Exporting Vegetables to China:

Transcription

1 Exporting Vegetables to China: Examining Opportunities and Barriers A report prepared for Senator the Hon. Richard Colbeck Shadow Parliamentary Secretary for Fisheries and Forestry Shadow Parliamentary Secretary for Innovation, Industry and Science Tegan Bensley An Intern with the Australian National Internships Program Date 13 May 2013

2 Executive Summary This report is written in the midst of an ongoing discussion regarding the increasing global demand for food, the growth of the middle class in Asia and the dynamic trade relationship Australia has with China. Forecasts project that the real value of world agrifood demand in 2050 is projected to be 77% higher than in 2007, with 43% of this future demand deriving from the Chinese market alone. 1 This report aims to investigate the potential opportunities this presents to Australian vegetable exporters, as well as the barriers they face in entering the Chinese market. Research indicates that consumption patterns are changing, with a shift towards greater consumption of fruit and vegetables. This is true of China where its 2 nd largest forecasted commodity demand in 2050 is in fruit and vegetables, behind meat. Chinese consumers are now extremely focused on food quality and safety. An estimated 83% of Chinese middle-class consumers are willing to pay more for safe food products, 2 providing opportunities to access Australian fresh, safe and premium vegetables. China is Australia s top agricultural export market after Japan, 3 yet figures show that Australian exports of vegetables to China are considerably low. $6 million worth of vegetables were exported to China in , compared to $43 million worth to Japan. 4 The low numbers of exports are attributed to growers seeing the Chinese market as too hard/too time consuming, where export is generally inhibited by both tariff and nontariff barriers, and access to Chinese vegetable market information is limited. 5 This report 1 Veriy Linehan et al. ABARES, Food Demand to 2050 Opportunities for Australian Agriculture, Conference paper presented at 42 nd ABARES Outlook conference 6-7 March 2012, Canberra: 1. 2 A.T, Kearney. Food Safety in China: What it means for global companies, Accessed March 11, DFAT, Australia. Australia s major agriculture export markets 2011 (calendar year). Last updated ABARES, Australia March Quarter Agricultural Commodities. 2013: Neil, T et al. 2012, Horticulture: Review of the export efficiency powers. Australian Bureau of Agricultural and Resource Economics and Sciences report to client prepared for the Review of Horticulture ii

3 recommends that the government provide more cost-effective assistance to tools essential to market access, such as market information and fees associated with exporting. Chinese consumers perception of quality is influenced by the product s intrinsic attributes as well as by extrinsic indicators and cues provided by the Australian seller of the product, making branding essential. This report recommends that current branding strategies should work towards highlighting clean and green vegetable produce to safety-concerned Chinese consumers. Further, a campaign should be used in China that promotes Australia horticulture s safety and premium quality, facilitated by increased horticulture trade fairs in both Australia and China. Australia s businesses, communities and institutions involved in agriculture and food need to nurture and strengthen their links with the Chinese region to move forward in the trade relationship. To this end, the Australian government should make the completion of the Australian-China Free Trade Agreement a major priority. During these negotiations, the government should commission an updated joint FTA Feasibility Study. This in itself would encourage people-to-people links between Australian and Chinese vegetable growers, improving access to market and consumer information. Continuing investment into R&D is essential for Australian vegetable producer competiveness and any veritable medium-long term growth in China. This is not to deny the growth potential for Australia, or the potential of market access to China. Rather, significant weaknesses and threats need to be addressed so Australia can utilise its strengths to take advantage of opportunities presented in China. Australian vegetable exporters should look to identify and develop new high value and high growth export markets, without neglecting their current relationships with their top markets. Australia Limited export regulation powers. Canberra, June 2012: data/assets/pdf_file/0006/ /horticulture-review-of-the-export-efficiencypowers.pdf iii

4 Acknowledgements This report would not have been made possible without the help, support and guidance of a number of people. The following people are recognised for making this report possible: 1. I am grateful to Senator the Hon. Richard Colbeck for providing me with the opportunity to conduct this research and work in his office. 2. Thank you to Jane Lovell, Advisor and Electorate Officer Office of Senator the Hon. Richard Colbeck for her ongoing support, advice, encouragement and hospitality throughout the internship. 3. Thank you to Dr. Andrew Banfield, Director and Cheryl Wilson, Program Administrator for the Australian National Internship Program (ANIP) from the Australian National University for granting me the opportunity to be a part of the internship program. Their guidance and support were greatly appreciated. 4. Thank you to the people interviewed: Mike, Rick and Jim Ertler, co-owners Premium Fresh; Kim Brown, Sales and Marketing Manager Field Fresh Tasmania at Webster Ltd; Simon Drum, General Manager Harvest Moon; David Addison, Managing Director Charlton Farm Produce P/L; Sally Chandler, TradeStart Adviser - Tasmanian Chamber of Commerce & Industry; Lucy Gregg, Business Development Manager Fruit Growers Tasmania. Their insights were fundamental to an understanding of the industry. 5. Thank you to William Churchill, Communications & Public Affairs Manager AUSVEG Limited for his assistance and comments. 6. Thank you to Eugenia Karanikolas, Parliamentary Researcher for her consultation. 7. Thank you to Dr Lin Cui and his guidance. 8. Thank you to Eric Shek for proof reading. 9. Thank you to the other ANIP students for sharing their insights and ideas. 10. Thank you to friends and family for their support and encouragement. iv

5 Table of Contents Executive Summary... ii Acknowledgements... iv Table of Contents...v List of Tables... vii List of Figures... vii List of Abbreviations... viii INTRODUCTION...1 CHAPTER 1: AUSTRALIA S VEGETABLE EXPORTING INDUSTRY Background to the Industry Key Destinations China...10 CHAPTER 2: OPPORTUNITIES AND STRENGTHS FOR AUSTRALIAN VEGETABLE EXPORTS Opportunities for Australian Vegetable Exports China s Growing Demand for Food China s Changing Consumer Strengths of Australian Vegetable Exports Safety Premium and quality products Low tariff Barriers Seasonality...23 CHAPTER 3: THREATS AND WEAKNESSES TO AUSTRALIAN VEGETABLE EXPORTS Threats to Australian Vegetable Exports China s Tariff and Non-Tariff Barriers Competition with Other Markets Currency Weaknesses of Australian Vegetable Exports Attitudes of Growers Access to Information Accuracy Availability Cost Regulatory Costs Australia-China Free Trade Agreement Branding SWOT Table...38 CHAPTER 4: WAYS FORWARD...39 v

6 4.1 Building Relationships Between Commonwealth and State Governments Between Australia and China Between Australian Suppliers and Chinese Customers Research and Development Brand Development Regulatory Facilitation Australia s Place in the Global Vegetable Market...44 CONCLUSIONS REFERENCES APPENDIX...58 vi

7 List of Tables Table 1: Selected Australian vegetable exports, by level of transformation... 8 Table 2: Major growth opportunities for vegetable farms, by state, Table 3: Impediments to developing export markets, by state, Table 4: SWOT Table List of Figures Figure 1: Australia's net exports of fruit, nut and vegetables... 6 Figure 2: China's imports by commodity groupings Figure 3: Australia's Vegetable Trade with China (millions of Australian dollars) Figure 4: World agrifood demand by commodity grouping Appendix Appendix A: MICoR Fresh Vegetables to China vii

8 List of Abbreviations Abbreviation Definition ABARES Australian Bureau of Agricultural and Resource Economics and Sciences ACCI ANIP ANU AQIS AQSIQ Australian Chamber of Commerce & Industry Australian National Internships Program Australian National University Australian Quarantine Inspection Service Chinese agency- General Administration of Quality, Supervision, Inspection & Quarantine ASEAN Association of Southeast Asian Nations: Indonesia, Malaysia, the Philippines, Singapore, Thailand Brunei, Burma, Cambodia, Laos, and Vietnam DAFF DFAT FTA HAL MFN MICoR OECD Department of Agriculture, Fisheries and Forestry Department of Foreign Affairs and Trade Free Trade Agreement Horticulture Australia Most Favoured Nation Manual of Importing Country Requirements Organisation for Economic Cooperation and viii

9 Development PSE R&D VAT VIEN WTO Producer Support Estimate Research and Development Value added Vegetable Industry Exporters Network World Trade Organisation ix

10 INTRODUCTION This report investigates the key opportunities and barriers to trade faced by Australian fresh vegetable exporters in gaining access to the Chinese market. Through research and analysis, this report identifies the principal strengths and weaknesses inherent of the internal environment of Australian vegetable exporters. Furthermore, it identifies possible actions the Australian government can take to enhance Australia s vegetable export industry s ability to compete in the Chinese market. This report is written in the midst of an ongoing discussion regarding the increasing global demand for food, the growth of the middle class in Asia and the dynamic trade relationship with China. A number of policy processes completed or underway such as the 2012 White Paper on Australia in the Asian Century 6, the 2012 Select Committee Report on Australia s Food Processing Sector 7 and the 2012 National Food Plan Green Paper 8 will be used to inform this report. Further, qualitative data obtained through interviews with industry members primarily from Tasmania is utilised to inform and guide policy from an industry perspective. Tasmanian businesses were chosen because per state, Tasmania had the highest proportion of growers selling for export. 9 6 Department of Prime Minister and Cabinet, 2012 Australia in the Asian Century White Paper. 7 The Senate. Australia. Australia s Food Processing Sector Inquiry into Australia s food processing sector. 8 DAFF, Australia, 2012 National Food Plan Green Paper. 9 ABARES, Australia, Australian Vegetable growing farms: 40. Exporting Vegetables to China Page 1

11 Chapter 1 presents an insight into Australia s vegetable exporting industry, providing background to the industry. It briefly describes the vegetable export and import dynamics that exist in Australia and goes on to explore Australia s key destinations for vegetable exports. As Australia s top export market for agriculture, China s dramatic projected increase in demand for vegetables in 2050 offers potential growth in Australian export markets for fresh vegetables. Despite Australia s close trade relationship with China, however, China does not place in the top 20 country destinations for fresh vegetables. Chapter 2 will analyse information gathered from interviews with businesses and industry from Tasmania, along with government, peak body and academic research to identity the opportunities in the Chinese market, and the strengths that are characteristic of Australian vegetable exports. China s growing population, rising income of their middle class, and demand for safe and fresh vegetables provides Australian vegetable exporters with opportunities for export. Australia can utilise its strengths of having a strong reputation for premium, safe and high-quality vegetables to take advantage of these opportunities. Further, Australia s low tariff barriers and counter seasonal production to China in the Northern Hemisphere can enhance the trade of vegetables. In correspondence with Chapter 2, Chapter 3 will identify the threats that the external environment poses on the Australian vegetable exporting industry and the weakness that exist internally within Australia that impede access to Chinese markets. The high Australian Dollar has seen the competiveness of Australian vegetables decline and some Exporting Vegetables to China Page 2

12 countries looking towards cheaper export countries. This coupled with China s tariff and non-tariff barriers presents real challenges for Australian vegetable exporters. Nevertheless, considerable weaknesses exist internally in Australia. The attitude of producers is not conducive with future growth in vegetable exports to China. Most growers see poor access to market information, high regulatory costs (licensing and phytosanitary) and existing country trade barriers too risky and time consuming to navigate. Chapter 4 reflects on the assessment of the Australian vegetable markets engagement with China to suggest some initiatives for the future. These measures should be aimed at minimising the threats posed by the Chinese market, and building on the strengths of the Australian vegetable industry. The Australian government should not only envisage to nurture the Australia-China relationship by pursuing a FTA and barriers to trade, but also its relationship with state and industry. Investment into research and development plays a key role in the future of the Australian vegetable export industry. This report can be used to inform further research into the viability of fresh vegetable exports to China. However, due to several limitations of this report, further research is needed. This report was primarily limited by access to information and the length of the report. All figures given in the report are in Australian dollars unless specified otherwise. It recommends that future research should focus on a comprehensive analysis of consumers to best match Australia supply with Chinese demand for vegetables. Exporting Vegetables to China Page 3

13 CHAPTER 1: AUSTRALIA S VEGETABLE EXPORTING INDUSTRY 1.1 Background to the Industry Australia s horticulture industry comprises of fruit, vegetables, nuts, flowers, turf and nursery products. 10 In Australia s horticulture industry was the nation s third largest agricultural industry based on gross value of production, ranking third behind the meat and grain industries. 11 While horticulture production contributes a significant proportion to the gross value of Australian farm production, the sector s export earnings are relatively small. Horticulture export earnings were estimated to be around $1.25 billion in , or 4 per cent of an estimated $32.4 billion for farm exports as a whole. 12 In terms of gross value of production, vegetables ranked 2 nd behind fruit and nuts ($3,431 million) at $3,409 million, and accounted for 23% of Australian horticultural exports. 13 The Australian vegetable production sector is an important supplier of food to the Australian domestic market, supplying most of the vegetables consumed in Australia. The sector is domestically focused with Australian vegetables making up about 85% of 10 DAFF Horticultural Fact Sheet. 11 DAFF, Australian Food Statistics Neil, T et al., Horticulture: Review of the export efficiency powers. 13 ABARES, 2013 March Quarter Agricultural commodities: 240. Exporting Vegetables to China Page 4

14 the domestic vegetable market, with the remainder comprised of imports. 14 After a forecast decline of 22 per cent, the value of Australian vegetable exports is forecast to increase by 3 per cent in to $570 million, before rising marginally to $577 million (in dollars) in Vegetable growers in Australia typically sell their produce into one of three market segments: the fresh vegetable market, the processed vegetable market, and/or the export market. However, few Australian grower companies are genuinely export focussed (i.e. exporting 30% or more of production). 16 According to the data from the Australian vegetable growing farm: An economic survey and ABARES report, the proportion of vegetable growers selling for export in Australia was only 4%, with Tasmania having the highest proportion per state at 10%. 17 Australia produces and exports both fresh and processed vegetables. Processed vegetables include vegetables in the form of pre-prepared, canned, frozen or dried saw all categories of vegetable exports fall. Despite Australia having a trade deficit in 14 AUSVEG and Horticulture Australia, Australian vegetable industry Strategic Investment Plan March ABARES, 2013 March Quarter Agricultural commodities: Food Advantage Consulting Services. Global Comparative Analysis - China. May HAL Project no VG07150: Therese, T, Zhang, K, ABARES. Australian vegetable growing farms An economic survey and : Exporting Vegetables to China Page 5

15 for vegetables (that is, the value of imports exceeds the value of exports), it maintains a trade surplus in fresh vegetables. 18 Fresh vegetables remain the largest category by a significant margin, accounting for 60% of the total value of vegetable exports in Figure 1 20 demonstrates that there has been a significant and ongoing decline in processed vegetable exports since Although there has also been a decline in the export of fresh vegetables, it has remained in surplus. Exports in were $267 million of which $164 million were fresh vegetables. In contrast, in the financial year , exports were $326 of which $198 were fresh. 21 However, vegetable exports have been in a steady decline. Figure 1: Australia s net exports of fruit, nut and vegetables DAFF, Australian Food Statistics AUSVEG, Summary Trade in Vegetables. Last updated DAFF, Australian Food Statistics : AUSVEG. Sourcing of vegetables by Asian economies A look at the data DAFF DAFF 2013, Australian food statistics Exporting Vegetables to China Page 6

16 As previously mentioned, Australia generally imports only small volumes of fresh vegetables. Fresh or chilled vegetable imports accounted for only 7 per cent of total vegetable imports valued at just under $64 million, while the remaining 93 per cent was processed vegetables. 23 Imports of fresh vegetables are generally counter seasonal or they supply market segments not well catered for by Australian production. 24 Imports of fresh asparagus, for example, tend to supplement a seasonal shortfall in domestic production. 25 Australia exports a wide range of vegetables from onions and potatoes, to carrots and mushrooms. Table 1 below shows that carrots, onions, potatoes and asparagus were the leading products exported in 2012 and accounted for 75% of vegetable exports in the year. 26 Carrot growers continue to have the lowest average cost of production of $261 per tonne in Potatoes have the second lowest cost of production, followed by onions 27. Due to Australia s high costs of labour and production relative to the rest of the world, it does not appear to be a coincidence that carrots, potatoes and onions are Australia s leading fresh vegetable exports ABARES, 2013 March Quarter Agricultural commodities: Australian Horticultural Exports Association (AHEA). Seasonality for Export Apted, S et al. International Competitiveness of the Australian Vegetable Production Sector ABARE ereport. Canberra: 3 26 DAFF, Australian Food Statistics : Therese, T, Zhang, K, ABARES. Australian vegetable growing farms 28 Ian James, AUSVEG. A discussion paper on industry issues drawn from data collected by ABARES in 2012 from Australian vegetable growing farms BARES%20in%202012%20from%20Australian%20vegetable%20growing%20farms.pdf Exporting Vegetables to China Page 7

17 Table 1: Selected Australian vegetable exports, by level of transformation Key Destinations New Zealand, Japan and Singapore have remained as the top 3 export destinations for Australian vegetables for the last 7 years. 30 Statistics from the peak body AUSVEG illustrate that the export destination countries vary between vegetable categories. As previously noted, fresh vegetables make up the largest proportion of vegetable exports from Australia. In , the top four fresh vegetable export destinations were Singapore, Japan, United Arab Emirates and New Zealand. Contrasting this information with processed vegetable export destinations, for which during the same period the top four destinations were Japan, New Zealand, Papua New Guinea and Singapore DAFF, Australian Food Statistics : AUSVEG, Summary Trade in Vegetables. Last updated Ibid. Exporting Vegetables to China Page 8

18 Trends in Australia s export markets are mixed, however, with exports into some markets growing, while exports to some other markets declining. 32 In Australia s top fresh vegetable export destination (Singapore), Australia holds significant market share for carrots, broccoli and lettuce. Fluctuating between a range of 66% to 73% over the past five years, Australia held 66.2% of the total market share for carrots in It remains ahead of China, the second most important supplier of carrots into Singapore, even though Australia s prices are significantly higher than carrots imported from China. Australia prices were approximately 70% higher than Chinese prices in 2008 and 2009, and approximately 86% higher in 2010 and This indicates that although price is a factor, factors other than price are important in determining the source of vegetable imports for countries, such as quality, reliability and availability. This will be discussed in more detail in Chapter 2. In 2011/12, the top four countries importing vegetables to Australia were New Zealand, China, United States and Italy ABARES, 2013 March Quarter Agricultural commodities: AUSVEG, Sourcing of vegetables by Asian economies A look at the data 34 AUSVEG, Summary Trade in Vegetables. Last updated Exporting Vegetables to China Page 9

19 1.2 China China is now Australia's largest two-way trading partner in goods and services (valued at $127.8 billion in ), our largest merchandise export destination ($76.8 billion in ), and our largest source of merchandise imports ($43.4 billion in ). 35 It is also Australia s top agricultural export market after Japan. 36 Over the past 10 years, China s imports and exports of agriculture products have grown considerably. Since 2003, China has had a negative trade balance in terms of agricultural goods. Despite the growth of agricultural imports, agriculture still represents less than 5 per cent of China s total imports of goods. 37 Not only is China the largest consumer of food and beverages in the world, it is also the world s largest producer of vegetables 38. Vegetables are China s primary product in terms of the value of production (20% of the output value). 39 In 2007, China imported around US$98m of vegetable products, where some 70 per cent of this was frozen product from the USA and Canada. Fresh vegetables were a very small part of this trade (about 35 Merchandise trade refers to goods which add or subtract from the stock of material resources of a country by entering (imports) or leaving (exports) its economic territory. OECD. Glossary of Statistical Terms. Last updated Statistics from DFAT, Australia. Towards 2025: Australia s China Strategy in the Asian Century. Issues Paper. April DFAT, Australia s major agriculture export markets 2011 (calendar year). Accessed 3 March, World Trade Organisation (WTO). Trade Policy Review China DAFF, Australian Food Statistics : World Trade Organisation (WTO). Trade Policy Review China Exporting Vegetables to China Page 10

20 US$2m), predominantly from Thailand, Vietnam and North Korea. 40 However, as illustrated by Figure 2 below, China s demand for vegetables is projected to increase dramatically in 2050, offering potential growth in Australian export markets for fruit and vegetables. Figure 2: China s imports by commodity grouping 41 Data regarding vegetable exports from Australia to China is relatively limited, varied, and accurate figures are difficult to access. Data taken from ABARES, an independent government research agency, DAFF, an Australian government department, and AUSVEG, a national peak industry body for vegetable and potato growers, indicate inconsistencies with vegetable classification and data collection. The implications of these inconsistencies will be addressed in Chapter 3. The most recent figures from the 40 Food Advantage Consulting Services. Global Comparative Analysis - China. 41 Veriy Linehan et al. ABARES, Food Demand to 2050 Opportunities for Australian Agriculture, 2013: 9. Exporting Vegetables to China Page 11

21 Commodities Report show that Australia exported $6 million worth of vegetables to China in , compared to $43 million worth to Japan. 42 Despite Australia s close trade relationship with China, according to AUSVEG data, China does not place in the top 20 country destinations for fresh vegetables. However, it ranks sixth as a destination for Australian processed vegetable exports. 43 Overall, China is Australia s second largest vegetable import source country after New Zealand, importing approximately $95.5 million of Chinese vegetables in China is Australia s number one importer nation for fresh vegetables and second for processed vegetables. 44 However, Figure 3 below illustrates the significant trade imbalance between the value of vegetables China exports to Australia compared to the value of vegetables Australia imports from China, with the value of China s vegetables much lower than those of Australia s vegetables. This is in part due to differing trade barriers and market needs, which will be discussed in detail in Chapter ABARES, 2013 March Quarter Agricultural commodities: AUSVEG. Summary Trade in Vegetables. Last updated Ibid. Exporting Vegetables to China Page 12

22 Exports to China Imports from China Australia Vegetable Trade with China (Millions of Australia Dollars) Figure 3: Australia s Vegetable Trade with China (Millions of Australia Dollars) Data taken from ABARES 2013 March Quarter Agricultural Commodities pg 258. Exporting Vegetables to China Page 13

23 CHAPTER 2: OPPORTUNITIES AND STRENGTHS FOR AUSTRALIAN VEGETABLE EXPORTS This chapter will analyse information gathered from interviews with businesses and industry from Tasmania, along with government, peak body and academic research to identify the opportunities and strengths for Australian vegetable exports to China. These findings will then be summarised in Table 4 at the end of Chapter 3, along with the weaknesses and threats found in Chapter Opportunities for Australian Vegetable Exports Opportunities for Australian vegetable exports refer to the opportunities that exist in China for Australia vegetable exporters. In the medium to long term, ongoing economic growth in China, as well as a growing and increasingly affluent population provides positive trade prospects for Australian fruit and vegetables. There are opportunities for certain products to earn significant returns to the Australian horticulture industry in the export market; these are likely to be counter seasonal, niche and of high quality China s Growing Demand for Food The world is becoming increasingly conscious of the growing demand for food, closely correlated with the growing population. Forecasts from ABARES project that the real value of world agrifood demand in 2050 is projected to be 77 per cent higher than in 2007, driven by higher world population and per person incomes. The majority of the Exporting Vegetables to China Page 14

24 projected rise is to occur in Asia, where agrifood demand is expected to double over the projection period. China alone accounts for 43 per cent of the projected increase in global demand, while India contributes to 13 per cent of this growth. 46 Figure 4 below illustrates that the largest increase in the real value of total agrifood demand in 2050 is for vegetables and fruit. Figure 2 in Chapter 1 demonstrates that in terms of commodity groupings, China s 2 nd largest forecasted commodity demand in 2050 is for fruit and vegetables. This is consistent with the expected change in diets towards high value products. 47 This growing demand for vegetables provides an opportunity for Australian vegetable growers. Figure 4: World agrifood demand by commodity grouping Veriy Linehan et al. ABARES, Food Demand to 2050 Opportunities for Australian Agriculture, 2013: ANZ. Feeding the Dragon December Veriy Linehan et al. ABARES, Food Demand to 2050, 2013: 9. Exporting Vegetables to China Page 15

25 2.1.2 China s Changing Consumer The rapid economic and population growth rates in China have resulted in increasing urbanisation, a rise in consumer income and an increasing middle-upper class population. 49 Currently, China s urban population exceeds its rural population. 50 Opportunities for high quality and premium vegetables exist in affluent urban areas in China, but they are not free of strong competition from local produce. Urban areas present the greatest opportunity for such niche vegetables. As ANZ New Zealand Economics Agri Research National Household Survey shows, as incomes rise, urban households change the structure of their diets. It indicates that as income increases, fresh fruit and vegetable consumption considerably increases. 51 However, as Figure 5 below reveals, the rise in consumption for these products do reach a plateau, indicating that middle to upper-class consumers purchase approximately the same amount of fresh vegetables. This kind of information can be used to better understand and target consumer behaviour. 49 Ibid DFAT, Australia. Asian-Century 2013 agribusiness and food Sydney presentation. Sydney ANZ. Feeding the Dragon December Exporting Vegetables to China Page 16

26 Figure 5: Annual per capita purchases of other products, by income levels 52 Chinese consumers are now extremely focused on food quality and food hygiene. A series of national scandals over poisonings, contamination and fraudulent products have made food safety a major issue for local buyers. In 2008 in China, the illegal practice of adding melamine to milk to boost the protein level tainted milk crisis of 2008, which saw hundreds of thousands of infants fall ill across the country, drastically altered consumer trust towards Chinese food products. 53 This distrust in food products in China resurfaced in 2013 when purchase limits in overseas markets coupled with toughened custom controls between Hong Kong and the mainland has led to an infant milk formula supply 52 ANZ. Feeding the Dragon December 2012: China Communications. China Will dominate new global damand for agri-food products Australian exports to benefit. June Accessed 2 March, Agri-Food-Products-Australian-exporters-to-benefit.php Exporting Vegetables to China Page 17

27 crisis for Chinese consumers. The ongoing crisis reflects the very low trust and confidence in domestic products, which have led to middle class parents paying inflated prices for foreign-made milk powder and other products. 54 Chinese women are an important demographic group as far as food consumption is concerned. It is estimated that women in China hold about 60% of spending power and that they determine 78% of daily purchases in households. 55 Research shows that some of these shoppers, as mothers, were willing to spend approximately 20% more for food products, clothing and related toiletry items for their babies if they were fully confident that those products were safe. Further, it is estimated that 83% of Chinese middle-class consumers are willing to pay more for safe food products. 56 This is a clear opportunity for Australian vegetable exporters, who while not competitive on price, are able to market their products with a safety guarantee to Chinese middle-class consumers. 54 Ibid. 55 Abraham Zamcheck et al. Shanghai s Youth Market: Changing Perceptions in Food Consumption. 2008, 56 A.T, Kearney. Food Safety in China: What it means for global companies, Exporting Vegetables to China Page 18

28 2.2 Strengths of Australian Vegetable Exports Strengths of Australian vegetable exports refer to the strengths that Australia products and businesses possess, such as a premium brand, safe products, low tariff barriers and seasonality Safety According to William Churchill, Communications and Public Affairs Minister for AUSVEG, Australia is known for its high standards in food safety, quality assurance systems and low pesticide use. 57 All food for sale in Australia - whether locally produced or imported - is required to comply with a code set out in the The Foods Standards Australia New Zealand Act Ensuring compliance with the Food Standards Code is the joint responsibility of state and territory governments, Food Standards Australia New Zealand, and the Australian Quarantine and Inspection Service (AQIS). 59 In accordance with the World Trade Organisation (WTO) Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) and the Agreement on Technical Barriers to Trade (TBT Agreement), DAFF Biosecurity upholds stringent quarantine requirements to help protect 57 William Churchill, AUSVEG. Communications & Public Affairs Manager, answer from s 20 April Food Standards Australia New Zealand, What we do, Last updated Recent changes saw AQIS, Biosecurity Australia, and segments of the Product Integrity, Animal and Plant Health Division in DAFF be combined into the Biosecuity Services Group, which will be referred to as DAFF Biosecurity in this report. Exporting Vegetables to China Page 19

29 human health, Australia s agricultural industries and its environment. While these comprehensive bodies and laws result in Australia being well-known and internationally trusted for safe food produce, countries such as China may see the laws as a barrier to an economically-prosperous trade relationship. Not only does Australia have detailed regulations and laws, its growers also have a high awareness about the safety of their products. An ABARES report investigating Australian vegetable growing farms indicated that most vegetable growers were concerned about pests and diseases, with an estimated 98 per cent of vegetable growers following a set pest and disease monitoring program Premium and quality products As perceived quality plays an important role in influencing price premiums 61, Australia is able to leverage the perceptions that Chinese consumers have about Australian produce being safe, high quality and premium. Australia is a world leader in growing technology and invests heavily in research and development (R&D), which has led to increased crop yields and farms where less and less human labour is required. 62 However, Australia will never be able to compete with local Chinese vegetable production in regards to labour 60 Thompson, T and Zhang, ABARES, Australian vegetable growing farms An economic survey and : Sethuraman, R. & Cole, C. Factors influencing the price premiums that consumers pay for national brands over store brands, The Journal of Product and Brand Management, vol. 8, no. 4: William Churchill, AUSVEG. Communications & Public Affairs Manager, answer from s 20 April Exporting Vegetables to China Page 20

30 and production cost. As such, a greater focus should be placed on differentiating Australia s products, allowing Chinese markets to be secured using factors other than price. Australia, like many other nations have initiatives that promote its nation and products strengths to the rest of the world. One example of this is The Australian Made, Australian Grown logo. It is administered by Australian Made Campaign Limited (AMCL); a not-for-profit public company established in 1999 by the Australian Chamber of Commerce & Industry (ACCI) and the network of state and territory chambers of commerce, with the cooperation of the Federal Government. 63 Horticulture Australia s Australia Fresh export program was relaunched in September 2012 and incorporated the iconic green-and-gold Australian Grown logo, offering the horticultural industry a powerful marketing tool both within and outside Australia. However, other countries such as New Zealand have done much more to utilise branding to advertise their strengths to foreign markets. This will discussed further in Chapter Four Low tariff Barriers Worldwide, agricultural trade is generally characterised by high tariffs and high level of government support to producers. Average global tariffs for agricultural goods are more than 3 times higher than for non-agricultural goods. Conversely, Australia provides 63 Australia Made, Why Buy Australia Made. Last updated December Exporting Vegetables to China Page 21

31 agricultural produce to world markets without high levels of financial support and protection policies used by some countries. This results in Australia being one of the world s most efficient agricultural producers. According to Department of Foreign Affairs and Trade (DFAT), this is demonstrated by the Producer Support Estimate (PSE) produced by the Organisation for Economic Cooperation and Development (OECD). The PSE estimates the percentage of farm income arising from government support. Australia s PSE in 2010 was only 2.6 per cent, the second lowest among OECD countries, where China s was 17.4 per cent. 64 This is a reflection of Australian farmers strengths of efficiency. In current and future pursuits of a Free Trade Agreement (FTA) with China, this strength will act as an indication of Australian farmers willingness to trade. There are no tariffs on fresh vegetable imports into Australia and only very small tariffs on some processed vegetables of 5% for developed countries and 4% for developing countries (such as China), except where free trade agreements exist. 65 There are some biosecurity restraints on imports of certain vegetables where it is considered that the import poses a high risk to the local industry. This can often cause tensions and even reduced trade between nations, most notably with the banning of New Zealand apples 64 DFAT, Australia Agriculture and the WTO Ian James, AUSVEG. A discussion paper on industry issues drawn from data collected by ABARES in 2012 from Australian vegetable growing farms Exporting Vegetables to China Page 22

32 because of fire blight. 66 However, under WTO rules to which Australia is a signatory, biosecurity cannot be used as a trade barrier and arguments against market access must be based on scientific evidence showing that there is a reasonable risk that the pest or disease will be transmitted to Australian producers Seasonality Counter seasonality is an important element in Australia s trade in fresh fruit and vegetables, including citrus, table grapes and asparagus. 68 Where the increased demand cannot be met from within the consuming country, for example, because of climatic limitations, product is often sourced from countries in other regions. As such, counter seasonal trade with countries in the southern hemisphere, for example, supplying out of season produce to the northern hemisphere, is a strength of Australia s. For Australia, it has opposite seasonality with many regions of China that growers could take advantage of. However, seasonality seems to be both a reason for the success of Southern Hemisphere growers exporting to Japan and Singapore, as well as a major constraint in not being able to supply these markets beyond a few months each year. 66 WTO 2010 Australia Measures Affecting the Importation of Apples from New Zealand Report of the Appellate Body 67 Ian James, AUSVEG. A discussion paper on industry issues drawn from data collected by ABARES in 2012 from Australian vegetable growing farms. 2013: Kim, M, Thompson, N & Penm, J 2010, Recent trends in Australia s food trade, Australian commodities, vol. 17, no. 2, Canberra. Exporting Vegetables to China Page 23

33 CHAPTER 3: THREATS AND WEAKNESSES TO AUSTRALIAN VEGETABLE EXPORTS This chapter will analyse information gathered from interviews with businesses and industry from Tasmania, along with government, peak body and academic research to identity the threats and weaknesses for Australian vegetable exports to China. 3.1 Threats to Australian Vegetable Exports Threats that exist for Australian vegetable exports refer to the threats presented by the external environment, namely China s laws, regulations, market competition, and other outside forces China s Tariff and Non-Tariff Barriers For China, tariffs remain as one of its main trade policy instruments. Tariff barriers can be an important determinant of the price competitiveness of Australian products on overseas markets. However, some non-tariff barriers also threaten market access into China for Australian vegetable exporters. Since China s entry into the WTO in 2001, China has reduced its overall average tariff for agricultural products from 21.2 per cent to 15.3 per cent (compared to non- Exporting Vegetables to China Page 24

34 agricultural products to 8.8 %). 69 Despite China s ongoing efforts to meet its 2001 commitments, many tariff and non-tariff barriers remain and the Chinese business environment is still challenging for Australian companies. For example, compared to Australia s tariff rate of 0 for fresh vegetables, and 4-5% for processed vegetables, China s tariffs are high (average of 13.8% for vegetables) 70, and act as a barrier to trade. It should be noted that as China applies its most favoured nation rate (MFN) 71 to Australian imports, while Australia applies its developing country tariff rates to Chinese imports. Hence, as a developing country, China is already afforded some tariff concessions by Australia relative to those levied on imports from a MFN country. Whilst not directly paid by Australian vegetable exporters, VAT (a form of consumption tax) is levied by China on imported agricultural products, increasing the price for Chinese consumers and acting as a non-tariff barrier for Australia. The rate levied on agricultural products remains at 13.8%, 4 percentage points lower than the general VAT rate. Agricultural products produced and sold directly by small-scale farmers are still exempt 69 Under the WTO policy of most-favoured-nation (MFN): treating other people equally where countries cannot normally discriminate between their trading partners. As such, all countries that do not hold any further trade agreements (e.g. bilateral) are subject to the same tariffs. WTO Principles of the Trading System. Last updated December DFAT, Australia Agriculture and the WTO See footnote 64. Exporting Vegetables to China Page 25

35 from VAT. 72 This reduces the overall competitiveness of Australian vegetables to Chinese consumers on the basis of price. A call from members of the WTO on China to eliminate non-tariff barriers illustrates that non-tariff barriers are restrictive for Australian businesses. The WTO argues that many of the measures are vague and obstruct trade and investment growth. China not providing adequate information on rules and regulations to trading partners, in particular regarding information on different states is acting as a barrier to trade Competition with Other Markets In the fresh sector of vegetables, there are considerations other than price that drive the choices and procurement strategies of the major buyers in China. 74 Australia s strength of providing counter-seasonal niche produce to countries in the Northern Hemisphere is not without competition. Australia s fresh vegetable exports compete with other sources such as New Zealand, Latin America, and South Africa. Australia s number one competitor when it comes to China is New Zealand. It is one country that differentiates its products similarly to Australia based on high quality and safe produce. While New Zealand is also a large exporter and competitor of onions and carrots, they have successfully innovated to develop novel products for a niche market. 72 WTO Principles of the Trading System. 73 The Nation, 2012 WTO wants China to cut non-tariff barriers 74 Food Advantage Consulting Services, May Global Comparative Analysis - China. Exporting Vegetables to China Page 26

36 For example, $40 million was invested by the New Zealand government to map the gene sequences for apples and kiwifruit. These genetic maps allow breeders to target traits like shape, flavour, colour and vitamin content. 75 The development of Gold kiwifruit allows them to have a significant price premium over green kiwifruit. This R&D expenditure and competition from similar export countries such as New Zealand are significant threats to Australian exports Currency The exchange rate is an important macroeconomic variable that significantly influences the performance of Australian export industries via its impacts on export earnings and international price competitiveness. 76 Various industries within the horticultural sector have been reporting that the high Australian dollar is causing export losses to their respective sectors. Tasmanian Farmers and Graziers Association chief executive Jan Davis said, the direct loss of export income due to the high dollar is about $1.2 billion, value added. 77 All vegetable growing companies interviewed in Tasmania said that the high Australian dollar was having an impact on their competitiveness and attitudes towards the export market. Field Fresh Tasmania, a division of Webster Limited and Australia s largest exporter of onions identified currency as the major problem currently 75 HAL and AUSVEG, March 2012 Australian vegetable industry Strategic Investment Plan : Apted, S et al. International Competitiveness of the Australian Vegetable Production Sector The Examiner. High Aussie dollars costing farm million. Thursday 28 Feb Exporting Vegetables to China Page 27

37 facing their company, given that 90 per cent of sales revenue is generated through export sales. 78 Within the past year the Australian dollar was as low as US 96 cents in early June 2012 and as high as US 106 cents in mid January Consequently, it remains important for primary producers and exporters to manage the risks associated with fluctuations in the Australian exchange rate. 79 The recent currency deal allowing direct currency conversion between the Australian dollar and the Chinese Yuan was welcomed by vegetable exporters, but they say it will have no substantial impact on their costs. David Minnis, from the Australian Horticultural Exporters Association, says its market access into China, and not currency, that's the biggest concern for Australian producers. "They're [China] still small fry in the overall context of things, so no, our important issue in China is getting market access," he said Weaknesses of Australian Vegetable Exports Weaknesses that exist for Australian vegetable exports refer to the disadvantages and limitations of the external environment, namely Australia and the vegetable industry. These weaknesses inhibit market access to China. 78 Field Fresh Tasmania, The Currency Challenge AUD v YEN brochure ABARES Agricultural commodities March Quarter 2013: Minnis, David, Currency deal Australia China no effect for exporters 10 April Exporting Vegetables to China Page 28

38 3.2.1 Attitudes of Growers The attitudes of vegetable growers need to be positive towards the possibility of export if Australia wants to gain better access to the Chinese market. However, data from government bodies and interviews indicated this was not the case. Table 2 below based on ABARES research, illustrates that a low percentage of vegetable business are involved in export, seeing only 4 per cent actually selling to export markets. Just 12 per cent of businesses said they saw export markets as a viable growth opportunity 81, indicating that there is little enthusiasm for exporting amongst Australian vegetable growers. Table 2: Major growth opportunities for vegetable farms, by state, While Table 2 above confirms the previous argument that the opportunities for vegetable growers appear more aligned with the development of niche vegetable markets by providing high quality innovative product, Table 3 below highlights a number of impediments to developing export markets. 80 per cent of growers indicated that in 81 Thompson, T & Zhang, K 2012, Australian vegetable growing farms: an economic survey and : Ibid. Exporting Vegetables to China Page 29

39 general, export was, too hard/time consuming. Tasmanian growers had the highest response to the question (71%). Table 3: Impediments to develop export markets, by state, None of the four Tasmanian vegetable businesses that were interviewed were exporting fresh vegetables to China. All expressed interest in learning about the possibilities to tap into the growing demand in China, but suggested that a lack of information about the market and the requirements they would have to meet to export to China had prevented them from pursing China further and risking relationships with existing profitable markets. It is evident that the mindset shown by the current vegetable growing enterprises towards China as an export market is one of some interest, but given that the high dollar is putting some pressure on their business, more focus is going into maintaining existing export relationships. The attitudes are growers are also significantly influenced by the factors mentioned in the next sub-sections. 83 Ibid. Exporting Vegetables to China Page 30

40 3.2.2 Access to Information Export markets are time consuming and are often difficult. Exporters in Australia rely on the market information available to them through government and industry bodies to navigate exporting. However, some concerns were expressed about the accuracy and lack of access and to this kind of information for small and medium enterprises, which have fewer resources and capacity to understand technical market access issues Accuracy Having a clear understanding of the figures of Australian vegetable exports and imports to China is necessary for exporters to make the most informed decisions. One key finding of this report is the inconsistencies and absence of data related to vegetable trade. For example, figures are shown of between $1-6 million for the period for the value of vegetable exports to China in a table from the ABARES Commodities Report. 85 However, in the DAFF Australia Food Statistics, it lists Australian vegetable exports to China and as If information is gathered by exporters from the DAFF report, it would be assumed that Australia is not currently exporting any vegetables to China, considerably changing their business strategies and attitudes toward export. William Churchill from AUSVEG confirmed that there are large problems with 84 The Senate 2012, Australia s Food Processing Sector Inquiry into Australia s food processing sector: ABARES Agricultural commodities March Quarter 2013: DAFF, Australian Food Statistics :98 Exporting Vegetables to China Page 31

41 data collection in the horticultural sector and with uniformity of results that need to be addressed: Some data sets capture some items while others do not. A good example is research into the top 10 vegetables in Australia. This research is funded by the Australian vegetable levy but doesn t include data from Onion growers and Potato growers as they have their own levy and tomatoes don t have a levy at all Availability Exporters must meet both the requirements of the Export Control Act (1982) and its subordinate legislation, and any importing country quarantine requirements to DAFF to provide the necessary documentation to enable products to be exported. 88 For vegetable growers, within DAFF is the reference tool MICoR Manual of Importing Country Requirements, which details the requirements for Import Permits, Phytosanitary Certificates, and any other relevant export information and documentation, such as protocols. In theory, this website allows exporters who are considering exporting vegetables to China to search for the specific requirements for their vegetables required by both the Chinese and Australian government. However, given that protocols required for each vegetable to enter China have not yet been established, the only information the 87 Churchill, William AUSVEG Commendations and Public Affairs Manager April MICOR, DAFF Plants. Last updated Exporting Vegetables to China Page 32

42 website can provide is that a phytosanitary certificate is required (See Appendix A for a screen shot of the website page). Sally Chandler, a TradeStart Adviser at the Tasmanian Chamber of Commerce & Industry said she agreed that there is no information at all under MICoR so it is necessary to contact a DAFF officer directly. 89 Ms Chandler was able to help obtain information regarding the issue of exporting vegetables to China through an employee at DAFF Biosecurity. After obtaining the information from DAFF, it is clear that the process is costly and that an exporter wanting to sell vegetables to China must be very proactive. Ms Chandler reported that, To ascertain the conditions around the import of vegetables to China would necessitate the following action:- 1. A potential Chinese buyer, or, an agent for the exporter would need to contact the Chinese authorities (AQSIQ) and ask for an Import Permit. This Import Permit would give the conditions around the entry of the particular vegetable to China. There is no guarantee an Import Permit would be given it all depends on the pest and disease risk associated with the commodity, as judged by the AQSIQ. 89 Chandler, Sally Interview 19 April 2013, Devonport Tasmania. Exporting Vegetables to China Page 33

43 2. If no Import Permit is forthcoming, it would then need DAFF s Policy area to become involved, in order to negotiate Protocols government to government. This is normally a very time consuming exercise and can take years sometimes with no positive result Cost While statistical information on trade and some of the requirements necessary for export are available free of charge, there is potential and often the necessity for Australian vegetable exporters to pay for further market information. During an interview with Premium Fresh Tasmania, the co-owners said they had used Austrade s services when they wanted to enter the Japanese market. While they said they were happy to pay the $190/hour fee charged by Austrade for market research 91, other businesses identified this as a barrier to accessing information that was deemed vital for sound business decisions Regulatory Costs As mentioned previously, export is a very expensive business venture, with a high proportion of costs dedicated to the regulatory costs associated with export. DAFF Biosecurity requires that businesses wishing to export require a number of aspects of 90 Chandler, Sally 26 April 2013, Ertler, Jim, Ertler, Mike, Ertler 18 April Interview. Forth, Tasmania. 92 Simon Drum 19 April Interview. Forth, Tasmania. Exporting Vegetables to China Page 34

44 their business to be inspected and certified, that is by and large a user pays system. For example, premises must be registered for export and in most cases phytosanitary certifications issued. In the Senate Committee hearing for the Food Processing Sector, the Australian Manufacturing Workers Union were critical of this suggestion that although it is absolutely imperative that Australian industries be protected from disease, there is no longer a right balance between protection and market access. 93 Since 2009, new export fees and charges returned the industry to full cost recovery, meaning that businesses are now paying the full amount of the fees required to be certified for export. 94 An article in The Mercury highlights the jump in shed registration fees. In the article Fruit Growers Tasmania business development manager Lucy Gregg said the fees are now $8500, an $8000 increase from the previous season, meaning export will no longer be a financially viable option for some of their [Tasmanian s] niche products Australia-China Free Trade Agreement Australia currently does not have a FTA with China, despite ongoing negotiations since Consequently, Australia s ability to compete effectively in the market against other premium and high quality vegetable producing nations that have negotiated FTAs with China, such as New Zealand, is significantly reduced. All the current FTAs to which 93 The Senate 2012, Australia s Food Processing Sector Inquiry into Australia s food processing sector: DAFF, 2012 Cost Recovery Statement for the Horticulture Export Program July June Hanson, Roger. Future is cherry ripe The Mercury. March Exporting Vegetables to China Page 35

45 Australia is a signatory are comprehensive (covering goods, service and investment) and the advice and research to date continues to suggest that a possible FTA with China should also aim to be comprehensive. 96 While not having a FTA with China is a weakness that affects Australian vegetable exports, debate remains as to the real advantages and disadvantages of an agreement. Although the FTA would be expected to provide Australia with greater market access and to enhance the price competitiveness of a range of exports (potentially including vegetable exports) to China, the extent of overall gains to Australian industries will largely depend on the extent of any increases in production and total exports of the product. If there are only minor increases in production and total exports, any increase in Australian exports to China is likely to be largely the result of switching away from existing markets in other countries, which would be potentially detrimental to the longterm relationships Australian exporters have built internationally. As such, there needs to be investment into increasing Australia s low vegetable exports to China through a promotion strategy that emphasises Australia s high-quality and safe product. 96 DFAT, Inquiry by the Senate Foreign Affairs, Defence and Trade References Committee intro: Australia s relations with China Exporting Vegetables to China Page 36

46 3.2.4 Branding As indicated in previous sections, although price is a determinant in vegetable exporting success, it is by no means the sole determining factor to success. Australia requires a strong branding strategy that promotes our premium, safe and high quality produce to the Chinese market. Australia currently has Building Brand Australia, which is the Australian Government s nation brand program, represented by Australia Unlimited. It aims to, help ensure a world that is no longer surprised by the quality of our smart manufacturing, our entrepreneurs, the innovation of our scientists, the achievements of our sports men and women and the creativity of our artists. 97 While this encouraged the promotion of Australia s investment in R&D, the emphasis was to change the view of Australia to be seen as, more than a quarry and a farm. 98 According to Ms Kate Carnell from the Australian Food and Grocery Council, this shift away from promoting our produce means that Australia Unlimited s brand approach, does not fit very well in the food space The Hon. Simon Crean speech delivered at Australian Pavilion, Shanghai World Expo May 2010http://trademinister.gov.au/speeches/2010/100520_brand_aus.html. 98 Ibid 99 The Senate Australia s Food Processing Sector Inquiry into Australia s food processing sector:174 Exporting Vegetables to China Page 37

47 3.3 SWOT Table (Table 4) Exporting Vegetables to China Page 38