For 30 years we’ve been talking about the “next big boom in soft commodities.” In two recent reports published by ANZ, ‘Feeding the Dragon’ and ‘Greener Pastures,’ Australia is touted as the leading caterer for the Asian Century. Eureka!
Hang on a minute, let’s put Australia in perspective. In recent years the entire annual Australian Wheat crop represented between 20-25% of China’s annual domestic consumption (see Table 1). China is the world’s largest Wheat producer and has been mostly self-sufficient until 2013. Australia’s total annual beef production is less than half of China’s annual domestic consumption and less than 20% of the United States annual domestic consumption (see Table 2). Australia is a blip on the global production scale, albeit an important one.
With all the Boom talk, we need to remember that Australia operates in a global market and our scale dictates the meaningfulness of our role in the Asian Century. Perhaps Australia should aim to cater for the top end of the Asian Century rather than the masses. Even if the middle class does grow exponentially throughout Asia, this doesn’t guarantee a price that will satisfy Australia’s cost of production. Australia is in a unique position to meet the top end of the market with safe, clean, green, high quality products [see more].
In a mature, high cost economy, Australia should aim to capture as much value throughout the supply chain as possible. Australia exports approximately 70% of agricultural production therefore the key part of the supply chain is offshore. By building on existing trade relationships, Australian agribusiness needs to position itself in markets where sales volume and value is likely to grow in the long-term and invest in these markets. Markets where we currently operate may not be the growth markets of 2020 and beyond. The lowest hanging fruit is the Association of South East Asian Nations (ASEAN) utilising the ASEAN-Australia-New Zealand-Free Trade Agreement. This FTA accesses a rapidly growing population of 640 million, GDP of US$3.2 trillion and trade value to Australia of $104 billion (2010). This FTA offers real value to exporters and investors so we should be using it!
If there’s so much Boom out there, why the gloom? The most successful operators in the Australian agricultural sector at present seem to be the Receivers. Banks with exposure to risky debt are losing patience and crystalizing their positions. Debt within Australian agriculture climbed to dizzying heights pre-GFC to a point where income generating capacity could not sustain debt serviceability. All it took to bring down the house was a change in international credit ratings, a faltering commodities market and a global economic handbrake. The agricultural land market in Australia is experiencing the correction it needed to return the market to an affordable state.
As the world cycles through economic troughs and crests, there is an undeniable fact that the primal needs of a growing population will increase. New players and restored operators will have the opportunity to partake in a three-sided market turnaround.
- Land. The agricultural land market is sluggish in Australia. There is an oversupply of properties on the market, particularly those over AU$10 million. Although evident across all sectors, the northern pastoral sector is showing the worst signs of distress. These corrections are bringing the land market back to affordable levels on a discounted cash flow basis. Over time, agricultural land availability will decrease yet the demand will increase. Land is a safe long-term play that will underpin a sustainable agricultural investment strategy.
- Commodities. Commodity markets are ever volatile but mostly fair in Australia. The Australian market is steadily gaining improved access to global pricing through international trading and operating companies. The next step is for Australian agribusiness to invest into offshore markets to gain direct exposure to increasing global soft commodity prices.
- Macro-Market. Australia is a commodities focused exporter that produces soft and hard commodities which are in high demand. Even as growth steadies throughout Asia, the sheer volume of demand means Australia will have a role in the Asian Century for decades particularly in niche products supported by our clean and green global reputation. Countries such as China and Indonesia are net importers of core commodities that Australia has a competitive advantage producing. The lower AUD and increased commodity demand from large growing markets is highly positive for Australian agriculture.
The final hurdle before the next inflow of investment is Australia’s federal election. Pro-investment and pro-business policy will stimulate the Australian economy by reinvigorating business activity. Call +61733079555 to find out more.