The ABARES crystal ball – What can we expect for the major commodities in the next 12 months?

The Australian Bureau of Agricultural and Resource Economics (ABARES) has recently published its outlook for major rural commodities, including crops and livestock pertinent to the north west region.

While some people dismiss these forecasts and projections as theoretical, they represent an important practical ingredient to consider in future planning in the farming sector.

It would be foolish to ignore an organization that has been involved exclusively in farm and commodity economic analysis and forecasting for more than 70 years, and in annual outlook projections for almost 50 years.

All ABARES forecasts are predicated on a number of assumptions about topics such as future weather, rainfall, trade, export and economic and political policy trends.  Basically, they assume continuation of average seasonal conditions, normal rainfall and no major trading or policy disruptions.

Against that background, what is in store for agricultural producers?

The good news is that in 2019–20 the total value of farm production in all of Australia is forecast to be $59 billion. The value of crop production is forecast to remain unchanged from 2018–19 at $30 billion.

Assuming adequate rainfall throughout the remainder of the growing season, grain, oilseed and pulse production are expected to increase by 20% to 36.4 million tonnes—driven by higher yields and area planted when compared to the drought affected 2018–19 season.

However, production is nevertheless expected to be 10% below the 10 year average to 2018–19.  Production of irrigated crops (particularly cotton and rice) is forecast to remain low because of low water availability and high temporary water prices.

The value of livestock and livestock products is forecast to decline by 6% to $29 billion. Declines are forecast in 2019–20 for live animal exports (down by 11%), slaughter (9%) and wool production (7%).

The bad news is that these forecasts are highly dependent on seasonal conditions during 2019–20. If dry conditions continue across eastern Australia, crop yields could again be low while increased turn-off (and meat production) could reduce livestock inventories. The national cattle herd is at its lowest level since 1992–93.

While early indications are that rainfall will be sufficient for crop and pasture growth during winter, much depends on conditions during the spring of 2019 which are beyond the window of reliable seasonal forecasts.

If average seasonal conditions are realized, saleyard prices for cattle and lamb are expected to be supported as producers rebuild herds and flocks. However, prices could fall if a lack of rainfall reduces feed availability and high livestock turn-off continues.

Improved seasonal conditions will lead to a decline in feed prices by reducing the need for supplementary feeding of livestock and increasing the production of fodder, grain and pasture.

Exports

Agricultural export earnings are forecast to decline by 5% in 2019–20, driven by a forecast fall in exports of livestock and livestock products.

Crop export earnings are forecast to increase by 3%, driven by increased grain, oilseed and pulse exports. However, world prices are forecast to decline for most major crops, including wheat and barley. Favourable conditions for northern hemisphere crop production are driving international prices lower.

Export earnings for livestock and livestock products are forecast to decline by 11%. This is driven by a reduction in volumes, assuming seasonal conditions improve and enable farmers to rebuild herds and flocks.

The average export price for livestock and livestock products is expected to be unchanged, and remain above average because of strong demand rising faster than the supply for red meat and wool, as has been the case for several years.

However, a number of uncertainties affect the outlook for Australia’s agricultural exports in 2019–20. Global economic growth has been revised down, and downside risks have increased, particularly in China—Australia's largest export market.

Balancing that, a weaker Australian dollar will help to maintain global consumption of Australian agricultural exports, by making beef, dairy products, horticultural products and sheep meat cheaper for importing countries. It will also help maintain profit margins for grain producers if global prices fall as forecast in 2019–20.

On the downside, the demand side benefits of a fall in the Australian dollar are likely to be partially offset by the rising cost of imported inputs such as fuel and farm chemicals. Capital inputs, such as tractors and other farm machinery could also become more expensive in 2019–20.

2019-20 Winter Crop

The 2019–20 winter cropping season has had a mixed start and the chance of a positive Indian Ocean Dipole (IOD) event developing has increased. A positive IOD often results in below average winter–spring rainfall particularly in central and south-eastern Australia. This represents a significant downside risk to final winter crop production levels in 2019–20.

The Bureau of Meteorology's climate outlook suggests drier than average rainfall across large areas of eastern Australia and parts of southern Australia. However, areas unlikely to exceed median rainfall are still likely to receive rainfall sufficient to sustain crop and pasture production except in parts of Queensland.

Between June and August 2019 cropping regions in New South Wales have a 75% chance of receiving between 25 and 100 millimetres, so keep your fingers crossed that the BOM has got that right.

Livestock

In the livestock arena, the weighted average saleyard price of cattle is forecast to rise by 3% to 460 cents per kilogram in 2019–20. This reflects increased demand for frozen beef exports and a reduced supply of cows in saleyards.

Saleyard lamb prices in 2019–20 are forecast to rise due to increased competition between processors and restockers. Ongoing strong export demand for sheep meat will encourage processors to offer high prices in saleyards.

In eastern Australia, restocker demand is expected to increase as flocks rebuilding begins. If this forecast is realised, it will be the highest price in real terms since 1973–74.

In 2019–20 the EMI for wool is forecast to fall as higher volumes of superfine wool come onto the market and historically high prices cause some processors to substitute towards lower-cost fibres. The high EMI is creating an incentive for processors to substitute wool with cheaper synthetic fibres that can be blended with lower-cost medium micron wools (20.6 to 22.5 microns).

So that’s about it. No matter how much we analyse, scrutinize and agonise, our future in regional and rural Australia will still be largely determined by the weather.

Photo credit: Joshua J Smith