Agribusiness Review - Vol. 3 - 1995

Publication Reviews
ISSN 1442-6951

Research Publication Reviews

1. North Asian Markets for Australian Beef by R Reynolds, I Shaw, K Lawson, J Clark, K Hamal and A Bui-Lan. ABARE Research Report 94.10, Canberra, 1994.
2. Corporate Strategies and Structures: Penetrating Asian Markets , a report for RIRDC by Dr S Heilbron, S G Hejibron Pry Ltd and J T Larkin, INSTATE Pty Ltd, RIRDC Research Paper, 95/7, Canberra.
3. Food Retailing in East Asia and Australia: Emerging Opportunities for Agribusiness by N Cheesman, H Jolly, K Smith, M Wilkinson and R Breddin, Agribusiness Marketing Services, Information Series, Queensland Department of Primary Industries and Rural Industries Research and Development Corporation, Brisbane, 1995.
4. Government / Agribusiness Relations in Australia: Towards a New Research Agenda by B Schroder and F Mavondo, (1994) Monash University, Syme Department of Marketing Working Paper 94-03, Melbourne.
5. Quality Identification, Pricing and End Use of Australian Wheats by F Ahmadi-Esfahani and R Stanmore, (1994) Grain Research and Development Corporation Occasional Paper Series No.10.

Book Review

6. Agribusiness Reforms in China - the case of Wool by J B Longworth and C G Brown, CAB International, Oxford, 1995. pp185 + appendices and index, ISBN 0 85198 951 9.

Research Publication Reviews

1 - North Asian Markets for Australian Beef

by R Reynolds, I Shaw, K Lawson, J Clark, K Hamal and A Bui-Lan. ABARE Research Report 94.10, Canberra, 1994.

This report is a synthesis and updating of earlier Bureau analyses of the North Asian beef markets of Japan and Korea. The objectives of the report are to identify the main factors influencing Japanese and South Korean demand and imports, to assess the current impact of each factor, and to estimate the likely impact of these factors up to 1999. An attempt is also made to assess the implications for Australia, generally, and for beef producing regions in Australia. Because of space constraints, this review will relate mainly to what the report has to say about the Japanese beef market.

Projections made by the authors indicate that by 1999, per person consumption of beef in Japan will increase from its 1992 level of 6.3 kg per person to 11.4 kg per person (an 81 per cent increase), while for poultry meat and pig meats consumption is projected to increase by 39 per cent and 12 per cent, respectively. Thus by 1999, Japanese consumers will be eating 64 kg of beef, pork, poultry and seafood, as compared to 54.4 kg in 1991. This implies a rapid and unprecedented change in diet since calorie uptake in Japan has been around 2600 KC per day since 1970. There is no reason to believe that this level of calorie intake will change by the end of this decade. This being the case, it is not clear from the paper what foodstuffs Japanese consumers will drop in favour of more beef and other meats.

A major weakness of the report is that only one Japanese study is mentioned and no Korean studies appear in the reference list. There have been numerous studies of the beef market by Japanese researchers and presumably the same is true of Korea. For example, Higuchi (1991) helps explain why Japanese calorific intake has been almost constant for over 20 years by pointing out that Japanese consumers are likely to substitute high quality foods as incomes increase. This view is shared by Egaitsu, Mon and other Japanese scholars. Researchers at the National Research Institute of Agricultural Economics have been doing analyses of the Japanese beef market since before the removal of quotas with tariffs, and have been debating the effect of quota removal on the domestic industry.

The authors base their projections in part on elasticity estimates. Following on from Harris and before him Dyck, they provide elasticity estimates for Wagyu beef, dairy beef, and imported grain fed and grass fed beef.

Results suggest that domestic beef is a substitute for imported beef and that imported beef is a substitute for domestic beef. This is at odds with Mon who argues that while domestic beef can substitute for imported beef (domestic beef can be used for hamburgers), the reverse is not true (imported beef cannot be used for sukiyaki). This point is important because acceptance of one view or the other will influence the forecasted level of imports.

The ABARE report also discusses nominal rates of protection for beef in Japan, obtained in an earlier ABARE study. Those estimates (and similar ones obtained by United States researchers) have been challenged by Mori (1994) on the grounds that they failed to take conversion factors between carcass and full sets into account correctly. Again, this is an important issue because it influences the results from the projection analysis. Without the results from sensitivity analysis included in the paper, it is difficult to judge how much the results would change with alternate values for key variables such as rates of protection and exchange rates. (The Y/A$ rate for 1995 was set at 81 in the simulation experiment; by 1999, it was 74). The report says little about the dairy industry and the policy arrangements in that industry. This omission is unfortunate because much of Japan's beef is sourced from the dairy industry.

It is not clear who is the intended audience for the report. There is insufficient information on the operations of the Japanese and Korean markets for the report to be of great value to traders or others planning to invest in the North Asian market.

For example, little is said about the distribution system in Japan, despite this being identified as an important non-tariff barrier in the Structural Impediment Initiative talks between Japan and the United States, and despite it undergoing rapid recent change. Also, nothing is said about the findings of the many studies that have been done on consumer attitudes about beef or beef purchasing behaviour, conducted in Japan by Jussaume, Kobayashi, Nagano and others. Readers looking for this type of information on Japan should obtain a copy of Professor Mori's excellent book on the Japanese beef market (Mon 1994). It is quite likely that similar studies to Mori's would have been published in Korea.

References

Higuchi , T (1991), 'Japanese dietary habits and food consumption in The Committee for The Japanese Agriculture Session (Ed.), Agriculture and Agriculture Policy in Japan, Tokyo.

Mori , H and Lin, B H (1994), Japanese Beef Market Distinctly Unique, Senshu University Press, Tokyo.

2 - Corporate Strategies and Structures: Penetrating Asian Markets, a report for RIRDC

by Dr S Heilbron, S G Heilbron Pry Ltd and J T Larkin, INSTATE Pty Ltd, RIRDC Research Paper, 95/7, Canberra.

This study examines the corporate structures and strategies of firms in the Asian market, with the aim of identifying key success characteristics for penetrating Asian agribusiness and food chains by Australian firms.

Considerable emphasis is placed on distinguishing between the Asian food segment and the Western food segment. The emphasis arises out of a belief that Westernisation in food is limited - Western food is said to constitute a niche market in Asia. The mainstream market is said to be for Asian food, ie. the food produced, marketed, processed, packaged and consumed along traditional Asian lines.

The view is expressed that "..even if the entire projected growth in Asian food markets is satisfied by Western food, the share of Western food in Asian markets would only account for around 30 per cent by the year 2000...".

The recommendation is made that "...Western food companies [should view] Asian markets in terms of Western branded products where they have initial comparative advantage." .

The article makes the point that it is "naive" to assume that Asian consumers will "... quickly embrace the styles and tastes of the West" . This raises the question of whether there is scope for taking advantage of Asian tastes in Asia. For instance, the markets for offal, dried meat, and dried fruit in China are large and growing rapidly. Could this Asian taste preference work to the advantage of Australian meat companies?

The report makes the useful point that the supermarket and fast food "revolution" in Asia does not mean that Western firms will enjoy untrammelled commercial advantage in Asia; or that the pervasive existing retail and distribution systems, official policies, or consumer attitudes will change overnight. Agri-food chains in Asia are said to exhibit greater complexity than Western models. Such complexity is said to arise from dualism' ie. the co-existence of traditional 'wet' markets and modern Western supermarkets.

Two important implications are drawn for Western food operators approaching Asian markets. First, the fact that supermarkets have a minor role as food outlets; second, to access the agri-food markets of Asia successfully requires a detailed understanding of the strategy for penetrating traditional markets.

The report makes an important contribution by alerting Australian businesses to the very different corporate strategies of Asian food corporations compared to their Western counterparts. Asian agri-food companies are distinguished from the Western majors in two important respects.

First, they are usually conglomerates ie. they embrace many forms of core businesses ranging from food production, and retailing to real estate and finance. Secondly, they are largely family owned with strong ethnic and political connections, and are rarely publicly listed. The report states that the contrast between Asian and Western companies in terms of vertical integration is striking. In other words, the barriers to entry are reported to be quite high.

The report suggests key success characteristics of Western firms in Asian agri-food markets; the development of dedicated corporate resources, the ability to sustain long pay-back periods, a willingness to commit significant expenditure to market research and development, the ability to obtain sufficiently skilled resources, a focused approach to product strategy, and good supply chain management.

Generally, the report provides good background for the undertaking of product-specific research in relation to relevant identified target markets.

3 - Food Retailing in East Asia and Australia: Emerging Opportunities for Agribusiness

by N Cheesman, H Jolly, K Smith, M Wilkinson and R Breddin, Agribusiness Marketing Services, Information Series, Queensland Department of Primary Industries and Rural Industries Research and Development Corporation, Brisbane, 1995.

This report is an overview of five desk studies that together present a comprehensive review of the development of food retailing in Asia and in Australia. Although the information provided is more descriptive than analytical, it is nevertheless useful for gaining background knowledge of developments in retailing.

The overall message is that while 'wet' markets are still dominant, non-traditional retailing (in the form of mainly supermarkets and convenience stores) is increasingly becoming an alternative for emergent middle and upper classes in Asia. The pace and extent of this change is recognised to differ among three categories:

In the undeveloped food retailing sectors (Malaysia, Thailand, Indonesia, the Philippines, China, Vietnam), rapid medium to long term growth in non-traditional sectors is expected.

• In the emerging food retailing sectors (Taiwan and South Korea), continued growth in supermarket and convenience chains will enable increasing market access to affluent market segments.
• In the mature food retailing sectors (Hong Kong, Japan, Singapore), market share of retail chains is high, and supermarkets and convenience chains are increasingly acquiring market power over manufacturers and suppliers.

'Channel control' is said to be shifting away from manufacturers and distributors into the hands of retailers. The overall significance is that as food retail chains increase market share, they are able to import and negotiate directly with suppliers, while keeping out new entrants. The use of retail technology such as point-of-sale (POS) systems and electronic data interchange (EDI) technologies are said to have contributed to the process of concentration.

There is of course a crucial strategy difference between marketing fresh produce (mainly generic) and processed products (branded). The report recognises that traditional networks in East Asia are still complex in comparison to those for processed foods, but as markets mature, the distribution of fresh products is also expected to become increasingly streamlined. The surprising conclusion is reached that as retailers gain further power they will look to bypassing intermediaries and importing (particularly, fresh products) directly from overseas suppliers. The non-traditional food retailers have succeeded in rapidly capturing a share of the fresh product market. This is said to represent "... an opportunity for Australian agribusiness to supply fresh foods to supermarkets as they look increasingly to gain competitive advantage over traditional retailers in terms of price, quality and variety of product offered year round".

Various business opportunities and their implications for agribusiness are identified as follows:

• Rapid growth of the modem retail sector makes it opportune for Australian agribusiness to establish direct supply relationships and manufacturers' brands.
• The dominance of the traditional retail sector means that Australian agribusiness is presented with potential market opportunities. Consumers prefer 'wet' markets because they sell fresh produce and are service orientated.
• While Western-style food accounts for less than 10 per cent of demand, production of non-staple and high-protein foods has been unable to keep pace with the rise in demand in Asian countries, so imports of products such as beef, wheat, and dairy would be needed. This is a potential export opportunity for Australian businesses; in addition, opportunities arise from supplying ingredients for Asian food preferences.
• Because markets for imported and Western-style food will continue to be concentrated in the major centres of wealth in this group of countries, cities could present opportunities for Western products and thus entry points for Australian agribusiness.
• Traditional distribution channels are barriers to market entry, but new distributors are familiar with the expectations and requirements of Western exporters. They offer the prospect of previously unexploited opportunities for Australian agribusiness.
• Products showing high rates of growth are high quality fruit and vegetables, beef, dairy and bakery products, bottled water, snack foods, and possibly prepared meals. These represent opportunities for Australian agribusiness to develop direct supply relationships with relevant retailers, mainly where there is no local supply (eg. apples), or where there are local seasonal shortages.
• Retailers are in need of information on Australian supplies. Hence, marketing opportunities for Australian products could be improved by providing retailers with information on product specifications and availability.
• Strong growth will continue in hypermarkets, warehouse clubs and convenience stores, and to a lesser extent supermarkets. Australian agribusiness exporters will need a unique product that can compete against multinationals and Asian agri-food conglomerates in niche markets.
• Since Asian food remains the preferred cuisine, Australian agribusiness producers should look at producing Asian style food.

While these desk studies do not appear to have used all the empirical secondary information already available, the 'opportunities' identified above nevertheless point to areas that require further product-specific empirical knowledge for the formulation of practical marketing strategies.

4 - Government / Agribusiness Relations in Australia: Towards a New Research Agenda

by B Schroder and F Mavondo, (1994) Monash University, Syme Department of Marketing Working Paper 94-03, Melbourne.

This discussion paper represents the first stage of a research project funded by the Rural Industries Research and Development Corporation (RIRDC) entitled 'Public/Private Linkages in Agribusiness: Towards a Conceptual Foundation'. The research project seeks to address the role of government(s) in achieving international competitiveness in the agribusiness sector. This paper is evidently a preliminary report on the problem statement, literature review, and hypothesis formulation stages of the research.

Two series of 'propositions' are presented throughout this discussion paper. The first is a set of 'research propositions' which are empirically testable hypotheses. Some of these will presumably be tested in the empirical phase of the research. The second set of propositions are 'policy propositions', which can be seen as indicators of future policy directions. The propositions are derived from a number of sources; economic and business strategy theory, insights from the literature, and observations from Australian and overseas experiences.

There are four sections in this paper (excluding the introductory and summary sections). The section 'The Environment of Australian Agribusiness' discusses major changes in the Australian and international environment that are impacting upon Australian agribusiness. These changes include issues such as the emergence of Asia as the world's fastest growing food market and the gradual overall reduction in trade barriers for agricultural and food products. A SWOT framework is used to analyse the implications of these changes for Australian agribusiness.

The section 'International Competitiveness' begins with a discussion of the elusiveness of the concept. Alternative definitions and views are discussed. The authors emphasise that it is not international competitiveness per se that is important, but rather that an external orientation will lead to increased productivity, resulting in public benefits in the same way as research and extension activities for production agriculture.

The section 'Government, Society and Agribusiness' presents an examination of the relationship among business, government, and society. The discussion centres on three views on the role of government in a market economy These are the national interest perspective, the public choice perspective, and the international perspective. The national interest perspective postulates that government acts to increase social welfare and suggests the possible role for government in corrective regulations. Reasons for regulations include market failure, which reduce international competitiveness, or international competition, which may yield negative sum outcomes for Australia. The public choice perspective sees governments as a marketplace for the activities of interest groups. This suggests that the management of government business interface should be based upon the principle of equal and open access to this marketplace. The international perspective concerns the role of governments in providing an attractive environment for both local and foreign investment in competition with other host countries. This suggests that businesses are government's customers, and thus government policies should be based on understanding their needs.

The section 'Government and Business Strategy' presents discussion on the government-business relations as a component of business strategy. Business strategy is concerned with the long-term relationship between the firm and its environment. Government policies affect this environment and thus have influence on business strategies of firms, which in turn have ramifications on the performance of the industry.

There are complex perceptual linkages between managers' responses to government policies. Understanding these linkages is necessary if policies are to achieve their desired effects.

5 - Quality Identification, Pricing and End Use of Australian Wheats

by F Ahmadi-Esfahani and R Stanmore, (1994) Grain Research and Development Corporation Occasional Paper Series No.10.

This study analyses wheat quality characteristics demanded by ten of Australia's major export markets. These markets are China, Japan, Egypt, Iran, Iraq, Indonesia, Malaysia, Singapore, South Korea and Thailand. The study aims to determine which quality characteristics particular markets desire, and what value they place on these characteristics; and to examine the implications of such evidence for the wheat industry.

The study considers six characteristics: test weight, protein content, falling number, moisture, un millable material, and foreign material. The first three are positive characteristics. The last three are negative characteristics.

Values attached to characteristics are related to end uses of the wheat. Over 90 per cent of Australian wheat is divided fairly evenly among the three major end uses: pan bread, flat bread, and noodles. Ability to pay and availability of substitutes from other markets also affect values attached to each characteristic.

This study uses data from previous Australian wheat export contracts to the respective markets. The sample covers the period 1984 to 1991. The data include the prices and quantities of wheat exported to the markets, as well as the six quality measures. Prices are first adjusted to account for inflation, and for demand and supply shocks specific to the wheat market.

The study uses a model based on hedonic pricing theory. The model amounts to a regression relating the adjusted price to the six quality characteristic variables. The estimated coefficient for each characteristic variable is interpreted as the marginal implicit value attached to the characteristic. Thus a statistically non-significant coefficient estimate indicates that the associating characteristic is not considered of value for the particular market.

The research finds that payment for quality varies significantly between markets. The three most significant characteristics overall are protein content, falling number and test weight. Generally, the Asian markets are far more quality-conscious than the Middle Eastern markets.

The research also finds a significant trend towards less concern for quality. When the model is re-estimated with data divided into two periods, 1984-87 and 1988-91, the study finds that more characteristics are statistically significant in the earlier periods. The study also finds that the premium or discounts for five of the six characteristics are lower for the later period.

Based on the results, the authors argue that the differential payment system for protein in Australian Standard White wheat should remain. The premium for protein should be raised to at least $3.00 for levels above 11.5 per cent. The authors see no justification for an investigation of payment differential to growers for other characteristics, with the possible exception of falling number. Australian marketeers and traders should emphasise certain characteristics for certain markets, and target particular types of wheat to each market. The trend toward lower-quality wheat suggests that investigation into higher yielding lower quality wheats is warranted, including investigation into the possible introduction of red wheats.

Book Review

6 - Agribusiness Reforms in China - the case of Wool

by J B Longworth and C G Brown, CAB International, Oxford, 1995. pp185 + appendices and index, ISBN 0 85198 951 9.

The current downturn in the Australian wool market has been attributed to a lack of demand, especially from Chinese buyers. The importance of China to the Australian wool industry is evident from the statistics which show that sales to China account for approximately 20 per cent of total sales (Italy being second with a little over 11 per cent).

When it is recognised that China also has the third largest sheep flock in the world (after Australia and New Zealand), and the world's fastest growing consumption of wool products, then a book which is focused on the reforms in the Chinese wool market is well worth reading.

Agribusiness Reforms in China aims to provide a comprehensive analysis of the Chinese wool marketing system and to highlight opportunities for new agribusiness technologies and services as a result of the reforms undertaken in the 1980s.

The main focus of the book is a description of the distribution system by which both domestically grown and imported wool reaches the mills for processing. Data presented in the book are a result of extensive fieldwork undertaken between 1989 and 1993.

The structure for the book adopted by the authors consists of twelve self contained chapters which are meant to cater for both the general reader and the wool specialist.

The chapter topics cover the history of the Chinese wool industry post 1949, the grading and pricing systems, the role of supply and marketing cooperatives, and early stage processing.

The book highlights the differences between sectors of the wool industry that process domestic and imported wool, respectively.

The domestic wool industry is plagued by an inadequate grading and price determination system. The authors identify opportunities for Australian expertise in the reforming of these deficiencies. However, if foreign firms are to contemplate taking up these opportunities then they should understand the history and politics associated with these economically depressed wool growing regions. The real strength of this book is that it provides this cultural and political insight.

I found the structure of the book resulted in too much repetition between chapters which detracted from the overall content of the work and made it difficult to read. This was compounded by the authors uneven treatment in the depth of various chapters (for example Chapters 5 and 7).

The book is more suited to the w~ industry specialist rather than the general reader, as most of the cultural and political insights are incorporated within the individual chapters and are not brought together well in Chapter 12.

Overall the book is a detailed work which I found interesting. Some of the problems identified were similar to those, which existed in Australia in the 1960's - stemming from a lack of an adequate grading system. It makes you think what a force China will be if it gets its act together.