Agricultural overview: March quarter 2021
Andrew Cameron, Charley Xia and Rohan Nelson
Record value of production for 2020–21, but exports falling
The gross value of agricultural production is forecast to reach a record $66 billion in 2020–21, boosted by Australia's second‑biggest winter crop on record. Significantly larger harvests in every Australian state are forecast to result in a 59% increase in the gross value of grains, oilseeds and pulses compared with the 2019–20 season. The gross value of livestock production is forecast to fall 8% due to falling slaughter, despite record high prices for cattle and sheep.
Exports are forecast to fall 4% to $46 billion in 2020–21 – the third consecutive year of falling export earnings. This is mostly due to lower livestock and livestock product exports as herd and flock rebuilding leads to lower slaughter and meat production. The value of crop exports is forecast to increase sharply in line with record production, up 12% to $24 billion.
Value of production down and exports up in 2021–22
In 2021–22 the gross value of agricultural production is forecast to fall from record highs to $63.3 billion. Cropping regions will benefit from residual soil moisture and replenished water storages, but production is unlikely to match that of 2020–21. New South Wales and Victoria are estimated to have harvested their largest ever winter crops in 2020–21 – a feat unlikely to be repeated next season. Rebuilding of cattle and sheep numbers will also reduce slaughter. Prices are forecast to fall for most commodities – apart from natural fibres, which will begin to recover from sharp falls in 2020 in the wake of COVID-19. Australia's agricultural exports are forecast to grow 6% in 2021–22, driven by higher cotton, wool and dairy exports.
Over the medium term to 2025–26 the gross value of production is forecast to remain above $60 billion (in nominal terms). The livestock sector is expected to enter a period of rebuilding at the same time as prices are forecast to ease from record levels. Broadacre and irrigated crop production will remain highly dependent on variable seasonal conditions. Crop production is forecast to sit between recent record highs (2016–17 and 2020–21) and drought-affected lows (2018–19 and 2019–20). Horticulture is forecast to continue steadily growing to reach a record 21% of agriculture's gross value by 2025–26.
Agriculture adapts well to COVID-19 but faces future growth challenges
The agricultural sector has navigated the COVID-19 pandemic relatively well. Recovery from drought and external demand for red meat have dominated the impacts on sector performance, despite the challenges posed by labour shortages, border closures and lockdowns.
Australia has successfully delivered the second-largest winter crop on record, with few reports of disruptions to harvest. Despite a lack of seasonal harvest workers and working holiday makers, prices for horticultural products have not yet recorded significant price increases. This demonstrates that Australia's agricultural sector and downstream supply chains are resilient and adaptable, and again confirms that Australia is one of the most food secure countries in the world.
Over the medium term, agriculture will continue to face challenges and opportunities. China's expected recovery from African swine fever and restructuring of its pig industry are expected to ease global demand for red meat, lowering prices from their current record levels. Prices for crop and crop products are forecast to fall in 2021–22 before resuming trend growth. Despite recent tariffs on barley and wine, China is still expected to remain Australia's most significant agricultural trading partner. These developments, along with macroeconomic and production uncertainties, will provide the backdrop for a likely more difficult environment in which to grow trade value. Using existing market access and recognising the role of market diversification as a risk management strategy will be important to ensure export growth.
The sector is not expected to increase the total volume of agricultural production over the medium term. The volume of production, while variable year-to-year, has been fairly stable over the decade to 2020–21. Australia's highly variable climate will continue to dictate the fortunes of the sector year-to-year and longer term. Recognising this key source of uncertainty, ABARES has expanded the use of seasonal climate scenarios to produce medium-term forecasts (see Box).
Demand for Australian agricultural goods less affected by pandemic
Throughout the COVID-19 pandemic, the impacts of containment measures have been cushioned by the low income responsiveness of demand for food staples, and the small share food makes up in the budgets of advanced economy households. The demand prospects for Australia's agricultural exports remain good despite the lingering adverse effects on incomes of COVID-19 containment measures. Early in the pandemic, panic buying caused temporary supply disruptions, which were largely corrected within 1 to 2 months. This was followed by lockdowns and a transfer of consumption from eating out to meals prepared at home. Unprecedented levels of income support in many countries has also dampened the effects of the pandemic on consumer demand.
Scenario analysis shows upside potential
Scenario-based forecasts suggest that Australian agriculture has more upside potential than downside over the medium term. Projections for the gross value of production developed under the upside and downside scenarios range from $66 billion to $58 billion in 2025–26 (nominal terms), compared with the $60.3 billion forecast. Realising this upside would require more favourable seasonal conditions combined with faster than expected recovery from COVID-19 globally. This would result in larger crop harvests and higher crop and livestock prices than forecast. Projections for the value of agricultural exports in 2025–26 range from around $50 billion to $46 billion (nominal terms), compared with $47.2 billion forecast. In the downside scenario, a combination of a weaker Australian currency and increased livestock turn-off limits overall reductions in gross value of production and exports.
Supply chains adjust through a turbulent year
Farmers' terms of trade have improved
The farmers' terms of trade index (a measure of the prices received by farms for agricultural goods sold relative to prices paid for inputs) has improved during 2020–21. It is forecast to be 3.3 index points higher in 2020–21 than in 2018–19 prior to the pandemic. Lower energy prices resulting from COVID-19 lockdowns drove down costs for chemicals, fertilisers and fuel in 2019–20. Fodder and seed prices are also forecast lower in 2020–21 due to improved seasonal conditions. At the same time, higher livestock prices resulting from African swine fever's effects in China and restocking demand in Australia increased prices received, improving the terms of trade measure. Broadacre farm cash incomes are projected to increase by 18% to an average of $184,000 a farm in 2020–21.
Food manufacturers affected by drought and lockdowns
Food manufacturers faced more challenging conditions during 2020. Prices for cakes and pastries fell noticeably over 2020 because demand from cafes and restaurants dwindled as a result of lockdowns. Fruit and vegetable processors also saw output prices fall, as better seasons after drought resulted in higher production and lower prices. Input prices for vegetables were flat, but fruit and nut prices for manufacturing rose during the first half of 2020. To date, there have been only small increases in fruit and vegetable prices for manufacturers and consumers, despite the challenges faced by some producers in securing harvest labour.
Domestic consumers saw price rises for red meat, COVID-19 impacts muted
Food prices have risen marginally above trend during the pandemic. Food price rises in 2020 have been largely driven by red meat rather than fruit and vegetables. Red meat prices have risen due to post-drought restocking competition for animals and increased international demand for protein as a result of African swine fever.
Changes in retail spending favour food during pandemic
Some surprising trends in household consumption have emerged. Expenditure associated with travelling and social gatherings formed a significant proportion of household spending before the pandemic. In some advanced economies (including Australia), this has been redirected to precautionary savings, grocery purchases and household goods. In some countries, overall food spending has increased as consumers spend more on food retailing than they previously did on eating out. With the food services sector in many countries heavily affected by lockdowns, this has shifted the composition of food consumption in restaurants to more easily prepared food consumed at home.
Medium-term forecasts now using expanded scenario approach
In this edition of Agricultural commodities, ABARES has expanded the use of scenarios for medium-term agricultural forecasts. The purpose of moving to scenario based forecasts is to better explain the factors driving Australia's agricultural markets. This approach was first introduced in March 2020 (see Seasonal climate scenarios for medium-term agricultural forecasts) and aims to use more realistic medium-term assumptions that take into account Australia's highly variable and changing climate. In light of the unprecedented uncertainty introduced by the ongoing COVID-19 pandemic, this edition combines more advanced climate scenarios with post-COVID-19 scenarios of global macroeconomic recovery.
The forecasts presented in this publication have been derived from 3 types of scenario:
- 'neutral' scenarios use a sequence of climatic and macroeconomic assumptions that form ABARES view on the range of most likely outcomes
- an 'upside' scenario which assumes a more favourable sequence of climatic outcomes combined with a faster macroeconomic recovery
- a 'downside' scenario which assumes a less favourable sequence of climatic outcomes combined with a slower than expected macroeconomic recovery.
Most of the market analysis in this publication concerns the average of the neutral scenarios, unless explicitly noted. These are termed the forecast. The full range of projections are based on the macroeconomic assumptions outlined in the Economic overview, combined with 4 seasonal climate scenarios outlined in Seasonal conditions. These forecasts are presented in the tables in each chapter and are available for download in the associated data products. This approach is similar to the ensemble technique used by forecasters like the Bureau of Meteorology when forecasting climate drivers such as the El Niño Southern Oscillation (ENSO) – albeit highly simplified. An illustrative example is shown in Figure 1.
Except where explicitly noted, production in other countries, consumer demand and prices are assumed not to be meaningfully affected by the various neutral scenarios used. The upside and downside scenarios are assumed to have some effects on these variables. Scenario analysis was not extended to the input components of the farmers' terms of trade estimates.
Both the upside and downside scenarios are designed to combine sequences of events that are considered less likely to occur than the neutral scenarios, but which are plausible enough to warrant exploring their likely effects on markets.
The 4 climate sequences that form the neutral scenarios each assume the same seasonal conditions for the first year of the projection period (2021–22), based on an analysis of the climate conditions most likely to follow a La Niña event (Table 1). No reliable seasonal climate forecasts are available for the 4 years between 2022–23 and 2025–26, requiring assumptions to be made about the conditions most likely to be experienced. A drying trend means a high probability of decile 3 to 4 rainfall in the wheat-sheep zone in most years. Analysis of the climatic record indicates that the wheat-sheep zone is likely to experience at least one very dry year (decile 1 to 2 rainfall) over the 4 years of the projection period and is much less likely to experience the recurrence of a wet year like 2020–21 (see Seasonal conditions).
|Neutral climate scenarios|
|Year||Scenario A||Scenario B||Scenario C||Scenario D||Upside scenario||Downside scenario|
|2021–22||5 to 6||5 to 6||5 to 6||5 to 6||7 to 8||1 to 2|
|2022–23||1 to 2||3 to 4||3 to 4||3 to 4||1 to 2||3 to 4|
|2023–24||3 to 4||1 to 2||3 to 4||3 to 4||3 to 4||3 to 4|
|2024–25||3 to 4||3 to 4||1 to 2||3 to 4||3 to 4||3 to 4|
|2025–26||3 to 4||3 to 4||3 to 4||1 to 2||3 to 4||1 to 2|
Note: Wheat-sheep zone rainfall deciles. Rainfall deciles based on rainfall records from 1910 to 2018.
Production outcomes are then forecast using these climate scenarios. Production outcomes are not necessarily tightly linked to rainfall inputs, as shown in Figure 2. Each forecast also considers additional factors such as the persistence of soil moisture from season-to-season, crop rotations, pasture management, responses to price incentives and technology trends. Export forecasts additionally consider the influence of domestic use and inventories, as well as the macroeconomic environment.
|Agricultural commodities: March quarter 2021 - Report PDF||80||8.04 MB|
|Agricultural commodities: March quarter 2021 - Commodities - data tables XLS||12||209 KB|
|Agricultural commodities: March quarter 2021 - Statistics - data tables XLS||32||601 KB|
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