ABARE: General Rural Commodity Overview - 2002

03 December, 2002

The Bureau of Agricultural and Resource Economics (ABARE) hosted the Commodities Outlook Conference in Canberra from March 5-7, 2002. This report, specially prepared for CSD website viewers, summarises ABARE’s General Rural Commodity Overview – 2002.

Over the medium term, Australia’s annual rate of inflation is assumed to remain around 2.5 per cent.

*Australia’s prime lending rate declined from 9.8 per cent in 2001 to 7.8 per cent in February 2002. Rates are assumed to average 7.9 per cent in both 2001-02 and 2002-03, compared with an average of 9.2 per cent in 2000-01. Over the medium term, Australia’s real prime lending rates are assumed to average around 6 per cent, close to assumed real interest rates in the United States.

Since October 2001, the Australian dollar has gradually appreciated against most international currencies, including (between October 2001 and February 2002) 5 per cent against the US dollar, 16 per cent against the Japanese yen and 10 per cent against the euro. While the Australian dollar is assumed to appreciate in 2002-03, significant fluctuations are likely during the year. It is assumed to average US55c in 2003-04 and US56c in 2004-05 and 2006-07. Strengthening world economic growth, and prospects for higher commodity prices, would provide support for an appreciation of the Australian dollar.

*Farm commodity export earnings are forecast to be A$31 billion in 2001-02 and A$30.4 billion in 2002-03, compared with A$29.4 billion in 2000-01. Over the medium term, farm exports are projected to be worth A$28.5 billion by 2006-07, around 8 per cent lower than the forecast value in 2001-02. For many commodities, including wheat, cotton beef, wool and dairy products, export earnings are forecast to decline in 2002-03. The value of crop exports is projected to increase in the five years to 2006-07 (largely driven by a big lift in wine exports).

Net farm income in 2001-02 at A$8.7 billion, was the highest for over two decades (26 years). The net value of farm production is expected to fall by 19 per cent to around A$7 billion in 2002-03, largely owing to expected falls in the prices of beef, sugar, wool and dairy products.

Average farm cash income for the broadacre industries as a group is forecast to rise by 32 per cent from the 2000-01 level to average A$94,400 in 2001-02. The rate of return is forecast to average 3.7 per cent in 2001-02, the highest rate of return recorded since the early 1980s (0.7 per cent in 1999-2000).

Total farm costs are forecast to increase by 1.5 per cent to A$28.3 billion in 2002-03, following a 2.7 per cent rise in 2001-02, which largely reflected a rise in input use. And a rise in the index of prices paid. Prices for most farm inputs are not expected to increase faster than the general rate of inflation during 2002-03 and through to 2006-07.

Total farm debt increased from A$19 billion in 1996 to A$27.6 billion in 2001. The majority is held by banks, whose share rose from A$14.7 billion to A$22.3 billion over the same period. Debts to pastoral companies increased significantly from A$376 million to A$641 million.

*The total area sown to grains and oilseeds in Australia over the past 10 years has increased from around 14.3 million hectares in 1991-92 to around 21 million hectares by 2000-01. During the same period, sheep numbers fell from 151 million to 114 million.

While wool prices have since improved, the high cost of replacement stock and the improved returns from sheep sold for slaughter and the live sheep trade are likely to prevent any large scale shift back into wool production. The movement of resources out of cropping will also be limited because of the substantial capital that has been invested in cropping, particularly in machinery.

While some small improvement is expected in world grain prices over the next one or two seasons, prices are then expected to weaken as world stocks are rebuilt. Prices to Australian growers would be further weakened by an expected appreciation in the dollar over this period.

Australian wheat prices are expected to fall slightly in 2002-03, with the average pool return for Australian premium white wheat forecast to be around A$245 a tonne. Canola prices are forecast to fall by 10 per cent to average A$355 a tonne in 2002-03, following an 18 per cent increase in 2001-02.

Wool: Although world wool supplies are at a 30 year low, and the Australian sheep flock is at its lowest level since 1949, weaker world demand is expected to result in lower prices in the short term. However, the medium term provides more promise, with an assumed recovery in world economic growth providing a boost to consumer demand for textiles and apparel, although there is uncertainty abut both the timing and extent of this recovery. Also, intense competition is expected to maintain downward pressure on prices for wool, cotton and synthetics.

The Australian eastern market indicator price for wool is forecast to fall by around 3 per cent to average 760c/kg in 2002-03, although there are likely to continue being periods of significant price volatility in the short term. As an example of recent volatility, the EMI averaged 801c/kg in July 2001, fell to 702c/kg clean in November 2001, then spiked to average 894c/kg in January 2002, representing a variation of 192c/kg or 27 per cent in just two months.

Constraints on wool prices and demand over the medium term include a lower proportion of consumer expenditure on apparel items; growing competition for a share of consumer budgets; changing consumer tastes and demographics; fashion changes; competition between fibres; and an assumed appreciation in the Australian dollar. In essence, wool is competing in what are likely to be declining market segments.

*The Australian sheep flock declined from a high of 174 million in 1991-92 to 121 million in 1994-95, then steadied to 120 million for several years before falling to 113 million in 2001, and is forecast to fall by nearly 3 per cent to 110 million by June 2002. The flock is projected to rise to 114 million in 2003-04, then 117 million in 2004-05, before rising to 119 million in 2005-06 and 120 million again in 2006-07, back to where the flock was a decade earlier.

The world cotton price is forecast to rise 14 per cent to average US49c/lb in 2002-03, then US54c/lb in 2003-04, before remaining steady in real terms to 2006-07 (US57c/lb). The area sown to cotton in Australia is forecast to decline 5 per cent in 2002-03, with production falling to 592,000 tonnes, recovering to 718,000 tonnes in 2003-04 and 781,000 tonnes by 2006-07.

*Australian beef prices rose 43 per cent to an estimated average of 310c/kg dressed in 2001-02, the highest since 1986-87, but are estimated to fall 15 per cent to average 265c/kg dressed in 2002-03, and fall further in 2003-04 (225c/kg) as beef production rises, particularly in the USA. Prices are expected to fall to 220c/kg in 2004-05, 215c/kg in 2005-06 and 211c/kg in 2006-0, almost 100c/kg dressed or 32 per cent below the peak in 2001-02.

*The total cattle herd reached 28.8 million in June 2001 and is estimated to reach 30.4 million by June 2002, peaking at 31.6 million in June 2003, coinciding with a period when lower prices are forecast. The herd is forecast to fall slightly to 30.6million in 2003-04, then 29.7 million in 2004-05, sliding to 29 million in 2005-06 and 28.3 million in 2006-07, which is slightly below the herd size in 2000-01.

*Live cattle exports are forecast to increase by 9 per cent to 925,000 in 2002-03, and to continue rising as demand in SE Asia continues to improve reaching, reaching 1.065 million in 2006-07, or about 26 per cent above the level exported in 2000-01.

*Rising lamb supplies over the medium term are forecast to result in an easing in saleyard lamb prices in real terms. Prices are expected to fall 8 per cent to 236c/kg in 2002-03 and 227c/kg in 2003-04 before rising gradually to 237c/kg by 2006-07. Lamb exports to the USA are projected to continue to grow over the medium term, jumping from 22kt in 1999-2000 to 34kt in 2002-03 and 48kt in 2006-07, more than double the export volume in 1999-2000.

*Mutton prices are forecast to remain close to the current year’s estimated average of 150c/kg dressed in 2002-03 (152c/kg) but ease beyond then as production rises slowly, falling to 130c/kg by 2006-07, just 13 per cent below the average price in 2001-02.

*Live sheep exports rose 21 per cent in calendar 2001 to around 6.4 million. However, demand from Australia’s largest market, Saudi Arabia, is expected to ease in the short term due to lower oil prices weakening that economy and a resumption in live sheep imports from north Africa. Live sheep exports are forecast to fall 11 per cent in 2002-03 to under 5.6 million, but rise gradually to 5.9 million by 2006-07, or around the same level as in 2000-01, but one million head above exports in 1999-2000.

*After declining by about 3 million to an estimated 110 million at June 2002, sheep numbers are projected to increase over the medium term to 120 million by June 2007, representing an increase of barely 8 per cent over a five year period.

*While the number of pig farms fell 24 per cent over the five years 1996 to 2000, total pig numbers changed very little, but the number per farm rose significantly from 560 to 760. Pig meat production is estimated to reach a record 386,000 tonnes in both 2001-02 and 2002-03, when higher global production and lower prices are expected to force pig numbers and production downwards again. Saleyard prices are expected to peak at 273c/kg in 2001-02 before declining 11 per cent to 243c/kg in 2002-03, and 241c/kg in 2003-04, but rising to 254c/kg by 2006-07.

With feed costs remaining high and profitability squeezed, poultry meat production is forecast to rise only marginally in 2002-03 to 664,000 tonnes, but lower feed costs over the medium term should force production up to 722,000 tonnes in 2006-07.

*Dairying is now the fourth largest agricultural industry in Australia, accounting for nearly 9 per cent of the gross value of agricultural production. Dairy exports were valued at almost A$3 billion in 2001-02. The number of dairy farms in Australia has fallen to around 12,000, the average rate of decline being 2.5 per cent annually since the 1970s. Farm gate prices for milk are forecast to fall in 2002-03 to 30.2c/L and to remain relatively flat over the medium term, reaching only 30.3c/L by 2006-07. Dairy cow numbers (2.17 million in 1999-2000) are expected to rise to 2.29 million in 2002-03 before declining gradually to 2.25 million by 2006-07.

*Volatility in sugar prices is expected to continue, with world production projected to increase by more than consumption, placing further downward pressure on prices. Australian sugar production is projected to increase only slowly to round 5.7 million tonnes by 2006-07, with returns to Australian producers expected to show only moderate improvement after 2002-03. The industry faces a difficult trading environment over the next five years.