|
Promising outlook for Australian farmers
post-drought - Industry report
29 January 2007
Australian farmers will be well positioned to take advantage
of a positive global environment in 2007, once they emerge
from the effects of the current drought, according to a recently-released
industry report.
While acknowledging much of Australian agriculture has begun
the year in the grip of severe drought, in its annual Australian
Agriculture in Focus report, the world's leading food
and agribusiness bank Rabobank says a return to just average
seasonal conditions could see 2007 hold reasonable prospects
for Australian agribusiness.
"Climatic conditions will remain the dominant concern
over the coming year, however not everything is working against
the sector," the report says. "The global and the
local economy remain strong, providing solid support for demand
growth, while agricultural commodity prices are also generally
high."
As with 2006, when drought dominated the Australian agricultural
scene, seasonal conditions will again be the most important
determinant of prospects for the sector in 2007, the report
says. Decent autumn rains will be crucial to many farmers.
Head of Food & Agribusiness Research for Rabobank Australia
& New Zealand Bill Cordingley says for many sectors, it
will be the March/April period that determines their production
prospects in 2007.
"A decent autumn break, and typical rainfall patterns
thereafter, would enable production levels in the cropping
sector to recover quickly, with the potential to return to
a normal harvest by the end of 2007," he says. "While
recovery will be slower for the livestock sector, given the
time lags inherent in rebuilding culled herds, improved pasture
growth would also provide some immediate benefits to most.
"Once producers are able to finally emerge from the
effects of drought, they should find a positive global market
for agricultural products in 2007."
Economic growth
The Rabobank report says solid, if somewhat slowing, global
economic growth should continue to underpin rising demand
for most agricultural commodities.
"While high oil prices, rising interest rates and various
localised factors will moderate global growth to some degree,
the World Bank's forecast of 3.2 per cent global GDP growth
remains above the long-term average," Mr Cordingley says.
"The prospect of robust growth in developing economies
in particular is important as rising incomes in these countries
are a key driver in consumers purchasing food and fibre products."
The signs are also positive for the local Australian economy.
Commodity prices
A favourable outlook for global rural commodity prices is
another positive for Australian agriculture, according to
Rabobank.
"Strong global demand for agricultural commodities is
at present coinciding with poor climatic conditions in many
key producing regions around the world," Mr Cordingley
says. "As a result, export prices are generally above
long-term averages for most rural commodities, with grains,
oilseeds, meat and dairy prices very high in historical terms.
"Conditions are expected to continue to underpin generally
firm pricing for many rural products in 2007."
On the down side for agricultural producers, some factors
driving the current high prices for their products on world
markets are also responsible for higher input costs for their
businesses.
"In particular, strong growth in China and the world
more generally is also contributing to higher prices for oil,
freight and fertiliser," Mr Cordingley said. "High
oil prices, in turn, continue to underpin pressure on the
cost of derived products, including diesel and plastics."
Trade
The report predicts that 2007 should see progress in the
development of bilateral and regional trade agreements.
Australia will continue to negotiate trade agreements with
China, Malaysia and the Gulf Cooperation Council (GCC) states
of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United
Arab Emirates in 2007. In December 2006, it was also announced
that free trade negotiations would begin with Japan and that
a joint study would commence with South Korea looking at the
possibility of a future free trade agreement (FTA). Work also
continues on an ASEAN-Australia-New Zealand FTA.
"The trade outlook under these agreements is positive
if they can be successfully concluded and if agriculture is
included," Mr Cordingley says.
"The emphasis and renewed commitment to bilateral and
regional agreements should mean that significant headway will
be made this year leading to improved agricultural trade outcomes
beyond 2007."
Food retail
Australian consumer spending on food is expected to continue
to grow in 2007, continuing the trend witnessed in 2006, according
to the report.
Australia's retail food market proved vibrant throughout
2006, delivering strong sales growth. Food sales grew by more
than five per cent throughout the year (measured in dollar
terms).
"A significant part of this growth reflects the increase
in food prices seen throughout last year," Mr Cordingley
points out. Food price inflation reached almost 10 per cent
in the September quarter of 2006, driven by a cyclone-induced
leap in banana prices, as well as strong rises in the price
of dairy, bread and cereals, snacks, soft drinks and fats
and oils.
The report says the nature of food price inflation will change
substantially in 2007. While the price of bananas has already
fallen as supply has begun returning to the market, the ongoing
drought, along with strong global demand for rural commodities,
is expected to exert upward pressure on prices for many other
food items.
While any further interest rate rises have the potential
to dampen Australian consumer spending in 2007, the report
says, it is unlikely that food retail sales growth would be
severely curtailed given other economic factors in place.
"On balance, the Australian economy looks set for another
year of solid growth in 2007, laying the foundation for continued
growth in demand for agricultural products at home,"
Mr Cordingley says.
Australian Agriculture in Focus 2007 - Sector
Summaries
Beef
Global demand for Australian beef is expected to remain strong
this year, continuing the trend seen through 2006.
However, the sector has moved into 2007 significantly impacted
by the effects of drought. Higher-than-usual slaughter rates,
particularly of cows, in response to the dry conditions and
resulting lack of pasture and cost of feed are expected to
result in a fall in the herd in 2007. Beef production and
exports are also expected to fall due to the reduced supply
of animals for slaughter next year.
Despite strong global and local demand, the continued dry
conditions also saw cattle prices finish 2006 down, with large
numbers of animals turned off to market as producers struggled
to provide feed and water for their stock.
Global export market conditions have, however, remained positive
for the Australian industry. Demand from two of Australia's
largest beef export markets, Japan and Korea, continued to
be strong. Major competitor the United States failed to gain
a foothold in these markets during the past year, despite
the lifting of BSE-related bans on their product. Australian
exports to Russia also increased significantly, while the
US itself remains a large customer for our beef.
Lamb
Assuming a break in the dry conditions, the outlook for lamb
in 2007 also looks positive, with global demand expected to
remain strong.
Lamb-producing states have been particularly impacted by
harsh seasonal conditions in Australia. Reduced feed and water
availability and high feed grain prices resulted in increased
turn-off of lambs for market. October 2006 saw the highest-ever
monthly lamb production. Drought resulted in lamb prices falling
in the second half of 2006, with dry conditions seeing an
increased number of lighter lambs entering the market.
Demand for lamb remained robust in both domestic and overseas
markets in 2006, with Australia continuing to be the largest
single market for our lamb. Global demand was also strong,
with increased exports to a number of destinations, including
Australia's largest lamb-export market, the US. Rising export
levels also saw Japan, not widely considered a natural lamb
market, finish the year as the second largest importer of
Australian lamb.
Despite the ongoing effects of current drought conditions,
there is expected to be a good supply of lambs in early 2007,
although autumn rains would result in some tightening of supply
and increased prices. Lower lambing due to drought will also
impact in the latter half of the year and production should
struggle to reach 2006's record levels.
Dairy
Dairy market fundamentals are expected to remain positive
at both global and local levels for at least the next 12 months.
Frustratingly, however, the current drought has put industry
profitability and growth on hold for the time being.
The prevailing combination of robust growth in global demand
for dairy - led by Asia, the Middle East and Latin America
- along with weak growth in the world's dairy export supplies
is expected to underpin high export prices for the commodity
in 2007. Dairy also continues to enjoy enviable consumption
growth in the Australian market.
However, the majority of Australian dairy producers will
face an extremely challenging finish to the 2006/07 season
as irrigation water allocations are used up and feed remains
scarce and expensive.
The prospects for the industry in the 2007/08 season will
rely heavily on the arrival of a decent autumn break in dry
conditions.
Grain & Oilseeds
Weather and politics provided an unfolding and, as yet, un-resolved
grain-based drama during 2006.
The 2006 winter growing season was severely hampered by lack
of rainfall. As a result, grain growers faced significant
difficulties in sowing, establishing and growing crops. Recent
forecasts from ABARE suggest Australia's total grain crop
will decline, in volume terms, by more than 60 per cent in
2006/07. Wheat export volumes are forecast to decline by 75
per cent. In addition, low pasture availability has resulted
in farmers increasing their use of grain to maintain livestock.
The industry also finished the year in a position of uncertainty
in regards to the future of the wheat export single desk,
with full resolution of wheat marketing issues likely to take
some time. Following the final report from the long-running
Cole Inquiry in November 2006, the Federal Government announced
the Minister for Agriculture would take control of the 'right
of veto' over export wheat, pending three months of consultation
and review.
The combined impact of drought in Australia, poor weather
in a number of other countries and the increasing use of grain
and oilseeds for industrial purposes, including biofuels,
has resulted in the prices of a number of grains reaching
long-term highs.
The outlook for 2007 wheat prices is difficult to call. Global
wheat consumption has outstripped production for several years
and additional demand from biofuels is strong and growing.
However, there are also moves underway to sizeably expand
growing areas in 2007, providing a boost to global production
capacity.
Wool
2006 saw a much-needed recovery in wool prices, which had
been in decline since mid-2004. Prices have responded to both
concerns over declining Australian production due to drought
and to signs of demand growth in a number of export markets,
including Asia and Europe, due to low pipeline stock levels
and strong retail sales.
Production in Australia, which supplies nearly a quarter
of the world's wool, is forecast to fall to a 20-year low
of 421,000 tonnes in 2006/07. The two-largest wool producing
states, Western Australian and New South Wales, are expected
to see the largest falls, with production down by 15 per cent
and 10 per cent respectively. A reduction in numbers of animals
shorn and a fall in the wool yield from each animal due to
drought are the major reasons behind the decline in production.
While the recent recovery in wool prices is a welcome change
of fortune, it will take sustained increases in price through
2007 and beyond to encourage many former wool growers to return
to the industry with any conviction.
Cotton
Of all the agricultural commodities Australia produces, cotton
is probably the worst affected by drought in the 2006/07 season.
While some sectors have been supported by higher prices during
the dry conditions, cotton has suffered the double whammy
of low, stagnant prices and significantly lower production.
The area sown to cotton in Australia is forecast to decline
by 55 per cent to around 150,000 hectares in 2006/07, the
smallest area sown to the crop in 20 years.
Global market fundamentals appear to provide a more positive
outlook for the future, however, with global consumption expected
to outstrip production this year. In the longer term, global
demand is forecast to grow at three per cent per annum until
2010, driven by developing Asian nations. Production growth,
however, is limited by land scarcity and competition from
other crops. In addition, higher energy costs are making competing
synthetic fibres more expensive for consumers. Looking towards
2007/08, these factors should provide some positive news for
prices.
Horticulture
2006 was a tough year for Australian horticulture, with many
issues which impact production and sales squeezing the sector.
Despite the resilience of the industry, it looks as though
2007 could bring more of the same.
Extreme climatic conditions late in 2006 - including drought,
reductions to water allocations, hail and frosts - have severely
impacted many horticultural sectors and limited production
capabilities.
The Australian dollar has maintained its strength against
the major currencies, placing pressure on the competitiveness
of Australian horticultural products in overseas markets.
With imports of vegetables still on the rise, particularly
frozen and processed, Australia has become a net importer
of vegetables to the value of some A$125 million.
Overall conditions experienced in 2006 look set to continue
well into 2007. Consolidation seen within the industry in
recent years will inevitably continue. However, these tough
conditions will provide opportunities for some players who
are able to achieve greater efficiencies in production and
economies of scale.
Sugar
Volatile and unpredictable are the words that best described
the past year for the Australian sugar industry.
While most of Australian agriculture has suffered through
drought, 2006 was a wet year for a number of cane-growing
regions in northern Queensland. As a result, the harvest and
crush were slower than usual and there is likely to be some
negative impact on the sugar content of cane. Cyclone Larry,
which hit the coast of Queensland in March, also caused significant
damage to cane and infrastructure. Cane quality and quantity
were affected and recovery will take some time.
Sugar prices have fallen significantly from the 25-year record
highs experienced in February 2006, but have remained within
a range that can still provide decent returns to the Australian
industry.
Looking forward, global production capacity appears to be
on the increase. After several poor seasons, production has
rebounded significantly in a number of major sugar-producing
countries - India, Thailand, China, Pakistan and Brazil. In
addition, 2006's substantial increase in the price of raw
sugar has encouraged a strong production response in both
traditional exporting and importing countries.
The short-term outlook for global sugar production and prices
will, as always, be influenced by the weather. While at this
juncture, the world sugar balance appears to be entering a
period of surpluses and growing stocks, future price volatility
is likely.
Wine
After the record vintages of 2004 and 2005, 2006 was another
bumper vintage, the second largest on record. This placed
considerable pressure on prices and resulted in many grapes
being dumped or left on the vine.
However, the 2007 vintage is looking somewhat smaller than
anticipated, hampered by severe frosts and drought.
The expected decline in 2007 production should help bring
supply and demand closer towards equilibrium, and help underpin
grape prices this year.
On the global scene, oversupply will continue for the foreseeable
future as many of the European producers experienced strong
vintages in 2006. This will maintain the highly competitive
environment and place downward pressure on global wine prices.
Despite the tough conditions, large parts of the Australian
wine industry remain strong and well placed to benefit from
any unexpected strength in global wine prices.
Rabobank Australia 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, in recent years, has twice been awarded
the title of the world's safest bank by Global Finance magazine.
Rabobank operates in 38 countries, servicing the needs of
more than nine million clients worldwide through a network
of more than 1500 offices and branches. Rabobank Australia
is one of Australia'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
46 branches throughout Australia.
Contact
For further information please contact Denise Shaw, Public
Relations Manager (Tel: +61 2 8115 2744) or email on sydney.pr@rabobank.com.
back to top
|
