abare.gov.au - Regional Outlook Conferences 2009

Commodity outlook and financial performance of key agricultural industries in South East Queensland

Daniel Mackinnon, Peter Martin and commodity analysts

This paper presents the current commodity outlook and the recent financial performance of some key agricultural industries in Queensland, highlighting the performance of grains, beef and dairy farms. Financial performance of South East Queensland broadacre farms is also reported and discussed.

The South East Queensland region covered in this paper contains the Australian Bureau of Statistics (ABS) defined regions of Wide Bay-Burnett and Darling Downs, and includes the regional centres of Bundaberg, Hervey Bay, Gympie, Toowoomba, Kingaroy and Goondiwindi (map 1). However, for the analysis of South East Queensland broadacre farm performance, estimates are drawn from a larger area which extends from the New South Wales-Queensland border to just south of Mackay, west to Dalby in the south and Emerald in the north (see map 2).

In dollar value terms, beef cattle are the most significant agricultural product in the South East Queensland region, accounting for 43 per cent or almost $1.3 billion of the $3 billion total value of agricultural production for the region in 2006-07. This is the most recent year for which Australian Bureau of Statistics data is available on a regional basis (figure a).

FIGURE A – Value of agricultural production, South East Queensland, 2006-07

Vegetables accounted for a further 13 per cent ($395 million) of the total value of agricultural production in the region in 2006-07, with tomatoes accounting for around 28 per cent of this value. Fruit accounted for 9 per cent ($278 million) of the total value of agricultural production, of which more than 60 per cent was citrus fruits.

Pigs were the fourth largest agricultural product produced, accounting for 7 per cent or almost $209 million of the total value of agricultural production in the South East Queensland region in 2006-07.

Number and type of farms

Australian Bureau of Statistics data indicates that in 2006-07 there were 10 741 farms in the South East Queensland region with an estimated value of agricultural operations of more than $5000 (table 1).

Farms are classified in table 1 according to the activities which generate most of their value of production. In South East Queensland, around 56 per cent of farms operated beef cattle enterprises, compared with
52 per cent at the state level. Grains farms were the second most common farm type in 2006-07, accounting for around 8 per cent of farms, followed by mixed grains-livestock farms accounting for around 5 per cent of all farms in the region.

The majority of farms in South East Queensland are small in size, with more than a quarter of all farms having a value of agricultural operations less than $25 000 and a further 21 per cent having a value between $25 000 and $50 000 in 2006-07 (figure b). Around 35 per cent of farms had a value of agricultural operations greater than $100 000. Just 7 per cent of farms in the region had more than $500 000 worth of agricultural operations in 2006-07.

Employment

Australian Bureau of Statistics quarterly data from November 2008 shows that around 246 000 people were employed in the South East Queensland region (also including the South West Queensland statistical region), with the retail trade industry employing the largest number of people — approximately 14 per cent (35 000 people) of the total labour force (figure c). Construction industries accounted for a further 13 per cent (33 000 people) and the manufacturing industry 11 per cent (27 000 people). The agriculture, fishing and forestry industries were the equal fourth largest employer with 10 per cent (24 000 people) of the South East Queensland labour force for the November quarter in 2008.

1	Number of farms, South East Queensland, 2006-07, by industry classification a

South East Queensland

Queensland

no.

Beef cattle

5 979

14 274

Grains

815

1 059

Mixed grains-livestock

533

889

Sugar

446

3 516

Dairy

423

813

Vegetables (outdoors)

361

1 033

Horses

286

777

Pigs

181

241

Cotton

171

218

Sheep

151

349

Other

1 395

4 488

All agricultural industries

10 741

100

27 656

100

a Where the estimated value of agricultural operations is more than $5000.
Source: Australian Bureau of Statistics.

FIGURE B – Distribution of farms by estimated value of agricultural operations, South East Queensland, 2006-07

Broadacre farm performance – Australia and Queensland

Financial performance of Australian broadacre farms is projected to strengthen in 2008-09, adding to the improvement in farm financial performance recorded in 2007-08. Increased grain production, combined with favorable prices for livestock and reductions in fodder prices and interest rates, are projected to result in farm cash incomes on broadacre farms rising, to average around $80 000 a farm in 2008-09 (figure d and table 2).

Average farm business profit of Australian broadacre farms is projected to recover more strongly than the increase in farm cash income in 2008-09 (table 2). This largely reflects a small buildup in the value of trading stocks because of producers increasing cattle numbers in northern Australia and increasing on-farm inventories of fodder and grain.

Queensland broadacre farms are estimated to have recorded a larger improvement in farm cash income in 2008-09, compared with that recorded nationally (figure d). In 2008-09, Queensland broadacre incomes are projected to increase, mainly through increased winter crop production and higher beef cattle receipts. Receipts from summer crops are projected to be lower because of expected lower prices for feed grains, and reduced grain sorghum production because of lower plantings compared with 2007-08. Beef cattle receipts are projected to increase in 2008-09, with beef cattle turn-off projected to increase slightly after two successive years of growth in beef cattle numbers, combined with higher beef cattle prices. Overall, farm cash incomes for broadacre farms in Queensland are projected to rise to average $96 000 a farm in 2008-09 (table 2).

Despite an increase in average beef cattle inventories on Queensland broadacre farms in 2008-09, a much smaller increase in grain stocks on-farm in 2008-09 compared with 2007-08 is projected to lead to a smaller buildup in trading stocks compared with 2007-08. Subsequently, average farm business profit is projected to increase by a smaller amount than farm cash income in 2008-09 (figure e).

FIGURE D – Farm cash income, broadacre industry, average per farm

FIGURE E – Queensland broadacre industry, average per farm

Grains industry – Australia and Queensland

Historically, farm cash income of Queensland grains farms (defined as farms in the grains and grains-livestock industries) has been below the national average. Farm cash incomes for Queensland grains farms have displayed increased volatility in the past decade mainly because of increased variability in seasonal conditions (figure f).

In 2007-08, farm cash income for Australian grains industry farms rebounded from the drought reduced income of 2006-07. This was on the back of record grains prices and production increases in some regions, and despite increased expenditure on the key crop inputs of fuel, chemicals and fertiliser. For Queensland grains farms, a record sorghum harvest, combined with increased winter grain production and higher grain prices, led to a much larger increase in farm cash income compared with the national average (figure f).

In 2008-09, increased grain production in New South Wales, Queensland and Western Australia is expected to result in average farm cash income for Australian grains farms increasing to around $136 000 a farm. This is despite low grain yields in southern and eastern states, weaker grains prices and an overall increase in expenditure on crop inputs. Average farm cash income for Queensland grains farms is projected to increase to average $178 000 a farm, because of higher winter grains receipts and higher beef cattle receipts, and despite increased total cash costs in 2008-09.

FIGURE F – Farm cash income, grains industries, average per farm

Beef industry – Australia and Queensland

Average farm cash income of Queensland beef industry farms has historically exceeded the national average, mostly because of the larger average herd size of Queensland beef industry farms (figure g).

Nationally, reduced beef cattle turn-off and lower beef cattle prices resulted in a large fall in total cash receipts in 2007-08 as herd rebuilding occurred. Average total cash costs were also lower with the biggest cutback in spending coming from reduced beef cattle purchases. With larger falls in total cash receipts compared with total cash costs, average farm cash income for both Australian and Queensland beef industry farms declined in 2007-08.

FIGURE G – Farm cash income, beef industry, average per farm

In 2008-09, higher beef cattle prices, combined with a projected increase in beef cattle turn-off in northern Australia, is projected to result in beef cattle receipts increasing by a larger amount in Queensland compared with the increase in the national average. Total cash costs at both the state and national levels are projected to rise in 2008-09, with increased beef cattle purchases in areas where seasonal conditions have improved more than offsetting reduced fodder expenditure and interest paid. With a bigger increase in total cash receipts compared with total cash costs, average farm cash income is projected to increase to around $70 000 in Queensland and to around $32 000 nationally (figure g).

Dairy farm performance – Australia and Queensland

Farm cash income for Australian dairy farms more than tripled in 2007-08 to average $144 300 a farm, the highest average farm cash income recorded in the past 20 years (figure h). Record farm-gate milk prices more than compensated for reduced milk yield per cow because of dry seasonal conditions and higher total cash costs (because of increased expenditure on fodder, fertilisers, chemicals, fuel and interest paid) (table 3).

FIGURE H – Farm cash income, dairy industry, average per farm

In Queensland, tightening milk supplies and competition between milk processors led to an increase of more than 30 per cent in average farm-gate milk prices received. However, while the average increase in milk price received by Queensland dairy farms was not as large as the increases recorded in states such as Victoria and Tasmania where milk is used mainly for manufactured dairy products, the average price received by Queensland farmers was the highest paid in Australia in 2007-08 at around 52 cents a litre (Dairy Australia 2008). With a much bigger increase in total cash receipts relative to the increase in total cash costs, average farm cash income for Queensland dairy farms increased from $58 810 in 2006-07 to around $117 500 in 2007-08 (table 3).

At the national level, average farm cash income for Australian dairy farms is projected to fall to around $74 000 a farm in 2008-09, in response to lower manufacturing milk prices. Despite a small increase in milk production in all states, average total cash receipts are projected to fall by around one-fifth in 2008-09. Lessening the effect of reduced milk receipts on farm cash income, total cash costs are projected to fall by around 12 per cent because of falls in hay and feed grain prices, together with a decline in interest rates.

Eastern Darling Downs broadacre farms are projected to record a larger fall in farm business profits in 2008-09 because of a much smaller buildup in trading stocks compared with the previous year. In 2007-08, the average value of farm trading stocks increased significantly as farms increased inventories of grain following the record grain sorghum harvest and high grain prices.

South Queensland Coastal

Farm cash income of South Queensland Coastal broadacre farms is projected to improve markedly in 2008-09, but will remain well below the average for Eastern Darling Downs and Queensland farms, reflecting the smaller average size of farms in this region (figure k). Farms in the region are expected to increase beef cattle turn-off in 2008-09, which, when combined with higher beef cattle prices, is projected to boost beef cattle receipts by around 35 per cent. Higher beef cattle receipts combined with increased crop receipts are projected to more than offset increases in farm cash costs, leading to average farm cash income increasing from $32 800 a farm in 2007-08 to around $67 000 a farm in 2008-09 (table 4).

Outlook for selected commodities

ABARE’s assessment of the outlook for world economic growth is provided in its quarterly publication, Australian commodities, which also includes market forecasts and detailed discussions of major Australian agricultural, mineral and energy commodities. The forecast summaries presented here for a number of the commodities important in this region are based on information in the March 2009 issue of Australian commodities.

Seasonal outlook

The Australian Bureau of Meteorology in its latest (24 March 2009) seasonal rainfall outlook for the June quarter shows a mixed outlook for exceeding median rainfall. A wetter than normal season is favoured in parts of eastern New South Wales and south-east Queensland, with a 55 to 60 per cent chance of exceeding median rainfall. A drier than normal quarter is more likely over north-west Western Australia, parts of South Australia, Victoria, south-west New South Wales and northern Tasmania.

Livestock

Beef

The Australian weighted average saleyard price for cattle is forecast to rise by around 2 per cent in 2009-10 to 305 cents a kilogram. This follows a forecast 4 per cent increase in prices in 2008-09 because of stronger restocker demand, the depreciation of the Australian dollar and continued low cattle turn-off. Slaughterings are forecast to increase by 1 per cent in 2009-10 to 8.8 million, reflecting the expectation that there will be more young cattle available for slaughter, particularly toward the latter half of the year. Higher slaughterings will translate into higher beef and veal production, which is also forecast to rise by around 1 per cent in 2009-10.

A key factor putting upward pressure on saleyard prices is the increased incentive for herd rebuilding in 2009-10. This stronger restocker demand is the combined result of lower forecast feed grain prices and an expected improvement in pasture conditions resulting from above-average rainfall in much of northern Australia in late 2008 and early 2009. Furthermore, the proportion of females in the beef cattle herd has reached its highest level in the past 20 years, which will facilitate a quicker recovery in herd numbers. The depreciation of the Australian dollar and continued low cattle turn-off will also put upward pressure on saleyard prices.

Beef cattle numbers are forecast to increase by 2 per cent in 2009-10 to 25.9 million, with the majority of growth expected to occur in the northern states. The slight expected increase in slaughterings, despite the incentive to rebuild herds, reflects the expectation that there will be more young cattle available for slaughter. However, the recent floods in northern Queensland are likely to delay herd rebuilding efforts in those regions. Stock losses and damage to infrastructure is likely to adversely affect production and operations on some northern Queensland properties in the short term.

Lower export demand for Australian beef in some markets because of the global financial crisis is expected to limit the rise in Australian saleyard prices. Assumed economic contractions in the Republic of Korea and Japan in 2009, and weak economic growth in 2010, are expected to place downward pressure on the demand for beef as consumers substitute toward cheaper protein sources. Demand in smaller markets, such as the Russian Federation and South-East Asia, could also be weaker. Increased competition from US beef is expected to further weaken the demand for Australian beef in the Korean and Japanese markets. However, the assumed depreciation of the Australian dollar against the US dollar will increase the international competitiveness of Australian beef.

Total Australian beef exports are forecast to fall in 2009-10 to 920 000 tonnes because of lower demand in export markets. Australian beef exports to Japan are forecast to fall by 4 per cent to around 345 000 tonnes in 2009-10. Exports to the Republic of Korea are forecast to fall by 6 per cent, to 105 000 tonnes, as competition from US beef increases following the easing of Korean import restrictions on US beef over the past year. In contrast, Australian beef exports to the United States are forecast to increase by around 11 per cent in 2009-10 to 300 000 tonnes. US consumers are expected to substitute away from more high value cuts towards manufacturing beef, which accounts for the majority of Australian beef exported to the United States.

Australian live cattle exports are estimated to fall by 3 per cent in 2009-10, to around 760 000 head, as a result of demand for beef in Indonesia and other South-East Asian countries weakening, in line with sharply lower economic growth. However, the demand for beef is expected to recover over the medium term as economic growth in Indonesia improves. Australia is well placed geographically to export live cattle to Indonesia to be finished in feedlots to meet this demand. One downside risk to Australia’s live cattle trade is the possibility of increased competition from Brazilian beef, following an announcement from the Indonesian Government they would again import beef from Brazil. However, this prospect remains uncertain at this stage.

Dairy

World dairy product prices fell sharply in the first half of 2008-09 in the wake of the global economic slowdown, with growth in consumption falling in many regions. While dairy consumption has remained relatively unchanged in some developed countries, growth has declined markedly in many developing countries, especially in the emerging markets of Asia and Africa, where dairy items are considered luxury goods. World dairy prices have also been affected by a moderate increase in world dairy production, to which New Zealand has been the major contributor.

Internationally, growth in consumption of dairy products is forecast to slow in 2009-10, with import demand and world trade volumes to be relatively unchanged from 2008-09. Increased global production and slower growth in world import demand has contributed to a buildup of stocks in some of the major exporting countries, particularly the European Union, New Zealand (the world’s largest dairy exporter) and the United States. The significant rise in stocks has placed significant downward pressure on world dairy prices.

In Australia, moderate herd rebuilding and a steady increase in yield per cow will contribute to an increase in production. However, relatively dry conditions and low irrigation water allocations persist across many dairying regions, which will limit growth in herd numbers and increases in yield per cow. Lower feed prices have provided some relief to dairy farmers, but sharply lower farm-gate milk prices, particularly in the export oriented states of Victoria, South Australia and Tasmania, will reduce profitability in the short term.

Declines in world dairy prices are expected to result in average Australian farm-gate milk prices falling by 14 per cent to 34.5 cents a litre in 2009-10. Farm-gate prices are expected to be highly variable across the country, with larger declines projected for regions which are more exposed to export markets. Australian milk production is estimated to increase by 1.9 per cent to around 9.4 billion litres in 2008-09. In 2009-10, Australian milk production is forecast to increase by 1.6 per cent to 9.55 billion litres. The total value of Australian dairy product exports is forecast to fall by 19 per cent to $2.13 billion in 2009-10, despite the positive effects of increased export volumes and a lower exchange rate.

For the year 2009-10, the value of Australian skim milk powder exports is forecast to be down by 22 per cent, to $337 million and whole milk powder export earnings down by 21 per cent to $315 million. Australian butter exports value is forecast to be down by 25 per cent to $154 million, while export earnings from casein and cheese are expected to be down by 20 per cent and 16 per cent, to $89 million and $835 million respectively.

Pig meat

In 2007-08, high feed grain prices combined with a strong Australian dollar placed the Australian pig industry under pressure, causing many producers to leave the industry or to sell off stock. The reduction in the breeding herd has placed upward pressure on pig prices in 2008-09, providing respite for producers. The decline in feed grain prices and the depreciation of the Australian dollar have further improved prospects for the industry. Largely reflecting lower supply of pig meat, pig prices are estimated to be 31 per cent higher in 2008-09 than in 2007-08.

Australian pig prices are forecast to fall by 5 per cent in 2009-10, to average 300 cents a kilogram. This forecast decline in prices follows the high pig prices in 2008-09, and reflects an expected increase in the supply of pig meat and lower feed grain prices. In 2009-10, Australian pig meat production is forecast to increase by 6 per cent relative to 2008-09, to 340 000 tonnes. The forecast increase reflects the expected response by producers to the high returns achieved in 2008-09.

Increasing import volumes have also concerned the industry in recent years. However, imports are forecast to decline by 3 per cent in 2009-10 because of a lower Australian dollar and a decline in breeding sow numbers in Canada, Denmark and the United States.

Crops

Grains

Global grain production in 2009-10 is forecast to decline, as yields are assumed to return closer to historical averages from record highs in 2008-09. In 2009-10, world production of wheat is forecast to fall to 632 million tonnes from last year’s record 687 million tonnes. World coarse grains and oilseeds are also forecast to fall, to 1.07 billion tonnes and 396 million tonnes, respectively. Prices in 2009-10 are forecast to fall, although will remain at relatively high levels by historical standards. The world indicator price for wheat (US hard red winter, fob Gulf ports) is forecast to fall by 5 per cent in 2009-10 to average US$248 a tonne. The coarse grains indicator price (US corn, fob Gulf) and oilseeds indicator price (soybeans, cif, Rotterdam) are forecast to fall in 2009-10 by US$6 a tonne and US$15 a tonne, respectively.

Reductions in world wheat consumption in 2009-10 are expected to be driven by a decline in the use of wheat for livestock feed. Food wheat consumption over recent years has increased by around 1 per cent a year. Global wheat consumption is forecast to fall from 648 million tonnes in 2008-09, to 628 million tonnes in 2009-10. World coarse grain consumption is forecast to decline by 9 million tonnes to 1.07 billion tonnes in 2009-10, reflecting reduced demand for feed grains as livestock production contracts in response to weaker demand for livestock products. World oilseed consumption is forecast to decline by 9 million tonnes in 2009-10, as the derived demand for oilseed products falls. Oilseed meal consumption is forecast to decline by 3 per cent in 2009-10 and vegetable oil consumption by 2 per cent.

In Australia, the split up of winter crop area will depend on the timing and extent of autumn rainfall. Crop rotation factors will also be a consideration for individual growers. A later break to the season could result in a smaller area being planted to canola and pulses, as these crops are generally planted earlier in the growing cycle than wheat and barley crops. The area planted to winter crops is forecast to be 21.1 million hectares in 2009-10, compared with 21.8 million hectares planted in the previous season.

The 2008-09 winter cropping season was highly variable across Australia, with mixed yield and quality results between and within states. Assuming yields return closer to the longer term average, winter crop production is forecast to increase by 3 per cent in 2009-10, compared with the harvest in 2008-09. Of the major winter crops, wheat production is forecast to increase to 22 million tones, up from 21 million tones harvested in the previous season. Barley production is forecast to increase to 7.3 million tonnes, up from 6.8 million tonnes in 2008-09. Canola production is forecast to be 1.4 million tonnes in 2009-10, a decline of around 220 000 tonnes.

Increased domestic supplies and lower world grain prices in 2009-10 are factors contributing to a forecast decline in Australian grain prices. The world wheat indicator price is forecast to decline by 5 per cent in 2009-10. However, an assumed depreciation of the Australian dollar against the US dollar will support the returns for Australian growers. The pool return for Australian premium white wheat (APW 10) is forecast to average A$315 a tonne, 3 per cent lower than the previous year. Australian feed barley and canola prices are forecast to fall in 2009-10 to an average of A$186 a tonne and A$570 a tonne, respectively, down 3 per cent and 4 per cent on last year.

Australian export volumes of wheat, coarse grains and canola are also expected to rise in 2009-10, to
14.7 million tonnes, 5.2 million tonnes, and 975 000 tonnes, respectively.

Sugar

The world indicator price for sugar (Intercontinental Commodities Exchange no.11 spot, fob Caribbean) is forecast to average US13 cents a pound in 2008-09 (October-September year), buoyed by lower world sugar production in 2008-09 and increased use of sugar cane for ethanol production in Brazil. The sugar indicator price is forecast to decline only slightly to US12.8 cents a pound in 2009-10. Aggregate world demand for sugar is unresponsive to changes in consumer incomes, so the global financial crisis is forecast to only slightly dampen the rate of growth in sugar consumption in 2008-09. Global sugar production is expected to rebound somewhat to 166.1 million tonnes in 2009-10, with India contributing to the majority of the increase.

Key factors underpinning world sugar prices over the short term are: production reductions in the European Union induced by government policy reforms; the positive demand effects of strong income growth in developing countries, such as China and India; and the increasing diversion of Brazilian sugar cane into ethanol production. Further, world carryover stocks of sugar are forecast to decline by 2.1 million tonnes in 2008-09.

The low Australian dollar means sugar prices are favourable in Australian dollar terms for the 2008-09 and 2009-10 seasons. The current indication for Queensland Sugar Limited’s 2009-10 seasonal pool is $446 to
$466 a tonne, IPS (International Polarity Scale). At the same time, the seasonal pool price indications of QSL translate into returns to Australian sugar cane growers of around $29 a tonne in 2008-09 and $34 a tonne in 2009-10, compared with $25.40 a tonne in 2007-08.

Australian sugar production in 2009-10 is forecast to decline by 2.3 per cent to 4.56 million tonnes, despite a slight increase in the area harvested. Floods in the Herbert River, Burdekin River and Tully regions of Queensland in early February 2009 have probably reduced sugar yield potential, with the 2009-10 Australian cane harvest (crushed in the second half of 2009) down by around 6 per cent.

The necessity of using lower yielding cane varieties, which are resistant to the sugar cane smut since the outbreak of the disease in 2006, also negatively affects yields. Further, the landlocked major sugar producing regions along the Queensland coast and part of northern coastal New South Wales offer little scope to expand areas under sugar in these regions. At the farm level, there is a trend toward diversification of production on cane farms in Australia. As a result of these factors, there is unlikely to be any significant increases in Australian sugar production over the next five years.