A small but growing number of Australian farmers, under pressure from a strong currency and rising costs, are pushing aside commodity traders in a bid to boost earnings.
Whether on their own or in cooperatives, these farmers are selling direct to Asian buyers—bypassing traders like Louis Dreyfus Commodities and Cargill Inc., which dominate the global trade in agricultural commodities.
Australia is among the world’s top suppliers of wheat, beef, cotton and sugar, and is seen as crucial in filling the gap as global food demand grows an expected 80% by 2050, including major growth in Asia.
But rising costs and mounting debt, accumulated through years of drought, as well as the lure of more-lucrative mining jobs are pushing farmers out of the business. Australia’s rural population is expected to fall by half in the next decade.
Farmers argue that direct selling allows them to earn more by eliminating merchants’ fees.
“To make a reasonable living as a farmer under current prices was becoming untenable,” said Queensland cotton farmer Glen Rogan, who plans for the first time to sell all his 6,500 bales of high-quality fiber direct to Asian mills, and hopes to earn a 30% premium by doing so. “That was the only way I could see to stay relevant and viable.”
Direct deals also appeal to some buyers, who like the farmers see it as a way to cut costs and improve their negotiating position. Many companies in fragmented industries like textile manufacturing or flour milling think the “ABCD” trading houses—Archer Daniels Midland Co., Bunge Ltd., Cargill and Dreyfus—along with Singapore-based traders like Noble, Olam and Wilmar, hold too much sway in the supply chain.
On a recent Australia trip to look for suppliers, Chen Jun, general manager of Chinese cotton importer and spinner Zhangjiagang Free Trade Zone Worldway Import and Export Co., said one issue with buying from the big merchants is the international standard contract. It specifies fibers of between 3.5 microns and 4.9 microns, which means Worldway gets a lot of cotton that is too heavy for its spindles.
“We want to find a way to buy from the growers or gins,” Mr. Chen said. “Saving even one cent a pound is worth it for us.” Worldway, based north of Shanghai, buys 120,000 metric tons of cotton a year that it spins or sells, and about 60% of it comes from large merchants.
Traders say they benefit both farmers and consumers.
Josh Martin, Head of Trading & Risk Management at Cargill, said large companies allow farmers to stagger sales, which can get them better prices. The large companies also take on weather risk, a major factor in drought-prone Australia, provide long-term infrastructure investment, and bear the costs if contracts don’t get paid.
Merchants have been pushing hard into Australia’s grain sector since the breakup of the government’s central exporting agency in 2008. ADM is closing on a 3.4 billion Australian dollar (US$3.3 billion) deal for Australian trading company GrainCorp Ltd. That would give ADM, Glencore and Cargill a combined slice of nearly 60% of wheat shipments from Australia, the world’s second-largest supplier, and put almost all the country’s export infrastructure under foreign ownership.
Merchants are loath to disclose sensitive profit margins. Some traders suggest these amounted to $50 to $100 a ton when cotton prices were at their 2011 high, and Mr. Watson reckons farmers need a premium of $20 to $30 a ton, net, to make marketing direct worthwhile.
There are costs to going it alone. Farmers can’t sell their crops ahead of the harvest, making it harder to pay for fertilizers and pesticides when needed. They take on price, exchange-rate and weather risks, and face the possibility of jumps in storage and transport costs.
Their risks are particularly great when prices are volatile. The sudden fall in world cotton prices last year prompted mills to cancel purchases, sending contract defaults soaring. Disputes in Australia alone rose to a record A$400 million—costs shouldered by the merchants, estimated to control more-than 80% of exports.
“I can see the benefits of going direct, but you need to have deep pockets if it goes wrong,” said Adam Kay, chief executive of industry group Cotton Australia.