THE STATE’S peak farming organisations have backed the CBH Group’s implementation of a drastic cost cutting program, as the co-operative attempts to close the gap between the cost of production in WA and its key competitors in the Black Sea region.
It comes amid speculation of significant internal job cuts this week and after several CBH Group suppliers received letters from the bulk handler, calling for them to drop fees.
The letters were sent in recent weeks, calling for a reduction in prices and service rates for current and future purchase orders by 20 per cent or more.
It is understood multiple CBH partners received the request from CBH’s procurement department, in which they were asked to assist the co-operative in its transformation program, aimed at cutting supply chain costs by at least $10 per tonne.
This is despite the co-operative’s record surplus of $247.6 million before rebates in the year to September 30, 2017.
“We have begun this program because WA grain growers face increasing international competition in our contestable markets, particularly from producers in Russia and the Ukraine,” the letter states.
“We value our relationship with you and thank you for your work supporting us in our activities over the years, however, in order to meet our cost reduction target and support our growers’ we’re seeking your support.
“We ask that you reduce your price book and/or service rates by at least 20pc for your current and future purchase orders with us.”
Suppliers were asked to respond to the request via email by tomorrow.
CBH Group was contacted for further information about the request and potential internal job cuts, but declined to comment.
This letter comes shortly after growers were sent an email from CBH Group chief executive officer Jimmy Wilson flagging a “large amount of change” for the co-operative in its bid to remove more than $100m in paddock-to-port costs over the next 18 months.
Mr Wilson – who began in CBH Group’s top job eight and a half months ago – has a history of success in drastic cost-cutting and was recognised for posting savings of up to 50pc in his former position at the helm of BHP Billiton’s iron ore division.
In his address to growers, Mr Wilson highlighted significant gains in production from the Black Sea region, from where wheat could reach its consumers in Indonesia – Australia’s key wheat market – $40 a tonne cheaper than WA wheat.
He said action would be taken by CBH to ensure a “leaner, fitter and more agile organisation” that would allow WA grain growers to better compete for contestable markets, while returning value to growers through reduced supply chain fees, a commitment to holding fees flat, the grower rebate and better service to growers.
Mr Wilson said the CBH team had planned cost and inefficiency reduction throughout early 2018 and would now commence an implementation phase.
Technological, digital and automation advancements were among changes outlined, along with action to streamline and improve processes, more targeted and innovative grower service offerings and “ensuring we have the right people, with the right skills”.
Pastoralists and Graziers Association of WA president Tony Seabrook commended the co-operative for its proactive attempt to cut costs, but said he was unsure whether suppliers could afford to reduce fees.
“In the face of the competition of the Black Sea, every dollar that can be saved needs to be saved,” Mr Seabrook said. “Anyone in any production system has to be competitive and I think it’s a good thing that they’re pursuing a reduction in the cost of doing business, it’s their obligation, they have to provide the service as cheaply as possible.
“I’d like to think that there was enough room in the system for that to happen but it’s a big ask, I just don’t know whether the people that are supplying CBH have that much fat in the system. “It would be nice to think that they did and that they could reduce it by that much but I think they’re going to get an outcry from a lot of suppliers that they’re doing the best they can anyway and that they can’t do it for free.”
Mr Seabrook said while he was pleased CBH was taking action to reduce supply chain costs, it was the government that needed to do more to assist WA’s agricultural sector compete against the likes of the Black Sea.
He said unnecessary red tape was a major hindrance to WA’s capacity to run efficient, cost-effective production systems.
“If we’ve become one of, if not the highest cost nations in the world in which to do anything, we ought to have a very close look at why,” Mr Seabrook said.
“There’s a myriad of reasons and a large number of them can be shot back to government – it comes down to compliance, regulation and licences.
“We set a standard that’s beyond world’s best practice and there’s always a cost – until government recognises the role they have to play in trying to restrain the increase in the cost of production here, anything that CBH is trying to do will be dwarfed.”
WAFarmers president Tony York said he too backed the co-operative’s attempt to cut costs in light of increasing international competition for WA’s key grain export markets.
He said WAFarmers understood CBH’s sense of responsibility to ensure excessive costs were scrapped where possible.
“It is common for operators of any business to continue to minimise its cost structure,” Mr York said.
“WAFarmers understands that this review is being done across the entire operation of the organisation and will include all internal administrative and executive functions.”
Mr York said WAFarmers was yet to be made aware of any concerns from its members, who he believed had an appreciation of the need for the co-operative to do what it could to remain competitive.
However, he said suppliers could feel the consequences. “Growers have stressed the need for the grains industry to be as competitive as possible and to maximise the returns to growers in having the lowest possible supply chain costs,” Mr York said.
“Regional businesses and communities are constantly adapting to changing economic climates – farmers are large contributors to their local supply chains and any financial impact on farm does have a ripple effect on regional communities.
“Suppliers will have to make their own decisions as to how far they can meet this request.
“Competitive tendering is a normal process in farm business and will ultimately reflect the real costs of services provided however there is the risk that some regional business may be impacted.”
