Horticulture: March quarter 2021
Peter Collins and Charley Xia
Prices to rise in 2020–21 and then fall
The farmgate prices of some horticultural products are forecast to rise in the latter part of 2020–21, driven by an expected fall in production as a result of a significantly reduced supply of overseas labour. Prices of summer vegetables, stone fruit, pome fruit and table grapes are forecast to increase by between 7% and 29%. Fruit prices are expected to rise most, because fruit production is likely to be most adversely affected by reduced labour supply. The peak harvest period for fruit is in February, March and April, meaning lower than average supply and higher than average fruit prices may not occur until well into autumn. These price increases are expected to be low relative to normal seasonal volatility.
In the medium term, a staged increase in the supply of overseas labour is forecast to enable an increase in production. This will lower prices over the first half of the projection period. Over the latter part of the projection period to 2025–26, prices are forecast to stabilise, with production expected to continue recent growth trends.
Medium term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian horticulture are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat-sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of deciles 3 to 4. For a more detailed explanation see theAgricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is still assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.
Fall in supply of overseas workers in short term
A large fall in the supply of overseas workers is expected to reduce the supply of horticultural produce in 2020–21 and 2021–22.
The supply of overseas workers on working holiday maker visas and from the seasonal worker program declined significantly following the introduction of COVID-19 containment measures, which curtailed international travel. The major impact was on the number of working holiday makers, which fell by 64% in 2020 to around 61,000.
ABARES has assumed that the overseas labour supply will be around 50% of pre-COVID-19 levels in 2020-21, which is a significant fall in the usual workforce available to horticultural enterprises. The rise in the number of seasonal workers is likely to be limited until after the peak harvest period (February, March and April) in 2020–21. No additional backpackers are expected. ABARES forecasts assume a staged return to pre-COVID-19 levels of overseas labour supply in 2021–22 and 2022–23.
The supply of overseas labour is expected to be around 70% of pre-COVID-19 levels in 2021–22. The present impasses preventing Pacific Islanders from coming to Australia in large numbers on seasonal worker visas are assumed to be resolved during 2021. This would add significantly to the supply of overseas workers during the peak harvest period (February, March and April) in 2021–22. However, because overseas travel into Australia is expected to remain restricted until at least the end of 2021, the number of working holiday makers (backpackers) is expected to remain low. Even if restrictions on inbound travel ease significantly early in 2022, holiday makers would not be expected to come to Australia in time for the peak harvest months in 2021–22.
Constraints to the supply of overseas labour are assumed to be removed by 2022–23. Seasonal workers from the Pacific Islands and working holiday makers are assumed to be able to travel to Australia in sufficient numbers to eliminate any shortages. For the final 2 years of the projection no constraints to the use of overseas labour are assumed.
Modelling the impact of labour shortagesAnalysis of the likely impact of the reduced supply of overseas labour on production and prices in 2020–21 was reported in Agricultural commodities: December quarter 2020. That analysis included a discussion about the uneven regional impact of the reduced supply of overseas labour, adaptive responses of growers and Australian Government measures to bolster labour supply. Also described was ABARES approach to modelling the effect of the reduced supply of overseas labour on production and prices. That approach was modified slightly for the analysis reported here. A more aggregated level was used to run the model over multiple years and includes the impact of demand and the impact of the climate, economic and labour market scenarios.
Changes to supply of overseas workers to affect production
The assumed fall in the supply of overseas labour is forecast to reduce production of some horticultural products in 2020–21, despite favourable seasonal conditions. Production of fruit is forecast to fall by around 17% and production of vegetables by around 2%. Typically fruit and table grape producers are most reliant on overseas workers for picking and packing fruit. Packing sheds are becoming increasingly automated but there is no viable alternative to manual harvesting of most fruit. Many vegetable producers are smaller scale and less acutely affected by the reduced supply of overseas labour because they are better able to mobilise family labour, and are often located in peri-urban areas that are more attractive to local workers.
Production is forecast to increase in 2021–22 and 2022–23 as constraints on the supply of overseas workers return to pre-COVID-19 levels. A large number of almond and citrus orchards are coming into full production over the projection period. These will contribute to small increases in aggregate production, particularly over the latter part of the projection period.
Consistent demand drives prices higher when supply falls
Despite demand for some horticultural produce being somewhat seasonal, demand for many products is quite consistent throughout the year, serviced by counter-cyclical imports of fresh produce from overseas. Counter-cyclical imports also occur between Australian states. This is common during the winter months when many sought-after fresh vegetables are imported into the southern states from Queensland. However, counter-cyclical imports add transport and biosecurity costs and are not always instantly available when local supplies fall.
Demand for horticultural produce in Australia is not particularly sensitive to changes in price. For example, Australian consumers generally do not significantly reduce purchases of fresh produce when prices rise. Most household purchases of fresh produce generally make up only a small share of household budgets and this provides more scope to pay higher prices for these products.
These characteristics of demand for fresh produce in Australia often mean variations in local supply lead to large short term swings in prices. Broccoli provides a good example of this phenomenon. Its price regularly cycles between about $4 per kilogram and about $7 per kilogram in southern states, depending on crop cycles and the source location.
In this context, forecast price changes of between 7% and 29% are not particularly unusual and are unlikely to come as a shock to consumers of fresh produce.
Disruptions to the supply of fresh fruit and vegetables have been occurring since March 2020. Year-on-year increases in fruit and vegetable prices in the December quarter in 2020 were higher than recent years. In 2016, the December price increase was much higher than other years because of floods in key growing regions. In the September quarter, year-on-year price increases in 2020 were much higher than recent years and slightly higher than in 2016 when floods adversely affected key growing regions. In the June quarter, the year-on-year price increases in 2020 were similar to 2019 when there was unfavourable growing conditions in key Queensland growing regions but much lower than in 2017 when there was very unfavourable growing conditions in key growing regions. Increases in farmgate prices are likely to be passed onto consumers by retail outlets and show up in consumer prices.
Production value to rise in 2020-21 then fall
Despite a forecast fall in the volume of production, higher prices are forecast to result in an increase in the gross value of horticultural production by 6% to almost $13 billion in 2020–21, 17% above the 5-year average to 2019–20 in nominal terms. The value of vegetable production is forecast to increase to a record high of $4.9 billion, 18% above the 5-year average to 2019–20 in nominal terms. The value of fruit and tree nut production is forecast to increase to $5.6 billion, 20% above the 5-year average to 2019–20 in nominal terms.
The value of horticultural production is forecast to fall in 2021–22 and 2022–23. With overseas labour assumed to return in stages to pre-COVID-19 levels over those years, production is forecast to increase and prices to fall.
Over the latter part of the projection period when constraints to the supply of overseas labour subside, the value of production is forecast to increase in nominal terms at a small but steady rate, but to fall in real terms. This is expected to be driven by increasing productivity and production, especially in horticultural commodities that have a higher than average export orientation, particularly almonds and citrus. There were significant plantings in these sectors around 2016–17, and shortly after, which will bear over the next few years.
For example, almond production is set to reach a record high in 2020–21, with more trees coming into production over the projection period. In the climate scenarios behind these forecasts, sufficient irrigation water is expected to be available for these high value crops. Even if the supply of irrigation water falls, and the price of water increases, producers of high value crops are still expected to purchase what they need to maximise production. Export demand for these products is expected to grow over the projection period. These products are popular in countries where incomes are rising and consumers are becoming more health conscious. Demand will be aided by a slowly recovering world economy following the roll out of COVID-19 vaccines.
Export value to rise
Exports of fresh horticultural produce are expected to be mixed in 2020-21. The value of almond exports is forecast to grow due to expected record production and growing demand in Asia, particularly China and India. There are already contracts in place for the expected exports to China in 2020-21. The value of vegetable exports is forecast to grow modestly in 2020-21. However, the value of fruit exports is forecast to fall with fruit production expected to be most affected by the reduced supply of overseas labour. Over the latter part of the projection period, the value of horticultural exports is forecast to grow steadily, driven by growth in fruit and nut exports.
The upside scenario has very much above average rainfall early in the projection period followed by one year of very much below average rainfall and 3 years of just below average rainfall. The economic outlook is more positive than forecast, with a rapid recovery in the world economy following vaccine rollouts for COVID-19. The labour market outlook is also more positive, with a larger return of overseas labour in 2021–22 than used to produce the forecast.
The value of horticultural production is forecast to be lower in the upside scenario than in the 2021–22 forecast. An assumed higher supply of overseas labour would increase the volume of production. Higher production would result in a faster fall in prices as the sector adjust backs to pre-COVID-19 trends.
From 2022–23 to the end of the projection period, the value of horticultural production in the upside scenario would be expected to be higher than in the forecast. The year with very much below average rainfall comes after 2 years of well above average rainfall, and well-stocked water storages can reasonably be expected to buffer horticultural production. Constraints to the supply of overseas labour are removed by 2022–23 and the more favourable economic outlook would be expected to drive stronger export demand for products like almonds and citrus.
The downside scenario assumes well below average rainfall early in the projection period in 2021–22 and again in 2025–26, with just below average rainfall in the intervening years. The well below average rainfall early in the period comes after one year of well above average rainfall that would replenish water storages but not to the same degree as 2 years of above average rainfall early in the upside scenario. Consequently, horticultural production is forecast to be more adversely affected by the well below average rainfall early in the period in the downside scenario. Similarly, well below average rainfall in 2025–26 would have a more significant adverse impact on production. This is because it follows the year of well below average rainfall early in the period and 3 subsequent years of just below average rainfall.
The economic environment in the downside scenario is assumed to be difficult, with ongoing outbreaks of COVID-19 leading to ongoing containment measures that restrain economic activity and people movements. These measures would lead to a slower return of overseas labour. World economic activity would be dampened for much of the period with some recovery late in the projection period. This delayed economic recovery would increase export demand for horticultural produce like almonds and citrus late in the projection period, providing a partial buffer to the downward impact on the value of production caused by projected lower production.
The value of horticultural production in 2022–23 is forecast to be higher in the downside scenario than in the forecast, mainly because of the lower supply of overseas labour. The volume of production would be lower, which would be expected to lead to proportionately higher prices.
Opportunities and challenges
Labour shortage may spur productivity growth
COVID-19 is creating significant resourcing challenges for parts of the Australian horticultural industry. But this also presents the industry with an opportunity to put itself in a stronger long-term position that is better prepared for future market upheavals.
For example, robot harvesters for fruit are being developed and are closer to being commercially viable. If this technology becomes commercially viable it would help protect the industry against future labour shortages. Labour saving technologies could also lower variable operating costs, increasing the competitiveness of the industry in growing export markets. However, this kind of innovation requires significant capital investment, and may also require changes to existing production systems. For example, the way orchards are laid out may need to be altered to maximise the cost and picking effectiveness of robots.
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