NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
There are plenty of opportunities for agribusiness in 2016. Four agri specialists from NAB – Khan Horne, Phin Ziebell, Greg Noonan and Rodd Ludeman, share their predictions.
With the Australian dollar falling, historically low and stable interest rates and numerous free trade opportunities, plus an ever-growing demand for Australia’s high-quality produce, 2016 is looking positive for Australian agribusiness. Some of NAB’s leading commentators identify the opportunities ahead.
Despite continued pressures of some less than ideal and drought conditions in parts of Australian agriculture, the industry has benefitted from the lower Australian dollar and interest rates.
These are exciting times supported by Australian agribusinesses getting out and into offshore markets, establishing relationships and taking advantage of this low dollar because when it’s high it’s a hard old slog.
Future modelling shows there will continue to be flat interest rates and some downward pressure on the dollar. But no-one knows what the dollar will do exactly, so it’s important for agribusinesses to be aware of the impact.
Regarding agriculture finance, make sure you’re fully aware of the Farm Management Deposit scheme over the next 12 months. There may be opportunities for many who have had a good year to increase the level of deposits.
There’s a lot of goodwill out there from the government to enhance Australian agriculture such as the free trade agreements, so be aware of the macro support but also look for other opportunities – we’ve seen a wonderful take up for the subsidies associated with the Clean Energy grants.
There are also opportunities for farmers who think globally, and act locally; they’ve got to be in tune with the macroeconomics of their product, but also the efficiencies of running the business.
We’re seeing a big kick in leasing numbers with people taking advantage of low-interest rates to move to more efficient, labour replacing, plant and equipment. There’s a massive hunger for upgrading equipment to optimise production and reduce costs associated with waste, energy and labour.
A significant trend is an increased investment in food safety and quality assurance programs. Agricultural products are being treated as food in the paddock not just when they hit supermarket shelves.
There are big opportunities in agribusinesses in being able to move up the value chain; that’s a long-term story for Australian agriculture. We haven’t always sold at the right point in the value chain. We’ve been producing a premium product, but not putting enough emphasis on marketing it as a premium product. Internationally, we haven’t been as effective at marketing our products as we could be. Moving up the value chain is increasingly happening and needs to keep happening to keep Australian agriculture getting the best returns they can for the product.
It’s easier for some products to product differentiate than others. There have been some successes, even with wheat. There are some producers who have moved up that value chain with a premium wheat and flour product, and there’s a real undersupply of organic grains. But it’s going to be harder for a bulk commodity like wheat, than beef, for example. It’s a matter of knowing your market.
One of the big trends next year focused on trade is going to be about diversification, of products and most importantly of markets. The last few years have seen a lot of focus on a single market, and certainly China has become a much bigger share of Australian exports, but when you look at the beef industry, all the growth in Australian beef exports has been the US markets so traditional markets can surprise you. And having a diversity of markets mitigates the risk of being caught if there are problems in a single market.
I think the big trend for the year is going to be diversification of destinations for your produce. Keep working hard to make your product as good a quality as it can be and market it as well as it can be.
One of the big challenges is around what happens with global commodity prices. The grain picture globally hasn’t looked great with the surplus stocks of corn and wheat and another year of strong global production. For Australian producers, that’s been offset by the lower Australian dollar, but if the dollar strengthens that’s going to put pressure on that sector.
The other one that’s going to be important for Australian agriculture is how the China situation plays out in the next 12 months. There’s no question it’s slowed [but] we think the Chinese economy will continue to grow at a good rate and demand for Australian agricultural products will remain strong and that will underpin returns.
I think we’ll start to see an adjustment in investment return expectations to reflect the very low interest rate environment. With cash yields and borrowing rates at historical lows, investment decisions will need to take into account this very low rate environment. Rate of return hurdles for capital investment decisions should be based on the outlook for a period of lower than normal rates, rather than historical cash rates of 5 to 6 per cent.
Over the past year, we’ve seen great volatility in markets and they may continue to be volatile in the next 12 months. The key for participants in agriculture is to be aware of what the markets are doing, to be educated and ready to take advantage of them so make sure you’ve got access to up-to-date information and be clear about your strategy.
There are a lot of positive aspects to Australian agriculture at the moment with the opening up of free trade agreements with several countries that augers well for expanding overseas markets, and also the world demand for protein and clean, green agriculture. Also positive is the exchange rate that’s been great for exports; and that’s sitting alongside interest rates that remain at very low levels.
Some of the headwinds, though, are what we’ve seen this year with El Nino starting to bite with dry conditions and that’s started to spread further.
We also see foreign investment in agriculture in the same way we’ve seen foreign investment into property, so that’s giving opportunities for people to look at other sources of investment and equity or move into other areas of agriculture as new markets open.
What’s very important is for people to be close to their financiers, their bank relationship manager, who can help open the doors to exports as well as helping them tap into specialists – productivity groups, accountants and agronomists. It’s hard to be a jack-of-all-trades these days, so you need to get the right advice and use specialists in particular areas to provide the direction and support for your business.
To take advantage of the opportunities, it’s important to have a clear game plan. Budgets and assumptions need to be rigorously reviewed because agribusiness is open to various vagaries and producers need to know how far they can go, when they should pull back, and what’s their plan if things don’t work out in one direction.
There’s no doubt there’s also a greater focus on sustainable farm management practices and I think there will certainly be a lot more developments there. We’ve seen a lot of clients looking for ways to reduce their energy bills, things like moving away from the old diesel pump on the river to using a solar powered pump, better use of water and maximising water entitlements. It’s about making better use of the resources you’ve got.
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