Agricultural overview: June quarter 2020
Matthew Howden, Rohan Nelson and Andrew Cameron
Recovery from drought dominates COVID-19 impacts
While the COVID-19 pandemic has and will continue to present challenges for Australia's agricultural sector, the recovery from drought dominates the outlook for 2020–21. Farm production is forecast to rebound in 2020–21, after one of the worst droughts in over 100 years (in terms of rainfall). This follows 3 consecutive years of contraction in output. Despite a resurgence in production, the gross value of farm production is forecast to increase by only 1% to $61 billion in 2020–21 as a result of falling prices.
In 2019–20 the gross value of farm production is estimated to be $60 billion. This is an upward revision of almost $1.3 billion since the March edition of Agricultural commodities and is driven by a $1.5 billion increase in the estimated value of livestock production. An improvement in seasonal conditions across much of eastern Australia in early 2020 saw restocker competition return to saleyards, and meat prices rise. This coincided with continued strong export demand, driven by the effects of African swine fever across Asia, particularly in China.
Note: Chain volume measures.
Sources: ABARES; ABS
Prices to fall because of weaker demand and production increases
A global recession in the wake of COVID-19 is expected to result in reduced demand and lower world prices for many agricultural commodities in 2020–21. For Australia, this will be compounded by domestic grain prices falling back to export parity—and fodder crop prices falling—as the effects of drought subside. Price falls are expected in most grains, oilseeds, pulses, fibres, fodder and milk. Partially offsetting these falls are modest forecast price rises for red meat, due primarily to African swine fever-induced demand. The global pace of recovery from the pandemic is uncertain, and a prolonged slow recovery would result in prices lower than those forecast in this edition of Agricultural commodities.
f ABARES forecast.
Source: ABARES
Seasonal conditions are generally favourable in major crop-producing countries, leading to record or near record production forecasts for staples such as barley, corn, rice, soybeans and wheat in 2020. Higher production of these crops will drive prices lower but will also lead to increased food affordability and security. This differs from other major economic shocks such as the Asian financial crisis of 1997 and the 2009 recession, where prices for staples were already at high levels, which exacerbated the effects of recession in many countries.
Sources: ABARES; ABS
Return of export parity prices for crops
In Australia, crop prices are expected to fall by 9% in 2020–21 as production increases and stocks begin to recover. Feed grain demand has already subsided due to improved seasonal conditions and pasture growth. As domestic demand weakens, Australia will return to an export orientation for crops and grain prices are forecast to fall to parity with world prices in Australian dollar terms. However, this is expected to be offset by a 26% increase in production, pushing the value of crop production up 15% in 2020–21 to $30.8 billion.
Domestic grain prices rose above world grain prices during Australia's drought. This was due to the costs of importing grain, which include transport costs and the costs of meeting Australia's rigorous biosecurity protocols. The domestic wheat price is forecast to fall around 15% compared with a largely unchanged world price, and domestic barley prices are forecast to fall around 9% compared with a world price down just 3%.
Note: World wheat price is US no. 2 hard red winter wheat, Australian price is APW, fob Port Adelaide. World barley price is France feed barley, fob Rouen, Australian price is Feed barley, fob Geelong.
Sources: ABARES; IGC; Jumbuk Ag
Surge in crop production to offset herd rebuilding in Australia
Favourable climate conditions during autumn 2020 have improved prospects for the 2020–21 winter cropping season. Farm production is expected to be 7% higher in 2020–21 compared with the drought-affected production in 2019–20. Improved seasonal conditions encouraged farmers to increase the area planted to winter crops nationally by 23%, with increases of over 90% in New South Wales and Queensland.
These strong increases reflect the low base of crop area after several years of drought. Wheat is expected to make the largest contribution to increased crop production. Production of barley, canola and pulses are also expected to increase.
Sources: ABARES; ABS
Improved seasonal conditions and pasture growth to June 2020 have already reduced feed costs. A continuation of improved seasonal conditions into 2020–21 is expected to support herd and flock rebuilding and reduce livestock slaughter. Cattle and sheep slaughter are both forecast to fall significantly in 2020–21. In contrast, continued strong demand for lamb is expected to result in slaughter increasing by 4% in 2020–21.
Exports to fall despite grain production rebound
In 2020–21 the value of farm exports is forecast to fall by around $2.7 billion to $44.4 billion. A significant increase in crop export volumes will not be enough to offset a 12% fall in livestock exports, with lower prices for both categories. Slaughter numbers, and therefore exports, are forecast to fall sharply because graziers are looking to rebuild herds and flocks. Meat and live animal exports are forecast to fall by $3.5 billion in 2020–21.
In addition to animal restocking, Australia's domestic grain inventories are also forecast to rebuild. Over 4 million tonnes of the 2020–21 grain harvest (valued at over $1 billion) is expected to be retained to rebuild domestic stocks, accounting for almost half the fall in total export value. The composition of Australia's agricultural exports also differs from domestic production. The inclusion of value-added products, such as meat, dairy-based products and wine, can lead to differing performance between production and exports.
In 2019–20 the value of farm exports is expected to exceed $47 billion, 3% lower than in 2018–19. Exports of livestock and livestock products were valued at $26.6 billion in 2019–20, of which exports of meat and live animals contributed over $17 billion, a record high. Crop exports were valued at just over $20 billion, reflecting constrained production because of the drought.
Sources: ABARES; ABS
Agricultural supply chains adapt to COVID-19
With some significant exceptions, rapid and comprehensive action has meant that COVID-19 has not had a severe impact on most of Australia's agricultural industries. This has limited the amount of adaptation required.
The first impact of COVID-19 on Australia's agricultural value chains was from panic buying. As expected, panic buying at the start of the pandemic proved to be a short-term shift in the timing of purchasing. Retail purchasing has since fallen below seasonal norms as household stockpiles have been consumed.
The next most significant impact of COVID-19 on agricultural value chains came from the measures introduced to slow the spread of the disease. Specialist horticultural, wine and other businesses tailoring production toward restaurants and the food services industries have been significantly impacted. The lockdowns shifted consumption from higher value products sold in restaurants and food services toward lower-value staples consumed at home. Industries like horticulture and wine are also labour intensive, and so have been most affected by the additional costs of introducing social distancing. In broadacre agriculture, the wool industry has also been affected by social distancing for shearers, while the meat processing and live animal export industries have been affected by a small number of abattoir and shipping outbreaks.
Demand for Australian exports of food staples has remained steady. The demand for food staples is likely to be less affected by COVID-19 related falls in incomes (see the Economic overview).
Higher value exports have been impacted. Lockdowns in Australia's export markets have shifted consumption from products destined for restaurants and the food services industries to products purchased in supermarkets and consumed at home. Seafood has been the most affected industry, along with wine, horticulture, and some higher value livestock and dairy products. The Australian Government has responded with financial assistance to facilitate airfreight to alternative markets.
Global lockdowns that abruptly curtailed retail clothing sales significantly impacted the demand for Australia's wool exports. Wool exports were also affected by measures to contain the spread of COVID-19 in the yarn, textile and clothing manufacturing industries in importing nations such as China. Wool has also been affected by low oil and synthetic fibre prices and an income-related fall in demand for high-value clothing. Australia's cotton industry would also have been significantly affected had the 2019–20 crop not been dramatically reduced by drought.
However, in general, industry adaptation both in Australia and abroad has reduced the impact of COVID-19 on Australia's agricultural industries (see box). For example, the producers of high-value foods and wine have dramatically expanded online pathways for marketing directly to households. Labour-intensive industries have adapted to social distancing requirements to continue operations, albeit with additional costs and reduced productivity. Lockdown effects on agricultural and veterinary supply chains to Australia proved short term, with minimal additional disruptions to supply beyond the effects of drought.
Farmers' terms of trade to remain unchanged
The farmers' terms of trade index is the ratio of prices paid by farmers for inputs into agricultural production relative to those received for their produce. In 2020–21 it is assumed to remain unchanged, as prices received and prices paid are assumed to both fall by 5%. The farmers' terms of trade index has been increasing since 2017–18, driven by high prices received for livestock and livestock products.
In 2020–21 prices received are expected to be lower, reflecting lower prices for some crops and livestock products. Lower prices received are expected to be offset by falls in prices paid, which have been driven by lower prices for fuel, fodder and seed.
Adapting to COVID-19
The degree of adaptation required to cope with COVID-19 varies from industry to industry based on the magnitude of its impacts and the degree to which these are predictable. Pelling (2010) described 3 levels of adaptation that may be required for industries to be resilient to the impacts of change.
For impacts that are reasonably predictable or small, only minor adaptation may be needed to cope with them. Examples include a fall in the price of a commodity that shifts production to alternatives.
Impacts that are less predictable or more significant may need adaptation that pushes existing ways of doing things close to their limits (transitional adaptation). The multiple ways that Australian farming business survive prolonged drought is an example.
Impacts that are deeply uncertain or overwhelming may require entirely new ways of doing things (transformational adaptation). Examples include the invention of synthetic fibres during World War II and transformation of Australian agriculture from wool to crop production.
Effective containment strategies have meant that most of the adaptation taking place to COVID-19 in Australian agriculture has been relatively minor 'coping'—well within the existing limits of current businesses and industries. Because containment has been effective, Australia's agricultural businesses have mostly had to adapt to the effects of containment measures rather than the effects of the virus itself. This means that adaptation has only tended to be transitional or transformational at points in agricultural value chains that involve a concentration of staff or customers.
References
Pelling, M 2010, Adaptation to Climate Change: From Resilience to Transformation, Routledge, London.
Note: Export unit returns are obtained by dividing the value and quantity of the commodity exported.
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