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Future of food and agriculture in Australia

We expect Australian agriculture to see growth across the board in 2010/11 on the back of better yields and overall fair weather. Given the high base that consumption is already at, we do not expect to see significant changes. On the export front, while certain Asian markets are seemingly less open to Australian imports of meat for example, we see more export opportunities to Latin American and the Middle Eastern countries going forward. A salient risk, however, could be the proposed Murray- Darling Basin Plan which could potentially cut up to 30% of irrigation water to agricultural farms. While the Plan is currently being debated and is scheduled to only come into action in 2011, we believe this could potentially impact the agricultural sector especially water-intense ones like cotton rice and wheat.

Key Forecasts

-Wheat production growth to 2014/15: 24.8%. Wheat consumption growth to 2015: 7.1%. Australia's signature export good will show strong production increases owing to increased deregulation in the sector and enhanced export opportunities, particularly to the Middle East.
- A surge in rice-consuming Asian immigrants combined with increased interest in foreign foods should see rice gain in popularity. Assuming the rate of growth of immigrants, rice consumption growth to 2014/15: 18.3%.
- Sugar Production growth to 2014/15: 11.83%. We expect growth on the back of yield improvement and increased consolidation in the sector to improve efficiency and economies of scale.
- Milk production growth to 2015: 18.7% and consumption growth to 2015: 7.9%. Consumption growth will be driven mainly by population growth, since at close to 110kg per year, Australia already has one of the highest global per capita milk consumption rates.
- 2011f Real GDP Growth: 1.6% (down from 2.8% in 2010e; predicted to average 2.5% from 2010 to 2015).
- 2011f Real Lending Rate (% eop): 6.5%. Up from 6.3% eop in 2010.

Industry Developments

The Draft Murray Darling Basin Plan could potentially impact Australian Agriculture significantly given that the region sustains the largest agricultural region and houses more than half of the nation's farms. Estimates are that diversions listed in the plan would cause the value of irrigated cotton to fall by 25% in the region. A similar drop of 30% for rice and cereals is also expected. The plan is aimed to be apporved and enacted by mid-2012.

Canadian fertiliser giant Agrium's offered to buy the Australian Wheat Board (AWB) straight up for US$1.1bn in an all cash deal on August 18 was finally approved on October 3 2010. For the recently privatised AWB, the move would help fulfill a goal of joining forces with a global player after its monopoly over Australian wheat exports was recently revoked in 2008. This could also benefit the sector as a whole by increasing efficiency and lowering costs.

On July 6, Indonesian Wilmar International, the world's largest palm oil producer, agreed to buy Sucrogen, a major Australian sugar producer for US$1.75bn, in a bid to pursue growth strategies in Asian markets which synergise its operations.

The postponement of the Ethanol Mandate (E5) to 2011 from end-2010 might pose downside risks to the country's sugar output in the short run. Over the longer term, however, BMI believes that this could be a step in the right direction to galvanise the once-large industry into being more efficient as producers strive to increase output to meet ethanol demands (to supply 5% of fuel consumed from sugar and sorghumbased ethanol).

Politics-wise, we note the larger role that rural independents could play in the government going forward. Given the slim majority that the incumbent Australian Labor Party currently hold over the Liberal- National coalition. Consequently, rural independents could potentially hold more sway to votes, especially those pertaining to agriculture. Indeed, usually being more pro-farmer, we expect these politicians to lobby for more protectionist policies to be passed in the next few years. This will be intended to boost purchases of domestically produced agricultural products which have been facing stiff competition from cheaper imports.

by S. C.
18 december 2010, World News > Oceania

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