NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Australia’s agricultural producers, long frustrated by the inaccessibility of neighbouring Asian markets, now find themselves operating on a more level playing field given the signing of free trade agreements with Japan, Korea and China.
Australia’s agricultural producers, long frustrated by the inaccessibility of neighbouring Asian markets, now find themselves operating on a more level playing field given the signing of free trade agreements with Japan, Korea and China. NAB Agribusiness Economist Phin Ziebell gives the lowdown of what it means for Australian farmers.
What are the big opportunities in this brave new world of freer trade?
China is the big story – it’s got a huge population and burgeoning middle class that will spend money on premium, ‘clean and green’ food. I don’t want to downplay Japan – it’s a big market for Australian agricultural produce. It may, for example, be importing more of our beef or indeed wine given the tariff reductions in that area. But it’s a first-world country with a declining population and low rates of economic growth. Korea is positioned somewhere between the two but closer to Japan in terms of its potential as a growth market.
Which agricultural producers will do the best out of the new arrangements?
Those who are producing protein, feed or dairy have reason to celebrate.
Especially with China, there’s the potential to export a lot more beef and live cattle. That could happen in Japan and Korea as well, but there’s currently not a lot of demand from those countries. China is also hungry for feed – it’s immediately dropping its barley tariff from three percent to zero. The Chinese are transitioning from a carbohydrate-based diet to a protein-based one; at present that protein is mainly coming from pigs and chickens, but beef will become increasingly important.
Dairy also looks set to be a winner, especially if we can replicate the kind of success New Zealand dairy has had in China. It may prove more difficult to make big inroads into the heavily regulated Japanese dairy industry but, especially over the longer term, Australia will probably be selling more infant formula, cheese and butter to Korea. Once again, China is the big opportunity, especially given Chinese consumers distrust of local dairy products in the wake of scandals such as Melamine being added to baby formula.
Exactly how much free trade is in these free trade agreements?
Firstly, almost nothing is changing overnight. The tariffs are, in most cases, being reduced over a number of years. Secondly, there’s a range of mechanisms in place, including customs and quarantine measures, for our trading partners to reduce the amount of Australian agricultural imports they’re accepting if that’s what they want to do at some point. Thirdly, some of China, Japan and Korea’s markets remain highly protected. We’re not going to see improved market access for Australian rice into those countries anytime in the foreseeable future, for example. These FTAs allow Australia to sell more of the agricultural products it was already selling, rather than opening up a host of new markets.
Is Australian agribusiness now a lot more attractive to foreign investors?
Yes, there is certainly foreign interest but the government is scrutinising those investments more closely; it’s reduced the cumulative threshold for purchases that need to be approved by the Foreign Investment Review Board to $15 million. Australia has a strong family-owned farming sector, and an increasingly ageing workforce may see demographic challenges in the future. So, overall we’re likely to see the increasing corporatisation of farming in Australia but it’s not yet clear how these ownership arrangements will be structured.
Should agricultural producers be focusing on premium products?
Savvy agricultural exporters, whether they’re selling meat, dairy or anything else should certainly be concentrating on differentiating themselves and value-adding. Asian consumers see Australia as a clean country with high food safety standards where livestock are treated humanely. That’s what agricultural producers should be trading on, whether they are selling top quality steaks to the Japanese, wine to the Koreans, or milk powder and infant formula to the Chinese.
Are we on the cusp of a ‘dining boom’?
Can we sell a lot more agricultural products to Japan, Korea and especially China? Absolutely. Can we double or triple our wheat production in the next decade and become the food bowl of Asia? Probably not. Also, our trading partners have their agendas, which will change over time. China is looking to ramp up domestic dairy production, which means it will probably be importing a lot more fodder but possibly, down the track, less dairy. So Australian agricultural producers will be dealing with ongoing evolutionary rather than revolutionary change.
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