The Australian agriculture sector is recovering from a decade of subdued production growth due to extreme weather and a lack of investment. The industry is expected to remain buoyant in 2013/14, largely supported by export demand from Asia and higher prices for grains and oilseeds. In the longer term, we see major export growth opportunities in the sugar and livestock sectors. Although Australia will face stiff competition from Asian countries such as Thailand for sugar, and from the US and Brazil for meat, the country will remain a key player in those industries. As well as facing growing competition in its own region, Australia will very likely see high production costs and a vulnerability to extreme weather events.
- Beef consumption growth to 2017: 4.3% to 776,800 tonnes. Demand growth will be largely driven by population growth, as consumption per capita decrease over time due to health consciousness.
- Sugar production growth to 2016/17: 25.2% to 4.6mn tonnes. Industry consolidation will encourage economies of scale and should boost output over the forecast period. Export opportunities to Asian countries will also support investment in the sector.
- Wheat production growth to 2016/17: -12.6% to 26.1mn tonnes. The decline will result from high base effects, as 2011/12 production was really strong. Although exports opportunities in Asia will incentivise to increase production, resources constraints will limit growth.
- BMI universe agribusiness market value: US$23.76bn in 2013; down from US$27.47bn in 2012; growth expected to average -0.9% annually between 2012 and 2017.
- 2013 real GDP growth: 2.3%; down from 3.7% in 2012. Forecast to average 2.5% from 2013 to 2017.
- 2013 consumer price index: 1.9% average % change year-on-year (y-o-y); up from 1.7% in 2012. Forecast to average 2.3% from 2013 to 2017.
- 2013 central bank policy rate (average): 2.25%; down from 3.00% in 2012. Forecast to average 2.20% from 2013 to 2017.
Key Revisions To Forecasts
- 2013/14 wheat production forecast revised down, to 24.0mn tonnes, compared with a previous estimate of 25.3mn tonnes, as below-average rainfall since mid-winter in parts of New South Wales, Queensland and Western Australia is hampering yields.
- 2013/14 sugar production forecast revised down, to 4.3mn tonnes, compared with a previous estimate of 4.4mn tonnes. This revision is due to flood damages to new plantings in early 2013 and lower average sugar yields, as the Bundaberg and Isis regions are being hit by the canopy syndrome disease.
Key Industry Developments
Both milk production and milk transformation sectors are undergoing a sharp consolidation. Herd sizes are likely to become larger as margins decrease and farmers are forced to strive for economies of scale. Meanwhile, a number of high-profile Australian dairy farms are currently being sold, as debt levels are currently high in the sector. This is due to the harsh price competition from supermarkets that can import cheaper milk and dairy products. Lactanz Dairies, Raleigh Dairies and Van Diemen's Land are up for sale.
In the latest round of negotiations of the Australia-Japan Free Trade Agreement (FTA) in April 2013, the two countries have successfully come to a broad agreement for agricultural exports, which has been a difficult subject given the sensitivity of the industry for both countries. We see opportunities for dairy and sugar exports to increase. However, the benefits that will extend to livestock agribusinesses remain uncertain, as Japan remains eager to maintain high tariffs on beef, especially of the grain-fed variety.
Australia is also currently negotiating for the Trans-Pacific Partnership (TPP), another proposed free trade agreement under negotiation by 11 countries including Australia, New Zealand, Japan and the US. Despite the optimistic tone of various negotiating countries for the TPP, the obvious hurdles to reaching a basic agreement by October 2013 are undeniable. As such, we do not believe that 2013 deadline is likely to be realised, unless there is a reduction in scope and/or number of participant countries. Japan plans to keep barriers for its agribusiness industry, especially rice, wheat, beef, pork and dairy products.
Because Australia already has a mature agriculture industry, prospects for a widespread production gains are limited. We expect the country to record rather moderate grains production growth, as land and water constraints, coupled with already high productivity will be strong brakes to output expansion in the coming years. Australia is trying to turn the tide and increase farmland acreage by developing some outback regions into agriculture, such as northern Western Australia. The government has ramped up irrigation and transport projects and aims to attract domestic and foreign investment in order to turn those lands into arable land. However, the contribution of this type of projects to the farmland availability will be small.
Archer Daniels Midland (ADM) won agreement in April 2013 to acquire Australia's largest independent grains handler GrainCorp after a six-month courtship. We remain positive on this deal, as it will help ADM to diversify its activities in terms of products and geography. The acquisition of GrainCorp would also grant ADM direct exposure and freight advantages in Asian markets and among them in major grain importers such as Japan, South Korea, China and Indonesia. We do not see any significant opposition arising from the Australian government regarding ADM's offer for GrainCorp as it does not have a strong presence in other parts of the supply chain other than storage and export. However, the approval by China's government may face hurdles and delays.