June 8, 2011

 

Australia's Asian ties to protect farm exports

 

 

The growing proportion of Australia's agricultural output being bought by fast-growing Asian nations will protect the country's export earnings from hits from easier prices and a strong currency.

 

Australia's export earnings "may pull back a little" over 2011-12 to AUD$32.2 million (US$34 million) from a rate of increase which, in March, reached 33%, National Australia Bank analyst Michael Creed said.

 

Prices of agricultural commodities, while likely to "remain high by historical standards over the medium term", had "begun to wind back" as high values looked like sparking bigger crops.

 

The stronger Australia dollar, near its highest for 29 years, will "certainly hurt export earnings for producers who are on the margin" if, for other farmers enjoying fatter profits, "simply taking some of the icing off the cake".

 

However, prospects were underpinned by the growth witnessed among many importers of Australian farm commodities, among which China now ranks second, and whose geography makes them natural trade partners.

 

"Importantly, Australian agriculture is becoming increasingly tied to the fortunes of the developing world," Creed said.

 

"In particular, Asian economies outside Japan and South Korea now account for around 35% of total agricultural product exports."

 

The economies of Australia's farm commodity customers will grow by 4.2% this year. Prospects looked particularly rosy in beef, where Australia was set to fight back in exports after a 2010 record blighted by growing competition from the US, even in South Korea.

 

However, this switch was to a large part driven by sales from the southern US, where drought-hit farmers are cutting herds, leaving the US cattle herd set to decline further, to its lowest in more than 50 years.

 

"This will create a medium-term opportunity for Australian producers," Creed said.

 

Furthermore, the competitiveness of Brazil, the top beef exporter, has been "significantly eroded over the past year or so, with a rising real coupled with domestic demand pushing up the relative price of Brazilian beef".

 

A "similar pattern" was evident in Argentina, factors which would "help Australia's drive into non-traditional export markets" such as Russia which, with the Middle East, offered a further trade opportunity.

 

For wheat, export volumes were set for a "marginal increase" in 2011-12, helped by prospects for another bumper crop and healthy carryover stocks left over from the previous season.

 

Furthermore feed wheat was still "maintaining competitiveness" with corn. Indeed, US Commodities noted that the discount of Australian wheat-to-corn had increased AUD60 (US$64) a tonne from AUD25 (US$26.68) in a week.

 

For cotton export earnings would "remain solid", but decline for sugar as prices ease and output remains depressed, following storm damage earlier this year.