BMI View: 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: 6.2% to 791,400 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: 25.9% 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: -10.6% to 26.7mn 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.
- 2014 real GDP growth: 2.0%; down from 2.4% in 2013. Forecast to average 2.5% from 2013 to 2017.
- 2014 consumer price index: 2.0 average % change y-o-y; down from 2.3% in 2013. Forecast to average 2.4% from 2013 to 2017.
- 2014 central bank policy rate (average): 2.00%; down from 2.50% in 2013. Forecast to average 2.25% from 2013 to 2017.
Key Revisions To Forecasts
- 2013/14 wheat production forecast revised up, to 26.1mn tonnes, compared with a previous estimate of 24.0mn 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 4.25mn tonnes, compared with a previous estimate of 4.3mn 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
Australian Treasurer Joe Hockey's rejection of the proposed takeover of GrainCorp Limited by US-based Archer Daniels Midland Company (ADM) came as a surprise to many industry observers, and has sparked increasing concerns that the Australian government is leaning towards nationalism. While we do not believe this rejection marks a reversal of the Abbott administration's business-friendly stance, we do expect the government's approach to find middle ground with opposing parties to result in greater risks for major foreign investments that are likely to impact the industry landscape. That said, we highlight that farmers' fears of higher prices may still be realised even with this rejection due to growing infrastructure needs.
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.
After milk production declined in 2012/13, we forecast a recovery in 2013/14. Expansion will be driven by a marginal increase forecast for the dairy herd and higher yields following a return to favourable seasonal conditions. The ongoing decrease in feed prices will also boost yields, as farmers will be encouraged to increase feeding supplements. Production will also be helped by improvement in the dairy sector's profitability. The increase in farmgate milk prices, reflecting higher global dairy product prices, will boost income. The Australian Bureau of Agricultural and Resource Economics and Sciences forecasts farmgate prices at AUc46/litre in 2013/14, up 17.9% y-o-y. The improvement of the financial situation of dairy farmers is likely to benefit the industry in the 2014/15 season.
China's beef imports have been growing exponentially in recent years, jumping almost eight-fold in five years. The strength of imports reflects the growing imbalance between expanding consumption and stagnant production. We believe Australia will maintain its grip on the growing Chinese beef import market in spite of growing competition from emerging markets such as Uruguay, Brazil and India, that offer cheaper cuts in greater quantities. Overall, exports to China are likely to remain volatile as the country is liable to impose swift trade restrictions if there is a disease outbreak, or any doubt about the meat quality.