FARMERS and graziers will continue to ride the wave of strong commodity prices and excellent seasonal conditions into the back half of the year, with production upticks finally starting to show up.
This overarching positive sentiment is clear in the mid-year agriculture outlook report from Rural Bank, released today, although challenging trade conditions continue and rising input costs are a definite headwind.
Fuel, fertiliser and transport are the big contributors to rising costs of production, while Australia's relationship with its largest trading partner, China, shows no tangible signs of improving, the report says.
The bank highlighted three key themes it feels will impact the performance of Australian agriculture in the second half of 2022 - the season, trade conditions and supply chain disruptions.
Rural Bank Head of Sales Andrew Smith said for most regions and most commodities, seasonal conditions had set up the next six months beautifully.
Above average Australian winter crop production was forecast for the third season in a row as a result of these favourable conditions, he said.
Horticulture too, should see strong production, with supply expected to rebound following flooding in Queensland and northern NSW which has taken a toll so far this year.
Mr Smith said wet conditions were forecast to continue through to September across most of the country, with an even chance of a third La Nina weather over the summer.
That would allow the continued rebuilding of the nation's cattle herd and sheep flock, ensuring strong beef, sheep meat, wool and dairy production into the second half of 2022.
"It is dry in parts of south west Western Australia and Tasmania but it is early enough that we can still get a good run," Mr Smith said.
"La Nina creates the conditions for the unseasonal rain we've experienced this week. At the back end of the year, that could also mean disruptions for harvest."
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Trade
The report calls out the fact the situation with China continues to be cool, but Mr Smith said exporters had adapted to challenges like this, and other barriers, by finding alternative markets.
Evolving diversification in export markets was an enormous positive, he said.
The recently-signed deal with India and the United Kingdom free trade agreement were examples, he said.
Sheep meat, almond, wool, lentil and wine producers are expected to see the largest benefits from the improved access to the Indian market with the agreement due to come into force in the back half of the year.
"We've also made our way into markets we might not have traditionally considered and that has paid big dividends," Mr Smith said.
Lamb into the United States, the UAE, South Korea, Canada, Japan, Malaysia and Saudi Arabia was a good example, he said.
Supply chains
Supply chain disruptions will continue to impact the Australian agriculture industry at both a domestic and export level, the Rural Bank report says.
"We are certainly not out of the woods when it comes to shipping," Mr Smith said.
"There is a view container availability won't return to pre-COVID levels until 2023."
Ports remain shut down across China and the Ukraine war has cut off exports from the Black Sea region and seen a raft of economic sanctions placed on Russia, further intensifying global supply chain issues.
Energy prices have also been driven higher by the conflict which has consequently sent the cost of inputs skyrocketing.
The Rural Bank report says elevated inputs costs are expected to remain a key issue throughout the remainder of 2022 with growers weighing up a reduction in the application of fertiliser for this season to maintain margins.
Spending up
Producers continue to invest increased earnings in an array of areas, Mr Smith said.
"We were 28pc up in terms of account openings, which is no great surprise but the flow of money into farm managed deposits did feature," he said.
"We have also seen a lot of paying down of debt.
"Beyond that, people have been utilising surpluses to invest in farm expansion, with a lot of land changing hands.
"Where producers were able to source machinery, we saw an uptick in equipment finance, which was pronounced in the last quarter driven by both delayed times of getting hold of equipment and tax management behaviour."
There had also been significant off-farm investment.
The outlook
Beef
Production will rise but consumer demand is also expected to remain firm. Cattle prices will continue to decline at a marginal rate. Strong ongoing restocker demand will keep them high by historical standards. Rural Bank's senior agribusiness relationship manager for Queensland Mark Pain said the beef industry was expected to be strong throughout the remainder of the year with good export opportunities and favourable seasonal conditions likely to accelerate the herd rebuild and expand production.
Cropping
Estimated wheat production of 30.5 million tonnes is a year-on-year decline of 21pc but remains 17pc above average. Due to a combination of reduced planted area and lower yields, barley production is forecast to decline 24pc year-on-year to around average at 10.6m tonnes. Most states have had a favourable start to the season, but there are areas of concern in northern NSW, where excess rainfall has caused waterlogging. Combined with strong export demand and high global prices, this provides an excellent outlook for cropping.
Dairy
Dairy production is forecast to see a modest increase for the remainder of 2022, on the back of the extended La Nina. Herd numbers are predicted to remain stable or slightly decrease. Production growth is being curtailed by competition for land, high beef prices, rising input costs and labour shortages.
Rural Bank's regional manager agribusiness for Southern Victoria Kathryn Davies said it was new territory for inputs and milk price.
"It is critical farmers prioritise time to sit down with their banker, farm advisor and milk company to really analyse and understand their cashflow drivers and production margins," she said.
"Being able to shift farm production effectively as we navigate uncertainty will be a key driver of profitability."
Horticulture
Above average rainfall will drive increased horticulture production across most states, though produce quality may be impacted as a result. Fruit and vegetable prices are expected to rise as logistical challenges set in. Domestic demand will dip as a result but export demand will tick higher as freight shortages ease.
Rural Bank's regional manager agribusiness for Western Australia South John Reilly said ongoing labour shortages, rising input costs and some supply chain issues were expected to remain key challenges for the industry over the next six months.
Sheep meat
Sheep meat supply so far in 2022 has been lower than expected with average weekly lamb slaughter only two per cent higher year-on-year and sheep slaughter up three per cent. However, the ongoing expansion of the national sheep flock and favourable conditions in many areas is forecast to drive a 10 to 15pc year-on-year increase in lamb and sheep slaughter from here. That increased supply will pose a risk to the processing sector as labour shortages are set to continue. Strong demand from the US and a range of smaller markets will drive increased export value.
Wool
The Eastern Market Indicator is forecast to remain steady around 1400 cents a kilogram for the rest of the year off the back of economic uncertainty surrounding consumer demand globally. This forecast aims to balance earlier signs of strong consumer demand against the coming inflationary pressures on household budgets. Wool supply will rise as the national flock increases.
Rural Bank's senior agribusiness relationship manager for Western Victoria Fiona Whale said strong seasonal conditions were expected to continue to grow flock numbers and increase wool production.
There would continue to be a growing premium for high quality fine wool, particularly at the 17-micron end, she said.