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15 February 2007

Australian farmers optimistic despite drought, says new agribusiness index

Seventy per cent of rural Australia's agricultural producers are looking to 2007 with confidence, even after confirmation of the expected weak December 2006 quarter, according to the inaugural Westpac & Charles Sturt University (CSU) Agribusiness Index.

The Westpac & CSU Agribusiness Index, a new quarterly survey providing a detailed national and state-based overview of business performance by primary producers as well as upstream and downstream suppliers in the agribusiness sector, shows that even in those regions most badly affected by drought, such as South Australia's Yorke, Lower East and Eyre regions, farmers are optimistic that production levels will increase once expected Autumn rains arrive.

In addition, more than half (53%) of farmers surveyed felt that the current dry conditions were not as bad as the drought of 2002.

Graham Jennings, Westpac's General Manager Regional and Agribusiness Banking, says the December 2006 Quarter's Index highlights reasons for the agribusinesses sector to be optimistic that when weather conditions improve the industry is poised to regain momentum.

"The Index shows a comprehensive overview of the state of play in Australian agribusiness and the regional breakdowns allow us to really understand how the drought has impacted upon rural communities.

"Crucially it also shows how weather conditions are the most negative influence on business performance and that farmers should feel relief across operating costs, capital expenditure and profit margins should the rains return," Mr Jennings said.

"Westpac's local agribusiness teams are out on properties witnessing first-hand the devastation caused by the prolonged drought. Yet my team are also telling me how rural communities have pulled together to help each other get back on their feet and that resilience amongst the farming community shines through in the Index."

In a one-off question the December 2006 Quarter Index also examined farm financing which showed that 35% of farmers sought finance in the last 12 months, with only 17% of those who sought financing having difficulty obtaining credit. In addition 16% of producers had farm management deposits with 39% of those producers drawing down their deposits during the drought period.

According to Westpac's Senior Agribusiness Economist Justin Smirk the low number of farmers seeking additional financing suggests that agribusiness owners are looking long-term when forming drought survival strategies.

"Of those farmers who did seek finance, some will be looking to invest in business improvements as well as seeking day-to-day capital to manage their seasonal cash flow. The majority of producers are being conservative and cutting costs during the drought period, so we would expect to see production and investment costs lift in the next quarter," Mr Smirk said.

"The results on farm management deposits give us a good idea of producers' sentiments on farm liquidity and how they are using cash reserves. Producers still are tapping into their deposits yet being cautious about managing this. I anticipate that we will see a bigger drawdown as we head towards the cropping season when producers will tap into their liquid assets rather than borrow to better offset risk and capitalise on any potential returns."

Commenting on the research, Tom Murphy, CEO of the Western Research Institute based at CSU, which conducted the survey, said the Index allows Westpac and CSU to partner together to provide valuable economic data for the agribusiness sector.

"More than just a snapshot of the nation's agribusiness producers and operators, the Index allows us for the first time to build an ongoing idea of what is happening at ground-level in rural communities," said Mr Murphy.

"What we are seeing at the moment is very much a picture of expectation amongst farmers who are eagerly anticipating some relief in weather conditions. As such, we are looking forward to the March and June 2007 Quarter reports which we hope will show how farmers are developing their recovery strategies and rebuilding their livelihoods."

The index results measure an Economic Performance Indicator (EPI) for each state based on the average results collected from all regions.

Additional state and territory results from the December Quarter 2006 Index include:

• Western Australia produced a negative EPI of -0.24 with outlooks to the March quarter expected to rise to 0.04. The majority of farmers (56%) considered the 2006 drought to be the same or worse than 2002 and the Central and Upper Great Southern regions were amongst Australia's worst performing regions economically. Yet Upstream and downstream producers both reported above average performance in the December quarter.
• Queensland was the nation's third strongest state after the Northern Territory and Tasmania reflecting a strong export market for Australian beef products buoyed by low competition from US producers in Japan and Korea. With 80% of Queensland farmers confident about 2007 returns, the overall EPI is expected to rise from -0.07 to 0.14 by the March quarter. The Moreton, Fitzroy and South West regions are the state's most drought-ravaged areas.
• Agribusinesses in Tasmania and Northern Territory were least affected by the drought with the nation's top two EPI of 0.07 and 0.16 respectively. Tasmania was the only state in Australia where producers reported positive business performance.
• While New South Wales' Hunter and Murrumbidgee regions suffered from reduced investment and employment, they were among the few regions in Australia to experience a positive December 2006 Quarter. Overall in New South Wales the EPI was -0.12 with good indications for an improved result of 0.01 in the March quarter.
• In addition to drought, severe frosts and bushfires also affected business performance in Victoria in regions such as Goulburn. Gippsland was the country's best performing statistical division with positive business performance and employment, although March quarter outlooks suggest that declining stock levels will slow performance.
• South Australia was the most drought affected state in Australia recording the lowest EPI rating of -0.36 and results indicating that 68% of farmers consider current conditions similar or worse to 2002. State-wide businesses reported increased operating costs and employment levels declined.

The March 2007 Quarter Westpac & CSU Agribusiness index will be released in May.

About the Westpac & CSU Agribusiness Index
The Westpac and CSU Agribusiness Index is a quarterly survey of Australia's Agribusiness sector conducted by the Western Research Institute of Charles Sturt University. A survey is conducted via a phone questionnaire with respondents drawn from the 48 statistical divisions of regional Australia with a mix of both primary producers, and businesses upstream and downstream of the agricultural sector. The December 2006 survey resulted in 1,211 responses.

About Westpac Agribusiness
With over 450 staff in Regional and Agribusiness banking, 140 experienced Agribusiness specialists who are passionate about their work, Westpac is committed to delivering the right solutions for its customers. Westpac's Agribusiness bankers aim to help customers realise their financial goals through initiatives such as Agribusiness One, a new business account designed to ease seasonal cash flow fluctuations and offers greater flexibility in accessing finance; specialist beef and grain packages developed in association with leading industry bodies; drought-relief packages and becoming the first of the four major banks to offer stock leasing options.

About Charles Sturt University
CSU is Australia's leading inland university and largest regional university. CSU has earned a reputation for working hand-in-hand with business, the professions and government to provide industry-based practical courses through professional partnerships and innovative research. CSU is also one of the leading Australian universities for graduate employment.

About Western Research Institute
The Western Research Institute undertakes research and consultancy on economic issues that impact on regional Australia. Research areas include regional aspects of competition policy, finance, trading area development, cost benefit and economic impact analysis, and exports and rural industries. The Western Research Institute is an independent research collaboration between Charles Sturt University, State and Federal governments and community agencies.