The honeymoon years of Australia's mining boom are over. The country's wealth may have helped its GDP per capita and filled the coffers of corporations, but the country's monetary balance is now so off-keel that it can't even afford to grow potatoes in its own country.
McCain foods announced today that it is closing its Penola plant in South Australia, citing an incompatible price squeeze as the primary push behind its decision. With a strong Australian dollar, manufacturers and retailers are getting hit from both relatively cheaper imports, as well as relatively higher operating costs. McCain Foods' Regional President for Australia and New Zealand told ABC News that labour, fuel, electricity, and raw material costs all contributed to his plant's closure.
The plant will lay off 59 employees as local farmers scramble to push their potatoes elsewhere. Although McCain has offered to accept the potatoes at another plant, the 300 kilometre distance puts even more price pressure on farmers.
Who's to blame?
Every stakeholder is playing the blame game, and there aren't enough fingers on any complainer's hand to cover all the culprits. But failed government, energy corporations, and cheap importers aside, there's one bad guy accused of cutting into sustainable supply chains: big retail.
While grocers have hit hard times themselves, farmers are quick to point to big retail as their biggest problem. The Australian Competition and Consumer Commission (ACCC) is currently investigating giants like Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) for improper pricing behavior, spurred on by agricultural lobbyists from New South Wales, Victoria, Western Australia, and Queensland.
Winemakers like Treasury Wine Estates (ASX: TWE) and Australian Vintage (ASX: AVG) are also teaming up to push back on retail prices. Woolie's and Wesfarmers control 77% of domestic wine sales, and wine companies are complaining that the companies are marking their bottles down to at-loss prices.
Woolworths recently made nice with Coca-Cola Amatil's (ASX: CCL) SPC Ardmona food processing business when it agreed to source all canned fruit locally. The move is paying off, with sales up more than 100% in some parts of Oz, but consumers might not be willing to pay a price premium for local potatoes the way they will for fruit.
Foolish takeaway
Australia is losing its agricultural advantage. Comparative costs are the foundation of international trade, but Oz should be wary of how and why potatoes are no longer price competitive. The ACCC investigations will shed light on big retail, and ongoing inquiries should start to clear up some accusations of importers "dumping" cheap food on Aussie markets.
Agriculture only accounts for 4% of overall GDP and is hardly a huge employer, but local food is an outsized asset for any self-sustaining economy. Excessively high food costs are "wasted consumption" for the country's growth, and any dependence on foreign imports puts Australia in a potentially precarious position. Investors should keep a close eye on this price war as a proxy for the economy's future stability and, if worse comes to worse, start hoarding all the fish and chips you can!
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More reading
- A prediction for Woolies, Telstra and the ASX
- Is big retail to blame for last week's fuel tanker tragedy?
Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.
