Despite significant challenges from the global economic downturn and downward pressure on commodity prices, Australia’s agricultural sector is in a good position to “weather the COVID-19 storm”, according to Rabobank’s April Agribusiness Monthly.
The report says the nation’s farm sector has a number of factors in its favour which will help cushion the negative economic impacts of the coronavirus pandemic in coming months.
These include the low Australian dollar, local farmgate prices supported by limited Australian supply and positive seasonal expectations.
Rabobank head of Food & Agribusiness Research Tim Hunt says while it will undoubtedly be a difficult season ahead, with a number of potential risks – primarily from COVID-19 impacts – Australia’s agricultural sector is overall positioned for a profitable year.
Global demand will be significantly impacted by the pandemic
Rabobank Head of Food & Agribusiness Research Tim Hunt
“While China appears to be in the early stages of recovery, the rest of the world is now falling ill. Global demand will likely weaken significantly in coming months as panic buying for food and groceries fades and the negative impacts of reduced incomes across most of the world come to the fore.
“With that, we expect US dollar prices of most ag commodities to fall further in this second quarter of 2020.
In global ag markets, supply typically fails to adjust quickly to negative demand shocks, resulting in the build up of inventory. We expect this will see significant US-dollar price falls as a result, given the size of this demand shock.”
Importantly, Mr Hunt said the lower Australian dollar would provide some shelter from falling prices for Australian producers.
The worse the pandemic gets, the lower the Australian dollar will fall as capital gets reinvested in lower risk financial markets like the US and Japan.
“Significantly, the AUD is likely to be lower for longer than it was during the global financial crisis, which was the last time we saw a large global economic shock. This will ensure the contraction in farmgate prices in local currency terms is less than seen on world markets.”
Local farmgate prices will also be supported by low local grain stocks as well as diminished sheep flock and cattle herd numbers after several years of drought, the report says.
“This is ensuring strong competition for product in the local market from processors downstream,” Mr Hunt said.
In addition, the report says, recent rainfall and the current weather outlook suggest Australian farmers will overall have a decent production season this year.
“After a wet February, more significant rainfall was recorded across the eastern states in March, including in many drought-affected regions,” Mr Hunt said.
“On top of this, the next three months are likely to be wetter than average in the west and the south, according to Bureau of Meteorology forecasts.”
Global market support
There are also global factors which will go some way towards mitigating the negative impacts of COVID-19 on demand, the report says.
“Most prominently, we expect that African swine fever will further reduce Chinese pork production in 2020,” Mr Hunt says.
“This will keep the global animal protein market tighter than would have otherwise been the case.”
In grains and oilseeds markets, the risk of supply disruption is creating a different dynamic. Traders are concerned about the potential for disruption to export shipments coming through key ports in Argentina and Brazil, and the threat of export restrictions in the Black Sea region. This is creating a risk premium that will likely take some months to ease.
While in dairy, Mr Hunt said, the dry end to the 2019/20 season which has occurred in New Zealand will see a reduction in supply that will partly offset the impact of weaker global demand in the near term.
The report says the outlook for Australian agriculture does come with “downside risks on many fronts” as a result of COVID-19 disruption.
Beyond demand and pricing, the sector faces material risks on several other fronts. Locally, these include availability of agri chemicals and farm labour as well as the continuation of operation of packing houses and processing plants,
“Other market downside risks include the potential of re-infection in China, a global economic downturn in 2020 that is worse than the global financial crisis, high infection rates in regional Australia which could impact the agricultural sector and the wildcard of an appreciation in the Australian currency,” Mr Hunt said.