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Select an Australian business from the list of ASX Companies (The list is provided on LearnJCU. Each company can  only be used by one student. First in first served. Record your name and student number in the columns as  indicated). Provide an overall description of the business and the competitive environment in which it operates. You may provide information about the business as suggested below plus any other information peculiar to the  business you choose.

  1. a) Name and location of the business, the type of business (e.g. retail, manufacturing);  
  2. b) What the business produces or sells;   
  3. c) Who the main customers are (e.g. other businesses, government departments, young girls, older men);
  4. d) Where most of the customers are located (e.g. in Townsville, Brisbane, or on the internet);
  5. e) Who the main competitors are (i.e. those producing similar products, and selling to similar customer  base);
  6. f) Where the competitors are located; and
  7. g) The (approximate) market share of key competitors including your business (e.g. ’your’ businesses has  approximately 10% of the market, your main competitor has approximately 50% of the market, and many  other small businesses share the remaining 40% of the market).

Given the above information, comment on whether or not you think the competitive environment in which the  firm operates is likely to be closer to (a) perfect competition; or (b) monopoly. Comment also on the number of  ‘close substitutes’ for the business’ products, and the cost of the product relative to ‘average’ incomeof its  customers. Does this mean that the demand curve facing the firm is likely to be relatively elastic or relatively  inelastic? What does this imply about the ability of the firm to ‘mark up’ its price above marginal cost?

2) Production costs and scale  Provide a description of the required factors of production, grouping them according to whether the factors of  production are:

  1. a) Fixed and hence unlikely to vary much according to the quantity of goods produced or sold; or
  2. b) Variable and hence likely to increase with increased production or sales.

Introduction to the Business and General Business Environment

1. Introduction to the Business and General Business Environment

Analysis of the competitive environment in which a business operates is of great importance to its present and future performance. First, a business must understand the competition it faces, the costs it is likely to face as well as the macroeconomic conditions in the country of operation. The effects of changes in the macroeconomic variables may have positive or adverse effects on the productivity of the business. Additionally, the social, environmental and financial practices have a huge impact on the future performance, sustainability and viability of the business. A critical evaluation of the operations of Namoi cotton limited company, hereafter referred to as NAM or Namoi Cotton will reveal the effects of such practises and a prediction of its future performance.

a. Name, Location and Type of Business

Namoi Cotton Co-operative Limited is a publicly listed company in Australia. Established in 1962, the company has its headquarters in Wee Waa, Australia. It operates in the agricultural supply chain industry. It serves the rural areas of New South Wales and Southern Queensland as well as the external market (Namoi Cotton, 2018).

b. The Products

Namoi Co-operative Ltd mainly sells ginning and marketing services. Additionally, it distributes by-products of ginning like cotton seed, and mote and moss (Aerial Dimensions Australia,2018). The company works both as a contract ginner and a ginner for the joint venture, Namoi Cotton Alliance, through which it exports ginned cotton (Namoi Cotton,2017).

c. The Customers

The main customers of the ginning services offered by NAM are local cotton growers. A good example of the growers served by the company is Webster (WBA). The NCA also offers 12% of the bales it buys each day to Louis Dreyfus Company at the particular day’s price and with a certain margin basis. The sale occurs under an Offtake Agreement. The end buyers of the cotton NAM markets and exports through NCA are top tier spinning mills in Asia (Namoi Cotton, 2018).

d. Location of the Main Customers

Most of the local cotton growers that the company serves are located in New South Wales and South Queensland. Apart from serving local customers, NAM exports the ginned cotton bales to Asian countries like China, Indonesia, Bangladesh, India, Japan, Saudi Arabia and Vietnam. The company does so through Namoi Cotton Alliance JV.

e. The Main Competitors

The marketing segment of cotton production has 15 marketing organisations. The firms function as merchants of cotton. They include; Omni Cotton, Queensland Cotton(Olam), RCMA Group, Reinhart Australia, S & G Cotton, Brighann Marketing, Namoi Cotton Alliance(NCA), Auscott Limited, Cargill Cotton, CNCGC Australia, Cofco Agri, Cubbie Cotton Marketing, Ecom Cotton, Glencore Grain and Louis Dreyfus Company (LCD). All these firms sell ginning services as well as marketing services to growers in Australia and beyond (Market Publishers Report Database, 2018).  

f. Location of Main Competitors

Most of Namoi’s competing organisations are multinational companies based in Australia. Majority of them purchase cotton from various countries except the NCA and Brighann. NCA is the leading cotton origination company that exclusively deals with Australian cotton. These merchants directly or indirectly own ginning infrastructure including upcountry warehouses. NAM owns an extensive network of 12 gins in Queensland and New South Wales (Market Publishers Report Database, 2018).

Name, Location and Type of Business

g. The Market Shares of the Competition

Approximately, Namoi Cotton commands 25.6% of the Australian cotton crop ginning market share ("SWOT: Namoi Cotton Co-operative Ltd (NAM)", 2018). The key competitors of NAM command market shares described hereafter. Olam is second to NAM with a 22.2% market share, Auscott takes 17.3% whereas LCD commands 7.4%. The rest of the merchants command the remaining 27.5% of the market share.  The company has ginned an average market share of between 25% to 40% of the total cotton produced by Australia (Moore &Gelsomino,2017). Clearly, NAM is the market leader in the ginning industry.

Market structure of operation.   According to the Australian government, the market for Australian cotton is generally unregulated. The cotton growers can deliver their cotton to the ginners or market it through various independent merchants. Such mode of operation could occur in two extreme types of markets; perfect competition or monopoly. Perfect competition markets have many sellers who are: price takers, and firms selling identical products that have close substitutes. Conversely, a monopoly has only one seller who is the sole price maker. They sell one commodity that does not have substitutes. In a perfect competition market structure there are no barriers to entry and exit of firms. However, there exist high barriers to entry in a monopoly market structure (Acemoglu, Laibson& List,2016). Thus, Namoi Cotton operates in a market structure tending to a perfect market structure than a monopoly.

Number of substitutes and demand curve elasticity.  There are a number of substitutes for cotton in the form of man-made fibre. Examples of such include; cellulosic, acrylic, polyester, nylon and rayon (Moore&Gelsomino,2017). Given the variability of the prices of cotton, some of the customers of NAM find it easy and cheaper to purchase the man-made fibres in production. Otherwise, the ginning market has over ten other similar services from various merchants as pointed out earlier in the text. They can substitute those offered by NAM. A product that has a number of close substitutes tends to have an elastic demand curve (Varian, 2010). Therefore, Namoi faces a demand curve that is likely to be relatively elastic.

Implication of demand curve elasticity on mark up.  The elastic demand curve implies that the firm may manage to mark-up its price so as to match the volatility of its marginal costs. According to Samuelson &Marks (2012), “Starting from any point of elastic demand, the firm can increase revenue by reducing its price” (p.93). Given that NAM is not a monopoly, their prices are not likely to be high hence they are favourable for the spinning mills. The spinning mills are likely to have to be high and hence in periods when they generate higher revenues, it is expected that they would buy more cotton. Theoretically, selling a normal good at a discount as suggested above could increase their ability to offset the effects volatility of marginal costs

2. Production Costs and Scale

a. Description of Factors of Production

The factors of production required by Namoi Cotton can be broadly grouped into capital, labour and raw materials. They include; property, plant and equipment, the services provided by agents and directors, field staff and the sales people. These factors of production drive both the ginning segment and the marketing segment of cotton processing and sales.

The Products

b. Classification of Factors of Production

The three factors of production can be classified into fixed and variable factor inputs. The fixed factors of production do not increase or decrease depending on the volume of production (Krugman & Wells, 2013). Conversely, the variable factors of production may be increased or decreased depending on the volume of the product produced. An example is the cotton that is ginned or that is exported by NAM. Permanent staff of about 150 employees of the company will constitute the fixed aspect of labor. The company hires 350-450 temporary workers during peak season (Moore &Gelsomino,2017). The services offered by these workers form part of the variable factors. Fixed capital in the firm is composed of the plant and equipment that is used in the processing of cotton. The raw materials are part of the variable factors of production.

c. The Behavior of Costs

Given the classification of the fixed and variable inputs of NAM, the accompanying costs will also be divided into two; fixed costs and variable costs. The costs are attached to items such as administration costs, purchase of raw materials, labour, energy, maintenance, insurance and technology.  Fixed costs are attached to compensation of permanent sales and field staff, operational executives and directors. Electricity, insurance and maintenance costs attached to the equipment and property are variable costs (Kieso, Kimmel & Weygandt, 2012). Wages and salaries of temporary staff, cotton transportation and procurement costs variable costs. Unlike the fixed costs, variable costs increase with the increase in volume of cotton bales acquired for ginning and those that are prepared for export.

     Cost structure and scale.  The likely cost structure for this company is a cost-driven cost structure. It involves cost items such as raw materials, processing(ginning), storage, transportation, marketing and sales. It is a mixed structure that has a low proportion of fixed costs relative to the variable costs aiming at minimising costs. The firm is likely to be large given that it has a higher proportion of variable costs compared to fixed costs.  A large firm will choose to operate on lower average costs (Layton, Robinson & Tucker, 2015). The total fixed costs that NAM faces are low. Therefore, the company is operating on a large scale and its optimal size is likely to be large.

3. The Macro Business Environment

a. The Overall Political/Government Stability of Australia

Australia has one of the most stable political systems in the world. It has a federal government democracy with parliament at its heart. Its governance system encompasses the values of rule of law, freedom of speech and religious tolerance. It has a legal system that is based on the English model of common law. In one of the recent rankings on the Economist Intelligence Unit, Australia ranked among the highest (Hellenic-Australian Business Council, n.d). It has low corruption levels and high government support towards business hence doing business in the country is easy and favourable.

b. General Level of Inflation, Unemployment and Interest Rates in Australia

Most of the ginning customers of Namoi are Australian cotton growers from the Southern Queensland and New South Wales regions. Additionally, the company serves other local businesses that contract it’s ginning services. Therefore, a look at the statistics on general unemployment, interest and inflation rates of Australia is important.

The Customers

Current levels of unemployment, inflation and average interest rates. According to the Australian Bureau of Statistics (2018), the seasonally adjusted unemployment of Australia standing as at June 2018 was 5.4% which is the lowest since November 2017. The rate is the same as that of the previous month. The Reserve Bank of Australia (RBA) (2018) reports that, the general inflation rate was 2.1 % during the second quarter of 2018. The country recorded an average interest rate of 1.5% as at June 2018 (RBA, 2018).

Recent changes in unemployment, inflation and interest rates. The table below show a falling trend in the rates of unemployment in Australia.

Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Unemployment rate

4.23

5.56

5.21

5.08

5.22

5.66

6.07

6.06

5.72

5.486

Source: World Bank

 Australia’s consumer price inflation recorded a 2.1% in the second quarter of 2018 which is a new high compared to the one recorded at the end of the first quarter of 2017 (1.9%); another 1.9% was recorded during the second quarter of 2017.The rise in inflation rates can be attributed to the increase in prices of tobacco, fuel and electricity (RBA,2018).

The phase in which Australian economy is in the business cycle. To reliably comment on the stage Australia is in the business cycle, an analysis of the Gross Domestic Product (GDP) trend is necessary. According to World Bank (2018), the GDP of Australia has varied as shown below.

Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

GDP(Constant LCU in trillions)

1.353

1.379

1.407

1.442

1.498

1.538

1.577

1.614

1.66

1.692

  Source: World Bank

An economy in recovery normally experiences expansion in its GDP, moving from negative positions to positive ones. The rates of inflation rise as those of unemployment decline. The average interest rates decline hence helping it to grow again (Krugman &Wells,2013). From the foregoing variations in the stated macroeconomic variables, it can be concluded that Australia is in recovery phase of the business cycle.

c. Cotton exports and Australian dollar exchange rates

Australian cotton is traded in US dollars in the international markets. The Chinese, Indonesian, Japanese and other overseas spinning mills for example are some of the customers of NCA cotton exports. Hitherto, delve into the variations in the exchange rates of AUD over the years. The current exchange rate is averaging at approximately 1.74 AUD per USD (RBA,2018).

Recent changes in the Australian dollar exchange rates.  Statistics from the World Bank (2018) provides detailed view of the variations in exchange rates. A glimpse into the variation of the Australian dollar exchange rates in the past ten years is provided below.

Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Exchange rate(LCU per US$)

1.192

1.282

1.09

0.969

1.966

1.036

1.109

1.331

1.345

1.305

Source: World Bank

From the table, it can be established that the exchange rate of Australia has been generally weakening. The value of the currency in the international market is depreciating in the face of the international market currency unit.

Expected Future macroeconomic conditions. Predictably, the recovery period will be followed by boom in the economy of Australia. The unemployment rates are expected to be low as well as the interest rates. Given that cotton is a normal good, there will be a higher consumer demand in Australia for Namoi services at the onset of boom. Therefore, Namoi Cotton is expected to generate more revenues during the early stages of the peak of economic productivity.

Location of the Main Customers

Firms face higher operational, insurance, raw material and labour costs due to increasing inflation during the boom. The situation is not likely to be different for NAM.  It will face challenges in accessing labour and cotton deeper into the phase because of their rising prices. In the face of falling exchange rates, exports become cheaper (Whittall & Bird, 2017). This will be experienced in the market of Australian cotton since depreciation of the Australian dollar makes exports cheaper for the customers in the importing nations. It can safely be concluded that the macroeconomic conditions are likely to be favourable at the beginning of the next phase. However, they will deteriorate as the business cycle advances in the coming years leading to a decline in revenue of the company.

4. Sustainability practice of the business

a. Production externalities

Production activities can affect third parties in a bucolic nature or by benefiting them. However, these effects do not appear in market transactions(Nicholson&Snyder,2008). Here below is a description for the case of Namoi cotton.

Negative externalities. The negative externalities due to the production of the services of Namoi include the risks associated with noise, spills at the gins as well as noise and air pollution. Occurrence of such risks could lead to societal problems for residents of the regions surrounding the gins.Company internalization policies. The producer has to put measures in place to ensure that they can internalize the cost of offsetting the negative effects of their production activities. Namoi Cotton manages the water runoff, possible dust emissions and noise do not affect the welfare of the community. Namoi Cotton (n.d.) describes an environmental monitoring program that involves all its 12 ginning sites that performs regular environmental audits. The results are reported on their website. Further, the company has established pollution incident management plans to ensure that any pollution incident is reported fast and procedurally at all ginning sites.

Government policies. The government has established laws that protect the communities around plant and production sites from pollution(Gifford,2013). For example, under Protection of the Environment Operations Act 1997(NSW), the government directs that all the warehousing and ginning facilities in New South Wales are licenced. Namoi Cotton (n.d.)  indicates that all NAM gins are licenced according to the requirement of the Environment Protection Agency (EPA). The penalties for failure to comply include AUD $ 5million for ‘Tier 1’ offenses, AUD $ 1 million for ‘Tier 2’ offenses. ‘Tier 3’ penalties are subject to fees and penalty notices (Preston,2011). These penalties are there to discourage the occurrence of the negative externalities.

Positive externalities. There are a number of benefits to third parties that can be attributed to the Namoi Cotton. Firstly, the ginning services of the company have led community support projects over the past 50 years. The projects include contribution to the Westpac Rescue Helicopter Service, Wee Waa Public and Private Schools, Cancer Council of Australia and the District Sporting clubs. Secondly, the company supports the cotton industry by representing the crop at the Cotton Australia, Moree Trade Show, Water Users Group, Australian Cotton conference, Australian Cotton Ginners Association and other bodies or events (Namoi Cotton, n.d.).   

The Main Competitors

Company positive externality encouragement. In response to the occurrence of this externality, the company has devised ways to take advantage of the positive. It regularly encourages its workers to engage charity events and also to contribute to such events at local, state and national levels. To reinforce it, the company holds an annual golf day as its charity event at every year at its headquarters in Wee Waa.  All the money collected during the event is distributed to local communities (Namoi Cotton, n.d.).

Consumption externalities

Naturally, consumption of given service or product can have benefits or costs that spill over to a bystander. However, the documentation of externalities arising from consumption of the products of Namoi Cotton was limited. Further study would unearth the externalities and record them for future studies.

The sustainability practices and long-term viability.  A business is likely do well in revenue generation if its production activities have minimum negative effects on the environment as well as the community around it (Pagell &Wu, 2017).  To achieve the milestone, it requires sustainable environmental practices such as reduction of environmental pollution and internalization of the costs of alleviating effects of pollution on the environment. Namoi can attract and improve customer sales and loyalty due to their representation of the crop if they maintain their sustainability practices.

 Financial success is the bottom line of every company. That objective is achievable through employee retention, choosing a proper cost structure hence promoting competitiveness. The company and their competitors are likely to achieve this if their sustainability practices are maintained and/or improved. The future resilience of the company is dependent on their management of resources at their disposal. Namoi needs to tweak their response to the environmental and social issues that arise from production and consumption of their services to achieve stability in the face of the expected adverse macroeconomic climate.

Conclusion

Namoi Cotton Limited is preparing for a sustainable growth. That can be attributed to the competitive edge of the company based on the relatively elastic demand curve it faces. The minimisation of costs through increasing the scale of operation, the current economic recovery conditions favour growth of the company sales. Environmental and social practises of the company are likely to compensate the effects of the recession that the economy may face in the long run thus the company can survive the then impending recession.

References

Acemoglu, D., Laibson D. & List J. (2016). Microeconomics (global edition). Boston, Pearson Education Limited.

Aerial Dimensions Australia (2018, August 2). Grower services Namoi Cotton. [Video file]. Retrieved from https://www.youtube.com/watch?v=BRaggdPI8-U 

Australian Bureau of Statistics. (2018, June). Labour force, Australia (no.6202.0).  Retrieved from https://www.abs.gov.au/ausstats/[email protected]/mf/6202.0?opendocument&ref=HPKI .Open document.

Gifford, M. (2013). Chief Environmental Regulator, NSW EPA, Protection of the Environment Operations Act 1997 (NSW), undertaking to the Environment Protection Authority given for the purposes of Section 253A, AGL Upstream Investments Pty Limited, signed 8 August 2013.

Hellenic-Australian Business Council (n.d.). Geopolitical assurance for business and investments. Retrieved from https://www.habc.gr/australia_geopolitical.asp  

Kieso, D. E., Kimmel P.D. & Weygandt J.J. (2012). Accounting principles (10th ed.). New York: John Willey& Sons Inc.

Krugman, P.& Wells R. (2013). Economics (3rd ed.).  New York: Worth Publishers.

Layton, A., Robinson T. & Tucker I. B. (2015). Economics for today (Australian edition). South Melbourne: Cengage Learning.

Namoi Cotton (2018). 2018 Annual report of Namoi Cotton. Retrieved from https://www.namoicotton.com.au/media/52674/210782%20Namoi%20AR%202018_HR.pdf 

Namoi Cotton. (n.d.). Community involvement. Retrieved from

https://www.namoicotton.com.au/about-us/community-involvement

Namoi Cotton. (n.d.). Environment. Retrieved from

https://www.namoicotton.com.au/about-us/environment 

Namoi Cotton (2017). Namoi Co-operative Limited restructure booklet

Retrieved from https://www.namoicotton.com.au/media/35351/namoi-cotton-restructure-booklet.pdf

Nicholson, W. & Snyder C. (2008). Macroeconomic theory basic principles and extensions (10th ed.). Mason, OH: Thomson South-Western.

Market Publishers Report Database (2018). SWOT Analysis. Retrieved from https://www.reportlinker.com/p05198277/Namoi-Cotton-Co-operative-Ltd-NAM-Financial-and-Strategic-SWOT-Analysis-Review.html 

Moore, B., & Gelsomino, K. (2017). Namoi Cotton unlocking value. Morgans. Retrieved from https://my.morgans.com.au/research/1B89E218-63F6-4E2E-8DDD-43B130D58272.pdf?u=9b6e4620-b777-4faa-824c-18d547e2ca31 

Pagell, M. & Wu, Z. (2017). Business implications of sustainability practices in supply chains. Sustainable Supply Chains, pp.329-353. Springer: Cham

Preston, B. (2011). Enforcement of environmental and planning laws in New South Wales

Samuelson, F. W. & Marks, G. S. (2012). Managerial Economics (7th ed., pp.93). Hoboken, New Jersey: John Willey& Sons Inc.  

Reserve Bank of Australia (2018, August). Exchange rates, Australia. Retrieved from https://www.rba.gov.au/statistics/frequency/exchange-rates.html open data

Reserve Bank of Australia (2018, July). Inflation rates, Australia. Retrieved from https://www.rba.gov.au/inflation/measures-cpi.html open data

The World Bank, world development indicators (2018). GDP (constant LCU) | Data. (2018). Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.KN?locations=AU  open data.

The World Bank, world development indicators (2018). Official exchange rate (LCU per US$, period average) Retrieved from

https://data.worldbank.org/indicator/PA.NUS.FCRF?locations=AU open data.

Varian, H. (2010). Intermediate microeconomics: A modern approach. New York: W.W. Norton & company.

Whittall, C. &Bird, M. (2017, June 11). When currencies fall, export growth is supposed to Follow—until now. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/when-currencies-fall-export-growth-is-supposed-to-followuntil-now-1497207236

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