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NOV An Economic Analysis 10 of GRDC Investment for Support ... · PDF file GRDC Project Code: ATR00008 This report was commissioned and published by the GRDC. ... A Monte Carlo analysis

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  • GRDC Impact assessment RepoRt seRIes

    An Economic Analysis of GRDC Investment for Support of the Wheat Variety Classification Scheme (WVCS)

    NOV 10

  • GRDC Impact Assessment Report Series: Title: An Economic Analysis of GRDC Investment for Support of the Wheat Variety Classification Scheme (WVCS) November 2010 GRDC Project Code: ATR00008 This report was commissioned and published by the GRDC.

    Enquiries should be addressed to: Mr Vincent Fernandes Corporate Strategy & Impact Assessment Grains Research and Development Corporation PO Box 5367 KINGSTON ACT 2604 Phone: 02 6166 4500 Email: [email protected]

    Author: Agtrans Research PO Box 385 TOOWONG QLD 4066 Phone: 07 3870 4047 Email: [email protected]

    ISBN No. 978-1-921779-22

    © 2011 Grains Research and Development Corporation. All rights reserved.

    Disclaimer Any recommendations, suggestions or opinions contained in this publication do not necessarily represent the policy or views of the Grains Research and Development Corporation. No person should act on the basis of the contents of this publication without first obtaining specific, independent professional advice. The Grains Research and Development Corporation will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on the information in this publication.

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    Impact Assessment: An Economic Analysis of GRDC Investment for Support of the Wheat Variety Classification Scheme (WVCS)

    Executive Summary ........................................................................................ 4   1. Introduction ............................................................................................... 6   2. Project Investment ...................................................................................... 8   3. Activities and Outputs ................................................................................ 10   4. Outcomes ................................................................................................. 12   5. Benefits ................................................................................................... 13   6. Measurement of Costs and Benefits ............................................................. 19   7. Confidence Rating ..................................................................................... 30   8. Conclusions and Lessons Learned ................................................................ 31   Acknowledgments ......................................................................................... 32   References ................................................................................................... 33  

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    Executive Summary GRDC has been responsible for continuing with and remodelling the former Wheat Variety Classification Scheme administered by the former regulator Australian Wheat Board International (AWBI). GRDC contracted AWBI to continue with their previous role for a 6 month period and then facilitated the establishment of the Wheat Classification Council (WCC) to initially manage the classification guidelines and support the Variety Classification Panel. Another role of the WCC was to assess support for a continuation of the scheme and determine what structure and function any new scheme may embrace. Both face-to-face consultations and intake of public submissions were achieved by the WCC during 2009 and 2010 with financial support from GRDC. This resulted in an unambiguous level of support for wheat classification to continue in order to support the quality position of Australian wheat in the world market. An economic analysis of continuing with the wheat classification scheme during the transition period and thereafter has been attempted in order to identify the key benefits from the scheme and assess whether it is in the industry’s interest to financially support a new scheme into the future. Any such analysis is complex due to the nature of wheat classification affecting key components along the wheat marketing supply chain including growing, storage and handling, marketing, and end–use, as well as wheat breeding. In attempting to define the benefits from continuation of the scheme, it was necessary to construct a counterfactual scenario of what may have happened along the supply chain and in wheat breeding if the scheme was not continued after 2008. The benefits identified are presented in the table below. An attempt was then made to value some of the identified benefits in order to construct a benefit cost analysis of the investment in the scheme. The benefit cost analysis included costs of the GRDC transition funding as well as the ongoing likely annual cost of the classification scheme of $1 million per annum. Value estimates were made for three benefits including:

    • Continued quality image and consistent quality of Australian wheat parcels marketed resulting in the maintenance of a price premium for a proportion of exported bulk wheat

    • More efficient wheat breeding • Improved varietal decisions by growers

    Based on the assumptions made, the net present value was positive with an expected net present value of $93 million over 30 years at a 5% discount rate, a benefit-cost ratio of 6.4 to 1, and an internal rate of return of 112%. A Monte Carlo analysis that included probability distributions of 6 variables supported the positive finding with only a very low chance of the investment returning a negative NPV or a benefit cost ratio less than 1.

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    Benefits Identified for Continuation of the Wheat Variety Classification Scheme after Market Deregulation

    Industry Productivity and Profitability • Sustained brand names which continue the quality image of Australian

    wheat • Consistent quality of aggregated wheat parcels marketed • Lowered storage and handling costs • More efficient and transparent pricing • Improved varietal decisions by growers • Greater certainty for wheat breeders resulting in more efficient breeding Environmental • Nil Social • Capacity building along the value chain

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    1. Introduction “Consumers of wheat, bread and other products made from wheat insist on having the desired products in a definite form (bread of certain kinds, crackers, pastes etc) and of a definite quality, to such an extent that substitution of one type of wheat for another and lower grades of certain kinds of wheat for higher grades of the same kind also is materially limited; and these limitations are reflected in the demand for specific types and grades of wheat that are particularly adapted to the production of specific products“ Jasny (1940) Wheat classification is a differentiation process for categorisation of a wheat variety into a specific grade based on tested processing characteristics and end product quality information. The grading enables market requirements to be recognised and taken into account by organisations breeding new wheat varieties. To achieve consistent differentiated end product quality, wheat varietal classification focuses entirely on the genetic potential of wheat varieties. In contrast, wheat receival standards categorise grain deliveries on a combination of:

    i. The variety, as declared by the grower; and ii. The impact specific seasonal conditions and farming practices (the

    environment) has on various aspects of the grain itself. The classification for particular varieties may differ between regions as a variety may perform differently quality-wise between environments. Hence there are a series of classification zones where the grade for a specific variety may differ. Categorisations are usually made with several years of data. The classification process has two functions:

    i. defining target wheat grades based on knowledge of market requirements ii. classifying specific varieties into these grades

    Prior to the deregulation of Australian bulk wheat exports in 2008, the variety classification scheme was conducted by the Australian Wheat Board International (AWBI). The AWBI produced guidelines that complemented the receival standards established through Grain Trade Australia (GTA). GTA (formerly the National Agricultural Commodity Marketing Association (NACMA)), was formed in 1991 to standardise grain standards, trade rules and grain contracts across the Australian grain industry in order to enable the efficient facilitation of trade across the grain supply chain (http://www.graintrade.org.au/About_GTA) Wheat quality has been historically a principal strength of the Australian wheat industry including physical characteristics, low moisture content, cleanliness, freedom from infestations, processing capability and end use suitability (WEMCC, 2007). After deregula

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