What’s next on Aus agri’s plate?

Food inflation pressure looms as a factor to watch across all parts of the supply chain in Australia’s agriculture sector. With consumer inflation forecast to stay high until at least well into 2024, businesses are factoring into their strategies the risk of food inflation continuing to rise.

At the food-production level, commodity prices have been largely soft, particularly for beef and lamb as farmers destock, as well as for fresh produce amid improved growing conditions.

While lower input costs have been welcomed by processing industries, rising costs, especially around energy and labour, have narrowed margins.

For several industries, labour shortages continue to be a challenge, although this may start to alleviate in 2024 as immigration levels begin to tick higher.

At a retail level, the impact of wider inflationary pressures continues to hit demand. Many supermarkets, butchers, grocers and others have reached a point where they need to pass on the cost increases of their suppliers while taking care not to alienate consumers.

Extended dry

In the meat supply chain, the impact of any potential dry period due to El Nino continues as the sector’s biggest focus. The dry period of 2018/19 is still fresh in the minds of many Australian cattle producers, and while conditions are holding up, some producers are playing it safe selling excess stock now rather than risk being caught without adequate feed inventory.

This has led to a strong flow of cattle onto the market and, combined with subdued buying, led to a fall in prices. While the short-term impact is negative, in many ways it shows Australia’s producers are planning ahead, ensuring they keep their best stock on farm and maintaining overall herd quality.

Despite El Nino concerns, in the years since the last drought Australia’s cattle herd has been rebuilt to a strong level, which should see it able to meet strong export demands. The herd size has risen to around a three-year high, driven by the strong availability of cattle, the soft Australian dollar, and ongoing strong demand from major export markets, particularly the United States and China.

For meat processors, current prices are providing some relief from the record highs of a year ago. At the same time, labour shortages continue, although there is some thought immigration may slightly alleviate this in the medium term.

In the retail space, the lower price of beef has gradually flowed on to the shelves, although this has been tempered by inflationary pressures on the rest of the supply chain, such as around transport and energy costs. In addition, large levels of meat in storage point to a months-long lag in prices reaching shops.

The beef supply chain will also be closely monitoring the behaviour of consumers, particularly as tighter economic times lead many to revaluate purchases. This could include a shift toward cheaper cuts of meat, and from butchers’ shops to supermarkets.

Globally, the ongoing decline in the US cattle herd continues to impact trade flows. The US herd is forecast to hit a 60-year low in 2024, which is good news for exporters, given the country is the world’s second-largest importer of beef.

Dairy contraction

The Australian dairy supply chain continues to be impacted by a decline in milk production, accompanied by a continuing fall in dairy-farmer numbers.

In 2023/24, Australia is forecast to produce 8.2 billion litres of milk, down from 11.3 billion in 2001/02. This trend is part of a long-term structural change in Australian farming, with an increasing amount of acreage shifting to cropping and beef cattle.

Internationally, prices on the Global Dairy Trade rose in October for the fourth-consecutive month following a longer period of subdued rising.

Reasonably uncertain

After three record harvests in a row, the Australian cropping industry is forecasting a decline of around 30 per cent for the 2023/24 season, from the previous year. While this sounds like a large fall, it is coming off three record years, and would still represent the sixth largest overall crop in history.

The outlook for the winter harvest - already underway in some regions - remains reasonably uncertain given different cropping areas have seen varying levels of rain over the spring period. The uncertainty around El Nino may be felt not only on the upcoming harvest, but into the crops of 2024/25, as farmers make decisions now based on the information available to them.

These decisions are likely to ripple right through the grain supply chain. A wider move to stock up on feed, in case it is needed in drier months, could place upward pressure on prices, and add challenges for grain handlers looking to deliver feed to drier parts of Australia.

For grain handlers, El Nino could mean a late-season re-examination of where to allocate resources, not only due to different harvest volumes, but in directing greater volumes of grain than planned across the country. With port access and shipping availability also an issue around harvest time, grain handlers will also be looking to ensure these factors are locked down as soon as possible.

Globally, the general outlook across most crops remains bullish, with the US Department of Agriculture forecasting a rise in global production of corn, rice and soybeans, and only a very marginal decline in wheat production.

Elsewhere, Australia’s sugar industry is well poised to take advantage of several factors currently impacting the industry globally, which have limited or paused exports from the world’s biggest sugar-producing nations. For Australian sugar producers and sugar mills, this could mean the industry is excellently placed to take advantage of a strong year ahead, both in terms of prices and export demand.

For manufacturers, the high price of sugar could well become a factor in food inflation pressures, given it is a base ingredient in so many products. For chocolate manufacturers, the pressures may be even stronger, given cocoa prices have recently been around 45-year highs due to global supply issues.

Gerry Karam is Head of Food, Beverage & Agribusiness at ANZ Institutional

This is an edited excerpt from the ANZ report “Food for Thought Spring/Summer 2023/24”.