This commentary is provided by Roger Crook, a leading agribusiness expert commentator, whose website is www.globalfarmer.com.au.

As everybody now knows, supermarket Coles was recently fined $2.5 million for selling bread that they claimed had been freshly baked that day on the premises—in the shop—when in fact it was par baked and frozen Irish bread from an Irish company called Cuisine Royale. Coles simply finished off the baking process. Cuisine Royale are based in Clara, County Offaly, just a short drive on the M4 from Dublin in the Republic of Ireland.

It seems Cuisine Royale, in spite of their very un-Irish name, are a company to be reckoned with.

Formed around 2010 and by 2011 they were exporting to Kuwait, Saudi Arabia, Qatar, Oman, Bahrain, the United Arab Emirates and as we all know at some time Australia was added to that list. In the same year, 2011, Mr Tom Doyle, the owner of Cuisine Royale was awarded the Business Person of the Year by his local Chamber of Trade.

There is an old saying, ‘Let the punishment fit the crime.’ Well, Coles have certainly broken the law.

Whether the punishment Coles received fitted the crime and whether they have been taught a lesson apart from being found out, I leave it to you to decide, because the fine Coles received was 0.197 per cent of their earnings of $1.67 billion in 2014, and for their parent company just 0.116 per cent of Wesfarmers’ profit for that year.

Tom Doyle and his company have certainly made an impact on Coles and I presume they are still enjoying doing business together. A recent examination of the Cuisine Royale web site reveals that Mr Doyle’s company has had product in Coles stores around Australia — even if not always in the bread range, that is or was only in a few selected stores, then certainly in the muffins.

So it is reasonable to assume that muffins for sale in Coles have been imported into Australia par baked and frozen. When they are needed the baking process is completed so the Irish muffins are sold as ‘fresh’ as the day they left the Emerald Isle, even though they may not say so.

Australia missing an Irish opportunity?

Ireland is barely self sufficient in wheat, so the wheat used by Cuisine Royale is imported into Ireland. There is no mention in Australia’s export statistics of Australia having exported any grain or bakery products to Ireland in the last five years.

Australia grows about 5 per cent of the world’s wheat. What makes us important in the world wheat trade is that because of our small population our wheat exports represent about 15 per cent to 20 per cent of all the wheat traded in the world each year. We should have a natural ‘home grown’ advantage when it comes to processing wheat for home consumption. Australian Food Statistics 2012 -2013, produced by the Commonwealth Department of Agriculture, have a different and sobering tale to tell.

Australia’s food terms of trade moving in ominous direction

In 2013, Australia imported bread, pastry and cakes worth some $281 million, together with biscuits worth a staggering $229 million and breakfast cereals worth some $594 million.

So in 2013, Australia imported $1.104 billion dollars worth of cereal products into Australia and the amount we import is growing year on year.

By comparison, five years ago Australia was importing $175 million of bread pastry and cakes, but by last year that figure had grown to $281 million, an increase of 60 per cent over five years. The growth in biscuit imports during the same period has been 41 per cent.

Interestingly, the less-developed countries produce only a minor market share of the cereal products that Australia imports. China is in there of course with a minor share of the minor share, as are Malaysia, Thailand, Pakistan and Indonesia, but I stress, combined, they hold a minor share of the total cereal products imported into Australia. There is certainly a considerable quantity of imported baked products coming into Australia from the EU, the UK, America and Ireland and New Zealand. We import large quantities of breakfast cereals from America. Yet if the free trade economists are to be believed, how can that be? It seems that the main countries that are exporting to us have governments providing grower subsidies and appear to also provide exporter incentives.

New Zealand conundrum

The New Zealand figures are quite high for exports of processed cereal products to Australia. I would think that may well be a distortion as the New Zealanders are net importers of grain, but as we all know they have an FTA with China and as with frozen vegetables and many other products, if there is sufficient processing or input of an ingredient the finished product can be described as ‘Made in New Zealand’ or ‘Made in  New Zealand from local and imported ingredients’ or some such words. The other explanation may be the fact that at the time that the New Zealand dollar was worth considerably less than the Australian dollar, manufacturing in New Zealand was an incentive for some major global brand-owners to utilise the lower cost structure to process some of their product range in New Zealand compared with manufacturing in Australia. Combined with the arrangements made under the free trade Trans Tasman Mutual Recognition Agreement, this allowed for cheaper imports or transshipment of ingredients and/or minor transformation of  food products through New Zealand. Whether that will change now remains to be seen. My view is that it won’t.

Delicious irony

Coles is a subsidiary of Wesfarmers.  Wesfarmers owes its origins to Westralian Farmers Co-operative, which was formed in 1914 and became one of the biggest and most successful agricultural coops in the country. In 1922 Wesfarmers was part of and instrumental in forming and managing the first ‘wheat pool’ in Australia, designed to give wheat growers strength through numbers. From those humble beginnings grew the Australian Wheat Board, and Cooperative Bulk handling for more than eighty years the envy of wheat growers around the world.

Coles are now developing their business in direct competition with the descendants who were their founding fathers.

Why did Coles source their bread in Ireland?

What I found interesting about the whole shenanigan was that Coles went to, or had to go to Ireland to find a frozen bread and muffin company with the production capacity to put (I presume) product in all of its 700 or so stores in Australia. We know that Coles’ senior management team were brought in by Wesfarmers over the past decade from the UK, and it was the same management people that introduced the “dollar a litre milk” tragedy to Australia, just as they had done the equivalent previously in the UK.

So it is not beyond the realms of possibility the Irish baker Cuisine Royale and their products were known to Coles’ management before they were introduced into Australia. The other interesting thing about Cuisine Royale is that it’s odds on that they have to import into Ireland many of the ingredients used in their products, especially wheat.

Cuisine Royale’s Tom Doyle has shown Australians in his bold dealings with Coles how to add substantial value to a raw material and how to capitalise and exploit a market sitting right under our noses, in case anyone doesn’t know that is how the world works.

To add insult to injury, Coles controls at least 40 per cent of bread sales in Australia.

Should Coles invest a few more dollars, in the national interest, into maintaining Australia’s food processing industry? Of course they should.

Last year Coles made a profit of $1.67 billion. Coles’ parent company Wesfarmers made a profit of $2.398 billion.

If an Irishman can move product halfway round the world sell to Australia, like selling coals to Newcastle, and sell to our close neighbours, who really should be Australia’s customers. How can it be Australia’s national interests for Coles to be buying from an Irish baker rather than building a new bakery or encouraging and providing an incentive to an Australian bakery to bake the bread for the Australian market and for export  using Australian wheat and more importantly Australian labour.

Raw and processed growth ratio out of kilter

Between 2003-4 and 2009-10 the domestic market for all food, including fresh food grew by about 46 per cent, while the processed food sector only grew by 32.2 per cent. The domestic processed food sector is therefore not keeping up with demand.

There is clearly an opportunity now waiting for Australia’s major supermarket groups to buy and invest here in new product and help create a new food processing industry sector that needs to grow in Australia, to avoid economic and social calamity.