Agribusiness Newsletter Feb 2009
Contents
Meat Industry
Wine Industry
Dairy
Meat Industry
Global credit squeeze causes market volatility
- With meat importers having more difficulty gaining credit and money becoming more expensive to obtain (especially in countries such as Russia and Korea), beef trading has become much more ‘hand to mouth’.
- In the past, meat was often bought in advance and stored, thus helping in smoothing out any short-term supply and demand anomalies in the market.
- Due to the ‘credit crunch’, the meat stockpile has shrunk considerably, as no one is prepared to hold much product. As a result, it is likely that there will be more price fluctuations as there is less product stored to cater for changes in consumer demand. This is similar to how the global run-down in grain stocks has caused that market to fluctuate.
- Although the price of primal cuts has not fluctuated to the same degree, prices for offal and hide have fallen to their lowest level in more than 10 years.
Co-product at their lowest point in 10 years
- Prices of skins and hides, as well as tallow, are at their lowest level in 10 years. Traditionally, meat processors have generated significant profits out of sales of skins and hides and other by-products such as tallow and offal.
- As a result of the global credit crunch, demand for leather and luxury goods has plummeted since last year. Cow hides are now selling for a mere quarter of what they were about a year ago. Some hides (81kg to 140kg) are trading for as little as $2.00 per hide according to Meat and Livestock Australia.
- Tallow prices have also halved in the past three months, down from record highs of $1,000 per tonne.
- Although lamb skins have also decreased in price, the impact has not been as severe as in the hide market.
- Lamb skins (five centimetre and longer in the 24.1kg category) were recently trading at $6 to $7.50, compared to $10 a year ago.
- The above dramatic decreases in co-products, has resulted in significant reductions in profits to meat processors, which inturn has resulted in processors being forced to pay less for livestock.
Lotfeeders speculate on future demand for product improving
- According to latest figures from the Australian LotFeeders Association (‘ALFA’), the number of cattle on feed across Australia lifted 15% in the last quarter of 2008.
- Whilst the number of cattle on feed has increased by 15%, current feedlot capacity is still relatively low at 59%.
- The increase in the number of cattle on feed has predominantly been in Queensland, where the numbers have increased by 52% and in Western Australia where the numbers have increased to 20%.
- The major drivers to the increase in cattle on feed are primarily:
- a decline in the Australian dollar, thus making Australian beef cheaper on global markets;
- reduction in the cost in the price of feeder cattle – average 4% lower in the last quarter; and
- a significant reduction in grain prices – 23% decrease.
- a decline in the Australian dollar, thus making Australian beef cheaper on global markets;
- According to ALFA, the average cost of barley fell from $313 per tonne in early last year to $259 per tonne in the last three months of 2008. Likewise, feed wheat fell from $470 to $269 per tonne. In addition, sorghum prices in Queensland were slashed after a better than expected harvest.
- In broad terms, the outlook for beef is still tempered by the global financial crisis and its likely impact on demand for beef. For example, Australian grain fed exports to Japan declined 8% in the fourth quarter of 2008, while those to Korea were down 10%. Based on the above, according to Mr Gordon, an ALFA executive director, “the feedlot industry was basically speculating, hoping demand for product would come good to cement the profit margins that could potentially be made now grain was cheaper and the Australian dollar was lower”.
- The above comments are supported by the fact that the biggest increase in cattle numbers on feed has been in the smaller feedlots, which traditionally have been regarded as speculative.
- Mr Gordon said “if the global meltdown or other issues kept beef prices in check, then there could be another slowdown in feedlot buyer activity in the next few months”.
Brazil down, but not out
- Brazil, the biggest beef exporter in the world, has experienced a 20% drop in unprocessed beef exports – the lowest since 2004.
- The decrease had predominantly been driven by tighter supply, which is expected to continue on the back of drier conditions and competition for land use from other agri activities, such as cropping.
- Although volumes are down, revenues from beef exports increased 15% as a result of a 45% rise in the average price paid at the port. The higher prices achieved have primarily been driven by the appreciation of the Brazilian currency against the US dollar and improved breeding programs, feeding regimes and advances in disease control that have assisted in improvement in meat quality.
Wine Industry
The Australian industry’s most competitive global advantage is under threat
- Australian Wine and Brandy Corporation (‘AWBC’) general manager Paul Henry says this advantage (the industry’s ability to market itself collectively) is being restrained by commercial reality.
- While the AWBC is trying to promote the nation’s premium and fine-wine profile internationally and thus increase the average price paid for exports, immediate economic pressures are conspiring to tempt companies to sell value-for-money brands.
- Paul Henry says “If the collegiate and collaborative nature of our industry starts to go, we’ll lose the only marketing advantage we have, we’ve already let price and value go”.
- Mr Henry believes the same problems plaguing Australian wine producers must eventually be faced by their major competitors in Chile, South Africa and Argentina, so the sooner the Australian industry overcomes its difficulties, the sooner it will have established a significant advantage over its competitors.
Riverland optimism
- Australia’s biggest wine companies have warned the region’s growers that the on-coming vintage could see prices for over-supplied chardonnay grapes fall below costs of production of between $250 to $350 a tonne. Although red grape varieties could realise about $500 a tonne, it’s expected that growers’ margins would be tightly squeezed by increased diesel, fertiliser, debt financing and water costs.
- Wine Grape Growers Australia executive director Mark McKenzie says “2007 production costs, before water buy-ins began, that were about $405 a tonne had increased considerably since then”.
- Yet optimism persists among a surprising number of irrigators determined to battle on through the drought. Recently, prices have been as low as $300 a megalitre compared to as much as $4,000 a megalitre last summer. Furthermore, irrigators have become increasingly skilful in water use and management. Some have already started buying or saving water to carry into the next irrigation season which starts in July.
Consumers enjoying value for money
- Despite major issues facing growers, the consumers are not only seeing prices drop (chardonnay drinkers can expect unprecedented bargains), but also the pleasing sight of increasing quantities of premium wines being blended with lesser quality wines at astonishingly low prices.
- For example, at Jim Barry Wines in South Australia as much as 80% of the winery’s McRae Wood shiraz not long ago retailing for $50 a bottle, is being blended with The Lodge Hill shiraz, which can be bought for less than $20.
- Winemakers’ Federation of Australia chief executive Stephen Strachan says “he expects this will continue throughout the industry for about 12 months”. He also says “up-market consumers will be tending to trade down to bottled wine priced between $15 to $20 and getting extraordinarily good value for money”. Wine producers will have no alternative but to give it to them, if they’re to sell premium wine that can’t be exported to rapidly contracting international markets.
- For example, at Jim Barry Wines in South Australia as much as 80% of the winery’s McRae Wood shiraz not long ago retailing for $50 a bottle, is being blended with The Lodge Hill shiraz, which can be bought for less than $20.
Vineyard values expected to soften in the short term
- Many participants in the industry are interested to know what sort of capital growth can be expected from vineyards.
- The graph below applies to premium broadacre vineyards with a stable buyer for the fruit. The values are indicative and are intended for comparison purposes. Obviously values for non-premium and poor quality vineyards will be less and values for uncontracted vineyards may be significantly compromised.
- Vineyard values in most Australian wine regions spiked dramatically during the export drive of the late 1990’s. This was coming off a low base from the difficulties experienced in the wine industry in the 1980’s followed by general recession in the early 1990’s.
- Generally, after the boom of the late 1990’s and leading into the 2000’s, values retreated in response to the oversupply conditions which became apparent by 2001.
- However, with the short 2007 vintage as a result of frosts and on-going drought, the prospects were for a reversal of the oversupply situation and the promise of higher grape prices. This has driven increased vineyard values over the past couple of years, recovering much of the lost ground.
- The glaring exception to the trend is Langhorne Creek, which has borne the brunt of the state of the Murray Darling. Although these values should improve where properties are able to source water other than from Lake Alexandrina.
- Napa has been included for international comparison, however, it is a very different market (not export focussed) and underpinned by very high land values.
- The current trend is not expected to continue and vineyard values will probably soften, at least in the short term, for the following reasons:
- There is already evidence that the Global Financial Crisis (‘GFC’) has caused buyers to withdraw from the market and demand for vineyards (along with most other property) is expected to soften.
- The unexpectedly large 2008 vintage, well in excess of predicted tonnages, and many believe that 2009 will be similar.
- Despite recent exchange rate relief, the GFC, particularly in the USA, is likely to have further impact on already difficult export markets.
- Already tough domestic sales are likely to weaken with continued competition from imports.
- Rationalisation and restructuring within the major wine companies is expected to see more vineyards on the market.
- There is already evidence that the Global Financial Crisis (‘GFC’) has caused buyers to withdraw from the market and demand for vineyards (along with most other property) is expected to soften.
Dairy
EU subsidies threaten local industry
- The European Union Agriculture Commissioner (Dr Marianna Fischer) has signalled a return to subsidies being made available for dairy farmers in the EU. It is reported that the EU will introduce a floor price for locally produced butter of almost $3,000 USD per tonne, while the current world price is closer to $1,900 USD per tonne. Thus at present levels, EU dairy farmers could be eligible to receive a subsidy of approximately $1,000 USD per tonne.
- The Australian Government has requested that the EU reconsider the decision, which given past experience seems like an unlikely outcome. Industry commentators are suggesting the move by the EU to introduce subsidies may yet spark a dairy produce trade war with the United States, which would be further bad news for the local industry.
- The price depressing affect of EU subsidies will be felt by all Australian dairy farmers who are exposed to export markets. These producers tend to be located in Southern dairy regions of Australia and are estimated to comprise more than 60% of producers.
Local prices continue to fall
- Widespread reports are being received of continued falls in the prices offered by major dairy companies to their suppliers. Price reductions in the range of 25% to 35% are expected to come into effect in many regions from February.
- These reports follow earlier comments from industry representatives that dairy stockpiles are increasing rapidly in the face of falling export demand and that a price war has broken out between Fonterra and Murray Goulburn, in an effort to move stockpiled product.
- Not surprisingly, the widespread fall in prices has seen many dairy operators place their expansion plans on hold, until the extent of the downturn and its expected duration become clearer.
Contacts
SydneySteve Parbery t +61 2 8116 3000 Andrew Smith t +61 2 8116 3060 Level 46 t +61 2 8116 3000 BrisbaneGrant Sparks t +61 7 3371 7244 Level 3 t +61 7 3831 2700 AdelaidePeter Macks t +61 8 8211 7800 Level 10 t +61 8 8211 7800 |
MelbourneJoe Dicks t +61 3 9653 6209 Rod Slattery t +61 3 9653 6204 Level 10 t +61 3 9654 1517 PerthSimon Theobald t +61 8 9382 8933 Level 10 t +61 8 9382 8933 Port MacquarieDavid Leigh t +61 2 6580 0400 Level 2 t +61 2 6580 0400 |
