Agriculture Outlook Rosy - Just Add Rain

The Age

Tuesday April 3, 2007

Philip Hopkins, Agribusiness Reporter

AUSTRALIA'S $100 billion agriculture sector is set for a post-drought rebound, with commodity prices as high as they have been for 20 years, according to economists.

"Commodity prices are fantastic at the moment," the acting chief executive of the National Farmers Federation, Denita Wawn, said. "The big issue is reduced production. Farmers can't take advantage of the prices . . . it all depends on rain."

Ms Wawn said there had been some good rain, but it had been patchy and a good follow-up was needed.

Rabobank's head of food and agribusiness research, Bill Cordingley, said the global and domestic outlook was positive. "But it all comes back to the one thing: whether we will get a decent season or not," he said.

"All eyes are firmly fixed on the break . . . and farmers' ability to generate cash revenue for their businesses. If we get some decent production, we will get a decent result for agriculture this year."

Australian farms and related industries generate more than $100 billion in production - about 12 per cent of gross domestic product. Farm exports are valued at $28 billion - about 20 per cent of all exports.

The drought is estimated to have cut GDP growth by 0.75 per cent this financial year. The buoyant agricultural outlook comes as the Reserve Bank is likely to raise interest rates and unemployment is at a 30-year low.

Westpac's latest regional economic report said that, apart from sugar and cotton, nearly all commodity prices were up in US-dollar terms.

Westpac's senior agribusiness economist, Justin Smirk, said even taking into account the stronger Australian dollar, Australian prices were on par with the best levels of the past 20 years. "This is about as good as it gets," he said, and no big deterioration was expected soon. But the bad news was the dollar was tipped to trade in the US75-80? range to the end of the year.

ANZ chief economist Saul Eslake said some factors could hamper GDP regaining its drop from the drought.

Livestock production could be affected by herd rebuilding. "Once it's clear the drought has broken - it's now still just a forecast - livestock producers will withhold their stock from abattoirs to rebuild their herds," he said. In contrast, there should be a rebound in grain production.

Mr Eslake said the rebound could also be hampered by irrigation authorities deciding to allow water levels to recover. "The need to retain more water could have an impact on cotton, rice and horticulture producers," he said.

Mr Smirk said the growing biofuels industry would affect new markets and prices for Australian grain and sugar producers, but government policy was also crucial.

The industry's viability depended on government support or higher oil prices, he said.

KEY POINTS ? Commodity prices are the highest in 20 years.

? Rain is needed to boost production so farmers can benefit from the prices.

? The high $A is a negative.

© 2007 The Age

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