Agribusiness outlook 2015 has been saved
Agribusiness outlook 2015
Deloitte has predicted agribusiness as the sector with the strongest competitive advantages for Australia’s economic future. This article takes a closer look at the outlook for 2015.
The Agribusiness Bulletin
The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise.
Agribusines outlook 2015
Last year Deloitte nominated agribusiness as one of the five industry sectors that have the potential to take over from mining as key drivers of growth opportunities for the Australian economy over time. The burgeoning global opportunity for agribusiness is driven largely by population growth and rising incomes proximate to us. Indeed, within two decades, Asia is expected to be home to almost half the world’s middle income consumers. Asia is also expected to account for 71% of the growth in global food demand up to 2050, with much of this growth coming from China.
Of all the sectors in the Australian economy, agribusiness was the sector with the strongest competitive advantages for Australia’s economic outlook. The key attributes of agribusiness in Australia contributing to this competitive advantage include our abundance of agricultural land and our proximity to emerging Asian markets. The latter is particularly important to agribusiness as the Asian economic boom becomes more consumer-focused, so being physically located in close proximity to those growing markets should deliver a time and cost advantage for Australian produce, relative to our key export market competitors.
Australia's current, next and future waves of growth 2013-33
Source: Deloitte Access Economics
The conclusion that agribusiness in Australia has great growth potential raises the questions of where within agribusiness are those opportunities greatest. Using the same framework behind Building the Lucky Country – Positioning for Prosperity, Deloitte Access Economics has completed an assessment of the growth opportunities of sub-sectors of agribusiness. The ‘fantastic five’ of Australian agribusiness in this assessment are beef, lamb, aquaculture, dairy and oilseeds. A forthcoming issue of the Agribusiness Bulletin will explain these long term opportunities further, and explain where the greatest opportunities in Australian agribusiness lie, and why.
As recently summarised in the 17 March 2015 edition of the Weekly Economic Briefing, while the growth potential of agribusiness over time is clear, potential does not necessarily translate in growth, especially short term. The March 2015 outlook released by the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) Agricultural Commodities Report and Outlook conference (3-4 March) papers provides mixed news for the farm sector, with export earnings set to remain consistent overall with last year’s results despite weakness in some commodity prices of late as global demand softens (relative to production) for some key commodities.
Overall, Australian export earnings from farm commodities are forecast to be about $40.5 billion in 2015-16, slightly higher than expected 2014-15 levels. Strong growth in export earnings is expected for wheat (up by 12%), sugar (11%), canola (10%), and dairy products (8%). On the other hand, notable price falls from commodities such as cotton are expected to notably detract from total export earnings going forward.
World prices for farm products may not have declined as much as they have for industrial commodities, but they too have softened. In particular, the slowdown in China’s economic growth coupled with sanctions against Russia mean that dairy’s recent strong run looks to be ending. Prices for a number of dairy products have halved amid rising global dairy supply and the fall off in demand from China and Russia. Cotton prices have also fallen significantly driven by China’s massive stockpiles, higher crop turnoff from the big cotton producing countries, and a relative softening of global demand.
However, it is noted that there are a number of positive trends for Australian agriculture which have or are likely to offset these softening in commodity prices and weakening demand, at least for now. These include:
- A lower $AUD, making it cheaper to buy Australian product
- Lower fuel prices, which has resulted in lower direct on-farm operating costs, and is likely to flow through eventually to lower freight costs and farm chemical costs (as oil is the basis for some synthetic farm fertilisers/pesticides and is a high input to fertiliser production)
- Low interest rates, which provides a more encouraging investment environment and a greater ability to service and pay down farm debt.
In addition, Australia has entered into three recent Free Trade Agreements (FTAs) with Korea and Japan (both now in force) and China (in force later this year), which will either phase out or significantly reduce tariffs on imports of Australian produce over time. Again, increasing the price competitiveness and improving market access of Australian produce.
In relation to the China–Australia Free Trade Agreement (ChAFTA), Australia is already China’s third largest supplier of agricultural products after Brazil and the United States and the agreement has the potential to expand this relationship further – particularly important given the size and potential growth of the Chinese market. Some key changes to key commodity tariffs include:
- Beef – current tariffs of between 12-25% to be removed within nine years
- Lamb – current tariffs of between 12-23% to be removed over eight years
- Dairy – current tariffs of between 10-19% (for various products) to be removed over varying time frames
- Horticulture – current tariffs (including 25% on nuts and 30% on citrus) to be removed within eight years.
The actual impact of these tariff removals on Australian agriculture plays out in a number of ways. In Impact of the China-Australia Free Trade Agreement on Australian agribusiness, we discussed the results of our economic modelling on the impact of ChAFTA for the beef sector. We found that the tariff removal will result in an incremental 1% rise in the farm gate price of live cattle and an increase in the volume of cattle output by approximately 2.2%, or approximately 280,000 head applied to the size of today’s national herd. The combination of higher prices and higher output sees overall value-add in beef cattle rise by approximately 2.5%, or $350 million applied to today’s industry.