What’s in store for ag commodities? | Deloitte Australia | Consumer & Industrial Products, Agribusiness has been added to your bookmarks.
What’s in store for ag commodities?
According to ABARES latest Agricultural Commodities report (March 2017) Australia's recorded farm production volume in 2016-17 was "exceptional" with a record crop year (up $5.7 billion) more than offsetting a small reduction in the value of livestock (down $0.8 billion) compared with the prior year.
What has driven this exceptional year? It was a simple equation of good prices (for most commodities) coupled with favourable seasonal conditions, and in particular, good rainfall during the 2016 winter and spring seasons (boosting winter cereal crop yields and rejuvenating grazing pastures).
What is in store for 2017-18 and beyond? In this edition of the Agribusiness Bulletin, we take a look at the factors and influences anticipated to shape the outlook for five key export agricultural commodities – beef, wheat, wool, sugar and cotton.
- Over the next four years, the Australia beef cattle herd is forecast by ABARES to increase to 26.6 million head (growing at 2% per annum, though against the backdrop of a beef cattle herd that had been in decline since in 2014)
- ABARES analysis of weighted average saleyard price and export unit value to peak in 2016-17, and through to 2021-22 average prices are expected to remain above $4 per kilogram and $6 per kilogram respectively
- Increasing competition from the US into our common export markets and lower US import demand for grinding beef (including Australian beef) will increase price competition for Australian beef on the global market
- In addition, competition from South American beef into China could result in decreased Australian market share of this rapidly growing market
- Live export beef cattle prices are forecast to remain strong with ABARES expecting 2016-17 will see the peak unit value exceed $1,200 per head. The ‘million head’ export milestone (which was exceeded in both 2014-15 and 2015-16) is not expected to be reached again until 2021-22
- In the next year, export earnings are forecast to increase 1% overall for beef. Within the beef sector, higher live export earnings (up 4% due to higher prices, rather than volume growth) will outpace earnings growth for beef and veal exports (up 1%). Earnings from beef and veal exports (typically chilled and frozen beef) will be a little softer as a result of domestic herd re-building, lower demand in the US market (in recent years one of our largest export markets), and softer global prices.
The outlook for beef exports remains very favourable with prices and demand to be driven primarily by growing Asian demand. The approval of additional export-accredited processing facilities for exports to China is a favourable development, providing incremental market access for Australian beef. The live export outlook might be at lower volumes than have been achieved in the past, but with stronger prices on offer, overall returns for this beef segment are likely (on balance) to be better overall.
- Following last year’s record Australian winter crop, export earnings for wheat are forecast to be 9% lower in 2017-18 as planted area and yield moderate toward the longer-term trend, and in the face of softer global wheat prices
- Globally, the wheat price outlook is muted by relatively large carry-over stocks and relatively high forecast global production in consecutive years
- Absent a significant production shock in a major wheat producing region, the global price outlook is relatively soft. Current ABARES forecasts point to 2017-18 having the lowest annual average price in over 15 years ($US190 per tonne world wheat indicator price).
In this context, Australian farmers are likely to look to alternate crops (chasing higher prices and/or profitability from the likes of canola and pulses) or livestock. We’d expect this adjustment to be observed through a smaller planted area to wheat this winter.
- The ABARES forecast for export earnings in 2017-18 is an increase of 10% due to increased flock numbers and firmer global prices
- China remains the key export target market due to its continued leading position in global woollen fabric and textile production
- The premium for lower micron wool remains evident with the highest incremental margin gain for the lowest micron and higher quality clips.
The Merino-dominant flocks look set to benefit from better wool prices, and particularly those flocks targeting finer microns. However, those enterprises primarily targeting domestic fat lamb markets will still benefit given forecast wool price increases across most microns.
- Australian sugar export earnings are forecast to increase in 2017-18 by 10% due to incremental crop yield gains and firmer global prices
- Domestic production is forecast to grow over the next several years through incremental increases planted cane area and cane yield.
The key message on sugar exports is that global consumption will grow faster than production, leading to lower stocks-to-use ratio and firmer prices for Australian growers (rising to an estimated $54 per tonne in 2021-22).
The impact of Cyclone Debbie on Queensland cane crops has been estimated to be at least $150 million. This figure may increase once the 2017 harvest and milling activity gets underway and the sugar quality impact (if any) can be quantified.
- Export earnings up 35% due to increased planted area and stronger prices in 2017-18
- On a global scale, cotton consumption is exceeding production leading to a decline in the stock-to-use ratio. By 2021-22 the global stock-to-use ratio is forecast to decline to below 60%, and that would be the lowest level seen since 2011-12
- China remains the world’s largest purchaser of raw cotton but China’s share of consumption growth is slowing as lower cost Asian textile mills gain market share
- ABARES analysis indicates that China reached ‘peak cotton’ with a (nearly) 15 million tonne stockpile in 2014-15. By June 2018, China’s stockpile will be a third lower, despite China maintaining its minimum raw cotton import obligation of 900,000 tonnes per annum.
Australian cotton growers will benefit from improved irrigation dam levels and firmer global prices. On that basis, we’d be expecting a significant area to be planted next summer to irrigated cotton. In the event of favourable winter and spring rainfall during calendar year 2017, the area planted to dryland cotton could also be higher next season.
More records to fall
Following a record Australian agricultural production year in 2016-17, ABARES forecast that 2017-18 production will moderate slightly before reaching a new peak in 2019-20 (and continued growth in the years beyond). Export earnings, which have grown year-on-year since 2009-10, are expected to remain correlated to the twin positive effects of global demand trends (and in particular Asian demand) and relative depreciation of the Australian dollar (relative to the US dollar). Even though production volume is expected to moderate in the next year, the value of exports shows no sign of slowing down with ABARES anticipating that the value of exports in 2021-22 will be $8 billion higher than in 2014-15.