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Strong dollar takes toll on Australian farmer confidence
7 December 2009
Results at a glance:
- Australian rural confidence has slumped following improvements earlier in the year.
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The strength in the Australian dollar had the greatest impact on farm sentiment.
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Confidence weakened in all states, except Victoria, and among all farm types with the exception of dairy where strong improvements were observed.
Australian farmer confidence has fallen as the stronger Australian dollar erodes returns, the latest quarterly Rabobank Rural Confidence Survey has shown.
The rural confidence index is back in negative territory, with more farmers now expecting conditions to deteriorate over the next 12 months compared with those expecting conditions to improve. Rabobank general manager Rural Australia Peter Knoblanche said that the strong rises in sentiment earlier in the year could not be sustained this quarter.
The latest survey – taken approximately a month ago – found 23 per cent of farmers expected conditions to improve in the coming year, down from 28 per cent last quarter. The number of farmers expecting conditions to worsen increased to 37 per cent, up from 25 per cent last quarter.
A comprehensive monitor of outlook and sentiment in Australian rural industries, the Rabobank Rural Confidence Survey questions approximately 1200 farmers across a wide range of commodities and geographical areas throughout Australia on a quarterly basis.
Mr Knoblanche said that despite an improved winter cropping season in most areas, rural confidence slipped back to levels observed earlier in the year.
Sentiment was weaker in all states with the exception of Victoria, with farm incomes expected to be adversely affected by the stronger Australian dollar over the coming months.
"All else being equal, every one cent rise in the Australian dollar against the US dollar strips more than $150 million off the gross value of agricultural production. With near 50 per cent rise in the Australian dollar against the US dollar in the last twelve months, returns to producers have suffered accordingly," he said.
Generally favourable rains had resulted in a good finish to the winter cropping season in most areas, Mr Knoblanche said.
"While there have been some disruptions to harvesting in some areas, the winter grain crop will be an improvement on the past few years," he said.
"It is disappointing that farmers won’t be able to take full advantage of this due to the lower farm gate returns for most commodities."
The Rabobank survey showed that the stronger Australian dollar is having the biggest negative impact on farmer sentiment.
Of those primary producers surveyed who expected conditions to worsen over the next 12 months, 65 per cent cited the rising Australian dollar as a major factor.
"Many of the winter cropping areas around the nation will achieve their best production for a few years with the national crop expected to be at its highest level since 2005," Mr Knoblanche said. "However, the stronger Australian dollar has kept pressure on domestic prices, which has resulted in farm gate returns to many producers being lower than expected."
Since the survey was taken, commodity prices have rallied somewhat, driven by improved market sentiment and a broad recovery in risk appetite. For wheat, gains in international prices and slight downgrades to Australian crop estimates helped support local values, up around $20/tonne in November. That said, these gains will be limited by ample global supplies, sluggish export demand and further strength expected in the Australian dollar.
Market expectations are for the Australian dollar to remain elevated in coming months, supported by ongoing weakness in the US dollar, a widening interest rate differential between Australia and the US, strong commodity demand from China, and a domestic economy shifting back toward trend growth.
Concerns about seasonal conditions also continue to negatively influence sentiment, cited by 33 per cent of survey respondents as a major reason for conditions worsening (compared to 18 per cent with that concern last survey). Mr Knoblanche said while winter grain crops may have improved this year, some areas missed out on winter rainfall and were unable to grow crops. Harvesting has also been adversely affected in some areas by frosts and heavy rainfall.
There is also some concern that the current El Niño event will strengthen and the drier-than-average conditions associated with these events in eastern Australian will extend into next year’s winter cropping season.
Concerns over the direction of input prices have moderated this quarter with 14 per cent citing rising input costs as a reason for the worsening outlook, compared with 26 per cent in the last survey period.
Mr Knoblanche said the moderation in prices for fertiliser and chemicals had contributed to the reduced concern over input prices. "Livestock producers will also benefit from the reduction in feed grain prices," he said.
Farm business performance, investment and income
In terms of farmers’ own businesses, the Rabobank survey found 31 per cent of respondents expected to see improved performance in their business over the next 12 months, compared to 35 per cent last quarter. This is significantly higher than farmers’ expectations of the overall agricultural economy.
The survey also showed little change in farmers’ investment intentions despite the fall in headline confidence. A total of 88 per cent intending to maintain or increase the level of investment in their business, compared with 89 per cent last quarter.
Mr Knoblanche said the stability in investment intentions and farmers’ own business performance indicated an underlying confidence in the sector, with farmers feeling more positive about their own situation than that of the agricultural economy as a whole.
Sugar producers continue to be the most likely to increase their investment in their farm businesses, with no cane farmers expecting to reduce their investment over the next 12 months.
Australian farmers generally reported lower incomes over the past three months, with 41 per cent receiving lower incomes than during the same period the previous year and 26 per cent higher. There is also little expectation of improved incomes over the next 12 months with 28 per cent of respondents expecting higher gross farm incomes in this period and 33 per cent lower.
States
The survey found rural sentiment had weakened in all states, with the exception of Victoria which recorded a significant improvement in confidence.
Mr Knoblanche said the improvement in confidence in Victoria in part was driven by a more favourable outlook for international dairy prices. "In addition, an excellent winter cropping season will result in higher crop production this year and pasture conditions are generally good for livestock producers," he said.
In the other states, confidence has been eroded by the rising Australian dollar and the effect it is having on farm gate returns.
In South Australia, confidence has fallen despite the prospect of the second largest winter crop on record. The lower grain prices have offset the increased yields for many producers.
In Western Australia, Queensland and parts of New South Wales, the problem of lower prices has been compounded by reduced production. "For some producers, yields have been less than was anticipated in the last survey period due to a poor finish to the season. And some have had problems with poor weather affecting harvest," Mr Knoblanche said.
Sectors
Sentiment has deteriorated within all sectors, with the exception of dairy, which recorded a strong improvement in confidence. Dairy farmers have gone from being the least confident to the most confident in one survey period.
Mr Knoblanche said after very low opening milk prices, farm gate prices have improved as the benefits of higher international prices have flowed through to higher farm gate returns. Together with lower grain prices and increased water allocations for irrigators, confidence has improved dramatically.
Sentiment is particularly low among beef producers with a considerable fall in the last survey period.
"Export returns for beef producers have been eroded by the stronger Australian dollar, a reduction in processor demand for cattle and dry weather," Mr Knoblanche said. The prospect of an El Niño event causing drier than average conditions over the next few months in eastern Australia is also adversely affecting outlook among producers in northern Australia.
Confidence weakened among sugar producers, but sentiment remains in positive territory and above the historical average.
International sugar prices have come off their peak and together with the rising dollar producers may have thought things can’t get any better, Mr Knoblanche said. "Despite the easing in sugar producer confidence, prospects remain sound for the sector with prices still very high by historical standards and the potential for improved yields after a faster than expected harvest this year," he said.
Confidence among sheep producers has shown resilience despite a slight fall this quarter. Strong prices for lamb and mutton have continued to underpin sentiment in the sector.
Grain producers reported a substantial fall in confidence in this survey period with the weak price outlook affecting farmers everywhere.
The most robust study of its type in Australia, the Rabobank Rural Confidence Survey has been conducted since 2000 by an independent research organisation interviewing an average of 1200 farmers throughout the country each quarter. The next results are scheduled for release in March 2010.
Rabobank Australia is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and has a AAA credit rating from Moody’s and Standard & Poor's. Rabobank operates in 46 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia is one of the country's leading rural lenders and a significant provider of business and corporate banking and financial services to the Australian food and agribusiness sector. The bank has 52 branches throughout Australia.
To arrange an interview with Rabobank general manager Rural Australia Peter Knoblanche, or for more information on Rabobank’s Rural Confidence Survey, please contact:
Denise Shaw
Public Relations Manager
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Email: denise.shaw@rabobank.com
Kelly Lund
Public Relations
Rabobank Australia & New Zealand
Phone: 02 8115 4861
Email: kelly.lund@rabobank.com
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