Positive signs for Australian agriculture despite falling prices and trade headwinds

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Improving seasonal conditions are encouraging optimism in Australia’s agricultural sector, but headwinds in global trade and falling commodity prices could push export prices down over the coming year.

The predictions are contained in the September agricultural products Australian Bureau of Agricultural and Resource Economics (ABARES) report.

The report found that despite the dramatic improvement in harvest volumes thanks to favorable seasonal conditions, a combination of lower commodity prices, booming supply and reduced livestock sales meant that the gross value of production for all types of commodities is expected to remain static at $ 61 billion for fiscal year 2020-21.

“The value of agricultural production is expected to increase by 17 percent to over $ 32 billion thanks to markedly improved seasonal conditions, particularly in New South Wales,” said Dr Steve Hatfield-Dodds, executive director ABARES.

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The fall in grain product prices was largely due to an increase in global supply, according to Westpac senior economist Justin Smirk.

“[Commodity prices] revolve more around supply, the ebb and flow of supply. These are mostly seasonal conditions – we have had a series of good seasonal conditions around the world and this has led to an increase in supply, ”said Mr. Smirk.

The resulting drop in commodity prices would have an uneven effect on production values ​​across the country, with states like WA, which has benefited from good seasonal conditions in recent years, being the most exposed to price changes.

“This macro photo [of falling values] is okay, but on a micro level, NSW has experienced severe drought in recent years. For the whole country, these farmers who are doing well, they will see the prices fall [but in] those areas that have been in drought for the past three years, they are going to have a much better year, ”Smirk said.

The reduction in animal production can be directly attributed to an effort by farms to replenish their properties after a large herd reduction during drought years, which means fewer animals brought to market.

“Herd rebuilding will also begin to affect overall production, with the value of animal production expected to drop 14% to $ 28.9 billion,” Dr Hatfield-Dodds said.

But the reduction in beef production must be seen as good news, according to Smirk, because it was a sign of increased farmers’ confidence.

“When you enter a drought, animal production increases because everyone is destocking. Now the volumes are down, but they are down because they are restocking. As a result, the activity side, like slaughterhouse rates, is going down, ”Mr. Smirk said.

“If you think about it from a land price point of view, the fact that production is declining is not a bad thing for the land value,” he added.

Export values ​​down
On the export front, the bureau predicts a 10% drop in the value of agricultural exports to $ 43.5 billion in 2020-2021.

Wool prices are expected to fall the most drastically, falling 25% over 2020-2021 (based on export unit values) due to their association with discretionary spending.

Wheat and barley prices will both fall by 21 percent despite a significant increase in the volume of exports, while canola and sugar will fall by 12 percent and 11 percent respectively.

Regarding livestock figures, exports of lamb will fall by 8 percent, mutton by 7 percent and beef and veal by 5 percent.

The reduction in the value of beef exports was likely due to a combination of factors, Smirk said.

“One is the history of prices. Prices have been massively inflated by African swine fever, resulting in increased demand for animal protein. The increase in income also meant an increased demand for beef. What we have seen now is that the cycle has reached its peak, ”he said.

Despite this, Mr Smirk suggested that animal protein outperforms grains over the next six to twelve months.

“[I’d tip] farming or horticulture or wine production because we are probably in the worst phase of the global demand cycle, due to COVID-19, so in the next six to 12 months we will probably see an increase in demand at the start of the economic recovery, ”he said.

“With cereals, they have less distance to travel. We are now in the sweet spot due to the seasonal recovery, but the price outlook is rather mixed, ”he added.

This sentiment is shared by farmers, with 30 percent of beef producers predicting improved trading conditions over the next 12 months, the highest sentiment among any sectors surveyed, according to the latest Rabobank Rural Confidence survey, which reported was completed in August.

Headwind trade

The ABARES report identifies recent trade disputes with Australia’s largest agricultural trading partner, China, as another source of uncertainty for the sector.

Tim Hunt, head of food and agri-food research at Rabobank, said Australian agriculture was at risk of being overexposed to the Chinese market.

“Australia has five [food and agriculture] exports to China which can be worth more than a billion dollars each year. In 2020, China has so far hindered or threatened to hinder three of them – via the removal of accreditation to supply certain ranges of beef products from certain slaughterhouses, the imposition of a duty anti-dumping on barley, and now a threat to impose anti-dumping duties on wine as well, ”Hunt said.

Australian agricultural exports to China hit their highest level in history in 2019-2020, increasing 8% (in value), but the bank predicted that the sector’s exposure to the Chinese market may have peaked.

Mr Smirk said Australia was faced with the question of whether to seek short-term economic gains through China or diversify export markets to reduce long-term risks.

“If you want to manage risk, more diversity might not maximize returns, but it does reduce risk in the long run,” he said.

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