7 February 2005
Australian agribusiness must give top priority to protecting and enhancing its reputation for safe, high- quality food products as the sector faces a challenging year ahead, according to a recently-released report.
Australian Agriculture in Focus, by the world's leading food and agribusiness bank Rabobank, says Australia's international reputation for clean, safe, high quality food and agriculture products provides critical competitive advantage in global markets increasingly focussed on safety, health and well being.
"Australian food and agribusiness exports are not necessarily the cheapest in world markets, but to protect our strong export position in key markets, they must be the safest and highest quality," the Rabobank report contends.
"Protecting and enhancing this competitive position should remain top of the priority list for Australian agriculture in coming years."
This reputation for quality and safety, Rabobank says, absolutely underpins Australia's market access across the full range of commodities and trading partners
Key Drivers of Profitability
The report predicts a challenging year ahead for Australian farmers and agribusiness, with the industry's fortunes depending on three key factors - climate, currency and the global economy.
"Climate, currency and the strength of key global economies are delicately balanced as we enter 2005," the report says.
"The overall business environment remains positive, underpinned by strong domestic and global economies, low inflation and stable interest rates. However, fortunes in 2005 will depend greatly on the direction of these three key drivers of agribusiness profitability."
Global Economic Activity
Global economic activity, a key driver of food and commodity demand, appears to be slowing after three consecutive years of growth. The International Monetary Fund has forecast world economic growth of 4.3 per cent for 2005, down from 5.0 per cent for 2004.
The Rabobank report says economic growth in Australia's largest food and agriculture markets of Japan, the United States, China and South East Asia is expected to uniformly decline in 2005 (see graph).
"Combined with our strong dollar, (this) may result in some softening of demand for food and agriculture commodities over the next year," it warns.
However, while sobering, Rabobank says, slowing international economies need to be placed in the context of 2004 having the highest rate of global economic growth since 1976.
"Further, a measured slowdown (or 'soft landing') is generally regarded as necessary for sustaining longer term economic growth."
Figure 1: Actual (2004) and forecast (2005) GDP growth in Australia and major trading partners.
Source: RBA, IMF, 2004
Currency
After a volatile 2004 - which saw the Australian dollar peak in mid February at around 80 US cents, decline to 67 US cents mid year before appreciating again to finish the year at 76 US cents - further appreciation of the Australian dollar in 2005 would be of real concern to most food and agribusiness industries.
"Export-focussed sectors such as beef, grains, wool, cotton and, increasingly, dairy, would see returns and competitiveness further challenged," the Australian Agriculture in Focus 2005 report says.
"Domestically-focussed sectors - such as pork, fruit and vegetables - would be further exposed to food imports made cheaper by our high currency."
While difficult to forecast, the report says, there is some expectation in the market that the US dollar could fall further in 2005, underpinning even more the strength of the Australian currency.
Climate
Climatic patterns are also delicately balanced as Australia's farmers and agribusinesses move into 2005.
While the Southern Oscillation Index (a key measure of weather patterns across the Asia Pacific, with negative values correlated with below average rainfall) has been in negative territory for the final six months of 2004 and is yet to decisively break the negative trend in place since 2002, Rabobank notes that the Bureau of Meteorology December 2004 National Rainfall Outlook reports a 40 to 60 per cent probability of above average rainfall for the January to March 2005 period.
"In other words, rainfall could go either way in 2005," the report concludes.
Despite the uncertainties created by these external drivers, the Rabobank report finds Australian agriculture remains in very strong shape.
"Encircled by the fastest-growing economies in the world, the long-term prospects are bright for farming and agribusinesses who meet demanding consumer expectations while continually improving cost competitiveness," it reasons.
Other significant issues facing Australian agribusiness in 2005 include building markets in China and the ongoing challenge of water.
China
Building food and agribusiness markets in the massive growth economy of China requires a serious investment in time and money, and very strong and robust business relationships, the report maintains.
The booming Chinese economy and growing demand for food and fibre raw materials loomed large in Australian agribusiness in 2004. China is Australia's fourth largest market for food and agricultural products, worth $A2.1 billion in 2003. Australian exports to China of grain, dairy and lamb all continued to increase during 2004, while China adopted the mantle of our largest customer of fine wool, it says.
"(However), despite the promise, there are few if any financial 'free kicks' in Chinese food and agricultural markets - competition both from other importers and domestic producers and manufacturers is very strong, while many complexities remain in doing business, from cultural, government and consumer angles."
Australia is in the early stages of negotiating a free trade agreement (FTA) with China, an agreement which promises to address market access issues and technical barriers to trade.
With Australia to follow New Zealand's lead of undertaking a joint feasibility study on a bilateral FTA with China, the benefits and costs of such an agreement will be hotly debated during the year, the Rabobank report says.
"While exporters will be seeking reduction of trade barriers to improve access to China's increasingly sophisticated food and beverage markets, manufacturers will be concerned about increasing competition from Chinese imports under a free trade agreement. These concerns will be exacerbated if the Australian dollar strengthens further against the US dollar, given the Chinese currency is pegged to the US dollar."
Water
The vexed issue of water reform will continue to loom over the industry in 2005.
Reform looks to be heading to the next level however, the report says, with work to continue this year on the various elements of the National Water Initiative (NWI).
The initiative began to take shape in earnest last year, with the majority of states agreed on its funding and structure and two inter-governmental agreements signed - one dealing with the over allocation issues in the Murray-Darling and the other, a national framework encompassing greater compatibility for water management.
While there remains contention between state and federal government over funding of the two agreements and this may potentially delay water recovery proposals for environmental flows agreed upon late last year, most of the proposals to date are expected to be achieved through infrastructure upgrading on farm and in irrigation systems, water use efficiency and purchasing from licence holders willing to sell.
"With most of these projects having already being scoped out, they are expected to deliver over half the environmental outcomes agreed upon with little impact on irrigators titles," the report says.
The Australian Agriculture in Focus 2005 report is produced by Rabobank's Food and Agribusiness Research (FAR) unit.
(see Sector Summaries below)
Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked one of the world's safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1900 offices and branches. Rabobank is one of Australasia's leading rural lenders and a significant provider of business and corporate banking and financial services to the food and agribusiness sector. The bank has 70 branches throughout Australia and New Zealand.
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Australian Agriculture in Focus - Sector Summaries
Of the major agricultural sectors, the Australian Agriculture in Focus 2005 report says:
Dairy
Strong global demand - and the response of dairy companies to both changing consumption patterns and competitive forces - will make 2005 a dynamic year for the dairy industry.
Internationally, demand from non-traditional dairy consumers, particularly China, South East Asia and the Middle East, is expected to drive a 2.2 per cent annual consumption growth rate in coming years, outstripping an expected one per cent annual growth in global milk supply.
The Australian and New Zealand dairy industries are particularly well positioned to capitalise on these emerging markets, with established customer relationships and highly competitive production and processing sectors.
The biggest limitation to growth in these important export markets will remain the capacity of Australian dairy producers to lift milk supply back to the annual growth rates of around 5 per cent that preceded the 2002/03 drought. Australian dairy production is now at its lowest level since 1997/98, however with reasonable seasonal conditions and continued strong international demand, should start a gradual recovery from spring 2005.
Beef
Market access will be the hot topic for the global beef industry in 2005, with access to international markets increasingly being constrained by animal health and food safety status.
Australia has undoubtedly benefited from the US and Canada's absence from the international beef market over the past year, particularly in markets such as Japan. However, this absence has been due to unclear, inconsistent and, to many, unscientific market access restrictions imposed by importing countries. This is not in the spirit of the World Trade Organisation's push towards a level playing field for trade, nor is it a long term competitive landscape that will work to the advantage of Australian beef exporters.
Lamb
While the United States remains Australia's largest and most important lamb export market, China represents a huge market opportunity for Australian lamb.
China not only has a history of eating sheep meat (unlike consumers in other Asian countries), it also offers significant opportunities for otherwise low export demand products, such as offal.
Already, China is Australia's third largest lamb export market by volume, with Australia exporting 8.9 tonnes of lamb to China in the 12 months to September 2004.
By 2015, however, according to Meat & Livestock Australia, our lamb exports to China have the potential to climb to 20,000 tonnes a year.
Grains/Oilseeds
Australian grain growers move into the new year anticipating a diminished grain harvest of some 31 million tonnes (20.2 million tonnes of wheat), down from the record highs of the previous year.
The reduced harvest has resulted from mixed climatic conditions during 2004, including a late break across much of the country at the beginning of the season, little winter rain followed by frost, wind and unseasonable heat before harvest.
Australian growers also face a very competitive export market, with large global crops of wheat, barley, soybeans and corn putting pressure on prices, along with a strong Australian dollar.
China has re-emerged as a significant wheat buyer, with predicted imports of 10 to13 million tonnes for 2004/2005, of which 2.5 million tonnes is contracted to be supplied from Australia.
Cotton
Domestically, the 2004/05 season has started to see a recovery in production levels of Australia's cotton crop following on from the previous year which had the smallest crop recorded in 10 years
While the industry now has capacity to increase production, it has seen returns severely diminished, with prices sitting at approximately $A100 a bale (below break even levels) during planting season and limited upside over the next six months.
By late last year, strong international supply of cotton had seen cotton prices fall by approximately 47 per cent from highs experienced in October 2003.
Internationally, a combination of perfect growing conditions in many countries, increased acreage and yield improvements is expected to result in a huge 113.2 million bale (24.64 million tons) crop for the 2004/2005 season.
Wool
With the much hoped for improvement in demand for wool not eventuating in 2004, limited price upside is expected given a continuation of current buying patterns.
Wool faces hot competition in the apparel textile market, particularly from new generation synthetic fibres and cotton, and price increases are partly limited by the relative prices of competing fibres.
In this environment, to maintain and grow market share, the industry must focus on continued innovation and cost reduction in processing technology, as well as promotion of wool as a fibre of choice along the value chain.
Sugar
After a strong rebound in the fortunes of Australian sugar in 2004, the outlook for the local industry looks positive for 2005.
Raw sugar prices climbed in 2004, with some estimates that prices are likely to remain at relatively high levels or increase through 2005.
Factors contributing to improved prices included a lower than expected Brazilian sugar crop, increased ethanol production and increased demand from sugar in Asia (particularly China) and the Middle East.
Contact
For further information please contact Denise Shaw, Public Relations Manager (Tel: +61 2 8233 8744) or email on sydney.mediarelations@rabobank.com.