MI H2 ECONS P1 QP Answer

2015 Preliminary Examination 2 Pre-University 3 ECONOMICS 9732/01 Paper 1: Case Study 15 September 2015 2 hours 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams or graphs. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. Begin your answer to Question 2 on a fresh sheet of writing paper. At the end of the examination, hand in your answers to the 2 questions separately. The number of marks is given in brackets [ ] at the end of each question or part question. This question paper consists of 7 printed pages and 1 blank page. [Turn over

2  9732/01/P2/MI/2015 Answer all questions. Question 1 Australian Agriculture Sector Extract 1: Challenges faced by Australian farmers A near-perfect growing season for small farmers in two of Australia's biggest food belt regions - south-east Queensland and Victoria - has produced a bumper crop. But despite a bountiful yield, oversupply has driven down prices. It should be a time for celebration for growers, who have become hardened to a relentless cycle of droughts and floods in recent years. Instead many are complaining that they are being paid less at wholesale markets than the cost of harvesting their crops. The number of farmers in Australia is shrinking, and it's not just the current domestic oversupply that is hurting the bottom line. The amount of imported fresh produce has reached record levels, and growers are facing unfair competition from overseas imports. Local farmers want prices to be set by the federal government to guarantee a decent return. If not, the sector will continue to contract. In contrast, Tasmania produced large crops of apples and many other crops. Artisan farming has blossomed on the island state in recent years, where small enterprises labour away making high-value, niche specialities, including hand-ground spelt and rye flour along with boutique jams and relishes. Tasmanian farmers are also leading the way on exporting extensively. But Tasmania's optimism gives way to a sense of gloom in other parts of Australia. In Queensland's sugar capital, Bundaberg, Mark Presser, a fourth generation cane farmer, enjoyed a record crop last year, and is on course to harvest another reasonable yield this time around. Yet he too feels besieged by falling prices and growing competition from overseas, most notably Brazil and India, where production costs are far less. Source: BBC News, 31 October 2013 Extract 2: Australian dairy industry The Australian dairy industry starts with some 6,686 registered dairy farms. Most of the dairy farms in Australia are family owned and operated small businesses that produce fresh milk on a daily basis. Only about 2% of dairy farms are corporates. As a community of small businesses the bargaining power of the dairy farmers is generally low. Key factors that impact on their farm’s profitability are the domestic price of milk at the farm gate, the demand for milk, and the price of key inputs such as electricity and animal feeds. The impact of drought can also play a significant role. Over the years, small-scale farmers are exposed to competitive market pressures. Th is has forced them to invest more in technology designed to enhance on-farm productivity. A modest growth in milk production over the next five years is forecast due to improved herd management and greater economies of scale. However, the total number of farms is expected to fall. Farm management and the application of greater science and technology to herd health, pasture production, feeding and milking systems will be critical to success. Downstream from the farmers are the milk processors and dairy product manufacturers who control both the farm gate price and the export and domestic market distribution channels. Dairy product manufacturing is capital intensive and requires large scale and scope in

3   [Turn over 9732/01/P2/MI/2015 operations to be economically viable. Today the Australian milk processing and manufacturing sector is dominated by a handful of large firms. Traditionally farmer-owned co-operatives dominated Australian dairy processing sector. However, today it is dominated by foreign companies. Foreign ownership of Australian dairy manufacturing and export is not inherently bad. However, for the thousands of small, family- owned dairy farms, the lack of bargaining power in the market may be a cause of concern. Dairy co-operatives serve the interests of the small family farm busin esses, for instance co- operatives such as Dairy Australia engage in investment projects to achieve internationally competitive farming systems that cannot be done efficiently by individual member farmers. Unlike foreign ownership that needs to pay substantial returns to shareholders, a co- operative serves to improve the relative competitiveness of their members by taking all the milk its members wish to supply in order to help them grow their own farm businesses. The existence of large co-operative in a dairy market generally helps to keep prices stable at the farm gate. Yet no co-operative farmers are forced to be price takers. Source: The Conversation, 24 November 2013 Extract 3: Australia blocks GrainCorp takeover bid from ADM Rising global food demand has seen agriculture firms become takeover targets. Australia has blocked US conglomerate Archer Daniels Midland's (ADM) A$3.4bn ($3.1bn; £1.9bn) takeover of Australian-owned GrainCorp - its biggest grain merchant. The grain business has evolved to be an industry dominated by foreign grain giants like Cargill, Viterra and Agrium in an open market. Australia is one of the world's largest exporters of wheat. ADM’s (the world's biggest processor of corn) bid to fully acquire GrainCorp had been opposed by some farm groups, who raised concerns over the impact of such a move on competition in the sector. "Many industry participants, particularly growers in eastern Australia, have expressed concern that the proposed acquisition could reduce competition and impede growers' ability to access the grain storage, logistics and distribution network (including port facilities) which GrainCorp originally owns," Treasurer Joe Hockey said. However industry analysts believe there’s no reason for ADM to keep ports and receival sites close if the takeover materialises. After all, ‘it’s a matter of making money’, and allowing as many growers as possible to use their facilities. Patricia Woertz, chief executive of ADM, said "We are confident that our acquisition of GrainCorp would have created value for shareholders of ADM and GrainCorp, as well as grain growers and the Australian economy." Growers and industry analysts hope that the takeover can result in rail freight improvements, equal access to ports and injection of much needed funds into assets like grain storage facilities. Sources: ABC News, 2 May 2013 and BBC News, 29 November 2013

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