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Agriculture overview: September quarter 2018

​​​​​Matthew Howden and Kirk Zammit

World economic growth is assumed to be 3.9% in 2018 and 2019 

Value of production to be $60 billion in 2018–19

The value of farm production is forecast to be relatively unchanged at $60 billion in 2018–19, above the 10-year average of $56 billion (in 2018–19 dollars).

The value of crop production is forecast to be $30 billion in 2018–19, 3% lower than in 2017–18. The decline is expected to be driven by a forecast decline in area planted in the eastern states. Drought conditions across eastern Australia during late autumn and early winter restricted planting opportunities for crops such as barley, canola and wheat. Planting of dryland cotton in spring is also forecast to decline significantly because of low soil moisture.

Higher forecast prices for canola, coarse grains, cotton and wheat are expected to mitigate the impact of lower crop volumes on the value of production. Wine grape and sugar production are forecast to rise because producing areas have been less affected by drought. However, the value of sugar production is forecast to decline due to weak international prices. Horticultural production has increased following a warm winter that boosted production of a range of fruits and vegetables.

Real value of farm production, 1994–95 to 2018–19
In 2018–19 the value of agricultural production is forecast to be relatively unchanged at $60 billion. The value of production is above the 10-year average of $56 billion (in 2018–19 dollars). Crop production is forecast to be $30 billion and livestock and livestock products are forecast to be $30 billion.

f ABARES forecast.
Sources: ABARES; Australian Bureau of Statistics

The value of livestock production is forecast to be $30 billion in 2018–19, 2% higher than in 2017–18. Drought in the eastern states has increased cattle and sheep turn-off, resulting in increased meat production. Dairy production is forecast to increase, as processors continue to offer relatively high milk prices. However, the production response is likely to be dampened by increasing feed and fodder costs. Wool production is forecast to be lower, constrained by lower flock numbers and poor grazing conditions.

Winter crop production to fall

In September 2018 the Australian Bureau of Meteorology indicated that much of New South Wales, inland southern Queensland, northern Victoria and eastern South Australia had recorded severe rainfall deficiencies over the eight months to August.

The drought has lowered crop prospects over winter in many cropping regions. However, winter crop production in 2018–19 is expected to be significantly higher than in years with more widespread drought conditions. In 2018–19 exceptionally unfavourable seasonal conditions have been limited to Queensland, New South Wales and parts of Victoria and South Australia. In contrast, extremely unfavourable seasonal conditions affected most cropping regions in Australia during droughts in 1994–95, 2002–03, 2006–07 and 2007–08, resulting in significantly lower national crop production than is forecast for 2018–19.

Winter crop production, Australia, 1994–95 to 2018–19
In 2018–19 winter crop production is forecast to be 33 million tonnes, 12% lower than in 2017–18. Winter crop production in New South Wales is forecast to decline by 46% to 3.8 million tonnes. This is partially offset by a 12% increase in winter crop production in Western Australia to 16 million tonnes.

f ABARES forecast.
Sources: ABARES; Australian Bureau of Statistics

Very poor conditions in New South Wales and Queensland have been partly offset by forecast above average yields in Western Australia.

In 2018–19 yields in New South Wales are forecast to be well below their long-run averages, but substantially higher than in 2002–03 and 2006–07. This is because dry planting conditions during late autumn and early winter led many farmers to reduce the area sown to avoid low yields or crop failures. In previous droughts, area planted was larger because drought conditions developed after adequate rainfall for planting.

Higher input costs and increased competition in livestock and livestock product markets

In 2018–19 production of livestock and livestock products is forecast to increase as farmers destock. Droughts often result in increased meat processing and live exports because farmers reduce the size of their herds and flocks in response to scarce pasture and rising feed costs. The increased supply of meat on the market typically leads to lower prices. However, relatively high world prices for meat are currently supporting cattle prices.

While livestock and livestock product prices are forecast to remain relatively high in 2018–19, profit margins are forecast to decline from historically high levels. Input costs are increasing, such as for feed, water and diesel. The global supply of meat is also forecast to increase, partly because of droughts in the European Union and the United States. This will increase competition in Australia's export markets and put downward pressure on prices.

Broadacre farmers entered drought with record incomes

Broadacre farmers in New South Wales and Queensland entered the current drought following two years of the highest incomes recorded since 2001–02. This should help farmers manage and recover from drought.

Farm income, New South Wales and Queensland, 1994–95 to 2016–17
Broadacre farmers in New South Wales and Queensland entered the current drought following two years of the highest incomes recorded since 2001–02. In 2016–17 the average farm cash income in Queensland was $250,000 (in 2018–19 dollars). In New South Wales it was $196,000.

Sources: ABARES

Reflecting the historically high incomes, the total value of farm management deposits (FMDs) held by Australian farmers was around $6.6 billion at 30 June 2018. Of this total, New South Wales accounted for 26% and Queensland 21%.

The proportion of broadacre farms in New South Wales and Queensland holding FMDs has increased steadily since they were first established in 1999–2000. Approximately 25% of farms in both New South Wales and Queensland held FMDs in 2017–18.

Continued growth in Australian agriculture depends on producers being able to maintain resilience to climate and market risks. It is important that support from governments does not impede incentives for farm businesses to develop new and better approaches to managing these risks.

Value of production driven by prices

The value of agricultural production is forecast to remain historically high in 2018–19. As discussed in Agricultural commodities: June quarter 2018, farm production volumes have remained relatively unchanged since the end of the Millennium Drought. The exception was in 2016–17, when very favourable seasonal conditions resulted in record production. From 2010–11 to the 2018–19 forecast year, prices received (rather than volumes produced) have been the strongest contributor to growth in the nominal value of production.

Annual average growth in value of agricultural production, by price and volume, 2010–11 to 2018–19
Broadacre farmers in New South Wales and Queensland entered the current drought following two years of the highest incomes recorded since 2001–02. In 2016–17 the average farm cash income in Queensland was $250,000 (in 2018–19 dollars). In New South Wales it was $196,000.

Note: Price and value are in nominal terms, 2018–19 is an ABARES forecast.
Source: ABARES; Australian Bureau of Statistics

Lower exportable supplies of crops in 2018–19

In 2018–19 export earnings for agricultural commodities are forecast to decline by 5% to $47 billion. This is a downward revision from the 2% decline forecast in Agricultural commodities: June quarter 2018.

In 2018–19 lower exportable supplies of canola, coarse grains, pulses and wheat are expected to be the main drivers of lower export earnings. This is due to lower winter crop production in drought-affected areas. Exportable supplies are also expected to be affected by increased use of grains and hay for feed by the livestock sector in eastern Australia.

The volume of livestock and livestock products exported is forecast to remain unchanged in 2018–19 compared with 2017–18. A forecast increase in meat exports is expected to be offset by a reduction in exports of live sheep, skim milk powder and wool.

Agricultural export prices, measured by the index of unit export returns, are forecast to increase by 3% in 2018–19, consistent with the five-year average. Livestock prices are high but have limited potential for further growth. Pulses and sugar prices have fallen sharply in response to rising global supply.

Beef prices are forecast to fall, as simultaneous droughts in Australia and the United States result in increased supply on global markets. In contrast, strong export demand for sheep meat is forecast to result in higher prices and production. Wool prices are also forecast to increase, reflecting continued global demand growth and constraints in Australian supply. Export prices for coarse grains, oilseeds and wheat are forecast to increase due to lower global supplies resulting from unfavourable seasonal conditions in the European Union, the Russian Federation and Australia.

Annual average growth in value of agricultural exports, by price and volume, 2014–15 to 2018–19
From 2014–15 to the 2018–19 forecast year, prices received (and not volumes produced) have been the strongest contributor to growth in the nominal value of exports.    The annual rate of growth in prices received was higher for livestock and livestock product prices, compared with crop prices.

Note: Price and value are in nominal terms, 2018–19 is an ABARES forecast.
Source: ABARES; Australian Bureau of Statistics

Domestic feed demand to reduce exports

Australia's domestic consumption of feed has increased over time, in line with growth in feedlots and the number of dairy operations moving to feed pads. A large proportion of beef, chicken and dairy production is located in areas currently affected by drought. Feed prices in the eastern states have spiked in recent months in response to poor pasture growth, reduced fodder availability and biosecurity-related constraints on imports.

Feed wheat prices, by delivered market, January 2017 to September 2018
From 2014–15 to the 2018–19 forecast year, prices received (and not volumes produced) have been the strongest contributor to growth in the nominal value of exports.    The annual rate of growth in prices received was higher for livestock and livestock product prices, compared with crop prices.

Source: Dairy Australia

Lower exchange rate to support export earnings in 2018–19

Farm incomes have received some support from the recent depreciation of the Australian dollar. Since the beginning of 2018, the Australian dollar has fallen in value against the currencies of Australia's major export markets. Its depreciation against the US dollar and Japanese yen is particularly beneficial for exports of wheat and beef.

Currencies of Australia's major competitors in agricultural export markets have also depreciated against the US dollar. Over the 8 months to August 2018, the Brazilian real fell by 19%, followed by the Russian ruble (down by 15%). The NZ dollar fell by 8% and the euro and Canadian dollar are down by 5%.

Change in Australian dollar exchange rates, major export markets, January to August 2018
Since the start of 2018, the Australian dollar has fallen by almost 2% against the Chinese renminbi, by 7% against the yen and US dollar, by 2% against the won and increased against the rupiah.

Note: Countries organised in order of value of Australian agricultural exports.
Source: Reserve Bank of Australia

Trade tensions a risk to the medium-term outlook for agricultural exports

Trade tensions between China and the United States could present opportunities for Australian agricultural exports. The Chinese Government has imposed tariffs on the majority of agricultural imports from the United States. China imports many of the same commodities from Australia, including beef, dairy, fruit and wine. The China–Australia Free Trade Agreement (ChAFTA) provides Australian exporters with better market access to China compared with the United States. The current tariff dispute gives Australian exporters an additional advantage. However, US product will be diverted to other markets, and there is uncertainty about what affect the recently announced subsidies would have on US competitiveness relative to Australian exports.

Chinese import tariffs, Australia and United States, August 2018
CommodityAustralia (%)United States (%)
Under ChAFTA
Beef7.2–1537–50
Dairy2-1233–40
Fresh or dried fruit2–16.747–70
Pork and pork products2.4–963–70
Tree nuts2–4.845–65
Vegetables and legumes1.4–2.625–38
Wine2.8–1329–35
Not included in ChAFTA a
Cotton126
Durum wheat126
Grain sorghum027
Soybeans328

a Most favoured nation in-quota tariff rates. ChAFTA China–Australia Free Trade Agreement.
Sources: Department of Foreign Affairs and Trade; US Department of Agriculture

The trade dispute also presents downside risks to the outlook for Australian agricultural exports. The main risk is to economic growth and therefore demand, particularly in Asia.

Asia is Australia's largest market for agricultural exports. In 2017–18 Asia accounted for 66% of total Australian agricultural exports. The second-largest regional market is the Americas, accounting for about 10% of Australia's total agricultural exports. The European Union and the Middle East each represent about 7% of Australia's agricultural exports.

Average value share of agricultural exports, by region, Australia, 2013–14 to 2017–18
Asia alone accounts for 66% of agricultural exports, followed by the Americas at 10% and then the Middle East and European Union, which each account for about 7%.

Source: Australian Bureau of Statistics

Many countries in Asia have close economic ties to China. A sharp economic downturn in China resulting from any ramp-up in the coverage or the rate of existing tariffs by China and the United States could have significant implications for income growth in the region.

Income shocks in Asia are likely to have a greater effect on consumption choices in emerging and developing economies than in advanced economies. Approximately 75% of agricultural goods exported to Asia are destined for low- and middle-income countries.

Major Australian agricultural commodity exports
Export earnings are forecast to decline in 2018–19 for canola (down 39%), barley (26%), wheat (10%), sugar (9%), wool (2%) and wine (1%). Export earnings for beef and veal and live feeder/slaughter cattle are unchanged compared with last year.    In 2018–19 export earnings are forecast to rise for lamb (up 17%), rice (14%), mutton (13%), cotton (9%), cheese (6%) and rock lobster (3%).

a All commodity prices are expressed as export unit returns in A$. Export unit returns are obtained by dividing the value and quantity of the commodity exported.
f ABARES forecast. s ABARES estimate.

Change in nomenclature: 'agricultural' versus 'farm'

The term 'agricultural' will now be used instead of 'farm' in statistical tables 16 to 22 to report on agricultural exports. The term agricultural is used to describe unprocessed or processed agricultural products, as defined in ABS International merchandise trade, Australia: concepts, sources and methods, 2018. These products include grains and flours, fresh and processed fruits and vegetables, meat and meat products, dairy products (excluding fresh milk), natural fibres, sugar and wine.

Use of the term 'farm' will be reserved for capturing the value of products that are sold from agricultural properties and that are either unprocessed or minimally transformed. These include grains, livestock sales and slaughterings, milk, sugar cane and wine grapes. The term farm is used in statistical table 10 to report on gross unit value of farm products and in table 13 to report on gross value of farm production.

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Last reviewed:
21 Nov 2018