Australia | Oct 20 2006
By Greg Peel
We are set to experience a rural recession, says Westpac. Analysts are forecasting a 15% fall in farm output but when you throw in rising costs, farm incomes are tipped to fall from $4.5bn to $2.8bn – below the level of the last rural recession in 1994-95.
Crops are withering as we speak and if it doesn’t rain before November – and it doesn’t look at all like raining – output could fall by as much as 23%, says Westpac, making this the worst drought since European settlement.
It was late rain that saved the crop last year. However, as us city folk sit sweltering in 30 plus degree spring temperatures, despairing as to what January will bring, and as Mike Bailey grimly reports each night of the movement of the Southern Oscillation Index into parched El Nino territory, there seems little hope of a rescue this time.
Westpac believes the worst case scenario would see 0.8 percentage points shaved off the GDP.
If you’re a farmer, the news is not good. If you’re an investor, let’s put on the detached, pragmatic financial hat.
The rural sector only represents 3% of the Australian economy. The other 97% is doing alright thank you very much, and there is little flow through from a rural recession into the wider economy outside of rising food costs for the consumer. Westpac notes that there will be little effect from rural unemployment, as the paid rural workforce mostly left for the mines last year and never came back. Probably never will.
What this means is something akin to a swift kick in the guts to a man who is already down. Westpac does not see the drought affecting a change in attitude from the RBA, and as such the expected interest rate rise in November is still expected. While the RBA will no doubt have farmers in mind, 3% of the economy is just not enough to sway the numbers. Nor does Westpac see any meaningful move in the Aussie as a result.
Westpac is at pains to point out that it is not downplaying the hardship ahead for Australian farmers. It’s just that the macroeconomic effects are not something we should be too concerned about.
Nor is ABN Amro Morgans rolling out the sympathy barrow. In a report this morning the analysts suggest that the drought will offer a good opportunity to get into an otherwise promising agricultural sector for the medium term cycle play. ABN is even suggesting now is the time to start buying, even though prices may yet fall further.
Let’s not forget we are experiencing a “soft” commodity boom (meaning a boom in soft commodities, not a soft boom). This is yet another Asian growth story as rising wealth in the likes of China and India signal the move to a higher protein diet. Australian agricultural produce, when it grows, is highly sought after for its quality and attracts premium prices, notes ABN.
The analysts also highlight the growing bio-fuels industry, and the advantage Australian companies boast in infrastructure and logistics management.
What to buy?
Incitec Pivot (IPL) has become a rising star once more having been in the fertiliser for a while now. While Incitec’s price is still often rain-driven, ABN describes it as “a fundamentally attractive turnaround story”.
Graincorp (GNC) is one company that stands to gain materially if AWB (AWB) loses its single desk. Australian Agricultural Co (AAC) has as its selling point vast land assets.
AWB itself is not out of the question. Just not a Buy yet until the outcome of everything is known, says ABN. But the analysts think the new CEO is capable of turning the company around once the dust settles.