The 2016 agribusiness wrap up | Deloitte Australia | Consumer & Industrial Products, Agriculture, Meat, Grain, Dairy, Wine has been added to your bookmarks.
The 2016 agribusiness wrap up: the good, the bad and the Trump
It has been a mixed 12 months for Australian agriculture, so the Agribusiness Bulletin delves deeper to give you a review of 2016 with an eye to the New Year… the good, the bad and the Trump!
It has been a great year for cattle producers with the EYCI (Eastern Young Cattle Indicator) peaking at a historic high of 723.25 cents per kilogram in early October. The high prices of 2016 are on the back of constrained cattle supply, after record 2014 and 2015 kill numbers. Higher rainfall totals this year across most of Australia has provided ideal conditions for Australian beef producers to begin replenishing depleted herd numbers. According to ABARES, 2017 should mark a cyclical low point in Australian herd numbers, meaning high farm gate prices should persist over the short term.
From an agronomic perspective, 2016 has been a strong year for winter crops with a bumper Australian winter crop of 46.1m tonnes forecast by ABARES and a record 17.1 tonnes expected from Western Australia. This result was driven by widespread favourable seasonal conditions and is expected, for the first time in nearly a decade, to achieve higher production volumes in every Australian state. For key commodities the results are impressive; wheat and barley production are both forecast to be the second highest on record, and canola production to be the third highest. A record chickpea crop of nearly one million tonnes was also harvested.
Unfortunately, from a market perspective, Australian wheat prices have fallen around 30% over the past year to a near decade low. This has been driven by strong global production with growers in regions such as North America and the Black Sea also benefiting from favourable seasonal conditions. As such, the Food and Agriculture Organisation (FAO) expects record global wheat production of 741 million tonnes. These factors have sharply thinned margins for wheat farmers who now show an increased willingness to consider other cropping options; grain growers planted 128,000 less hectares to wheat and barley across Australia compared with last year and instead planted larger areas to higher margin crops such as chickpeas, canola, oats and lentils.
Favourable winter rainfall events in key summer cropping areas is expected to lead to an increased summer cropping result - ABARES expects summer crop production to rise by 28% to approximately 4.8 million tonnes. This adds further weight to the trend towards rotational crops, and for the summer growing season, meaning cotton, sorghum and rice.
The Australian wine industry has had a tough time in recent years however, from an agronomic point of view, 2016 has been a great vintage. As highlighted in an earlier publication of the Agribusiness Bulletin titled 2016: A sensational vintage for Australian fine wine:
- Total wine grape crush volume increased by 6% from the previous year, to an estimated 1.81 million tonnes
- The total estimated value of the 2016 crush is $951 million (up 21% from 2015)
- Average price across all varieties is the highest since 2009, at an average of $526 per tonne.
Favourable changes in the structural drivers of the industry over the past few years paint a rosy picture for the future of the industry. Changes include the signing of free trade agreements that will open up key export markets, a rebalancing of supply and demand factors (particularly at the premium end of the market), as well as a lower Australian dollar.
White meat industries:
Overall these industries had a good year, let’s break it down further:
Poultry – there is a long term trend increasing domestic consumption (per capita and in total consumption) with a key driver being relatively higher prices for other proteins. Not surprisingly, this strong demand situation is reflected in the chicken processing numbers published by the ABS in September – processing volume is up around 10% year on year. Grain, a significant input for poultry businesses, has been cheaper to source than in previous years, boosting margins for farm-gate poultry operators.
Pork – according to Australian Pork, slaughter and pig meat production MAT (Moving Annual Total) volumes are both up around 2.5%. Pleasingly, both importers and exporters enjoyed favourable trading conditions:
- 12 month average prices per kilogram in export markets were up more than 8% on the previous year (on rising volumes and supported by a lower AUD)
- Value-add processors (importing mainly boneless middles and legs) enjoyed lower prices (-4%) for imported product (despite the relatively low AUD).
The volatile global sugar price has rallied hard this year - up on the back of dry conditions in India and Thailand as well as heavy rains in Brazil – as the global oversupply situation has moderated. This has seen Australian sugar prices recovering from lows of around $380 per tonne in September 2015 to highs of around $670 per tonne in October 2016 (the lower Australian dollar has also helped).
The sugar price has since corrected slightly but is expected to remain relatively strong in 2017 however there are many moving variables to keep an eye on including the Brazilian Real, and expected supply responses (i.e. increased plantings) from India, Thailand and other exporting nations.
Red meat processors:
The flip side of the feel good story of strong farm-gate cattle prices is that in the face of strong global competition, record domestic cattle prices and tight supply, beef processors are caught in a pincer move that has seen margins significantly deteriorate. Record 2014 and 2015 kill numbers and strong global demand (at a time when the US cattle industry was also experiencing drought conditions) delivered large profits to Australian processors.
In 2016, the lack of domestic supply caused by bumper kill years has driven the cattle price to record highs and with global beef prices reaching a point of elasticity as well more competitive global supply, Australian processors began cutting shifts, reducing operating days and planning for longer shut-downs. Tight supply conditions are set to continue in the New Year, causing further pain for processors (who live in an efficiency of scale environment), however industry players have seen this cycle before and will continue to look to both operational and commercial avenues to protect margins.
The sheep meats industry is tracking in a similar manner to beef processors, reflected through thinner margins and managing operational rosters to lower throughput levels. Global supply of sheep meats is relatively strong and demand is relatively niche (compared with beef). Farm gate sheep meat prices in 2016 have been fairly consistent with 2015 and coupled with better returns on offer from other livestock enterprises has meant domestic supply has remained relatively tight. As of mid-November lamb and mutton slaughter has declined 7% and 14% (respectively) year on year according to Meat & Livestock Australia.
Dairy farmers suffered a brutal farm gate price drop in April with some large processors cutting supplier prices by 10% due to China's economic slowdown and global oversupply. Additionally, domestic milk prices have remained stubbornly low. In short, 2016 has been ugly for both dairy producers and farmers. These issues have caused a great deal of financial pain, profit guidance downgrades, and uncertainty of future farm gate prices.
In response to softer global prices for dairy, producers have cut production with supply expected to fall from all major export markets (apart from the US). Commentators expect that the lower global production in 2017 will see higher milk prices on offer. However, long term fundamentals remain strong, the foundation of which is a rising Asian middle class. Many consider that the name of the game going forward is economies of scale (particularly inside the farm-gate) and, for some, a move higher up the value chain (particularly in the processing sector).
With such a large variety of produce, regions and issues falling under this category it is hard to define the year that was. With the South Australian floods destroying the ’salad bowl‘, a very wet winter across Southern Australia, the proposed backpacker tax, and the continued trend of cheap imports, one could categorise this as a poor year for many in the industry. However, fundamentals have improved and remain strong for the future of the industry. Recent free trade agreements have further opened the door to emerging export markets such as China (with mixed success to date in the face of other regulatory hurdles) which, in combination with a structurally lower Australian dollar, is expected to drive exports and production over next three to four years.
The surprise win of President-elect Trump has sent global markets into a period of volatility. Since the election there has been a softening of rhetoric and a distancing from some of his more hard line policies and there are also practical considerations of what the Republican controlled House and Senate will pass. While the world digests what the Trump presidential period could mean, here are some of our thoughts from an Australian agribusiness perspective:
- The TPP (Trans Pacific Partnership) appears dead with Trump announcing his intention to withdraw from TPP agreement
- This could lead to the emergence of China-led regional free trade agreements as China looks to establish economic leadership in the Asia Pacific region in the vacuum created by the death of the TPP. The long mooted tie up of the RCEP FTA (essentially ASEAN, China, Australia & New Zealand) looks not so far away from done, while the FTAAP (Free Trade Area of the Asia-Pacific) is a long way off but it now has oxygen. These sorts of agreements will bring further opportunity to Australian exporters, particularly the FTAAP.
Trump’s ultimate view on trade and capital flows will have lingering impacts on foreign exchange rates and interest rate markets around the world. Both directly in terms of Australia and US trade relations but also indirectly though impacts to our other key trading partners such as China.
Finally, we have put together our Christmas wish list for 2017, hopefully Father Christmas can deliver the following for Australian agribusiness…
- A lower Australian dollar
- An immaculate conception (or resurrection?) of the TPP or, in its absence, can we have a China led FTAAP, please?
- A decent wet season across Northern Australia and a return to more ’normal‘ patterns for rainfall events for the rest of the country (in comparison to the extremes of droughts, storms and flooding plains experienced more recently).