ANZ AGRI INFOCUS APRIL 2018 COMMODITY INSIGHTS

Transcription

1 ANZ AGRI INFOCUS APRIL 218 COMMODITY INSIGHTS

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3 ASEAN INSIGHTS For many companies across Australia s food, beverage and agri sectors, China has long been the main focus of their strategic outlook. This is unquestionably important not only because of China s economic growth and ongoing expansion of its hungry middle class, but for the potential new opportunities which may arise out of the geopolitical manoeuvrings between China and the US. However, the recent gathering in Sydney of the leaders of ASEAN (Association of South East Asian Nations) reinforced the fact that this region on Australia s doorstep will be a vital market for our agri sectors. ASEAN is made up of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The region is home to 647 million people, or around 9 per cent of the world s population. Of these, Indonesia, the Philippines and Vietnam are the major population centres, making up around 72 per cent of ASEAN s population. Like China, ASEAN is home to a rising urban population, a factor which acts as a major driver of food consumption. The rate of change in the urban population across ASEAN over the past two decades was well above the world average, signalling strong growth for food consumption going forward. ASEAN remains a highly import dependent region for its food needs, with the majority of ASEAN members continuing to import a sizeable share of their domestic consumption from outside the region. This is largely due to lack of resources and lack of scalable production to meet the rapid growth in consumption. While this situation is far from uncommon globally, ASEAN faces some unique challenges in being able to increase internal supply of agricultural produce to meet its needs. In terms of the ratio of agri land area to total land area, the figure for ASEAN sits at around 3 per cent, almost 1 per cent lower than that of the rest of the world. In terms of agricultural production land, the acreage for the region is likely to have peaked, with production land likely to decrease as the growth of urbanisation continues. As a result, much of the incremental increase in agricultural production in ASEAN is likely to come from technological investment. ASEAN s agricultural production is largely focused on rice, which makes up the major gross value share of the total agricultural production of many of the member countries. For example, in the Philippines, rice makes up 25 per cent of agricultural production, while in Cambodia it is 6 per cent. One exception in the region is Malaysia, where the largest agricultural output is palm oil. In terms of overall consumption, the ASEAN region consumed 223 million tonnes of agricultural products in Unsurprisingly, rice remains a popular choice of grains, while wheat and corn consumption continue to gain share wheat and corn consumption increased at around 6 and 5 per cent respectively. These two crops are likely to remain major import focuses for the region going forward. Meat consumption in ASEAN continues to rise, dominated by poultry (55 per cent), pork (38 per cent) and beef (7 per cent). Overall, meat consumption in the region has grown strongly. While consumption of beef has risen at around 3 per cent annually since 2, pork consumption growth has been around 6 per cent higher. Interestingly, over the same period, consumption of dairy products in ASEAN grew at a very modest rate of.4 per cent. However, with growing consumer income, combined with health awareness, it is anticipated that this will grow at a much higher rate in the near future. PAGE 1

4 AUSTRALIAN ASEAN AGRI EXPORTS ($A MILLIONS) 1k 8k 6k 4k 2k Cereal grains Meat and meat preparations Live animals chiefly for food Sugars honey coffee cocoas and confectionery Seafood fresh chilled dried smoked salted Preparations of food beverages and tobacco NES Dairy products processed Vegetables fruit and nuts fresh chilled or provisionally preserved Animal and vegetables oils fats and waxes Cereal preparations Unprocessed food NES Seafood frozen or processed Vegetables fruit and nuts preparations Source: DFAT AUSTRALIAN AGRI EXPORTS TO ASEAN/CHINA ($A MILLIONS) 1k 9k 8k 7k 6k 5k 4k 3k 2k 1k Australia to ASEAN Australia to China Source: DFAT Based on ANZ modelling of population and income growth in ASEAN, overall consumption of agri products in the region is forecast to grow to 285 million tonnes by , a growth of 62 million tonnes or 28 per cent. This will be driven primarily by income growth, which makes up around 6 per cent of the growth driver, while population growth will account for 4 per cent. Overall, average per capita income in ASEAN is projected to rise by around 7 per cent annually to US$6,754 by 225, up from US$4,22 in 217. ASEAN has remained a major growth centre for Australian agricultural exports. Since 2, these exports have grown by 216 per cent, or over 6 per cent since 21. Grain, meat, and live animals currently make up over half of Australia s exports, up from a quarter in 2. Strikingly, Australia s grain exports to ASEAN have increased from A$27m in 2 to A$2,285m in 216, growing at over 3 per cent annually. While meat and live animal export growth also remained strong, dairy export growth has been impacted by stagnant consumption across the region; the signs looking forward are far more promising. It may come as a surprise to many that ASEAN is a larger agricultural trade partner for Australia than China. For example, in 216, overall agri exports to the region were estimated at A$8,779m, versus A$5,499m of China. Australia s major agri exports to ASEAN are fairly comparable to that of China particularly grains and meat. Where agri trade between the two differs is on the diversity of exports, with seafood and horticulture making up a greater component of Australian exports to ASEAN. In terms of agricultural trade, agri exporters are able to benefit from the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which has been in place since 21. The AANZFTA includes tariff reduction schedules, regional rules of origin which allow Australian companies to enter local supply chains in the region, legal protections for Australian suppliers and investors, and an ongoing forum for business dialogue and economic cooperation. That said, while tariffs on agri products in ASEAN have continued to decline, Non-Tariff Measures (NTMs) have increased. The majority of NTMs have been centred on issues such as quality, disease control, and protection for domestic interests. The NTMs are increasingly based around Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT). With the increasing income levels across ASEAN, food variety and quality will grow as major drivers of domestic consumption patterns. As such, this rise in SPS and TBT measures partly reflects ASEAN governments actively pursuing food safety and quality. Arguably, the measures can also be used for protecting domestic agri sectors. With an increasing importance for goods to move quickly across borders, it remains more important than ever that Australia and ASEAN countries continue to develop protocols to reduce NTMs. PAGE 2

5 LAND AREA VS AGRICULTURAL AREA 7% 6% 5% 4% 3% 2% 1% Australia World ASEAN Source: World Bank ASEAN AGRI CONSUMPTION (MILLION TONNES) / / / / /99 2/1 22/3 24/5 26/7 28/9 21/11 212/13 214/15 216/17 Dairy Rice Other Grain Meat Oilseed Source: USDA IMPORTS SHARE OF AGRICULTURAL CONSUMPTION 35% 3% 25% 2% 15% 1% 5% Australia World ASEAN China India Source: USDA PAGE 3

6 BEEF INSIGHTS With the first quarter of 218 already behind us, many cattle producers would have been hoping for a steeper recovery to the Eastern Young Cattle Indicator (EYCI) than what has played out in markets across the country. With the average EYCI sitting around the 545 c/kg carcase weight (cwt) mark since the beginning of the year, there has been hope and expectation of market rises on the back of rains across major Queensland production areas. Thankfully, some rains did fall, with the first occurring during February. The key selling centres of Roma and Dalby received 42 per cent and 18 per cent respectively above their average rainfall for the month, and the market responded, with modest increase in prices through until mid March. In some areas however, this price recovery was restrained by large numbers of cattle on offer, demonstrating that cash flow requirements, after a considerable period of lower prices and supplementary feeding, may have been put in front of stocking numbers in the short term. A further consideration is that the southern production regions of New South Wales and Victoria were yet to receive a widespread Autumn break, with large yardings also recorded across early March at major centres including Dubbo, Wagga Wagga and Carcour. Positively, good rains continued to fall over Queensland later in March across many areas, giving some restockers confidence in their ability to hold stock for a longer term. With modest and restrained export growth however, the impact of the weather on cattle prices is being felt across the eastern seaboard as domestic supply and demand trade-offs occur. EYCI VS RAINFALL AVERAGES, AND TOTAL SALES Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Jan 18 Feb 18 Mar 18 EYCI (c/kg cwt) No. of head (s) Roma (% average monthly rainfall) Dalby (% average monthly rainfall) 15% 1% 5% % 5% 1% 15% Source: Bureau of Meteorology (BOM) and MLA. PAGE 4

7 In regard to export markets, competition from key global competitors and increased global production is forecast to continue to put pressure on Australian cattle prices for the remainder of 218. Tight supplies of Australian cattle and increased domestic production in the United States (US) resulted in a 22 per cent drop in beef exports to the US in 217 when compared to the five-year average for the period 212 to 216. There was a similar trend in exports to Canada, who also recorded a 22 per cent reduction in Australian import volumes for the same period. Whilst total exports to these nations have been reducing, there has been a positive trend for one important category fresh grassfed beef to North America as a whole. Consumer awareness of the grassfed product is high, driven by animal welfare, natural production techniques and concern for the environment. Chilled grassfed beef was 25 per cent of total export volumes to the US in 217, up 15 per cent on the five-year average from 212 to 216. Conversely, Australia s other two largest export markets of Japan and Korea, have seen negative trends for grassfed beef imports with a clear growing preference for grainfed product. Japanese imports are dominated by manufacturing beef, however there is a growing trend toward higher quality cuts, for instance striploin, for which imports increased 19 per cent in 217 from the average of the five years preceding it. In Korea, beef cuts suitable for traditional Korean BBQ are growing in import volume, such as brisket and ribs, with imports growing at 18 and 29 per cent respectively against the five-year average. Interestingly, while Australia has implemented both the Japan-Australia Economic Partnership Agreement (JAEPA) and the Korea-Australia Free Trade Agreement (KAFTA) with the important Japanese and Korean markets, there are factors at play that reduce the overall competitiveness of Australian beef against the US, who are our major competitor in these markets. In trade law, safeguards can be used by a country to implement higher tariff levels to protect a specific domestic industry from an increase in imports of any product which is causing, or which is threatening to cause, serious injury to the industry. Australian beef destined for the Korean market, as of 218, attracts a 26.6 per cent tariff, however, the safeguard sees this bounce back to 4 per cent when imports exceed the trigger volume. For the three consecutive years of 215, 216 and 217, the safeguard was triggered, causing trade disruptions and, in the latter part of 217, contributing to the downward trend of the EYCI. The US holds a 21.3 per cent tariff arrangement with Korea, therefore sitting at a 5.3 per cent tariff advantage to Australia under normal circumstances, and a considerable 16 per cent differential once our export volumes exceed trigger levels. For beef exported to Japan, a 38.5 per cent tariff would, under present arrangements, be implemented if total beef imports exceed the trigger amount. This is in contrast to our current standard tariff under JAEPA of 29.3 per cent for chilled product and 26.9 per cent for frozen. If the safeguard is triggered, Australian tariffs would be on a par with the US who have no Trade Agreement with Japan and pay 38.5 per cent. The safeguard was only introduced to the Japanese market in August last year, and Australia is yet to exceed trigger levels. Their presence, however, leads to the increased importance of the implementation of the Comprehensive Agreement for Trans-Pacific Partnership (CATPP), which has the potential of assisting Australian beef to compete, particularly against the US. On 8 March 218, the CATPP was signed by the Ministers and Senior Officials of Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The signing of the agreement allows the next phase, being completion of domestic processes to allow the agreement to be put into force, to take place. For the Japanese market, CATPP would see tariffs on chilled and frozen Australian beef reduce to 9 per cent over 15 years. This is a significant improvement on the current tariff reductions under JAEPA. All eleven CPTPP countries who supply beef to Japan will have similar advantageous tariff reductions, and a safeguard will be applicable for imports exceeding designated levels; the absence of the US from the agreement, and the fact that safeguards will also apply to US imports (if triggered) is a positive outcome for Australian beef. NORTH AMERICAN BEEF IMPORTS FROM AUSTRALIA Frozen Grainfed Chilled Grainfed Frozen Grassfed Chilled Grassfed 5, 1, 15, 2, 25, 3, 5 year average swt 217 swt Source: Department of Agriculture and Water Resources / ABS / MLA PAGE 5

8 WHEAT & GRAIN INSIGHTS Across Australia s cropping regions, many grain growers are busy with planting, whether out on the tractor sowing, or finalising their preparations. While the activity is strong in the paddocks, forecasters are looking ahead to the likely outcome of the season. WHEAT On current estimates, given a reprieve from last season s hot and dry weather and late season frosts, Australia s wheat production is forecast to rise around 12 per cent to 23.8 million tonnes, driven by a healthy yield increase to around 1.95 tonnes per hectare. On the export front, the ongoing strong competition from the Black Sea Region (BSR) into major markets is likely to see exports flatten, an impact which could have downward pressure on domestic grain prices. BSR competition will be particularly strong for feed wheat, while North America will continue to be a competitor for premium hard wheat. That said, the big unknown remains the impact of any escalation of the current trade dispute between the US and China. Indonesia remains a major market for Australian wheat, accounting for around a quarter of exports in 217. Australia s position as the major supplier of wheat to Indonesia is based on both geographic proximity as well as the Indonesian noodle industry s preference for Australian standard white wheat. Australia s market share in Indonesia of around 5 per cent is well ahead of Canada, the Ukraine and the US. While China and Vietnam had been Australia s second and third largest wheat export markets, these have more recently been surpassed by India and the Philippines. As India moved from being a wheat exporter to a net importer, it imported almost six million tonnes last year, with over half of this sourced from countries in the BSR. A preference by Indian local millers for higher quality wheat saw Australia become the second largest source of wheat imports. More recently, as the Indian season recovered to a record harvest year in , India imposed a 2 per cent tariff to restrict imports, as well as to support domestic prices. The impact of this is likely to be a reduction in overall imports to India of around 65 per cent, down to around two million tonnes. While this outlook may be bearish to Australian exporters, it is worth considering that India s wheat stock to use ratio of 11 per cent continues to be well behind the long-term average of over 17 per cent. Should India see any impact on wheat production, particularly due to unfavourable weather conditions, it is likely that subsequent pressure on domestic supplies would see a return to strong imports. With an election year looming in India, the need for food certainty would further strengthen this likelihood. AUSTRALIAN WHEAT PRODUCTION ( TONNES) 4k 35k 3k 25k 2k 15k 1k 5k 13/14 14/15 15/16 16/17 s 17/18 f 18/19 f Exports Domestic Usage Source: Agricultural Commodities March Quarter 218, ABARES PAGE 6

9 AUSTRALIAN BARLEY PRODUCTION ( TONNES) AUSTRALIAN SORGHUM PRODUCTION ( TONNES) 16k 14k 12k 1k 8k 6k 4k 2k 2.5k 2k 1.5k 1k.5k 13/14 14/15 15/16 16/17 s 17/18 f 18/19 f 13/14 14/15 15/16 16/17 s 17/18 f 18/19 f Exports Domestic Usage Exports Domestic Usage Source: USDA GAIN Reports Source: ABARES AgCommodities BARLEY For Australian barley producers, China remains the major destination, followed by Saudi Arabia and Japan. Chinese demand has continued to grow strongly, at over 2 per cent compound annual growth rate (CAGR) since 211, while exports to the other two markets have gradually declined. Demand for feed barley by Japan has been reduced as a result of rising prices caused by tightening supplies, while for food barley, a rising demand for glutinous barley has seen increased imports from the US. Reflecting global competition in the wheat export market, Australia s position in the Middle Eastern feed barley market is impacted by relative prices compared to exporters from the Black Sea Region. Saudi Arabia s barley imports are forecast to fall, given the increased availability of competitively priced processed feed. Until now, imported feed barley has been jointly fed with forage, but as a result of the forage crop ban in Saudi Arabia, aimed at protecting water resources, the country has been forced to look overseas for feed. With new feed processors expected to commence operations, accompanied by existing feed operators lifting production capacity, the demand for barley imports into Saudi Arabia may continue to decline. Globally, barley ending stocks have recently fallen to just under 1 million tonnes, their lowest in 18 years. Combined with a forecast fall in global production of almost 4 per cent, as well as the strong Chinese demand, barley prices are likely to see upward price pressure. Overall demand is likely to remain strong, driven by rising feed barley demand in China, while robust beer consumption in Asia will support malt barley demand across the region. In Australia, barley planting is likely to experience a small increase of around 3 per cent to four million hectares, with production growth likely to lift less than 1 per cent to nine million tonnes. Reduced domestic demand may see exports grow strongly by around 7 per cent, with better global prices pushing export values up to almost 12 per cent. SORGHUM For Australia s sorghum sector, nearly all exports are destined for China, a market dominated by US imports which make up over 9 per cent of the import market. The other key export market of Japan has seen a significant decline in sorghum exports in recent years, largely due to competitive corn prices. While the Japanese pork and broiler industries ideally prefer sorghum for their feed requirements, overall imports are likely to remain limited. Within Australia, demand from the local livestock sector is expected to see strong growth in sorghum planting in the medium term, with a rise of over 25 per cent in likely to be repeated on This may well see Australian sorghum production double, from around one million tonnes in to two million tonnes in the coming season. Of this, around half is likely to be exported. PAGE 7

10 SHEEP INSIGHTS The National Trade Lamb Indicator (NTLI) has averaged 625c/kg over the first quarter of 218, on par with the first quarter of 217 and 1c/kg above the 216 first quarter average. Constrained domestic supplies, largely driven by producers retaining stock to build flock numbers, combined with strong international demand in export markets continue the positive trend for the Australian sheep industry that it has enjoyed for some time. Meat and Livestock Australia are projecting stable lamb production for the remainder of the year and reduced mutton production, which give further confidence to the stability of high prices. Domestic consumption remains quite stable, at around 9kg per capita, despite consumers being asked to pay more per kilogram as saleyard prices rise and with the saleyard price of lamb and retail prices closely linked in Australia. Average lamb carcase weights are also expected to continue their upward trend. Average lamb carcase weights have increased 19 grams per year over the past 1 years, driven by genetic gains, better livestock management and lamb finishing, and more focus on dual purpose breeds. Meat and Livestock Australia are predicting carcase weights for 218 to average 22.9 kilograms, which would be the highest on record. To exports, our key global sheep meat competitor, New Zealand, has reduced its total sheep meat exports over the 1 years to 217 by approximately 15 per cent. A reduction in the New Zealand flock, driven in part by some producers exiting the industry for dairy farm conversions, further supports the continuing strength of the Australian industry. Beef and Lamb New Zealand report that in 217 New Zealand ewe numbers declined 1.9 per cent on the previous year, and for the period 26 to 216, the national flock declined 31.2 per cent. By contrast, the New Zealand dairy cow herd grew by 26 per cent over the same 1-year period. Sheep yards, sheep handlers, woolsheds, fencing and watering points are back on the agenda for many producers, particularly those who may have let this infrastructure degrade or removed it altogether to focus and invest on cropping enterprises. With the price of iron ore currently trading at approximately 5 per cent of its peak 1 years ago, and with the large number of competitors in the steel import and manufacturing market, producers are finding cost-effective solutions to sheep handling to enable flocks to grow and be managed more efficiently and with less labour. THE CONTINUED FAVOURABLE SHEEP MEAT AND WOOL MARKET IS ALSO CONTRIBUTING TO AUSTRALIAN PRODUCERS INVESTING IN SHEEP INFRASTRUCTURE PAGE 8

11 AVERAGE AUSTRALIAN LAMB CARCASE WEIGHTS Kg/head Source: ABS / MLA MEAT AND LIVESTOCK AUSTRALIA ARE PROJECTING STABLE LAMB PRODUCTION FOR THE REMAINDER OF THE YEAR AND REDUCED MUTTON PRODUCTION, WHICH GIVE FURTHER CONFIDENCE TO THE STABILITY OF HIGH PRICES NEW ZEALAND SHEEP FLOCK DATA Deer Million head Dairy Cattle Beef Cattle Sheep Source: Beef and Lamb New Zealand PAGE 9

12 WOOL INSIGHTS Year to date wool sale volumes have increased by approximately 3 per cent across the country when compared to the season. Ranging from 2 per cent in the northern centre and 8 per cent in the southern centre, and down by 8 per cent in the west. While these figures are in line with industry predictions for a modest increase in wool production for in the east, and a tougher year for wool production in the west, what has continued to surprise many in the industry have been the continued price gains across all categories of wool, particularly when prices were already at near record highs. Since July 217, the Eastern Market Indicator (EMI) has risen over 16 per cent, which equates to an approximate additional 25 cents (clean) back to growers. On direct comparison to March 217, the EMI is up 18 per cent, and the Western Market Indicator (WMI) is up 25.7 per cent or 383 cents. The most significant gains compared to the selling season have been in the finer micron categories of 16 and 17 micron, and the medium wools of 21 to 23 micron. The quality of wool on offer for the remainder of the financial year may see prices stabilise or attract discounts across some categories, with discounts appearing in the market in late March for wool with high levels of vegetable matter or high point of break in the middle readings. Australian Wool Innovation also warn that exporters may be feeling some financial pressure, due to the price rises hindering their ability to sell normal volumes of wool, and the high value of stock in warehouses limiting the ability for opportunistic trading. AWEX MERINO PRICE GUIDE FINANCIAL YTD GAINS AWEX Merino Price Guide financial year to date gains (cents/kilogram) AWEX Merino Price Guide March 218 compared to March 217 (cents/kilogram gains) Source: AWEX, Australian Wool Industries Secretariat Inc PAGE 1

13 AUSTRALIAN WOOL EXPORTS SHEEP GROSS MARGINS 5.5% 3.1% 81.4% China (81.4) India (5.5) Italy (3.1) Czech Republic (5.2) Malaysia (2.1) Korea (1.3) Taiwan (.2) Egypt (.7) Merino wether (18 mic) Merino wether (2 mic) Merino to Merino rams (18 mic) Merino to Merino rams (2 mic) Merino with wethers sold (2 mic) Merino with 25% to terminal rams (2 mic) Note: By weight of wool shipped July 217 to January 218 Source: AWEX, Australian Wool Industries Secretariat Inc Merino to terminal rams (2 mic) Merino to maternal rams (2 mic) In export markets, China continues to be the major importer of Australian wool, accounting for 81 per cent of imports for the period July 217 to January 218. Whilst Chinese imports have increased by just 5 per cent by weight over this period, they have increased over 2 per cent by value. Exports to India are slightly down, however exports to the Czech Republic and Malaysia are up 19.9 per cent and 72.4 per cent respectively. The sustained high price of both fine and medium wool, and strong industry outlook for export demand is driving a resurgence for Merinos with producers seeing value in holding Merino wethers and growing Merino ewe flocks. Recent work completed by the New South Wales Department of Primary Industries (DPI), based on 217 wool and sheep meat prices, found that when comparing various sheep production systems, an 18 micron self-replacing Merino enterprise returned the highest gross margin per hectare (ha), and was up 55 per cent on the previous year. A gross return of $554/ha was achieved, or $51.73 per dry sheep equivalent (DSE), based on a 1 DSE/ha stocking rate. The runner-up enterprise was 18 micron Merino wethers, returning $517/ha or $52/DSE reflecting the higher fine wool prices. What these figures also point out is the large positive impact of genetic gain that is achievable for many Merino producers. DPI data suggests that a 15 per cent increase in adult wool cut for 18 micron ewes, achievable through good genetic selection and classing techniques, would equate to a further $4.4/DSE return, and if combined with a 15 per cent increase in wool value, producers could find a further $9.59/DSE in their back pocket. With a variety of Merino wether trials in operation across the country all demonstrating the huge genetic and productivity variation in Australian Merino flocks, there is evidence that all Merinos are not made equal and there is upside on top of current high commodity prices should producers seek it out. 1st X Ewes to meat rams Dorper Ewes to Dorper Rams Source: NSW Department of Primary Industries $ $1 $2 $3 $4 $5 $ WITH GROSS MARGIN RETURNS OF OVER $55/HA ACHIEVABLE FROM SHEEP OPERATIONS, THESE FIGURES ARE COMPARABLE WITH SOME BROADACRE CROPPING RETURNS Traditionally, many farmers were content to accept a lower rate of return per hectare from livestock operations in return for reduced income volatility compared to dryland cropping. With the risk profiles unchanged, or arguably decreased further in favour of sheep enterprises, we are seeing examples of those farmers who were previously cropping focused, adding longer term pasture phases to cropping rotations, and investing in sheep infrastructure to accommodate their growing sheep businesses. PAGE 11

14 DAIRY INSIGHTS While the Australian market continues to approve of the sale of Murray Goulburn assets to Saputo by both the Australian Competition and Consumer Commission (ACCC) and Murray Goulburn shareholders, the global market remains relatively balanced with prices in recent Global Dairy Trade Auctions dipping for four successive auctions, following strong rallies earlier in the year. While the most recent Global Dairy Trade (GDT) Auctions produced slight falls in dairy prices, ranging from.5 per cent to 1.2 per cent, the most recent auction produced mixed results with an increase in the butter price of 4.1 per cent and whole milk powder of 1.6 per cent, but falls in skim milk powder of 1.8 per cent pulled the overall result down. The fall in prices stemmed from a production increase in New Zealand following a dry start to the year. Fonterra reported a 2 per cent drop in New Zealand output volume in February, compared with a 5 per cent fall in January. However this increase in production has been slow, with most analysts expecting stable prices for the rest of the season. THE UNCERTAIN FACTOR IN THE RELATIVELY STABLE GLOBAL MARKET REMAINS THE EU, THEIR SKIM-MILK STOCKPILE AND PRODUCTION GROWTH Production levels in the EU increased strongly towards the end of 217, with production increasing 6 per cent year on year in December. Production growth has moderated slightly since then with production up 2.9 per cent year on year in February. US production also continues to grow up 1.8 per cent in February. However as we enter the spring flush in the EU, uncertainty remains around just how much production will increase by further weighing on prices. The Australian domestic market looks relatively stable with production continuing to increase in the southern region with national production increasing 3.5 per cent year on year in February, with the largest increases in South Australia (1 per cent), Western Australia (8.3 per cent) and Victoria (4.3 per cent). Domestic consumption continues to be relatively stable in total consumption, however the ongoing trend away from low-fat and non-fat drinking milk continues, which has been only partially offset by the increase in demand for full-fat drinking milk. Domestic production of whole milk powder has grown over a third in one year, with cheese production also growing while skim milk powder and butter production have declined in the last year. Australia s dairy export markets continue to improve, particularly in China and Japan with both markets picking up in 217 after a decline in 216. Exports to China of milk and cheese, both concentrated and non-concentrated, continue to grow with the strongest of all categories of exports to China. However, the export picture becomes a little murkier when we look at the proportion of Australian exports going to China, with the Chinese export market increasing in importance for Australian exporters across all categories of dairy produce. In comparison, China has reduced reliance on Australian exports for cheese, yoghurt, milk powders and butter as the highly competitive global market and cheaper goods from the EU increase their market share. PAGE 12

15 AUSTRALIAN DAIRY EXPORTS BY DESTINATION 6, Exported Value ($M) 5, 4, 3, 2, 1, China Japan Singapore Indonesia Malaysia Korea Hong Kong Taipei, China Thailand Philippines New Zealand Source: ABT / Comtrade AUSTRALIAN DAIRY EXPORTS AS % CHINESE IMPORTS 25 Australian Exports (%) Whey Butter Milk and cream, concentrated or sweetened Buttermilk, curdled milk and cream, yoghurt Cheese and curd Milk and cream, not concentrated or sweetened Source: ABT / Comtrade CHINESE IMPORTS AS % AUSTRALIAN EXPORTS Chinese Imports (%) Whey Butter Milk and cream, concentrated or sweetened Buttermilk, curdled milk and cream, yoghurt Cheese and curd Milk and cream, not concentrated or sweetened Source: ABT / Comtrade PAGE 13

16 RICE AND COTTON INSIGHTS Following a recent short study by ABARES, the ongoing shift from rice to cotton production in particular regions of Australia is being discussed by many sectors. In particular, the ABARES study focused on the Murrumbidgee region of NSW. It was found that since 21, cotton planting had increased sevenfold in that region, from 5, ha to 35, ha. Over the same period, rice plantings had fallen dramatically, from 64, ha to 18, ha. The study found that the rise in cotton had boosted the ongoing strong financial returns for cotton growers in comparison to other crops. Importantly, however, this growth was also driven by the advances in technology and genetics, which had seen a strong rise in cotton yields, especially in cooler regions not as traditionally suited to cotton. In looking at this more widely across Australia, cotton s growth in comparison to rice continues to stand out. Ongoing high world prices, driven by global consumer demand for cotton, has seen the national acreage for cotton rise to almost seven times that of rice. Looking ahead, Australia s cotton plantings are forecast to remain strong in medium term through to at least , while rice plantation area s look to remain stagnant. This increase in cotton farms is largely seen in southern New South Wales. Returns for cotton growers have continued to be driven by high production levels, with having seen the third highest national production since 1973, at 931, tonnes. While both crops are water intensive, ABS reported water application rates show water use on cotton farms was around 56 per cent of that of rice farms in With a continued focus on water resources, both politically and by the relevant industries, the shift away from rice plantations towards cotton seems unlikely to reverse any time soon. RICE AND COTTON ACREAGE IN AUSTRALIA TO ( HA) Acreage ( ha) /61 64/65 68/69 72/73 76/77 8/81 84/85 88/89 92/93 96/97 /1 4/5 8/9 12/13 16/17 Rice Cotton Source: USDA PSD Query PAGE 14

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18 CHICKEN INSIGHTS The two dominant players in the industry, Baiada and Ingham s, continue to put downward price pressure on the broiler market. At the same time, other corporate structured operations are emerging. Oversupply and restrictions halting international trade are significant barriers to the industry at present. Over the past 2 years, the Consumer Price Index for broiler meat has remained stagnant, while other meats from beef, lamb, goat and pork continue to climb. In a highly competitive market where the supply chain is almost fully integrated in all aspects of the business, there is little room for unaccountable costs. Furthermore, projections towards the next five years indicate that broiler production will continue to increase. By 222, Australian chicken meat production is expected to hit 1.4 million tonnes (carcase weight). At this stage, it seems like competition between broiler businesses will only intensify. The poultry war between the big producers is flowing down the ranks, too. GROWERS ON CONTRACTS FOR BIGGER COMPANIES REPORT BEING SQUEEZED FROM THE MARKET IN AN ATTEMPT FOR BIGGER MARKET PLAYERS TO REDUCE COSTS AND EDGE OUT THEIR COMPETITION Victorian farmers in particular are being hit hard. Smaller operators on contracts with bigger companies are feeling the squeeze. Geographical factors restricting growers to their current confines have made room for corporate operators in NSW and QLD to build up to 27 sheds on one block of land. As a result, Victorian broiler production levels have slipped from 28 per cent of the market to 21 per cent. In Australia, competition is driven by interstate growers. Growth in production has been stimulated by demand and low feed costs, therefore producers can afford to produce more poultry meat and sell it for the same price. Private growers were once insulated from the current price wars evident within the poultry industry. While smaller producers run anywhere between one and 3 sheds, corporate structured organisations are constructing hundreds of sheds on one site. Such market disruption will only put further pressure on small scale producers. In addition, smaller broiler producers will be significantly disillusioned by the market. On a positive note, meat consumption is expected to increase. In terms of annual consumption, Australian chicken meat consumption is expected to rise from 47kg to 49.6kg per person. Furthermore, slaughter weight is expected to increase by 5.5 per cent from 217 to 222, an increase from 1.8kg per bird to 1.9kg per bird which can be put down to genetic improvements. While production improvements and efficiencies increase, this doesn t necessarily help smaller producers. In 218, Chinese demand for chicken meat is expected to rise by 7 per cent. However, current Australian trade restrictions on poultry will not grant Australia easy access into a growing market in China. PAGE 16

19 CHICKEN MEAT CONSUMPTION PER PERSON (FIGURE 1) WORLD CHICKEN MEAT PRODUCTION VS MEAT PRICE kg/cw Cents per kilogram (raw weight) Metric tons worldwide /1 2/3 4/5 6/7 8/9 1/11 12/13 14/ Source: ABS c/kg (rw) Mt (cw) As Figure 1 shows, demand for chicken meat has gradually increased over the last 18 years. The 56 per cent increase in consumption from the year 2 can be attributed to stable pricing of poultry meat and perceived health benefits of the meat. When compared to other major meat types consumed including beef, lamb and pork, the price of chicken meat has remained constant while other meats have shown huge increases in value. Consequently and unsurprisingly poultry has shown a gradual rise in demand for the product. AUSTRALIAN CHICKEN MEAT EXPORT VOLUME AND VALUE (FIGURE 2) Volume vs. value exported Source: ABS 9/1 1/11 11/12 12/13 13/14 14/15 15/16 16/17 $M Kt Figure 2 highlights the difference between supply of chicken meat on the international market and the value of chicken meat per kilogram. Over the last nine years, chicken meat prices paid by the consumer only increased 2 per cent. Given a 56 per cent increase in meat production and consumption over the last 18 years, it is surprising to see that with greater demand, the value of chicken fails to increase at a similar rate. As a whole, the volume of meat on the market is between 25 million tonnes and 38 million tonnes over the last 1 years, with no real trend set showing a gradual increasing supply of chicken on the market. The level of competition in the market is pushing smaller producers out of the equation, while larger producers on volume-based incentives are able to adapt to uphold leadership in the market. Source: ABS Over the last 18 years, the price of chicken meat has increased only 12.5 per cent in terms of raw weight. Between 2 and 214, world poultry production has increased by 57 per cent. In some ways, it is surprising to see broiler values increase at all. While supply within the Australian broiler market is marginally influenced by external countries, Australia s situation runs similarly to others in the fact that the country is producing more chicken meat while prices stagnate with diminished returns. HISTORICALLY, DEMAND FOR CHICKEN AND PORK MEAT HAS GROWN WHILE LAMB, MUTTON, BEEF AND VEAL HAS FALLEN. HOWEVER, PRICES FOR LAMB, MUTTON, BEEF AND VEAL HAVE INCREASED FOR THE CONSUMER WHILE CHICKEN AND PORK MEAT PRICES HAVE PLATEAUED Unfortunately for poultry and pork producers, there is little expectation for change in this trend in the immediate future. As with many industries in Australian farming, the number of farms is decreasing while the output per farm is increasing. It is hard to see an upside for poultry producers at this time. While production continues to rise, viability is becoming questionable for smaller operators. In addition, with large corporate operators trying to monopolise market supply, competition can be expected to escalate. PAGE 17

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21 NUT INSIGHTS Continued strong production across the US is expected to see total output for almond production for the year at 1.19 million tonnes (mt) which is 25 per cent more than the last 1 years average production. Similarly, world production of walnuts has experienced strong supply growth over the last decade, witnessing record production in of 854,459 mt. According to the International Nut and Dried Fruit Council, this supply response reflects the lead by China who increased production by 55 per cent over , followed by Chile and the US who increased production by 22 per cent and 11 per cent respectively. Over 75 per cent of global production has been provided by the US and China. ALMONDS In the five years to , the Australian almond industry has capitalised on increasing global demand for nuts, greater price competitiveness resulting from a more favourable Australian dollar, and improved market access via free trade agreements. The industry has also benefited from temporary production constraints and disruptions in competing countries. The Almond Board of Australia recently reported that, based on orchard planting, the almond industry was expecting a crop of 87,mt in 218. However wet, cold and windy weather during pollination has introduced down risks to production to approximately 81,mt. Quality appears good with large kernel sizes leading to reports of favourable price outcomes for growers/marketers. WALNUTS The Australian walnut industry has also responded to supply disruptions, most notably those emanating from California, by increasing supply. According to ABARES, walnut production is projected to increase from 6,5 tonnes in to 17, tonnes in Similar to the almond industry, walnut producers will need to adjust to falling real prices for Australian tree nuts and cost of irrigation water which will raise production costs. A key opportunity for Australian growers is to capture opportunities in relation to the growth in demand for organic almonds in the US, as less than 5 per cent of California s acreage is classified as certified organic. In the US, a domestic supply shortfall of organic almonds has been met by Spain and Italy under the US-EU organic trade equivalency agreement. This growth opportunity reflects one key macro trend in the food and beverage sector for safe foods through reduced use of insecticides and herbicides. GLOBAL ALMOND EXPORTS GLOBAL WALNUT EXPORTS 8% 88% United States (88) European Union (2) 4% 63% United States (63) European Union (2) Australia (8) Turkey (1) Chile (1) 1% China (3) Ukraine (1) Chile (16) ROTW (2) Australia () Moldova (4) 16% Note: All figures are rounded Source: International Nut and Dried Fruit Council, Nutfruit Magazine, March 218 Note: All figures are rounded Source: International Nut and Dried Fruit Council, Nutfruit Magazine, March 218 PAGE 19

22 ANZ AGRIBUSINESS CONTACTS MARK BENNETT Head of Agribusiness and Emerging Corporate T: E: mark.bennett2@anz.com TAMMY MEDARD Head of Diversified Industrials Institutional T: E: tammy.medard@anz.com CONTRIBUTORS MICHAEL WHITEHEAD Head of Agribusiness Insights, Institutional T: E: michael.whitehead@anz.com ALANNA BARRETT Associate Director Agribusiness Research, Business and Private Bank T: E: alanna.barrett@anz.com MADELEINE SWAN Associate Director Agribusiness Research, Business and Private Bank T: E: madeleine.swan@anz.com VIVEKA MANIKONDA Senior Analyst, Institutional Client Insights & Solutions T: E: vivekasri.manikonda@anz.com CRAIG PETTY Associate Director, Institutional R&A Australia T: E: craig.petty@anz.com MILES ROWLANDS Agribusiness Graduate Business and Private Bank E: miles.rowlands@anz.com PAGE 2

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