Australian Agribusiness: a quiet achiever in a troubled economy has been saved
Australian Agribusiness: a quiet achiever in a troubled economy
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. To get more articles like this delivered straight to your inbox, subscribe to the Agribusiness Bulletin.
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COVID-19 impacts spread throughout the Australian Economy
Australia, along with the rest of the world, continues to struggle with the economic consequences of the spread of COVID-19. The disease (and its management) has had, and will continue to, impact across virtually all sectors of the economy. In this Agribusiness Bulletin we unpack the recent effect of COVID-19 on agribusiness in Australia, before turning to look at what the spread of the virus might mean for Australian agribusiness in the future.
While the virus has created significant challenges for most industries, the effects and their timing vary enormously by industry, as illustrated by Deloitte Access Economics in Figure 1.
Figure 1: Covid-19 Australian industry stress map
Note: Figure charts jobs at risk (vertical axis), relative to period of expected peak impact; Source: Deloitte (3 April)
Industries impacted early and deeply are found in the top left quadrant. These include air transport, accommodation and recreation services, where swift curtailing of people movements dramatically reduced industry activity.
As economic risks have escalated, the impacts of COVID-19 have spread to most other industries, including much of services, manufacturing, construction and mining. For these industries, the impacts are expected to be realised relatively later, but still generate significant challenges.
A few industries are expected to fare better than the rest of the economy. Those industries forming food supply chains – especially agriculture, food manufacturing and food retailing, highlighted in green in Figure 1 – stand out as being sectors suffering the least. Food manufacturing and food and grocery retail actually show a slight expansion.
Impacts on agribusiness continue to evolve rapidly
This assessment that the agri-food industries are suffering the least is not to say they have escaped impacts. Rather, it reflects that agri-food industries have been impacted in both positive and negative ways.
When COVID-19 first developed in China, the impacts for Australian agribusiness were initially negative, but contained to high value products consumed mostly out of home. As the Chinese government imposed restrictions on public gatherings and the food service industry, demand for these luxury goods effectively disappeared.1 This included Australian wine, with exports reportedly down around 90% in the first months of the year, and lobster, where shipments ceased altogether.2,3
The impacts then spread beyond luxury items as large-scale logistics issues prevented loading and unloading of ships at Chinese ports.4 This meant many Australian exports were stuck in containers, while other goods en-route to China were diverted to alternative markets. This included Australian beef, where frozen exports were diverted to Japan, Korea and the United States.5
Australian exports of high value perishable commodities were also disrupted by the slowdown in air transport. Commodities like cherries, chilled meat or even fresh milk, typically piggyback as cargo onto passenger planes. With international travel effectively flatlining, air freight is no longer a viable route to market.
For Australian consumers, the impacts of COVID-19 were initially felt through widespread panic buying, with visible shortages in goods such as toilet paper. However, these impacts were temporary only, reflecting supply chain rigidity rather than an actual production shortages. Food scarcity is not a particular risk in Australia, as we are ranked in the top 10 globally for food availability and we export around 70% of agricultural production.6
Importantly most products missing from shelves have returned to supermarkets as supply chains have adjusted. Supply chains and production systems have had to adjust further as demand has also shifted. Consumers are now likely to purchase more staples and fewer discretionary items. This includes for example greater preference toward low cost protein such as chicken over red meat and low-cost products like sausages compared to steak.
As the virus spread in Australia, its effect on agribusiness mostly negatively impacted the food service industry. Social distancing measures imposed by the government, caused dining out to cease, with cafés, restaurants and pubs restricted to take-away or delivery services.7 Ultimately this has caused consumers to cook more and eat at home. This has supported retail food outlets, and producers of staple products, but it has also educated consumers in the challenges of producing and supplying food in Australia, and educating Australians about their food and where it comes from.
Shocks to regular transport routes also impacted inputs for Agribusinesses. There was some short-term scarcity for farm inputs typically supplied from overseas as a response to port closures in China. Concerns of potential shortages led to stockpiling of fertilisers and chemicals.8 However with ports in China (the primary supplier of these farm inputs) recently resuming operations, combined with increased manufacturing in Australia, it is likely that these impacts will only be short term.9
Figure 2: COVID-19 timeline of agribusiness impacts
Favourable conditions expectations for agribusiness despite COVID-19
A major reason for continued optimism in the Agribusiness sector is simply that people still need to eat. Because food is an essential product demand remains high, Although as discussed above it has shifted within the sector). Unlike other sectors, agribusiness supply chains have not been heavily restricted by government regulation. Indeed, the Commonwealth Government has confirmed what we knew, all farming and forestry are essential services, as well as food, beverage and fibre production and saleyards and auction.10
Optimism for the sector is also buoyed by a stark depreciation of the exchange rate as a result of COVID-19. Compared to the start of the year, the Australian dollar is around 10 cents lower than (down 11%) the US dollar. This competitive boost for our exports is comparable to that during the global financial crisis, where a weaker Australian dollar (which fell from around US98c in mid-2008 to US72c a year later) largely shielded Agribusiness from reduced global demand.11
Agribusiness has also benefited from reduced competition for its scarce inputs. This includes oil where prices fell more than 50% between early February and mid-March, as demand from non-essential services disappeared (combined with a spike in production).12 For essential services like Agribusiness that continue to operate, this reduced competition for in inputs makes operating conditions considerably more favourable throughout the supply chain by reducing production and freight costs.13
And while not an effect of COVID-19, the current favourable outlook for the growing season is likely to significantly contribute to the sector’s optimism. Even a return to average conditions, could see a dramatic increase in agricultural production, with last year’s grain harvest around 33% below the 10-year average.14 This growth in output should support farm profitability and provide enterprises with options that may otherwise have been unavailable as they look to navigate this period of considerable uncertainty.
Opportunities for the supply chain to adapt
COVID-19 has clearly exposed some of the supply chain weaknesses in a globalised world. And while this has challenged Australian agribusiness there are opportunities for transformation and growth.
Domestic manufacturing for example has the potential to develop markets in Australia where they have previously been uncompetitive against imports. Australian farmers may seek greater certainty of supply for inputs such as fertiliser, and this could provide a catalyst for the development of a competitive Australian fertiliser production sector.15,16,17 Restrictions on movement of people has also been a concern for some labour intensive industries, in particular horticulture which traditionally relies on low cost seasonal labour from overseas.18 Without this labour source horticultural production may provide opportunities for domestic labour. The absence of cheap and readily available labour could also prompt an increased development of mechanisation in horticulture.
Similarly, COVID-19 provides the agribusiness supply chain with an opportunity to modernise and address some of its structural issues. This includes issues such as traceability and competitiveness in freight and logistics with this market disruption highlighting the need for greater transparency, resilience and flexibility. Modernising our supply chains would not only deliver significant productivity boost at home, but it would also provide greater competitiveness in export markets. Moves towards increased traceability and Australia’s current success in containing COVID-19 could provide an opportunity to further leverage Australian Agriculture’s longstanding ‘Clean and Green’ reputation19, and Australia’s experience implementing traceability schemes.20,21
Longer term, the structural impacts of COVID-19 on agribusiness will persist. A poorer Australia and a poorer world will see higher demand for staple foods, at the expense of the exotic. The resilience of food supply chains is being questioned, and the interdependence of our food production systems dramatically highlighted, potentially affecting preferences for locally sourced produce.22 The way that food moves from paddock to plate, and the way we think about it may never return to pre COVID-19 ways. While the balance remains to be seen, this is likely to include at least some good news for the Australian agribusiness sector.
Dr Daniel Terrill – Partner, Deloitte Access Economics
Dr Stacey Paterson – Manager, Deloitte Access Economics
1. Rabobank (2020), “Coronavirus and agriculture – how worried should we be?”
2. Sainsbury, M (2020) Australian wine exports to China down 90% as coronavirus takes its toll
3. Plaganyi, E, et al (2010), “Coronavirus is killing Australia’s lobster export market”, The Conversation
4. Paris, C China’s Shipping Nears a Standstill Amid Coronavirus (2020) Disruption
5. Department of Agriculture, Water and the Environment, Australian red meat export statistics (2020)
6. The Economist Intelligence Unit, Global Food Security Index (2020)
7. Department of Health, Limits on public gatherings for Covid-19 (2020)
8. ABC, Farmers stockpile cheap diesel amid Coronvirus
10. Department of Agriculture, Food security and agriculture and COVID-19 (2020)
11. Department of Agriculture, Fisheries and Forestry, Submission to House of Representatives Standing Committee on Infrastructure, Transport, Regional Development and Local Government: Inquiry into the impact of the global financial crisis on regional Australia (2009)
12. The Conversation, 2020
13. ABC News ‘ Unemployment in Australia's cities amid COVID-19 downturn sees farmers inundated’
14. ABARES, Agricultural Commodities 2020
15. Agrimin, Lake Mackay SOP project
16. Kalium Lakes Beyondie SOP project
17. Australian potash, Lake Wells
18. The Conversation, 2020
19. ABARES, 2014
20. Beef Central, 2018
21. DAWE 2019
22. The Nielsen Company, 2020
Published: May 2020