Low rainfall forecasts and pressures on global prices will be among the challenges facing the Australian grain industry in 2019, according to Rabobank’s Agribusiness Outlook 2019 report.
Rabobank expects world wheat prices to come under pressure in the second half of 2019.
Coupled with the new Australian harvest supply in the fourth quarter of the year, this will push local prices down, but an above-average base will persist as the local pantry is restocked.
For other grains and oilseeds – in an otherwise favorable outlook – the report says a significant bearish factor lurks for barley, with a Chinese anti-dumping investigation into Australian barley exports weighing on the market. industry, with the potential to disrupt one of the barley industry’s most important trade flows.
Rabobank Senior Grains and Oilseeds Analyst, Cheryl Kalisch Gordon, said with global barley stocks at their lowest for 30 years and Australian stocks extremely tight, local and international support is expected for barley in 2019.
In addition, Rabobank predicts that China – an importer of Australian feed barley in recent years – will need additional feed stocks in the coming years as its corn stocks erode faster than industry expectations.
In addition, while the growth in global beer consumption, including in China, has slowed, China remains a significant buyer of malting barley.
The first announcement of China’s barley anti-dumping investigation, which is authorized 60 days after it opens, is expected in early February.
The announcement could see the imposition of a temporary tariff duty.
Ms Kalisch Gordon said if this came in the range of the temporary tariff duty imposed on US sorghum last year at 178.6%, it would shut down the market.
But the case could also be dismissed.
Either way, the threat of further measures will cast a cloud over what is the largest barley export market for Australian producers.
Australian feed and malt barley prices hit decade highs in 2018, hand in hand with wheat, and on numerous occasions with little or no price differentials.
Pressures on domestic feed grains
Local use of feed grains has boosted demand and is expected to keep prices up, and push prices even higher if we do not see a return to average seasonal conditions.
Western Australia and South Australia will fill the east coast shortfall, so east coast prices will remain high either through scarcity of local supply or by integrating the cost of freight into prices. from the east coast.
The sorghum crop generally helps meet the demand for feed grains in northern New South Wales and Queensland in the first half of the year.
However, the ABARES forecast of 1.4 million tonnes (18% lower than average) will bring only minimal slowdown in the feed grain price complex this year.
Rabobank expects continued high feed grain prices to drive acres of grain up at the expense of acres of canola in 2019.
Overall, Rabobank says Australian agriculture is on the right track, but “headwinds are intensifying” and “downside risks” are substantial in 2019.
The report says Australian agricultural industries are expected to benefit from growing offshore demand and better market access in the years to come, while reaping the benefits of growing investment in the sector.
However, he warns, there are “many cyclical and short-term factors” that are less favorable to Australian agriculture as we head into 2019, including the climate and the global economic outlook.
“And some headwinds are picking up, while the tail winds are easing,” he said.
Continued growth in demand
Lead author of the report, Managing Director of RaboResearch Tim hunt, says the next five years will see continued growth in demand for Australian agricultural products in world markets, with additional boost coming from improved market access.
“Obstacles to China will continue to fall under the FTA and recently negotiated protocols for a range of products, while the trade advantages we will enjoy under the TPP, especially with Japan, will begin to flow. at stake, ”he said.
“In addition to this, the investments that have been attracted to the sector due to these export market opportunities will further strengthen the production and value-added capacity of the sector. “
The prize will be “the friend of the industry”
The report states that other positive factors in favor of Australian agriculture are a weak (and declining) currency, combined with a strong local price base, which guarantees exceptionally high prices in Australian dollars for many agricultural products. keys.
“We predict that a slowdown in the global and local economy, combined with concerns about downside risk, will see Australian exporters benefit from the lowest average annual exchange rate against the greenback in a decade in 2019” Mr Hunt said.
“Meanwhile, the poor grain harvest of 2018 and low herds of oxen and sheep will keep Australian crop and livestock prices higher than usual relative to world prices for most or all of 2019 .
“And with dairy and sugar markets also tightening globally, and wool markets expected to shrink only slowly from record levels, price will be friend of the industry in 2019. “
But Australian agriculture is also facing less favorable conditions on many fronts.
Climatic factors are shaping up to be the “most obvious” problem for the sector in the coming year, according to the report.
“We opened the year with a majority of eastern Australia amid large long-term rainfall deficits,” Mr Hunt said.
“Water storage levels in the Murray Darling Basin are low and pastures are in poor condition in many grazing areas.
“For winter production to return to average on the east coast this season, above-average precipitation will be required in the coming months. Right now, climate indicators are providing mixed signals as to whether this is likely or not. “
At the market level, according to Rabobank, the global economy is starting to slow down after two years of strong and growing growth. Locally, Australian consumers are also facing increasing economic pressures as “house prices on the east coast enter what looks like a major correction, mortgage rates rise and wage growth remains absent”.
Mr Hunt said forecasts for global economic growth – including Rabobank’s – are being reduced to just below average. “While the economic forecast does not look too bad, the language used by economists suggests a level of pessimism that is not yet factored into these numbers,” he said.
“What concerns us most in 2019 is not so much the likely trajectory of the global economy – which is less favorable than in 2018, but not bad – but the risk that something worse could happen.”
This includes the slowdown in the Chinese economy and escalating international trade tensions, according to the report.
“The slowdown in the Chinese economy is of particular concern to Australian agriculture,” Hunt said, with China growing at its slowest pace since 1990 in the last quarter of 2018.
Brexit and the risk of a “catastrophic exit” of the United Kingdom from the European Union are also looming on the horizon.
“A no-deal departure would have a significant impact on two key markets for Australian agricultural products,” he said.
The potential for a worsening or resolution of the US-China trade war also came with its own set of risks.
“These include the consumer repercussions of a possible recession in the United States if the trade war escalates, or a resolution that favors American agriculture at the expense of Australia,” said Mr. Hunt.
Overall, according to the Rabobank Report, if Australia sees a return to “anything close to average precipitation, our baseline scenario suggests that 2019 will bring a decent year for Australian agriculture – with improved production conditions. compensating for what we expect to be somewhat less favorable conditions. “
“But Australian agriculture would do well to take market downside risks into account when planning for the next season.”