introduction of a user pays system similar to the mass-distance-location pricing model.

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While a user pays system that appropriately charges for the use of road infrastructure, accompanied by a funding system that returns funds to where damage occurs, is theoretically the most efficient road pricing system, a number of issues need to be investigated to identify the feasibility and practicality of introducing such a system. For example, there will be distributional effects (winners and losers) in moving from the current road charging/funding allocation model. Additional research is needed to identify the extent of any gains and losses for different users as this will influence the acceptability of such a scheme to industry and the wider community.

It would also be useful to demonstrate how a user pays system could increase productivity by directing investment to where damage occurs and to relieving constraints on roads that currently restrict access to higher productivity vehicles. While some users would pay more under a user pays system, they could also receive significant benefits, including better quality roads that reduce travel times and damage to trucks, as well as increased access to the road network for higher productivity vehicles. Increased access could stimulate investments in higher productivity vehicles, which could reduce the unit costs of road freight over the long term.

Box 12 Options considered by the COAG Road Reform Plan feasibility study

The COAG Road Reform Plan feasibility study considered several pricing model options.

Status Quo: The current road charging system. A fixed registration charge levied by the states and territories and a variable charge from a part of the diesel fuel excise.

Fuel-based distance price: Fuel excise taxes. These act as a proxy for pricing for distance and mass.

Kilometre-based distance price: Charges based on a system that measures the actual distance travelled.

Distance-location-based price: Charges based on a system that measures distance travelled and the type and location of the roads used.

Mass-distance-based price: Charges based on a system that measures distance travelled and mass of the vehicle at the time of travel.

Mass distance-location-based price: Charges based on a system that measures distance travelled, the mass of the vehicle at the time of travel and the type and location of the roads used.

Source: Table 5.1 in CRRP 2011

Those farmers who do have an increase in net costs when moving to a user pays system may not be able to pay for any increase in road charges (or access fees in the case of rail charges). Between 2002−03 and 2012−13, wheat farmers in Western Australia earned $268,000 in farm cash income on average while farmers in New South Wales earned around $150,000. Moreover, the rate of return earned on capital invested in wheat farms was significantly higher in Western Australia than in New South Wales (3.1 per cent compared with 1.5 per cent). This suggests that farmers in Western Australia are likely to be in a better position to pay for any increase in road charges than farmers in New South Wales are.

The majority of stakeholders in the grain industry expressed the view that a mass-distance-location road charging structure could be introduced to ensure that charging is linked to use, revenues are linked to road providers and funding certainty is promoted. However, they also noted that user pays charging should not be restricted to heavy freight vehicles but should cover other road users. They further emphasised that it is important that the revenue received from charges is appropriately redistributed to roads that bear the most damage.

The common view among stakeholders with respect to rail was that rail branch lines will not be economically viable if further investment is not made to maintain and upgrade these lines. As most of the benefits of maintaining the grain branch line networks are likely to accrue to the

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grain industry, there are economic incentives for the industry to contribute to the costs of upgrade and maintenance.

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7 ConclusionIncreasing populations and incomes in Asia are expected to lead to a significant increase in world food demand over the medium term. While Australia is already a major food exporter to Asia, the extent to which Australian producers can take advantage of these opportunities will be influenced by the efficiency of supply chains used to deliver their products.

Previous analysis by ABARES has identified wheat as one commodity where Australian producers may benefit from a significant increase in demand (Linehan et al. 2012).

The analysis in this study indicates that there are several constraints in the wheat supply chain that have the potential to increase costs and reduce the competitiveness of Australian wheat exports. While the main constraints are in the transport sector, other issues identified in stakeholder consultations include a lack of mobile phone coverage in some areas that could potentially restrict grain marketing activities during harvest when most farmers are in the field and the allocation of access to grain loading facilities at ports.

Research by Engineers Australia (2010) has found that much of Australia’s road and rail networks is in poor condition. This is particularly the case for some local road and rail networks, many of which are located in rural areas. The deterioration in condition of the rail network has led to the imposition of speed and weight restrictions on some branch lines, while other lines have been closed.

It is likely that competitive pressures that have led to the rationalisation of branch lines carrying low volumes and largely dedicated to grain will continue, which will put more pressure on the road network. In addition, any increase in wheat production would be expected to place additional pressure on the road network, much of which is already in poor condition.

The modelling undertaken in this study suggests that increasing wheat production in Western Australia could lead to a doubling in wheat road freight by 2035 if Tier 3 lines were closed. The results also show that road transport increases significantly in regions where there are few branch lines such as Esperance and Geraldton, and where farmers rely heavily on Tier 3 lines, particularly around Albany.

These modelling results highlight the importance of taking an integrated approach to planning and investing in different modes of transport, with decisions on investments in the rail network affecting road use. The modelling undertaken in this study is an example of the type of analysis that could be used to guide where future investments in the road network may be needed, and to highlight that much of the anticipated increase in road use will occur on local roads that are largely dedicated to servicing grain farmers. These farms are often located in areas that have a low population density, which has implications for the funding of road maintenance as the rates base of local councils is likely to be narrow, and in many cases declining.

The main issue with the provision and maintenance of transport infrastructure is that the pricing currently applied to road and rail infrastructure does not reflect the true cost of provision, potentially distorting funding and investments within and across road and rail infrastructure.

Currently, some rail services used to transport wheat are heavily subsidised, while there are questions as to whether road costs are fully recovered. Commercial pressures to increase cost recovery on rail lines since deregulation of the rail sector have been constrained by the price of

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road transport. This has in turn limited investment in the rail sector, and led to some rationalisation of the rail network.

The current road charging and funding allocation system used in Australia is unlikely to be very responsive to increases in the volume of wheat transported using road. That is, the current system will not necessarily result in funds being allocated in a way that adequately reflects potential increases in maintenance costs on these roads because of increases in wheat production and the closure of rail lines.

The first step to addressing this inefficiency is to collect data on road use, road condition and the cost of maintaining or upgrading roads so that road funding can be allocated in a way that more accurately reflects where use and damage occurs. It would also help facilitate the introduction of a user pays system similar to the mass-distance-location pricing model recommended by the Productivity Commission, the National Transport Commission and more recently, by the National Commission of Audit.

A user pays system that appropriately charges for the use of road infrastructure, accompanied by a funding system that returns funds to where damage occurs, is theoretically the most efficient road pricing system. However, a number of issues need to be investigated to identify the feasibility and practicality of introducing such a system. For example, there will be distributional effects (winners and losers) in moving from the current road charging/funding allocation model. Additional research is needed to identify the extent of any gains and losses for different users as this will influence the acceptability of the scheme to industry and the wider community. It will also be important to identify the extent of any transaction and compliance costs, since these costs have the potential to influence both the efficiency and acceptability of the scheme. For example, it could be relatively expensive for a small farmer who only uses the road network to deliver wheat to a nearby receival site for a few weeks a year to comply with a new system.

It would also be useful to demonstrate how a user pays system could increase productivity by directing investment to where damage occurs and to relieve constraints on roads that currently restrict access to higher productivity vehicles. While some users would pay more under a user pays system, they could also receive significant benefits, including better quality roads that reduce travel times and damage to trucks, as well as increased access to the road network for higher productivity vehicles. Increased access could stimulate investments in higher productivity vehicles, which could reduce the unit costs of road freight over the long term.

Identifying the impact of any further rationalisation of the up-country receival network is also potentially important. GrainCorp currently has around 180 receival sites in New South Wales, but is planning to only operate 96 sites in 2015−16. Continued rationalisation will increase road transport costs for some farmers, as they are required to cart wheat for longer distances. However, the increased utilisation of larger more efficient receival sites could result in lower bulk handling costs and lower charges for rail transport. The net impact on users will vary depending on where they are located, with farmers transporting wheat further by road facing higher road transport costs than in the absence of closures, while users located closer to larger receival sites are likely to benefit from more efficient facilities.

It may also be worthwhile considering how a change in the composition of Asian food demand could affect Australian supply chains. According to ABARES analysis of global food demand, rising incomes in Asia have shifted food consumption patterns away from traditional diets of starchy staples to more varied diets with higher protein foods such as meat and milk (ABARES 2013). This trend is projected to continue. The increase in demand for higher protein foods could in turn divert some wheat from the export market to the domestic feed grain market as

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Australian producers increase production of beef, using feedlots, and dairy products. This would have implications for the wheat, beef and dairy supply chains, and the mode and pattern of transport.

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Appendix A: Road maintenance costs and pricingThe case studies in this report discuss the likelihood that increased grain production will increase traffic on roads. More road freight will result in greater costs in the form of road wear and externalities. Increased road usage will require further investment in construction and maintenance, but the extent of these costs is uncertain.

This appendix briefly discusses two issues:

the extent to which policy makers can estimate the increase in road maintenance costs from higher road freight

road pricing proposals to achieve higher cost recovery.

Costs of road maintenanceIncreased road freight will increase the costs of road maintenance, but the size of this increase is uncertain. This makes it difficult for policy makers to anticipate the level of investment required to transport greater volumes of freight.

When analysts have attempted to estimate future costs, the estimates have been very uncertain. For example, Parsons Brinckerhoff of Grain Infrastructure Group (GIG 2008) estimated that projected increases in grain production in Western Australia from 2005 to 2030 would increase road maintenance costs by anywhere from $2 million to $18 million a year, depending on structural changes in the bulk handling industry. The response to these estimates was cautious. DITRDLG (2009a) adopted similar cost estimates, but expressed uncertainty over the figures. Western Australian Farmers Federation expressed concern that road projects conducted in subsequent years had proved these estimates were too low.

The Bureau of Infrastructure, Transport and Regional Economics and the National Transport Commission have developed methods to track the costs of construction and maintenance, and estimate the cost of marginal road use respectively.

The Bureau of Infrastructure, Transport and Regional Economics has developed an index measuring the change in nominal prices over time of road construction and maintenance (see BITRE (2014) for an overview of the component prices of road construction included in this index—mainly materials, capital machinery and labour). This index gives an indication of how prices have risen and can be compared with other industries.

The prices paid for road construction and maintenance inputs have risen since 2004, with a brief fall and then lower to flat growth following the 2009 financial crisis (Figure A0). Until the financial crisis, prices measured by the index increased more quickly than the prices of production inputs in all industries. These prices have increased at a similar rate since the financial crisis.

The National Transport Commission (2011) has also developed a model of relative marginal road wear costs per vehicle axel on different road types. This model estimates that the marginal cost of a movement on local roads, which are often unsealed, is more than four times higher than a movement on major arterial roads, which are usually sealed.

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BITRE’s road construction and maintenance price index and the National Transport Commission’s road wear model are high level and further methods will be needed to understand and anticipate costs for road investment in specific areas, such as wheat producing regions.

Figure A0 BITRE road construction and maintenance price index and ABS producer price index

road construction and maintenance

price index

producer price index

100

130

160

March 2004

March 2005

March 2006

March 2007

March 2008

March 2009

March 2010

March 2011

March 2012

March 2013

March 2014

Note: both indices have been reindexed to March 2004. Sources: BITRE 2014, ABS 2014

Road pricingMany local roads used for wheat transport are traditionally maintained by local governments. These governments may lack the capacity to fund any increased maintenance or upgrading that will be needed if road freight increases. Low population growth could limit the rates base of some local councils and inhibit their ability to provide suitable road infrastructure in the absence of other forms of revenue.

Several government bodies have recommended reforming road pricing so an individual user’s costs would reflect the costs their use imposes, and this could also provide a method of allocating funds collected to the local government responsible for maintaining the roads used.

The National Transport Commission (2009b) suggests an incremental pricing scheme. Such a scheme would charge vehicles road use prices based on the weight of the vehicle and the road in question rather than using blanket regulations to permit or prohibit certain classes in different areas. This could allow high value freight activities to continue when their value exceeds and compensates for the costs they impose on infrastructure providers and other road users and residents.

In 2011, the COAG Road Reform Plan feasibility study (CRRP 2011) accepted the theoretical basis for direct pricing of heavy vehicles, but recommended that any plan should be accompanied by funding and expenditure reform. This reform would ensure revenue from charging is linked to roads and the level of government responsible for providing these roads. The study states that ‘road pricing and funding are inextricably linked’. The report also discussed a range of options for direct charging (see Box 12 in Chapter 6) covering how charges are calculated, technological requirements and experience from abroad.

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The Heavy Vehicle Charging and Investment Scheme is being developed by the Council of Australian Governments (COAG). The Productivity Commission (PC 2014) describes it as follows:

The Heavy Vehicle Charging and Investment (HVCI) reform project was established by COAG to design a more efficient approach to charging and road provision for heavy vehicles. It is overseen by a board of senior officials from the three tiers of government and the freight industry.

A fundamental principle guiding the project is that user charges should be based on forward-projected expenditure, applied based on actual road usage and cost, with the resulting revenue used to fund road expenditure for heavy vehicles.

Details of the proposed reforms are still being developed and are subject to agreement by governments. To date, various charging options have been considered, including a national fuel-based charge and a state-specific mass-distance-location charge.

In 2014, the National Commission of Audit included the following recommendation (NCA 2014):

There is significant scope to expand road user charging, particularly for heavy vehicles, to reduce congestion and increase funding from those that directly benefit from road use.

The Commission recommends that the Commonwealth work with the States to develop mass-distance-location charging reforms. Over time, these reforms should be extended to universal road user charging for all vehicles to the maximum extent possible.

The Productivity Commission also advocates the extension of user pricing—incorporating the costs of congestion to light vehicles (PC 2014). This could address the congestion which stakeholders noted on roads leading to ports in urban areas. This would discourage lower value traffic in congested areas, and allow higher value traffic, which may include wheat freight in the ‘marketing window’, to travel on less congested roads. Research by BITRE suggests that ‘avoidable’ road congestion costs the Australian economy $13 billion a year and is forecast to grow in the future (BITRE 2008).

In September 2014 the draft report of the Competition Policy Review – the 'Harper Review' noted the following (CPR 2014):

More effective institutional arrangements are needed to promote efficient investment and usage of roads, and to put road transport on a similar footing to other infrastructure sectors. Lack of proper road pricing leads to inefficient road investment and distorts choices between transport modes, particularly between road and rail freight.

The advent of new technology presents opportunities to improve the efficiency of road transport in ways that were unattainable two decades ago. Linking road user charges to road construction, maintenance and safety should make road investment decisions more responsive to the needs and preferences of road users. As in other sectors, where pricing is introduced it should be overseen by an independent regulator.

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Appendix B: Freight movement simulation—Scenarios and resultsAs discussed in this report, infrastructure bottlenecks in the wheat supply chains in Western Australia and New South Wales can affect the efficiency of moving wheat to final destinations. Furthermore, any expansion in wheat production is likely to put greater pressure on existing infrastructure and exacerbate the impact of these bottlenecks.

In this appendix, a simulation is used to illustrate the impacts of changes in wheat production and infrastructure management on the modal share of wheat freight and the spatial patterns of freight movement in Western Australia. Similar analysis could be extended to the wheat industry in other states in Australia. Furthermore, a number of other scenarios reflecting the infrastructure issues discussed previously could be examined using this simulation model, and are identified as potential areas for future research.

Methodology and dataThe wheat freight model solves a cost minimisation problem. The objective is to minimise the total freight costs of moving the annual wheat harvest from production areas to ports through the bulk grain supply chain, using existing transport networks. There is no constraint on the optimisation except for the implicit constraints given by the configuration of the rail and road networks.

Supply blocksThe model divides the Western Australian wheat belt into 5km square blocks, which are attributed a proportion of their local government area's (LGA's) total production under each scenario. The proportions are determined from the area identified as cropping land in ABARES catchment level land use data (daff.gov.au/abares/aclump/Pages/Default.aspx). This means that the scenarios represent changing production levels as changes in the average yields obtained from the same land areas and not from any expansion into land that is not currently used for cropping.

Each block is associated with a single representative node on the part of the road network that lies within the block. The road freight within each supply block is below the resolution of the model and is only roughly approximated by freight flows from these representative nodes. A small allowance for this haulage is calculated from the distance between the centroid of the block's cropping areas and the associated nodes.

Site choice and routingThe model implements Dijkstra’s algorithm in C++ to find the least cost path for wheat freight in two stages (Dijkstra 1959). The first is from the supply blocks to receival sites using only the road network and the second is from the receival sites to the four major ports using both the road and rail networks.

The rail and road networks are based on Geoscience Australia's GEODATA TOPO 250K Series 3 product (ga.gov.au/metadata-gateway/metadata/record/gcat_63999). The status of rail lines has been updated and some recently constructed roads have been added. However, it is worth noting that Brookfield Rail announced in 2013 that two Tier 3 branch lines—from York to Quairading and from Merredin to Trayning—would not operate from October 2013 after they

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http://www.ga.gov.au/metadata-gateway/metadata/record/gcat_63999

http://www.daff.gov.au/abares/aclump/Pages/Default.aspx


failed to reach an agreement with CBH on these lines, and that the remaining Tier 3 lines will be placed in non-operational ‘care and maintenance’ before the 2014−15 harvest. This has not been captured in the construction of the baseline in this model.

Roads identified as tracks were removed and only roads in Western Australia accessible by restricted access vehicles such as B-doubles are included—according to the online mapping information for the Restricted Access Vehicle Network 2 of Permitted Roads at gis.mainroads.wa.gov.au/RAV2012/.

The transport costs for each link on the transport network are relative cost rates per kilometre that discriminate between rail lines and roads of different classes and surface types as identified in the Geoscience Australia data. A loading/unloading cost is also included for when wheat is loaded from road to rail or vice versa. These cost parameters were chosen to reflect broad patterns of wheat freight movements and are kept fixed across the different scenarios. However, given the longer-term focus of the analysis, no attempt has been made to model any cross subsidisation that may currently exist between different parts of the network. While it is assumed that rail haulage has a lower cost than road haulage per tonne-kilometre the model parameters do not generally attribute different costs for different lines such as between different Tier 3 lines.

The model routes grain from each block to the CBH receival site that gives the lowest overall freight cost. The overall freight costs include the cost of transporting wheat from the block to the receival site plus the cost of transporting wheat from the receival site to the port. The receival site to port costs are reduced by 5 per cent compared with farm to receival site costs in order to reflect higher average costs per tonne-km for the farm to receival site trip.

QualificationsAs the amount of wheat grain kept for seed, feed and private sales is small, the model assumes that all wheat production is sent to Geraldton, Kwinana, Albany or Esperance. Other destinations are not represented. Future research could consider the increasing share of non-bulk wheat exports and the additions of two new export facilities at the ports of Bunbury and Albany.

Variation in wheat production between years is modelled to come from changing wheat intensity in the same supply areas. In practice, both areas planted to wheat and wheat intensities vary between years.

It is worth noting that the focus of the model is on wheat production despite the fact wheat is only one of the grains that use the bulk grain export supply chain. If production of other grains is also predicted to increase, the freight volumes on rail and road will be higher and there will be competition for capacity at receival sites and port terminals.

The current model does not represent capacity constraints at receival sites or site closures. While stakeholders have reported that some sites have exceeded capacity in the past, the model assumes that improved site capacity utilisation and technical efficiency, including automation and increased hours of operation during larger harvests, will ensure that capacity constraints are not binding. Similarly, the model assumes that neither the road network nor the rail network will exceed capacity under the scenarios.

As previously mentioned, the model does not attribute different costs for different lines within a class, such as between different Tier 3 lines. This assumption, therefore, does not reflect track capacity and efficiency on different Tier 3 lines.

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https://gis.mainroads.wa.gov.au/RAV2012/


The analysis does not account for the cost of maintaining road and rail lines. These could change the relative costs of different road and rail lines and result in different allocation of wheat freight on these modes.

The analysis assumes that relative prices of wheat and other commodities are such that it will be profitable to increase wheat production to meet the growing demand in Asia. Moreover, climatic conditions are assumed to be favourable, allowing higher production levels to be achieved.

ScenariosTable B0 summarises the scenarios used in the simulations.

The baseline scenario uses average production levels for the census years from 1991−2011 for each LGA and assumes Tier 1, 2 and 3 railway lines are available for wheat haulage.

The higher production scenarios differ in the level and spatial pattern of wheat production. The maximum production level (MPL) scenario uses maximum wheat production levels for each LGA over the census years from 1991−2011 and the DAFWA projected production level (DPPL) scenario uses production levels based on DAFWA projections.

The infrastructure scenarios use the same production levels as the baseline and higher production scenarios but differ in that only Tier 1 and 2 railway lines are assumed to be available (that is, Tier 3 lines are closed).

Table B0 Scenarios

Scenario Description

Baseline scenario (APL) Average production level in WA over the period 1991−2011, ~6.3 million tonnes

Tier 1, 2 and 3 lines are available

Higher production scenarios

MPL Maximum production level in WA over the period 1991−2011, ~9.4 million tonnes

DPPL DAFWA projected production level in WA to 2035, ~10.3 million tonnes

Tier 1, 2 and 3 lines are available

Infrastructure scenarios

APL−no−Tier3 Baseline scenario with closure of Tier 3

MPL−no−Tier3 MPL with closure of Tier 3

DPPL−no−Tier3 DPPL with closure of Tier 3

Below is a more detailed description of each scenario.

Baseline scenarioThe baseline scenario represents long-term average production in Western Australia, and uses ABS agricultural censuses between 1990−91 and 2010−11 to identify average wheat production in each LGA. Average wheat production over this period was 6.3 million tonnes (Figure B0).

As shown in Figure B0, prior to 1997−98 there was an annual agricultural census. Since 1997−98, agricultural censuses have occurred in 2000−01, 2005−06 and 2010−11. State

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aggregate production was above the decade average for the first two of these years, and below average for the last. The ABS conducts surveys in non-census years and provides annual production estimates, shown as ‘ABS estimate’ in Figure B0.

The average production levels are used to model average freight levels associated with wheat haulage. Since maintenance of transport infrastructure is largely determined by cumulative freight levels as well as local climatic conditions, average freight levels can be used to represent annual infrastructure maintenance requirements. If maintenance cost data are available, total future annual maintenance costs can also be estimated.

Figure B0 Western Australia's wheat production levels in scenarios

0

4

8

12

mill

ion

tonn

es

ABS Census years average Census year maximum Census year DAFWA2035 ABS estimate

Sources: ABS Agricultural Commodities, Australia, cat. no. 7121.0, ABS Principal Agricultural Commodities, Australia, Preliminary, cat. no. 7111.0 and DAFWA 2009

Map B0 Wheat intensity by Local Government Area in the baseline scenario

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Map B0 shows production per hectare or wheat intensity by LGA in the baseline scenario. Wheat intensity is the ratio of the total LGA level wheat production to the area of cropping land (from the land use data) and is a good indicator of the productive capacity of the land in the LGAs. It can be seen that the areas with higher wheat intensities are located further away from the main ports except for those around Geraldton and Esperance.

Higher production scenarios (MPL and DPPL)These scenarios reflect the potential for a significant expansion in wheat production in Western Australia in light of increasing demand for wheat from Asia. Under these scenarios, it is possible to investigate how a potential expansion in production could affect aggregate freight movements by mode and the spatial patterns of these movements.

Two production scenarios were examined:

the MPL scenario involved a 49 per cent increase in wheat production (compared with the baseline). This is the historical maximum level for each LGA for the census years between 1991 and 2011 (Figure B0)

the DPPL scenario involved a 63 per cent increase in wheat production (compared with the baseline). This is based on DAFWA projections on wheat production in 2035 (Figure B0).

Historical maximum production level scenario (MPL)This scenario simulates wheat freight movements assuming maximum production in each LGA using ABS census data for census years between 1991 and 2011. Historical maximum production during this period was estimated to be 9.4 million tonnes of wheat. While this total was exceeded in 2003−04 and 2013−14, LGA level estimates were not available. LGA estimates are only available in census years.

Map B1 Wheat intensity by Local Government Area in the maximum production level scenario

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This scenario reflects recent peak freight loads on the transport network. If wheat production is projected to increase to this level by 2050 to satisfy growing demand on average, this type of scenario would indicate the impacts of expansion on freight movements.

Map B1 shows that the pattern of wheat intensity by LGA in the MPL scenario is higher than in the baseline scenario. In particular, regions with the highest increases in wheat intensity are located away from ports except for those around the ports of Geraldton and Esperance.

DAFWA projected production level scenario (DPPL)This scenario is based on DAFWA projections of increases in LGA level wheat production in 2035 (DITRDLG 2009a). Two projections were developed, including low and high production estimates. Both DAFWA projections are based on expected changes in climate, improvement in plant genetics and expansion into grazing land and different soil types. Since some of these factors vary by area, these projections show varying increases. In general, the scenario assumes that only areas with average annual rainfall above 350 mm between 1976 and 2008−which are generally closer to the ports−increase production.

In this study, ABARES has used DAFWA’s high production projection. In particular, the average increases in wheat production in LGAs in the DAFWA high estimate are applied to this study’s baseline.

Map B2 shows a slightly different pattern of wheat intensity compared with the baseline and MPL scenarios. The DAFWA projection suggests that many of the LGAs in the high rainfall areas that are closer to ports will have the highest increases in wheat intensity.

Map B2 Wheat intensity by Local Government Area in DAFWA projected production level scenario

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Infrastructure scenarios (APL−no−Tier3, MPL−no−Tier3 and DPPL−no−Tier3)As mentioned above, these three scenarios use the same production levels as in the first three scenarios. However, the rail lines described as Tier 3 in the Freight and Logistics Council of WA report (2009) are assumed to be closed. The receival sites on these lines, however, remain available but are only accessible by road. The model’s baseline, however, does not account for the fact that the lines from York to Quairading and from Merredin to Trayning were closed in October 2013.

The reason these scenarios are considered is because one of the main issues identified in the case studies is the declining quality of rail branch lines and the limited ability to recover costs. Under these scenarios, the combined impacts of increased production and reduced rail availability can be examined.

Results and ImplicationsThe results of these simulations are presented under two themes.

The first theme provides an overall picture of the aggregate freight volume by mode when there are changes in wheat production in Western Australia. These results are relevant to producers, bulk handlers and exporters assuming a potential expansion in wheat production in response to opportunities arising from increased demand for wheat.

The second theme is about the spatial patterns of the increase in wheat road freight assuming some branch line closures and expanded production. An understanding of where the biggest impacts are likely to be will assist investment decisions on transport infrastructure.

Results under both themes provide important information for governments as well as the private sector on where funding could be directed.

Higher production scenariosResults for the production scenarios show the simulated freight movement by mode and LGA assuming there is an expansion in wheat production in Western Australia.

Simulated aggregate freight volume by mode Table B1 contains simulated flow estimates of total freight movements on rail and road networks for the baseline, MPL and DPPL production scenarios. In all scenarios, the freight volume in tonne-kilometres is higher on rail than on road. This is because the model assumes that Tier 1 and 2 lines offer lower haulage costs per tonne-kilometre than road. This modelling assumption is consistent with the classification of the rail network by the Freight and Logistics Council of WA (2009).

Under MPL, increasing wheat production from 6.3 to 9.4 million tonnes leads to an increase in freight volume on both road and rail. However, the percentage increase in road usage is greater than that in rail usage (57 per cent road usage compared with 45 per cent rail usage). In terms of absolute freight volume increases, rail still outweighs road in transporting wheat.

Within the rail network, the percentage increase in freight volume on Tier 3 lines is lower than percentage increases on tiers 1 and 2 (37 per cent on Tier 3 compared with 46 per cent on both Tier 1 and Tier 2). The largest increase in rail usage in tonne-kilometres occurs on Tier 1 lines, which reflects the central location of Tier 1 lines in the areas with the largest increases in

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production and the fact that wheat carted on Tier 3 or Tier 2 lines is eventually put on Tier 1 lines to arrive at ports.

Table B1 Freight volume results by mode, for production scenarios

Mode Baseline

(million t-km)

Scenario

(million t-km)

% change absolute change

(million t-km)

MPL

road 288 453 57 165

rail 1,443 2,093 45 650

—Tier 3 78 106 37 28

—Tier 2 59 87 46 27

—Tier 1 1306 1901 46 595

DPPL

road 288 515 79 226

rail 1,443 2,044 42 601

—Tier 3 78 107 38 29

—Tier 2 59 85 44 26

—Tier 1 1306 1852 42 546

Under the DPPL scenario, increasing production by 63 per cent from 6.3 million tonnes to 10.3 million tonnes leads to 79 per cent increase in road usage and 42 per cent increase in rail usage.

Under the DPPL scenario, increases in freight volume within each of the rail classes are estimated to be of similar order to those increases under the MPL scenario, despite the fact that wheat production increases are assumed to be higher under DPPL than under MPL. This is because the spatial distribution of the increases is closer to the ports in the DPPL scenario (see Map 5).

Spatial patterns of the increase in wheat road freightAs the percentage increases in road freight are projected to be higher than that in rail freight, examining the spatial patterns of these increases might provide important information on where funding may need to be directed. The spatial distribution of wheat road freight for the baseline scenario is presented in Map B3. It is reasonable to expect that the volume of wheat freighted by road would be higher in areas where there are few rail lines, such as in regions surrounding Esperance and Geraldton.

Table B2 Percentage of Local Government Areas with changes in road usage, for production scenarios

Change category MPL (%) DPPL(%)

<10% increase 0 23

11−100% increase 64 16

100−200% increase 24 59

>200% increase 12 2

Table B2 shows the percentage of LGAs experiencing different proportional increases in road freight under the MPL and DPPL scenarios.

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Under the MPL scenario, the results suggest that road freight could increase by between 10 and 100 per cent for 64 per cent of LGAs, two to three fold for 24 per cent of LGAs and more than threefold for 12 per cent of LGAs. However, it is worth noting that LGAs with the largest proportional increases in road freight are areas with low production and low freight.

Map B3 Wheat road freight by Local Government Areas in the baseline scenario

Map B4 shows that LGAs with the largest increases in road freight under the MPL scenario are located in areas transporting wheat to the port of Esperance. Higher production is also estimated to lead to moderate increases in road usage (increases of between one and 5 million tonne-kilometres) in LGAs that are located at the end of the grain rail lines and further from the major ports. Unless there are changes in the existing road and rail networks, this result shows that areas with less rail infrastructure will experience significant increases in road usage to service higher wheat freight volumes because of a potential expansion in production in these areas.

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Map B4 Increase in wheat road freight, by Local Government Areas for the maximum production level scenario (MPL)

Under the DPPL scenario, 59 per cent of LGAs are estimated to have a 100 to 200 per cent increase in road freight (Table B2). LGAs estimated to have the largest increases in road usage (> 20 million tonne−kilometres) are concentrated in regions around ports at Esperance, Albany and Geraldton. LGAs with average annual rainfall above 350 millimetres over the 32 years to 2008 are estimated to have moderate increases in wheat road freight of between one to five million tonne-kilometres (Map B5).

The spatial patterns of freight movement on road and rail are highly dependent on

where the increases in wheat production are projected to occur and

what existing transport infrastructure (rail or road) is available.

Higher freight volumes would potentially put greater pressure on existing infrastructure in those areas or exacerbate infrastructure bottlenecks that have not been addressed.

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Map B5 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario (DPPL)

Infrastructure scenariosThe previous section shows how a significant expansion in wheat production could have discernible impacts on the modal share and spatial patterns of wheat freight in Western Australia. Given the current uncertainty about the future of Tier 3 lines in Western Australia, a useful extension to this analysis would be to investigate what could happen to these modal shares and spatial patterns if Tier 3 lines were closed down. The results of these scenarios are presented below.

Combined impacts of branch line closure and higher production on aggregate freight volumes Table B3 contains the results of the APL, MPL and DPPL scenarios assuming no Tier 3 lines. Similar to results in the production only scenarios, the freight volumes of wheat in tonne−kilometres is higher on rail than on road in all infrastructure scenarios. This is because Tier 1 and 2 rail lines offer lower haulage costs per tonne-kilometre than road.

The results of the APL−no−Tier3 scenario indicate the impact of branch line closures assuming average production levels. Under the APL−no−Tier3 scenario, wheat road freight in Western Australia is estimated to increase by 14 per cent while wheat rail freight is estimated to decrease by 6 per cent (Table B3). Map B6 and Map B7 show freight volumes by road and rail assuming average production with and without Tier 3 branch lines. These maps show that the regions where Tier 3 lines are closed have higher road usage following these closures. The most noticeable increases occur in regions that use the grain lines to transport wheat to Kwinana port.

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Under the MPL−no−Tier3 scenario, the closure of Tier 3 lines is estimated to lead to a 76 per cent increase in road freight and a 37 per cent increase in rail freight, compared with the baseline. However, the absolute change in freight volume (in tonne−kilometre) is estimated to be higher on rail than on road. In particular, the wheat freight volume on rail is estimated to increase by 536 million tonne−kilometres compared with 218 million tonne-kilometres on road (Table B3). Map B8 shows the pattern of freight volumes on rail and road under the MPL−no−Tier3 scenario.

Table B3 Freight volume results by mode, for infrastructure scenarios

Mode Baseline

(million t-km)

Scenario

(million t-km)

% change absolute change

(million t-km)

APL−no−Tier3

—road 288 330 14 41

—rail 1,443 1,358 -6 -85

MPL−no−Tier3

—road 288 506 76 218

—rail 1,443 1,979 37 536

DPPL−no−Tier3

—road 288 579 101 290

—rail 1,443 1,913 33 470

Under the DPPL−no−Tier3 scenario, wheat road freight is estimated to increase by 101 per cent and rail freight by 33 per cent (Table B3). The percentage increase in aggregate rail use under the DPPL−no−Tier3 scenario is less than that under the MPL−no−Tier3 scenario because more of the increases in production under the DPPL−no−Tier3 scenario occur in areas that are serviced by roads or previously serviced on Tier 3 lines (see Map B2). Map B9 shows the pattern of freight volumes on rail and road under the DPPL−no−Tier3 scenario.

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Map B6 Freight volumes on rail and road for the baseline scenario with Tier 3

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Map B7 Freight volumes on rail and road for the baseline scenario without Tier 3

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Map B8 Freight volumes on rail and road for the maximum production level without Tier 3

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Map B9 Freight volumes on rail and road for the DAFWA projected production level without Tier 3

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Spatial patterns of the increase in wheat road freightTable B4 shows the percentage of LGAs experiencing different proportional increases in road transport under the three production scenarios assuming no Tier 3 lines. Assuming the same level of wheat production in the baseline, the closure of Tier 3 lines results in small changes in road freight volumes for a large number of LGAs. In particular, 74 per cent of the LGAs in Western Australia would have a less than 10 per cent increase in road freight (Table B4).

Under the MPL−no−Tier3 scenario, it is estimated that 48 per cent of the LGAs would have an increase in road freight of 10 to 100 per cent, while around 38 per cent would have a two to three fold increase in road freight volumes.

Table B4 Percentage of Local Government Areas with changes in wheat road freight, for infrastructure scenarios

Change category APL−no−Tier3 (%) MPL− no−Tier3 (%) DPPL−no−Tier3(%)

<10% increase 74 1 15

11−100% increase 17 48 15

100−200% increase 9 38 60

>200% increase 1 14 11

Under DPPL−no−Tier3 scenario, 60 per cent of LGAs are estimated to have an increase in wheat road freight of 100 to 200 per cent, while 11 per cent are estimated to have a more than threefold increase (Table B4). It is worth noting, however, that the biggest proportional changes often occur in areas with low production or low freight.

Map B10 Increase in wheat road freight, by Local Government Area for the baseline scenario without Tier 3 (APL−no−Tier3)

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Assuming the average production level of the census years between 1991 and 2011 and the closure of Tier 3 lines, freight movements on rail and road networks do not change significantly compared with the baseline, as shown on Map B10. The majority of LGAs are estimated to have relatively small changes of less than 100 thousand tonne-kilometres. The biggest changes in wheat road freight (between 2.5 to 10 million tonne-kilometres) are likely to be concentrated in regions that transport wheat to Kwinana and Albany. These ports are connected to parts of the rail network that have Tier 3 lines.

Map B11 shows how freight movement on road changes when wheat production is projected to expand to the historical maximum of the census years between 1991−2011 and Tier 3 lines in the rail network are closed. Under this scenario, the largest changes in wheat road freight would likely occur in the areas once serviced by Tier 3 lines and those around the ports of Esperance and Albany. It is reasonable to expect such a result since reduced access to rail infrastructure will lead bulk handlers to use road as a substitute mode of transport. This result applies to the areas once serviced by Tier 3 lines and transporting wheat to Kwinana. For areas transporting wheat to Esperance and Albany which are mainly serviced by roads, most of the increases in road freight might be explained by the direct impact of production expansion, rather than the reduced rail availability because of the closure of Tier 3 lines.

Moderate increases in road freight of 1 to 5 million tonne-kilometres are estimated to occur all throughout the wheat cropping areas of Western Australia, with LGAs further away from the main ports to have higher increases in road freight.

Map B11 Increase in wheat road freight, by Local Government Area for the maximum production level scenario without Tier 3 (MPL−no−Tier3)

Under the DPPL−no−Tier3 scenario (see Map B12), most of the increases in wheat road freight are estimated to occur in regions that were previously serviced by Tier 3 rail lines and where production is projected to increase (areas with average rainfall above 350 millimetres). Such a

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result is reasonable to expect as more production would lead to higher freight and reduced rail availability would lead to greater use of the road network to substitute for rail.

LGAs with the largest increases in road freight are in the southeast (moving wheat to Esperance and Albany) and the northwest (moving wheat to Geraldton). As noted above, many of the impacts occurring in the southeast are because of increases in production, rather than because of the closure of Tier 3 lines.

Moderate increases in road freight of 1 to 5 million tonne-kilometres are estimated to occur along the stretch spanning the length of the cropping areas with average rainfall above 350 millimetres. This coincides with the areas where production is projected to increase the most.

Map B12 Increase in wheat road freight, by Local Government Area for the DAFWA projected production level scenario, without Tier 3 (DPPL−no−Tier3)

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Policy implicationsThe results of the infrastructure scenarios show that the spatial patterns of freight movements on road and rail are highly dependent on:

where the potential increases in wheat production are projected to occur

which existing transport infrastructure (rail or road) is more available and

where Tier 3 lines are closed.

However, it must be noted that this analysis only examines freight movements for wheat production, and does not include other grain production that uses the bulk grain supply chain. If other grain crops have a similar expansion, freight movements could be significantly higher and the spatial patterns of freight movements could be different from those presented in this report.

It is important to note that as Tier 3 lines are solely used by the grain industry, most of the benefits of maintaining and upgrading the infrastructure are likely to accrue to grain producers and exporters. However, there might be some social benefits from reducing the number of trucks on regional and metropolitan roads.

The modelling results emphasise the importance of an integrated approach to infrastructure planning as the closure of rail branch lines is likely to lead to higher freight volumes on roads. Increases in road usage will lead to more road damage, which will in turn require increased funding by local governments if these roads are to be maintained.

Map B13 Population density in Western Australia, 2011

Source: ABS Regional Population Growth, Australia, 2011, cat. no. 3218.0

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The funding base in the eastern regions of the wheat belt in Western Australia is limited because of low population density (Map B13). As a result, paying for the maintenance of transport infrastructure in these regions is likely to be difficult. Given most of the benefits of maintaining and upgrading the infrastructure are likely to accrue to the grain industry, some form of user pays model provides an avenue for this infrastructure to be maintained.

To address the funding issue, reforms in road and rail pricing are needed. For road transport, a mass-distance-location charging model might need to be introduced to pay for the road damage caused. This model is being considered under the COAG road reform agenda. For rail transport, some of the branch lines used to transport wheat in Australia have very low levels of cost recovery. Again, given that the grain industry is the main beneficiary of these lines, growers are likely to have to contribute more to the upkeep of these lines if they are to be kept open. However, the potential to increase rail fees is constrained by the cost of road transport and the capacity of wheat growers to pay.

Along with reforms in road and rail pricing, institutional arrangements need to be introduced that ensure the revenue collected from these charges is redistributed to fund maintenance and upgrades in regions where damage to infrastructure occurs.

Future workThe simulations undertaken in this study could be extended to the wheat industry in the eastern states. One of the main differences between the eastern states and Western Australia is that the domestic demand for grain and the share of containerised wheat exports is much higher. The expected increase in demand for higher protein products such as beef and dairy products because of increases in incomes in Asia could see a diversion of wheat from the export market to the domestic feed grain industry, which would have implications for the pattern of transport.

There are other scenarios that could be investigated. For example, different assumptions on the marginal cost of road and rail transport could be tested—or differences within modes of transport such as differences in costs across Tier 3 lines—to assess the impacts on rail and road use. Another possible scenario would be to investigate the impact of continued rationalisation of the up-country receival network on modes and patterns of transport. The benefits (and potentially net benefits if road cost data were available) of relieving some constraints in the road freight sector could also be estimated. An example is the benefits of up-grading a road or bridge to allow access to higher productivity vehicles. The impact of an increase in wheat production on congestion on roads leading to ports in urban areas assuming current infrastructure is another issue that could be investigated.

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Appendix C: List of stakeholders consultedLocation Organisation

Australia wide Department of Agriculture

Infrastructure Australia

Bureau of Infrastructure, Transport and Regional Economics

Australian Logistics Council

Australian Trucking Association

Australian Livestock and Rural Transporters Association

Australian Export Grains Innovation Centre

Australian Grain Exporters Association

Australian Lot Feeders Association

Grain Trade Australia

Ports Australia

Grains Research and Development Corporation

NICTA

New South Wales GrainCorp

New South Wales Department of Primary Industries

Grain Growers

Transport for New South Wales

Western Australia Western Australian Department of Transport

Co-operative Bulk Handling (CBH)

WA Farmers

Western Australian Department of Agriculture and Food

Grain Industry Association of Western Australia

Brookfield Rail

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Australia’s wheat supply chains: Future opportunities and implications for infrastructure

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