“Making Hay While the Sun Shines” for Australian Agriculture in 2022

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Cheryl Kalisch Gordon, Principal Commodities Analyst at RaboResearch.

In its flagship annual Australian Agribusiness Outlook for 2022, “Making Hay While the Sun Shines”, Rabobank said Australia’s agriculture sector is set to enjoy another profitable year, with the gross value of agricultural output on track for a fourth. consecutive year of growth in 2021/22.

“The second year of favorable prices in Australia and mostly exceptional production conditions in 2021 means that the Australian agricultural industry is well placed to meet the challenges of 2022. More importantly, it means that the industry can prepare when the sun is not shining so brightly. in his favour,” the report said.

RaboResearch’s senior commodities analyst, Cheryl Kalisch Gordon, said there will be some pressure on farm margins in 2022 compared to 2021 – with some heat expected to break out of a range of commodity prices. raw materials, mixed production prospects and supply chain challenges – another favorable year was expected for Australian agriculture.

According to the report, local macro-economic parameters also remain supportive for Australian agriculture: “In particular, we expect the Australian dollar to appreciate only slightly over the course of the year and remain close to its five-year average. .”

Year “blue moon”

As a “once in a blue moon” year for the Australian agricultural sector, 2021 has seen very high prices resulting from global difficulties, coinciding with favorable Australian production conditions.

“There has been a combination of drought and adverse weather conditions in major growing regions of the world, high demand for storage in the face of potential food shortages as well as Covid-induced labor shortages which have had an impact on agricultural products and intensive production transport,” Gordon said.

“It has delivered clouds to agricultural sectors in many parts of the world and a silver lining for Australian agriculture. This second consecutive year of rising commodity prices coincided with once again favorable to very favorable Australian production conditions. And for commodity sectors where production was weaker, high prices still provided highly profitable positions. »

Supply chain and price outlook

While the outlook for 2022 is also positive, RaboBank expects the coming year to bring “less pronounced opportunities” for Australian agriculture.

“We start 2022 with the Australian food supply chain under unprecedented pressure, with supply chain disruptions and bottlenecks being felt at every level – from access to inputs to closes to consumers accessing food on supermarket shelves,” Gordon said.

The impacts on supply chains are expected to persist at least until the first quarter of the year.

“We also expect some of the heat to emerge from the prices of a number of commodities in 2022, as supplies turn over globally, inventory levels increase and as demand tempers,” she said. “However, we expect prices to remain at levels above the five-year average for our major agricultural commodities.”

The Rabobank Rural Commodity Price Index is expected to decline from record highs reached in December 2021 this year, although it is still 5% above the five-year average (and 16 % above the five-year pre-COVID index). average) at the end of the year.

Production

For Australian agricultural production, the outlook is mixed, coming off the high base of 2021 volumes.

“Very favorable seasonal conditions in 2021 – and in some cases record rainfall – have provided a beneficial start to 2022 for crop and pasture prospects, helped by good soil moisture,” Gordon said.

“Having said that, at this stage we cannot expect a repeat of the record grains and oilseeds harvest we experienced for the 2021/22 season. Although for livestock, we expect a year-on-year increase in the number of cattle and sheep slaughters, given the prolonged period of good seasonal conditions we have seen in most regions, which allowed some replenishment of stocks.

Milk production is also expected to increase, but only in the second half of the year, according to the report, while 2022 cotton production is expected to continue to increase, to see an 85% increase over the previous year. last year.

World challenges

While 2021 has had its share of challenges, 2022 will also bring headwinds to Australia’s agricultural sector, according to the report.

This will include the continued impacts of COVID-19, as the world grapples with the surge of Omicron and “the prospect of Rho, Sigma or Tau delivering the next blow”.

Another aspect is the ever-present challenge of inflation, which continues on one of the strongest rises in 30 years, Gordon said.

“Furthermore, we expect a global policy tightening around the economic stimulus measures that have been put in place during the pandemic, which will be designed to moderate demand,” she said.

“Getting the policy settings on reducing stimulus and managing inflation will be key to maintaining economic growth and consumer demand in many economies, and failure to do so could dampen demand in some. of our markets for certain purchases, in particular the most discretionary ones.”

Ongoing supply chain issues and geopolitical tensions also pose significant challenges for agricultural markets in 2022, according to the report.

“Dry bulk freight rates have fallen significantly from their 11-year highs in 2021, but still remain high on several routes,” Gordon said. “Container rates remain close to recent highs, and we expect global trade to continue to be affected by issues, particularly related to boxed freight, in 2022.”

In terms of geopolitical considerations, the tight global market for agricultural commodities had shielded Australia from the impact of losing China as a buyer in 2021.

“However, as markets ease, we expect Australia to need to redouble its efforts to diversify into alternative destinations,” Gordon said.

At the same time, there is also the potential for market spillovers from the ongoing tensions between Russia and Ukraine, which could “cause exaggerated volatility in markets ranging from wheat to oil and fertilizers,” according to the report.

Other challenges include still high agricultural input prices (although down slightly in the second half of the year) and persistent labor shortages.

And after?

The report says that with Australian agriculture positioned for another positive year ahead, it presents an ideal opportunity for the sector to prepare for future times when “the sun is not shining so strongly in its favour”.

According to Gordon, this included preparing for increased pressures on margins (when world prices fall and Australian agricultural yields are under pressure), diversifying markets and trading relationships, and equipping agricultural businesses for future droughts and climate change.

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