By Mark Bennett - Head of Agribusiness
Our latest ANZ Agri InFocus commodity report shows that rising agricultural commodity prices could impact the price Australian consumers pay for food.
Australian retail food prices have increased by a modest 5 per cent since 2010 due to a relatively high Australian dollar and lower oil prices and since 2014 food manufacturers and retailers have faced increased pressure to maintain shelf prices due to growing domestic and global competition. This has caused many of them to lower their margins in a bid to maintain customers and market share.
While high prices for agricultural commodities reflect the hard work of our farmers and the quality of Australian produce, as production costs continue to rise, combined with a potentially lower Australian dollar, it’s unrealistic to expect manufacturers and retailers to absorb costs or use more affordable imports to maintain lower prices.
Data from the Australian Bureau of Statistics showed farm-gate prices no longer align with retail prices, further emphasising the challenges food manufacturers and retailers face. Despite a significant 30 index point increase in the cost of on-farm production, retail prices have only grown five index points since 2011.
For example, Australia’s red meat sector has experienced significant price gains at the saleyards, but those increases have not been passed on to consumers. Instead they’ve been absorbed by the supply chain.
Strong production in the United States and Europe, as well as the European Commission’s new rules on intervention into the skim milk powder market, call for caution regarding milk prices in 2018. Locally, Australian production is improving following a depressed 2016–17 year, with 2017–18 production finally edging above 2016–17 levels towards the end of last year.
Wheat and Grain
Ahead of harvest, the national wheat crop was forecast to be as low as 20 million tonnes, pushed down by late frosts and a lack of rain in some regions. It now appears the crop could be reasonably higher with receival data from a number of facilities suggesting a figure closer to 22 million tonnes.
The booming chickpea and lentil sector was rocked by India’s decision to impose a new 30 per cent tariff in late 2017. The move coincided with the Indian government also imposing a 50 per cent tariff on field peas and a 20 per cent tariff on wheat.
For Australian pulse producers, exports in 2016–17 reached a record 3.7 million tonnes. More than half of this was made up of chickpeas while lupins accounted for about 11 per cent.
Domestically, the year has begun with the dry weather in the north continuing to have a negative impact on cattle prices. The Eastern Young Cattle Indicator (EYCI) has seen its lowest start to a year since 2015. The continued reduction in tariffs in line with Australia’s Free Trade Agreements (FTAs) will bolster beef exports.
Sheep meat and wool are being supported by strong international demand and constrained global and domestic supply. The latest ABS figures show lower than expected growth in the national flock with only a 4 per cent rise to 70,155,667 head (up from 67,353,000 head) at the end of June 2017. This is significantly lower than the industry’s forecasts of more than 5 per cent and shows that many producers are facing a similar trade-off to the cattle industry of prices against flock size.
Despite a dry summer to date, the Australian crop is still forecast to be favourable for both irrigated and dryland producers. Globally, cotton prices have been volatile throughout the end of 2017 and into 2018 with the futures market jumping to more than 83UScents/pound (c/lb) before falling sharply to 77USc/lb. Much of this movement remains due to changing forecasts in global production, particularly in the United States.
Globally, the forecast of a surplus of more than 5m tonnes in 2018–19 is likely to put downward pressure on sugar prices for some time to come. The rise in global surpluses is forecast to occur despite a slight fall in global production, particularly from Brazil. However, global sugar consumption levels continue to be dampened by factors such as new taxes as well as consumer health concerns.
Australian pork production in 2017 closed at about 400,000 MT (approx. 3.5 per cent up from 2016 levels) with 2018 projections forecasting production to reach 410,000 MT as a result of increasing pig numbers per farm and consumption levels. The industry is facing undesirable market factors which have created an imbalance of supply and demand resulting in downward pressure on farm gate prices.