Australian agriculture faces ‘multi-year rebuild’ after drought – Rabobank

Interest from institutional investors and private equity remains strong in Australian agriculture despite difficult conditions because of a belief in the asset class’ ‘long-term thesis’.

It is set to be another difficult year for Australian agriculture, claims the latest outlook from Rabobank. However, strong commodity prices and a weak Australian dollar will continue to offset some of the pain.

In its Agribusiness Outlook 2020, Rabobank said the coming 12 months would be “extremely challenging” and that a “multi-year rebuild” was the most likely scenario, with the sector facing its third consecutive annual contraction in farmgate revenues and production set to remain low.

Tim Hunt, lead author of the report and head of food and agribusiness research at Rabobank, told Agri Investor that several factors had helped to offset some of the negative impacts of the drought so far.

“This drought has coincided with near-record or record pricing of agricultural products at the farmgate, which is not the case in every drought,” said Hunt. “I’d also add that leading up to 2017-18, Australian agriculture had a run of seven or so consecutive good years, which enabled the industry to build equity buffers to help it negotiate several dry years.

“So while this is one of the toughest production environments agriculture has been in in recent decades, high pricing and strong equity buffers leading into it have helped ameliorate some of the difficulties.”

A full recovery is set to take several years despite these mitigating factors, Hunt added, with a strong bounce back in 2020-21 seen as unlikely. “Firstly, we need above-average rainfall to get an average winter crop given current soil moisture, and the chances of that are not great according to the Bureau of Meteorology. Secondly, it will likely take several favorable seasons to refill the southern Murray-Darling Basin water storages,” he said.

“And thirdly, once we get a break in the season, farmers will be looking to pay down debt and retain some equity before they invest in expansionary things like buying farms or building new infrastructure.”

Investment among family farms is likely to be constrained in the period following the drought, but interest from private equity investors remains strong, “who continue to believe the long-term thesis of investing in Australian agriculture,” Hunt said. “That’s been helped also by the crackdown on foreign investment into the New Zealand dairy industry, which is redirecting some of the investment that would have found its way into New Zealand assets into the Australian market.”

Rabobank said 2020 is likely to be a pivotal year in the world’s transition towards tackling climate change, with mounting evidence of its extent and impact as well as greater public awareness around the issue.

Factors to watch this year that could affect Australian agriculture include: the US presidential election as a Democratic president could make China policy more predictable; the continuing risk of a hard Brexit; potential free trade agreements with the UK and the European Union; and political tensions between Australian and China.

In addition, the implementation of the phase one trade deal between the US and China has potentially big implications for the sector.

“We have question marks over whether the trade deal will be adhered to, but if it is it will have implications for Australian agriculture,” Hunt said. “For 2020, it would see a substantial boost in US shipments for products like grains, cotton and almonds into the Chinese market, which will increase competition for our sales of those products. Longer term, over the next five years, we’d see the US beef and dairy industries invest in building relationships, supply chains and accreditation to boost their share of the Chinese market.”

Hunt added that it was a “good time to be in livestock”, with year-on-year global increases in demand for animal proteins despite talk of alternatives and strong commodity prices due to the impact of African swine fever.