21 Nov 2019
In part one of this series, our experts looked at how labour and productivity is being impacted by agtech and asked whether large farms will be the answer to reaching $A1 billion by 2030.
You can read part one HERE.
Agriculture remains one of the most capital intensive industries in Australia. That means the need to attract significant new capital underpins the drive towards a $A100 billion industry by 2030.
“It is clear the Australian agriculture industry is hugely dependant on strong export demand, and a stable and growing global economy.”
To attract new capital, the Australian agriculture industry will require existing producers to be ‘investment ready’: they must have strong financial and operational frameworks capable of proving to external investors the investment potential.
Due to the volatile nature of agriculture, it has traditionally struggled to attract external investment. However, producers are increasingly adopting corporate structures and stronger financial management and reporting to help them make better informed decisions for themselves. That also helps external parties judge the merit of investment and potential partnership.
Attracting capital and improving financial management in the agriculture industry requires planning for Australia’s changing seasons, potential droughts and ensuring on-farm sustainability. This is key to ensuring strong farm and environmental stewardship and also for achieving strong returns and productivity growth over a long period of time.
Methods to improve financial outcomes through environmental measures include better soil management, access to water resources, crop and livestock management and breeding techniques. To manage seasons, drought and sustainability, producers also require access to strong financial management tools and training to ensure long-term investment in land resources.
China’s risk and reward
It is clear the Australian agriculture industry is hugely dependant on strong export demand and a stable and growing global economy.
Australian producers have delivered strong output growth in recent decades which means Australia now produces far more than we consume domestically. To date, Free Trade Agreements with South Korea, Japan and China have all delivered appreciable benefits to local producers as - whether selling into the local market or exporting - greater demand has pushed prices higher.
However, the strategy of pursuing bilateral trade agreements leaves Australian exporters open to other countries doing the same and achieving more favourable market access agreements with our key trading partners.
The Australian export market continues to be heavily concentrated in Asia and in particular China. China is the largest importer of Australian agricultural exports, taking 25 per cent or almost $A12 billion of Australian exports in 2017-18.
While China’s rise in importance to Australian exports has been rapid, China is still taking less Australian exports than Japan did in the early 1990s, showing heavy export concentration is not an unusual situation for Australian exports.
It does pose a risk, however, particularly in light of the ongoing disturbances to international trade, with that risk particularly focused on a few key commodities - sorghum, wool, forest products and seafood.
As a heavily trade-exposed industry, Australian agriculture could also be impacted by the current US-China trade tensions and resulting downturn in global economic conditions and confidence.
The recent volatility in wool prices stemming, in part, from declining global confidence, is a clear example of the significant impact disruptions to global trade can have on domestic commodity markets. While increased trade barriers between the US and China may present some short-term opportunities, particularly for beef producers, in the longer term a downturn in economic growth in China and the US, not to mention the flow-on impacts on the global economy, is likely to have a detrimental impact on the industry as a whole.
While Australia’s proximity to Asia continues to be an advantage, opening access to new markets for each commodity, combined with improved and cost-effective freight, will also remain paramount.
This is especially true in countries like China where the growth in consumption of internationally sourced horticultural products such as blueberries and avocados continues to grow strongly.
Commodity prices remain a key driver of farmer and industry returns and productivity growth. Continuing strong commodity prices will underpin the industry’s attempts to reach $A100 billion - and for almost all major commodities, this will rely on global prices, demand and supply.
Recent years have seen strong increases in some major commodity classes - particularly milk, beef, sheep and wool. While global wheat prices have remained relatively stable in response to large increases in global production, Australian wheat production in particular has benefitted from increases in productivity stemming from greater use of machinery and technology.
The Australian wheat industry is a relatively small producer in the global market. As a result, domestic producers are largely price takers dependent on production in major producing countries such as Russia and the Ukraine. Because of this, Australian producers face stiff competition from competing exporting nations to meet the growing demand in China, which is expected to grow at an increased pace as the Chinese Government plans to rely less on imported meat and dairy - increasing their demand for feed wheat.
Australia’s challenge against major exporters is also exacerbated by growing yields in competing nations which have not been matched in Australia.
Since 2000/01, the average global wheat yield is estimated to have increased by around 30 per cent, from 2.7 tonnes per hectare (t/ha) to a forecast 3.5 t/ha in 2019/20. In comparison, wheat yields in Australia grew around 5 per cent over the same period, from 1.8 to 1.9 t/ha.
Australian beef exports continue to grow strongly, with Australian producers now exporting over 73 per cent of production. While strong increases in domestic cattle prices has put pressure on domestic retail prices and is likely to keep a lid on red meat consumption growth in Australia, protein consumption growth across Asia will continue to grow and support local prices.
However, the industry is facing ongoing challenges - drought conditions have led to high sale rates and may constrain the industry’s ability to take advantage of either good climatic conditions - when they return - or strong prices.
The sheep meat and wool industries remain the most trade exposed, with almost all wool produced in Australia exported, and 73 per cent of lamb meat exported – a steep increase from 37 per cent in 1999.
While the increase in lamb, mutton and wool prices has been particularly strong in recent years, lamb meat is quickly becoming a luxury good for many Australian consumers and wool prices remain subject to the fluctuations in global economic trading conditions and confidence. Growth in the Australian sheep industry is also being constrained by historically low national flock levels, and high levels of investment in yards, sheds and fencing required for new producers to enter the market.
Dairy producers are currently experiencing strong farm-gate prices as a result of low production and competition for milk supply from processors. The global market however remains competitive with production remaining relatively strong in the European Union and New Zealand, keeping a lid on global prices. The primary concern facing most dairy farmers is the high cost of inputs including water and feed, with high water prices in particular posing the prospect of significant structural changes for those dairy farmers in the Murray-Darling Basin.
Based on the trends behind where the Australian agriculture industry is now, what might 2030 look like if we continue on this path?
Modelling undertaken by ANZ looks at the importance of a number of key drivers for industry output and how they may impact the industry using four key variables against industry output levels:
The results show those four factors alone explained 98 per cent of variability in industry output.
Higher debt levels are actually related to lower output levels, perhaps indicating debt is more often used to cover poor seasons than to expand productivity. Declining farm numbers are also strongly related to increases in productivity and improvements in farm output.
This is what the agriculture industry may look like in 2030 - unless alternative paths are followed to increase output.
Mark Bennett is Head of Agribusiness and Madeleine Swan is Associate Director for Agri Research at ANZ
This article is adapted from a submission made by ANZ to the Australian Government’s Standing Committee on Agriculture and Water Resources and has been published with permission.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Nov 2019
28 Feb 2019