03 Aug 2020
The Australian agriculture industry has been bearing up well in the face of the COVID-19 pandemic with strong livestock prices, solid seasonal conditions and continuing export demand.
But while the industry is continuing to perform very well on an historical basis, the continuing pandemic in Victoria and across many export partners is taking the gloss off a number of sectors – in particular the sheep industry. That said, cattle prices continue to be extremely strong and global wheat prices are relatively stable despite forecasts of a bumper global crop.
“While the flow-on effects from COVID-19 have arguably impacted Australian agriculture less than many other industries, they have still been felt in a number of ways.”
While some sectors have felt new bumps in the road as a result of Stage 4 lockdowns in Victoria, and in particular the reduction in meat processing throughput, the industry as a whole continues to hold up well.
It wasn’t that long ago many Australians believed we may have avoided the worst of the impact of the COVID-19 pandemic. Unfortunately, a second wave of infections in Victoria and New South Wales resulted in strong lockdowns across Victoria.
The Victorian meat processing sector was in the spotlight for a number of weeks due to a high number of COVID-19 cases in some processing plants. Under Stage 4 directives, meat processors were required to reduce their on-site workforce by 33 per cent on 7 August 2020. The flow-on effects to the livestock sector have been mixed.
The beef sector continues to perform exceptionally well with the indicator price at times trading over 50 per cent higher than the same time last year, driven in greatest part by continued restocker demand and low supply which has covered declining export demand. In contrast, lamb prices have fallen solidly as the winter decline in restocker activity in the south has coincided with the reduction in processing demand in Victoria, the first flush of sucker lambs as well as the increase in export weight lambs diverted to the domestic market. Despite this, restocker demand is likely to increase again in spring and will likely support a return to prices seen earlier in the year, assuming the supply chain regulatory environment allows it.
Global grain prices remain relatively robust in light of a forecast record global harvest and stocks, which are likely to dampen prices. However, Australian producers are cautiously optimistic about the domestic outlook. While most grain-growing regions of Australia experienced a good start to the season, a number of them saw little or no rain throughout June and July this year.
Good rains in August appear to have consolidated the crop as we come into spring. The dairy industry is seeing some volatility as price gains from July have been clawed back in recent weeks as buyers grapple with the changing global environment around supply chains and consumer demand.
The outlook is less upbeat for the Australian wool industry which continues to register significant falls – and at the time of writing had suffered the largest percentage decline in the Eastern Market Indicator since the abolition of the wool price floor. From a very profitable peak price, falling prices are now challenging an acceptable level of profitability.
While the flow-on effects from COVID-19 have arguably impacted Australian agriculture less than many other industries, they have still been felt in a number of ways. These include the shutdown of some meat processing operations, cross-border and international freight and logistics, and the repercussions of panic buying and changed consumer demand.
One area which is fundamental to the sector, and where the impacts may be felt longer term, is foreign investment into agriculture. Foreign investment in Australian agriculture essentially comes in two different forms. These are predominantly either the direct purchase of an agri asset by an offshore individual or entity or an investment by an offshore capital provider such as a pension fund or family office into a specific fund which owns and operates the agri asset.
For many Australians, one of the starkest impacts of COVID-19 has been the almost complete cessation of international travel, whether for Australians to travel overseas or for people from the rest of the world to come here.
For foreign investment into agriculture, this restriction is a game changer. Yet while it is possible this will disrupt the process of investment, it will also present new opportunities. As basic as it sounds, the human factor is a fundamental element of most investment into Australian agriculture. For example, once a North American pension fund has made the decision to invest in an Australian agricultural fund, it will clearly undertake a great deal of due diligence to evaluate the risks and returns of the investment, until it is comfortable with the numbers.
However, before the final investment decision is finalised, almost every investing entity will require their representative, such as a Chief Investment Officer, to travel to the asset in person. Through this process, they are able to satisfy themselves they are not only happy with the nature of the asset but with other factors such as the management team. In addition, they may see it as important to meet personally with the key regulators in Australia.
Not only is this first-hand inspection and interaction important for the investor and its management team but depending on their location and structure, it may also be compulsory from a regulatory perspective.
As the economic impacts of COVID-19 continue to be felt, many forecasters are seeing this as a period which will impact global economies and markets for some years. Right now, and looking ahead, it is foreseeable investment in agriculture will, if anything, be an even more attractive proposition to many investors than it was before.
This is partly due to the strengthening of the fundamental demand base – in times of crisis, global consumer governments will purchase, pay more, and stockpile food and agri products, particularly to improve their levels of food security. From a market perspective, investors may look to reduce their level of exposure to traditional equities and increase it in the relative certainty of agricultural demand.
Given these factors, the restrictions on business travel, combined with a possible increased focus on agri investment, could potentially create a concerning issue for Australian agriculture. Investors, particularly from the northern hemisphere, may look away from Australian opportunities, possibly focusing on areas they are able to visit first hand, such as South America.
If this were to occur, there could be a range of negative impacts for the Australian sector. These would potentially include missed opportunities for the investment to be used for agri production and productivity growth, a reduction in selling opportunities for current asset owners keen to take advantage of opportunities, and a slowing of the development of innovation by some of the larger players in the agri sector. But at the same time, crisis creates opportunity, and while the travel restrictions create these issues, it is vital for the agri sector, as well as government, to not only plan for this, but look at ways of overcoming it.
In terms of marketing the opportunity to investors, it will become more important for relevant Australian entities to utilise their offshore networks or create new partnerships to take the message directly to the investors in their own countries.
Most importantly, when offshore investors are unable to travel to Australia to ‘seal the deal’, it creates the opportunity for specialist Australian individuals and entities to structure themselves to be able to fill this role as well as possible. This includes areas such as ensuring not just that all risk and return modelling and documentation is well within the capability of the Australian entity but that all regulatory questions are covered before they are asked. For government, it will be important to look at the current regulatory structure around the process and decide whether any amendments are required to avoid missing valuable opportunities.
It’s clear that in the Australian market, a number of players are already moving quickly and professionally to fill this space, to work with offshore investors who are keen to continue moving on Australian agri investment opportunities despite the COVID-19 disruptions, and to build their own businesses.
Looking ahead, as with so many parts of our current society, it will be vital to see that if Australian entities can make this work, whether the playing field of foreign investment into Australian agriculture is changed for the long term.
Michael Whitehead is Director Client Insights, Institutional Madeleine Swan is Associate Director Agribusiness Research at ANZ
Click here to read the full Agri InFocus report.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
03 Aug 2020
07 Jul 2020