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Getting down to agribusiness

What changes in agribusiness can Australian producers expect in 2015 and how can they best be managed?

Words: Mark Story

The outlook is positive for a buoyant agribusiness sector in 2015, according to Trish Gleeson, Senior Economist at ABARES.

At face value, forecasts by ABARES don't paint the rosiest outlook, with farm export earnings predicted to fall by 7.7 per cent in 2014-15 after rising 8 per cent in 2013-14. But, given that the 2013-14 year was extraordinary for prices and volume within key pockets, notably livestock exports, Gleeson says Australia's agribusinesses have held their own remarkably well.

This is despite a number of undesirable factors, such as the impact of declining production and export volumes on farmgate income due to drought, a macro-economic headwind, pressure on prices from increased offshore production and the adverse effects of geopolitical tensions in Eastern Europe and the Middle East.

Assuming ABARES' forecast of $37.9 billion in farm export earnings for 2014-15 is right, in real terms this would still be 7 per cent above the average of $35.5 billion over the past decade to 2012-13. Gleeson expects higher export prices in 2014-15 for beef, wool and sheep meat to offset lower prices for wheat, cotton, barley, sugar and dairy products.

ABARES is forecasting a 5.3 per cent drop in total farm production for 2014-15. Within its Agricultural Commodities publication (September 2014), ABARES research attributes the expected fall in winter crop production (wheat, barley and canola) to unfavourable seasonal conditions in some regions, the impact of an expected 12 per cent fall in average wheat yield across all states, plus China's increased domestic production.

This is expected to see the gross value of crop production fall 11.4 per cent in 2014-15, following a 6.1 per cent rise a year earlier. Meanwhile, increased global supplies are also expected to place downward pressure on grains and oilseeds.

Changes and drivers

Tony Mahar, General Manager of Policy at the National Farmers' Federation, says the softening of the Australian dollar will provide some timely relief to average farm incomes. As the American economy continues to strengthen, ABARES forecasts the Australian dollar is likely to average about US$0.90 in 2014-15. Mahar suggests it could be timely for farmers looking to invest in new productivity-enhancing technologies to lock them in before rates rise, although the individual circumstances of each agribusiness are different.

Gleeson also regards the falling of the Australian dollar as a net positive. Despite it being offset by input costs and weakening commodity prices, notably for wheat, cotton, barley, canola, cheese, and skim and whole milk powder, she estimates that a
 

" Sustained depreciation of the Australian dollar by US$0.01 might improve farm sector income by $200 million annually. "
 

This depreciation should especially be welcomed by cattle and grain producers, who have been hit by the double whammy of drought and lower global demand.

ABARES' seasonal outlook is neutral, but Gleeson says timely rainfall will be critical for realising forecast wheat and livestock production in northern NSW, Queensland and parts of SA. She says if seasonal conditions fail to improve in the major cattle-producing regions in the near future, the average saleyard price for 2014-15 will likely be lower than forecast.

Mick Keogh, Executive Director of the Australian Farm Institute, also expects cattle and grain producers to be more acutely exposed to future interest rate movements. However, he dispels the notion of a wholesale debt crisis across the agriculture sector.

Australian Bankers' Association figures suggest that rural sector debt owed to banks has increased by an average of just 1 per cent over the past four years, which Keogh says is the positive result of producers preventing debt levels from spiralling out of control, thanks to lower inputs, advanced debt repayment and better efficiencies. Given the increased likelihood of an interest rate hike in the first quarter of 2015, Keogh says some farmers may be considering switching from a variable to a fixed-rate loan.

Key externals

Australian producers should keenly watch what happens to ongoing demand for agricultural production in China, a market on which many parts of the sector are increasingly reliant, says Keogh.

According to the International Monetary Fund's latest World Economic Outlook report (October 2014), China's GDP growth is expected to soften from 7.4 per cent in 2014 to 7.1 per cent in 2015.

"We expect increased demand for food from China, India and Indonesia as more people enter the middle class," says Keogh, "but their commitment to accelerate domestic production-especially in China, the third most significant destination by value for Australian wheat-has major implications for agricultural product demand globally.

"Increased growing programs around the world should dispel any notion that we have this market to ourselves," he says. "China, for example, will increase its wheat harvest in 2014-15 by 2.5 to 3 per cent."

Regarding other Australian export markets, Russia's one-year embargo on selected Australian produce-due to sanctions for its actions in eastern Ukraine-will compromise about $400 million in exports. However, this loss should be offset by the revival of the live cattle trade to Indonesia.

Interestingly, Keogh says Russia's decision to export less of its own grain, in response to banning imports from some markets, should be a net positive for global markets, including Australia.

Key ABARES forecasts for 2014-15

Source: ABARES 'Agricultural Commodities: September quarter 2014', daff.gov.au

Export earnings

  • Farm export earnings are expected to fall by 7.7 per cent to about $37.9 billion. In real terms, this is still about 7 per cent above the 10-year average to 2012-13.
  • Livestock exports (meat, live animals and dairy) are expected to hold up well, falling only 1.1 per cent after a 22.6 per cent rise in 2013-14. This is attributed to a forecast decline in cattle and sheep turn-offs as producers hold onto stock in response to improved seasonal conditions.
  • Export earnings are forecast to increase for lamb (up 2 per cent), live feeder/slaughter cattle (up 7 per cent) and live sheep (up 24 per cent).
  • Lower export prices are forecast for wheat (down 8 per cent), barley (down 42 per cent) and cotton (down 29 per cent).
  • Total crop export earnings are expected to fall by 13.1 per cent to $19.8 billion.

Production

  • Total volume of farm production is expected to fall by 5.3 per cent, returning to 2012-13 levels; however, this is still 9.3 per cent above the 10-year average to 2012-13.
  • Gross value of farm production is forecast to fall by 5.7 per cent to about $50.3 billion, following an estimated increase of about 10 per cent in 2013-14.
  • Crop production is expected to fall by 7.9 per cent.
  • Livestock production is expected to fall by 2.1 per cent.