The effects of the global economic crisis are having an ever-greater influence on the Australian agricultural industry, according to a just-released Rabobank industry report.
In its annual Australian Agriculture in Focus report, food and agribusiness lender Rabobank says the reduction in credit availability and the fall in consumption has had a marked impact on the agricultural sector.
Rabobank Food & Agribusiness Research general manager, Bill Cordingley, said the global economic crisis will directly impact commodity pricing in 2009.
“As the economic crisis hit in 2008 the lack of credit availability created difficulties for all borrowers including farmers, processors, distributors and retailers,” Cordingley said.
“The exodus from futures markets, a shortage of credit for companies trading in agricultural commodities and the damage to consumer wealth have all added to the downward pressure on commodity prices.”
Cordingley said that while all agricultural commodities will be affected, the commodities that will be most impacted are those that are seen as discretionary spending such as natural fibres, wine and even dairy.
“Particularly in developing nations dairy is still considered a discretionary purchase so prices are likely to drop along with the reduced consumption of milk, cheese and yoghurts.”
However, although many of the impacts of the global economic crisis have been negative it is not all bad news for Australian agriculture and some commodities will not be as badly affected.
There have been a number of resulting benefits for the agricultural industries, not the least of which is the fall in the Australian dollar.
Cordingley said that while the currencies of many countries fell as investors sought the perceived safe haven of the United States and Japanese markets, the Australian currency fell more than most.
“The Australian dollar was driven down by 30% against the US dollar in the second half of 2008 helping to offset the falling US dollar commodity prices in export markets and the softening of prices at farm gate,” he said.
“The second benefit of the global crisis was the collapse in input costs, fuel, energy, fertilisers and agrichemicals have all fallen well below the highs of early 2008 and with the global uncertainty continuing it is likely they will stay that way for at least the first half of 2009.”
A third key benefit of the crisis for Australian farmers has been the aggressive cutting of interest rates by the RBA.
“Combined these factors mean that the full effects of the crisis, that are severe globally, will be somewhat softer in Australia in 2009, giving the industry the opportunity to manage through what will be a difficult year better than many competitors overseas,” Cordingley said.
Farm inputs
The financial crisis has had a major impact on farm input prices and international prices are expected to be significantly lower in 2009.
“In 2008 the annual growth rate in fertiliser use doubled from that seen in recent years as farmers sought to take advantage of high agricultural commodity prices,” Cordingley said.
“By the end of 2008 international prices for both oil and major fertilisers had fallen 60% to 75% in response to the plummeting commodity prices, energy costs and freight rates.”
The Rabobank report says that although there will be a need for major importing countries like Australia to overcome high priced inventories from earlier purchases and to manage exchange rate volatility, prices farmers pay for fertiliser, agrochemicals and fuel will likely remain considerably lower in 2009 than was the case in 2008.
Global supply and demand
The uncertainty around agricultural commodity prices will mean that there is likely to be a contraction in plantings and global cuts in herd and flock numbers the report says.
“A contraction in wheat plantings in 2009/10 together with a reduction in fertiliser utilisation (due to high input prices and a drop in commodity prices), is expected to result in a smaller world wheat crop this season,” Cordingley said.
“A repeat next year of the extremely tight supply issues seen throughout the world in grain in 2007 would certainly provide a more bullish outlook for global prices, given the relatively tight supply and demand balance for the 2009/10 season.”
Beef prices are also expected to remain steady, supported by herd cuts in the US market in response to reduced profitability.
“Any substantial rainfall in the beginning of the year would potentially drive increased interest from restockers looking to take advantage of improved water and feed availability,” Cordingley said.
However, dairy, wine, wool and cotton are all expected to be negatively impacted by the economic crisis.
“Dairy, wine and natural fibre demand is highly related to economic conditions as these commodities are still primarily a discretionary purchase for many buyers,” Cordingley said.
“Thus when incomes fall, products like milk, cheese, wine and apparel are often left off the shopping list. In ingredient markets, dairy use can also be cut to save costs — either by substituting to cheaper vegetable based alternatives or just reducing ingredient use altogether.”
The timing of the global demand recovery will be crucial to determining prospects for 2009/10, though the drop in input cost and the Australian dollar will ease some of the pressure on prices.
Food retail
Food prices have continued to be impacted by the “tail-end ripple effects” of last year’s commodity boom.
While the cost of agricultural and oil-derived products fell sharply in the second half of 2008, lags ensured that retail food prices continued to increase through to the end of the year.
“This price ‘stickiness’ is a global phenomenon, with the retail costs of food remaining high or adjusting only slowly downwards in most countries around the world at present,” Cordingley said.
The Rabobank report said it was likely that retail price increases across many food categories would dry up (and in some cases fall) as 2009 progressed, as most of the forces that drove them started to reverse.
“We expect to see reduced costs of ingredients, fuel and plastics passed on to shoppers as processors compete to sell product in a challenging retail environment and retailers strive to keep consumers moving in through their doors,” Cordingley said.