Australia | Apr 30 2008
By Chris Shaw
A worsening of trading conditions and poor profitability combined to produce a deterioration in conditions in Australia’s agribusiness sector in the March quarter according to National Australia Bank’s latest Quarterly Agribusiness Survey, but recent rain means confidence in the sector’s outlook is showing some improvement.
The better rainfall of late means production expectations are being revised up and this is generating improved confidence levels in both commodities and suppliers, examples being wheat up 49 points to a +48 rating and beef increasing by 22 points to a +19 rating on the bank’s index. Confidence among those in the cotton, sugar and dairy sectors also rose, showing the improved conditions are having a broad impact across the agribusiness sector.
This improvement in confidence levels is also flowing through into higher expectations in terms of profitability as the bank’s agribusiness economist Frank Drum notes the outlook here among participants in the survey rose 6 points to +32 in the latest survey, though for a number of respondents higher interest and exchange rates continue to be areas of concern.
A lack of demand is also seen as hampering profits in the coming year by 36% of participants, while Drum notes 7% saw the drought as the most likely negative impact over the next 12 months, an improvement from the 18% who listed it their number one issue in the December survey.
Given concerns over the level of the currency the use of hedging continues to increase and with reasonably favourable results of late, the survey showing 41% of those using hedging are currently experiencing favourable results, up from 33% previously, against 25% in unfavourable positions.
From an individual industry perspective the food manufacturing and wholesaling sectors reported the largest declines in operating conditions, thanks in large part to increases in raw material and fuel costs that saw input prices rise faster than final product prices during the period. The survey showed only the retail sector recorded improved conditions among those exposed to the agribusiness sector.
The falls in sales margin reported as a result of higher input costs are unlikely to be reversed in coming months, Drum noting respondents in general expect relatively flat margins in the current quarter, though the rain-related improvement in conditions is expected to deliver some improvement in terms of profitability during the period even allowing for an expected fall in forward orders.
As with the rest of the Australian economy availability of labour remains an issue, Drum pointing out while employment growth continued during the March quarter more than half the participants in the survey see a lack of suitable labour as a constraint on output in coming months. This is not impacting on planned capital expenditure, Drum noting this has increased on the back of the general improvement in outlook thanks to the recent rains.
