Agricultural overview: September quarter 2020
Andrew Cameron and Charley Xia
Drought recovery on track but COVID-19 to hit earnings
The agricultural sector remains on track for a recovery after 3 years of drought-affected seasons. Production is forecast to grow strongly, but the gross value of production is forecast to remain unchanged at $61 billion in 2020–21 due to falling prices. Crop volumes are forecast to drive this recovery in production – crop prospects on the East Coast are particularly favourable (see the Australian crop report for more information). Livestock earnings will be a drag on growth as depleted herds and flocks are rebuilt. COVID-19 pandemic-related travel restrictions and manufacturing facility closures are not expected to result in meaningful reductions in Australia's total agricultural production. However, these remain a significant risk in the latter half of 2020–21, particularly for horticulture (see box for upside and downside scenarios).
A combination of falling commodity prices, reduced livestock product exports and grain stock rebuilding is expected to result in a 10% fall in the value of agricultural exports to $43.5 billion in 2020–21. The global economic outlook has deteriorated since the last outlook was issued in June and downside risks continue to dominate (see the Economic overview for more information). Prices are forecast to fall for almost all Australian agricultural exports.
COVID-19 continues to cloud demand outlook
Demand for most agricultural products has fallen as a result of the continuing pandemic, although not to the same degree as discretionary goods and services. Global GDP will contract sharply in 2020 and unemployment is likely to remain elevated worldwide during 2020–21 and beyond. This has reduced consumer discretionary spending power and lowered prices and consumption of higher value agricultural goods such as wool to a much greater extent than food staples such as milling wheat.
Consumer spending patterns in Australia and in other major economies appear to be settling in to a 'new normal', with higher expenditure on food for home consumption, lower expenditure on restaurants and takeaway, and reduced spending on clothing. This situation is likely to continue for some time. These shifts will be exacerbated and extended if future waves of infection and lockdowns occur.
African swine fever supporting red meat prices
The reduction in Chinese pig numbers due to African swine fever will continue to support animal protein prices in 2020–21. Despite COVID-19 reducing consumer spending power, red meat prices will remain close to historic highs. Meat prices for Chinese consumers remain very elevated compared with historical levels and alternatives will continue to be needed in coming years. Pig numbers are expected to continue their slow recovery, reaching 80% of pre-outbreak levels by the end of 2021. However, African swine fever outbreaks continued to be reported worldwide during August 2020, including in China.
Rising trade tensions add further risks to outlook
The COVID-19 pandemic has highlighted the issues and risks that come with highly concentrated supply chains. China – Australia's largest agricultural trading partner – has recently announced anti-dumping and countervailing-duty investigations into Australian wine exports. This follows an 80% tariff being imposed on Australian barley exports. Since 2017 China has signalled that it could increase its use of anti-dumping and anti-subsidy tools. This presents an increasing risk for many agricultural industries in coming years. Agricultural trade with China continues to be very strong despite these tensions. China has ranked as the highest value destination for Australian agricultural exports every month since February 2011.
Global food production and trade continue to grow
The world's agricultural production and distribution systems have continued to function during the pandemic. Conditions have been generally favourable for crop production worldwide, and seasonal climate models indicate that this is likely to continue during the next 3 months. World grain stocks are abundant, with record highs expected for both wheat and rice. Record or near-record global export volumes of corn, wheat and soybeans are forecast in 2020–21. When combined with shocks to demand resulting from the pandemic, there is very little chance that agricultural commodity prices will rise substantially during 2020–21.
Australian crop prospects good but livestock production falling
Grain production is forecast to rebound in 2020–21 to the highest level since the record harvest of 2016–17. Prospects for New South Wales are particularly good, following 3 consecutive years of falling production due to adverse seasonal conditions. Over 60% of the forecast increase in winter crop production will come from New South Wales. Cotton production is also forecast to increase strongly in 2020–21, although this crop will not be exported until 2021–22. Depleted domestic grain stocks are expected to be rebuilt. This means at least 4 million tonnes of the 2020–21 harvest will not be exported in 2020–21.
Falling livestock production is expected to almost entirely offset the increase in the value of crop production. The value of livestock production is forecast to fall by over $4.4 billion in 2020–21, with herd and flock rebuilding being the largest contributing factor. Almost every livestock category is forecast to fall in value in 2020–21 – apart from poultry and eggs, which will see modest rises in the values of production. The domestic market will remain well supplied with meat and dairy products, as exports will fall in response to lower production. Live sheep exports are forecast to stabilise around 1 million head per year following the formalisation of animal welfare regulations (see box).
Value of live animal exports to Australian agriculture
Live animal exports are an important but small component of Australia's agricultural exports. Over the 5 years to 2019–20, live animal exports contributed an average of $2 billion to agricultural exports. Live exports fell from close to 14% of the total value of meat and live animal exports to less than 12% over the same period. Cattle made up 79% of the total value of live exports, sheep accounted for 11% and horses 9%. Small numbers of other animals, such as poultry, goats, camels and bees, were also exported. Regulations implemented from May 2020 are expected to increase certainty for live sheep exporters.
Grain harvest unlikely to be hampered by travel restrictions
Border closures and other travel restrictions are not expected to significantly reduce total Australian agricultural production in 2020–21, but may add to costs for labour-intensive activities such as fruit harvesting. On September 4 2020 several Australian states agreed to adopt a risk-based code allowing for the movement of agricultural workers, and most states agreed in-principle to move to a 'hotspot' system for travel between regions. Both systems will allow for more interstate movement.
Broadacre crop harvesting partly relies on the movement of equipment and staff up and down the East Coast. Social distancing is relatively easy to achieve and much of the workforce is already in Australia. While some localised issues may emerge, the national grain harvest is not expected to be significantly affected.
Seasonal labour a risk for horticultural production
Seasonal labour availability for the horticultural sector will present challenges over the summer and autumn of 2020–21. Overseas workers normally supply a significant share of harvest labour, but COVID-19 travel restrictions mean this may not be the case in 2020–21. Continuing collaboration between governments and supply chain participants, combined with on-farm risk management, are expected to lessen the possible disruption to production in 2020–21.
Currently, fresh produce markets in key capital cities have reported increasing supplies of newly harvested fruit and vegetables, and wholesale prices are exhibiting normal seasonality patterns in early spring (see the Weekly Australian Climate, Water and Agricultural Update for more information). These indications suggest that fresh produce prices are unlikely to rise significantly in the short term because of seasonal labour shortages.
If major labour disruptions were to occur in late summer and early autumn, the impact would be more significant. This period coincides with harvests of a number of fruit, nuts and vegetables across all states and a sharp rise in the number of casual and contract workers employed on farms.
If labour shortages reduce harvests, fresh produce prices would increase. The prospect of higher prices may encourage some producers to increase wages to secure additional domestic labour. Farms would also compete for the limited labour supply, and provided the movement of agricultural workers is largely unimpeded, workers would shift to higher productivity farms.
Scenario modelling shows downside risks more significant than upside in 2020–21
Given the historic uncertainty presented by the COVID-19 pandemic, 2 additional scenarios are considered in this edition of Agricultural commodities. These are based around different levels of economic activity as represented by the upside and downside scenarios outlined in the Reserve Bank of Australia's August 2020 Statement on Monetary Policy, with some additional assumptions relevant for the agricultural sector added. The extreme uncertainty associated with the pandemic means it is difficult to evaluate if one scenario is more likely than the other.
In the upside scenario, a faster than expected reopening of the domestic economy and a recovery in private demand is assumed to translate to lower unemployment and a modest increase in discretionary consumer spending. Although international tourism does not resume, improvements in addressing outbreaks overseas are assumed to translate to similar outcomes in Australia's agricultural trading partners. This leads to higher prices than forecast for most agricultural products, particularly wine, wool and lamb. Labour supply issues for agriculture are assumed to lessen and no further major outbreaks in Australian supply chain facilities such as abattoirs or distribution centres occur. There is no significant impact on agricultural production as a result. The Australian dollar exchange rate remains at around 72 US cents over 2020–21 (unchanged from ABARES current assumption).
In this scenario, the gross value of agricultural production would be $1.9 billion higher in 2020–21. This is primarily the result of higher prices relative to those forecast for both crops and livestock products. There is little production response to higher prices because crop production is already locked in for the 2020–21 season and depleted cattle and sheep numbers would limit additional production responses in the short term. The cropping sector would add $930 million and the livestock sector just over $1 billion. Agricultural exports would still fall year-on-year, but by 4% instead of 10% as forecast. The largest improvements would be in export returns from wine and natural fibres as a result of international demand for discretionary purchases partially recovering.
In the downside scenario, periodic outbreaks and lockdowns occur in Australia and around the world. A wave of new infections peaks in early 2021, during the Australian summer. Movement restrictions and business closures in Australia would be more widespread. This would result in consumer spending continuing to fall, unemployment rising further, and greater disruptions to domestic and international supply chains. Broadacre crop harvesting is assumed to continue under these challenging conditions, but highly labour-intensive production in the horticultural sector is likely to be much more disrupted. Occasional outbreaks and shutdowns occur in domestic meat manufacturing facilities, combined with limits on throughput during lockdowns. The Australian dollar in this scenario is assumed to appreciate further because additional fiscal stimulus in the US puts downward pressure on the dollar, while iron ore supply disruptions in Brazil increase prices for Australian exports.
The agricultural sector is much more sensitive to this downside scenario. The gross value of agricultural production would be $3.7 billion lower than forecast in 2020–21. Again, prices are the main factor influencing sector performance. However, some production falls in horticulture as a result of labour shortages would also occur. The cropping and livestock sectors would lose around $1.8 billion each. Agricultural exports would fall by 11% relative to the forecast, to $38.9 billion in 2020–21, as international demand for Australian exports fall. This would be the lowest export value in a decade. On top of the deteriorating international demand for a number of Australian commodities already factored into the forecast, worsening conditions in the downside scenario are expected to spill over to significantly affect exports of grains and oilseeds, sugar, meat, dairy products and live animals. Weaker exports would accelerate stock rebuilding in Australia in crops industries and herd rebuilding in livestock industries.
|Gross value of agricultural production||2019-20s||2020-21f||Upside scenario||Downside scenario|
|% change from 2019-20||-||0.4%||3.6%||-5.6%|
|% change relative to forecast||-||-||3.2%||-6.0%|
|% change from 2019-20||-||17.6%||21.0%||10.9%|
|% change relative to forecast||-||-||2.9%||-5.7%|
|% change from 2019-20||-||-13.7%||-10.6%||-19.2%|
|% change relative to forecast||-||-||3.6%||-6.3%|
|Value of agricultural exports|
|% change from 2019-20||-||-10%||-4%||-20%|
|% change relative to forecast||-||-||7%||-11%|
|% change from 2019-20||-||2%||11%||-9%|
|% change relative to forecast||-||-||9%||-11%|
|% change from 2019-20||-||-20%||-15%||-29%|
|% change relative to forecast||-||-||6%||-11%|
f ABARES forecast. s ABARES estimate.
|Agricultural commodities – September 2020 PDF||63||6.2 MB|
|Agricultural commodities: September quarter 2020 - Commodities - data tables XLS||12||176 KB|
|Agricultural commodities: September quarter 2020 - Statistics - data tables XLS||32||582 KB|
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