2016 is shaping up as a brighter year for Australian agriculture, with overall improved trading conditions predicted for the year ahead, according to a just-released industry report.
In its Agribusiness Outlook 2016, global agricultural banking specialist Rabobank says further depreciation of the Australian dollar will act as a “tail wind” for Australian agriculture, while low oil prices will help ease input cost pressures but are also likely to weigh on agricultural commodity prices.
China will remain a potential downside risk to the outlook however, with any further weakness in the Chinese economy likely to have widespread consequences on the demand for Australian agricultural exports.
Other key “swing factors” expected to impact Australia’s agricultural industries, both positively and negatively, in the year ahead include the dissipation of the El Nino weather pattern and global financial market volatility.
The report finds the outlook is positive for most agricultural sectors, with prospects remaining particularly bright for beef and sheep producers, while there is upside for cotton, sugar, dairy and wine.
Releasing the report, Rabobank Australia national manager Country Banking Todd Charteris said 2016 was shaping up to be a more promising year for Australian producers, after 2015 “presented a host of challenges” led by the strong El Nino which hindered production prospects – particularly the winter grain crop.
“After enduring a hot and dry year, it looks as though 2016 is shaping up to be more favourable for producers, with expectations of wet, cooler weather as we transition to more neutral conditions in coming months, and face the prospect of a La Nina weather pattern developing in the second half of the year,” Mr Charteris said.
“Further depreciation of the Australian dollar, which is expected to drop to 64US cents by the end of the year, will also be a boon for producers – particularly for those commodities at historically low levels in US dollar terms - such as grains and oilseeds.”
The report – produced by Rabobank’s Food & Agribusiness Research unit – highlights that while the weak Australian dollar will continue to lend considerable support to Australia’s agricultural sector, currency movements in other key exporting nations will also have an impact on Australia’s global competitiveness.
Rabobank general manager Food & Agribusiness Research Tim Hunt said there had been significant devaluation in the currencies of Australia’s key global competitors, which had muted market signals by encouraging production of agricultural commodities in some regions despite high global stocks and falling USD prices.
“For example, the Russian ruble has depreciated by around 50 per cent against the US dollar since the beginning of 2014, compared to a 20 per cent depreciation in the Australian dollar over the same period,” he said. “This has helped to underpin returns for Russian wheat producers despite US prices remaining under pressure. And we’ve seen a similar dynamic in the Brazilian sugar sector.”
Lower oil prices are also expected to have widespread implications on the agricultural sector, the Rabobank report notes.
“There appears to be limited upside for oil prices in the first half of 2016, with only a weak recovery likely to follow towards the end of the year as markets rebalance,” Mr Hunt said.
“Weak oil prices will exert a negative influence on agricultural commodity prices in 2016, via reduced costs of production and freight to market, pressure on biofuel prices and cheap synthetic fibres.” he said. “While the current oil price environment does help stimulate consumer spending, the positive impact is likely to be partly offset by slow global wage growth.”
The Chinese economy and overall financial market volatility are also expected to present downside risks to the outlook for the agricultural sector in 2016, the report cautions.
“China’s government policy and economic development is entering a pivotal stage this year, as it continues to steer its economy towards a more consumer-based growth model,” Mr Hunt said. “But while the challenges there are mounting, the Chinese economy is expected to maintain sufficient momentum in the near-term.
“We are also in for a bumpy ride in terms of financial markets and, with it, the real risk of contagion to commodity markets and disruption to the real economy.”
In light of the broader macroeconomic outlook, Mr Hunt said market fundamentals were bullish for sugar and cotton, compared to the subdued market conditions last year, and to a lesser extent dairy, with an anticipated lift in global dairy markets towards the latter half of 2016.
“Sugar prices are expected to be supported by the first global production deficit in six seasons, while the cotton market is also set to tighten – with both sectors also key beneficiaries of the weaker Australian dollar,” he said.
Mr Hunt said the outlook remained strong for beef and sheep, while grains and oilseeds prices continued to be range-bound given large global stocks and sluggish demand growth.
“That said, Australian wheat prices will remain underpinned somewhat by the weakening Australian dollar and strong domestic demand, however the basis (margin) between Australian and global wheat prices is expected to ease slightly as we move through 2016,” he said.
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 115 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 operates in 40 countries, servicing the needs of approximately 8.8 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading rural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
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