David Dyer, McKinsey & Company - Opening Keynote Address: Analysing the Competitiveness of the...

Analysing the Competitiveness

of the Australian Agriculture

& Food Industry

Food and Fibre Forum

30 October 2014

Keynote address

CONFIDENTIAL AND PROPRIETARY

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McKinsey & Company | 1

Australia’s competitiveness challenge 1

Growing demand for food 2

Unlocking our potential 3

Finding our niche 4


What has underpinned two decades of growth?

SOURCE: Australian Bureau of Statistics; McKinsey analysis

Gross domestic income (GDI), market sectors; $ Billions, real

1993

income

Terms

of trade

Additional

Capital

Additional

Labour

Capital

productivity

Labour

productivity

2005

income

549

927

95 38

102

93 50

40%

35%

x% Share of income growth


What has underpinned two decades of growth?

SOURCE: Australian Bureau of Statistics; McKinsey analysis

549

927

95 38

102

93 50

Capital

investment

186

Terms

of trade

100

2005

income

927

2013

income

1,249

Labour

productivity

58

Capital

productivity

76

Additional

labour

55

40%

90%

x% Share of income growth

35%

-6%

Gross domestic income (GDI), market sectors; $ Billions, real

1993

income

2005

income


Text


Less than one-third of Australia’s industry sectors are competitive

SOURCE: EU KLEMS, 2005, from revs published 2008 and 2011; Bureau of Economic Analysis; ABS

1 Traditional productivity comparisons in the finance sector are difficult due to complexities measuring sector GVA

-0.5

-0.4

-0.4

-0.4

-0.3

-0.3

-0.2

-0.1

-0.1

0.1

0.2

0.8Agriculture

Mining and extraction

Finance1

Accommodation and food services

Manufacturing

Wholesale and retail trade

Logistics and communications

Domestic services

Real estate services

Construction

Professional services

Utilities

Changes from 2005

–

–

–

–

–

–

Australian Competitiveness Score compared to US


What do we mean by competitiveness?


Less than one-third of Australia’s industry sectors are competitive

SOURCE: EU KLEMS, 2005, from revs published 2008 and 2011; Bureau of Economic Analysis; ABS

1 Traditional productivity comparisons in the finance sector are difficult due to complexities measuring sector GVA

-0.5

-0.4

-0.4

-0.4

-0.3

-0.3

-0.2

-0.1

-0.1

0.1

0.2

0.8Agriculture

Mining and extraction

Finance1

Accommodation and food services

Manufacturing

Wholesale and retail trade

Logistics and communications

Domestic services

Real estate services

Construction

Professional services

Utilities

Changes from 2005

–

–

–

–

–

–

Australian Competitiveness Score compared to US





Finding our niche 4


Food prices have more than doubled over the past decade

50

100

150

200

250

300

350

2011 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900

1 Food sub-index is calculated based on coffee, cocoa, tea, rice, wheat, maize, sugar, beef, lamb, bananas and palm oil prices weighted by total world export values

1999-2001 at indexed prices over the same time period in real terms.

SOURCE: Grilli and Yang 1988; Pfaffenzeller 2007; World Bank; International Monetary Fund; Organisation for Economic

Cooperation and Development; Food and Agriculture Organization; UN Comtrade; McKinsey Global Institute analysis

-0.7% p.a.

MGI Food sub-index1

McKinsey & Company | 12 SOURCE: World Bank; Food and Agriculture Organization (FAO), WRI

Food demand expected to increase by 70% by 2050

Global population

Billions

Anticipated food demand

Global daily kcal consumption, trillion

1 Assuming world population to reach 3,000 kcal/day

9.3

6.0

2000 2050

+55%

27

17

+70%

2000 20501


World population vs. yield growth1

Growth rates in agricultural yields have been declining

SOURCE: Food and Agriculture Organization; UN

1 Includes all cereals; excludes impact on yield increase from change of crop mix

2 Yield growth from 2005-2009 due to limitation of data

World population

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

20102 2005 2000 1995 1990 1985 1980 1975

Yield growth

197

0

5 year growth rate

Percent





Finding our niche 4


Agriculture, food and beverages are 10% of Australia’s exports –

but while exports are growing, we are losing market share

SOURCE: OECD, World Bank, ABS, McKinsey analysis

0

-0.4

-0.7

0.3

0.1

5.4

4.6

5.5

6.0

16.4

Mining and extraction 46.1

15.0

Commodities processing

Food and beverage

manufacturing

Professional services,

tourism and education1

Agriculture

Advanced manufacturing

Exports

2010; Percent of Australian

Export market

share growth

Change 2005-10; Percent

Export growth

2008-13; Percent

CAGR

14.8

-1.5

-0.9

2.4

2.8

12.9

1 Includes tourism, education where data available


1990 1995 2000 2005 2010 2015

10

8

6

4

2

0

New

Zealand

Australia

Drought

NZ signs FTA

with China

New Zealand has unlocked its potential in dairy

Dairy Industry

Restructuring Act

Total dairy exports

A$ Billions

CAGR

2004–13

11.7

0.1

Deregulation;

levy on retail milk Levy ceases

SOURCE: ABS 5368.0; Statistics New Zealand Table EXP006AA; exchange 2004–2013 AUD/NZ = 1.19;

McKinsey analysis


Australian dairy is less competitive than New Zealand

SOURCE: Expert interviews; Dairy Australia

0

0

0

0.36

0.55

0.20

▪ Lack of farm scale, higher system costs reduce

margins to farmers Raw milk

Additional cost

A$/kg1 Root cause

Dairy

processing ▪ Plants lack scale and are higher cost

International

logistics ▪ Shipping is only a small component of the price

Domestic

logistics

▪ Processing plants located in close proximity

to farms

1 Landed cost per kilo of skim milk powder

2 Share of dollar exports using FAPRI 2013 data and oceania export prices

Import duty

▪ New Zealand has valuable Free Trade agreements

including one with China (consumes ~15% of the

total exports2)

▪ Limits the returns to processors and farmers,

discouraging investment Total





Finding our niche 4


11

16

3

70

30

70

As developing economies drive global

GDP growth…

1 Megacities are defined as metropolitan areas with ten million or more inhabitants. Middleweights are cities with populations of between 150,000 and

ten million inhabitants.

2 Real exchange rate (RER) for 2007 is the market exchange rate. RER for 2025 was predicted from differences in the per capita GDP growth rates of

countries relative to the United States.

Contribution to GDP and GDP growth by type of city; Percent

GDP, 2007

100% = $55.5 trillion

SOURCE: McKinsey Global Institute Cityscope 1.0

Emerging market megacities1

Emerging market middleweight cities

Emerging market small cities

and rural areas

Developed economies


As developing economies drive global

GDP growth…


ten million inhabitants


countries relative to the United States

GDP growth, 2007–252

100% = $54.9 trillion

37

29

8

26

74

26






and rural areas

Developed economies

11

16

3

70

30

70

GDP, 2007

100% = $55.5 trillion


440 cities in emerging markets are poised to

deliver nearly half of global growth by 2025


ten million inhabitants


countries relative to the United States

GDP growth, 2007–252

100% = $54.9 trillion

10

13

14

29

8

26

29

45

26

Large

Midsized

Small






and rural areas

Developed economies

Mega

11

16

3

70

30

70

GDP, 2007

100% = $55.5 trillion


`

China can be divided into 22 city clusters,

each of which has distinct characteristics

SOURCE: McKinsey Insights China; McKinsey Global Institute analysis

Small

Large

Mega

Chongqing

Nanning

Kunming

Chengdu

Hefei

Changzhutan

Hangzhou

Nanchang

Shenzhen

Yangzi mid-lower

Coast West

Shandong Byland

Nanjing

Shanghai

Guanzhong

Taiyuan Central

Guangzhou

Changchun-Haerbin

Large cluster example

Chengdu

▪ 25 cities

▪ Cluster GDP 2.7%

Small cluster example

Kunming

▪ 15 cities


Mega cluster example

Jingjinji

▪ 37 cities


Liao central-south

CHINA EXAMPLE

Jingjinji

Huhehaote


A cluster approach to target markets can be simpler, cheaper and

more effective

SOURCE: McKinsey analysis; Expert interviews; literature search

58

11

200 cities.

81%

market

8 clusters.

70%

market

6%

threshold

cost to

serve

10 states.

75%

market

▪ 8 clusters with 67 cities

▪ Local supply chain

▪ Cluster-based targets

▪ 120 cities

▪ Centralised

supply chain

▪ Overall targets

▪ Key cities in

15 priority clusters

▪ 40 cities across

China

Packaged goods manufacturer

India China

From … To … From … To …

▪ Differentiated targets ▪ Similar targets

across all regions

▪ 2–3% reduction in

cost-to-serve

▪ Cost-to serve a

challenge

Accelerated

annual

growth

to 20%

Cost to serve

Percent

David Dyer, McKinsey & Company - Opening Keynote Address: Analysing the Competitiveness of the...

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