Ongoing growth despite headwinds: Rabobank

By: Cat Fitzpatrick

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Australian agriculture on strong path, but 2019 to bring ‘headwinds’ and ‘downside risks’

Ongoing growth despite headwinds: Rabobank
RaboResearch general manager Tim Hunt

 

Australian agriculture is on a strong path, but ‘headwinds are mounting’ and ‘downside risks’ are considerable in 2019, according to a newly-released industry report.

In its flagship Agribusiness Outlook 2019, food and agri banking specialist Rabobank says Australia’s agricultural industries are set to enjoy rising offshore demand and improved market access in the years ahead, while reaping the benefits of growing investment in the sector.

However, it warns, there are "many cyclical and short-term factors" that are less favourable for Australian agriculture entering 2019, including climate and the global economic outlook.

"And some headwinds are rising, while tailwinds are softening," it says.

The report’s lead author, RaboResearch general manager Tim Hunt, says the next five years will see continuing growth in demand for Australian agricultural produce in global markets, with an additional boost from improving market access.

"Barriers to China will continue to come down under the FTA [Free Trade Agreement] and the recently-negotiated protocols for a range of products, while the trade benefits we will enjoy under the TPP [Trans Pacific Partnership], especially with Japan, will start to come into play," he says.

"Added to this, investment which has been attracted into the sector because of these export market opportunities will further boost the sector’s productive and value-adding capacity."

The report says other positive factors playing out in Australian agriculture’s favour are a weak (and falling) currency, combined with strong local price basis, which is ensuring exceptionally-high Australian dollar prices for many key agricultural commodities.

"We expect that a slowing global and local economy, combined with concerns over downside risk, will see Australian exporters enjoy the lowest annual average exchange rate against the greenback in a decade in 2019," Hunt says.

"Meanwhile, the poor 2018 grain harvest, and low beef and sheep herds, will keep the prices for Australian crops and livestock higher than usual compared with world prices over most or all of 2019.

"And with dairy and sugar markets also tightening globally, and wool markets only likely to see a slow retraction from record levels, price will be the industry’s friend in 2019."

Mounting Headwinds

But Australian agriculture also faces less favourable conditions on many fronts.

Climate factors loom as the ‘most obvious’ problem for the sector in the year ahead, the report says.

"We have opened the year with a majority of eastern Australia in the midst of significant long-term rainfall deficiencies," Hunt says.

"Murray Darling Basin water storage levels are low and pasture is in poor condition in many grazing regions.

"For winter production to return to average on the east coast this season, above-average rainfall is required in coming months. At present, climate indicators provide mixed signals as to whether that is likely or not."

At market level, Rabobank says, the global economy is starting to decelerate after two years of strong and rising growth. Locally, Australian consumers also face rising economic pressures as "east coast housing prices enter what looks like a major correction, mortgage rates rise and wages growth remains absent".

Hunt says forecasts for global economic growth – including by Rabobank – are being reduced, to just below average.

"While economic forecasts don’t look too bad, the language economists are using suggests a level of pessimism that is not yet factored into these numbers," he says.

"What concerns us most in 2019 is not so much the likely path for the global economy – which is less favourable than 2018, but not bad – but the risk something worse may eventuate."

This includes the slowing Chinese economy and escalating international trade tensions, the report says.

"The slowdown in the Chinese economy is a particular concern for Australian ag," Hunt says, with China growing at its slowest rate since 1990 in the closing quarter of 2018.

Brexit and the risk of a "calamitous exit" of the UK from the EU was also looming large.

"A no-deal departure would have a heavy impact in two key markets for Australian agricultural products," he says.

The potential of both a worsening or a resolution of the US/China trade war also brought its own set of risks.

"These include flow-on impacts on consumption from a possible US recession if the trade war escalates, or indeed a resolution that favours US agriculture at the expense of Australia," says Hunt.

Outlook

Overall, the Rabobank report says, if Australia sees a return to "something approaching average rainfall, our base case suggests 2019 will bring a decent year for Australian agriculture – with improved production conditions offsetting what we expect will be somewhat less favourable condition".

"But Australian agriculture would do well to consider the downside market risks when planning for the next season."

Commodities

For specific commodities, the Rabobank report finds that for wheat global prices will come under pressure during the second half of 2019. The prevailing factor in global grain markets for 2019 will be US-China trade relations, and this will have implications for Australian grain. Wheat pricing will be affected as US farmers substitute soybeans for more wheat and corn.

Dairy has ongoing pressure on supply chain margins with feed shortages and reduced herds driving down milk production. For irrigation farmers across the southern Murray-Darling Basin, the outlook for water availability presents an ongoing risk. 2019 brings anticipation of a range of initiatives including the Australian Dairy Plan and Mandatory Code of Conduct. 

The outlook is good for grains and oilseeds, but an anti-dumping investigation by China into Australian barley exports has the potential to disrupt one of the Australian barley industry’s largest trade flows. An area to watch, says Rabobank, is the Indian general elections in March/April that could affect pulse production and import policies.

Beef production is down and prices steady as the sector waits for rain. African swine fever will impact global animal protein markets, other protein sources will fill the gap, supporting prices.

Sheepmeat prices are expected to stay strong, but production to ease after a high-slaughter year in 2018. Rabobank predicts a tougher year for the poultry industry whilst pork will continue to be limited by high grain prices.

Sugar and cotton prices are expected to steadily rise, while wool supply will support strong prices, but its demand outlook is uncertain.

Continued growth in wine export values are expected, but more modest than in recent years, with global macro factors bringing potential downside, while horticulture’s strong 2018 performance is likely to continue into 2019.

 

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