STAKEHOLDER REPORT 2016 - GRDC · 1/7/2016 · Theme strategies focus on: meeting market...

STAKEHOLDER REPORT 2016–17

7 January 2016

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Stakeholder Report 2016-17

Postal address Grains Research and Development Corporation P O Box 5367 KINGSTON ACT 2604 Location Level 4 4 National Circuit BARTON ACT 2600 Telephone: 02 6166 4500 Facsimile: 02 6166 4599 Grains Research and Development Corporation 7 January 2016 This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from the Grains Research and Development Corporation.

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Contents

1. Executive Summary 4

Introduction 4

Investment planning 4

Grain production 4

GRDC revenue forecasts 5

Levy rates 6

Recommendation 6

Projected 2016–17 Budget Analysis 7

Overview 7

Revenue Forecast 7

Expenditure 9 NEW PROJECT INVESTMENT 10 CONTINUING INVESTMENT 10 EMPLOYEE AND SUPPLIER EXPENSES 10

Sensitivity Analysis 12 BASELINE SCENARIO 13 PESSIMISTIC SCENARIO 14 OPTIMISTIC SCENARIO 15 CONSIDERATIONS 16

Attachment A - GRDC Revenue Forecast Assumptions 17

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1. Executive Summary

Introduction

The GRDC Stakeholder Report 2016-17 provides information to Grain Producers Australia (GPA) and GrainGrowers to support an informed decision and recommendation on the GRDC levy rate for 2016–17. The Report is one of a suite of informal and formal measures used to facilitate effective communication and accountability to Australian grain growers. In conjunction with the GRDC Annual Report and the GRDC Growers’ Report it provides an overview of GRDC activities, key achievements and an analysis of revenue and expenditure estimates for 2016- 17.

Investment planning

Investments planned in 2016–17 are aligned with regional grower and Australian Government priorities, and the GRDC’s corporate and theme strategies. The GRDC corporate strategies are to:

create value,

coordinate nationally,

deliver regionally,

connect globally, and

engage with growers and industry.

Theme strategies focus on: meeting market requirements, improving crop yield, protecting the crop, advancing profitable farming systems, improving the farm resource base, and building skills and capacity. Projected revenue and expenses for 2016–17 are outlined in this report.

The GRDC has committed $180 million to continuing projects in 2016-17 and has released an approach to market for 16 additional research projects with expected budgets totalling approximately $19 million. Responses to the approach to market are currently being evaluated. It is expected that contracting of successful applicants will occur by the end of March 2016 to enable projects to commence on 1 July 2016.

Grain production

The 2015 winter crop harvest has been varied across the country and within regions. While forecasts suggest slightly above average overall production figures this has been offset by mixed fortunes in different regions. NSW was expected to produce a better than average harvest but potentially damaging wet weather early in November 2015 may significantly reduce the forecasts.

Although parts of Western Australia had early season rainfall, the state recorded a drier than average September. Overall production is forecast to be average to slightly above average for wheat, barley and canola. Queensland conditions were above average in the South of state but difficult conditions in Central and Northern Queensland are leading to a below average growing season. Overall Queensland is expected to be below average for wheat.

Victorian growers experienced a very difficult season, with seasonal rainfall very much below the average and crops being cut to hay in many parts of Victoria. Production is expected to be similar to last year but quality may be reduced.

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South Australia forecasts are mixed. Eyre is forecast to be above average but Yorke and South East have experienced below average growing conditions. Overall production expected to be in line with last season.

Tasmania has had a drier than average season is forecast to have below average yields

As demonstrated in figure 1, despite seasonal variations grain production has steadily risen since 2006-07. This correlates with an increase in the GRDC revenues.

Figure 1

Source: Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) Australian Crop Report and Agricultural Commodities (formerly Australian Commodities) reports

GRDC revenue forecasts

The GRDC current revenue estimate of $204.5 million for 2016-17 is based on wheat production of 24.9 MMT and barley production of 7.6 MMT. Both of these production figures are consistent with the 5 year average production figures. Expenses are estimated at $220.5 million. Actual revenue will depend on the volume of crops sold, prices achieved by the growers and input costs. The volume of crops is highly dependent on seasonal conditions, pest and disease outbreaks and area sown to crops and will not be known until early in 2016.

0

10

20

30

40

50

60

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Area sown (million hectares) Grain production (million tonnes)

24.220.9

37.641.7

44.6

49.746.4

40.7

23.719.2

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Levy rates

The current levy rate is 0.99 percent of farm gate value for 24 grains and 0.693 percent of farm gate value for maize. The Commonwealth matching payment is 0.5% of the Gross Value of Production (GVP) calculated as a three year rolling average of GVP.

In recent years the volatility of grain production and more importantly grain prices has led to fluctuating levy revenue for GRDC. Overall, grain production has increased but grain prices are inherently volatile and varied across grain crops.

GRDC believes the forecast expenditure level is sustainable and GRDC has sufficient financial reserves to meet any shortfalls at the current levy rates.

Stability and a strong reserves position will enable the GRDC to lead the implementation of the National Grains RD&E Strategy and continue to implement its Strategic R&D Plan. This will create significant value for Australian grain growers and the community at large.

Recommendation

The GRDC recommends no change to the levy rate due to the inherent volatility of prices which reduces certainty on the revenue available to the GRDC to deliver a balanced portfolio of research to growers.

50,000,000

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

2010-11 2011-12 2012-13 2013-14 2014-15

GRDC revenue/expenditure past five years

Revenue Expenditure surplus/deficit

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Projected 2016–17 Budget Analysis

Overview

The GRDC is primarily funded by a levy on the farm gate value of production on 25 grains. The Australian Government provides a matching payment up to the lesser of the total levies received or 0.5% of the gross value of production (GVP) (In reality the government contribution is always capped at 0.5% of GVP).

GRDC’s levy revenue has a high degree of uncertainty. It is dependent on the actual farm gate value of grain sold which in turn is determined by the prices growers achieve for their grain, the tonnages delivered and the farm gate costs incurred. Prices can vary by type of crop, grade, bulk handling company, port zone, and silo. Prices are also strongly influenced by events affecting international grain markets including of significant weather events such as droughts, floods, heat waves, cold snaps both locally and in key overseas producer countries, the levels of international grain stocks available, prices of substitute commodities (e.g. corn), grain infrastructure bottlenecks, government policy decisions, demand for biofuels, impact of globalisation on developing countries, hedge fund activity, and the general global economic outlook. The volume of grain actually sold will be determined by growers’ individual marketing decisions and seasonal conditions.

Growers’ marketing decisions impact on the amount and timing of the levies received (for example receipt of levies from pools is usually delayed to the following financial year). Farm gate costs which are deducted from gross sale value to determine farm gate value can also vary significantly for different grain growers.

In order to maximise the benefits of RD&E to Australian grain growers GRDC must manage this volatility in revenue while maintaining critical long-term capacity. GRDC does this by developing a budget which is sustainable given anticipated revenues and the level of financial reserves. Reserves are held in accordance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The use of financial reserves is governed by the GRDC Board, within Australian Government requirements.

The GRDC derives grain production estimates and price data from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Australian Crop Forecasters (ACF), Profarmer, ASX Futures and its own estimates. GRDC consults regularly with other agricultural commodity consultants and the Levies Revenue Service in the Australian Government Department of Agriculture and Water Resources to develop its forecasts.

This budget analysis has been developed more than 10 months before the 2016–17 harvest and much can happen in grain markets in that time. It is also considerably more difficult to forecast revenue in the current environment of increased grain price volatility. Therefore expected revenue is highly uncertain. The sensitivity analysis undertaken highlights the effect of significant changes in key revenue drivers. However GRDC’s current reserves put it in a strong financial position to complete implementation on the 2012-17 Strategic Research and Development Plan.

Revenue Forecast

Table 2 shows the GRDC’s financial results for the previous three years and the revenue and expenditure forecasts for 2015–16 and 2016–17. The major price and production assumptions used for the revenue estimates are shown at Attachment A – GRDC Revenue Forecast Assumptions. Projected revenue in 2016–17 is based on the levy rate of

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0.99 percent of farm gate value of all grains except for maize1 and continuance of the prevailing Australian Government contribution. At this stage, GRDC’s 2016–17 revenue is estimated at $204.5 million.

Table 1: GRDC 3 Years Financial Results and Baseline Forecasts2 for 2015–16 and

2016–17 ($m)3

Actual Actual

Actual Forecast Forecast

2012–13

2013-14 2014–15 2015–16 2016-17

Grain Grower Levy 118.2

120.2 117.5 111.3 118.7

Australian Government a 62.8

68.6 68.0 70.3 71.2

Grants b 1.7

1.2 0.9 1.6 1.2

Interest, Royalty & Other c 13.5

19.1 16.8 14.5 13.4

Total Revenue d 196.3

209.1 203.2 197.7 204.5

Research and Development 159.2

165.4 194.1 197.0 198.0

Employees 8.2

10.1 11.4 11.7 11.9

Suppliers 7.7

8.6 9.5 11.2 10.6

Write-down and Impairment of Assets 3.0

0.3 1.0 0.0 0.0

Total Expenses e 178.0

184.4 216.0 219.9 220.5

Share of (deficit) of associates and joint

ventures 0.1

0.00 0.00 0.00 0.00

Surplus/Deficit f 18.4

24.7 (12.8) (22.2) (16.0)

Gross Reserves g 180.6

203.8 191.3 169.1 153.1

Less Property Plant & Equipment 6.9

6.8 4.9 7.0 5.9

Less Shares in unlisted companies 8.1

7.9 6.8 6.8 6.8

Liquid Reserves h 165.6

189.1 179.6 155.3 140.4

40% Lower Limit Reserves

87.3

a The Australian Government contributes 0.5% of the three year rolling average of the gross value

of grains production (provided the Government contribution does not exceed grower levies or 50% of expenditure for the relevant year).

b Grants are contributions from other organisations for implementation of R&D programs. c ”Other” includes penalties and project refunds. d Revenue estimates for 2015–16 and 2016–17 are indicative only. Revenue is highly uncertain due

to greater grain price fluctuations and seasonal influences on production. e R&D expenditure may be revised. f Deficit forecasts are subject to Ministerial approval. g Gross reserves means net assets (i.e. total assets less total liabilities). h Liquid reserves are net assets which are easily convertible to cash.

1 Levy rate for maize is 0.693 percent 2 Forecasts are indicative and subject to change. 3 Figures are subject to rounding differences

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The proportional break-up of the GRDC’s forecast revenue for 2016–17 is shown in Figure 1.

Figure 1: Break-up of GRDC’s Forecast Revenue for 2016–17 as a Percentage of Total Revenue

Expenditure

Planned expenditure for 2016–17 is estimated at $220.5 million. The percentage break-up of this into new investment, continuing investment, employees and suppliers and strategic investment is shown in Figure 2.

Figure 2: Break-up of the GRDC’s Total Expenditure for 2016–17

Grain Grower Levy, $118.7m,

58%Australian Government, $71.2m, 35%

Grants, $1.2m, 0%

Interest, Royalty & Other, $13.4m, 7%

Continuing Commitments

81%

New Research Investment

9%

Employees5%

Suppliers5%

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NEW PROJECT INVESTMENT

New project investment is budgeted at $19.1 million. This makes up about 9 percent of the total budget.

CONTINUING INVESTMENT

Ongoing project investments for 2016–17 is $178.9 million which represents 81 percent of total expenditure. As at 30 June 2015 GRDC had existing forward program contractual commitments of $385.0 million as shown in Figure 3.

Figure 3: Break-up of Forward Contractual Commitments by Year ($m)

EMPLOYEE AND SUPPLIER EXPENSES4

Employee and supplier expenses in 2016–17 are estimated at $22.5 million. This represents 10 percent of total expenditure which is within the target range of 8 to 11 percent.

EXPENDITURE BY THEMES AND PANELS

As part of the Strategic R&D Plan GRDC’s investments are allocated to themes. Figure 4 shows the percentage break-up of proposed 2016–17 RD&E investment into these categories. Significant capacity building for industry and researchers also occurs directly through each of the individual themes.

4 Employee expense is employee remuneration. Suppliers’ expense is the cost of the supply of goods and services, which primarily includes panel and themes support and depreciation.

140.8

109.6

78.8

40.5

15.2

0102030405060708090

100110120130140150

2016 2017 2018 2019 2020

Forw

ard

Co

mm

itm

en

ts (

$ m

illio

n)

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Figure 4: 2016–17 Proposed R&D Project Investment by Theme

Figure 5: 2016–17 Proposed R&D Project Investment by Panel

Figure 5 shows the distribution of proposed 2016–17 RD&E investment among the GRDC Panels. The Growers’ Report describes the panel system and how it is used to ensure investments meet the interests of GRDC stakeholders. The National Panel investments comprise the national components of the GRDC’s RD&E investment across Australia.

Meeting Market Requirements

5%

Improving Crop Yields19%

Protecting Your Crop26%Advancing Profitable

Farming Systems19%

Improving Your Farm Resource Base

6%

Building Skills & Capacity

4%

Foundational Activities

13%

R&D Management8%

National46%

Northern Panel19%

Southern Panel17%

Western Panel18%

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Sensitivity Analysis

As GRDC’s revenue is uncertain, sensitivity analysis is undertaken on key variables to examine the possible impact of more optimistic and pessimistic scenarios on GRDC reserves and its ability to maintain a satisfactory level of RD&E investment. Table 3 shows the results of the sensitivity analysis and Table 4 shows the underlying assumptions which were varied.

Table 3: Sensitivity Analysis on Forecast Revenue 2016–17 5

Forecast Pessimistic Baseline Optimistic

2015-16 2016-17 2016-17 2016-17

Projected Revenue 197.7 143.4 204.5 224.8

Expenditure 219.9 220.5 220.5 220.5

Surplus/(Deficit)6 (22.2) (77.1) (16.0) 4.3

Liquid Reserves 7 155.3 79.3 140.4 160.6

Table 4: Underlying Assumptions by Scenario

Pessimistic Baseline Optimistic

Wheat Production in 2016-17 (mt) 12.0 24.9 24.9

Barley Production in 2016-17 (mt) 5.0 7.6 7.6

Sorghum Production in 2016-17 (mt) 1.3 2.0 2.0

Canola Production in 2016-17 (mt) 0.8 3.3 3.3

Oats Production in 2016-17 (mt) 0.8 1.2 1.2

Wheat Price (APW) in 2016-17 ($/t) 245 245 400

Wheat Price (APH) in 2016-17 ($/t) 380 380 426

Malt Barley Price in 2016-17 ($/t) 286 286 390

Feed Barley Price in 2016-17 ($/t) 273 273 272

Sorghum Price in 2016-17 ($/t) 266 266 291

Canola Price in 2016-17 ($/t) 543 543 665

Oats Price in 2016-17 ($/t) 238 238 273

5 Figures are subject to rounding differences 6 Deficit forecasts are subject to Ministerial approval 7 Liquid reserves are net assets which are easily convertible to cash

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BASELINE SCENARIO

The baseline scenario for 2016–17 assumes a 0.99 percent levy rate on farm gate value for 24 grains and a 0.693 percent levy rate on farm gate value for maize, and operating expenditure of $220.5 million in 2015–16. The baseline scenario is depicted in Figure 6 below.

The baseline scenario shows projected revenue of $204.5 million in 2016–17. Liquid reserves as at the end of the 2016–17 financial year are projected to be $140.4 million, which is within the target range.

Figure 6: Baseline Scenario

$0m$20m$40m$60m$80m

$100m$120m$140m$160m$180m$200m$220m$240m

Levy Govt Match (0.5 % GVP)

Other Income Expenses

40% Lower Limit of Reserves 70% Upper Limit of Reserves

Closing Liquid Reserves

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PESSIMISTIC SCENARIO

The pessimistic scenario for 2016–17 assumes low crop production volumes. Prices for the major crops of wheat, barley, sorghum, canola, and oats are assumed to stay as per the baseline scenario. Such a scenario may be possible if other major producer countries have very good harvests while Australia has a very poor harvest.

This scenario shows projected revenue of $143.4 million in 2016–17 (refer Table 3 and Figure 7). Liquid reserves decrease to $79.3 million which is below the target range. This indicates the forecast expenditure level is achievable under such a scenario but GRDC may need to review expenditure levels going forward to maintain financial viability. If liquid reserves are lower than expected as depicted in this scenario, the GRDC has the ability to cut funding to bring expenditure back into line with revenue.

Figure 7: Pessimistic Scenario

$0m$20m$40m$60m$80m

$100m$120m$140m$160m$180m$200m$220m$240m





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OPTIMISTIC SCENARIO

The optimistic scenario for 2016–17 assumes crop production levels as per the baseline scenario but prices similar to the record high prices in 2007–08. This scenario could be possible if world grain stocks were depleted severely but Australia manages to have a reasonably good season.

This scenario shows projected revenue of $224.8 million in 2016–17 (refer Table 3 and Figure 8). Liquid reserves increase to $160.6 million. As can be seen in Figure 8 reserves would move to the upper bound of the target range of GRDC’s reserves policy.

Figure 8: Optimistic Scenario

$0m$20m$40m$60m$80m

$100m$120m$140m$160m$180m$200m$220m$240m





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CONSIDERATIONS

The three scenarios outlined above highlight the potential volatility in GRDC’s revenue base and liquid reserves position. With the current longer term (5 year) baseline income and expenditure forecasts depicted in Figure 9, the GRDC’s liquid reserves will be within the target range from 2016–17. Note that these forecasts are reliant on the Minister for Finance approving an increased deficit budget for 2017-18 and approving new deficit budgets for 2018-19 and 2019-20.

If liquid reserves move lower or higher than expected, the GRDC can implement appropriate strategies to address reserves over time:

If liquid reserves are lower than expected as depicted in the pessimistic scenario, the GRDC has the power to cut funding to bring expenditure back into line with revenue.

If liquid reserves are higher than expected as depicted in the optimistic scenario, the GRDC has the power to consider new investment opportunities provided that robust business cases demonstrate strong returns to growers.

Figure 9: GRDC 5 Year Income, Expenditure and Liquid Reserves Forecasts

020406080

100120140160180200220240

Mill

ion

s

Total Levies C/Mtch Payment Total Other Income

TOTAL EXPENSES Reserves (40%) Reserves (70%)

Liquid Reserves

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Attachment A - GRDC Revenue Forecast

Assumptions

GRDC’s forecast for 2015–16 and 2016–17 is based on the production and price assumptions in Table A1.

Table A1 GRDC’s Price & Production Assumptions - 2015-16 and 2016-17

Production (mt) 2015-16 2016-17

Wheat 26.0 24.9 Barley 9.2 7.6 Sorghum 1.9 2.0 Canola 2.9 3.3 Oats 1.5 1.2

Prices ($/t) 2015-16 2016-17

Wheat 278 345 Wheat-APH 291 380 Feed Barley 253 273 Malting Barley 263 286 Sorghum 288 266 Canola 526 543 Oats 275 238

Production references

2015-16: Australian Crop Forecasters – September 2015 2016-17: ABARES Australian Commodities - March quarter 2015

Price references

2015-16: Wheat: Profarmer – September 2015 Other crops: Australian Crop Forecasters – September 2015

2016-17: ABARES Australian Commodities – March quarter 2015

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