Below trend growth to continue
As Australian agriculture exports gets set for record earnings, NAB agri economist Phin Ziebell looks beyond the stellar numbers to examine where future opportunities lie.
What a difference a year makes. Australia’s farmers are forecast to earn a record $66 billion for their produce this fiscal year, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). That represents a doubling of the wheat crop – and an eight per cent increase overall on last year – as many farms reap the benefits of vastly improved weather conditions.
Export earnings, meanwhile, are expected to surge in the next fiscal year, with projections of a six per cent rise to around $49 billion – a discernible shift from the previous three years, which all saw declines.
As NAB Associate Director of Economics Phin Ziebell says, the current export story is a highly positive one – and grains are the standout. “We’ve seen very good production numbers here, which have basically destroyed domestic premiums. That’s made Australian grain very favourably priced in global markets.”
On the animal production side, the export numbers are more mixed – lamb is up, beef is down – but again, there’s a sense of optimism. Farmers are making the most of favourable conditions to restock, a promising sign for future seasons.
In such circumstances, it would be understandable if many farmers sat back and contemplated their good fortune. Yet the past year has also been a reminder of just how vulnerable our agricultural industry is to external forces – not simply our unpredictable, often harsh climate, but also socio- and geopolitical forces beyond our borders, including shifting trade patterns and consumer demand.
Certainly, the pandemic continues to take its toll on the beef sector.
“It’s still going to be a bit of a challenge in the beef markets globally,” Ziebell says. “It’s not like people in Japan or South Korea, [for instance], are going out to restaurants in the way that they were before coronavirus. Hopefully the vaccines do provide some endpoint to that, but there will be a rebuilding period for those sectors.”
Meanwhile, trade tensions with China in 2020 have underlined the importance of market diversification. Take the rock lobster industry: 95 per cent of all live exports went to China, leaving the industry particularly hard hit by China’s ban on such exports.
The pandemic has only compounded this issue. While Australia’s comparative success in tackling COVID-19 and our proximity to Asia have served us well for the most part, exporters haven’t been immune to the challenges around air freight, which came to a near total halt early last year. “That was a real challenge early in the pandemic – to try and actually get product to market,” Ziebell points out.
While this issue has been resolved, higher global shipping costs remain. “For time-sensitive, high-value-add products like rock lobster, it’s a challenge getting on a plane for a reasonable amount of money because commercial flights simply aren’t there,” Ziebell explains.
Barley producers have also suffered under trade tensions with China. Nevertheless, their experience is a great example of the power of diversification. Last year they won lucrative feed barley contracts with Saudi Arabia; more recently they tapped the Mexican market, where their malt barley will be turned into beer.
“Barley has been really successful around diversification,” Ziebell says. However, he points to an element of good fortune here. “The global price really is good news for us, [but] it’s concealing the fact that feed barley [tends to be] a lot cheaper than malting barley. If we hadn’t had that grain price rally, the barley growers could have been a bit stuck.”
Other sectors are also being forced to diversify. Australia’s wine makers have significantly upped their exports to the UK and Europe, a move that may go some small way to alleviating the fall in exports to China following its introduction of substantial tariffs. Faced with similar issues, cotton growers are also pivoting to such countries as Indonesia, Thailand, Vietnam and Bangladesh.
Yet such success stories don’t reflect the bigger picture. Finding new markets of sufficient size can be far more problematic. The fibre sector, for instance, can’t ignore the fact that China is a massive part of the global textile industry. While rising wages in that country may see this change over time as manufacturing moves to countries with lower wage costs, for now that’s simply not the case, Ziebell says.
He also points to the challenges of establishing new relationships. “It sounds easy to say, ‘Oh, we’ll just diversify’, but it’s actually quite a difficult process. In the short term, it means potentially taking lower prices for your commodities. When you go and do business with a new country, you don’t have those established relationships, it’s not necessarily clear what the market demand is. There are always challenges around that.”
Certainly, the consumer profiles of individual countries can differ significantly. India, for example, isn’t a direct replacement for China. “The commodities demands are going to be completely different,” Ziebell points out. “You’ve got a majority Hindu country, a large number of vegetarians. They’re not going to import Australian beef or even lamb, so that’s going to be a much more grains/pulses story.”
There’s also the fact that there are local concerns around opening up India’s agricultural markets. “The previous export booms to India, particularly around pulses, proved to be relatively short-lived,” Ziebell notes.
It’s clearly important for Australian farmers to invest in their future growth and that could mean looking outside traditional export markets.
Ziebell says that, beyond next season and excluding China, the opportunities are most evident in East and South East Asia. “You’ve seen very high levels of economic growth there and that’s likely to continue. You’ve got emerging middle classes in these countries who want to eat high-quality food. I think that’s a big diversification opportunity.”
Livestock into Indonesia is the obvious example, but Ziebell points out that Australian grain also has a good reputation. “It depends on what sort of grain you’re talking about but noodle wheats, for example, have been really strong into Asia for a long time.” Beef and lamb, meanwhile, benefit from a robust marketing strategy, Ziebell says. “I think that that is a big advantage.”
Nevertheless, we shouldn’t assume this will hold strong. As Ziebell notes, countries such as New Zealand and those in South America are also good at marketing their produce. “It’s not guaranteed that people see us in a positive light,” he says. “There are challenges to our reputation, particularly when it comes to climate change management now.”
He also says we have to keep in mind our relative size globally and the high costs of production here. Rather than trying to compete in bulk commodity markets, Ziebell believes our best opportunity lies in offering the rest of the world high-value-add, high-quality produce backed by our good reputation.
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