Commodities | May 28 2007
By Chris Shaw
While some rain has increased optimism in the agricultural sector National Australia Bank’s Farm Aggregates Report for May points out the prospects for an improvement in both farm production and incomes remains uncertain and dependent on further improvement in conditions.
The bank’s agribusiness economist Skye Dixon points out conditions are still poor across most of Australia, as while the recent rain has improved the outlook for the current winter crop further falls are needed to replenish depleted catchment areas across much of the country.
As a result while the bank expects an increase in farm production of as much as 15% in FY08, this is actually a modest post-drought rebound given a historical average increase of 20-25%. In Dixon’s view the risk remains to the downside as further rain is required to boost storage levels and allow for higher water allocations.
Looking at the winter crop, the bank expects it to show an increase of around 145%, which sounds impressive but must be viewed in the context of the 60% fall in last year’s crop. Wheat should be a major improver, with the crop forecast at around 25 million tonnes, though Dixon suggests risk is to the downside given parts of Queensland and Western Australia are yet to receive enough rain to facilitate planting.
In addition, follow up rain will be required to develop the crop as subsoil moisture levels remain very low.
In contrast, livestock production is tipped to fall as producers attempt to rebuild herds, though again here a break in the season is needed as there is a lack of suitable pasture and fodder costs are very high.
This means wool production is also likely to suffer, as sheep numbers are being constrained, so Dixon sees no recovery in volumes following the 8% fall in production in FY07.
Production in the Murray-Darling Basin may also be constrained as the lack of water means there is unlikely to be any allocation for irrigation to start the season. Products most at risk from this situation in the bank’s view include rice, cotton and dairy producers. Its worst case scenario is no recovery in total farm production in the coming year.
Assuming some rain the bank expects total farm incomes to rise by around $5 billion to $7 billion, regaining most of the $6 billion lost in 2006/07. Again the risk is to the downside given the potential for production to be lower than forecast, while the bank also notes there has been some minor increases in costs.
Overall the sector is forecast to boost GDP by around 0.5% in 2007/08, this after reducing GDP by as much as 0.75% in 2006/07.