Australia’s agricultural sector is set for another profitable year, with the gross value of agricultural production on track for a 4th year of growth according to Rabobank.
The flagship annual Australian Agribusiness Outlook for 2022 is titled ‘Making Hay While the Sun Shines’ and the specialist global agribusiness bank expects a stellar year.
The high to record-high agricultural commodity prices and production volumes reaching record levels in some Australian commodities represent a continued recovery from the crippling drought and had positioned Australian agriculture for a strong year.
“Australia’s second year of great pricing and mostly exceptional production conditions in 2021 means the Australian agriculture industry is well placed to take on the challenges of 2022.”
“The industry can prepare for a time when the sun is not shining brightly in its favour.”
RaboResearch senior commodities analyst Cheryl Kalisch Gordon said that there was expectation for some pressure to be felt on farming margins in 2022 compared with 2021.
Heat is forecast to come out of a range of commodity prices, a mixed production outlook and supply chain challenges but a favourable year was expected for Australian agriculture.
“Local macro-economics remain supportive for Australian agriculture and we expect the Australian dollar to only gain a little over the year and remain near its five-year average.”
‘Blue moon’ year
Dr Kalisch Gordon said 2021 had been a “once in a blue moon” year for Australia’s agricultural sector, with very strong prices resulting from “hardship globally”, and with the high pricing coinciding with “favourable to very favourable Australian production conditions again.”
“There was a combination of drought and adverse weather in key cropping regions around the world, strong stockpiling demand in the face of potential food shortages along with Covid-induced labour shortages which impacted intensively-produced agri products and transport.”
“This delivered clouds to the sector globally and a silver lining for Australian agriculture.”
“This second straight year of increasing commodity prices coincided with again favourable to very-favourable Australian production conditions. And for those commodity sectors where production has been lower, high pricing still delivered strongly profitable positions.”
Supply chain and price outlook
While the outlook for 2022 is also positive, the bank expects the year ahead will bring “less pronounced opportunities” for Australian agriculture.
“We start 2022 with the Australian food supply chain under unprecedented pressure, supply chain disruption and bottlenecks being felt across the board – from access to inputs at the farm level through to consumers accessing food on supermarket shelves,” Dr Kalisch said.
The impacts on supply chains are expected to linger through the first quarter of the year.
“We also expect some of the heat to come out of prices for a number of commodities in 2022 as supplies are renewed globally, stock levels are increased and demand tempers,” she said.
“We expect prices to remain above the 5-year average for our main agricultural commodities.”
The Rabobank Rural Commodity Price Index which tracks local prices of key commodities is forecast to ease from record highs reached in December 2021 over the course of this year, albeit to still sit 5% above the 5-year average by the year’s end.
Australia’s agriculture production outlook is mixed after the high base of 2021 volumes.
“Favourable seasonal conditions in 2021 and in some cases, record rainfall have provided a beneficial start to 2022 for cropping and pasture prospects, due to good soil moisture.”
“We can’t expect a repeat of the record grain and oilseed harvest seen for the 21/22 season.”
“Although for livestock, we do expect year-on-year lifts in slaughter numbers for both cattle and sheep, given the extended period of good seasonal conditions we’ve seen in most regions that have enabled some rebuilding of stock numbers.”
Milk production was likely to lift, but only in the second half of the year while 2022 cotton production was on track to continue rising, to see an 85% increase on last year.
2022 will also bring some headwinds for Australia’s agricultural sector.
This will include the ongoing impacts of Covid, as the world grapples with the Omicron surge and also “the prospect of Rho, Sigma or Tau delivering the next blow”.
On top of this, Dr Kalisch Gordon says, “lies the pervasive challenge of inflation, which continues on one of the steepest rises in 30 years”.
“We expect there will be global policy tightening around economic stimulus measures that have been in place during the pandemic, which will be designed to moderate demand.”
“Getting the policy settings on reducing stimulus and managing inflation will be critical to maintaining economic growth and consumer demand in many economies, and failure to get this right could curb demand in some markets, especially more discretionary purchases.”
“Ongoing supply chain issues and geopolitical tensions also loom large as challenges for agricultural markets in 2022. Dry bulk freight rates have fallen considerably from their 11-year highs in 2021, but still remain elevated on several routes,” Dr Kalisch Gordon said.
“Container rates remain near their recent record highs and we expect global trade to continue to be impacted by issues, especially relating to boxed freight, in 2022.”
In terms of geopolitical considerations, she said, the tight global market for agricultural commodities had shielded Australia from the impact of losing China as a buyer in 2021.
“As markets unwind, Australia needs to work on diversifying into alternative destinations.”
There is also the potential for market fallout from current tensions between Russia and Ukraine, delivering exaggerated volatility in markets ranging from wheat to oil and fertiliser.
Other challenges ahead included still-high farm input prices, albeit easing somewhat in the second half of the year and ongoing labour shortages.
Ready for what’s next
Australian agriculture is positioned for another positive year ahead with ideal opportunities for the sector to prepare for a future when “the sun is not shining in its favour”.
This included preparing for an increase in margin pressures (when global prices decline and Australian farm returns come under pressure) , diversifying markets and trading relationships, and equipping farm businesses for future droughts and climate change.