Agribusiness Newsletter Nov 2008
Contents
Meat Industry
Wine Industry
Grain
Wool
Other
Meat Industry
Falling $A – mixed impact to the meat industry
In normal circumstances, a depreciating $A is generally good news for Australian exporters. This is particularly the case when the $A not only depreciates against the $US, but against the currencies of our other major export destinations, being the Japanese Yen and the Korean Won.
For lamb exporters, the benefits have been two fold, as the price of lamb on the domestic market has also fallen, thus providing exporters with the benefit of cheap supplies and increased returns on sales as a result of the depreciating dollar. For example, the National Livestock Reporting Services Indicator for heavy lambs was approximately 450 cents/kg in July and August, when the $A was around US 0.95 cents, but has since fallen to 362 cents/kg, with the dollar now at $US 0.65 cents.
In relation to beef exports, the impact of the depreciating $A has been, to a degree, diluted by decreasing beef prices (in $US). Since mid-September, the price of beef has decreased from US 325 cents/kg to approximately US 297 cents/kg. Furthermore, the price of hides has also fallen on the global market.
The turmoil on the credit markets has also made it extremely difficult for exporters in deciding whether to hedge their currency exposure on future contracts, or wear the currency risk on contracts. Normally, in an environment where the $A is predicted to weaken, exporters are inclined to wear the currency risk. However, in these volatile times, there appears to be no consistency with regards to movements in the $A.
The situation is exacerbated by the fact that contracts are often negotiated two to three months prior to meat being shipped. Furthermore, importers are often attempted to renegotiate a contract if they see the Australian price declining. All the above makes the decision as to what price to pay for cattle very difficult.
Continuing drought forces livestock sell-off
The continuing drought, particularly in northern Victoria and the western Riverina, has resulted in farmers being forced to sell-off livestock in ever increasing numbers.
Experts are now suggesting that some producers will soon be down to 25% of their usual breeding flock / herd numbers.
Ironically, if the drought continues, this may provide a short term reprieve to livestock producers, as cropping country, which would have been harvested had the conditions been right, will now be used for stock to run on.
The increase in both sheep and cattle being yarded is good news for processors, particularly in light of the depreciating dollar and continuing demand for meat products overseas.
The continuing drought has now driven the Australian sheep flock number to levels that are 32% lower than a decade ago.
Prospects for beef still looks good
Although the current global credit crunch has taken its toll on commodity prices across the board, industry experts are predicting that the prospects for the Australian beef industry, in the long-term, are good.
Reasons for this include:
In developed countries such as the US, consumers have shifted from eating expensive primal cuts to hamburgers. This benefits the Australian meat industry, as the US imports large quantities of Australian manufactured beef, used in hamburger production.
The $A has depreciated against the $US, Japanese Yen and Korean Won, thus boosting returns to exporters.
Exports to the US are expected to rise, as the US cow/beef herd is liquidated in the face of declining producer margins and higher grain prices.
The domestic Brazilian cow herd is also tight, as beef producers shift resources to more profitable commodities such as sugar cane and soya beans.
Australia remains well placed to service the growing Asian food services and retail markets with chilled beef, given the relatively short shipping times to these destinations.
Prices of livestock have generally fallen across all categories over the past few weeks, according to the National Livestock Reporting Service.
As indicated elsewhere in this newsletter, the yardings of cattle, lamb and sheep are on the increase as a result of drought conditions in Australia.
However, those exporters that have concentrated primarily on developing countries such as Russia, will find the going tougher. Pressure on consumer disposable income in those countries will impact on the supply chain in Australia’s beef markets.
To exacerbate the situation in the developing countries, the prices of staple commodities such as cooking oil and rice have increased significantly, resulting in households cutting back on luxuries such as beef.
Wine Industry
Premium brand sales hit
Just as we were going to press the news was released by the Winemakers’ Federation of Australia (‘WFA’) in their monthly report, which showed that red bottled wine sales fell by 11.3% and bottled white wine sales were down by 9% for the month of August compared to July.
Lawrie Stanford (Manager, Information and Analysis WFA) said the low August figures followed the best July sales in the past four years. Mr Stanford said he expected the falling Australian dollar would help reduce wine imports and boost the sale of Australian wine. It follows a 55.3% rise in imports to 56 million litres worth $445 million in the past year.
Hong Kong Opportunity
Australian wine imports into Hong Kong rose 52% after duty was reduced last year, and now that the financial secretary of Hong Kong Special Administrative Region, People’s Republic of China, John Tsang has totally removed the import tariff, a massive market beckons wine producers.
In the past three years Australia, by exporting wine worth $80 million to Hong Kong, has been the former British colony’s second largest wine supplier. But the French connection is stronger and because, as Mr Tsang said during a recent visit to Australia, “Hong Kong’s wine drinkers are more used to French wines”, Australia will face a fierce battle to increase market share.
The Asian region has half the world’s population, but consumes only 7% of wine production, and Mr Tsang makes no secret of his desire to see Hong Kong as a main distribution centre for regional wine consumption that economists are saying will be worth $US17 billion by 2012, $US27 billion by 2017.
By special arrangement with the Chinese Government, businesses registered in Hong Kong can send wine shipments to mainland China free of tariff.
There were 13 SA wineries that took part in the inaugural Wine Expo in Hong Kong in August, and Mr Tsang urges Australian wine producers to become involved in education programs that will help them realise the ‘massive potential’ of the wine trade that can be generated from Hong Kong.
He says many courses on wine appreciation are already booked out by a populace ‘hungry to learn’.
Perish the thought Australia’s Federal Government could follow France’s lead
A French court has ruled that the Internet should be included in the country’s strict laws on alcohol advertising, which is already banned on television, radio, in the press and on posters, in order to combat binge-drinking, under-age alcohol consumption and alcohol-related diseases.
Winemakers and merchants, many of whose livelihoods depend on internet promotions, are urging the French Government to resist demands of the health lobby.
It seems inconceivable that in a country long renowned internationally for its wines and spirits, that a click in France on, for example, the website of Courvoisier cognac elicits the message: “Sorry, the regulations in your country do not authorise us to give you access”.
As other major French wine companies follow suit for fear of prosecution, Daniel Lorson, a spokesman for champagne producers, says the ruling has hugely penalised one of the glories of the French economy and national heritage by equating “the sight of a bottle of wine with the offensiveness of pornography”.
Australian wine researchers have just given the industry a huge advantage
Scientists at the Australian Wine research Institute started work to map the genetic code for wine yeast this year, with what was believed to be a four-year head start on their northern hemisphere counterparts.
Institute managing director Professor Sakkie Pretorius says, “the discovery means new strains of yeast can be developed without the need for genetic engineering”.
He says wine producers can now “tailor-make” a process in such a way that they can shape an aroma profile and ensure the composition of a wine meets any market’s specifications with unerring accuracy.
This, the professor adds, “is absolutely critical in developing and maintaining a market, and the most critical element in the entire operation is the choice of yeast”.
Building bridges over troubled water was never meant to be easy
The third Federal Government’s buyback of water to help revive the Murray-Darling Basin began on October 7, but Victorian Premier John Brumby was still refusing to lift a 4% cap on water sales.
SA Treasurer Kevin Foley has described Mr Brumby’s decision as “voodoo economics” at the expense of the Commonwealth.
But Senator Penny Wong says the new tender process to buyback water entitlements from willing sellers in SA, Victoria and NSW would continue nonetheless.
She said she would not however, buy into the row between SA and Victoria. The Minister pointed out that the Victorian attitude to capping, and SA’s newly announced $67 million plan to underwrite critical water allocations to keep long-standing vine and fruit trees alive notably in Riverland regions, were instances of States exercising responsibilities under a national agreement.
Mr Foley says SA will continue to pressure Mr Brumby to do the right thing “not just for Victorians for all Australians”. Mr Brumby, showing no sign of wanting to build a bridge over troubled water, says Victoria’s water savings far exceed those of any other State, and SA’s plan to ‘save the Riverland’ is simply making water more expensive for everybody.
But Melbourne’s future water supply has just been massively boosted by the Federal Government’s approval of the controversial Sugarloaf pipeline that will drain a billion litres of water from the Goulburn River. This was despite a cross-party appeal by a group of Senators to delay the decision, pending an imminent report from a Senate Inquiry into Murray-Darling Basin water.
Meanwhile the Queensland Government has provided some rare good news for downstream water users, announcing “serious efforts to help save the Basin” with the release of some 10.6 billion litres of water that would otherwise have been auctioned for irrigation. But just how much of this, if any, will benefit grape growers in the Riverland, remains to be seen.
Grain
Dry Spring impacts forecasts
Anticipated normal spring rainfall patterns across South Eastern Australia have been dashed, as the extremely dry conditions continued during October. In many of the affected areas, October rainfall has been in the range of 10% to 20% of the average rainfall for that month.
The expectation of crop failure has led some growers in Northern Victoria and Southern NSW to begin cutting their crops for hay. In the areas that are hardest hit by the dry conditions, it is reported that the crops have not produced sufficient dry matter to warrant cutting for hay.
Understandably, forecasts of the total Australian grain harvest have continued to be wound back over recent weeks. With no meaningful rain being forecast in the coming week, it is likely that further reductions in the forecast will be required.
Hedge contracts – monitoring required
Grain growers, who are now facing the prospect of markedly reduced yields or total crop failure, should be actively monitoring their hedge contracts with the aim of minimising any further adverse impact on their positions.
After crop failures that occurred in many cropping areas last year, there were a number of cases of disputes arising in relation to hedge contracts. These disputes usually related to the terms of forward sale agreements and the subsequent inability of growers to deliver the contracted grain.
These disputes can be mediated by the National Agricultural Commodities Marketing Association (‘NACMA’). However, the Victorian Civil and Administrative Tribunal (‘VCAT’) recently ruled that it was able to arbitrate a matter relating to a forward sale agreement, because the parties had failed to agree upon a dispute resolution mechanism involving NACMA.
Wool
Prices falling and growers refusing to sell
Recent auctions in Sydney and Melbourne have seen wool prices plunge.
As prices have fallen growers have refused to sell and what they consider may be at the bottom of the market. However, buyers are suggesting the prices could go lower yet.
Elders Northern Region Manager, Maurice McNeil, recently reported that “we have seen the most significant drop in the market in US dollar terms since the demise of the floor price in 1991”.
Fine wool has fared worse, is a sign that demand for good quality suits and fashion garments is anticipated to dive, as consumers cut discretionary spending on luxury items.
Chinese buyers, who usually buy about two-thirds of the Australian wool clip and process it into garments that are on-sold to consumers in markets such as US and Japan, are retreating.
Mr McNeil said current prices are attractive and was confident trade would pick up again.
Other
Global Economy Cooling Local Industry
Dairy Australia, Situation and Outlook October 2008 Update, reports uncertainty facing the Australian dairy industry due to cuts in global growth forecasts, volatility of exchange rates and input prices.
Inflationary pressures of rising food and fuel prices in developing countries, where most Australian dairy products are sold, are impacting consumers and as a consequence, are purchasing fewer dairy products.
However, almost 90% of participants who took part in the Dairy Australia survey continue to feel positive about the future of the industry.
The financial turmoil behind the move to recently cut interest rates may further weaken demand for agricultural commodities, if the world heads into recession, following falls in recent months in global prices for wheat.
Key success factors for industries currently impacted by a cooling global climate is to ensure:
- a diverse range of clients;
- access to quality personnel management;
- an experienced workforce;
- optimum capacity utilisation;
- ensure pricing policy is appropriate;
- effective cost controls; and
- solid financial management and
debt management.
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 2, QV 1 Building t +61 8 9382 8933 Port MacquarieDavid Leigh t +61 2 6580 0400 Level 2 t +61 2 6580 0400 |
