What the experts are saying about 2020

By: Andrew Hobbs

Presented by

Australia’s farm production will fall for the third consecutive year in 2019 – and farmers, economists and dealers are expecting a difficult year ahead

ABARES acting executive director Peter Gooday
ABARES acting executive director Peter Gooday

Australian farms will produce roughly 1 million tonnes less of grains in 2019–2020 – a 3 per cent fall to 29.24 million tonnes following an unexpectedly hot and dry spring, according to the Australian Bureau of Agriculture and Resources Economics and Sciences (ABARES).

Released in December, the Australian Crop Report forecast is 13 per cent down from the Bureau’s production forecast in September 2019 – reflecting bad news for Australia’s winter crops.

ABARES acting executive director Peter Gooday says bad spring weather in Western Australia and southern New South Wales was behind the fall, which is the third consecutive year the total volume of agricultural production has fallen – a trend which has not occurred for more than 60 years.

"[Total] forecast winter production is around 27 per cent below the 10-year average to 2018–19 and is set to fall for the third consecutive year since record-high production was achieved in 2016–17," Gooday says.

"High fodder prices and unfavourable seasonal conditions caused some crops planted for grains and oilseeds production to be cut for hay in regions with low levels of soil moisture at the beginning of spring."

CRUEL SUMMER

In its latest three-month rainfall outlook, the Bureau of Meteorology says summer rainfall will be below average in most parts of Queensland and northern New South Wales – which Gooday says will likely have a knock on effect on grain sorghum and cotton crops.

ABARES forecasts that grain sorghum production will more than halve to 398,000 tonnes, the lowest on record, while cotton production is forecast to fall by 63 per cent to around 177,000 tonnes of lint and 251,000 tonnes of cottonseed.

"A combination of the unfavourable summer outlook and very much below average levels of soil moisture at the end of spring means summer crop production is forecast to decline by 52 per cent to around 1.2 million tonnes, which is 69 per cent below 10-year average to 2018–19," Gooday says.

"Fodder availability is likely to be higher in 2019–20 than last season and prices are expected to fall, but they are likely to remain well above average – a poor summer crop could add pressure to prices later in the year."

ABARES says it is too early to tell whether poor seasonal conditions will extend into the 2020–21 winter crop planting window of May to July 2020, particularly in New South Wales and Queensland.

"With a delayed northern wet season, an optimistic scenario is that sustained improvement in seasonal conditions from autumn 2020 will gradually replenish soil moisture levels, water storages and pastures during the winter and spring of 2020," it says.

"However, if drought continues, national crop production and exports are likely to fall for a fourth consecutive year."

Australia's cattle herd is forecast to reach its lowest level since the early 1990s - Picture courtesy of Alamy

ON THE SHEEP’S BACK

Higher prices for livestock products have helped to keep the value of Australia’s total agricultural production high at $61 billion, Gooday says, despite it being a 3 per cent drop on the prior year.

In its latest commodities report, ABARES predicts the livestock sector will make up 53 per cent of Australia’s total agricultural gross value in 2019-2020 – the first time this has happened since 1990–91 when the Wool Reserve Price Scheme collapsed.

"We’re expecting to see higher prices year-on-year for cattle, sheep, lambs, pigs and goats, which will partly offset the decline in production," Gooday says.

That said, with numerous drought-affected Australian cattle producers de-stocking their properties, Australia’s cattle herd is forecast to reach its lowest level since the early 1990s.

With fewer animals available for slaughter, livestock production and exports are forecast to fall, and Gooday says rebuilding Australia’s cattle herd and sheep flock will take between five and 10 years to recover.

"While cropping can be expected to rebound quickly once seasonal conditions improve, the livestock sector will require a longer period for pasture to recover and begin herd rebuilding," he says.

Should the drought conditions continue into next year, ABARES predicts that the higher prices and lower pasture productivity could increase the number of animals finished in feedlots, potentially fed using imported feed.

"However, such a change is likely to be temporary, and as pasture growth conditions improve the livestock production system would return to one based primarily on Australia's comparative advantages in extensive, low cost grazing," it says.

Rabobank senior animal proteins analyst Angus Gidley-Baird says global demand will keep local beef and lamb prices strong, adding that prices were unlikely to experience a large downside as there was "simply not the volume of stock in the market to drive any big crash in prices".

"There is considerable upside potential for prices, given livestock inventories for both sheep and cattle are at their lowest levels in over 20 years," he says. "And it is this low stock availability that will see the market remain highly sensitive to substantial rain events.

"In this environment of really strong global demand, we have seen, for example, US beef import prices hit record levels at over $8/kg for lean trimmings, but there is simply not the product to send over to take advantage of these high prices," Gidley-Baird says.

Rabobank commodity analyst Charles Clack
Rabobank commodity analyst Charles Clack

UNCERTAINTY PREDICTED

ABARES predicts Australian wheat production in 2019–2020 will be down 8 per cent on last year to around 15.9 million tonnes and canola down 4 per cent to about 2.1 million tonnes – both 35 per cent below their 10 year average.

Reduced production will result in lower exports, with ABARES forecasting the value of agricultural exports forecast to fall by 8 per cent to $45 billion in 2019–2020, also due in part to Australian grain being diverted from exports into the domestic market for feed and human consumption.

Transhipment of grain from Western Australia for use as domestic feed on the east coast is expected to continue, albeit in smaller volumes, and imports of Canadian milling wheat are also believed likely to continue in 2020.

ABARES also predicts that domestic prices for wheat and barley will remain elevated and above export parity in 2019–2020, with world prices to fall in light of positive grain growing conditions globally.

Cheryl Kalisch Gordon, senior grains analyst for agricultural banking giant Rabobank, puts the Australian export parity price at between $285–$290 per tonne for the 2020 harvest – based on current expectations on the value of the Australian dollar.

"For barley, global markets will be weighed down by growing stocks and subdued demand from China, while the soybean and palm oil outlooks lend support for upside in global canola pricing over the next 12 months," she says.

In its Agri Commodities Research Outlook 2020, released in December, the bank says farmers across the world will operate in a period of uncertainty after years of relatively low prices.

"Wheat prices are expected to remain supported during the coming months, as Australia’s disastrously low crop gets harvested and the market fears for export challenges from Argentina after a change in government," the report says.

"However, record global stock levels are expected by the end of 2019/20, and any price increase will be capped as long as the global corn market doesn’t also bring serious price excitement to wheat."

As far as commodities go, Rabobank was most bullish about sugar, which it said should see "substantial support going forward, as global supply tightens due to a large drop in Indian output".

Rabobank commodity analyst Charles Clack says the bank sees Australian sugar prices moving above $450/tonne in 2020, with depreciation of the Australian dollar (against the US currency) and the rise of global prices assisting local growers. 

For Australian cotton, he says, new season production appears particularly tight – with between 760,000 and 800,000 bales forecast to be produced. 

"This will keep domestic supplies tight, basis relatively strong and prices above the $550/bale level, approaching $600/bale in late 2020," he says.

Rabobank senior animal proteins analyst Angus Gidley-Baird
Rabobank senior animal proteins analyst Angus Gidley-Baird

SURPRISE CONFIDENCE

In light of these statistics and predictions, it may not surprise readers to learn that sentiment in Australia’s agricultural sector is at a 15-month low.

The latest quarterly Rabobank Rural Confidence Survey, which interviews an average of 1000 primary producers every quarter, found 41 per cent – more than two in every five people surveyed – expected conditions to worsen in the coming year.

Rabobank Australia CEO Peter Knoblanche says the drought was the primary reason for farmers expecting economic conditions to worsen in the year ahead – particularly in NSW where the rate was 99 per cent.

"Despite some parts of New South Wales, such as Bourke in the far west, recently receiving their best rain in years, it was far from drought-breaking," he says.

"Some rain had also since reached drought-stricken areas in northern New South Wales and the New England, but the overall dry conditions there are largely unprecedented."

Across the nation, only 17 per cent of farmers surveyed had a positive outlook on the year ahead – down from 25 per cent in the September survey, while 31 per cent expected things to stay the same.

In Queensland sentiment remained relatively unchanged despite one of the worst droughts on record, which Knoblanche says reflects how long farmers have been enduring drought there – up to seven years in parts.

He added that while seasonal concerns had dented confidence in WA, SA, Victoria and Tasmania, Knoblanche said many living there had optimistic investment plans for the year ahead.

The survey showed with 19 per cent of farmers plan to reduce their on-farm investment in the next 12 months – up from 14 per cent in the September survey.

"Understandably, after multiple dry years in many regions, near-term investment intentions are starting to be impacted," Knoblanche says.

"This is not uncommon during severe droughts and, to some extent, the most remarkable fact is that the impact on investment plans has been so modest."

But a total of 17 per cent of farmers surveyed are planning on increasing that investment – a level unchanged from September – with dairy farmers among the most optimistic and cotton growers among the least confident.

A ship being loaded with grain at the Kwinana Grain Terminal, WA. Bad spring weather in Western Australia and southern New South Wales means that for the third consecutive year the total volume of agricultural production has fallen. Image courtesy of Alamy

Transport and Machinery Association of Australia’s quarterly Dealer Business Sentiment Survey showed that over 50 per cent of dealers expect their turnover to decline and 41 per cent expect it to remain unchanged. 

TMA executive director Gary Northover says dealers expect their sales of new equipment to remain unchanged, with stocks of new machinery held on dealers floors considered to be average.

"Used equipment stocks are also considered to be at average levels for both tractors and combine harvesters whereas for balers, hay equipment, SP sprayers and Implements inventory levels are considered to be low," he says.

Only 13.1 per cent of dealers surveyed announced a plan to reduce their workforce, with 63.9 per cent of those surveyed expecting there to be no change – up from 45.8 per cent in the prior quarter.

"Despite tougher trading conditions there has been an increase in the number of dealers who see no reason to change their employment levels," Northover says.

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