Agribusiness Outlook Australia

Transcription

1 Agribusiness Outlook 2019 Australia RaboResearch Food & Agribusiness January 2019

2 2019 Headwinds are stiffening For Australian agriculture, 2019 is likely to be characterised by stiffening headwinds and concern for significant downside risks. On a secular basis (i.e. putting cycles to the side), the industry remains on a strong path. The industry will continue to enjoy rising offshore demand for its products; It will further benefit from improved access to these markets in Barriers to China will continue to come down under the FTA and recently negotiated protocols, and the CPTPP starts to come into play. Investment that has flown into the sector because of these factors will further boost productive potential and value-adding in coming years. The above three factors are likely to more than offset the structural challenges presented by climate change and social licence to operate, which remain key medium-term issues. There is a significant offset to the concerns raised above. A weak and falling currency, combined with strong local price basis, is ensuring exceptionally high AUD prices for many key agricultural commodities. However, many cyclical and short-term climate factors are less favourable for Australian agriculture as we enter 2019, with tailwinds softening and some headwinds arising: Most obviously, we open the year with a majority of Eastern Australia amid significant long-term rainfall deficiencies. For winter production to return to average on the east coast this season, above-average rainfall is required in coming months. At present, climate indicators provide mixed signals as to whether that is likely or not. Murray-Darling Basin water storage levels are low and pasture is in poor condition in many grazing regions. At the market level, after two years of strong and rising growth, the global economy is starting to decelerate. Economists are reducing forecasts, and while most of them (including Rabobank s) are still pencilling in just-below average growth, their language suggests a level of pessimism not yet factored into these numbers. Locally, Australian consumers are facing rising pressure, as eastcoast housing prices enter what looks like a major correction, mortgage rates rise, and wage growth remains absent. We expect that the slowing global and local economy, combined with concerns over downside risk, will see Australian exporters enjoy the lowest annual average exchange rate against the USD in a decade in Meanwhile, a poor 2018 harvest, and low beef and sheep herds, will keep the prices for Australian crops and livestock higher than usual compared to world prices over most or all of With dairy and sugar markets also tightening globally, and wool only likely to see a slow retraction from record levels, price will be the industry s friend in 2019.

3 and downside risks are mounting What concerns us most in 2019 is not so much the most likely path for the world less favourable than 2018, but not bad but the rising risk that something much worse may happen: The slowdown in the Chinese economy is a particular concern for Australian agriculture. It grew at its slowest rate since 1990 in 2018, and while officially the rate was still 6.6%, many pundits (us included) believe the deceleration is far greater and risks will be worsening through the coming year. Meanwhile, the UK and EU have yet to sort out how Brexit works, despite it being minutes to midnight according to the deadline that, if missed, triggers a no-deal departure, creating a real risk of a calamitous exit with heavy impact in two key markets for Australian agricultural products. This is all before we even get to the potential for the trade war between the US and China to worsen, or to be resolved in a manner which favours US agriculture at the expense of Australian agriculture. Plus the risk of flow-on impacts on consumption resulting from a potential US recession, and a correction in the Australian housing market becoming a crash. We also enter the year with an anti-dumping investigation by China into Australian barley exports hanging over the industry. This has the potential to disrupt one of our largest trade flows. Less dramatically, but worth noting: 2019 will likely see a federal Labour government elected, which at the very least for agriculture would appear to bring a significant change: live exports of sheep will likely be phased out. Despite a tough year for many in 2018, Australian farmers start 2019 with high viability levels. Producers have generally become more adept at managing drought and positioning their businesses to be able to ride them out. A tough 2018 was also preceded for many producers by several good years, so equity buffers were built. If we see a return to something approaching average rainfall in 2019, our base case suggests that 2019 will bring a decent year for Australian agriculture with improved production conditions offsetting what we expect will be somewhat less favourable market conditions. But Australian agriculture would do well to consider the downside market risks addressed above when planning for the next season. Tim Hunt Head of Food & Agribusiness Research, Australia & New Zealand

4 2019 Australian Ag Outlook Wheat Grains & Oilseeds Dairy Beef Sheepmeat/wool Sugar Cotton Wine Horticulture Land Global wheat prices will come under pressure during 2H Coupled with the new Australian crop supply in Q4 2019, this will soften local prices, but above-average basis will persist as the local larder is restocked. In an otherwise supportive outlook, there is a significant bear factor lurking for Australian barley. There will be ongoing pressure on supply chain margins with hopes for a better pasture season ahead in 2019/20. Production is lower and prices are steady as we wait for rain. We expect lamb prices to stay strong but production to ease after a high-slaughter year. Wool supply will support strong prices but demand is uncertain. Falling 2019 production prospects in Thailand, India, and the EU bring steady upside for sugar prices. Production challenges and Chinese imports spell a positive price outlook amid a global trade war. We expect continued but more modest growth in wine export values than in recent years, with global macro factors bringing potential downside. Horticulture s strong 2018 performance will likely continue into 2019, but risks are weighted to the downside. Rabobank expects the growth in land prices to continue during 2019, primarily supported by a very low number of properties for sale and continued strong demand from buyers with long-term growth strategies.

5 No rain on the horizon Despite average to above-average rainfall across most of south-east Australia during Q4 2018, most drought-affected regions enter 2019 with significant long-term rainfall deficiencies and below-average soil moisture. According to the Bureau of Meteorology (BOM), February to April is forecast to be dry, with the majority of Australia s agricultural regions rated a below 50% chance of reaching median rainfall over the three-month period. Major climate drivers, such as ENSO and IOD are neutral and are having little impact on Australia s climate. Instead, local factors such as ocean temperature are driving weather patterns. High forecast temperatures will exacerbate dry soil conditions. BOM has forecast that nearly all of Australia has a greater than 65% chance to exceed median maximum temperatures over the February to April period. 12-month rainfall deficiencies (2018) cm soil moisture deciles, December 2018 Source: BOM, 2019 October-December 2018 rainfall rainfall (mm) Source: BOM, 2019 Source: BOM, Rabobank Five-yr. avg.

6 El Niño threat eased slightly Sea temperatures in the Pacific have declined below El Niño thresholds in recent weeks. Subsequently, BOM s El Niño Southern Oscillation (ENSO) outlook has eased from El Niño alert to El Niño watch, meaning there is approximately a 50 per cent chance of an El Niño forming during winter or autumn. BOM expects that towards autumn, sea temperatures will remain relatively stable, on or near the El Niño threshold. If an El Niño occurs, this typically will bring dry conditions to the eastern states of Australia during winter. What to watch BOM also expects the IOD to remain neutral towards Australia in A positive XXX IOD XXXgenerally brings drier-than-average conditions to north-west Australia. El Niño Southern Oscillation (ENSO) & Indian Ocean Dipole (IOD) Outlook Three-month outlook, February April 2019 Source: BOM, 2019 Source: BOM, 2019 Source: BOM, 2019

7 Trade war tremors down under Cheryl Kalisch Gordon Senior Analyst Grains & Oilseeds cheryl.kalisch-gordon@rabobank.com The prevailing factor in global grain markets for 2019 will be US-China trade relations, and this will have implications for Australian grain. Despite not being a key pawn in negotiations, wheat pricing will be affected as US farmers substitute soybeans for more wheat and corn. After the first global wheat deficit in six years lifted CBOT wheat to the USc /bu range in 2018, Rabobank forecasts a softening back into the lower half of this range in 2H US farmers are facing extreme price uncertainty due to trade tensions with China this may significantly move soybean prices either way in the next weeks in the run-up to US spring-crop planting time, thus also impacting the overall acreage of each of the three major US row crops. What s even more important for wheat globally is that EU cereal hectares have moved higher as rapeseed acreage was forced lower by dryness during planting. We expect further softening of CBOT wheat to USc 480 as the balance of northern hemisphere wheat supply is harvested and we see a return to average for Australian wheat supply. Australia begins 2019 with the lowest wheat stocks in 10 years. Basis sits 100% to 250% higher than five-year-averages for this time of the year and we expect it will remain above average throughout the year. There is currently no sign of the extended dry breaking, and even if it does, local prices will remain well above global prices until the new crop becomes available near Q In fact, basis will likely remain high into 2020 as Australian stocks are rebuilt. Going against the grain of eastern Australia, Western Australia delivered a 2018/19 wheat harvest 8% above average. Western Australia will benefit from east coast demand but continue to be more exposed to the volatility of global markets that can be expected as ongoing trade announcements trigger soybean, wheat, and corn market and currency movements. The AUD trending downwards in 2019 puts our forecast for Australia s export wheat parity price at AUD 255 in December Wheat What to Watch El Niño. Though El Niño indications have modestly eased, a failure of widespread opening season rains in March to April would move prevailing local prices higher. The extremely tight local balance sheet spells additional volatility as markets react to climate developments throughout the year. Trade truce. Announcements from Beijing and Washington will move grain markets and currency during In addition, a trade truce that commits Beijing to more imports from the US could mean reduced demand for Australian wheat (and barley, sorghum, and canola) if it is replaced with US-origin shipments to meet truce commitments.

8 Give a little, take a little for global wheat After a 20m-tonne deficit in 2018/19, a 10mtonne surplus is on the cards for 2019/20 change in global stocks (million tonnes) % 35% 30% 25% 20% 15% 10% stocks/usage USc/bu Northern hemisphere harvest will lead CBOT back below USc 500 in Q after gains in Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19f Q2 19f Q3 19f Q4 19f Q1 20f Surplus/deficit (LHS) Source: USDA, Rabobank 2018 Stocks/usage (RHS) Source: Bloomberg, Rabobank 2019 High/Low scenario Historical Base The global stocks-to-use ratio is forecast to move higher, to 36%, in 2019/20 after the 2018/19 decline to 35%. Forecast softening places CBOT wheat at USc 480/bu, and AUD 255/tonne with 0.69 USD/AUD in Q

9 Dry times hangover for Australia in 2019 APW port prices are off decade high peaks but will stay elevated during the wait for new crop availability 500 Basis will soften if the rainfall outlook improves, but we expect it to remain above average levels as stocks rebuild 225 AUD/tonne APW basis (AUD/tonne) Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Adelaide Brisbane Geelong Kwinana (APW 2) Newcastle 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Five-yr. avg. NWC Five-yr. avg. ADEL Five-yr. avg. KWI 2018 NWC 2018 ADEL 2018 KWI Source: Bloomberg, Rabobank 2019 Source: Bloomberg, Rabobank 2019 Australian grain prices have moved to ten-year highs across the country, with the exception of Western Australia, which is at eightyear highs. Despite good new crop supply and lower local demand, Western Australian prices will be pegged to east coast prices as the west supplies the east coast at least until October 2019.

10 There s a big bear on barley Cheryl Kalisch Gordon Senior Analyst Grains & Oilseeds cheryl.kalisch-gordon@rabobank.com Despite a strongly supportive outlook for Australian barley prices, China s November 2018 initiation of an anti-dumping investigation will hang over the market in With global barley stocks at 30-year lows and Australia s stocks being extremely tight, both local and international support is expected for barley in In addition, Rabobank forecasts that China an importer of Australian feed barley in recent years - will require supplementary feed stocks in coming years as their corn stocks erode faster than industry expectations. Furthermore, while global beer consumption growth, including in China, has slowed, China remains a significant buyer of malting barley. The first announcement on China s anti-dumping investigation into barley, which is allowed 60 days after its initiation, is expected in early February. The announcement could see the imposition of a temporary tariff duty. If this is in the order of the temporary tariff duty placed on US sorghum last year at 178.6%, it will close the market. But the case could also be dismissed. Regardless, the threat of further action will cast a cloud over what is the largest export barley market for Australian producers. Australian feed and malting barley prices moved to decade-highs in 2018, hand in hand with wheat, and on many occasions with limited to no price spreads. Local feed grain use has driven demand and is expected to keep prices up, and push prices even higher should we not see a return to average seasonal conditions. Western Australia and South Australia will supply the east coast deficit, so east coast pricing will remain elevated by either scarce local supply or by incorporating the cost of freight in east coast pricing. The sorghum crop typically helps meet northern NSW/Queensland feed grain demand in the first half of the year. However, the ABARES forecast for 1.4m tonnes (18% below average), will deliver minimal softening to the feed grain price complex this year. Rabobank expects continuing high feed-grain prices to prompt expanded cereal hectares at the expense of canola hectares in Grains & Oilseeds What to Watch Indian general elections. Australian lentil and chickpea prices have gained off 2018 lows, despite ongoing Indian import restrictions. The subcontinent s monsoon concerns and lower pulse supply estimates support prices staying at the improved levels. Indian general elections in March/April may spell change to pulse production and import policies, in turn creating volatility and upside risk for Australian prices.

11 Canola playing home game again in 2019 No global support for Australian canola due to burdened international edible oil market Price ratios have moved well in favour of cereals ahead of 2019 Australian planting decisions 5 AUD/tonne CAD/tonne Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Non-GM Canola Newcastle ICE Canola (RHS) WA Canola/APW2 GEEL Canola/Feed Barley BNE Chickpea/APW ADL Lentils/APW NWC Canola/APW Source: Bloomberg, Rabobank 2019 Source: Bloomberg, Rabobank 2019 After trending in the opposite direction to global prices in 2018, Australian canola prices start the year up almost 30% YOY and at AUD145/tonne over ICE Canola. Rabobank expects Australian east coast prices to remain supported around AUD600/tonne (FOB) until Q3 and soften if we approach harvest with near to, or, average new crop production expectations. Despite prevailing higher canola prices, the strength of cereal prices compared to canola (and pulse) prices support expanded cereal hectares and lower canola hectares

12 Dairy is under pressure to recover Dairy Michael Harvey Senior Analyst Dairy michael.harvey@rabobank.com The Australian dairy industry will remain under duress with a margin squeeze felt across the supply chain. Feed shortages and reduced herds coupled with an acceleration in farm exits are driving milk production lower. Dairy companies are feeling the pinch in the form of intense competition for supply and lower volumes in plants. Milk production is likely to contract further as the season winds down, with farm margins unlikely to improve in the short term. The entire supply chain will be eager to see the milk pool stabilise in the 2019/20 season. Has there ever been a more important autumn break for Australian dairy? The reality is that a well-timed and adequate autumn break will lay the foundations for farm profitability in 2019/20. Better seasonal conditions will lead to improved home-grown pasture feed which helps to mitigate high feed cost bills and ease lingering feed gaps. Nonetheless, trading conditions for dairy farmers will remain challenging well into The cost of production will remain high, and until feed bills fall, farmer margins will be under pressure and trading losses widespread. For irrigation farmers across the southern Murray-Darling Basin, the outlook for water availability present an ongoing risk. Lower water-storage levels and strong demand for entitlements will likely see new season allocations open lower, with traded water prices remaining high. Dairy farm operators will be hoping that good rainfall over the catchments and improving inflows will boost water availability during peak demand period. Based on prevailing global commodity market indicators, there is limited upside in current farmgate milk prices across southern Australia for the remainder of the 2018/19 season. As dairy farm business operators review plans for the 2019/20 season, some good news is that the global market fundamentals are improving with prices in a recovery cycle. The AUD is also forecast to depreciate, which will support export returns. This scenario bodes well for opening prices, and the market should be supportive of improvement in southern Australia farmgate milk prices in 2019/20. What to watch The hunt for industry cohesion. The search for the required ingredients to get the industry back on track continues in While last year brought some closure of past events, 2019 brings anticipation that a ranges of initiatives can help chart a new course including the Australian Dairy Plan and Mandatory Code of Conduct. Another wave of supply chain transformation. The sale of the Lion Dairy and Drinks (LDD) business is progressing quickly and we expect the business to have a new owner(s) in 1H will be a big year for some of the smaller dairy companies with new plants due to be fully commissioned.

13 An upswing in the price cycle is on the cards Global dairy prices (FOB) 7,000 USD/tonne FOB 5,500 4,000 2,500 1,000 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Butter SMP WMP Cheese Source: USDA, Rabobank 2019 Commodity prices for Oceania-origin product were under pressure through much of 2H This came as no surprise given that New Zealand set new records for monthly milk flows during their spring peak. However, farm margins have been squeezed in key production regions around the world, which will constrain milk supply growth across the Big 7 through 2019.

14 Production moves lower and prices steady as we wait for rain Very dry conditions affected much of eastern Australia through 2018, with a significant increase in female cattle slaughter. So 2019, for which we expect continued dry seasonal conditions and limited fodder, will see slaughter numbers contract slightly and prices remain steady. Rabobankmodelled forecasts suggest that with drier-than-average seasonal conditions, lower slaughter and lower US import prices, Australian cattle prices will be softer in However, with the ongoing limited domestic supplies of cattle, prices should remain higher than the models suggest and potentially even have some upside if seasonal conditions improve. Angus Gidley-Baird Senior Analyst Animal Protein angus.gidley-baird@rabobank.com We expect cattle slaughter in 2019 to be just over 7m head, down about 8% on 2018 volumes. The forecast reduction in numbers is largely due to reduced female slaughter after large volumes in 2018 and low inventory limiting increased male slaughter. With dry seasonal conditions and limited fodder available, female slaughter numbers may push these levels higher. The global market outlook will be one of trade-off. Expected ongoing growth of beef and other protein production in the US will pose downside risk to Australian prices. Meanwhile, strong markets in Asia (now accounting for the largest share of total exports in ten years) will support exports and prices, and should help sustain demand for Australian grain-fed beef. Export volumes are expected to be down slightly as a result of lower production volumes. We expect live exports to remain similar to 2018, with favourable markets in Indonesia and Vietnam. Beef What to watch Limited fodder availability may force additional breeding stock liquidation through African swine fever will impact global animal protein markets in With the expectation that Chinese pork production will decline through 2019, global pork and other protein supplies are prime candidates to fill the gap, supporting global protein prices.

15 Limited cattle supplies will keep prices above modelled values and closer to 2018 prices Rabobank model calculations are pointing to Eastern Young Cattle Indicator softening but limited supplies and producer demand may counter this At 69% of boxed beef exports, Asia is accounting for the largest share of exports in ten years 100% 80% AUc/kg % 40% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 20% 2017 EYCI 2018 EYCI Five-yr. avg. ( ) EYCI 2019 model 2019 forecast range 0% US Japan Korea SE Asia China Middle East Other Source: MLA, Rabobank 2019 Source: MLA, Rabobank 2019

16 Angus Gidley-Baird Senior Analyst Animal Protein angus.gidley-baird@rabobank.com Sheepmeat Prices stay strong but production eases after high-slaughter year Strong global demand and limited local supplies will support ongoing strong local prices for lamb in New record prices were seen in 2018 with the Eastern States Trade Lamb Indicator peaking at AUD 8.78/kg in August. Prices eased in spring following the normal trend but remained above 2017 prices and close to AUD 2 above the five-year average for that time of year. Strong prices were the result of a combination of limited domestic supplies, a strong US market, growing demand from China, and flat production from New Zealand. Rabobank expects all these market drivers to remain similar in That said, further upward price movement driven by the US will be limited, as current high Australian lamb prices have eroded the imported to local product basis. Rabobank also expects mutton prices to stay firm in 2019 given the more limited supplies and strong global demand. Australia s lamb production is expected to remain relatively static in A small decline (0% to 2%) in slaughter numbers will be offset by an improvement in carcass weights given slightly better seasonal conditions. Sheep slaughter will decline in 2019 following a big year in 2018, estimated to be 27% higher than 2017 due to dry conditions, forcing the sale of many sheep. While lamb exports will remain steady overall, sheepmeat exports will fall given lower mutton production. The existing strong markets the US, the Middle East, and China will continue to perform well. Exports will be supported by lower lamb volumes from NZ, which is expecting a drop in production of 2% to 3% as a result of the decline in breeding ewes. What to watch Brexit. Whether it s going to be a soft or a hard Brexit, opportunities exist to increase quota volumes into this high-value market. Although the deadline for Brexit is in 2019, any material trade impacts will likely take place later. Live sheep. The voluntary industry suspension of trade during the Middle Eastern summer months of June, July, and August will impact export volumes in But the bigger issue is whether there will be a change of federal government that will result in legislative change to end the trade.

17 Lamb prices to remain strong but with limited pull from the US market to go higher Eastern States Trade Lamb Indicator remains very strong in Australian imported lamb prices are eroding the basis to US retail prices AUc/kg cwt Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec Five-yr. avg forecast AUc/kg Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Basis - US retail to US imported National AU heavy lamb 22-24kg US boxed imported prices (AU) US retail lamb prices Source: MLA, Rabobank 2019 Source: MLA, USDA, Rabobank 2019

18 Steady but tough year ahead for other meat Poultry: Poultry production for the year to date September 2018 was 2% down on the same period in Production contracted in Victoria and Queensland but was offset with growth in NSW and South Australia/Western Australia. On the other hand, Q3 production jumped and was less than 1% below the record volume set in December Together with high grain prices, this suggests that 2019 will be a tougher year for the industry with high input costs and higher supply volumes in the market. Angus Gidley-Baird Senior Analyst Animal Protein angus.gidley-baird@rabobank.com Pork: After another difficult year in 2018, with low pig prices and increased grain prices, pig slaughter numbers started to show signs of a market correction. For the year to November 2018, pig slaughter was up 3%, with sow slaughter up 17% for the 12 months to October While African swine fever in China is set to influence the global pork market and could potentially relieve some import pressure, domestic supply will continue to limit upside for the local market. Together with higher grain prices, this will continue to test producer margins. Goats: Dry conditions and successive years of higher slaughter have seen slaughter numbers decline dramatically in With increasing management of goats and new processing facilities coming online, production growth will be more measured with volumes in 2019 similar to Lower slaughter numbers will support prices and potentially see some upside on 2018 levels. Other animal proteins What to watch Grain prices. Australian east coast grain stocks are at low levels, while prices are at ten-year highs. High feed prices will place pressure on operating margins, while limited stocks will challenge supply chains and make it difficult to access the desired feed grains.

19 Pork and poultry production and prices to remain relatively flat Pork prices recover while goat prices ease up Poultry production to stagnate and pork production to contract 1,400,000 1,200,000 35,000 30,000 AUc/kg cwt poultry and pork (tonnes) 1,000, , , ,000 25,000 20,000 15,000 10,000 goat (tonnes) ,000 5,000 0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan e 2019f 2020f 0 Goat price (16-20kg) cwt Pig price Poultry Pork Goat Source: MLA, APL Rabobank 2019 Source: ABS, MLA, Rabobank 2019

20 Steady upside for sugar Sugar Charles Clack Commodity Analyst Grains & Oilseeds, Sugar The 2018/19 season (October-September) is forecast to bring a surplus of just 0.5m tonnes, a sharp tightening from a 10.4m-tonne surplus through 2017/18. Several key production regions including Thailand, India, and the EU are forecast to see production fall YOY. With world consumption growing 1% YOY, this drives the global supply and demand into balanced territory. Early markets expectations of the 2019/20 crop year (October-September) suggest a global supply deficit. A shift towards potential global supply tightening drives a supportive tone through global sugar markets. Rabobank forecasts ICE#11 Sugar to reach USc 14.0/lb by 2H 2019, appreciating further to USc 14.3/lb in early At the current AUD/USD exchange rate (USc 0.72), Rabobank forecasts prices to appreciate marginally through 2019, to AUD /tonne IPS. A tightening supply outlook in both the 2018/19 and 2019/20 seasons makes the case for additional supplies to be made available globally even with India s domestic surplus. Brazil is the obvious choice, but ICE #11 prices will need to exceed the USc 13.4/lb ethanol parity in order to increase Centre/South sugar production. Given the close link with ethanol prices, the Brent crude outlook will hold increasing weight in 2019 higher prices would support the ICE #11. With the 2018 Australian cane harvest concluded in December, the season posted exceptional yields with lower YOY cane area. Industry groups highlight cane production of near 34.5m tonnes, while CSS reached 14.3 a nine-year high. Looking ahead, the 2019 season has had a strong start with good conditions and rainfall so far. That said, risks remain through the growing season, including the incoming cyclone season. What to watch The Australian government has addressed Indian subsides at the WTO level, as a significant surplus of Indian sugar which is likely to be exported looms above the global export market. The start of the Brazilian season brings hot, dry weather to the Centre/South region. While too early to gauge any damage, ongoing dryness would negatively impact the world s number-one producer.

21 A drop in global 2018/19 output drives support Global balance sheet tightens in 2018/19 Bullish outlook for the ICE #11 Sugar price production/consumption, million tonnes raw value Surplus/deficit, million tonnes raw value million USc/pound tonnes million tonnes Surplus/deficit Production Consumption Source: F.O Licht, Rabobank 2019 ICE No. 11 Sugar Tonnes Rabobank of cane forecast crushed Source: Bloomberg, Rabobank 2019 Previous forecast Sugar produced In light of a likely global deficit in 2019/20, the world will most likely need Brazil to produce more sugar next season the ICE #11 price will need to incentivise Brazilian mills to switch from ethanol to sugar

22 A soft start to 2019 Cotton Charles Clack Commodity Analyst Grains & Oilseeds, Sugar Global prices took a significant dip in late 2018 driven by gloomy demand growth, oil market weakness, and ongoing trade tensions but are set to recover again through 1H Rabobank has a bullish outlook on the ICE #2, forecasting prices to trade into the low-to-mid USc 80/lb range through the first half of Global trade and demand issues overthrow the broader supply outlook in 2019, as geopolitical tension and economic growth exert their influence. Global demand growth is set at just 2% in 2019/20 a four year low on slowing economic growth and currency weakness in several major importing nations. Furthermore, the US-China trade war is forecast to limit US exports heavily through These factors have taken the ICE #2 price to 13-month lows, but there are glimmers of hope ahead: Rabobank forecasts price upside of USc 85/lb in 2019 as global 2019/20 inventories tighten to 4.5m 480lb bales, driving world stocks to nine-year lows. China returns as the world s largest importer in 2019/20, despite the US-China trade war. Persistent trade tensions risk dividing the global market into two camps: one that trades with China (Brazil, Australia, etc.) and one which can t (US). Expect prices to differ accordingly. The Australian 2018/19 season is forecast to yield 2.7m 227kg bales, down almost 2m bales YOY, after reduced water availability plus recent heat. This accounts for an 80/20 output split of irrigated and dry land. Having dipped to 570 AUD/bale, local prices are forecast to rise in line with the ICE#2 through 1H 2019, assuming continued Asian import inquiry and a relatively stable AUD/USD. Longerterm, an increase in Chinese 2019/20 imports is bound to benefit Australian prices even further. Weather risks remain prominent as the dryland crops are subject to summer heat and dryness falling yield expectations could still feature in the short-term. What to watch A resolution of the US-China trade dispute, allowing cotton flows to resume freely, would drive significant upside in the ICE #2. Talks are underway this month but there are no guarantees that progress will be made. The Bureau of Meteorology now sets their ENSO Outlook at El Niño watch. While Australian irrigators can fall victim to El Niño, the event also tends to bring wet weather to the southern US through the winter. This can hugely benefit the establishment and early growth of US cotton crops potentially delivering higher-than-expected global production in 2019.

23 Tightening global stocks, despite slowing demand growth Global stocks and stocks-to-use % Major importer consumption & world imports % 56 million bales % 25% million bales % 0 Source: USDA, Rabobank 2019 World Ending Stocks World ex. China Ending Stocks Global Stocks/Usage (RHS) China Consumption Indonesia Consumption Turkey Consumption Source: USDA, Rabobank 2019 Bangladesh Consumption Thailand Consumption World Imports While global inventories decline in 2019/20, the location of these stocks continues to shift outside of China

24 Supply is supporting strong prices but demand is uncertain Following a large sheep slaughter in 2018, overall wool production will fall in 2018/19, supporting ongoing strong prices. However, it is not as certain that the demand side of the equation will support ongoing strong prices. Dry conditions through 2018 have had an impact on the industry. Industry forecasts hold that shorn sheep numbers will fall by 6% with the average cut per head falling 4%, resulting in an 11% reduction in wool production. With continuing dry conditions albeit better than 2018 sheep numbers will remain low in 2019, limiting growth in wool production into the next season. Angus Gidley-Baird Senior Analyst Animal Protein angus.gidley-baird@rabobank.com Global textile market dynamics will provide some headwinds for wool prices in US-China trade tensions, Chinese economic growth, slowing retail sales, and continued historically-wide ratios with other competing fibres create a degree of uncertainty in the market. Rabobank s forecast easing of the AUD/USD exchange rate over the next 6 to 12 months is a positive. Dry conditions also shifted the profile of the wool clip through The weight of wool tested under 18.5 microns for the period to December increased while weights for 20 to 23 microns decreased. This is reflected in the decline in the premiums for superfine wool. Until an improvement to seasonal conditions helps balance the supply, lower premiums will likely persist in Wool What to watch Chinese economic performance. With the US-China trade tensions and the general state of the Chinese economy, Rabobank expects Chinese retail sales to fall slightly in As a large consumer of wool apparel, this decline in retail sales may see Chinese wool-processing demand ease.

25 Wool prices are off their 2018 record highs but still looking strong for 2019 Australian EMI in AUD and USD 2500 Australian wool tested by micron dollar/kg million kg AWEX EMI (AUD) AWEX EMI (USD) AUD Five-yr. avg. USD Five-yr. avg micron micron micron micron 28.5 micron + Source: Bloomberg, Rabobank 2019 Source: AWTA, Rabobank 2019

26 Wine Hayden Higgins Senior Analyst Horticulture & Wine hayden.higgins@rabobank.com Exports will grow amid complexity For 2019, we expect continued but more modest growth in wine export values than in recent years, with global macro factors bringing potential downside. Australian wine exporters are well placed to increase shipments to China in Q did see a slowdown in Australian exports of wine to China (YOY), aligned to a reduction in Chinese imports from all sources. Influences included high inventories of imported wine, a slowdown in consumer spending on wine and increased promotion of domestic wines. But in 2019, Chinese wine consumption will continue to grow, the drag of inventory reductions will pass and we will see a number of tariff reductions on imported wines. Australia will be able to capitalise on this, on the back of heavy marketing by the industry in 2018 and zero wine tariffs from 2019 onwards (from the 2% to 4% applied in 2018). Bumbling Brexit negotiations ensure that the UK market presents considerable uncertainty for wine exporters in Assuming a hard Brexit is avoided (our base view), the market will remain weak but not significantly deteriorate. The UK economy would grow slowly and Australian exporters benefit from a likely appreciation in the GBP. This would help to offset the challenge presented by higher European wine stocks and softening bulk wine prices. A hard Brexit would see a tough market get worse. The economy will deteriorate, consumer spending will contract and the GBP will fall. Border disruptions would also likely impact transhipment of Australian wine through the UK and into the EU market. In the US, we expect modest growth in the premium wine segment as consumers trade up. But competition from other wine-exporting nations will increase in the USD 10+ per bottle category. Expect to see continued distributor consolidation and a focus on growth of e-commerce. The removal of all tariffs on Australian wine imports into Canada as of 2019 under the CPTPP will create a further growth opportunity in North America. What to watch Increased competition in China. The large global 2018 vintage and resultant higher wine stocks has led to a softening of global bulk generic wine prices. Prices have to-date stabilised since reaching a low in October Exporters can expect to see increased import competition in China, with increased available volumes of wine from all key export countries combined with other producers, such as Chile, also holding FTAs with China.

27 Key export markets: 2018 saw value growth, but the US remained challenging 1,250 1,000 66% 80% 60% AUD (million FOB) % 7% 12% -3% 16% -4% 40% 20% 0% annual value change - China USA Canada United Kingdom EU (excl UK) New Zealand Hong Kong year-end 30 June Value 2017 (lhs) Value 2018 (lhs) y/y change (rhs) -20% Australian wine exporters continued to grapple with how to grow market share in the US premium segment over 2018.

28 Another strong year ahead Hayden Higgins Senior Analyst Horticulture & Wine hayden.higgins@rabobank.com Rabobank expects horticulture s strong performance in 2018 to continue into 2019, but risks are weighted to the downside. Australian horticulture is well positioned for another strong export performance in Growth will be supported by further tariff reductions under free trade agreements, combined with increased demand in export markets. In particular, we expect Chinese consumers to continue to seek out fresh produce as part of a healthy diet, which will come at the expense of packaged foods. On a more tactical basis, we expect to see short-term trade opportunities for select products as a result of the US-China trade dispute. Growers of citrus, table grapes, and almonds are most likely to be able to capitalise. Almond exporters have already benefited, with shipments to China significantly up YOY to the end of September 2018, aided by tariffs imposed by China on US almonds. Buoyed by strong fundamentals, significant investment continued into productive assets over 2018, which we expect will continue throughout 2019 and beyond. Amid a generally strong fundamental outlook, risks are weighted to the downside. Australian horticulture in particular is exposed to the potential for a significant slowdown in both the domestic and Chinese economies. Water licence and temporary water prices are also expected to remain high in Following the 2018 drought period, expected lower water allocations for 2019 and continued increased water demand from permanent crop development will be key influences. Availability of labour is also likely to continue to challenge growers at peak demand times. Horticulture What to watch Asia economic slowdown. China s economy is expected to continue to slow down in The risk of an increase in the rate of slowdown remains ever present with the current state of the US-China trade war, or any further escalation of this. Further reduction in China s GDP would also likely result in a reduction in trade between China and other Asian economies. The downside risk here for horticulture is for contraction in those economies also, leading to reduced horticulture imports across Asia, or lower prices.

29 Return to export value growth in 2018, amid a strong export growth phase 1,500 AUD (million FOB) 1, Year-end 30 June Fruit Tree nuts Vegetables Source: ABARES, Rabobank 2019 Reduced almond exports were the leading driver of drop-off in tree-nut export value in A stable almond crop volume in combined with increased domestic demand resulted in more product sold into the Australian market with less available for export.

30 Low availability will drive price growth Wes Lefroy Agricultural Analyst wesley.lefroy@rabobank.com Rabobank expects the growth in land prices to continue during 2019, primarily supported by a very low number of properties for sale and continued strong demand from buyers with long-term growth strategies. Despite some farmers experiencing low operating profits in 2018 due to the drought, most farmers enter 2019 with their balance sheets in a strong position. Those farmers with expansion intentions remain in a position to do so. Nationally, the number of farmers who intend to purchase land in the next 12 months has declined YOY, although this varies significantly between states and regions. According to the Rabobank Rural Confidence survey, the number of NSW farmers intending to purchase a property in 2019 declined 7.1% relative to 12 months prior. This is in contrast to Western Australia, where the corresponding figure increased 7.4%. A season of high-grain prices and yields has boosted appetite and increased capacity for land purchases. Despite the decline, demand for property still heavily outweighs the number of properties on the market. Rabobank estimates that the number of property sales has fallen up to 50% YOY, and more than halved from 2013 to While improved seasonal conditions may send more properties to the market, Rabobank expects the number of properties on the market remain at a low level. Over the next 12 months, we expect that macroeconomic tailwinds will continue to soften, providing less support to land price growth. Rabobank expects prices of major commodities to continue to trade at profitable levels, although production levels will be the biggest variable on farm-operating profit and in turn purchasing power in We expect borrowing costs to remain stable during 2019, remaining well below the ten-year average. Rabobank forecasts global economic growth to decline for the second consecutive year. Volatility stemming from trade wars will continue to be a key risk factor for land prices. Agricultural Land What to Watch Falling residential house prices have been making headlines of late. The latest data from the ABS, shows that residential property prices fell 1.5% in Q If house prices suffered a major fall, what would that mean for ag land? We argue that it would at least hold value for two reasons. Firstly, ag land would increase in attractiveness to investors because it is not generally correlated with other asset classes. Secondarily, a fall in house prices would lead to a weaker AUD, making land more affordable to foreign investment. So in the event of a significant downturn of residential property, we see that ag land could become a safe haven for investors.

31 Decreased demand outweighs availability Percentage of farmers with intentions to buy land within 12 months 15.0% 10.0% 5.0% 0.0% AUS NSW QLD SA TAS VIC WA Q4 '16 Q4' 17 Q4' 18 Source: Rabobank Confidence Survey 2019 Number of property sales Index (2013=100) E WA QLD NSW SA VIC TAS Source: Rabobank, 2019 Macroeconomic tailwinds are softening Commodity Prices Climate Willingness & openness of global trade We expect prices of most major commodities to remain trading in a profitable range in BOM s El Niño Southern Oscillation (ENSO) outlook is on El Niño watch. Trade war between US and China has reached a temporary truce for the last couple of weeks, but remains a large risk for Australian agriculture. Foreign exchange Rabobank s 12-month forecast for AUD/USD is 0.68 Cost of funds We expect the cost of funding for all banks to remain stable during Global GDP Rabobank has forecast global GDP growth to fall 0.1% in 2019 to 3.5%. Previous five-year performance 12-month outlook Key: Supportive Mixed influence Unsupportive

32 Fundamentals point to a heated water market in 2019 Reduced water availability across the Murray-Darling Basin (MDB) will underpin allocation markets in The challenge for irrigators is that we start the new year with prices at nearrecords for a range of water classes and it will take widespread early-season rainfall to replenish water storages. Inflows are forecast to be below average through to March. There is limited good news on the horizon in terms of the climate outlook. December brought average to above-average rainfall across many parts of the east coast of Australia. However, rainfall over the summer months is forecast to be drier than average. The MDB requires betterthan-average rainfall across the catchment to refill the storages during Michael Harvey Senior Analyst Dairy michael.harvey@rabobank.com Current storage positions and strong demand points to another year of high water prices. Irrigators will receive seasonal determination guidance for the 2019/20 irrigation season in mid- February, but the first announced determinations will be released in July. It s highly likely that low early season allocations are on the cards meaning water planning will be paramount. There will continue to be structural changes across the southern MDB. The ongoing expansion of area planted to permanent crops, namely almonds, will continue to lead to increased demand for water across the southern MDB. Water What to watch Supply chain pressures. A significant drop in water availability coupled with high prices has already begun to affect supply chains, due to a drop in agricultural production. SunRice has announced reduced operations at its Riverina milling plant through In the dairy sector, the Murray Dairy irrigation district is being hit the hardest in terms of milk production falls. This is creating supply chain pressures for dairy companies collecting milk in the region. This will be an ongoing issue in 2019 given the likelihood of a slow recovery, notwithstanding the potential for further falls.

33 Tight water availability likely to continue Water storages in the Murray-Darling Basin, % 75% 60% 45% 30% Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Source: ABARES As 2019 gets underway, water storage levels across the MDB continue to fall. Latest data show that storage levels have fallen below 50% of active capacity. At the same time last year, storage levels were close to 70%. Given the lack of rainfall across Queensland and New South Wales, storage volume in the Northern Basin are very low at around 20%.

34 Elevated prices here for 2019 Wes Lefroy Agricultural Analyst wesley.lefroy@rabobank.com The demand recovery witnessed during 2018 will keep fertiliser markets at elevated levels during For two years, global markets were well supplied, causing prices of all major nutrients across the fertiliser complex to trade well below respective ten-year averages. During 2018, a resurgence in demand, primarily led by higher CBOT Wheat prices, incentivised farmer spending, in turn elevating fertiliser prices out of a two year slumber. Rabobank expects shifts in global corn and soybean markets to add to nitrogen demand during Trade tensions between the US and China has, to date, had a large negative impact on CBOT Soybean. While the outcome of the trade war is near-impossible to predict, Rabobank expects to see high volatility, relatively low prices, and very high ending stocks for US soybeans in Further encouraged by a bullish outlook for CBOT Corn, it is likely US farmers will shift planted area from soybeans to corn. This will add to nitrogen demand, with corn requiring around 360kg of urea per acre equivalent more than soybeans. For 2019, Rabobank expects that the global phosphate market will continue to trade at levels slightly below the multi-year highs reached late in The Indian government is considering a 40% fertiliser subsidy but has not yet approved it ahead of the April/May elections, which will lower production of processed phosphates. New capacity additions from the Middle East will add supply pressure. Rabobank expects that local prices will follow global trends in Some farmers on the east coast will be in a position to lower application rates, because residual soil nutrients are higher than usual following a failed crop. Fertiliser What to Watch Australian farmers are heavily exposed to the global market on average only 35% of fertilisers are manufactured domestically, and of that 35%, a most of the raw materials are imported. Subsequently, importers are exposed to fluctuations of currency and freight rates. In 2019, Rabobank expects the AUD/USD to fall to 0.68 cents, weakening purchasing power. We also expect freight rates to trend upwards, primarily because of a low number of new vessels this year. On top of that, a greater number of vessels will be send to an early retirement in 2019 ahead of new regulation in 2020 to reduce fuel emissions. How both for these factors trend is critical for local price movements.

35 Global prices seasonally lower in Q1 AUD-adjusted global prices AUD/tonne US GULF DAP Middle East Urea Vancouver MOP Source: Bloomberg, Rabobank 2019

36 A year of belt tightening? Michael Harvey Senior Analyst Dairy michael.harvey@rabobank.com There are some clear headwinds for Australian consumers in The housing market is undergoing a correction with prices registering their largest falls in more than a decade in 2018 with several domestic banks forecasting equally sharp falls to come in At the same time, Australian consumers are still encountering sluggish wage inflation, rising costs of living, and rising household debt levels. Will consumer sentiment hold up against this softer underbelly? Australian consumer confidence held up reasonably well in However, a clutch of bad news has started to weigh on sentiment in early Weakness in equity markets, macroeconomic uncertainty, and mounting concerns around the housing market have tipped confidence over the edge and will lead to a tightening of belts when it comes to consumer spending. There have been indications from a broad spectrum of retailers that a slowdown in consumer purchasing is already occurring. But there are still some positive underlying dynamics for the Australian consumer market. Australia s population is growing, and consensus forecasts point to an economic growth of between 2.8% to 3.5% in The unemployment rate which has fallen to its lowest level in more than six years is a positive signpost and a key reason for expecting a better wage growth in The RBA is likely on hold for now (but borrowing costs are rising), and there are promises of tax cuts, which would be welcome news. There will be shifts in consumption patterns for food companies to consider. History shows that against sluggish macroeconomic backdrops, eating in becomes more prominent for Australian households. While price and convenience are key influencers of discretionary spend, consumers tend to trade up in quality terms when preparing meals at home. Also, fundamental food trends still provide food companies opportunities for investment to align products to consumer demand. Consumer Foods What to watch 2019 will see a continued shake up in the retail sector as existing players battle it out. A restructured Coles will focus its energy on improving its fresh offering, growing its private label portfolio, and finding supply chain efficiency. Aldi is refreshing its existing stores while still expanding its footprint. Amazon has begun its move into pantry and grocery products. Perhaps the biggest moment of all would be a formal entry of Kaufland (part of the Schwarz Group) with reported plans to officially open its first store in Australia sometime in 2019/20. These highly competitive market conditions all point to strong competition for the consumer dollar.

37 Clear risks to the Australian economy Australian quarterly GDP growth (seasonally adjusted) % Source: ABS , Rabobank Economic growth in Australia will likely remain under pressure in The Australian economy was showing signs of weakness in late 2018 when it registered its weakest quarter of growth in two years. Weaker household consumption was a contributing factor for the slowdown

38 Tim Hunt Head of Food & Agribusiness Research, Australia & New Zealand tim.hunt@rabobank.com Rates & FX Further currency relief in 2019 We expect the AUD to further weaken in 2019, bringing the lowest average AUD/USD exchange rate this decade. This will ensure positive support for commodity prices in local currency terms. We are at the peak of US rates in this cycle, with the Fed unlikely to increase rates in Rabobank forecast the Fed to keep the funds target rate on hold at 2.50% in The run of recent rate hikes are likely to slow down business investment and personal consumption through the year. We are seeing the first cracks in the housing market, and a rising trade deficit will exert a drag on the economy in Against this backdrop, we expect inflation to subside through the year, removing the need for any further monetary policy tightening. Rabobank expects the Reserve Bank of Australia to cut the Overnight Cash Rate (OCR) in The OCR has sat at 1.50% since August 2016, as the RBA has awaited signs of increased inflation. We see little chance of them emerging in The housing market is likely to fall further through the year and the Chinese economy to slow, sapping consumer confidence and creating a substantial downside drag on the economy. And while unemployment is low, most of the jobs growth has been in the public sector, helping to explain the absence to date (and likely in future) of significant wage growth. With the premium of the US central bank rate over the Australian rate further widening in 2019, the Australian dollar is likely to slide further against the US dollar in We expect to see the AUD hit USc 68 by the end of the year. This should see Australian exporters enjoy the lowest average AUD/USD annual exchange rate this decade in What to watch The Chinese economy. There are widespread signs that the Chinese economy is slowing faster than official data depicts from falling auto sales to weak electricity use. While the Chinese government is responding with tax cuts, a rate cut, and fiscal stimulus, its room to manoeuvre is far smaller than in the past. A faster-than-expected deceleration in the Chinese economy will negatively impact Australian exports and exert even greater downward pressure on the AUD/USD than we currently forecast.

39 2019 will bring the weakest Australian dollar in a decade Australian dollar against the US dollar: historic levels and Rabobank forecast 1.10 annual average AUD/USD exchange rate f Source: RBA, Rabobank 2019 The widening premium of the US central bank rate over the Australian OCR will likely bring the lowest AUD/USD rate this decade. We see further downside risk to the AUD from the local housing market and Chinese economy.

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41 RaboResearch Food & Agribusiness Australia and New Zealand Tim Hunt Head of Food & Agribusiness Research and Advisory, Australia and New Zealand Tim.Hunt@Rabobank.com Cheryl Kalisch Gordon Senior Analyst Grains & Oilseeds Cheryl.KalischGordon@rabobank.com Angus Gidley-Baird Senior Analyst Animal Proteins Angus.Gidley-Baird@rabobank.com Emma Higgins Dairy Analyst Emma.Higgins@rabobank.com Michael Harvey Senior Analyst Dairy Michael.Harvey@rabobank.com Wes Lefroy Agricultural Analyst Wesley.Lefroy@rabobank.com Hayden Higgins Senior Analyst Horticulture and Wine Hayden.Higgins@rabobank.com Blake Holgate Analyst Animal Proteins and Sustainability Blake.Holgate@rabobank.com Catherine Keo Business Coordinator Catherine.Keo@rabobank.com Rabobank Australia Nearest branch call

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