Below trend growth to continue
2015 could be a very good year for agribusiness, with easier access to Asian markets and favourable economic conditions. Five of NAB’s leading commentators take a close look at the opportunities and share their tips on how to make the most of them.
With a lower Australian dollar, relatively low and stable interest rates and numerous free trade opportunities, 2015 is looking good for Australian agribusiness. Some of NAB’s leading commentators identify the likely opportunities and suggest ways to make the most of them.
Drought has taken its toll in New South Wales, Queensland and parts of Victoria and South Australia, so we’re all hoping for significant weather events to start the year. But, despite the drought, there are many reasons to feel optimistic – not least the fact that our large trading partners recognise Australia as a good and safe nation to do business with.
This year, opportunities lie in being able to move between macro-economics and micro-economics. On a macro scale, farmers need to be aware of global trends such as changing patterns of food consumption. On a micro level, they need to focus tightly on particular markets, which means thinking in terms of cities or counties rather than whole countries. And, while China is very much top of mind, let’s not forget the rest of Asia and our more traditional trading partners such as the United States.
Locally, one of the biggest trends is investment in northern Australia, which encompasses Queensland and the Northern Territory. The government is injecting resources and funding into the region and NAB already has close to 20 specialist bankers living in the north and funding projects in the region.
Overall, the biggest opportunities will always lie in understanding what your target market wants and satisfying their needs.
The trade agreements signed in 2014 will provide easier access to significant markets in Japan, Korea and, of course, China. For some time, China’s concerns about food security, environmental issues and the fast-growing middle class have been creating opportunities for Australian agribusinesses. The FTA has created a symbolic link between the two nations and signals a higher level of commitment to trade, which should encourage them to lengthen their supply chain into overseas markets.
It will take a while for the FTA with China to be formalised but as it’s phased in over the next few years, the reduction in tariffs will make us a lot more competitive – at least as competitive as countries such as New Zealand and the United States.
NAB’s Asia Desk can help domestic producers and processors to find new markets in Asia and facilitate foreign investment in Australian agriculture. This can involve a joint venture, where farmers receive the cash they need to expand or upgrade their business in exchange for suppling their investors into the future. Some Australian agribusinesses are already taking advantage of this win-win arrangement and we’re likely to see more joint ventures of this kind in 2015 and beyond.
People are paying a lot more attention to the provenance of their food and there’s evidence that they’re willing to pay more for produce grown sustainably and ethically in a clean environment. This opens up significant opportunities for Australian farmers to tailor products to this market.
Premium dairy products and ethically raised beef, pork and poultry are all attracting higher prices and there’s growing demand for niche horticultural products such as heirloom varieties of fruit and vegetables. There’s also been a significant growth in demand for organic products over past few years and we expect that to continue. In the Middle East and Asia, food safety is a paramount concern and ‘organic’ is considered to be a byword for food safety.
Grain growers probably face the biggest challenge in terms of differentiation but there could be opportunities to diversify. For example, some farmers in Western Australia’s wheat belt have responded to emerging demand by planting quinoa and other heritage grains. There are risks associated with introducing new grains to Australian conditions but farmers who diversify can also be less vulnerable to weather events and fluctuations in global markets.
Some farmers are missing out because they’re already producing a premium product but aren’t marketing it on the basis of its quality. A change in strategy could increase their margins by making the product more attractive for no extra cost.
Interest rates are at record lows and seem likely to stay low, at least until the end of 2015. That makes this year a good time for all agribusinesses to reassess their interest rate risk management and perhaps lock in lower costs by taking advantage of falls in longer-term fixed interest rates.
Over the past five or six years we’ve seen greater volatility in all markets and there’s nothing to suggest that 2015 will be any different. Volatility brings opportunities as well as risks but, if you’re going to take advantage of them, you need to stay abreast of developments and have a really clear strategy in place for responding as they arise. Last year we saw a good example of this in grain marketing. There were some great opportunities for forward sales around sowing time but prices fell away before recovering for a short-lived rally during harvest.
Last year we saw a sell-off in international commodity prices across both the agriculture and the minerals and resources sectors. This took many people by surprise – and it also brought home the fact that agricultural commodities are part of a much bigger commodities complex. So, while it’s really important to be aware of what’s going on in your own industry, you should also be aware of what’s happening in the context of the broader market.
Over the past few years we’ve seen farmers repaying debt, repairing their balance sheets and working through the difficult conditions that followed the global financial crisis. This positive trend looks set to continue but it’s still important to plan for shocks that could affect your cash flow. You can’t anticipate every risk but you need to know that your cash flows and projections are robust and sensitised. It’s also important to maintain contact with your banker as they can help you with managing risk and tracking actual results with budget.
Low interest rates and a reduction in the exchange rate are creating a favourable environment for exporters, so this will be a good time for anyone running an agribusiness to talk to their banker about opportunities in Asia and other parts of the world.
There should also be opportunities to minimise the cost of inputs such as seed, sprays, feed, fertiliser and fuel by locking in contracts with suppliers and also managing interest rate and foreign exchange risk with specialist input.
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