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ISSN 1321-784 4

2 Australian commodities • vol 17 no 1 • March quarter 2010

Australian commodities • vol 17 no 1 • March quarter 2010 3

Economic overview 5

Outlook for Australia’s commodity sector 17

Crops 21

Grains 21

Sugar 36

Cotton 46

Wine and wine grapes 54

Livestock 63

Beef and veal 63

Sheep meat 71

Pig meat 76Poultry 79

Wool 81

Dairy 88

Farm performance: Broadacre and dairy farms – 2007-08 to 2009-10 97

Energy and minerals overview 127

Oil 134

Natural gas 144

Thermal coal 152

Uranium 160

Metals 168

Steel and steel-making raw materials 168

Gold 179

Aluminium and alumina 187

Nickel 195

Copper 203

Zinc 210

Productivity growth: Trends, drivers and opportunities for broadacre and dairy industries 216

Statistical tables 231

ABARE contacts 268

Contents

A

Abbreviations

a ABARE macro assumptions

f ABARE forecast

s ABARE estimate

z ABARE projection

Across Australia in 2010

Discover a new perspective on your region at ABARE’s Regional Outlook conferences.

Held across Australia in 2010, each Regional Outlook conference delivers commodity forecasts and research results directly to rural and regional audiences.

Featuring a diverse range of local speakers, complemented by ABARE economists, the Regional Outlook program is tailored to specific regions, with economic data and commodity forecasts, a focus on regional industries and trends, innovative business stories, agriculture, productivity and climate change, and the opportunity to make new contacts in the community.

To discover a new perspective on your region, join other delegates, drawn from businesses, government, industry and the community, at the next Regional Outlook conference. WA Albany 28 April

TAS Hobart 19 May

NSW Wagga Wagga 30 June

QLD North Queensland 21 July

VIC Swan Hill 18 August

SA Port Lincoln 15 September

NT Katherine 13 October

Enquiries

Maree Finnegan Marketing and Events ManagerP: +61 2 6272 2260E: [email protected]: abare.gov.au/regional

Conference schedule for 2010


Economic overview

Prospects for world economic growth, 2010 to 2015

Neil Thompson and Marina Kim

• World economic growth is assumed to recover to 3.8 per cent in 2010, after declining by an estimated 1 per cent in 2009 as a result of the global financial crisis. Over the medium term, world economic growth is assumed to strengthen to 4.1 per cent in 2011 and 4.4 per cent in 2012, before easing gradually to around 4 per cent a year toward 2015.

• While economic activity in major OECD countries is likely to recover gradually, strong economic performance in the non-OECD region, and China in particular, is expected to continue. Economic growth in China is assumed to strengthen to 9.5 per cent in 2010, before averaging more than 8 per cent a year toward the end of the outlook period.

• Economic growth in Australia is assumed to rise to 1.5 per cent in 2009-10 and 3 per cent in 2010-11. Toward 2014-15, Australian economic growth is assumed to strengthen further to an average of 4 per cent a year.

The global economyGlobal economic recovery is underwayThe global economy is in the early stages of recovery as a sharp contraction triggered by the global financial crisis is coming to an end. The improvement in global economic activity has been underpinned by robust performance in the emerging Asian economies, particularly China, and stabilisation or resumption of activity in other major world economies. International stock markets have rebounded, risk premiums on business lending have fallen, and global industrial production and trade flows have also recovered noticeably.

The revival in global economic activity has been assisted by the substantial policy stimuli enacted worldwide since late 2008. Policy responses to the financial crisis included a wide variety of measures to stabilise the financial sector, large reductions in official interest rates by central banks, increases in public spending and infrastructure investment, and other fiscal policy measures to support aggregate demand. The composition of packages varies across countries, with the magnitude of the stimuli ranging from less than 1 per cent, in Italy and Brazil, to more than 10 per cent of gross domestic product, in China. These policies have been critical in restoring global confidence, stabilising financial markets, supporting demand and alleviating the economic and social effect of the global financial crisis.

The early stages of the global economic downturn were characterised by a sharp reduction of inventories, accompanied by significant declines in industrial production. The sharpest declines in export volumes and industrial production occurred among the major manufacturing exporters, especially those in Asia. Following some stabilisation of financial markets and


improvement in consumer and business confidence, companies started to resume production and restock inventories, led by the emerging Asian economies. The recovery in industrial production has underpinned renewed growth in commodity demand and an increase in world commodity prices.

However, the pace of recovery across individual economies remains uneven. In major OECD economies, private consumption and business investment remain subdued as a result of the continued rise in unemployment, wealth losses incurred during the crisis, and the desire of households and firms to rebuild balance sheets. As a result, major OECD economies are not expected to provide strong support to world economic growth in 2010.

While the pace of economic recovery has been stronger than previously expected, for 2009 as a whole global economic activity is estimated to have fallen by around 1 per cent, which mainly reflects the steep downturn in the first half of the year.

Stronger world economic outlook in the short to medium term…Looking ahead, global economic activity is assumed to strengthen by 3.8 per cent in 2010. As the recovery in private demand, particularly in OECD economies, takes place, world economic growth is assumed to increase further to 4.1 per cent in 2011 and 4.4 per cent in 2012, before easing gradually to an average of 4 per cent toward 2015. Under these assumptions, world economic growth is expected to average around 4.2 per cent a year in the five years to 2015. This compares with growth of 4.7 per cent in the five years to 2007 which preceded the global financial crisis.

Unemployment rates in major OECD economies

12

10

8

6

4

2

Dec-09

Dec-08

Dec-07

Jun-09

Jun-08

Jun-07

%

GermanyFranceItaly

United KingdomUnited StatesJapan

World economic growth

%

2015 z2013 z2011 f20092007200520032001199919971995-2

-1

1

2

3

4

5

6

Economic overview


In major OECD economies, the expansion of economic activity is expected to be relatively modest through much of 2010, averaging 2 per cent for the year as a whole, after contracting by an estimated 3.4 per cent in 2009. Economic growth in the OECD is assumed to strengthen to around 2.3 per cent a year over the medium term as private consumption and investment rise.

In the United States, private consumption is expected to gradually recover, based on an assumed improvement in labour market conditions over time. In Japan, a significant increase in government expenditure has provided support for economic activity, but the pace of economic recovery is expected to be modest mainly because of the weakness in domestic demand. In Western Europe, the recovery may lag behind other major OECD economies as significant job losses weigh on economic activity and the prospects for quick improvements in consumer and business confidence and trade remain weak.

unit 2008 2009 2010 a 2011 a 2012 a 2013 a 2014 a 2015 a

Economic growth b OECD % 0.5 – 3.4 2.0 2.3 2.6 2.3 2.2 2.2

United States % 0.4 – 2.4 2.5 2.4 2.5 2.4 2.3 2.3Japan % – 1.2 – 5.0 1.5 2.2 2.0 1.8 1.7 1.7Western Europe % 0.6 – 4.0 1.1 1.7 2.2 2.2 2.1 2.1Germany % 1.2 – 5.0 1.2 1.7 2.1 2.1 2.0 2.0France % 0.3 – 2.2 1.2 1.6 2.0 2.0 1.9 1.9United Kingdom % 0.5 – 4.8 1.0 2.3 2.4 2.5 2.4 2.4Italy % – 1.0 – 4.7 0.8 1.3 1.2 1.0 1.0 1.0Korea, Rep. of % 2.2 0.2 4.4 5.0 4.7 4.5 4.5 4.3New Zealand % 0.2 – 1.6 2.2 2.5 3.1 3.0 2.8 2.8

Developing countries % 6.4 3.4 6.2 6.3 6.5 6.5 6.4 6.3Non-OECD Asia % 7.7 6.2 7.8 7.8 7.8 7.8 7.5 7.4 South East Asia c % 4.8 1.1 4.6 5.1 5.5 5.7 5.9 5.9 China d % 9.6 8.7 9.5 9.0 8.8 8.6 8.2 8.0 Chinese Taipei % 0.1 – 3.5 4.0 5.0 5.2 5.0 4.5 4.5 Singapore % 1.1 – 2.1 4.5 5.1 5.3 5.3 5.0 5.0 India % 7.3 6.7 7.4 7.7 7.8 8.0 8.0 8.0Latin America % 4.2 – 2.3 3.7 3.8 4.3 4.5 4.7 4.7Middle East % 5.3 2.2 4.5 4.8 5.0 5.0 4.8 4.7

Russian Federation % 5.6 – 7.9 3.6 5.0 5.5 5.3 5.3 5.2Ukraine % 2.1 – 15.0 2.7 4.0 5.2 5.2 5.1 5.1Eastern Europe % 3.1 – 4.3 2.0 3.8 4.2 4.5 4.4 4.4

World e % 3.0 – 1.0 3.8 4.1 4.4 4.2 4.1 4.0

Industrial production b OECD % – 2.5 – 13.4 5.5 3.4 3.1 2.7 2.4 2.4

Inflation bUnited States % 3.8 – 0.3 1.7 1.8 2.0 2.2 2.2 2.2Interest rates US prime rate g % pa 5.1 3.3 3.5 4.5 5.1 5.3 5.3 5.3

US exchange rates hYen/US$ Yen 104 94 98 105 108 110 112 112Euro/US$ Euro 0.68 0.72 0.67 0.69 0.70 0.72 0.72 0.72

a ABARE assumption. b Change from previous period. c Indonesia, Malaysia, the Philippines, Thailand and Viet Nam.d Excludes Hong Kong. e Weighted using 2008 purchasing power parity (PPP) valuation of country gross domestic product by the IMF. g Commercial bank lending rates to prime borrowers in the United States. h Average of daily rates. Sources: Australian Bureau of Statistics; International Monetary Fund; Organisation for Economic Cooperation and Development; Reserve Bank of Australia; ABARE.

Key macroeconomic assumptions

Economic overview


In contrast, economic growth in the developing economies is expected to recover at a faster pace and reach 6.2 per cent in 2010, from an estimated average of 3.4 per cent in 2009. Over the medium term, economic growth in the developing countries is assumed to accelerate to 6.5 per cent in 2012, before moderating slightly toward the end of the outlook period. The economic improvement in the short term is expected to be driven by stronger performance in China, India and a number of other emerging Asian economies. Economies in Africa, the Middle East and Latin America are also expected to achieve solid growth as commodity prices and global trade recover, while output growth in the economies of Eastern Europe, the Russian Federation and Ukraine may rise more slowly because of the weakness in their major trading partners in Western Europe.

Inflation rates in many major OECD economies have fallen in 2009. Higher unemployment rates and lower capacity utilisation in these economies suggest that inflation is likely to remain low in the short term despite continued expansionary government policies. Inflationary pressures as a result of increased government spending and high liquidity injections, if they emerge, are more likely to be an issue in the medium term.

However, inflation risks are more pronounced for a number of emerging economies, where inflationary pressures have not eased as much as in OECD economies. This is especially the case in countries such as China, India and some South-East Asian economies where the economic performance has been relatively strong.

…but risks to sustainability of global economic recovery remainThe assumed path of global economic recovery remains subject to a number of risks and uncertainties. A premature withdrawal of policy support poses one of the key downside risks in the short term, as both the financial and real sectors of the global economy remain fragile.

Regional economic growth

%

OECD

2009

2010 f

2011 f

non-OECD Asia Latin America Russian Federation, Ukraine,

Eastern Europe

world

2012-15 z

-10

-8

-6

-4

-2

2

4

6

8

Economic overview


Another downside risk is that financial conditions could tighten again if progress in financial sector reforms is delayed by high unemployment rates or weakness in certain sectors in some major economies.

In the medium term, rising public debt as a result of short-term measures to assist economic activity could pose a downside risk to growth prospects. According to projections released by the International Monetary Fund, gross general government debt in the United States will reach 108 per cent of gross domestic product in 2014, compared with 62 per cent in 2007. For Japan, gross general government debt is projected to reach 246 per cent of gross domestic product in 2014, from 188 per cent in 2007.

If international investors perceive the rising public sector debt of a particular country as unsustainable, investment flows into that country would fall significantly, leading to a sharp increase in real interest rates or depreciation of the country’s currency.

Economic prospects in Australia’s major export marketsThe United StatesAfter declining significantly in late 2008 and early 2009, economic activity in the United States strengthened in late 2009. Real gross domestic product is estimated to have expanded at a seasonally adjusted annualised rate of 5.7 per cent in the December quarter 2009, following growth of 2.2 per cent in the September quarter. The increase in real gross domestic product in late 2009 primarily reflected the improvements in consumer spending, exports, public infrastructure investment, residential investment and private inventory expenditure.

The economic recovery in the United States has been underpinned by expansionary fiscal and monetary policies. The US Government implemented a fiscal stimulus package of US$787 billion in February 2009, and further plans to bolster investment in job growth were contained

General government debt (gross) in selected countriesper cent of GDP

Country 2007 2009 2010 2014 (pre-crisis)

Australia 9.8 16.9 22.7 27.8Brazil 66.8 68.5 65.9 58.8China 20.2 20.2 22.2 20France 63.8 78 85.4 96.3Germany 63.4 78.7 84.5 89.3India 80.5 84.7 85.9 78.6Indonesia 35.1 31.5 31.2 27.1Italy 103.5 115.8 120.1 128.5Japan 187.7 218.6 227 245.6Republic of Korea 29.6 34.9 39.4 35.4United Kingdom 44.1 68.7 81.7 98.3United States 61.9 84.8 93.6 108.2

Source: International monetary fund (IMF).

Economic overview


in the recently proposed US budget for fiscal year 2011 (October 2010 to September 2011). The Federal Reserve has kept the official interest rate at nearly zero since December 2008.

Despite substantial policy support, considerable concerns about the pace of the US economic recovery remain. After rising strongly by 1.8 per cent in November 2009, retail sales declined by 0.1 per cent in December, before rising again by 0.5 per cent in January 2010. In the housing market, significant stocks of unsold houses suggest that the pace of recovery in housing activity is likely to be gradual in the short term. Most importantly, job losses are continuing in the US economy, with the unemployment rate remaining at around 10 per cent in early 2010, compared with the rate of around 5.5 per cent in mid-2008.

While the most immediate need for the United States is to strengthen the pace of economic recovery, implementation of recent fiscal spending initiatives will result in a significant increase in the fiscal deficit. According to the US Congressional Budget Office, the US budget deficit was around 10 per cent of gross domestic product in fiscal year 2009 and is projected to be at 9 per cent of gross domestic product in fiscal year 2010. The challenge for US fiscal policy continues to be maintaining the balance between short-term requirements to stimulate economic activity and fiscal consolidation over the medium term.

Against this backdrop, the US economy is assumed to record growth of 2.5 per cent in 2010, compared

with an estimated contraction of 2.4 per cent in 2009. Reflecting the effect of expected fiscal consolidation over the medium term, US economic growth is assumed to be around 2.4 per cent in 2011 and 2.5 per cent in 2012, before easing marginally to an average of 2.3 per cent toward 2015.

ChinaEconomic growth in China strengthened in late 2009, with real gross domestic product growing at a year on year rate of 10.7 per cent in the December quarter 2009, following growth of 9.1 per cent in the September quarter. For 2009 as a whole, the Chinese economy expanded by 8.7 per cent.

OECD economic growth

-4

-3

-5

-6

-2

-1

%

3

2

1

United States

2009 2010 a 2011 a 2012-15 a

JapanWestern Europe

US industrial production

index2002=100

90

100

110

120

90

100

110

120

Jan-10

Jul-09

Feb-09

Sep-08

Apr-08

Nov-07

Jun-07

Jan-07

Economic overview


Strong economic activity in China has been underpinned by the government’s fiscal stimulus package of 4 trillion yuan (US$586 billion). Reflecting this stimulus, there has been a significant increase in bank lending, totalling around 9.6 trillion yuan (US$1.4 trillion) over the course of 2009. Spending on fixed asset investment has also risen markedly, with growth of 30.1 per cent recorded in 2009, following an increase of 25.5 per cent in 2008.

Strong fixed asset investment and bank lending have led to considerable concerns about the possibility of ‘overheating’ in the Chinese economy. In response, the Chinese Government announced in late January 2010 its intention to reduce growth in bank lending

to ease upward pressure on asset prices. There is also a possibility that interest rates in China will be raised to avoid the re-emergence of inflationary pressures.

A marked monetary tightening and reduced credit growth will inevitably moderate strong economic growth in China. In preparing this set of commodity forecasts, economic growth in China is assumed to average 9.5 per cent in 2010, before easing to 9 per cent in 2011. Over the medium term, economic growth in China is assumed to ease further, reaching an average growth rate of 8 per cent by 2015.

Japan and the Republic of KoreaAfter contracting sharply in late 2008 and early 2009, economic activity in Japan and the Republic of Korea began to recover in the second half of 2009. In Japan, real gross domestic

Growth of industrial value added, China monthly, ended November 2009

%year

on year

Nov-09

Nov-08

Nov-07

May-09

May-08

May-07

4

8

12

14

20

Recent trade indicators for China

30

60

90

120

150

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08

exports (left axis)

imports (left axis)

trade balance (right axis)

US$b US$b

30

20

40

50

10

Economic overview


product grew by 1.1 per cent on a seasonally adjusted basis in the December quarter 2009, after remaining broadly flat in the September quarter. In the Republic of Korea, real gross domestic product expanded at a seasonally adjusted rate of 0.2 per cent in the December quarter 2009, following strong growth of 3.2 per cent in the September quarter.

Reflecting the recent improvement in global economic activity, export performance in both Japan and the Republic of Korea has strengthened. The recovery in external demand, particularly from China and some other emerging Asian economies, has also supported the resumption of growth in industrial production. Japan’s exports rose year on year by 12 per cent in December 2009, while industrial production expanded year on year by 5.3 per cent in the same month. Similarly, exports and industrial production in the Republic of Korea increased year on year by 33.7 per cent and 33.9 per cent, respectively, in December 2009.

Despite the recent improvements in export performance, the adverse effect of weak labour markets on consumer spending in both countries represents a downside risk to the short-term economic outlook. In Japan, the unemployment rate was 5.1 per cent in December 2009, compared with a low of 3.8 per cent a year ago. In the Republic of Korea, the unemployment rate rose to 5 per cent in January 2010 from a recent low of 3.2 per cent in October 2009.

In preparing this set of commodity forecasts, economic growth in Japan is assumed to average around 1.5 per cent in 2010, before strengthening to 2.2 per cent in 2011. Over the medium term, high public debt, weak productivity performance, especially in the non-traded sector, and an aging population are expected to be the major challenges for sustaining economic growth in Japan. Economic growth in Japan is assumed to ease to 1.7 per cent by 2015.

In the Republic of Korea, economic growth is assumed to recover to 4.4 per cent in 2010 and5 per cent in 2011. Toward 2015, economic growth in the Republic of Korea is assumed to ease to around 4.3 per cent a year.

Non-OECD AsiaThe pace of recovery in a number of non-OECD Asian economies has strengthened. For example, in India, economic growth rose at a year on year rate of 7.9 per cent in the September quarter 2009, following an increase of 6.1 per cent in the June quarter. In Singapore, economic growth increased year on year by 3.5 per cent in the December quarter 2009, compared with a rise of 0.9 per cent in the September quarter. In Viet Nam, the economy expanded by 6.9 per cent in the December quarter 2009, following growth of 6 per cent in the September quarter.

Export dependent economies in the region, such as Singapore and Chinese Taipei, have been hard hit by the global economic downturn. To underpin the domestic demand, many regional economies implemented fiscal and monetary stimulus measures in late 2008 and early 2009. More recently, the improvement in world economic growth has led to a recovery in the regional export performance and industrial production.

In Thailand, manufacturing activity rose year on year by 30.7 per cent in December 2009, while exports recorded year on year growth of 26.1 per cent in the same month. In the Philippines,

Economic overview


manufacturing production increased year on year by 2.1 per cent in November 2009, while exports grew at a year on year rate of 5.1 per cent in the same month.

Looking forward, economic activity in non-OECD Asia is expected to strengthen, boosted by domestic demand and continued recovery in exports. For non-OECD Asia as a whole, economic growth is assumed to rise to 7.8 per cent in 2010 from an estimated 6.2 per cent in 2009. Toward 2015, economic growth is assumed to ease slightly to an annual rate of 7.4 per cent.

Recent export trends forselected Asian economies

80

70

60

50

40

30

20

10

US$b

JapanKorea, Rep. ofChinese Taipei

MalaysiaThailand

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Recent industrial productiontrends for selected Asianeconomies

250

200

150

100

50

US$b

ThailandChinese TaipeiPhilippines

Korea, Rep. ofJapan

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Economic growth in Asia

%

Thailand

2009

2010 f2011 f

MalaysiaIndonesia Philippines

Viet NamSingapore

ChinaIndia

Korea, Rep. ofChinese Taipei

2012-15 z

-4

-2

2

4

6

8

10

Economic overview


Western EuropeAfter contracting in the first half of 2009, economic activity in Western Europe resumed growth in the second half of the year. For the euro area as a whole, real gross domestic product grew year on year by 0.1 per cent in the December quarter 2009, following an expansion of 0.4 per cent in the September quarter.

The pace of decline in industrial production has also been moderating in the region, from a recent trough of 21.3 per cent year on year in April 2009 to a decline of 5 per cent in December,

as a result of government stimulus packages and improved demand for exports, particularly from China. Germany has benefited most from the recovery in global trade, given the export orientation of its economy. Nevertheless, export performance for the euro area as a whole remains relatively weak.

To assist domestic demand, the European Central Bank has markedly reduced its benchmark interest rate since the onset of the global financial crisis, while the strength of fiscal policy response varied across individual countries. A number of countries, including Germany, Spain and the United Kingdom, introduced large stimulus packages to support their economies.

Economic recovery in Western Europe is assumed to be relatively modest in the next

few quarters mainly as a result of continued weak business investment and the effect of high unemployment on consumer spending. The unemployment rate in the euro area reached 10 per cent in December 2009. Ongoing problems in a number of regional housing markets, including Ireland, Spain and the United Kingdom, and fiscal problems in some member economies, such as Greece, could also affect the strength of economic recovery.

Against this backdrop, economic activity in Western Europe is assumed to increase by 1.1 per cent in 2010, after declining by 4 per cent in 2009. Economic growth is expected to strengthen to 1.7 per cent in 2011 and around 2.1 per cent a year over the medium term.

Economic prospects in AustraliaIn Australia, real gross domestic product, in seasonally adjusted terms, rose by 0.2 per cent in the September quarter 2009, following growth of 0.7 per cent in the June quarter. Economic activity in Australia has been underpinned by accommodative monetary and fiscal policy settings, with mineral resource exports also supported by strong import demand from the Asian region.

Purchasing Manager Indexes(PMI) in selected world economies

PMI

ChinaUnited StatesEuro zone

JapanUnited Kingdom

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

10

20

30

40

50

60

70

Economic overview


Key macroeconomic assumptions for Australia

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 a -11 a -12 a -13 a -14 a -15 a

Economic growth b % 3.7 1.2 1.5 3.0 4.0 4.0 4.0 4.0Inflation b % 3.4 3.1 2.3 2.3 2.5 2.5 2.5 2.5Interest rates c % pa 7.7 6.3 6.0 6.5 6.8 6.8 6.8 6.8Nominal exchange rates d– US$/A$ US$ 0.90 0.75 0.88 0.88 0.86 0.84 0.82 0.80Trade weighted index

for A$ e index 70 60 69 69 67 65 64 62

a ABARE assumption. b Change from previous period. c Large business weighted average variable rate on credit outstanding. d Average of daily rates. e Base: May 1970 = 100.Sources: Australian Bureau of Statistics; Reserve Bank of Australia; ABARE.

Looking forward, household spending is expected to remain resilient as consumer confidence has risen significantly. Conditions in the labour market have also improved, with the unemployment rate falling to 5.3 per cent in January 2010 from a recent high of 5.8 per cent in October 2009. Business surveys released recently suggest the improvement in labour market conditions is likely to continue.

Economic growth in Australia is assumed to average around 1.5 per cent in 2009-10, before strengthening to 3 per cent in 2010-11. Toward 2014-15, economic growth is assumed to increase further to an average rate of around 4 per cent a year, before easing back to levels that are more consistent with the longer-term growth potential of the Australian economy.

InflationInflationary pressures in Australia remain moderate. The consumer price index rose year on year by 2.1 per

cent in the December quarter 2009, after an increase of 1.3 per cent in the September quarter. Contributing most to the price rises in the December quarter were fruit (a rise of 15.9 per cent), domestic holiday travel and accommodation (6.6 per cent), house purchase (1 per cent) and rents (1 per cent). The most significant offsetting price falls were automotive fuel (a decline of 2.8 per cent), audio, visual and computing equipment (7.1 per cent) and pharmaceuticals (5.3 per cent).

Inflationary pressures in Australia are expected to remain moderate, with the inflation rate assumed to average 2.3 per cent in 2009-10 and 2010-11, before increasing to around 2.5 per cent toward 2014-15.

Australian economic indicators

6

%

1

2

3

4

5

8

7

economic growth

2008-09 2009-10 a 2010-11 a

inflation rateinterest rate b

b Large business weighted average variable rate on credit outstanding.

Economic overview


Australian exchange rateThe Australian dollar appreciated significantly both against the US dollar and on a trade weighted basis during the second half of 2009, before a partial reversal in early 2010. The Australian dollar was trading around US89c and TWI 70 in mid-February 2010, compared with US94c and TWI 71 in late 2009 and US79c and TWI 63 in mid-2009. For the first eight months of 2009-10, the Australian dollar is estimated to average around US88c and TWI 68. This compares with US75c and TWI 60 in 2008-09.

The recent appreciation of the Australian dollar appears to reflect a number of factors, including the improved outlook for global economic recovery, robust economic performance of Australia’s major trading partners in emerging Asia, particularly China, and stronger growth in the Australian economy relative to other major OECD economies.

Changes in financial market sentiment toward the US dollar appear to have also affected the recent movements in the Australian exchange rate. As the world economic outlook improved, financial market sentiment toward the US dollar as a safe haven appears to have retreated and weighed on the value of the US dollar, which has been declining against many other major international floating currencies.

The US dollar was trading around ¥90 and €0.73 in mid-February 2010, compared with ¥99 and €0.75 in early May 2009.

In the short term, the value of the Australian dollar is assumed to remain relatively high. There are a number of reasons underpinning this assessment. First, the assumed global economic recovery in 2010 and 2011 is expected to provide strong support for the demand for mineral resources and, hence, Australia’s minerals and energy exports. Second, Australian interest rates may rise more rapidly in the short term than in other major OECD economies given Australia’s advanced stage of the economic recovery. Australia’s prime lending rates are assumed to average 6.5 per cent in 2010-11 and 6.8 per cent in 2011-12, compared with an estimated 6 per cent in 2009-10.

Looking beyond the short term, there is a strong possibility that the value of the Australian dollar could ease gradually from the current highs. This would especially be the case if economic recovery in other major OECD economies, particularly the United States, gathers pace, leading to an improvement in their fiscal position and higher domestic interest rates. By that time, financial market sentiment toward the US dollar could also strengthen, which would place some downward pressure on the value of the Australian dollar.

US-Australian exchange rate

US$/A$

2010-11 f

2006-07

2002-03

1998-99

1994-95

2014-15 z

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Economic overview


Taking the above into account, the Australian dollar is assumed to average around US88c and TWI 69 in 2009-10 and US88c and TWI 69 in 2010-11, before moderating gradually to an average of US80c and TWI 62 by 2014-15.

There is considerable uncertainty surrounding the outlook for the Australian dollar. This is because movements in the Australian exchange rate can be significantly influenced by changes in financial market sentiment, leading to strong volatility in the Australian exchange rate. Over the past 12 months, the Australian dollar fluctuated from a low of US63c and TWI 54 in early March 2009 to a high of US94c and TWI 71 in mid-November 2009. Consequently, it remains important for primary producers and exporters to manage the risks associated with fluctuations in the Australian exchange rate.

Outlook for Australia’s commodity sector

Commodity export pricesThe index of unit export returns for Australian commodities, in aggregate, is forecast to rise by 10.4 per cent in 2010-11, following a forecast fall of 23.3 per cent in 2009-10. The forecast increase in 2010-11 largely reflects the effect on world commodity prices, especially energy and minerals, of an assumed recovery in world economic growth, which is expected to lead to a rise in world commodity demand.

For farm commodities, the index of unit export returns is forecast to fall by 1.3 per cent in 2010-11, after declining by a forecast 7.7 per cent in 2009-10. Forecast lower world indicator prices in 2010-11 for wheat, coarse grains and sugar are expected to be largely offset by expected higher prices for oilseeds, cotton, wool and dairy products.

Unit export returns for Australian mineral resources are forecast to rise by 12.6 per cent in 2010-11, following a forecast decline of 25.9 per cent in 2009-10. Unit returns for energy exports are forecast to rise by 15.7 per cent in 2010-11, compared with an expected decline of 37 per cent in 2009-10. Unit export returns for metals and other minerals are forecast to increase by 10.1 per cent in 2010-11, after falling by an expected 14.5 per cent in 2009-10.

Unit returns for Australian commodity exports are projected to ease gradually in real terms over the remainder of the outlook period. By 2014-15, the index of unit returns (in 2009-10 dollars) is projected to be around 4.4 per cent higher than its value in 2009-10.

Commodity export earningsThe value of Australia’s commodity exports is forecast to be around $186.8 billion in 2010-11, which is an increase of 15 per cent from a forecast $162.5 billion in 2009-10. The value of Australian commodity exports in real terms is projected to rise over the outlook period. By 2014-15, Australian commodity exports are projected to be around $211.4 billion (in 2009-10 dollars), which is 30.1 per cent higher than forecast for 2009-10.

Commodity outlook


Under the assumption of favourable seasonal conditions, export earnings from farm commodities are forecast to be $29.1 billion in 2010-11, which is a slight increase from a forecast $29.0 billion in 2009-10. Agricultural commodities for which export earnings are forecast to be higher in 2010-11 include barley, rice, raw cotton, sugar, wine, live cattle and dairy products. For forest and fisheries products, export earnings are forecast to be around $3.8 billion in 2010-11, which is around 5.2 per cent higher for 2009-10.

Over the medium term, the value of Australian farm exports is projected to be higher in real terms. Australian farm exports are projected to be $32.2 billion (in 2009-10 dollars) in 2014-15, which is an increase of 10.9 per cent from 2009-10.

Export earnings for Australian minerals and energy commodities are forecast to be around $154 billion in 2010-11, compared with a forecast $129.9 billion in 2009-10. For energy commodities, export earnings are forecast to rise by around 19.8 per cent to $66.1 billion in 2010-11, being largely driven by higher forecast prices for oil and coal. For metals and other minerals, export earnings are forecast to increase by around 17.6 per cent to $87.9 billion in 2010-11. A forecast increase in export volumes and higher expected prices for Australian iron ore are the main reasons for the forecast increase.

Under the assumption that world economic growth, and hence world commodity demand, recovers to be more consistent with its longer term potential beyond 2010-11, export earnings for Australian minerals and energy commodities in real terms are projected to rise over the medium term. By 2014-15, minerals and energy commodity exports are projected to increase to around $175.2 billion (in 2009-10 dollars). For metals and other minerals, export earnings in 2014-15 are projected to be around $97.3 billion (in 2009-10 dollars), while export earnings for energy commodities in 2014-15 are projected to be around $77.9 billion (in 2009-10 dollars).

Commodity outlook


worldpricevalue valuevolume

Major Australian commodity exportsWorld prices are in US$ for all commodities except beef and veal and wine which are in $A.For export value, annual forecasts are the sum of quarterly forecasts. As a result, annual averages for export values do not necessarily reflect variations in export volumes, world prices and exchange rates.

$b 10 3020 40

2010–112009–10 f2010–11 f

A$35.1b

A$30.5b

A$16.7b

A$12.8b

A$10.1b

A$7.7b

A$6.8b

A$5.7b

A$4.1b

A$4.1b

A$3.8b

A$3.5b

A$2.6b

A$2.5b

A$2.4b

A$2.3b

A$29.0b

A$23.5b

A$14.7b

A$11.1b

A$9.0b

A$7.2b

A$6.2b

A$4.6b

A$3.7b

A$4.2b

A$4.0b

A$3.0b

A$2.2b

A$2.4b

A$1.9b

A$1.7b titanium and zircon

lead

wine

zinc

nickel

wheat

beef and veal

aluminium

alumina

copper

LNG

crude oil

thermal coal

gold

metallurgical coal

iron ore and pelletsna

na

-6%

na

5%

na

11%

4%

7%

-3%

-6%

13%

11%

0%

11%

-1%

-

-

+

-

-

-

na

+

-

-

-

-

-

-

-

+

2%

2%

19%

6%

4%

4%

3%

7%

2%

2%

0%

2%

-1%

4%

13%

32%

21%

30%

13%

15%

12%

7%

10%

23%

10%

-2%

-4%

16%

16%

5%

26%

32%

Commodity outlook


2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Commodity exports Exchange rate US$/A$ 0.90 0.75 0.88 0.88 0.86 0.84 0.82 0.80

Value of exportsFarm A$m 27 530 32 052 28 997 29 073 29 997 31 966 34 072 36 311– real a A$m 29 057 32 803 28 997 28 413 28 608 29 742 30 929 32 158

Crops A$m 13 027 16 886 15 437 15 480 16 151 17 487 18 928 20 525– real a A$m 13 749 17 282 15 437 15 129 15 403 16 271 17 182 18 177

Livestock A$m 14 503 15 166 13 560 13 593 13 846 14 479 15 144 15 786– real a A$m 15 307 15 521 13 560 13 284 13 205 13 471 13 747 13 980

Forest and fisheries products A$m 3 813 3 872 3 650 3 788 4 120 4 349 4 520 4 634– real a A$m 4 025 3 963 3 650 3 702 3 929 4 047 4 103 4 104

Mineral resources A$m 117 635 161 526 129 868 153 973 167 132 177 819 186 793 197 808– real a A$m 124 158 165 311 129 868 150 479 159 395 165 450 169 562 175 181

Energy minerals A$m 45 591 77 892 55 151 66 087 71 867 76 255 80 360 87 928– real a A$m 48 120 79 717 55 151 64 587 68 540 70 951 72 947 77 870

Metals and other minerals A$m 72 043 83 634 74 717 87 886 95 265 101 563 106 434 109 881– real a A$m 76 039 85 593 74 717 85 892 90 855 94 499 96 615 97 311

Total commodities A$m 148 978 197 450 162 466 186 834 201 249 214 133 225 385 238 754– real a A$m 157 240 202 076 162 466 182 595 191 932 199 239 204 594 211 443

Farm sectorFarmers’ terms of trade index 101.9 98.9 100.0 96.5 95.3 95.2 95.6 95.6Gross value of farm prodn b A$m 43 786 42 025 40 711 41 054 42 489 44 437 46 438 47 889– real a A$m 46 215 43 010 40 711 40 123 40 522 41 346 42 154 42 411

Crops A$m 24 272 22 753 22 301 22 520 23 396 24 543 25 656 26 448– real a A$m 25 618 23 286 22 301 22 009 22 313 22 835 23 290 23 422

Livestock A$m 19 514 19 272 18 410 18 534 19 094 19 894 20 781 21 442– real a A$m 20 596 19 723 18 410 18 114 18 210 18 510 18 864 18 989

Net value of farm production A$m 6 649 5 697 5 597 4 756 4 573 4 920 5 314 5 428– real a A$m 7 018 5 830 5 597 4 649 4 361 4 578 4 824 4 807

Volume of farm production index 97.3 101.1 100.0 102.5 104.8 107.2 109.2 111.0– crops index 90.7 98.9 100.0 104.6 108.3 111.5 113.8 116.1– livestock index 105.2 103.6 100.0 100.1 101.1 102.7 104.3 105.6

Minerals and energy sectorVolume of mine production index 95.9 96.6 100.0 108.3 113.2 116.8 120.2 124.8– energy index 94.8 99.0 100.0 109.7 114.2 118.5 121.9 128.1– metals and other minerals index 96.8 94.0 100.0 107.1 112.4 115.3 118.7 122.0

Gross value of mine prodn A$m 112 929 155 065 124 673 147 814 160 447 170 706 179 322 189 896– real a A$m 119 192 158 698 124 673 144 460 153 019 158 832 162 779 168 174

a In 2009-10 Australian dollars. b For a definition of the gross value of farm production see table 21. f ABARE forecast. z ABARE projection.Note: ABARE revised the method for calculating farm price and production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chained weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources: Australian Bureau of Statistics; ABARE.

Major indicators of Australia’s commodities sector

Commodity outlook


Crops

GrainsOutlook for wheat, coarse grains and oilseeds to 2014-15

James Fell, Daniel Mackinnon and Henry To

Short-term outlookWorld grain prices to decline in 2010-11Despite a forecast modest increase in global demand for wheat in 2010-11, relatively large global wheat supplies (production plus stocks) are expected to place downward pressure on prices. The world wheat indicator price (US hard red winter, fob Gulf) is forecast to fall by 6 per cent in 2010-11 to average US$196 a tonne, following a forecast decline of 23 per cent in 2009-10.

World coarse grain prices are also forecast to decline in 2010-11. Higher world production, leading to larger stocks, is forecast to offset an increase in global consumption driven by higher ethanol production. The world indicator price (US corn, fob Gulf) for coarse grains is forecast to average US$157 a tonne in 2010-11 over the September to August marketing year. This compares with a forecast of US$161 a tonne in 2009-10.

In contrast to grain prices, the world oilseed indicator price (soybeans, cif, Rotterdam) is forecast to rise by 4 per cent in 2010-11 to average US$365 a tonne. Steady soybean demand and reduced soybean production is forecast for 2010-11, which is expected to place upward pressure on prices.

World grains prices

oilseeds

wheat

coarse grains

2009-10$US/t

100

200

300

400

500

2014-15 z

2012-13 z

2010-11 f

2008-09

2006-07

2004-05

2002-03

2000-01

1998-99

1996-97

1994-95

1992-93

1990-91


World productionWheat production to fall in 2010-11World wheat production is forecast to decline in 2010-11, which reflects expected lower plantings, particularly in the United States. Average yields in 2010-11 are expected to be lower, which is also expected to contribute to lower global wheat production. World wheat production is forecast to fall by around 2 per cent in 2010-11, to 656 kilotonnes.

In the United States, the total area seeded for the 2010-11 winter wheat crop is reportedly down 14 per cent on 2009-10, with area planted to spring and winter wheat forecast to fall by 2.5 million hectares, to 18 million hectares. A key factor contributing to reduced plantings was the slow 2009 corn and soybean harvest, which considerably delayed and reduced winter wheat plantings in some states. The fall in winter wheat area is not expected to be offset by an increase in spring wheat area since spring wheat is typically grown in a belt from Minnesota to Washington, whereas corn and soybeans are typically grown in the Midwest. There is some overlapping of soybean, corn, winter wheat and spring wheat planting areas in North Dakota, South Dakota and Minnesota. The areas planted to spring wheat in these states are not expected to increase significantly. Yields of winter wheat are expected to be slightly higher for 2010-11, because of heavy winter snowfalls which will initially provide new plants with insulation against cold temperatures and wind erosion, then provide beneficial moisture in the spring.

Another factor expected to lead to a reduced total area seeded of wheat in the United States is the build-up of US wheat stocks. US wheat stocks rose by 24 per cent in 2009 and export volumes have fallen by approximately 28 per cent for the 12 months to January 2010, with US export volumes for 2009-10 expected to be the lowest in 30 years.

China is the world’s biggest producer of wheat and is expected to account for around 17 per cent of global production in 2009-10. Chinese wheat production has risen each year since 2003-04. Despite dry conditions in northern China in early 2009, the 2009-10 production and yields exceeded those of the previous year as a result of sufficient precipitation in late winter and early spring. In 2010-11 the area planted to wheat is forecast to remain largely unchanged at around 23.6 million hectares.

The area sown to wheat in the Black Sea region is forecast to be approximately 2 per cent higher in 2010-11. However, production is forecast to be largely unchanged as yields are expected to be lower. Producers benefited from above average yields in the past two years as a result of lower frost damage. In past years, producers in the Russian Federation received price support through state grain procurement and this influenced the area of wheat planted. However, recent government purchases have been small and a new program of support to farmers is to be developed. The scope of future areas planted to wheat in the Russian Federation will be affected by the outcome of this new program.

On average, India plants more area to wheat than any other country. Winter wheat plantings for the 2010-11 crop are reportedly down 1.5 per cent for the period October 2009 to January 2010. High government wheat stocks and a smaller increase in the government’s minimum support

Grains


price compared with previous years may have contributed to this decline. As at 1 January 2010, wheat stocks were 23 million tonnes, nearly three times the government’s target level. In November 2009, the government increased the minimum support price by 2 per cent for 2010-11 to 11 000 rupees a tonne, which is equivalent to around US$240 a tonne.

Coarse grains production to rise in 2010-11World coarse grains production is forecast to increase to more than 1.1 billion tonnes in 2010-11. The forecast increase is driven by expected higher corn production, partially offset by lower barley production. Carryover stocks from the previous season are expected to maintain global supplies at record levels of nearly 1.3 billion tonnes.

After the slowest and wettest harvest in 30 years, it is estimated that the United States will produce a record corn crop of 334 million tonnes for the 2009-10 season. In 2010-11, it is forecast that the area planted to corn will exceed last season’s area. Winter wheat plantings in the United States for the 2010-11 season have declined and should result in greater available land for summer cropping. Assuming average yields, corn production in the United States is forecast to be slightly lower than last season’s record production.

In China, the area planted to corn is forecast to rise in 2010-11 after drought affected production in 2009-10. Corn production in China in 2009-10 was well below earlier expectations and totalled 155 million tonnes. In late 2009, the Chinese Government approved for the first time the use of particular strains of genetically modified corn which can potentially increase yields. Chinese corn yields are significantly below those achieved by the United States.

In South America, Brazil is also forecast to increase its area planted to corn in 2010-11. Production in Brazil is forecast to reach 52 million tonnes in 2010-11, assuming average yields. Argentina is forecast to increase its corn area as a result of export restrictions being eased by the Argentinean Government in September 2009. There were increased plantings of soybeans in 2009-10 because export restrictions did not apply to soybeans.

World barley production is forecast to decline in 2010-11 as lower prices last season and lower relative returns compared with wheat and other crops reduced barley plantings. The European Union, the world’s largest barley producer, is forecast to reduce its barley planting area in 2010-11. The European Union’s second largest producer, France, has reduced its winter barley planting area by 5 per cent compared with 2009-10. EU barley production is forecast to fall in 2010-11.

The Black Sea region has established itself as a major exporter in the world barley market in recent years with production and trade steadily rising in the Russian Federation and Ukraine. Planting of winter barley for the 2010-11 season has been completed in these countries and early reports show a rise in the winter barley area. In 2010-11, barley production in the Russian Federation is expected to rise assuming favourable weather conditions and a recovery in yields which were affected by drought in the lead up to last season’s harvest. In Ukraine, dry conditions in late 2009 have raised concerns about the potential effect on yields.

Grains


Oilseeds production to fallIn 2010-11, world oilseed production is forecast to fall by 2 per cent to 425 million tonnes because of reduced soybean production. The effect of this forecast reduction in soybean production is expected to be partially offset by a rise in the production of other oilseeds (including canola).

In the United States, the world’s largest soybean producer, unfavourable early spring weather during the 2009-10 planting period in key grain growing areas delayed both soybean and corn plantings. However, conditions improved and the wider planting window available for soybeans resulted in significant late soybean plantings rather than corn. Overall, the area planted to soybeans increased by 17 per cent in 2009-10. In 2010-11, the area sown to soybeans is forecast to fall slightly, leading to lower soybean production in the United States.

In South America, the soybean harvest is just underway. Increased soybean areas sown and above average yields are forecast to lift both Brazilian and Argentinean production to new records in 2009-10. In particular, Argentina’s production is forecast to increase by around 66 per cent from the drought affected harvest in 2008-09, with the area sown increasing to a record 18.8 million hectares. In response to forecast lower oilseed prices in 2009-10, the area sown to soybeans in Argentina and Brazil in 2010-11 is forecast to fall, leading to reduced soybean production in those countries.

In Canada, the largest canola exporter by volume, the effect on production of an increase in canola area sown is forecast to be mostly offset by a return to more average yields. Consequently, production is forecast to be largely unchanged in 2010-11. Yields in 2009-10 were the second highest on record at 1.9 tonnes a hectare, which was slightly lower than the previous year’s record and around 12 per cent higher than the five year average to 2008-09.

Canola production in China and the European Union increased to new highs in 2009-10 on the back of record yields. Additionally, in the European Union, a record area was sown. Relatively high canola prices, driven by relatively high vegetable oil prices, are forecast to result in a larger area planted to canola in China in 2010-11.

Because of this, combined with an improvement in canola yields, Chinese canola production is forecast to increase further in 2010-11. World canola production is forecast to rise in 2010-11 by 4 per cent to 62 million tonnes.

Palm oil production in Indonesia, the world’s largest palm oil producer, is forecast to increase further in 2010-11. Following Indonesia’s considerable investment in plantations and processing facilities over the past decade, palm oil production has risen from around 8.3 million tonnes in 2000-01 to around 20.8 million tonnes in 2009-10. The expansion of trade in palm oil has grown by around 11 per cent a year over the past five years.

Grains


World consumptionWorld wheat consumption to rise in 2010-11World wheat consumption is forecast to rise in 2010-11 to 650 million tonnes. Wheat for human consumption has been increasing at around 1 per cent each year. Increases in world wheat consumption in the past five years have been driven predominantly by increased demand for livestock feed. However, in 2010-11, feed wheat consumption is forecast to remain largely unchanged at 102 million tonnes. The biggest consumers of feed wheat are the European Union, consuming 54 million tonnes in 2009-10, and the Russian Federation, at 14 million tonnes. Livestock numbers in the European Union are reported to be down in 2009-10, which is expected to limit growth in the consumption of feed wheat in 2010-11.

Ethanol to drive coarse grains demand in 2010-11World coarse grains consumption is forecast to increase to slightly more than 1.1 billion tonnes in 2010-11. This increase reflects greater utilisation of corn for ethanol production in the United States, but is expected to be partially offset by an overall decline in demand for feed grains in the United States and the European Union.

Production of ethanol, the main biofuel in the United States, has been driving growth in global coarse grains consumption in recent years. As part of the Energy Independence and Security Act 2007, the Renewable Fuel Standard (RFS) has mandated ethanol production in 2010 at 13 billion gallons (49 billion litres) and in 2011 at 14 billion gallons (53 billion litres). The volume of corn used to produce ethanol is estimated to be around 109 million tonnes in 2009-10.

In 2010-11, feed grains consumption in the United States is forecast to decline as livestock numbers continue to fall. In December 2009, the US Department of Agriculture estimated the number of cattle on feed was 1 per cent lower than in the same period a year earlier. The US hogs and pig inventory was down 2 per cent over the same period. Similarly, meat demand and livestock numbers have also declined in the European Union, which is forecast to lead to a reduction in feed barley consumption in 2010-11.

In contrast, developing countries, particularly in Asia, are forecast to increase feed grains consumption. A positive economic outlook, particularly in east Asia, is expected to lead to higher incomes and increased demand for meat and thereby greater feed grain requirements for livestock. Feed grains consumption in China, the fastest growing economy in the region, is forecast to continue to rise in 2010-11, although China is not currently a major trader in feed grains.

Higher oilseed demand in 2010-11World oilseed consumption is forecast to increase by 7 million tonnes in 2010-11, as the demand for vegetable oils and protein meals (by-products from the crushing of oilseeds) increases. Consumption of vegetable oils is forecast to increase by 6 million tonnes in 2010-11, while oilseed meal consumption is forecast to increase by 3 million tonnes.

The use of vegetable oil for industrial purposes (primarily biodiesel) has increased from 8.9 million tonnes in 2000-01 to an estimated 27.1 million tonnes in 2009-10. The increase has been the

Grains


result of government mandated blending targets in many world economies. In 2010-11, the use of vegetable oil in biodiesel production is forecast to increase in response to higher mandatory blending targets in the European Union, Brazil, Colombia and Thailand.

With an assumed improvement in world economic growth, the demand for oilseed meal, which is a widely used high protein feed for livestock, is forecast to rise in 2010-11. China is one of the largest consumers of oilseed meal, with consumption increasing by around 7 per cent a year over the past decade. This has coincided with China’s rapid expansion of its livestock sector. Assuming this growth continues, world consumption of oilseed meal is forecast to increase in 2010-11. This is despite a forecast reduction in soybean meal consumption in the European Union and the United States.

World tradeThe Baltic dry index is the world indicator for ocean freight rates and has declined significantly from the heights achieved in May 2008. In that month, the ocean freight rate peaked at 10 844 but fell below 1000 later that year as the onset of the global economic downturn adversely affected world trade. Since late 2008, the Baltic dry index has recovered to average more than 3000 in February 2010. Freight rates are expected to remain at these levels for 2010-11.

World wheat trade is forecast to be largely unchanged at around 117 million tonnes in 2010-11. In the past two years, the world’s biggest wheat net importers have been Brazil, Indonesia, Iran, Iraq, Japan, Mexico, Nigeria and the Republic of Korea. In aggregate, volumes of wheat imported by these countries are projected to remain steady in 2010-11.

The world’s major wheat exporters are Australia, Canada, the European Union, the United States and the Russian Federation. In the past, Argentina has also been a big contributor to world wheat exports. However, exports of wheat from Argentina have continued to fall since 2006-07. Estimated exports of wheat from Argentina in 2009-10 are 70 per cent lower than those for 2008-09, and more than 80 per cent less than those recorded in 2004-05. Recently Argentinean producers have been affected by drought, in addition to a tax on exported wheat. These factors have adversely affected domestic wheat production.

Wheat exports from the United States, the world’s biggest exporter, are estimated to be the lowest in 30 years in 2009-10. US exporters have been struggling, with producers in the Black Sea region benefiting from freight and logistics advantages, particularly to the Middle East. US wheat exports are forecast to remain low in 2010-11 as a result of the lower winter wheat area sown. The reduction in US exports is expected to be offset by increased exports from the Black Sea region.

Total global coarse grains trade in 2010-11 is forecast to rise from last season as increased corn trade is forecast to more than offset a decline in barley trade. Relatively large corn supplies in South America are forecast to place pressure on corn exports from the United States. Feed grain demand in east Asia is forecast to increase compared with last season. In 2010-11, world corn trade is forecast to rise to 87 million tonnes, which is 3 million tonnes more than last season. World barley trade is forecast to decline as a result of lower world supplies.

Grains


The volume of world soybean trade is forecast to rise in 2010-11 in line with an increase in exportable supplies from South America. This is despite a forecast reduction in exports from the United States in 2010-11 because of forecast lower soybean production. In the first half of 2009-10, China has become increasingly dependent on soybean imports from the United States as the usual supply from Brazil and Argentina fell because of lower carryover stocks in these countries. As such, the total volume of imports from the United States is expected to reach a new record in 2009-10. In 2010-11, import demand by China is forecast to rise in line with stagnant domestic soybean production and growing demand for soybean products.

World stocksWorld wheat stocks are projected to increase in 2010-11 to 203 million tonnes. This is an increase of 3 per cent on 2009-10 stocks, but 2 million tonnes less than the record in 1999-2000. The stocks to use ratio for 2010-11 is forecast to be 31 per cent. The recent increase in world wheat stocks has arisen from the combination of producers responding to historically high prices and weaker growth in consumption because of the world economic downturn.

Stocks of wheat held by the major exporters, Australia, Canada, the European Union, the Russian Federation and the United States, have been trending up since 2007-08, as production recovers.

World coarse grains stocks are forecast to increase by 1 per cent to 182 million tonnes in 2010-11 driven by higher production in China and Brazil. Corn stocks in the United States are forecast to decline slightly, which reflects increased ethanol production. World barley stocks are forecast to remain largely unchanged in 2010-11 with lower forecast production matching forecast lower consumption.

World end of season oilseed stocks are forecast to decline by 9 million tonnes in 2010-11, to 52 million tonnes. Since 2000-01, the majority of the world’s oilseed stocks have been held by Brazil and Argentina. Combined stocks in these two countries have increased from 20 million tonnes in 2000-01 to around 41 million tonnes in 2009-10. In 2010-11, stocks are forecast to fall slightly in Brazil and Argentina, largely in response to strengthening import demand by China.

Australian production and exportsThe area planted to grain sorghum in 2009-10 is estimated to have declined significantly to around 429 000 hectares, which is around 43 per cent lower than in 2008-09. This decline is a result of insufficient rainfall over the summer cropping regions at the time of planting. The planting window for grain sorghum has closed in northern New South Wales and southern Queensland and is approaching closure in central Queensland. Production is forecast to be around 1.3 million tonnes in 2009-10.

Winter crops area to decline in 2010-11Although 2009-10 winter crop production was higher than the 2008-09 season, yield and quality results were highly varied between and within regions. Wheat yields in Victoria and South Australia were 52 per cent and 51 per cent above the respective five year averages, while New South Wales

Grains


and Queensland yields were below. Total wheat production increased by 3 per cent across Australia to 21.7 million tonnes, largely as a result of increased production in Victoria and South Australia.

The area planted to wheat in 2010-11 is forecast to be marginally lower at around 13.7 million hectares. The area planted to barley is forecast to decline by around 2 per cent to 4.4 million hectares.

Australian wheat exports in 2010-11 are forecast to be around 13.9 million tonnes, largely unchanged from 2009-10. Export earnings from wheat are forecast to be around $3.8 billion in 2010-11, which is a fall of 4 per cent from 2009-10.

Medium-term outlookOver the medium term, there are a number of factors that are expected to support world grain prices. In particular, increased demand for grains, because of higher biofuels production and higher feed demand for grains, is likely to boost prices. Although crop yield improvements are projected over the medium term, particularly for corn, these increases are not expected to fully offset the increase in demand, leading to a gradual decline in stocks in the next few years. The biggest contributor to improvements in average yields is expected to be China through the greater adoption of genetically modified crops.

Since 2007-08, global grain stocks have increased significantly and this has placed downward pressure on world grains prices. As consumption rises over the outlook period, the stocks to use ratio for grains and oilseeds is projected to fall gradually. For example, the wheat stocks to use ratio is projected to fall from 31 per cent in 2010-11 to 27 per cent by 2014-15. The oilseeds stocks to use ratio is projected to fall from 12 per cent to 9 per cent over the same period.

World demandGrowth in world demand for grains over the outlook period is expected to increase in line with population growth, rising incomes and increased feed and industrial (mainly biofuel) demand. Most noticeably will be demand growth derived from increased production of biofuels and rising feed demand. The projected increase in oil prices over the medium term is expected to increase the substitution of biofuel for petroleum. As world incomes rise, especially in developing countries, demand for feed grains will rise as a result of increased livestock production.

Currently around 70 per cent of total world wheat use is for human consumption. This proportion is expected to fall over the medium term as demand for livestock feed increases. By 2014-15, the proportion of wheat consumed as feed is projected to rise by around 1 per cent, or around 11 million tonnes, to 16 per cent.

Increasing biofuels production, driven by transport fuel mandates in a number of countries, is expected to be the main source of growth in consumption of coarse grains and oilseeds, reaching nearly 1.2 billion tonnes and 495 million tonnes, respectively, by 2014-15. However, the extent to which coarse grains and oilseed consumption rise over the short to longer term

Grains


is also dependent on the development of alternative feedstock in biofuel production and any further changes in government policies toward biofuels around the world.

Demand driven by biofuel expansionThe majority of the world’s biofuels production is concentrated in the United States, the European Union and Brazil. Ethanol is the primary biofuel produced in the United States and Brazil, with corn as the main feedstock in the United States and sugar cane in Brazil. The European Union mainly focuses on production of biodiesel. Since 2000, the use of coarse grains and oilseeds for biofuel production has increased by 50 per cent and 300 per cent, respectively.

In line with the European Union’s mandatory biodiesel target of 10 per cent by 2020, several EU countries, including France, Spain, Italy, the Netherlands, Poland and Hungary, are planning to introduce higher mandatory blending requirements in 2010. A large part of this growth in biodiesel consumption is expected to be met by increased imports, mainly of Argentine soya methyl ester and palm oil based biodiesel from Indonesia and Malaysia.

United States driving coarse grains consumptionThe United States has seen a rapid expansion in its ethanol industry with distillery capacity more than doubling from nearly 25 billion litres at the beginning of 2007 to 58 billion litres at the beginning of 2010. The capacity is expected to rise further as many ethanol plants are currently under construction. However, the industry experienced difficulties in late 2008 and early 2009 as a result of the economic downturn and the significant decline in world oil prices. Some ethanol plants were left idle and some consolidation of the industry took place. After the recent recovery in world oil prices, the prospects in the ethanol sector have subsequently improved.

The current Renewable Fuel Standard (RFS) sets the 2010 and 2011 mandates at 13 billion gallons (49 billion litres) and 14 billion gallons (53 billion litres), respectively, and increases the mandate to 36 billion gallons (136 billion litres) by 2022. However, only 15 billion gallons (57 billion litres) of corn based ethanol can count toward the mandate and this is expected to be reached by the end of 2015. It is estimated that approximately 137 million tonnes of corn will be required to produce this volume of ethanol. The remaining 21 billion gallons (79 billion litres) of the mandate must be met from cellulosic ethanol which uses feedstocks other than corn starch.

In response to increased ethanol production, the availability of distillers grains has been increasing in the United States and reached 23 million tonnes in 2008, compared with 2.7 million tonnes in 2000 (according to the Renewable Fuels Association). The Food and Agricultural Policy Research Institute projects that US production of distillers grains will reach

EU industrial use of vegetable oil

rapeseedsoybeanpalmother

Mt

2

4

6

8

10

2009-10 f

2007-08

2005-06

2003-04

2001-02

1999-2000

Grains


40 million tonnes by 2014-15 with domestic use increasing to 33.5 million tonnes. There is also potential for increased US exports of distillers grain. The major markets for US distillers grains are Mexico, Canada and Turkey, while the fastest growing markets are China and other east Asian economies where livestock numbers are growing. US exports of distillers grains to Asia are projected to grow substantially into the medium term.

World supplyThe past few decades have seen production of grains steadily increase, while the area planted has been largely unchanged at around 547 million hectares. However, the area planted to oilseeds

has almost doubled since 1980-81. Over the medium term, world area planted to wheat is projected to remain largely unchanged at around 223 million hectares by 2014-15.

In contrast to wheat, the global area planted to coarse grains is projected to increase to 324 million hectares by the end of the projection period, compared with the 309 million hectares planted in 2009-10. More land is expected to be planted to coarse grains, particularly corn, which reflects the projected increase in feed and industrial demand.

Wheat and coarse grains production has been increasing by an average of 2 per cent a year since 1980-81, while oilseeds production has been increasing by nearly 4 per cent a year over the same period. Over the projection period, production of grains and oilseeds are expected to continue rising with productivity and yield improvements. Wheat production is projected to increase to 680 million tonnes by 2014-15, coarse grains to 1.2 billion tonnes and oilseeds to 492 million tonnes.

The rise of South American productionThere has been a substantial increase in the area under crops in South America over the past 30 years. In particular, soybean area has increased to more than 23 million hectares in Brazil in 2009-10 compared with 9 million hectares in 1979-80. Over the same period, Argentina’s soybean area has increased from 3.5 million hectares to nearly 19 million hectares.

These increases in area and production have affected world grains and oilseeds markets. Brazil and Argentina are now the world’s second and third largest exporters of corn and soybeans behind the United States, respectively. With further increases in production anticipated throughout the projection period, Argentina and Brazil are expected to compete strongly on world markets.

The potential for Brazil and Argentina to further extend their influence on the world grains and oilseeds market is substantial, and is driven by the potential availability of land for cropping and continued increases in productivity. Further development of infrastructure, particularly transport, in these countries would significantly enhance their competitiveness.

US corn utilisation for ethanol

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Grains


Strong competition from the Black Sea region The Russian Federation and Ukraine experienced difficulty in re-establishing their agricultural infrastructure and systems of production during the 1990s. The implementation of reforms has resulted in the emergence of these countries as major exporters in the world grains markets in recent years. In the Russian Federation, wheat production was the second highest on record at 62 million tonnes in 2009-10. This compares with an average of just 37 million tonnes throughout the 1990s. Grains production in Ukraine has also increased significantly. Wheat production in Ukraine averaged 23 million tonnes a year in the past two seasons, compared with an average of 15 million tonnes in the 10 years to 2008-09.

As production increased, exportable supplies of grains have risen in the Russian Federation and Ukraine. As a share of world wheat trade, these two countries now account for 15 per cent and 7 per cent, respectively, compared with a combined share of 2 per cent in 1999-2000. For barley, these two countries now account for more than 47 per cent of world exports, compared with 5 per cent in 1999-2000. The quality of Black Sea wheat and barley is generally lower than those produced in the United States and Australia. However, Black Sea grains are highly price competitive and have begun to gain market share from traditional exporters, particularly from the United States. The major destinations for Black Sea grains are the Middle East and North Africa. Traditional exporters are likely to face increased competition from the Black Sea area in the foreseeable future.

Australian medium-term outlookOver the five years to 2014-15, the area sown to grains and oilseeds is projected to average around 23.5 million hectares, compared with an average of 22.5 million hectares over the 10 years to 2009-10.

Since the 1990s, there has been an increase in the area under cropping, especially in the wheat-sheep zone. Over the medium term, competition for land in the wheat-sheep zone is expected to increase because sheep prices are projected to be relatively high. The Australian

South American soybean exports and area

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Brazil exports (left axis) Argentina exports (left axis)

Brazil area (right axis) Argentina area (right axis)

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Grains


sheep flock is projected to increase from the 68 million head in 2009-10 to 72 million head in 2014-15. However, the sheep flock size remains significantly below the 110 million head in the early 2000s.

Production of grains and oilseeds is projected to reach 43 million tonnes by 2014-15, under the assumption of favourable seasonal conditions. Increases in production are projected to be the result of increases in area sown and higher yields partly because of improved productivity. Measured by ABARE’s total factor productivity index, productivity growth in the cropping industry averaged around 1.9 per cent a year between 1977-78 and 2007-08. Over the same period, output growth was 2.1 per cent a year and input growth was 0.2 per cent.

Share of world wheat trade

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%

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20

ArgentinaUnited StatesRussian Federation and Ukraine

CanadaAustralia

European Union 27 other

2009-10 f2008-092007-082006-072005-062004-052003-04

Grains


Wheat outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

WorldArea million ha 216 223 224 221 222 222 223 223Yield t/ha 2.82 3.08 2.99 2.97 2.99 3.02 3.03 3.05Production Mt 609 687 668 656 663 670 675 680Consumption Mt 614 639 642 650 660 671 682 693Closing stocks Mt 118 165 197 203 206 205 198 186Trade Mt 110 136 119 117 119 121 123 125Stocks to use ratio % 19.3 25.8 30.7 31.3 31.2 30.5 29.1 26.8Trade to use ratio % 17.9 21.2 18.5 18.0 18.0 18.0 18.0 18.0Price a– nominal US$/t 362 271 209 196 190 195 200 210– real b US$/t 370 273 209 193 184 184 185 190

AustraliaArea ’000 ha 12 578 13 151 13 788 13 747 13 747 13 802 13 857 13 913Yield t/ha 1.08 1.59 1.57 1.60 1.64 1.69 1.74 1.80Production kt 13 569 20 938 21 656 21 940 22 600 23 370 24 165 24 990Export volume kt 7 408 13 410 13 874 13 886 14 432 15 931 17 138 17 418Export value– nominal A$m 2 990 5 028 3 988 3 836 3 922 4 466 5 047 5 617– real c A$m 3 156 5 146 3 988 3 749 3 741 4 155 4 582 4 975APW 10 net pool return d– nominal A$/t 423 324 252 235 240 245 260 275– real c A$/t 446 332 252 230 229 228 236 244

a US hard red winter wheat fob Gulf, July–June. b In 2009-10 US dollars. c In 2009-10 Australian dollars. d Australian premium white wheat, 10 per cent protein. From 2009-10, the pool return is an estimated average across the major companies offering grain pools. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; International Grains Council; US Department of Agriculture; ABARE.

Grains


Coarse grains outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

WorldArea million ha 318 313 309 315 318 320 322 324Yield t/ha 3.39 3.51 3.54 3.56 3.58 3.61 3.63 3.64Production Mt 1 076 1 100 1 094 1 120 1 140 1 155 1 170 1 180Consumption Mt 1 056 1 073 1 100 1 118 1 135 1 152 1 170 1 185Closing stocks Mt 160 189 180 182 185 186 184 180Trade Mt 127 107 110 113 114 116 117 118Stocks-to-use ratio % 15.12 17.66 16.39 16.28 16.32 16.13 15.71 15.22Price a– nominal US$/t 218 173 161 157 155 160 165 170– real b US$/t 223 175 161 155 150 151 153 154

Australia Area

barley ’000 ha 4 902 4 790 4 479 4 412 4 440 4 480 4 510 4 540oats ’000 ha 1 238 856 919 910 912 915 917 920triticale ’000 ha 360 355 350 352 355 357 360 362sorghum ’000 ha 942 754 429 480 545 590 640 685maize ’000 ha 68 70 65 69 70 71 72 75total ’000 ha 7 510 6 825 6 242 6 223 6 323 6 414 6 498 6 582

Productionbarley kt 7 159 7 669 8 048 7 950 8 070 8 240 8 440 8 590oats kt 1 503 1 205 1 244 1 245 1 263 1 280 1 296 1 315triticale kt 450 503 545 552 558 565 572 579sorghum kt 3 790 2 671 1 256 1 392 1 572 1 692 1 845 1 984maize kt 387 368 305 314 325 335 346 357total kt 13 289 12 416 11 398 11 453 11 788 12 111 12 498 12 824

Domestic use c kt 7 363 5 779 5 137 5 245 5 479 5 652 5 856 6 116

Export volume kt 4 429 5 560 4 968 4 951 4 998 5 083 5 153 5 224Export value

– nominal A$m 1 620 1 820 1 379 1 287 1 293 1 326 1 365 1 405– real d A$m 1 710 1 862 1 379 1 257 1 233 1 234 1 239 1 244

Price – nominalfeed barley e A$/t 308 227 190 185 189 195 201 207malting barley e A$/t 350 290 209 205 210 217 223 230grain sorghum A$/t 258 206 213 212 216 223 230 236

Price – real dfeed barley A$/t 325 232 190 181 180 181 182 183malting barley A$/t 369 297 209 200 200 201 202 203grain sorghum A$/t 272 211 213 207 206 207 208 209

a US corn, fob Gulf, September–August. b In 2009-10 US dollars. c Includes changes to stocks. d In 2009-10 Australian dollars. e Gross unit pool returns to Australian growers. f ABARE forecast. z ABARE projection.Sources: US Department of Agriculture; ABARE.

Grains


Oilseeds outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

WorldOilseedsProduction Mt 392 395 432 425 445 464 479 492Consumption Mt 400 400 426 433 447 465 481 495Closing stocks Mt 62 56 61 52 50 49 47 44Indicator price a US$/t 549 421 350 365 368 370 380 390– real b US$/t 562 425 350 360 355 350 352 353

Protein mealsProduction Mt 231 229 247 249 256 265 273 281Consumption Mt 230 228 246 248 256 265 274 281Closing stocks Mt 7 6 8 8 8 8 8 8Indicator price c US$/t 445 385 330 326 314 320 330 340– real b US$/t 455 389 330 321 304 303 306 308

Vegetables oilsProduction Mt 128 132 139 145 151 158 165 172Consumption Mt 125 129 139 145 150 158 165 172Closing stocks Mt 10 12 12 12 12 12 11 11Indicator price d US$/t 1 327 826 833 940 990 1 025 1 055 1 045– real b US$/t 1 358 834 833 927 956 970 977 947AustraliaTotal production kt 1 577 2 561 2 586 2 457 2 709 2 902 2 992 3 113Winter kt 1 241 1 877 1 923 1 618 1 669 1 739 1 805 1 901Summer kt 337 684 663 838 1 040 1 162 1 187 1 212

CanolaArea ’000 ha 1 277 1 670 1 394 1 352 1 385 1 420 1 450 1 490Production kt 1 214 1 861 1 910 1 605 1 655 1 725 1 790 1 885Export volume e kt 472 1 067 1 242 1 011 1 043 1 087 1 128 1 188Export value e– nominal $m 289 636 564 478 495 518 547 576– real g $m 305 651 564 467 472 482 496 510Price h A$/t 696 525 420 443 445 447 455 465– real g A$/t 734 538 420 433 425 416 413 412

SunflowersArea ’000 ha 48 43 34 37 39 43 45 50Production kt 73 80 48 49 52 55 60 65Exports i kt 2 2 4 2 2 3 3 3Price j A$/t 868 550 442 477 480 485 500 515– real g A$/t 916 563 442 466 458 451 454 456

a Soybean, cif Rotterdam, October–September basis. b In 2009-10 US dollars. c Soybean meal, cif Rotterdam, 45 per cent protein.d Soybean oil, Dutch, fob ex–mill. e Marketing year: November–October. g In 2009-10 Australian dollars. h Delivered Melbourne, November–October. i Marketing year, April–March. j Delivered Sydney, April–March. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.

Grains


SugarOutlook to 2014-15

Max Foster

Short-term outlook: 2009-10 and 2010-11World sugar prices to peak in 2009-10The world indicator price for sugar (Intercontinental Commodities Exchange no.11 spot, fob Caribbean) is forecast to average US23.1 cents a pound in 2009-10, which is US7.2 cents a pound higher than 2008-09, and the highest in real terms since 1989-90. The high prices result from a significant decline in world sugar stocks caused initially by a poor 2009 monsoon in India and exacerbated by the adverse effect on cane and sugar yields of too much rain in Brazil in the latter part of 2009. If the reduced world supply situation is eased by increased production in 2010-11, as is currently expected, the world indicator price for sugar is forecast to decline to US19.2 cents a pound in 2010-11.

At 17 February 2010, the world indicator price for sugar (a spot price) was around US26.9 cents a pound, compared with US13.9 cents a pound at the same time in 2009. Downward pressure on world sugar prices is expected to emerge over the remainder of the current marketing year, as the market anticipates a return to larger world production in 2010-11, easing the current tight supply situation. Initial information about the production prospects will come from the next Brazilian cane harvest that starts around late March 2010. Further information that could affect world sugar price movements will be rainfall of the Indian monsoon season which occurs in the June to September period.

World sugar market indicators

2014-15 z

2012-13 z

2010-11 f

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closing stocks (left axis)

production (left axis)

consumption (left axis)

real price (right axis)

2009-10USc/lb


The deficit between world sugar production and consumption is forecast to be 5 million tonnes in 2009-10. However, the world sugar production and consumption balance is forecast to return to a surplus of 5 million tonnes in 2010-11, as world sugar production is forecast to increase to a record 174.5 million tonnes. Much of the production increase is forecast to occur in India, where sugar production in 2010-11 is expected to increase to 25 million tonnes, which is 9 million tonnes higher than in 2009-10. Higher sugar production is also forecast for most other sugar producing countries in 2010-11, in particular in Brazil, Thailand and Australia.

The ratio of world carryover stocks of sugar to world consumption is forecast to decline to 33.6 per cent in 2009-10, which is the lowest since 1994-95. The low world sugar stocks mean that any significant supply disruptions in key sugar producing countries in 2010—particularly in Brazil, the European Union and India, that together accounted for 46 per cent of world sugar production in the five years to 2008-09—represents an upside risk to this price outlook.

Policy changes in response to high sugar pricesThe rapid rise in world sugar prices has led to a number of policy responses in key sugar producing countries. In early 2010, Brazil reduced its mandatory blend of ethanol (produced from sugar cane) in vehicle fuel from 25 per cent to 20 per cent until mid-March 2010. The reduction reduces the upward pressure on ethanol prices to Brazilian consumers and enables sugar cane mills to benefit from the buoyant world sugar prices.

The European Union plans to increase its limit on exports of sugar by 500 kilotonnes in 2009-10. This would increase EU sugar exports in 2010 to its export subsidy volume limit of 1.37 million tonnes a year under its World Trade Organization commitments. Favourable seasonal conditions in the European Union resulted in sugar production of 16.5 million tonnes in 2009-10, 0.9 million tonnes higher than in 2008-09 and 2 million tonnes higher than the EU sugar production quota.

Brazilian ethanol prices and exports

ML

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exports (left axis) domestic price, hydrous (right axis)

export price (right axis)domestic price, anhydrous (right axis)

US$/t

Sugar


A severe domestic production shortfall for the second year in a row has led India to introduce a number of policies aimed at containing the rapid rise of its domestic sugar prices. The minimum support price for sugar producers set by the Indian Government in 2009-10 has been raised to (Indian rupee) INR1077.6 (equivalent to around US$23) a tonne of cane, from INR811.8 (US$17) a tonne in both 2007-08 and 2008-09. Since February 2009, the Indian Government has removed import duties on 7 million tonnes of imports of refined and raw sugar. It has also put prohibitions on the private hoarding of sugar.

Bumper returns to Australian cane growers in 2009-10 and 2010-11Forecast high world sugar prices will deliver favourable returns to Australian cane growers in 2009-10 and 2010-11, despite the strength of the Australian dollar. The indicative price at15 February 2010 for the season pool offered by Queensland Sugar Limited (QSL)—the marketer of more than 90 per cent of Australian sugar—for 2009-10 production (harvested in the second half of 2009) was $504 to $514 a tonne IPS (International Polarity Scale), compared with $335 a tonne IPS for 2008-09 production. At the same time, the indicative price for QSL’s aggressive pool for 2009-10 production was $498 to $515 a tonne IPS. The returns to millers and cane growers in any year also reflects returns from long-term contracts and from higher priced markets in which import tariff quotas are applied, such as the United States.

The average return to Australian growers for cane in 2009-10 is forecast to be $51 a tonne, compared with $32.46 a tonne in 2008-09 and $26.39 in 2007-08. Although Australian sugar production is estimated to have been 5 per cent lower in 2009-10, the gross value of Australian sugar production is forecast to be around $1.5 billion, which is 55 per cent higher than in 2008-09.

High prices in 2009 are forecast to result in a 7 per cent increase in the cane area harvested in Australia in 2010-11, reversing the decline in cane areas that have occurred since 2002-03. Based on the weather conditions so far, Australia sugar production in 2010-11 is forecast to increase to 4.8 million tonnes, which is 0.3 million tonnes higher than the previous year. The return to Australian cane growers from 2010-11 production is forecast to decline to $39.70 a tonne of cane, $11 a tonne less than the previous year, because of the forecast fall in world sugar prices.

Medium-term outlook to 2014-15World sugar prices to decline from highsOver the medium term, the world sugar indicator price is projected to decline from the high of 2009-10, as world carryover stocks of sugar gradually recover. Continued strong growth in world sugar consumption, fuelled by strongly growing incomes in developing countries such as India and China, is not expected to be sufficient to offset increased production. Nevertheless, the sugar indicator price in real terms is projected to still remain above the lows that occurred in the period 1997 to 2003.

The concern with the current high world sugar prices is that they will lead to overinvestment in sugar production capacity throughout the world. Once planted, a sugar cane crop can be harvested annually for up to six years in some countries. While there is a relatively high

Sugar


cost with the initial plantings, the cost of harvesting in subsequent years is relatively low and explains why there has been a history of relatively short price spikes in the world sugar market, followed by longer periods of lower prices.

World sugar production to increase over the medium termWorld sugar production is projected to increase to 185 million tonnes by 2014-15, which is 18 million tonnes higher than the record of 167 million tonnes produced in 2007-08. The key determinant of world sugar production over the medium term is likely to be Brazilian cane sugar production and its allocation between sugar production and ethanol production. Government policies in India and the European Union will be important determinants of sugar production in those countries.

Demand for ethanol as a replacement for oil-based fuels is increasing rapidly and being encouraged in a number of countries through a range of government policies. These policies include targets for biofuel use and tax concessions for producers. The feedstocks for ethanol are primarily corn, sugar cane and molasses. Brazil has been encouraging the use of sugar cane for ethanol production for more than 30 years. As well as meeting a growing domestic demand for ethanol as a vehicle fuel, Brazil also accounts for around 40 per cent of world trade in ethanol. Research is underway around the world into using cellulosic sources such as switchgrass or cane trash to produce ethanol, but ethanol production from these sources is unlikely to be significant over the outlook period.

Brazil is expected to remain the dominant player in the world sugar market over the medium term. Given relatively low production costs and the potential to bring substantial areas into cane production, Brazilian production of sugar cane is projected to be 36 per cent higher in 2014-15 than in 2009-10. The proportion of sugar cane used in Brazil for ethanol production is forecast to decline in 2009-10, because of high sugar prices in relation to ethanol prices, but is

Brazilian sugar cane production and allocation a

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a April to March years.

cane production (left axis)

sugar production (left axis)

ethanol share (right axis)

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%

Sugar


Sugar industry in India

Sugar is an important food source in India, and cane production and processing is also a significant source of employment. The Indian Government pursues a range of policies to ensure affordable sugar prices to Indian consumers and adequate returns to Indian cane producers and sugar mills. These policies can be an important influence on world sugar prices, as India is a large producer and consumer of sugar and can switch between being an exporter and importer in some years.

Production of sugar cane is supported by a minimum price set each year by the Indian Government. In some Indian states, the minimum cane price is supplemented by additional payments from state governments. The main crops that compete for land with sugar cane in India are wheat and rice.

The bulk of Indian sugar cane is processed into centrifugal sugar at mills, but cane is also processed in largely cottage industries into the traditional sweetener forms of gur and khandsari using open pan evaporation methods. These traditional sweetener forms have lower sugar extraction rates than cane processed in sugar mills.

The Indian sugar industry is protected by an import tariff that can be varied up to the bound rate of 150 per cent. The applied rate on 1 April 2008 was 60 per cent, but this was lowered to zero in February 2009 for prescribed volumes of imports because of India’s domestic sugar shortfall.

Sugar consumption in India is growing in response to an underlying population growth of 1.8 per cent a year. The rate of growth in sugar consumption has increased over the past five years, fuelled by rapidly growing consumer incomes.

For food security purposes, the Indian Government aims to ensure that sugar stocks do not fall below the equivalent of three months of consumption.

Indian supply and disposal of sugar

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continued...

Sugar


Sugar industry in India continued

The Indian Government seeks to influence domestic sugar prices through a range of policies. For example, in 2007-08, when Indian sugar production reached a record high, subsidies for transport of sugar to Indian ports were introduced to encourage sugar exports.

In response to rapidly increasing sugar prices, the Indian Government has sought to contain the price increases through releases from sugar buffer stocks, removing duty payments on sugar imports, and introducing prohibitions on excessive stockholding by private agents.

To smooth price changes between periods, the Indian Government can require for imports of raw sugar by mills that an equivalent quantity of sugar is exported in later periods when domestic sugar supplies improve—the so-called advanced licence arrangement. However, the government can also waive the re-export obligations, as is the case with the duty free imports in 2009.

India cane production, allocation and minimum support price

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Sugar and gur prices, Delhi market

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Sugar


projected to resume rising throughout the remainder of the outlook period, as ethanol prices respond to higher oil prices and increasing demand for ethanol for use in Brazil’s growing fleet of flexifuel cars. Brazilian sugar production is projected to reach around 50 million tonnes by 2014-15, compared with a forecast 41 million tonnes in 2009-10.

Indian sugar production is expected to rebound in 2010-11, following two poor harvests in 2008-09 and 2009-10. By 2014-15, Indian sugar production is projected to be 30 million tonnes, compared with the record output of 31.7 million tonnes in 2007-08.

Reforms to the Common Market Organisation for sugar in the European Union are largely complete. The measures include lower guaranteed minimum prices to beet growers, lower market intervention (guaranteed) prices and reduced quotas to which the guaranteed prices apply. The sugar quota is set at 14.5 million tonnes but there is the possibility of increased out of quota sugar beet production over the next few years in response to high world sugar prices. Some of this out of quota sugar is expected to be used to make ethanol but most is expected to be exported, subject to the European Union’s World Trade Organization annual sugar export subsidy limit of 1.37 million tonnes.

Increased sugar production is expected in many other smaller producing countries over the outlook period. For example, Indonesia has recently announced plans to increase domestic sugar production to bring its domestic sugar consumption and production into balance by 2014.

Strong growth in world sugar consumptionWorld sugar consumption has increased at an average rate of 2.5 per cent a year over the 10 years to 2008-09, faster than the rate of world population growth rate of 1.2 per cent. Reflecting higher sugar prices, world sugar consumption is projected to grow at an average rate of only 2.1 per cent a year over the medium term.

Consumption of sugar in key consuming regions

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Sugar


Consumers in a number of countries are partially insulated by government policies from movements in world sugar prices. For example, in the United States, domestic sugar prices have usually been maintained well above world sugar prices by tariff quotas on raw and refined sugar imports. India is another example that has sought to stabilise domestic prices through various import and export policies (see the accompanying box).

Factors affecting the demand for sugar are population growth; consumer incomes; the prices of alternative sweeteners, particularly high fructose corn syrup; and, increasingly, a range of low calorie artificial sweeteners. A characteristic of world sugar consumption is that per person consumption of sugar is declining in developed countries, but increasing in less developed countries. This trend reflects, in part, that consumers can afford to choose more costly (and perceived to be healthier) food alternatives as income increases.

World sugar stocks to rebuild over the medium termWorld carryover stocks of sugar are projected to recover gradually over the medium term. By 2014-15 the sugar stock-to-use ratio is projected to be nearly 38 per cent, compared with 33.6 per cent in 2009-10.

Returns to cane growers to ease over the medium termReflecting the forecast decline in world sugar price, the average return to Australian cane growers is projected to decline in real terms over the medium term. The return to Australian cane growers is projected to average $33.50 a tonne of cane in constant (2009-10) dollar terms over the medium term, but this is still higher than the average of $31.78 a tonne received in the five years to 2008-09.

Australian marketers of sugar are increasingly giving Australian cane growers the opportunity to lock in forward prices for their cane, based on the use of ICE sugar futures contracts. For example, at 1 February 2010, the Proserpine Cooperative Sugar Milling Association Limited was quoting cane prices to growers for 2010-11 production of $46.65 to $48.73 a tonne of average quality cane at 14.34 per cent contained content of sugar (CCS); $40.01 to $40.33 a tonne for 2011-12 production; and $38.20 to $38.53 for 2012-13 production.

2010-11 will be the first year since 2002-03 that Australian sugar area harvested has increased. A range of factors contributed to the decline from 2002-03, including poor prices, drought, cyclones, sugar cane smut, urban encroachment, increased use of rotation crops (mainly soybeans and peanuts) and higher returns from production alternatives, particularly plantation forestry. Sugar production in the Ord River Irrigation Area (ORIA) also ceased in November 2007. At its peak, there were more than 4000 hectares of sugar cane harvested annually in the ORIA.

The area harvested of sugar cane in Australia is projected to stabilise at around 402 000 hectares by 2014-15, still 46 000 hectares less than the record harvest in 2002-03. Modest growth in Australian cane and sugar yields is also projected for the medium term. Australian sugar production is projected to increase to around 4.9 million tonnes by 2014-15, compared with 4.5 million tonnes in 2009-10 and the record of 5.4 million tonnes in 2002-03.

Sugar


In November 2009, it was announced that the Bureau of Sugar Experiment Stations Limited (the principal provider of research, development and extension to the Australian sugar industry) and DuPont (a major multinational life science company) would enter into an alliance to increase Australian sugar industry productivity, including the possible development of GM cane varieties. There have already been field trials of GM sugar cane in Australia, approved by the Office of the Gene Technology Regulator (OGTR), which have experimented with the traits of herbicide tolerance, nitrogen use efficiency, altered sugar production and drought tolerance. However, it is unlikely that any GM cane varieties will be commercialised in Australia over the outlook period.

At the farm level, it is expected that the number of growers in Australia will continue to decline and cane farms will increase in size. The number of cane growers in the Australian sugar industry has declined from around 6300 in 2000 to less than 4000 in 2010. Over the same period, cane production per grower has increased from 5000 tonnes to 9000 tonnes.

The traditional burning of sugar cane crops before harvest is being replaced by increased use of ‘whole cane harvesting’ practices, particularly in New South Wales. With whole cane harvesting, the leaf material that is separated from the cane is sold as garden mulch, or delivered to mills (along with the bagasse from the milling process) to generate electricity for running the sugar milling process and for export to the national electricity grid.

Commonwealth legislation on renewable energy targets (RET), enacted in August 2009, has the potential to boost cogeneration of electricity in sugar mills. The RET scheme legislation (to be supported by complementary legislation in the states and territories) establishes a target of 20 per cent, or 45 000 gigawatt-hours, of Australia’s electricity supply by 2020 be derived from renewable resources. This represents a fourfold increase over the previous Mandatory

Australian harvested area of sugar cane and cane yield

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1984-85

Sugar


Renewable Energy Target (MRET) set legislatively in 2001. The RET scheme (and previously the MRET scheme) guarantees a market for additional renewable energy generation, using a mechanism of tradeable Renewable Energy Certificates (REC).

However, the enhanced RET scheme will not necessarily see planned electricity cogeneration projects in the Queensland sugar mill industry go ahead in the short run. This is because the price for RECs fell from around $50 a certificate in the first half of 2009, to only $33 a certificate in mid-January 2010, as the supply of RECs on the market increased, mainly because of increased uptake of solar hot water and photovoltaic cells.

Sugar outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

World aProduction Mt 167.1 153.0 161.0 174.5 177.4 180.3 182.2 184.9Consumption Mt 160.7 164.3 166.0 169.5 173.4 177.2 180.9 184.6Stocks b Mt 72.0 60.7 55.8 60.8 64.8 67.9 69.2 69.6Price– nominal USc/lb 13.7 15.9 23.1 19.2 16.3 13.6 12.8 12.9– real c USc/lb 14.0 16.1 23.1 19.0 15.8 12.9 11.8 11.7

Australia d Production e kt 4 763 4 634 4 519 4 801 4 878 4 916 4 911 4 908Export volume kt 3 493 3 268 3 249 3 449 3 528 3 544 3 518 3 487Export value– nominal A$m 1 006 1 338 1 799 1 877 1 641 1 421 1 277 1 263– real g A$m 1 062 1 369 1 799 1 835 1 565 1 322 1 160 1 119

a October–September years. b Historical estimates of closing stocks are based on individual country estimates of production, consumption, trade and stocks. Given possible under/over reporting of statistics in individual countries, changes in world closing stocks from year to year may not necessarily equal the difference in world production and world consumption. c In 2009-10 US dollars. d July–June years. e Raw tonnes actual. g In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; International Sugar Organisation; ABARE.

Sugar


CottonOutlook to 2014-15

Max Foster

Short-term outlook: 2009-10 and 2010-11Favourable world cotton prices in the short termThe world indicator price for cotton (the Cotlook ‘A’ index) is forecast to increase by 21 per cent from 2008-09, to average US74 cents a pound in 2009-10 (August to July year). The price increase is being driven by a forecast decline in world cotton production for the third year in a row and the improved world economic outlook that is expected to increase world demand for apparel fibre. Continued recovery in world fibre demand and a low ratio of opening stocks to consumption are forecast to lead to a further 11 per cent increase in the cotton indicator price in 2010-11, despite higher world cotton production.

The world cotton indicator price (a spot price) was around US75.4 cents a pound at 17 February 2010, the 2009-10 season-to-date peak, and higher than the US53.65 cents a pound at the same time in 2009. At 17 February 2010, the price for the March 2010 cotton contract on the Intercontinental Exchange (ICE) was US75.17 cents a pound, increasing to US76.39 cents a pound for the July 2010 contract, before easing to US73.04 cents a pound for the December 2010 contract.

World cotton production is forecast to decline to 22.4 million tonnes in 2009-10, one million tonnes less than in 2008-09. Lower production in 2009-10 is mainly because of lower cotton plantings and poor cotton yields in China, which are only partly offset by higher cotton production in India.

World cotton indicators

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2009-10USc/lb


World cotton production is forecast to increase sharply in 2010-11, in response to favourable cotton prices compared with corn and soybeans prices. World cotton plantings are forecast to increase by around 1.1 million hectares and world cotton yields, on average, are forecast to recover from the current low that resulted from the poor crop growing conditions in China. In the United States, plantings are forecast to increase by 12 per cent.

A modest recovery in world cotton mill consumption of 1.5 per cent is forecast for 2009-10, as world demand for apparel fibres strengthens. This is a marked turnaround from the nearly 10 per cent decline in mill consumption of cotton in 2008-09. Since the lows of late 2008, world prices for cotton have recovered more significantly than prices for polyester, which is the main competing fibre with cotton.

The forecast shortfall between world cotton production and mill consumption in 2009-10 is 2.3 million tonnes, reducing the ratio of season ending stocks to consumption to 45.7 per cent, the lowest since 1994-95. This will underpin world cotton prices over the next two years.

Timely rains benefit Australian cotton production in 2009-10Although heavy rainfall in most parts of the Australian cotton industry in the last week of 2009 came too late to increase cotton plantings in 2009-10, it is expected to support dryland cotton yields and ensure adequate water supplies to finish most irrigated cotton crops this season. Australian cotton lint production is forecast to be 371 000 tonnes in 2009-10, which is 13 per cent higher than in 2008-09.

It is estimated that Australian cotton growers have forward sold more than half of their prospective 2009-10 production (harvested from late February 2010) at an average price of around $420 a bale of lint. For uncommitted production, the forward price on offer at 17 February 2010 for 2009-10 production was around $430 a bale of lint.

Cotton and polyester fibre pricesweekly, ended 28 January 2010

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Polyester staple, China (cotton equivalent)

Cotlook ‘A’ indicator

Polyester staple, Chinese Taipei (cotton equivalent)

7-7-20097-7-20087-7-2005 7-7-2006 7-7-2007 28-1-2010

Cotton


The rain in late 2009 had little effect on water levels in the major irrigation dams serving the cotton growing regions. The current low water levels in the main irrigation dams serving the cotton industry imply cotton plantings in Australia of only around 245 000 hectares in 2010-11, assuming average winter and spring rainfall. The return for 2010-11 production is forecast to be around $433 a bale, up $13 a bale on 2009-10.

Medium-term outlook for cottonFavourable cotton prices to be sustainedWorld prices for cotton are projected to remain favourable over the medium term. The cotton indicator price is projected to average US82 cents a pound in 2009-10 dollars by 2014-15, compared with US64 cents a pound in the five years to 2008-09. Relatively low world stocks; continuing growth in world cotton demand, fuelled by strongly growing consumer incomes in India and China; and slowing cotton productivity in key producing countries are the key factors underpinning this price outlook.

World cotton production to growBeyond 2010-11, world cotton plantings are projected to expand, but at a modest rate. Some growth in world cotton lint yields is projected for the medium term. A return to cotton production is expected for the central Asian republics (mainly Uzbekistan and Turkmenistan, but also Tajikistan and Kazakstan), as cotton prices increase relative to grain prices. Large potential exists in Brazil to respond to higher cotton prices with increased cotton production, provided some issues can be overcome (see the accompanying box).

However, the rate of yield growth is expected to slow over the medium term as the uptake of the current generation of genetically modified (GM) cotton crops that have contributed to world yield improvements since 1997 reaches near saturation point in the major cotton producing countries. A number of GM traits for cotton are in the development pipeline, including triple Bacillus thuringiensis (Bt) gene insect resistance, dicamba and glufosinate (herbicide) tolerance, drought tolerance, and lygus (insect) resistance. Even if these GM cotton varieties proceed to commercialisation, it will be at least three years before they are widely available.

World cotton plantings and lint yields

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Cotton


Cotton industry in Brazil

Brazil is an important cotton producer, accounting for 5 per cent of world cotton production in the five years to 2008-09. Brazil also has potential to increase its cotton production if new GM varieties are adopted and innovations such as narrow row cotton prove effective.

Brazilian cotton production grew strongly in the 2000s but has contracted recently because of more favourable returns from production alternatives (particularly soybeans), relatively low cotton yields and some growers having problems obtaining finance to purchase inputs.

Brazil has approved five versions of GM cotton, but only two have been commercialised to date. The uptake of GM cotton in Brazil has been low because the GM varieties released so far have not been effective against the insect and weed pests that affect cotton production in Brazil. It is believed that the double Bt gene GM cotton that is likely to be being commercially released in Brazil in 2011 will be more effective under Brazilian conditions than previous GM cotton varieties.

Brazilian cotton growers are also experimenting with other ways of growing cotton under Brazilian conditions. One promising agronomic innovation is cotton planted in narrow rows. Narrow row cotton reaches maturity at least 30 days earlier than traditional cotton plantings, which reduces the need for at least one application of pesticides. The drawbacks to date are yield and fibre quality reductions and the need to use specialised harvesting equipment. Cotton plantings of this type have expanded from 5000 hectares in 2007-08, to around 50 000 hectares in 2009-10, which represents around 6 per cent of total Brazilian cotton plantings.

The Brazilian Government sets a minimum support price for cotton at the beginning of each season, based on expected supply and demand conditions for cotton both domestically and internationally. The government can intervene in the auction market to buy cotton at the minimum support price, through Companhia Nacional de Abastecimento (National Supply Company), which is part of the Brazilian Ministry of Agriculture, Livestock and Food.

Supply and disposal of cotton in Brazil

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productionconsumption

importsclosing stocks

exports

continued...

Cotton


Growing world cotton demand to 2014-15World mill consumption for cotton is projected to grow at an average rate of 2.4 per cent a year over the medium term. This compares with the average rate of 2.3 per cent in the 10 years to 2009-10. The main factors influencing the world demand for cotton are world population and economic growth and the price of cotton relative to competing apparel fibres, particularly polyester.

Growing world cotton demand to 2014-15

Cotton industry in Brazil continued

However, even though cotton auction prices have mainly been below the minimum support price since October 2004, there has been virtually no intervention buying by the government. Instead, the government has operated the Equalization Premium Paid to the Producer Scheme, or PEPRO (Premio Equalizador Pago ao Produtor), whereby a premium is paid to the farmer or cooperative which sells its products at public auction, equal to the difference between the minimum support price and the lower auction price received. In 2008, 64 per cent of Brazil’s cotton production received PEPRO payments. The PEPRO scheme has similarities to the target price arrangement operated by the US Government under the US farm program.

Brazil’s cotton processing industry consumes the bulk of its domestic cotton production and, until recently, substantial quantities of cotton were imported to supply the industry.

However, Brazil’s cotton processing industry has contracted in the 2000s under increasing pressure from cheap textile imports, particularly from China and India. In 2005, China entered into an agreement to limit its textile exports to Brazil through a quota arrangement. This agreement expired in 2008 and since then China has refused to enter into a new agreement.

The decline of its textile industry is the main reason Brazil has increased its raw cotton exports and in 2008-09 was the third largest exporting country.

Brazilian prices for cotton and government cotton stocks

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BrazilianReal/lb

Cotton


Prices for polyester are projected to increase over the outlook period, but by less than cotton prices. The increase in cotton prices relative to polyester prices implies that cotton could lose market share in world apparel fibre markets over the outlook period.

Low stock-to-use ratio to persistWorld carryover stocks of cotton are projected to remain relatively low over the medium term. By 2014-15, the cotton stock-to-use ratio is projected to be 45 per cent, compared with the average ratio of 53 per cent over the 10 years to 2008-09.

Price prospects for Australian cotton growersThe projected world cotton prices and an assumed gradual depreciation of the Australian dollar means prices for Australia cotton production could improve over the medium term. Australian cotton growers are able to lock in prices up to three seasons into the future using the cotton futures contract on the Intercontinental Exchange. At 17 February

2010, the prices on offer were $430 a bale for 2009-10 production, $430 a bale for 2010-11 production, and $447 a bale for 2011-12 production. Over the outlook period, average return to Australian cotton growers is projected to be $437 a bale in 2009-10 dollars, compared with $380 a bale in the five years to 2008-09. Cotton growers also receive a return for the cottonseed that is separated from the lint through the ginning process.

The Australian Government’s buyback of rights to irrigation water from cotton growers is assessed to have had only a minor effect to date on the production capacity of the Australian cotton industry. When irrigation water is abundant, there is potential to plant more than 500 000

Growth in world mill consumption of cotton

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Cotton and polyester shares in world fibre consumption

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Cotton


hectares of cotton (both irrigated and dryland) in Australia. However, assuming average seasonal conditions in terms of water availability, cotton plantings in Australia are projected to be 345 000 hectares by 2014-15, producing 733 kilotonnes of cotton lint.

Improved integrated pest management systems, particularly systems based on the use of insect resistant GM cotton varieties, have raised the possibility of the introduction of cotton industries into tropical regions of Australia. This has been successfully demonstrated over the past three seasons with annual cotton plantings of 700 to 900 hectares in the Burdekin River region of Queensland, a traditional sugar cane growing area. However, the recent sharp rise

Returns to Australian cotton growers

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cottonseed value (left axis)

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a Net of ginning stocks.

Australian cotton production and yields

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Cotton


in world sugar prices is expected to discourage growers from expanding cotton areas in this region over the next few years.

There is also the potential for cotton to be grown in other tropical regions, such as the Ord River Irrigation Area (ORIA) of Western Australia and the Northern Territory. The ORIA currently consists of around 14 000 hectares of irrigated land and a further 8000 hectares is to be released in 2011. There was a cotton industry in the ORIA in 1960s, but it was abandoned because of insect control problems. However, over the past decade, field trials of GM cotton varieties with insect resistance and herbicide tolerance traits appear to suggest that a dry season irrigated crop would be profitable in rotation with other crops already grown in the ORIA.

However, there would be competition for land in the ORIA from production alternatives, particularly plantation forestry, tropical fruit, chia (a novel seed with healthy oil and other nutrient characteristics) and possibly rice. Another constraint on establishing any cotton industry in the ORIA is the need to have an annual throughput of around 12 000 tonnes (50 000 bales) to make the operation of a cotton gin viable. This would require annual cotton plantings of around 6000 hectares a year. Given the time needed for development, it is unlikely any commercial scale plantings of cotton would occur in the ORIA during the outlook period.

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15

World aProduction Mt 26.11 23.39 22.37 25.08 26.69 26.67 27.29 27.80Consumption Mt 26.77 23.97 24.68 25.09 25.93 26.52 27.09 27.65Closing stocks Mt 13.64 13.59 11.28 11.27 12.03 12.18 12.38 12.53Stocks-to-consumption

ratio % 51.0 56.7 45.7 44.9 46.4 45.9 45.7 45.3Cotlook ’A’ index – nominal USc/lb 73 61 74 82 79 83 86 90– real b USc/lb 75 62 74 81 76 78 80 82

Australia c Area harvested ’000 ha 63 164 202 245 310 345 345 345Lint production kt 133 329 371 484 623 706 719 733Value of production– nominal d A$m 253 685 790 1 107 1 426 1 702 1 813 1 941– real e A$m 267 701 790 1 082 1 360 1 584 1 646 1 719Export volume kt 266 260 321 389 515 638 698 711Export value– nominal A$m 466 500 660 852 1 121 1 452 1 651 1 758– real e A$m 492 512 660 833 1 069 1 351 1 498 1 557Export unit value– nominal Ac/kg 175 193 206 219 218 228 237 247– real e Ac/kg 185 197 206 214 208 212 215 219

a August–July years. b In 2009-10 US dollars. c July–June years. d Includes cottonseed value. e In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.

Cotton outlook

Cotton


Wine and wine grapesOutlook to 2014-15

Caroline Gunning-Trant and Gemma Kwan

Australian wine grape prices are expected to remain low in real terms over the medium term. Low prices, in combination with the cancellation of contracts by many wineries, are projected to lead to a contraction in national production toward the end of the outlook period, as an increasing number of vineyards are taken out of production. The decline in national production is projected to lead to a gradual recovery in domestic wine grape prices in real terms toward 2014-15, although prices in real terms will remain low in historical terms.

Total wine grape production in 2009-10 is estimated to be 1.6 million tonnes, which is a 4 per cent fall relative to 2008-09, as the prolonged heatwave in November 2009 affected later bearing varieties in parts of south-eastern Australia. Assuming favourable seasonal conditions over the outlook period, wine grape production is projected to increase over the next three seasons before gradually falling toward 2014-15. The projected turnaround in the latter half of the outlook period reflects the assumption of a gradual contraction in national bearing area.

Despite the downward trend in wine grape prices over the past decade, national bearing area for the top 10 varieties, as collected by the 2009 ABS Vineyards Estimates, has increased. Since 2004-05, the bearing area of the top 10 wine grape varieties has risen by almost 13 per cent to 139 000 hectares. At the same time, there are industry reports of increasing financial difficulties among grape growers and a growing incidence of vineyard abandonment. However, the effect on national production will depend on the extent to which this adjustment takes place.

Australian wine production, sales and wine grape prices

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In late 2009, four industry groups jointly released a statement titled the Wine Restructure Action Agreement (WRAA; see the accompanying box). This statement detailed the extent of the wine supply problem for both wine grape growers and wineries. The WRAA estimates that 20 per cent of bearing vines in Australia are unprofitable and, without a significant restructuring of the industry, wine grape prices will continue to face downward pressure.

Although total sales of Australian wine are expected to increase over the outlook period, wine grape prices are projected to remain subdued in the next few years, before rising gradually in real terms toward the end of the outlook period. By 2014-15, wine grape prices are projected to average around $547 a tonne (in 2009-10 dollars), which is still around 24 per cent lower than the average price for the five years to 2008-09.

Spring heat wave hits warm climate regional yieldsAccording to the ABS Vineyards Estimates, wine grape production in 2008-09 was around 1.7 million tonnes, which was a reduction of 8 per cent from the previous year. The fall in production was the result of reduced yields brought about by irrigation water shortages in some regions and high temperatures in late January and early February 2009, particularly in South Australia. The bearing area for the top 10 wine grape varieties increased by 2 per cent to 139 000 hectares in 2008-09. Most of the increase occurred in the cool climate regions of South Australia, north-east Victoria, Gippsland and Port Phillip. In the warm climate regions, particularly in Murray Darling–Swan Hill, the bearing area of wine grapes contracted.

In 2009-10, wine grape production is forecast to be around 1.6 million tonnes, which is a fall of about 4 per cent from 2008-09. The majority of this forecast reduction is expected to occur in warm climate regions as a result of a prolonged heatwave in late 2009 that affected the flowering and early fruit setting of later bearing varieties, particularly cabernet sauvignon. Varieties such as merlot and chardonnay were also adversely affected. While the heat wave covered most of south-eastern Australia, favourable seasonal conditions over the summer months resulted in better yields in many of the cool climate regions.

In late 2009 four industry groups jointly released a statement titled the Wine Restructure

Wine Restructure Action Agenda (WRAA)

In 2009, four wine and wine grape industry bodies—Wine Grape Growers Australia (WGGA), Winemakers’ Federation of Australia (WFA), Grape and Wine Research and Development Corporation (GWRDC) and Australian Wine and Brandy Corporation (AWBC)—jointly released a statement to growers and wineries to communicate the extent of the oversupply issue facing the wine industry. Specifically, the joint statement, titled the Wine Restructure Action Agenda (WRAA), provides an estimate of the amount of wine grape production being sold below the cost of production. It notes that Australia is currently producing a surplus of 20 to 40 million cases of wine a year (equivalent to 270 000 to 500 000 tonnes of grapes), with inventories currently exceeding 100 million cases. The WRAA suggests that if the current rates of production continue, inventories will more than double in the next two years. It estimates that 20 per cent of bearing vines in Australia are unprofitable, and that a restructure of the industry is required to both reduce capacity and to change the production mix. The WRAA suggests that without a significant restructure, inventories will continue to increase and there will be continued downward pressure on Australian wine and wine grape prices, given wine consumption in overseas markets and the industry’s decreasing competitiveness.

Wine and wine grapes


Prior to the heatwave, good spring rains in the second half of 2009 provided grape growers across the southern Murray-Darling Basin with improved access to water supplies. In October 2009, water allocations for 2009-10 were increased from an initial announcement of zero allocation to between 30 per cent and 50 per cent for New South Wales, Victoria and South Australia. The improved water availability reduced the average price of water, which allowed producers to better manage their vineyards.

Assuming more favourable seasonal conditions, wine grape production is forecast to continue to increase in the next three seasons, as vines that were planted over the past three seasons come into production. The increase in production is expected to mainly occur in the cool climate regions. However, from 2013-14 onward, the national bearing area is projected to decline as the industry reacts to the adjustment pressure. Production is expected to fall more sharply in the warm climate regions, which historically have produced more than 60 per cent of Australia’s total wine grapes.

Wine grape price to remain low Despite the general downward trend of grape prices over the past decade, there has been considerable variability between varieties. The average price of shiraz grapes has been the

highest of the top red wine grape varieties, with the price of cabernet sauvignon grapes about 9 per cent lower, on average. For white wine grapes, there has been a marked divergence in prices, particularly between sauvignon blanc and chardonnay. While the average price of sauvignon blanc remained largely unchanged (in real terms) between 2002-03 and 2006-07, the price for chardonnay grapes fell by 50 per cent over the same period.

The global financial crisis has dampened international demand for wine, placing significant downward pressure on all wine grape prices. With the assumed world economic recovery, demand for wine is expected to strengthen gradually over the short to medium term. However, the abundant world supply of wine and the increasing proportion of bulk wine shipments globally are unlikely to lead to a significant increase in international wine prices. Given this

backdrop, wine grape prices in Australia are expected to remain subdued in the next few years, before a gradual recovery toward the end of the projection period.

In 2008-09, the large supplies of wine grapes led many wine companies to offer lower prices for fruit. There are also reports that many growers have been informed that their contracts for wine grapes will not be renewed once they expire. Without a contract, the growers will have to supply their grapes to the spot market, which could potentially subject them to even lower wine grape prices.

Wine grape prices by variety

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sauvignon blancchardonnaysemillon



Lower export returns owing to a shift in demandThere has been a shift of demand for Australian wine exports into the lower price brackets, although the total volume of Australian wine exports continues to grow. For 2008-09 as a whole, the average unit export price of wine fell by 17 per cent relative to 2007-08, to average $3.61 a litre for reds and $2.57 a litre for whites. Approximately 85 per cent of wine exports in 2008-09 were categorised into the two lowest price ranges, ‘basic’ (up to $2.49 a litre) and ‘popular premium’ (between $2.50 and $4.99 a litre). By volume, the proportion of ‘basic’ wine increased to 35 per cent in 2008-09 from 31 per cent a year earlier, while the share of ‘popular premium’ wine increased by 3 percentage points to 50 per cent.

In the short term, demand for Australian wines in the higher price brackets is expected to be weak as the economic recovery in the United States and Western Europe is likely to be modest. In the second half of 2009, the share of ‘basic’ and ‘popular premium’ wine was 89 per cent of total wine exports, while the demand for premium wine exports declined further.

Bulk wine supporting export growthIn volume terms, Australian wine exports rose by 6 per cent in 2008-09 to 750 million litres. This growth was assisted by an increase of 35 per cent in bulk red wine exports and growth of 113 per cent in bulk white wine exports. For the first time since 2001-02, both red and white bulk exports were roughly equivalent, at 127 million litres each. Shipments of red and white bottled table wine fell by 11 per cent in 2008-09.

In value terms, Australian wine exports declined by more than 9 per cent in 2008-09, to $2.43 billion, which was the lowest value since 2001-02 (in 2009-10 dollars), largely as a result of the growth in demand for lower value wines.

Volume of exports by price category

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Nearly three-quarters of Australia’s wine exports are shipped to the United Kingdom, the United States and Canada. In 2008-09, shipments of Australian wine to the United Kingdom and Canada fell by 1 per cent and 3 per cent, respectively. However, export earnings from these markets fell more steeply, by more than 20 per cent in each market. In 2008-09, the share of bulk wine exports to the United Kingdom increased to 39 per cent of all table wine exports, compared with 25 per cent the previous year. Shipments of bottled wine to the United Kingdom also fell by 20 per cent. Shipments to the United States increased by 29 per cent in 2008-09; however, export earnings declined by 4 per cent in the year.

The only major market where export earnings increased in 2008-09 was China. In the past five years, China has become increasingly important for the Australian wine sector, becoming the fourth largest export market by value (see the accompanying box).

Although the shipments of wine are expected to increase in 2009-10, total export earnings are forecast to decline by 2 per cent to $2.39 billion. Over the medium term, continued economic recovery in Australia’s key export markets is projected to lead to a gradual strengthening in demand for higher valued wines. However, the increasing competition of bulk wine exports from all major wine exporting countries, including the European Union, Chile and New Zealand, is likely to put downward pressure on the rate at which the higher value wines regain a foothold in world markets. In addition, an assumed relatively high value of the Australian dollar against both the euro and the US dollar over the outlook period could constrain any significant increase in export earnings.

New Zealand sauvignon blanc popular in AustraliaAustralian wine imports increased by 14 per cent in 2008-09 to 62.2 million litres. Imports now constitute 14 per cent of domestic wine sales, compared with 5 per cent a decade ago. Imports from New Zealand continue to increase, making up almost 60 per cent of total wine imports in 2008-09, compared with 44 per cent a year earlier. The increased market share by imports from New Zealand was assisted by strong demand for sauvignon blanc.

In contrast, the volume of total Australian imports fell by 4 per cent in the second half of 2009 compared with the same period in 2008. Because of an 8 per cent fall in import unit prices, the value of wine imports declined by 12 per cent over the same period, from $279 million to $247 million. In the second half of 2009, the value of wine imported from the European Union and Chile fell by 24 per cent.

Over the medium term, wine imports are projected to increase, although at a slower rate than over the past five years. While an increase in imports of New Zealand wine is expected over the medium term, it is projected to be at a slower rate than in recent years.

Bulk wine driving growth in total Australian salesTotal sales of wine in Australia (which include table wine, sparkling, carbonated and fortified wines) increased by 4 per cent in 2008-09, following a 9 per cent decline in the previous year. Most of this increase was because of growth in imported wines, particularly from New Zealand.



Sales of Australian wine in the domestic market increased by 1 per cent, to 430 million litres, supported by growth in bottled white wine sales. Sales of bottled wine in Australia have been increasing over the past 10 years and now account for 53 per cent of total Australian domestic sales of table wine.

Over the medium term, Australian consumers are expected to favour bottled table wine over other wine packages. Growth in total table wine sales, in both bottled and soft packs, is expected to continue. By the end of the outlook period, total domestic sales, including domestically produced wine and imports, are projected to reach 600 million litres. Australian per person consumption is projected to increase by about 1.5 per cent a year, increasing to around 24.5 litres a person by 2014-15.

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2000-01



Australian wine exports to China

Although the value of wine exports to China accounts for only 4 per cent of total Australian wine exports, China has become Australia’s fourth largest export market. Australian wine exports to China have grown markedly in recent years, reaching 25 million litres (or $93.8 million) in 2008-09, compared with 12 million litres (or $20.8 million) in 2005-06.

In 2008-09 bottled wine accounted for 53 per cent of total Australian wine shipments to China (13.4 million litres), with more than 90 per cent of bottled wine made up of red wine. Bulk wine shipments were around 10.5 million litres in 2008-09, with white wine accounting for 54 per cent.

The increasing demand for Australian wine in China reflects continued strong income growth in that country and a shift in consumer preferences toward western diets. China has the potential to become a major market for Australian wine exports in the future.

The significant increase in demand for Australian wine in China has been of benefit to wine producers facing strong competition in traditional markets. Over the past decade, the average export unit value of Australian wine to its three largest markets, the United Kingdom, the United States and Canada, has fallen by 48 per cent.

The recent decline in average export unit values has, to a large extent, been the result of increased bulk exports, which command a lower price than bottled exports. However, apart from the bulk exports, there are some bottled wine shipments that are receiving a significantly higher export unit price. These bottled wine exports are labelled with the region from which they originate. While bulk shipments do not have a region associated with them (or Geographical Indication (GI)), almost70 per cent of both red and white bottled exports do.

Australian wine exports to Chinaby container type

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ML

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Note: ‘Other’ includes containers for fortified, sparkling and carbonated wines.

bulk red winebulk white wineother

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2000-01

continued...



Australian wine exports to China continued

In 2008-09, 17 of the 129 Australian GI regions exported one-third of regionally labelled bottled red wine exports to China. Of the top six GI regions (those that exported more than 100 000 litres), five were in South Australia. Despite the volume of wine exported, the unit value of wine from the Barossa Valley and McLaren Vale regions was more than double the average unit value of bottled red wine exports to China, of $6.00 a litre.

For white wine, which accounts for only10 per cent of total bottled exports to China, approximately 62 per cent of bottles either had no label claim or were labelled as originating from south-eastern Australia. Only eight GI regions exported more than 10 000 litres of bottled white wine. While the Riverina exported the largest volume, 46 623 litres in 2008-09, it also benefited from an above-average unit value of $7.93 a litre. Similarly, the Yarra Valley, which exported 12 659 litres, earned the highest unit value of the eight GI regions, of $11.44 a litre.

Export unit values

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2009-10$/L

United StatesCanada

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GI regions exporting more than 10 000 litres of bottled white wine in 2008-09 Value $’000 Quantity ‘000L $/L state

Riverina 370 47 $7.93 NSWMcLaren Vale 260 36 $7.32 SAMargaret River 248 22 $11.19 WAAdelaide Hills 149 17 $8.96 SAYarra Valley 145 13 $11.44 VICHunter Valley 135 17 $7.85 NSWBarossa 66 16 $4.22 SAStrathbogie Ranges 65 11 $5.69 VIC

GI regions exporting more than 100 000 litres of bottled red wine in 2008-09 Value $’000 Quantity ‘000L $/L state

McLaren Vale 3 735 313 $11.94 SA Coonawarra 3 248 385 $8.43 SABarossa Valley 2 889 219 $13.18 SALanghorne Creek 1 601 189 $8.45 SAHunter Valley 1 339 192 $6.98 NSWLimestone Coast 953 129 $7.39 SA



Wine outlook2007 2008 2009 2010 2011 2012 2013 2014

unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Bearing area ’000 ha 166 157 159 160 161 163 160 158Wine grape production sRed wine kt 984 888 900 934 934 945 926 906White wine kt 796 796 717 849 852 864 843 823

Total a kt 1 837 1 684 1 617 1 783 1 785 1 810 1 769 1 730

Wine exports Volume ML 709 750 777 810 850 890 930 980Value– nominal A$m 2 683 2 428 2 388 2 496 2 650 2 830 3 070 3 380– real b A$m 2 832 2 485 2 388 2 439 2 527 2 633 2 787 2 993

Australian wine grape price– nominal A$/t 787 527 520 517 531 552 579 618– real b A$/t 831 539 520 506 507 514 526 547

a From 2008-09, total production excludes multipurpose grapes. b In 2009-10 Australian dollars. s ABARE estimate. f ABARE forecast. z ABARE projection.Sources: ABS; Australian Wine Export Council; Australian Wine and Brandy Corporation, Approved Wine Shipments, Adelaide; ABS, Australian Wine and Grape Industry, cat. no. 1329.0; ABARE.



Livestock

Beef and vealOutlook to 2014-15

Peter Berry and commodity analysts

The Australian weighted average saleyard price for beef is forecast to be around 279 cents a kilogram in 2009-10 and 272 cents a kilogram in 2010-11, compared with 296 cents a kilogram in 2008-09. The forecast lower domestic beef prices in the short term mainly reflect the effect of increased competition for Australian beef in key export markets, especially in Japan and the Republic of Korea. In addition, the assumed higher average value of the Australian dollar over these two years, especially against the US dollar, is expected to place downward pressure on beef export earnings and, hence, domestic saleyard prices.

However, there are upside risks to this short-term price outlook. First, herd rebuilding in many regions has the potential to lead to a higher average saleyard price than currently forecast, particularly if favourable seasonal conditions eventuate. For example, restocker demand following significant rainfall in late 2009 and early 2010 in eastern Australia led to a rise in cow prices of around 14 cents a kilogram in January 2010. Second, a stronger economic recovery in Australia’s major export markets, namely Japan, the Republic of Korea, Chinese Taipei and Indonesia, could lead to stronger demand than currently forecast. This would especially be the case if US beef shipments were insufficient to meet the increased demand. This situation could arise given the contraction of the US beef cattle herd and the expectation of lower beef production over the next few years as breeding stock is retained for herd rebuilding.

Domestic saleyard prices for beef are projected to decline further in real terms in 2011-12 as competition with US beef increases in the major Asian export markets. Toward the end of the projection period, prices are projected to recover in real terms. By 2014-15, the average saleyard price for beef is projected to be around 270 cents a kilogram in 2009-10 dollars.

Australian beef exportsby destination

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United StatesJapan

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Beef herd projected to increase gradually toward 2014-15In 2008-09, the Australian cattle herd fell by more than 1 per cent to 27 million head, with significant declines in Queensland, Northern Territory and Victoria. Less than favourable seasonal conditions in many regions prevented an increase in cattle numbers. Slaughter of cows and heifers was up by 3 per cent in 2008-09 and was the highest slaughter for some years.

However, in the first half of 2009-10, total slaughter declined year on year by 6 per cent, reflecting improved seasonal conditions in many regions in eastern Australia. In late 2009 and early 2010, significant rainfall across much of northern Australia has led to reduced turn-off as transport became difficult in some areas and graziers withheld cattle in anticipation of improved pasture growth. For Australia as a whole, the cattle herd is forecast to be around 27.1 million head by June 2010.

Over the medium term, the Australian cattle herd is projected to increase gradually under the assumption of favourable seasonal conditions. Also supporting the increase will be stronger export demand as a result of income growth, and hence increased beef consumption, in Australia’s major export markets. The Australian cattle herd is projected to grow by almost 3 per cent over the outlook period, reaching around 28 million head by the end of 2014-15.

Much of the increase in the cattle herd is expected to occur in northern Australia. Beef cattle numbers have been increasing in northern Australia with improvements in management practices, including grazing management and cattle genetics and infrastructure. With the demand for live cattle and beef projected to remain relatively strong in the Asian region over the medium term, herd numbers in northern Australia are expected to increase gradually.

Australian cattle slaughter and prices

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saleyard price (right axis)

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Beef and veal


Competition from US beef in the Japanese marketFollowing a decline of 1 per cent in 2008-09, exports of Australian beef to Japan (Australia’s biggest export market for beef) fell, year on year, by 3 per cent to 178 kilotonnes in the first six months of 2009-10.

Total Japanese beef imports are forecast to increase in the next two years in response to improved income growth. However, much of the forecast increase in beef imports is expected to be filled by supplies of US beef. In the short term, rising imports of US beef are expected to increasingly displace Australian beef. Although Japan continues to restrict US beef imports to cattle slaughtered under 21 months of age and not containing any brain, bone or spinal cord, which have a higher risk of transmitting bovine spongiform encephalopathy (BSE or ‘mad cow disease’), US exporters have been able to provide increased volumes of compliant products, including the cuts that are in greatest demand in Japan.

For 2009-10 as a whole, Australian beef exports to Japan are forecast to decline by 6 per cent to 341 kilotonnes. In 2010-11, Australian exports to Japan are forecast to recover by 3 per cent to 350 kilotonnes.

While the competition from US beef is expected to increase in the next few years, the adverse impact on Australian beef exports is likely to be offset by a gradual strengthening in the overall demand for beef in Japan. This is particularly expected toward the end of the projection period.

Total beef consumption in Japan has been declining since the early 2000s, while pork consumption has increased. The shift away from beef mainly came as a result of food safety concerns following the discovery of BSE in Japanese cattle and later on in North American cattle, leading to a ban on US beef imports between 2003 and 2008.

Japan beef importsby source

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Beef and veal


Over the medium term, Japanese consumption of beef is projected to rise gradually in line with improving income growth. Food safety concerns surrounding beef are assumed to gradually recede. In response to higher demand, Australian beef exports to Japan are projected to increase gradually toward the end of the projection period, reaching around 380 kilotonnes by 2014-15.

Increased US beef imports by the Korean marketIncreased competition from US beef has also occurred in the Korean market. Import demand for beef by the Republic of Korea has been recovering as domestic consumer demand strengthens in response to improving economic growth. However, most of the increase came from increased imports from the United States.

While the competition from US beef has increased, the effect on Australian beef has been more than offset by recovering total consumption of beef. Australian beef exports to the Republic of Korea rose year on year by 6.1 per cent to 72 kilotonnes between July 2009 and January 2010, following a decline of 23 per cent in 2008-09. In the short term, Australian beef exports to that market are expected to encounter strong competition from US beef, as the US Meat Export Federation has launched an advertising campaign to win back Korean consumers. For 2009-10 as a whole, Australian beef exports to the Republic of Korea are forecast to rise by around 4 per cent to 117 kilotonnes, before falling by 6 per cent to 110 kilotonnes in 2010-11.

Competition from US beef in the Korean market is expected to continue over the remainder of the projection period, although the effect on Australian beef is expected to be offset by an increase in total beef demand in that market as relatively strong income growth resumes over the medium term. Also expected to support the competitiveness of Australian beef will be an assumed depreciation of the Australian dollar against the US dollar by that time. Reflecting these factors, Australian beef exports are projected to increase gradually over the medium term, reaching around 115 kilotonnes by 2014-15.

Korean monthly beef imports from the United States and Australia

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Beef and veal


Australian beef exports to the United StatesIn the United States, beef production has been falling since 2008, which partly reflects a declining beef cattle herd. Beef consumption in the United States also declined over this period, although a moderate increase in imports of manufacturing beef occurred.

The strengthening in demand for lower priced manufacturing beef was a reflection of the adverse impact of the economic downturn. This shift in US consumer preferences provided support for Australian beef (mainly manufacturing beef), with imports increasing by 18 per cent to 282 kilotonnes in 2008-09.

However, a significant appreciation of the Australian dollar since mid-2009 has weakened the competitiveness of Australian beef in the US market. In the first seven months of 2009-10, Australian beef exports fell year on year by 24 per cent to 115 kilotonnes. For 2009-10 as a whole, Australian beef exports to the United States are forecast to fall by around 15 per cent to 240 kilotonnes.

There has also been an increase in the US domestic supply of manufacturing beef as a result of an increased cull of US dairy cows. The US dairy industry has subsidised the cull of around 276 000 dairy cows since mid-2008 as a means of supporting domestic milk prices. While domestic milk prices have recovered partially from their recent lows, there remains a possibility that subsidised culls of dairy cows could occur in the year ahead. Given the low profitability of many US dairy farms, cow slaughter is expected to remain relatively high, at least in the short term.

In 2010-11, US imports of beef are forecast to increase by 4 per cent to around 1.3 million tonnes, with manufacturing beef making up the bulk of the imports. Despite continued competition from South American imports and an assumed strong Australian dollar, Australian beef exports are forecast to increase by 8 per cent to around 260 kilotonnes in 2010-11.

Australian beef exports to the United States and real prices

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beef exports to United States (left axis)

US 90CL price (right axis)

2009-10Ac/kg

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Beef and veal


Over the medium term, the demand for Australian beef is expected to recover further as the United States enters a herd rebuilding phase and cow slaughter falls. A more significant depreciation of the Australian dollar which is assumed toward the end of the projection period is also expected to improve the competitiveness of Australian beef. Australian beef exports to the United States are projected to increase over the medium term, reaching 295 kilotonnes by 2014-15.

Performance in other markets The Russian FederationAustralian exports to the Russian Federation fell by more than 19 per cent, to around 37 kilotonnes in 2008-09. Reflecting the effect of the economic downturn and a strong Australian dollar against the exchange rates of other suppliers, especially Brazil, Australian beef exports to that market are forecast to decline by a further 54 per cent to around 17 kilotonnes in 2009-10.

In 2010-11, total beef imports by the Russian Federation are forecast to increase by 10 per cent to 800 kilotonnes. However, much of this growth is expected to be filled by cheaper imports from South America. Australian beef exports to the Russian Federation are expected to recover only gradually over the medium term.

Prospects for improved trade with the European Union

In a recent resolution to a long-running World Trade Organization (WTO) dispute with the United States, the European Union agreed to open a new global import tariff quota for high quality beef, allowing 20 kilotonnes a year free of tariff, beginning 1 August 2009. To date, the United States and Australia are the only countries to have gained the EU certification required for access to this arrangement, although a number of other beef exporting countries are also seeking certification.

Access to the tariff quota has strict conditions. It requires cattle be less than 30 months old, not be treated with growth hormones and be fed on a specific diet for at least 100 days prior to slaughter. Carcasses and meat are then subject to EU agreed quality controls. The tariff quota is initially set at 20 kilotonnes a year for three years, before rising to 45 kilotonnes from the fourth year.

While it is difficult to make an accurate assessment on what share of the new tariff quota Australian beef may eventually fill, the move provides a new niche opportunity for Australian exporters and comes in the wake of US beef re-entering the Japanese and Korean markets. Under the existing country-specific tariff quota that Australia already accesses for high quality beef into the European Union, Australia has typically exported between 7 and 10 kilotonnes of beef a year to that region.

Shipments within the existing 7150 tonne beef tariff quota set by the European Union attract a 20 per cent tariff, while over-quota shipments attract a 100 per cent tariff. Under the new arrangement, Australian exporters are likely to sell high quality beef into the European Union from late March 2010.

Growth in Australian beef exports to the European Union under the new arrangement will be dependent on the ability of competing beef exporters to meet the strict import requirements, although the United States is expected to fill the bulk of the tariff quota.

Beef and veal


IndonesiaAustralia’s beef exports to Indonesia are forecast to increase by 16 per cent to 44 kilotonnes in 2009-10, largely as a result of continued strong consumer demand. Indonesian beef consumption has increased strongly over the past few years as a result of rising incomes. However, a relatively strong Australian exchange rate against the Indonesian rupiah is expected to moderate growth in export earnings from shipments to that country, at least in the short term.

In Indonesia, imports of live cattle from Australia increased by 28 per cent to 700 000 head in 2008-09. Indonesian import demand for live cattle has grown strongly, particularly after a recent expansion of Indonesian feedlot infrastructure. Australian exports of live cattle to Indonesia are forecast to increase by 5 per cent to 735 000 head in 2009-10 and by a further 2 per cent to 750 000 head in 2010-11.

Over the medium term, the Indonesian market is expected to become increasingly important to Australian beef producers in northern Australia, with strong growth projected for both beef and live cattle exports. Nevertheless, one downside risk to this outlook is the possibility of increased competition from Brazilian beef.

In early September 2009, the Indonesian Government issued a ministerial decree allowing imports of boneless beef from Brazil. The effect on Australian beef exports to Indonesia will depend on a number of factors, such as price and consumer preferences. While Australia has a freight advantage, Brazil is a lower cost producer. The integration of Australia’s live cattle trade into Indonesian’s beef supply chain (through feedlots), Indonesia’s familiarity with Australian product and the preference to consume beef on the same day as it is slaughtered is expected to provide support for Australia’s live cattle trade.

The Middle EastAustralian beef exports to the Middle East rose by more than 145 per cent to 14 kilotonnes over the five years to 2008-09. In 2009-10, strong growth in Australian beef exports to this market is

Live cattle exportsby destination

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Beef and veal


forecast to continue, reaching around 20 kilotonnes. Over the next few years, the Middle East is expected to increase its significance as a market for Australian beef exports, although import demand in this region will still be relatively small compared with the main export destinations of Japan, the United States and the Republic of Korea.

Changes in Australian conditions for beef and beef product imports

On 20 October 2009, the Australian Government announced a change in the import conditions for beef products sourced from countries that have had one or more cases of Bovine Spongiform Encephalopathy (BSE or ‘mad cow disease’) in its cattle herd and have managed the human health risk from the disease. Under the changed requirements, which come into effect from 1 March 2010, such countries can apply to Food Standards Australia New Zealand (FSANZ) to seek to export beef and beef products to Australia for human consumption. Upon receiving an application, FSANZ is to conduct a rigorous risk assessment to determine if the country meets the conditions that allow exports to Australia. Any beef or beef product imports from countries assessed as having a controlled BSE risk will need to be certified as not containing, or being contaminated, with BSE risk materials.

It is likely that the potential quantity of beef imported under these changed conditions will be small given the competitiveness of the Australian beef industry and the small quantities of imported beef, both historically and currently. The combined effect of the medium-term projections of saleyard prices and production, allowing Australia to remain a significant global beef exporter, and transports costs suggests any potential imports would have to focus on small niche markets to be competitive. Prior to the decision in 2001 to stop imports from countries that had one or more cases of BSE in its cattle herd, Australia only imported small quantities of beef and beef products.

Beef and veal outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Saleyard price a– nominal Ac/kg 286 296 279 272 277 285 295 305– real b Ac/kg 302 303 279 266 264 265 268 270Cattle numbers c million 27.3 27.0 27.1 27.2 27.3 27.5 27.7 27.9– beef million 24.8 24.5 24.7 24.8 24.9 25.0 25.2 25.4Slaughterings ’000 8 799 8 702 8 355 8 490 8 540 8 600 8 665 8 700Production kt 2 155 2 148 2 062 2 108 2 120 2 139 2 157 2 165Consumption

per person kg 36.3 32.7 33.9 34.0 32.8 31.9 30.7 28.9

Export volume d kt 930 968 889 910 930 950 975 1 000– to United States kt 240 282 240 260 270 275 285 295– to Japan kt 365 363 341 350 360 365 370 380– to Korea, Rep. of kt 146 113 117 110 105 107 110 115Export value– nominal A$m 4 190 4 857 4 160 4 085 4 024 4 187 4 421 4 693– real b A$m 4 423 4 971 4 160 3 993 3 838 3 895 4 013 4 156Live cattle exports ’000 713 856 934 953 973 994 1 017 1 041

a Dressed weight. b In 2009-10 Australian dollars. c At 30 June. d Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection.Sources: Department of Agriculture, Fisheries and Forestries; Australian Bureau of Statistics; ABARE.

Beef and veal


Sheep meatOutlook to 2014-15

Gwendolen Rees

In recent years, the Australian sheep industry has increasingly shifted its focus to meat production as the national sheep flock continues to decline. Production of sheep meat, particularly lamb, has been maintained as a result of strong demand. In the short term, sheep producers are forecast to continue to focus on meat production, as sheep meat returns are expected to remain favourable.

Over the medium term, a projected gradual recovery in wool prices combined with favourable sheep meat prices is expected to lead to a gradual rebuilding of the sheep flock toward the end of the outlook period. This projected increase in flock numbers, together with a continued emphasis on meat production within sheep enterprises, is projected to result in increasing sheep meat production over the medium term.

Favourable sheep meat prices continuing into the medium termThe Australian weighted saleyard price of lambs is forecast to increase by 3 per cent in 2010-11, to average 450 cents a kilogram. Reduced lamb production combined with increased demand is forecast to result in higher prices in 2010-11. Over the medium term, lamb prices are projected to remain relatively high in real terms. Production is expected to fall slightly to 2011-12, before gradually rising, while demand is projected to increase steadily.

In real terms, the Australian weighted saleyard price of sheep is forecast to rise by 38 per cent in 2009-10, and by a further 5 per cent in 2010-11. The saleyard price is expected to peak in 2011-12, at 300 cents a kilogram (in 2009-10 dollars), largely as a result of a forecast decline in adult sheep slaughter over that period. Real prices are projected to remain relatively high in historical terms throughout the outlook period.

Australian sheep meat production and prices

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Sheep flock to increase from 2011-12The Australian sheep flock was estimated to total 71.6 million head at 30 June 2009, continuing the downward trend in sheep numbers. Although a positive outlook for wool and sheep meat prices is expected to encourage producers to retain breeding stock from 2009-10, it is projected that overall flock numbers will only begin to recover from 2011-12, and reach around 72 million head by 2014-15.

The shift away from sheep enterprises into alternatives such as cropping is expected to slow over the outlook period. Unfavourable cropping seasons in some regions of Australia over recent years could encourage some mixed livestock-cropping producers to shift their enterprise mix toward sheep. The sheep industry is expected to remain focused on meat production. Producers are therefore expected to increase their breeding stock, with little expansion in non-breeding adult sheep (wethers) numbers until the latter part of the outlook period. Total sheep numbers are projected to begin to increase from 2011-12, despite projected relatively high turn-off of lambs in response to favourable prices.

Adult sheep slaughter is forecast to fall to 10 million head in 2009-10, and by a further 13 per cent in 2010-11 to 8.8 million head. In the medium term, sheep slaughter is projected to gradually increase from 2011-12 to around 9.6 million head by 2014-15 as the sheep flock expands.

Mutton production is also forecast to fall in the short term, following the decline in slaughter. A decline of 12 per cent is forecast for 2009-10, to around 207 kilotonnes carcass weight. Over the medium term, production is projected to decline to 182 kilotonnes in 2011-12 before increasing to around 200 kilotonnes by 2014-15. Slaughter weights could increase if seasonal conditions are favourable over the outlook period.

Lamb slaughter is forecast to rise by around 1 per cent to 21 million head in 2009-10, as producers respond to favourable prices by increasing turn-off. In the six months to December

Australian sheep flock

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2009, lamb slaughter was 1 per cent higher than the same period in the previous year. However, this high slaughter is not expected to continue over the medium term. Producers are expected to rebuild flock numbers and total sheep numbers are projected to rise gradually. Lamb slaughter over this period is expected to fall as more female lambs are retained for flock rebuilding. As ewe numbers begin to rise toward the end of the outlook period, lamb numbers are forecast to increase and lamb slaughter is projected to gradually rise again.

Lamb production is forecast to follow the same trend, also rising by around 1 per cent in 2009-10, but then falling in the next few years because of lower flock numbers. By 2014-15, lamb production is projected to increase from the low of 2011-12 to roughly the same as 2009-10. Slaughter weights are expected to improve over the outlook period because of an increased focus on first and second cross lamb production.

Domestic consumptionDomestic lamb consumption averaged around 10.4 kilograms per person over the five years to 2008-09. In 2007-08, per person consumption fell to around 10 kilograms, but recovered in 2008-09 despite the negative effect of the economic slowdown.

Domestic per person consumption of lamb is projected to remain around 10.4 kilograms over the outlook period. Per person consumption of mutton is projected to continue to fall in line with past trends, to around 1.9 kilograms in 2014-15. The possibility of consumer substitution away from sheep meat toward lower priced sources of protein, in response to relatively high sheep meat prices, remains a potential downside risk to this consumption outlook.

Exports to fall in the short term, but recover in the medium termTotal exports of Australian sheep meat are forecast to fall by 5 per cent to 286 kilotonnes shipped weight in 2009-10, with an expected reduction in mutton export volumes more than offsetting increased exports of lamb. In the first half of 2009-10, mutton exports fell year on year by 16.5 per cent, while lamb exports grew by 12.5 per cent. Australia’s lamb

exports to the United States from July to December 2009 increased by 4 per cent in volume terms compared with the previous year, although in value terms they declined by 18 per cent as a result of a significantly higher Australian dollar against the US dollar and consumers substituting toward lower value cuts of meat. Mutton export volumes to Canada, Japan, the Republic of Korea and the Russian Federation fell, in aggregate, by around 40 per cent in the same period. China remains a rapidly growing destination for Australian sheep meat, with export volumes of mutton and lamb growing by 75 per cent and 5 per cent, respectively, in the same period. In 2010-11, total sheep meat exports are forecast to fall a further 12.8 per cent.

Australian sheep meat consumption and exports

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Sheep meat


Over the medium term, import demand in key destinations such as the United States, China and the Middle East are expected to grow. Reflecting an assumed gradual depreciation of the Australian dollar, total exports of lamb and mutton are projected to be around $1.5 billion in 2009-10 dollars by 2014-15.

Competition with sheep meat from New Zealand New Zealand accounts for around 40 per cent of global sheep meat exports and is Australia’s main competitor in major export markets. Over the past 10 years, sheep numbers in New Zealand have declined by more than 20 per cent, with some producers converting to dairy production. According to Meat and Wool New Zealand, the New Zealand flock is forecast to fall a further 3 per cent in 2009-10, to 33.1 million head.

Over the medium term, the New Zealand Ministry for Agriculture and Fisheries has projected a rebuilding of the New Zealand sheep flock, as returns to sheep meat improve relative to alternative enterprises. Sheep meat exports from New Zealand are forecast to fall slightly in 2009-10, but to rise gradually over the next five years. However, increased New Zealand exports are not expected to significantly affect the demand for Australian sheep meat, as demand growth in sheep meat importing countries is expected to be more than sufficient to absorb increased exports from both countries.

Strong prospects for exports to the United StatesLamb exports to the United States, Australia’s largest export market, are forecast to grow by around 3 per cent in 2009-10, to 39 kilotonnes shipped weight. Although export volumes were weaker in both November and December 2009, the total volume exported increased year on year by around 4 per cent in the second half of 2009. US domestic demand for lamb is expected to increase gradually in the short term as economic conditions in the United States begin to improve.

According to the United States Department of Agriculture, US flock liquidation is continuing with adult sheep slaughter rates considerably above historical averages in the second half of 2009. Given this trend of lower domestic production, the projected recovery of US demand for lamb and mutton provides an opportunity for increased demand for Australian sheep meat exports.

One factor potentially limiting growth in Australian exports to this market is the assumed relatively strong Australian dollar over the short to medium term. If the Australian dollar remains strong against the currencies of other sheep meat exporters such as New Zealand, there could be some substitution away from Australian sheep meat in export markets.

Live exports to slowOver the past three years, Australia has exported around 4 million sheep a year. In 2009-10, live exports are forecast to fall to 3.7 million head, which reflects a lower number of suitable adult sheep and competition from the slaughter lamb industry. Over the medium term, live exports are projected to average around 3.5 million head a year. Live export values are expected to be supported by strong demand for live sheep, particularly in the Middle East. Competition from other live sheep exporters such as Sudan is expected to be constrained by flock numbers and quality regulations such as import protocol health requirements.

Sheep meat


2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Saleyard price for sheep a– nominal Ac/kg 159 199 280 300 315 315 310 305– real b Ac/kg 168 203 280 293 300 293 281 270

Saleyard price for lambs a– nominal Ac/kg 335 424 435 450 465 475 480 485– real b Ac/kg 353 434 435 440 444 442 436 430

Sheep numbers c million 77 72 68 68 69 70 71 72

Slaughterings Sheep ’000 11 929 11 282 10 000 8 750 8 650 8 850 9 200 9 550Lamb ’000 20 899 20 767 21 000 19 750 19 700 19 850 20 300 20 700Production d Mutton kt 258 235 207 187 182 186 194 200Lamb kt 435 423 428 405 404 410 420 430Consumption per personMutton kg 2.3 2.1 2.1 2.1 2.0 2.0 1.9 1.9Lamb kg 10.0 10.9 10.7 10.6 10.4 10.4 10.4 10.4ExportsMutton exports e kt 158 146 125 111 108 113 120 124Lamb exports e kt 163 156 161 139 141 143 149 154– to United States kt 42 38 39 34 34 35 36 38Lamb export value– nominal $m 803 925 980 873 917 985 1 036 1 084– real b $m 848 947 980 853 875 917 940 960Live sheep exports ’000 4 069 4 064 3 700 3 400 3 400 3 450 3 500 3 500

a Dressed weight. b In 2009-10 Australian dollars. c At 30 June. d Carcass weight. e Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

Sheep meat outlook

Sheep meat


Pig meatOutlook to 2014-15

James Fell

The weighted average Australian saleyard price of pigs is forecast to be 317 cents a kilogram in 2010-11. While this represents a decline of 1 per cent from the average price achieved in the previous year, this forecast remains around 33 per cent higher in real terms than the average price over the five years to 2008-09.

Over the medium term, the weighted average saleyard price of pigs (in 2009-10 dollars) is projected to fall gradually to 297 cents a kilogram in 2014-15, which reflects increases in both domestic pig meat production and imports. Under the assumption of a gradual depreciation of the Australian exchange rate toward 2015, growth in import demand could ease marginally over the outlook period.

Domestic production to increaseDomestic pig meat production is forecast to remain largely unchanged at 329 kilotonnes in 2010-11. Production is projected to increase to 338 kilotonnes by 2014-15 as producers respond to relatively high real prices projected over the medium term and more favourable feed grain costs. Feed costs account for approximately 55 per cent of total production costs. Over the outlook period, the pig to feed grain price ratio, which is an indicator of returns from pig production, is expected to remain largely unchanged from current levels.

Imports to rise slightly over the medium termIn 2010-11, pig meat imports are forecast to increase by 4 per cent to 148 kilotonnes as a

result of the relatively high value of the Australian dollar. Australian Pork Limited estimates that around 70 per cent of processed pig meat consumed in Australia is currently sourced from imports. The processed pig meat sector accounts for around 60 per cent of total pig meat sales. As the domestic pig meat industry increasingly focuses on the fresh pig meat market, the scope to which imports can substitute domestic production or maintain downward pressure on domestic saleyard prices will depend on the extent to which consumers will accept processed pig meat as a substitute to fresh pig meat. Australian pig meat imports are projected to increase only slightly over the medium term, to reach 151 kilotonnes by 2014-15.

Given that approximately 50 per cent of Australian pig meat consumption was sourced from imports, market developments in major exporting countries can affect the Australian pig meat market. Over the past five years, pig meat imported by Australia has mostly originated in

Australian pig to feed price ratios monthly, ended November 2009

2.0

1.6

0.8

1.2

0.4

Nov-09

Nov-08

Nov-07

Nov-06

Nov-05

Nov-04

ratio

pig price/feed barley pricepig price/feed wheat price


Denmark, Canada and the United States. In Canada, the breeding pig herd has been declining, with a fall of 5 per cent in the 12 months to October 2009. A similar trend has also occurred in the United States since 2007, with the breeding herd down by 3 per cent in 2009. In contrast, sow numbers in Denmark increased by 1 per cent in the 12 months to October 2009. Despite the reduction in the breeding herd in the United States, lower US feed grain prices and an improved US pig to corn price ratio (an indicator of returns to US pig farmers) are expected to encourage pig production in that country.

Exports to rise slightlyAustralian pig meat export volumes consist of around 55 per cent fresh pork, with exports to Singapore and New Zealand accounting for approximately 78 per cent of all pig meat exports by volume. Exports are forecast to remain stable at 27.5 kilotonnes in 2010-11. Toward 2014-15, exports are projected to increase to 29.5 kilotonnes, being supported by an assumed depreciation of the Australian dollar.

Australian domestic production and imports (carcass weight equivalent)

200

kt

300

400

500

700

600

100

production

imports (CWE)

2014-15 z

2012-13 z

2010-11 f

2008-09

2006-07

2004-05

2002-03

2000-01

Pig meat


2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Pig meatBreeding sows a ’000 313 276 298 301 303 305 306 307Saleyard price b– nominal Ac/kg 240 330 320 317 320 325 330 335– real c Ac/kg 253 338 320 310 305 302 300 297Slaughterings ’000 5 217 4 522 4 550 4 590 4 630 4 670 4 700 4 710Production kt 377 324 328 329 332 334 336 338Consumption per person kg 24.7 24.3 26.0 26.2 26.0 25.8 25.5 25.3Imports d– fresh kt 100.2 125.3 139.1 145.5 146.5 147.5 148.0 148.5– preserved kt 2.8 2.8 2.7 2.5 2.5 2.5 2.5 2.5– total kt 103.0 128.0 141.8 148.0 149.0 150.0 150.5 151.0Export volume de kt 39.1 32.3 27.9 27.5 28.0 28.5 29.0 29.5Export value– nominal $m 128.1 123.7 108.6 110.0 112.0 112.0 116.0 120.0– real c $m 135.2 126.6 108.6 107.5 106.8 104.2 105.3 106.3Poultry meatProduction kt 835 866 873 910 940 970 1 000 1 030Consumption per person kg 37.8 37.5 38.0 38.8 39.5 40.3 40.9 41.7Export volume kt 30.2 37.1 33.1 36.0 36.5 37.0 37.5 38.0

a Numbers at 30 June. b Dressed weight. c In 2009-10 Australian dollars. d Shipped weight. e Excludes preserved pig meat. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; ABARE.

Pig meat and poultry outlook

Pig meat


PoultryOutlook to 2014-15

James Fell

The Australian poultry industry has experienced strong growth over the past 20 years, with production increasing on average by around 4 per cent a year. This pattern of growth is expected to continue over the short to medium term. Australian poultry production is forecast to reach 910 kilotonnes in 2010-11, which is an increase of 4 per cent on the previous year.

Over the medium term, Australian poultry production is projected to increase by 13 per cent, compared with 2010-11, to reach 1030 kilotonnes by 2014-15.

The Australian poultry industry is highly concentrated with two major processors supplying more than 70 per cent of the domestic broiler chicken market. Chicken meat production accounts for around 96 per cent of total production of poultry meats. The chicken meat industry is more vertically integrated than other livestock industries and, in general, operates a business model whereby the processors provide both feed and day old chicks to broiler chicken growers who are contracted to grow the chickens.

Feed accounts for around 60 per cent of production costs in the poultry industry. Grains and oilseed meal account for around 90 per cent of feed volume and therefore constitute a large proportion of feed costs. Over the short to medium term, feed grain and oilseed meal prices are projected to be below the highs observed in recent years but still above that achieved in the early 2000s.

The Australian poultry industry continues to import new genetic strains that enable producers to improve numerous traits, including average slaughter weights, feed conversion ratios, disease resistance and fertility, which can lower production costs. Between 1991-92 and 2008-09, average chicken slaughter weights have increased by an average of slightly more than 1 per cent a year. This trend is expected to continue over the medium term.

In 2010-11, retail prices of fresh whole chicken are forecast to average 548 cents a kilogram, largely unchanged from 2009-10. Over the medium term, retail prices (in 2009-10 dollars) are projected to decline to 500 cents a kilogram by 2014-15 as lower production costs and increased supplies put downward pressure on price.

Australian meat consumption per head per year carcass weight equivalent

kg

9

18

27

36

45

2014-15 z

2011-12 z

2008-09

2005-06

2002-03

1999-2000

1996-97

1993-94

beef (excl. veal)poultrypig meatmuttonlamb


Poultry consumption is forecast to be around 39 kilograms a person in 2010-11, which is 2 per cent higher than the previous year. Over the medium term, consumption is projected to grow to 42 kilograms a person by 2014-15. Poultry is projected to maintain its position as the most consumed meat on a carcass weight equivalent basis.

Poultry exports for 2010-11 are forecast to be 36 kilotonnes. Over the outlook period, Australian poultry exports are projected to increase only slightly to 38 kilotonnes by 2014-15.

Poultry


WoolOutlook to 2014-15

Gwendolen Rees and Marina Kim

The Australian Eastern Market Indicator (EMI) price for wool is forecast to average 920 cents a kilogram clean in 2010-11, which is an increase of 6 per cent relative to 2009-10. The ongoing decline of the Australian sheep flock and increased demand for woollen textiles as world economic growth improves are the principal drivers of the forecast rise in the price of wool.

Over the medium term, the EMI is projected to rise gradually in real terms. Demand is forecast to increase over the outlook period, while wool supplies are projected to decline to 2011-12, before rising gradually as Australian sheep producers begin to rebuild flocks.

Flock contraction to slowThe ongoing decline of the sheep flock has been a feature of the Australian sheep industry for several years and is expected to continue in the short term. The number of sheep shorn is forecast to fall in 2010-11 by 3 per cent to 75 million head. Although favourable returns to sheep meat production and improved seasonal conditions are expected to encourage producers to retain breeding stock in 2009-10 and 2010-11, it is unlikely that producers will reduce slaughter rates sufficiently to turn flock numbers around in this period.

Over the medium term, the number of sheep shorn is expected to increase after 2011-12 as flock numbers gradually increase. In some regions, mixed livestock-cropping producers that have favoured cropping over sheep in recent years are likely to increase sheep numbers. However, any shift toward sheep from cropping is likely to focus on meat rather than wool production, given that returns to lamb production are projected to remain higher than returns from wool. As a result, flock rebuilding will occur gradually because producers will continue to turn off a significant proportion of lambs because of favourable prices. Despite the forecast

Wool cut per head and sheep shorn

4.0

4.2

4.4

4.6

4.8

2014-15 z

2008-09

2010-11 f

2012-13 z

2006-07

2004-05

2002-03

2000-01

cut per head (left axis)

sheep shorn (right axis)

kg

150

120

90

60

30

millionhead


gradual recovery in sheep numbers, the number of sheep shorn by 2014-15 is projected to be around 10 per cent lower than in 2008-09.

Assuming favourable seasonal conditions, wool cut per head is projected to gradually rise over the outlook period. However, cut per head is expected to remain considerably below the long-term average of 4.4 kilograms per head. Sheep producers are expected to retain a strong focus on sheep meat production, which is likely to result in a high proportion of lambs and a low proportion of non-breeding adult sheep (wethers) in the sheep flock. The forecast modest increase in the wool price relative to lamb and mutton prices toward the end of the outlook period is expected to encourage a small increase in the proportion of wethers in the flock.

Based on the projections for sheep shorn and cut per head, shorn wool production in 2010-11 is forecast to fall by 3 per cent relative to 2009-10, to 320 kilotonnes greasy equivalent. Shorn wool production is expected to continue to fall in 2011-12, but at a slower rate.

However, from 2012-13 a gradual increase in the wool clip is projected, which reflects an increased proportion of adults in the sheep flock and an increase in the total number of sheep. Over the medium term, it is likely that the micron distribution will be increasingly concentrated at the fine and coarse ends of the scale. Growers who had been producing medium micron wool are expected to shift toward meat production, while wool specialists are expected to focus production on fine and superfine wools in order to gain price premiums.

World wool consumptionAfter peaking in the late 1980s, world wool consumption declined throughout the 1990s and the first half of the 2000s. From a high of 1.9 million tonnes in 1987, wool consumption fell by more than 35 per cent to 1.2 million tonnes in 2007. On a per person basis, wool consumption halved over the same period. The fall occurred at a time of excess production in world fibre markets and declining fibre prices. This declining trend in wool consumption mainly reflected strong competition from synthetic fibres.

Australian EMI and shorn wool production

100

200

300

400

500

2014-15 z

2008-09

2010-11 f

2012-13 z

2006-07

2004-05

shorn wool production (left axis)


ktgreasy

1500

1200

900

600

300

2009-10c/kg clean

Wool


While wool consumption has declined in many major markets since the 1980s, the greatest decline was in Eastern Europe and the countries that comprised the former Soviet Union. Wool consumption also declined in the main wool consuming markets in Western Europe and Japan.

In contrast, wool consumption in China (including Hong Kong and Chinese Taipei) rose markedly from an average of 208 kilotonnes in the 1980s to 260 kilotonnes in the 2000s, which reflects the increase in the Chinese population. China now accounts for around one-fifth of world wool consumption. On a per person basis, consumption of wool remained relatively unchanged at around 0.2 kilograms clean.

Demand to remain strongDemand for Australian wool has risen in the first half of 2009-10, with China being the dominant buyer. Chinese retail sales of textiles, clothing and footwear grew by 19 per cent in 2009 and Australian wool exports to China have been increasing steadily since August 2009, in both volume and value terms, apart from falling slightly in December 2009. Domestic demand for wool apparel in China is projected to remain buoyant over the medium term as incomes increase.

Chinese demand for Australian wool used in textiles that are destined for export is expected to recover only gradually in the short term. Consumer demand for textiles—including woollen products—in apparel-importing countries is yet to fully recover from the effects of the global

World wool consumption

0.4

0.8

1.2

1.6

2.0

Mtclean eq

200720021997199219871982

Estimated average annual consumption of wool (clean volume) 1980-89 1990-99 2000-07

total per person total per person total per person kt kg kt kg kt kg

China a 207.8 0.2 253.3 0.2 259.6 0.2Japan 165.9 1.4 166.1 1.3 99.7 0.8Korea Rep. of 14.4 0.4 34.4 0.8 34.0 0.7Eastern Europe and former Soviet Union b 339.6 1.1 166.6 0.4 111.3 0.3France 52.0 0.9 41.8 0.7 26.1 0.4Germany c 138.6 1.8 121.0 1.5 66.3 0.8Italy 86.5 1.5 97.8 1.7 56.6 1.0United Kingdom d 86.8 1.5 81.0 1.4 83.8 1.4United States 130.4 0.5 123.7 0.5 146.7 0.5World 1 763.3 0.4 1 579.2 0.3 1 313.3 0.2

a Includes Hong Kong and Chinese Taipei; b Excludes Eastern Europe 1980-1987; c Includes former East Germany 1980-1990; d Includes Ireland 1980-1987.

Wool


economic downturn. Specifically, the unemployment rates in the European Union and the United States remain relatively high and consumer confidence, while improving, remains relatively low. According to the Office of Textiles and Apparel in the United States, US imports of woollen apparel from China fell in 2009 for almost all apparel categories. Similarly, European Union imports of animal hair yarn and fabric from China declined by around 17 per cent for the 10 months to October 2009 relative to the same period the previous year. Once economic conditions improve in these economies, demand for wool is expected to increase.

Assuming the prices of man-made fibres such as polyester move roughly in line with oil prices, wool prices are projected to increase in competitiveness in the next few years, as oil prices are forecast to rise more significantly.

World wool supply

Since 1990, world wool production has declined, which reflects a sustained period of low wool prices and reduced profitability for wool growers. In response to changes in demand and higher relative returns from alternative enterprises, many wool producers worldwide have turned to other options such as sheep meat, beef, dairy and cropping at the expense of wool.

Declining wool production has been observed in many wool producing countries, including Australia, New Zealand, South Africa, Uruguay and the United Kingdom. China has been an exception to this global trend, as both wool production and sheep numbers have increased. However, the increase in Chinese wool production has mainly occurred in the coarse wool category.

Reflecting the growing preference for dual purpose sheep breeds, there has been an increase in the world production of coarse wool, while fine wool production has declined. Notwithstanding this trend, many Australian producers have continued to specialise in fine wool production. Australia is the world’s largest producer of fine wool, accounting for around 90 per cent of global fine wool production.

Declining sheep numbers and wool production

After peaking in the early 1990s, world wool production and sheep numbers have declined. In 1990, world greasy wool production reached 3.3 million tonnes before falling to only 2.2 million tonnes in 2008. Global sheep numbers declined from 1.21 billion head in 1990 to 1.03 billion head in 2002, before a moderate rise to 1.08 billion head in 2008. The recent rise has been driven largely by an increase in demand for sheep meat.

Sheep numbers and wool production have fallen in most of the major wool growing regions. Between 1990 and 2008, greasy wool production and sheep numbers declined by 58 per cent and 56 per cent, respectively, in Australia, the world’s largest producer. In the former Soviet Union, sheep numbers and wool production

continued...

Chinese greasy wool production by Australian equivalent grade

50

1990

2008

100

150

200

250

kt

less than 25 μm 25.1 to 40 μm

Source: China Statistical Yearbook.

Wool


World wool supply continued

declined even more sharply—by 64 per cent and 73 per cent, respectively—during the 1990s, before rising by 50 per cent and 33 per cent between 2000 and 2008.

In contrast, sheep numbers and wool production in China increased by 20 per cent and 69 per cent, respectively, between 1990 and 2008. These increases were driven by higher domestic consumption of sheep meat. As a result, the increase in wool production in China has primarily been in the coarse wool category.

Increased production of coarse wool

While there has been an overall reduction in global wool supply in recent decades, the fall in fine wool production has been more pronounced than for medium and coarse wool types.

In 1990, around 50 per cent of global wool produced was classed as fine wool according to the IWTO standards (less than or equal to 24.5 microns in diameter), but by 2008 this proportion declined to 36 per cent. In volume terms, fine wool production fell from 948 kilotonnes in 1990 to 428 kilotonnes in 2008. In contrast, the share of coarse wool (greater than 32.5 microns in diameter) increased from 30 per cent to 42 per cent over the same period. The share of medium wool (24.6-32.5 microns in diameter) remained unchanged at around 22 per cent.

Source: IWTO, The Conference Board Total Economy Database.

World sheep population and wool production

1

2

3

4

5

2008200319981993198819831978197319681963

wool production (left axis)

sheep numbers (right axis)

Mtgreasy

1.25

1.0

0.75

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0.25

billionhead

continued...

Wool

World wool productionby IWTO grade

200

1990

fine medium coarse

2000

2008

400

600

800

1000

ktgreasy

Source: IWTO.


World wool supply continued

An increased preference for dual purpose sheep breeds, such as cross-bred merinos, is a major factor behind the reduced fineness in world wool production. Fine wool producing sheep are not ideal for sheep meat production, while sheep farmed for meat tend to produce coarser wool. As the proportion of sheep produced for meat increases relative to those produced for fibre, fine wool production decreases and coarse wool production increases.

Competition from major wool exporters to fallLike Australia, sheep flocks in most other wool exporting countries have declined over recent years (see the accompanying box). Sheep numbers have been falling in New Zealand, South Africa and Uruguay. Of the five major wool exporters, Australia has experienced the greatest decline in both relative and absolute terms.

Wool production in Argentina, Uruguay and South Africa is projected to decline in the short term, before stabilising toward the end of the outlook period as rising wool prices encourage producers to slow turn-off and retain more non-breeding stock. Flock rebuilding is expected to occur in New Zealand over the medium term as a result of the positive outlook for sheep meat. However, given New Zealand’s wool production is largely focused on coarse microns suitable for furnishings rather than apparel wool, it is not expected that New Zealand’s flock expansion will significantly increase competition for Australian wool. The projected rise in price is not expected to encourage any significant shift back into wool from either meat production or alternative enterprises in these countries.

Wool exports to rise gradually over the medium termTotal wool exports, including greasy and semi-processed wool and wool on skins, are forecast

to fall by 4 per cent to 385 kilotonnes in greasy equivalent in 2010-11. Exports are expected to decline further in 2011-12, before rising gradually in line with the projected increase in domestic wool production. By 2014-15, total wool exports are projected to be around 402 kilotonnes in greasy equivalent.

China, which imported more than 70 per cent of Australian wool exports in 2008-09, is expected to remain the principal destination for Australian wool exports. The importance

Sheep numbers in major wool exporting countries

120

100

80

60

40

20

millionhead

2007-08

2005-06

2003-04

2001-02

1999-2000

AustraliaNew ZealandSouth AfricaArgentinaUruguay

Wool


of Italy as an export market for Australia is expected to continue to fall, as Italian top-making capacity is relocated to Asia. India, which in 2008-09 became Australia’s second largest wool export destination by volume, is expected to receive an increased proportion of total Australian wool exports during the outlook period.

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Eastern market indicator (clean)– nominal Ac/kg 945 794 870 920 960 1 015 1 070 1 130– real a Ac/kg 997 812 870 899 916 945 971 1 001Sheep numbers b million 77 72 68 68 69 70 71 72Sheep shorn million 95 87 77 75 75 76 77 78Cut per head kg 4.30 4.27 4.28 4.27 4.25 4.28 4.29 4.29Wool production (greasy)– shorn kt 408 371 330 320 317 323 330 335– other c kt 51 34 32 32 31 30 31 32– total kt 459 404 362 352 348 353 361 367Wool exports (balance of payments basis)– volume (greasy equiv.) kt 477 439 400 385 381 387 395 402– nominal value A$m 2 796 2 322 2 297 2 059 2 038 2 105 2 198 2 359– real value a A$m 2 951 2 376 2 297 2 012 1 944 1 959 1 996 2 089

a In 2009-10 Australian dollars. b At 30 June. c Includes wool on sheepskins, fellmongered and slipe wool. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Australian Wool Exchange; ABARE.

Wool outlook

Wool


DairyOutlook to 2014-15

David Barrett

World dairy product prices recovered strongly in the first half of 2009-10 before partially retreating in early 2010. Stronger prices were the result of significantly higher import demand for milk powders by China and for butter by India in 2009, and lower than expected milk production in the European Union, Australia and New Zealand.

World dairy prices to rise in 2010-11In 2010-11, world prices for most dairy products are forecast to rise, driven by increased demand for dairy products in developed and major dairy importing developing countries as world economic recovery strengthens. Although milk yields in 2010-11 are forecast to be higher, growth in milk production in the major producing countries is likely to be constrained, to some extent, by forecast lower cow herds, particularly in the European Union, the United States and Australia.

Medium-term outlook for world dairy pricesWorld prices for dairy products are projected to remain relatively high over the period to 2014-15. Compared with the average prices of the five years to 2006-07, world dairy product prices are projected to average around 25 per cent higher over the outlook period.

Toward the end of the outlook period, projected higher dairy prices are expected to lead to increased milk production in the major exporting countries, placing downward pressure on world dairy prices.

Underpinning the medium-term price projections is the expected increase in demand for dairy products as a result of income and population growth as well as changing diets in favour of dairy products, particularly in developing countries.

World dairy prices

1000

2000

3000

4000

5000

6000

2014-15 z

2012-13 z

2010-11 f

2008-09

2006-07

2004-05

2002-03

2000-01

1998-99

1996-97

1994-95

1992-93

1990-91

cheese

skim milk powder

whole milk powder

butter

2009-10US$/t


However, the characteristics of the world dairy market mean that international dairy prices are likely to continue to fluctuate significantly over the medium term. Only a relatively small share of world dairy production enters world trade and small changes in production or consumption of dairy products in the major dairying countries can lead to volatility in world dairy product prices. The disposal of intervention stocks, including through the use of export subsidies, may also contribute to significant fluctuations in world market prices.

World milk production to recover over the medium termIn 2010-11, milk production in most of the major producing and exporting countries is forecast to increase after the downturn in 2009-10.

In the European Union, milk output is forecast to rise marginally in 2010-11 as producers recover from the relatively low prices of 2009. However, EU milk production is still expected to be below the EU milk quota, which is due to be increased by a further 1 per cent for the 2010-11 marketing year.

US milk production is forecast to decline by around 0.5 per cent in 2010, which reflects an expected 2.2 per cent fall in the national cow herd because of the recent culling of dairy cows. Higher milk prices in 2010 and 2011 are expected to lead to increased feeding and higher milk yields.

New Zealand milk production is forecast to increase again in 2010-11 in line with longer term growth as producers respond to the improved profitability of dairying in that country. Australian milk production is forecast to decline by 5 per cent to 8.9 billion litres in 2009-10, which is the lowest production since 1997-98. Assuming favourable seasonal conditions, Australian milk production is forecast to recover in 2010-11 as producers respond to expected higher milk prices.

Over the medium term, global milk production is forecast to increase in the traditional dairy exporting countries as well as emerging countries in Asia, such as China and India, and in South America.

In the European Union, the total milk quota will increase by 1 per cent a year through to 2013-14 before the scheduled complete removal of production quotas from 2015. In 2008-09, milk production in the European Union was around 4 per cent below the milk quota and is expected to be below quota again in 2009-10. For EU countries where intensive grain feeding of dairy cows occurs, such as the Netherlands, projected relatively high grain prices over the medium term are expected to limit milk production increases. In contrast, EU countries with relatively low costs of production, such as Poland, will be less constrained. Overall, EU milk production is projected to increase over the medium term.

Following the sharp fall in world dairy product demand and world dairy prices in 2008-09, the US dairy industry implemented several dairy cow cull programs to reduce overcapacity in the industry. While the US dairy cow herd is projected to remain relatively stable over the medium term, continuing growth in milk yields is expected to lead to US milk production increasing by around 1 per cent annually over the outlook period.

Dairy


Given the relatively favourable price outlook, New Zealand milk production is projected to increase by around 2 per cent annually, which is slightly less than the average growth rate experienced over the past 10 years. Much of the recent growth in milk production in New Zealand has resulted from an expansion in the number of dairy cows as agricultural land for other purposes was converted to dairying, particularly in the South Island. The extent to which further conversions take place over the medium term is likely to be limited by the availability of land that will generate higher returns to dairying relative to alternative uses. Therefore, further increases in milk production will depend on raising productivity.

Milk production in emerging economiesMilk production in most developing and emerging economies is characterised by relatively low milk yields. For example, milk yields in Brazil, an emerging dairy exporter, and India, the largest milk producing country, are low in comparison with the dairy industries in the United States and some countries of the European Union. The latter dairy industries are based on intensive grain feeding and this, combined with superior animal genetics, results in relatively high yields. Pasture based dairy industries of New Zealand, Argentina and, to a lesser extent, Australia also record lower average yields compared with the intensive feed based dairy industries operated in the United States and the European Union.

The Brazilian dairy industry is predominantly pasture based, with relatively low costs of milk production. Consequently, Brazil has the potential to be able to compete with other low cost producers, such as New Zealand and Australia, particularly in the market for milk powders. Over the medium term, Brazil’s milk production is projected to grow given the support it receives through interest rate subsidies and a minimum price program, and the potential to raise its productivity. However, much of the likely projected increase in Brazil’s milk production is expected to be used to meet the growing domestic demand for dairy products.

World milk yields

2000

4000

6000

8000

10 000

United States

Australia

Argentina

New Zealand

Russian Federation

China

Brazil

India

kg/cow

2010 f2008200620042002200019981996199419921990

Dairy


While Argentine milk production was adversely affected by drought in 2008-09, production is projected to increase over the medium term as efficiencies are gained through farm consolidations. Export taxes on dairy products were removed in March 2009 and this is expected to enhance Argentina’s export competitiveness.

Global demand and trade for dairy products to growOver the medium term, continuing economic growth in the major dairy importing regions, particularly developing countries, is expected to underpin import demand and lead to increased trade in dairy products.

Many Asian economies have reported substantial increases in animal protein consumption and in particular dairy products, although starting from a relatively low base. In general, demand for dairy products is responsive to rising incomes and many Asian countries have been experiencing westernisation of their diets. Urbanisation has also provided consumers with greater choice through the establishment of large retailers and restaurant chains. However, many Asian consumers are lactose intolerant and the consumption of fluid milk and milk fat is likely to remain lower than in other countries with comparable income characteristics. While many Asian countries provide some government support to their domestic dairy industries, most countries are expected to expand their dairy product imports over the outlook period.

Countries of North Africa and the Middle East are expected to remain significant importers of dairy products, particularly butter and milk powders. While some countries in the region, such as Algeria, are expected to increase milk production in response to increased government support, over the medium term the increase in production is unlikely to meet the expected growth in demand.

The Russian Federation is a large global importer of butter and cheese. However, there is some uncertainty over its import demand for dairy products over the medium term. The speed of economic recovery will influence domestic consumption and import demand for dairy products, particularly cheese. In recent years the government has introduced policies, such as subsidised credit for the construction of new dairies and higher import tariffs, to increase milk production. However, despite increased support the expected increase in production is unlikely to meet the growth in demand.

CheeseGrowth in global cheese consumption is expected to be underpinned by the recovery in economic growth in both developed and emerging economies. While Japan, the United States and the Russian Federation have been the most significant import markets for cheese, over the medium term the Republic of Korea, Mexico, South-East Asia, the Middle East and North Africa are expected to exhibit relatively strong growth in demand for cheese.

Japan imports around 200 kilotonnes of cheese a year, which accounts for around 80 per cent of its domestic consumption. Over the medium term, growth in Japanese imports of cheese is likely to slow as a result of increased domestic production and the projected slow decline in the population. However, Japan is still expected to remain Australia’s largest cheese export market.

Dairy


Cheese consumption in the Republic of Korea is expected to grow strongly over the medium term in response to greater exposure to western foods, such as pizza and pastas, and the associated rise in fast food outlets. Demand for imported premium soft cheeses, such as Brie and Camembert, is growing as consumers are offered greater choice. Elsewhere in Asia, while per person consumption remains low there is expected to be a continued change in diets to include more dairy products, particularly cheese.

World cheese prices are forecast to increase by 3 per cent to US$3800 a tonne in 2010-11, as compared to the forecast increase of 12 per cent in 2009-10.

ButterThe key global markets for butter and butter oil include the Russian Federation, the Middle East, North Africa and Asia. World demand for

butter is expected to improve in 2010-11 as economic activity in the main importing regions strengthens. While the Russian Federation is expected to remain the dominant importer of butter over the medium term, additional imports are expected by Mexico and some South-East Asian countries, such as Vietnam.

World butter prices are forecast to decline slightly to US$3120 a tonne in 2010-11, having been forecast to increase by 28 per cent for the current year. Over the medium term, world butter prices are projected to decline, in real terms, reaching US$2718 a tonne (in 2009-10 dollars) by 2014-15. This reflects higher supplies in the major exporting countries. A key uncertainty for prices in the short term is the timing of the disposal of EU intervention stocks onto the world market. EU butter stocks were 76 353 tonnes at the beginning of 2010. However, a significant proportion of these stocks have been allocated for distribution by charitable organisations to persons in need within the European Union in the second half of 2010.

Milk powdersGlobal trade in whole milk powder is dominated by New Zealand. Exports of whole milk powder from New Zealand have increased by 7 per cent annually since 2005. Other major suppliers are the European Union, Argentina and Australia. With EU milk production projected to increase only slightly over the medium term and EU cheese production to continue to rise, growth in EU exports of whole milk powder is expected to be relatively limited over the projection period. With forecast higher milk production in South America, both Argentina and Brazil are also projected to increase their exports of whole milk powder over the outlook period.

Major cheese importers

Russian FederationUnited StatesAlgeriaMexico

Korea, Rep. of JapanEuropean Union 27Philippines

1000

800

600

200

400

kt2003 2001 2009 20072005

Dairy


Over the medium term, China is likely to remain an opportunistic buyer of milk powders on the world market. In 2009, Chinese imports of whole milk powder increased fourfold to reach165 kilotonnes. The Chinese melamine contamination in 2008 undermined consumer confidence in domestically produced dairy products and, as a consequence, milk production in China declined sharply in 2009. Further sales of contaminated product were reported in early 2010 and this has the potential to again affect demand for domestically produced milk powders in favour of imports.

Per person consumption of dairy products remains relatively low in China, but over the medium term consumption is expected to grow as incomes increase and continued urbanisation takes place. Chinese milk production has increased significantly over the past decade and, although falling in 2009, production is expected to resume its longer term growth rate over the medium term, in line with greater investment in production and processing facilities.

South-East Asia is the largest importer of milk powders and is the principal destination for Australian exports. However, Australian milk powder exporters are expected to face increased competition over the medium term from other low cost suppliers such as Brazil, Argentina and New Zealand. An expected recovery in US dairy production in the second half of the projection period could also result in higher US skim milk powder exports to this region.

World whole milk powder prices are forecast to remain relatively high averaging US$3111 a tonne, in 2009-10 dollars, over the next three years and around 21 per cent higher than the average price achieved in 2008-09. Toward the end of the projection period, increased supplies of whole milk powder are expected to moderate real prices, with prices projected to be US$2899 a tonne in 2014-15.

Similarly, world skim milk powder prices are forecast to rise to an average of US$3012 a tonne, in 2009-10 dollars, over the next three years before increased world exports, particularly from the United States and New Zealand, are expected to put downward pressure on prices toward the end of the outlook period. The timing of the eventual disposal of skim milk powder stocks from EU intervention stores onto the world is uncertain. At the beginning of January 2010, EU intervention stocks of skim milk powder were 257 788 tonnes. From this, 65 290 tonnes will be distributed within the European Union by charitable organisations to persons in need.

Exports of whole milk powderto ASEAN

otherEuropean UnionUnited States

AustraliaNew Zealand

350

300

200

250

50

100

150

kt2002 20001998 2008 20062004

Dairy


Prospects for Australian dairy productsWhile world dairy product prices in 2010-11 are forecast to remain close to the average prices of the previous year, the forecast relatively high Australian dollar is likely to continue to temper the returns to Australian dairy exporters. Overall, the Australian farm-gate price for milk is forecast to average 35.5 cents a litre in 2010-11, which is only slightly higher than the current year.

Average farm-gate prices for milk are projected to rise to 2014-15, peaking at 36.3 cents a litre (in 2009-10 dollars) in 2013-14. At the end of the outlook period, Australian farm-gate prices are expected to ease back slightly, which reflects projected weaker international prices.

Australian milk production to recover over the medium termAustralian milk production is forecast to decline by around 5 per cent to 8930 million litres in 2009-10. Most of this forecast fall in production is expected to occur in Victoria and Tasmania where dairy farmers are more focused on producing manufacturing milk and thereby more exposed to fluctuations in returns from dairy export markets. Milk production is expected to fall sharply in the irrigation areas of northern Victoria where many farmers have culled their herds and adjusted their feeding regimes in response to the sharp decline in farm-gate milk prices in the first half of 2009.

Assuming favourable seasonal conditions, Australian milk production is forecast to increase slightly in 2010-11, but remain below that of recent years. Over the medium term, milk production is projected to rise gradually to reach 9.7 billion litres in 2014-15, driven largely by productivity increases.

Milk production over the medium term will depend on seasonal conditions, water availability in the main irrigation areas and fodder prices. The availability of water for irrigation, particularly in northern Victoria and southern New South Wales, is likely to be a continuing constraint on milk production in these areas, as competing water demands from urban users and the environment need to be balanced.

Many farmers in these irrigation areas have developed management strategies to cope with reduced water allocations—some of these have involved increasing supplementary feeding, particularly of grain. Supplementary feed now accounts for around one-third of farm cash costs of dairy farms. While domestic grain prices are forecast to be lower in 2010-11, grain prices (in 2009-10 dollars) are projected to remain relatively high over the medium term.

Victorian milk production

northernwesterneastern

3500

3000

2500

2000

1000

500

1500

ML

2001-02

1999-2000

2009-10 f

2007-08

2005-06

2003-04

Dairy


Climate variability will continue to be a key issue for the Australian dairy industry. For example, should they occur again, the extended periods of well above average temperatures during the peak milk production months, particularly in south-eastern Australia, will adversely affect milk yields and thereby constrain growth in milk production.

Over the outlook period, changes in Australia’s dairy product mix and total output will be driven by changes in relative returns from the various manufactured products. For example, the relative prices for higher valued products such as cheese are projected to be higher than prices of other dairy products. As a result, cheese is likely to account for an increased proportion of manufactured dairy product output and Australian dairy exports over the outlook period.

Australian domestic marketIn 2008-09, around 55 per cent of Australia’s milk production was sold on the domestic market—the highest proportion since the mid-1990s—which reflects the decline in milk production since the early 2000s. Over the medium term, the domestic market is expected to remain the dominant outlet for many of Australia’s dairy products. At the same time, imports of cheese and, to a lesser extent, butter are expected to continue to grow.

Around one-quarter of Australia’s milk production is sold as market milk. Since 2000-01, market milk sales have increased by 16 per cent to reach 2244 million litres in 2008-09. According to Dairy Australia, market milk consumption has been steadily shifting from regular milk to modified milk types, such as reduced and low fat milks. Total consumption of market milk is forecast to increase over the outlook period in line with income and population growth as well as demographic and lifestyle changes.

While per person consumption of cheese has been relatively stable in recent years there has been a shift from cheddar to non-cheddar varieties, except in 2008-09 when this trend was

Australian production and milk price

2000

4000

6000

8000

10 000

12 000

2014-15 z

2012-13 z

2010-11 f

2008-09

2006-07

2004-05

2002-03

2000-01

1998-99

1996-97

1994-95

1992-93


milk price (right axis)

ML2009-10c/L

30

20

40

50

60

10

Dairy


2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

WorldIndicative priceButter– nominal US$/t 4 027 2 485 3 188 3 120 3 100 3 120 3 100 3 000– real a US$/t 4 121 2 508 3 188 3 076 2 995 2 952 2 870 2 718Skim milk powder– nominal US$/t 4 204 2 333 2 846 3 010 3 100 3 250 3 200 3 100– real a US$/t 4 302 2 355 2 846 2 967 2 995 3 075 2 963 2 808Cheese– nominal US$/t 5 073 3 281 3 677 3 800 3 900 4 000 3 950 3 900– real a US$/t 5 191 3 311 3 677 3 746 3 768 3 785 3 657 3 533

AustraliaCow numbers b ’000 1 640 1 645 1 567 1 580 1 605 1 615 1 610 1 610Yield per cow L 5 624 5 707 5 699 5 715 5 789 5 882 5 969 6 025

Production Total milk ML 9 223 9 388 8 930 9 030 9 290 9 500 9 610 9 700– Market sales ML 2 202 2 244 2 282 2 310 2 365 2 410 2 445 2 490– Manufacturing ML 7 021 7 144 6 648 6 720 6 925 7 090 7 165 7 210

Butter c kt 128 148 130 125 120 112 115 110Cheese kt 361 342 321 319 335 348 354 352Skim milk powder kt 164 212 198 195 190 184 183 183Wholemilk powder kt 142 148 127 129 136 139 139 139

Farmgate milk price d– nominal Ac/L 49.6 42.5 35.2 35.5 36.5 38.0 40.0 40.0– real e Ac/L 52.4 43.5 35.2 34.7 34.8 35.4 36.3 35.4

Export volumeButter c kt 57 70 73 62 52 46 46 44Cheese kt 203 146 130 131 137 148 153 149Skim milk powder kt 123 162 153 151 142 131 133 132Wholemilk powder kt 82 116 97 99 103 106 106 104

Export value– nominal A$m 2 763 2 679 1 894 2 029 2 135 2 263 2 329 2 282– real e A$m 2 916 2 742 1 894 1 983 2 036 2 106 2 114 2 021

a In 2009-10 US dollars. b At 30 June. c Includes the butter equivalent of butteroil, butter concentrate, ghee and dry butterfat. d Includes freight from farm gate to processor in some states. e In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; Dairy Australia; ABARE.

Dairy outlook

reversed. The consumption of fresh and frozen dairy products, such as yoghurts, dairy desserts and ice cream, have expanded in the past decade and are expected to continue to increase over the outlook period.

Australian dairy exportsThe total value of Australian dairy exports is forecast to increase by 7 per cent to $2 billion in 2010-11. Over the medium term, the total value of Australian dairy exports is projected to remain around $2 billion (in 2009-10 dollars) in 2014-15, which reflects relatively lower projected world dairy product prices toward the end of the outlook period.

Dairy


Farm performanceBroadacre and dairy farms - 2007-08 to 2009-10

Peter Martin, Stephen Hooper, Paul Phillips, Sarah Crooks and Bruce Bowen

• Overall, broadacre farm financial performance is projected to decline in 2009-10 reversing some of the improvement recorded in 2008-09. Average farm cash income is projected to fall from $76 000 in 2008-09 to $62 000 in 2009-10.

• Reduced farm cash incomes are expected for broadacre farms in New South Wales and Queensland as a consequence of reduced crop production combined with lower grain prices and reductions in receipts from beef cattle.

• In Victoria, South Australia and Tasmania, farm cash incomes are projected to rise because of improved seasonal conditions, increases in winter crop production in 2009 and higher prices for wool, sheep and lambs. In Western Australia farm cash incomes are projected to be lower than in 2008-09, but remain relatively high.

• Average farm cash income for dairy farms is projected to decline further in 2009-10 in response to lower prices for manufacturing milk, continued dry conditions and low availability of irrigation water in some dairy regions.

• New investment in vehicles, farm equipment and improvements in 2008-09 was the highest recorded in the past 20 years. Overall, broadacre and dairy farms had strong farm equity at 30 June 2009 and debt servicing has been assisted by historically low interest rates in 2008-09 and 2009-10.

The financial performance of Australian broadacre farms improved in 2007-08 and again in 2008-09 after a record low in 2006-07 which was caused by widespread and severe drought. Farm cash income for broadacre farms increased from an average of $64 220 a farm in 2007-08 to average $76 000 in 2008-09. However, farm cash income for dairy farms declined from $129 310 in 2007-08, the second highest amount in more than 30 years, to $88 000 in 2008-09 as prices for manufacturing milk fell.

In 2009-10, the overall financial performance of Australian broadacre and dairy farms is projected to decline mainly because of significantly lower grain and manufacturing milk prices, a small reduction in beef cattle prices and reduced turn-off of beef cattle and sheep as herd rebuilding commences in response to improved seasonal conditions, particularly in northern regions. Lower overall farm cash incomes are expected despite reduced expenditure on the two most important cost items, fertiliser and interest payments, and improved seasonal conditions are expected to result in a reduction in fodder expenditure during 2009-10.

For broadacre farms, farm cash income is projected to decline to average $62 000 a farm in 2009-10 and farm cash income for dairy farms to decline to average $50 000 a farm.

Improvement in broadacre farm financial performance is projected for Victoria, South Australia and Tasmania in 2009-10. Farm cash incomes for sheep farms generally across the country are projected to improve in 2009-10 with higher wool, sheep and lamb prices, although


production remains constrained by low sheep numbers. In southern irrigation regions, farm financial performance remains constrained by shortages of irrigation water.

Financial performance of Australian farms Broadacre and dairy farms account for 68 per cent of commercial-scale Australian farm businesses (ABS, 2009). These farms are also responsible for the management of more than 90 per cent of the total area of agricultural land in Australia and account for the majority of Australia’s family owned and operated farms. Located in all regions across Australia, these farms form a vital part of rural communities and local economies.

Each year ABARE interviews producers from the broadacre and dairy sectors of Australian agriculture as part of its annual survey program. Broadacre industries covered in this survey include: wheat and other crops; mixed livestock-crops; sheep; beef and sheep-beef industries (box 1). The information collected provides a basis for analysing the current financial position of farmers in these industries and the expected changes in the short term. Data from ABARE’s Australian Agricultural and Grazing Industries Survey (AAGIS) and Australian Dairy Industry Survey (ADIS) have been analysed to gain insights into the performance of Australian broadacre and dairy farms over the period from 2007-08, including projected farm financial performance in 2009-10 (table 1).

ABARE uses the latest data available in producing estimates from its surveys. This means that estimates are revised as new information becomes available. When producing estimates from the 2008-09 farm survey, estimates for 2007-08 were recalculated to reflect updated benchmark information obtained from the ABS. This resulted in some estimates changing from the preliminary estimates previously published.

box 1 The broadacre sector of Australian agriculture is defined to include five industry types

Wheat and other crops industry: representing the more specialised producers of cereal grains, coarse grains, pulses and oilseeds.

Mixed livestock–crops industry: representing those farms engaged in the production of sheep and/or beef cattle in conjunction with substantial activity in broadacre crops such as wheat, coarse grains, oilseeds and pulses.

Sheep industry: representing the more specialised producers of sheep and wool. The number of properties classified to this industry, along with the sheep industry’s contribution to wool production, has declined substantially since the early 1990s as producers diversified enterprises. Currently, sheep industry farms account for only 30 per cent of Australia’s wool production. The majority of both wool and sheep meat production occurs on mixed enterprise farms, particularly on mixed livestock–crops industry farms.

Beef industry: representing properties engaged mainly in running beef cattle and which currently accounts for around 65 per cent of Australia’s beef production. The beef industry contains a large number of small farms.

Sheep–beef industry: representing properties engaged in running sheep and beef cattle. As for the sheep and beef industries, this industry also contains a large number of small farms.

Farm performance


Farm production 2008-09High grain, oilseed and grain legume prices in early 2008 led to a large increase in winter crop plantings in 2008-09. Below average spring rainfall in 2008 resulted in low yields in southern Australia. However, in Queensland and northern New South Wales, as well as in the northern grain belt of Western Australia, in-season rainfall and stored soil moisture resulted in a substantial increase in winter crop production. Overall, winter crop production increased by around 50 per cent on broadacre farms in 2008-09 compared with 2007-08. However, rain through the harvest period in many states resulted in a downgrading of grain quality, increased supply of feed grade grains and reduced prices for many growers.

Summer crop production was reduced by around 15 per cent on broadacre farms in 2008-09 relative to 2007-08. Although summer cropping regions of northern New South Wales and southern Queensland had favourable seasonal conditions, the area planted to grain sorghum declined as a result of lower feed grain prices and a reduction in the area of fallow land available. While there was a small increase in the total area planted to both cotton and rice, production of these crops remained low as farms continued to operate with limited availability of irrigation water.

Improved seasonal conditions in far northern Australia in 2008-09 led to a reduction in cattle turn-off as rebuilding of beef cattle herds commenced, although there were some losses of beef cattle as a result of flooding in the Gulf region of Queensland. In southern and eastern parts of Queensland and the Northern Territory dry seasonal conditions continued until late in 2009 and cattle turn-off increased. In southern states, cattle numbers were already reduced because of several dry years and cattle turn-off remained high as continued dry conditions prevented herd rebuilding in 2008-09. Sheep numbers and wool production declined further because of continued high turn-off rates of sheep and lambs for slaughter combined with reduced lambing rates.

Nationally, milk production increased by 1.8 per cent in 2008-09. Production increasing most in Tasmania, Queensland, Western Australia and South Australia, but in New South Wales and, particularly in Victoria, the increase was small. Continued dry conditions in south-eastern mainland regions combined with low irrigation water allocations and reduced farm gate-milk prices led dairy farmers in northern Victoria and southern New South Wales to further reduce dairy cow numbers and milk production.

2009-10Overall, the total area sown to winter crops increased only marginally on broadacre farms in 2009-10 compared with the area planted in 2008-09. Wheat area expanded slightly as the area planted to barley, canola and lupins was reduced.

Queensland, northern New South Wales, western Victoria and South Australia received good planting rains for winter crops and plantings were augmented after further rain in June. In Queensland, the area planted to winter crops increased by more than 20 per cent and in South Australia the planted area increased by around 2 per cent. However, in southern New South

Farm performance


Wales, eastern Victoria and Western Australia, the start to the season was poor before early June rainfall enabled the majority of planting to occur. The total area planted to winter crops fell in southern New South Wales and Victoria. In Western Australia the area planted to winter crops remained similar to 2008-09.

Yields in the major cropping regions of South Australia and Victoria were markedly higher than in 2008-09, reflecting above average rainfall through spring, although high temperatures and rains around harvest time reduced the quality of later sown grain crops. On broadacre farms, winter crop production is estimated to have increased by around 50 per cent in Victoria and is estimated to have increased by around 60 per cent in South Australia. In contrast, winter crop production in Queensland and New South Wales is estimated to have been reduced by around 20 and 30 per cent respectively, because of very dry seasonal conditions through spring. In southern and central New South Wales, late frosts also contributed to lower yields. In Western Australia a dry finish to the season, particularly in the southern wheat belt, reduced yields and with only a small increase in planted area in Western Australia, overall winter crop production is estimated to have been reduced by around 1 per cent relative to 2008-09.

Overall, total winter crop production on Australian broadacre farms increased by around 4 per cent in 2009-10 compared with 2008-09, with wheat production estimated to be around 3 per cent higher, barley production around 4 per cent higher and canola production 3 per cent higher.

Low rainfall in early summer in northern New South Wales and Queensland, combined with a reduction in the area available for summer crops because of large winter crop plantings, led to a reduction in the area planted to grain sorghum in 2009-10 compared with 2008-09. Widespread rains in late summer across Queensland and northern New South Wales improved prospects for summer crops, boosted expected sorghum yields, increased inflows to irrigation storages and perhaps, also, enabled some late planting of sorghum in Queensland.

A small increase in the availability of irrigation water in the Murray-Darling and Murrumbidgee catchment areas led to an increase in the area planted to rice in 2009, but the overall area planted was well below the long-term average. In addition, cotton plantings on broadacre farms increased in 2009-10, which mainly reflected expectations of improved returns from cotton production relative to alternative enterprises.

The late spring rains in Victoria and South Australia boosted pasture growth and encouraged many farmers in these states to hold onto sheep and beef cattle. In contrast, spring was extremely dry across northern and eastern Australia.

Conditions remained dry until late summer when above average rainfall occurred across most of northern Australia and into New South Wales, although parts of southern and eastern Queensland, the Northern Territory and New South Wales still remained dry late in summer. This rainfall is expected to significantly improve grazing conditions across northern Australia, together with northern and eastern New South Wales, leading to a substantial reduction in cattle turn-off as farms retain stock and commence herd and flock rebuilding.

Farm performance


Despite some improvement in seasonal conditions and increased availability of irrigation water, low farm-gate prices for manufacturing milk in 2009-10 are estimated to have resulted in a reduction in milk production in all states except Queensland and New South Wales. In recent years, milk production in the irrigation areas of northern Victoria and southern New South Wales has declined markedly as a result of drought and low water allocations in the Murray-Darling irrigation system. With better rainfall in catchment areas in spring 2009, water allocations for 2009-10 have improved, but availability of irrigation water still remains relatively low for many broadacre and dairy farms in 2009-10.

Farm receipts2008-09In 2008-09, increased crop production raised average crop receipts by around 2 per cent a farm, despite falls in grain and oilseed prices (fi gure a).

A small reduction in sales of both sheep and lambs was more than offset by the higher prices received resulting in sheep and lamb receipts increasing by an average of 12 per cent for broadacre farms in 2008-09.

Average wool receipts per farm declined by 23 per cent for broadacre farms in 2008-09 as reductions in wool production resulting from drought and reduced sheep numbers combined with lower prices resulting from weak export demand.

The number of beef cattle sold fell by 2 per cent on broadacre farms, but prices received per head sold were higher than in 2007-08, partly reflecting improved quality of the cattle turned off, resulting in average beef cattle receipts per farm increasing by 3 per cent in 2008-09.

At the national level, average total cash receipts for broadacre farms fell by 2 per cent in 2008-09; increased receipts from livestock sales and crops were outweighed by reductions in receipts for wool, together with reductions in government drought assistance payments to farm businesses.

2009-10In 2009-10, average crop receipts per farm are projected to fall by 7 per cent with increases in total crop production more than offset by lower grain, oilseed and pulse prices (fi gure a).

Significantly higher saleyard prices for sheep are projected to more than offset lower turn-off of sheep, resulting in an increase of more than 10 per cent in average sheep receipts per farm.

A small increase in turn-off of lambs, combined with an increase in forecast lamb prices, is expected to result in lamb receipts increasing by around 3 per cent in 2009-10.

Despite a forecast increase in wool prices, average wool receipts are projected to remain largely unchanged in 2009-10 from 2008-09. Wool sold per farm is expected to fall because of a further reduction in sheep numbers and lower wool cuts per head because of dry seasonal conditions in 2009.

Farm performance


Reductions in beef cattle turn-off from broadacre farms combined with lower saleyard prices is projected to result in a reduction in average beef cattle receipts per farm of around 6 per cent in 2009-10.

Average total cash receipts for broadacre farms are projected to fall by 8 per cent in 2009-10, with reduced crop and beef cattle receipts, outweighing increases in receipts from sheep, lambs and wool.

Farm cash receipts, broadacre industries

2009-10$’000

90

270

180

360

450

2006-07

2009-10 z

2005-06

2003-04

2001-02

1999-98

1997-98

1995-96

1993-94

1991-92

2007-08

a

other

crops

beef cattle

sheep and lambs

wool

box 2 Major financial performance indicators

Farm cash income = total cash receipts – total cash costs

Farm business profit = farm cash income + changes in trading stock – depreciation – imputed labour costs

Profit at full equity = farm business profit + rent + interest and finance lease payments – depreciation on leased items

Rate of return = profit at full equity ÷ total opening capital x 100

Off-farm income = wages off-farm + other business income + investment + social welfare payments

total revenues received by the farm business during the financial year

payments made by the farm business for materials and services and for permanent and casual hired labour (excluding owner manager, partner and family labour)

(return produced by all the resources used in the farm business)

(return to all capital used)

(owner manager and spouse only)

Farm performance


Farm costs2008-09Increases in fertiliser prices during 2007-08 resulted in fertiliser becoming the equal largest item, together with interest on borrowings, of cash expenditure for broadacre farms in that year (fi gure b). Farm business debt has risen over time and, with increases in interest rates in 2007-08, both interest paid and fertiliser expenditure reached historical highs. Fertiliser prices fell in the second half of 2008-09 when the majority of broadacre farms normally purchase fertiliser and interest rates were reduced from October in response to the global financial crisis, which lowered average expenditure on both items. However, with farm business debt remaining high, interest paid became the single largest item of expenditure for broadacre farms in 2008-09. Overall total cash costs for broadacre farms declined 6 per cent in 2008-09 reflecting lower expenditure on fuel as a result of lower fuel prices combined with reduced fertiliser and interest expenditure.

For dairy farms, purchase of fodder including grains, hay, silage and concentrates has remained the largest item of farm expenditure for all of the past decade. In 2008-09, fodder prices fell significantly because of lower feed grain and hay prices. However, purchases of fodder remained high with many dairy farms in southern New South Wales and northern Victoria increasing purchases in response to low irrigation water allocations, and as farms generally sought to increase milk production with seasonal conditions remaining dry. In addition, expenditure on interest, the second largest expense item for dairy farms, increased despite reductions in interest rates because of an increase in average farm debt per farm, which was partially driven by increased farm investment. Overall, average total cash costs for dairy farms are estimated to have increased by 6 per cent in 2008-09, with an increase in most cash cost categories.

box 3 Farm survey methodology

ABARE surveys are designed, and samples selected, on the basis of a framework drawn from the Business Register maintained by the Australian Bureau of Statistics (ABS). This framework includes agricultural establishments in each statistical local area classified by size and major industry.

Data provided in this paper have been collected via on-farm interviews and incorporate detailed farm financial accounting information.

The estimates presented have been calculated by appropriately weighting the data collected from each sample farm. Sample weights are calculated so sample estimates of numbers of farms, areas of crops and numbers of livestock in various geographic regions and industries correspond as closely as possible to the most recently available ABS data as collected in its Agricultural Censuses and updated annually with data collected in Agricultural Commodity Surveys.

The 2009-10 projections are based on data collected via on-farm interviews and telephone interviews in the period October to December 2009. The estimates include crop and livestock production, receipts and expenditure up to the date of interview, together with expected production, receipts and expenditure for the remainder of the 2009-10 financial year. Modifications have been made to expected receipts and expenditure for the remainder of 2009-10 where significant price change has occurred post interview.

Farm performance


2009-10For broadacre farms, average total cash costs are projected to fall by 3 per cent in 2009-10 mainly as a result of reduced expenditure on fodder and fertiliser and lower interest payments. Improved seasonal conditions combined with lower feed grain and hay prices are expected to reduce fodder expenditure. Fertiliser prices are forecast to be lower in 2009-10. Interest payments are projected to be lower because of lower average interest rates in 2009-10, relative to the higher interest rates applying in the second half of 2008-09, and despite expected increases in farm debt. Reductions in these costs are projected to more than outweigh increases in expenditure caused by higher fuel prices and increased expenditure associated with harvesting and marketing a larger winter grain crop in 2009-10.

Dairy industry expenditure is projected to reduce by 26 per cent, which is a sharp response to lower milk receipts in 2009-10. As in the broadacre industries, reductions are expected to be largest for fodder, fertiliser and interest payments.

Farm incomes and profits The financial performance of Australian broadacre farms is projected to decline, on average, in 2009-10, reversing the improvement recorded in 2008-09.

Nationally, average farm cash income for broadacre farms increased from $64 220 in 2007-08 to $76 00 in 2008-09 and is projected to decline to $62 000 in 2009-10 (table 1) which is around 19 per cent below the average for the 10 years to 2008-09 of $77 000 (in real terms – fi gure c, table 1). Lower grain, oilseed and beef cattle prices, combined with a reduction in beef cattle turn-off and wool production, are projected to outweigh increases in crop production and reductions in expenditure on fodder, fertiliser and interest payments, to result in this fall in average farm cash income.

For the dairy industry, farm financial performance is projected to fall sharply in 2009-10 because of lower milk prices, particularly for manufactured dairy products, and despite

Major cash costsbroadacre farms

fertiliser

interest paid

beef cattlepurchases

fuel, oiland grease

repairs and maintenance

crop and pasture chemicals

hired labour

interest paid

fertiliser

fuel, oiland grease

repairs and maintenance

fodder

3525155$’000

20015010050

2007-08 2008-09 s 2009-10 z

$’000

Major cash costsdairy farms

b

s Preliminary estimate. z Provisional projection.

Farm performance


the substantial reductions expected in farm expenditure. Nationally, average farm cash income for dairy farms fell from an historical high of $129 310 in 2007-08 to $88 000 in 2008-09 and is projected to fall to $50 000 in 2009-10 (table 1), which is well below the average for the 10 years to 2008-09 of $91 000 and similar to the average farm cash income recorded in the drought of 2006-07 (in real terms – fi gure f ).

Farm cash income is a measure of the cash funds generated by the farm business for farm investment and consumption after paying all costs incurred in production, including interest payments, but excluding capital payments and payments to family workers. It is a measure of

Financial performance, all broadacre industries average per farm

farm cash incomefarm business profit

120100

80

-80-100

60

-60

40

-40

20

-20

2009-10$’000

2009-10 z

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

c

1 Financial performance, all broadacre industries average per farm

2007-08 2008-09 s 2009-10 z

Total cash receipts $ 338 650 336 600 (3) 311 000Total cash costs $ 274 430 260 700 (4) 250 000Farm cash income $ 64 220 76 000 (6) 62 000Farms with negative farm cash income % 34 29 (6) 29Farm business profit $ –11 310 –1 500 (288) –18 000Farms with negative farm business profit % 68 68 (2) 70

Profi t at full equity – excl. cap. appreciation $ 29 380 36 600 (12) 18 000– incl. cap. appreciation $ 84 360 40 600 (29) naFarm capital at 30 June a $ 3 898 150 3 800 300 (2) naNet capital additions $ 40 110 43 500 (22) naFarm debt at 30 June b $ 413 060 409 000 (5) 418 000Change in debt -1 July to 30 June b % 8 4 (43) 4Equity at 30 June bc $ 3 362 320 3 234 200 (3) naEquity ratio bd % 89 89 (1) naHarvest loans at 30 June e $ 5 870 2 200 (30) naFarm liquid assets at 30 June b $ 142 710 153 300 (8) naFarm management deposits (FMDs) at 30 June b $ 28 160 28 800 (9) naShare of farms with FMDs at 30 June b % 22 22 (7) na

Rate of return g – excl. cap. appreciation % 0.8 1.0 (12) 0.5– incl. cap. appreciation % 2.2 1.1 (29) na

Off-farm income of owner manager and spouse b $ 34 030 35 800 (5) na

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. g Rate of return to farm capital at 1 July. s Preliminary estimate. z Provisional projection. na Not available.

Farm performance


short-term farm performance because it does not take into account depreciation or changes in farm inventories. A measure of longer term profitability is farm business profit as it takes into account capital depreciation and changes in inventories of livestock, fodder, grain and wool.

Average farm business profit in the broadacre industries is projected to be reduced by a slightly larger amount in 2009-10 than the reduction in farm cash income (table 1). This is partly because a high level of new investment in farm plant, machinery and improvements in 2008-09 resulted in increased depreciation in 2009-10 and partly because only a small change is expected in the value of trading stocks as an increase in stocks in some states is mostly balanced by reductions in others. The value of grain stocks on-farm is expected to increase in Victoria but to be reduced in Queensland. Similarly, little change is expected in the value of livestock inventories. Small increases are expected in cattle numbers in some northern regions, but small reductions or little change expected in southern regions. In addition, a small reduction is expected in sheep numbers during 2009-10.

On average, broadacre farm businesses are projected to realise a farm business loss of $18 000, compared with a loss of $1500 in 2008-09.

Rates of returnThe average rate of return to total farm capital including capital appreciation was relatively high between 2000-01 and 2006-07 but declined in 2007-08 and 2008-09 (fi gure d). Strong demand for rural land during most of the 2000s has resulted in a sharp increase in land values in most agricultural regions, which has raised the total capital value of farms. Rapidly rising farm capital values resulted in high rates of return, including capital appreciation. However, from 2007-08 increases in land values have been much smaller, particularly in northern Australia and in higher rainfall areas where the growth in land prices had been strong through the early and mid-2000s. Slower growth in land values in 2008-09 is estimated to have resulted in a much lower average rate of return to total farm capital, including capital appreciation.

Rates of return excluding capital appreciation have been adversely affected in many regions by a number of poor profit years resulting from adverse seasonal conditions and by lower profitability resulting from reduced grain and manufacturing milk prices in 2008-09 and 2009-10. Rises in total farm capital values as a consequence of increases in land values in recent years have also acted to reduce rates of return excluding capital appreciation. With lower farm business profits projected for broadacre and dairy farms in 2009-10, average rates of return excluding capital appreciation are expected to fall from 1 per cent in 2008-09 to 0.7 per cent in 2009-10 (figure e).

In 2009-10, the highest average rate of return excluding capital appreciation are projected

d Return on capitalbroadacre industries

including capital appreciationexcluding capital appreciation

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10

8

6

2

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2009-10 z

2006-07

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1997-98

Farm performance


for South Australia, Western Australia, the Northern Territory and Victoria (table 2); and for cropping farms and sheep farms (table 4).

Performance, by state Projected farm financial performance for 2009-10 and how this performance ranks in historical terms varies markedly across states and regions (table 2 and 3, together with map 1).

New South WalesLower farm cash incomes are projected in 2009-10 for most grain growing areas with the exception of parts of north western New South Wales, where relatively large increases in grain production are estimated to have increased farm receipts. Elsewhere in New South Wales cropping areas, poor spring rainfall and high temperatures resulted in reduced grain production and, in combination with lower grain prices, led to lower farm cash incomes.

Farm cash incomes for livestock farms in north eastern areas are projected to be maintained by increases in turn-off of beef cattle, sheep and lambs. However, in most other regions farm cash incomes for beef cattle and sheep farms are expected to remain relatively low being constrained by livestock numbers and low turn-off as some herd and flock rebuilding occurs following improvement in seasonal conditions in late 2009 and early 2010. The benefits of higher wool prices are expected to be limited by lower wool production in 2009-10, particularly in southern regions.

On average, farm cash income of broadacre farms in New South Wales is projected to fall from $50 800 in 2008-09 to $23 000 a farm in 2009-10 (table 2), which is less than half the average farm cash income for the 10 years to 2008-09.

Farm cash income, broadacre and dairy farms

average, 10 years ending

2008-09 2009-10 z

map 1

z Provisional projection.

Farm performance


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Farm performance


3 Financial performance, by state, all broadacre industries average per farm

New South Wales Victoria

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

Total cash receipts $ 256 350 292 800 (7) 254 000 265 280 199 200 (4) 237 000Total cash costs $ 237 670 242 000 (8) 231 000 187 370 158 400 (5) 157 000Farm cash income $ 18 680 50 800 (12) 23 000 77 910 40 800 (13) 79 000Farms with negative farm cash income % 41 33 (11) 35 26 27 (15) 17Farm business profit $ –59 170 –21 800 (27) – 54 000 12 490 –29 900 (19) 10 000Farms with negative farm business profit % 78 74 (4) 78 66 70 (6) 64

Profi t at full equity

– excl. cap. appreciation $ –21 460 16 400 (38) –22 000 38 180 –8 000 (65) 31 000– incl. cap. appreciation $ –2 540 17 500 (79) na 138 430 25 100 (131) naFarm capital at 30 June a $ 3 339 190 3 234 700 (4) na 2 904 190 2 859 200 (8) naNet capital additions $ 24 150 30 400 (35) na 28 580 26 900 (56) naFarm debt at 30 June b $ 394 010 407 600 (9) 409 000 236 580 225 800 (9) 228 000Change in debt – 1 July to 30 June b % 8 3 (63) 6 11 5 (118) 1Equity at 30 June bc $ 2 873 850 2 754 600 (4) na 2 628 590 2 594 800 (8) naEquity ratio bd % 88 87 (1) na 92 92 (1) naHarvest loans at 30 June e $ 130 200 (89) na 0 0 (99) naFarm liquid assets at 30 June b $ 113 930 134 800 (13) na 143 260 141 800 (21) naFarm management deposits (FMDs) at 30 June b $ 19 660 21 700 (18) na 28 410 19 200 (17) naShare of farms with FMDs at 30 June b % 16 19 (14) na 24 22 (16) na

Rate of return g

– excl. cap. appreciation % –0.6 0.5 (37) –0.7 1.4 –0.3 (67) 1.1– incl. cap. appreciation % –0.1 0.5 (79) na 4.9 0.9 (131) na

Off–farm income of owner manager and spouse b $ 33 160 43 100 (7) na 42 530 38 300 (13) na

Queensland Western Australia

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

Total cash receipts $ 343 300 338 000 (6) 270 000 608 820 708 100 (6) 631 000Total cash costs $ 273 770 255 400 (7) 224 000 490 690 491 500 (6) 516 000Farm cash income $ 69 530 82 600 (12) 47 000 118 130 216 600 (10) 115 000Farms with negative farm cash income % 34 28 (16) 40 39 28 (20) 32Farm business profit $ 18 090 19 800 (49) –22 000 24 370 96 200 (23) –5 000Farms with negative farm business profit % 64 62 (4) 73 59 52 (9) 64

Profi t at full equity – excl. cap. appreciation $ 65 760 62 000 (16) 15 000 95 580 160 200 (14) 64 000– incl. cap. appreciation $ 75 910 32 600 (96) na 200 610 186 400 (16) naFarm capital at 30 June a $ 5 601 170 5 452 800 (4) na 4 851 520 5 001 200 (6) na

continued...

Farm performance


3 Financial performance, by state, all broadacre industries average per farm continued

Queensland Western Australia

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

Net capital additions $ 18 850 16 400 (111) na 108 900 118 500 (40) naFarm debt at 30 June b $ 523 640 497 800 (11) 465 000 668 570 683 900 (9) 779 000Change in debt - 1 July to 30 June b % 7 3 (77) 7 6 3 (138) 1Equity at 30 June bc $ 4 861 900 4 688 600 (4) na 4 128 510 4 012 900 (6) naEquity ratio bd % 90 90 (1) na 86 85 (2) naHarvest loans at 30 June e $ 0 1 000 (81) na 41 020 14 000 (33) naFarm liquid assets at 30 June b $ 166 510 153 000 (21) na 161 780 207 800 (21) naFarm management deposits (FMDs) at 30 June b $ 36 250 35 200 (17) na 33 710 57 100 (19) naShare of farms with FMDs at 30 June b % 24 23 (14) na 24 32 (18) na

Rate of return g

– excl. cap. appreciation % 1.2 1.1 (15) 0.3 2.0 3.2 (14) 1.2– incl. cap. appreciation % 1.4 0.6 (96) na 4.3 3.8 (16) na

Off-farm income of owner manager and spouse b $ 29 670 25 400 (7) na 29 140 28 000 (13) na

South Australia Tasmania

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

Total cash receipts $ 336 310 305 900 (5) 334 000 233 160 226 200 (7) 240 000Total cash costs $ 259 620 241 100 (4) 230 000 195 720 186 800 (7) 180 000Farm cash income $ 76 690 64 800 (13) 104 000 37 440 39 400 (26) 60 000Farms with negative farm cash income % 21 26 (14) 11 36 27 (27) 37Farm business profit $ –14 310 –19 800 (42) 22 000 –49 030 –26 400 (38) 5 000Farms with negative farm business profit % 61 70 (6) 59 78 70 (11) 63

Profi t at full equity – excl. cap. appreciation $ 17 780 14 200 (58) 53 000 –28 140 –3 000 (300) 27 000– incl. cap. appreciation $ 55 220 5 700 (395) na 66 600 19 100 (149) naFarm capital at 1 July a $ 3 112 300 3 104 100 (5) na 3 258 180 3 352 700 (6) naNet capital additions $ 60 440 77 800 (45) na 27 480 9 600 (310) naFarm debt at 30 June b $ 338 510 314 500 (8) 315 000 212 590 272 500 (14) 281 000Change in debt –1 July to 30 June b % 9 6 (56) 3 11 10 (47) 1Equity at 30 June bc $ 2 670 500 2 602 700 (5) na 3 016 550 3 046 100 (7) naEquity ratio bd % 89 89 (1) na 93 92 (1) naHarvest loans at 30 June e $ 3 320 1 700 (50) na 0 0 () naFarm liquid assets at 30 June b $ 160 990 165 200 (14) na 144 350 191 100 (27) naFarm management deposits (FMDs) at 30 June b $ 29 430 29 700 (23) na 31 730 18 200 (57) naShare of farms with FMDs at 30 June b % 25 22 (22) na 21 16 (44) na

continued...

Farm performance


3 Financial performance, by state, all broadacre industries average per farm continued

South Australia Tasmania

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 zRate of return g – excl. cap. appreciation % 0.6 0.5 (57) 1.8 -0.9 -0.1 (300) 0.8– incl. cap. appreciation % 1.8 0.2 (395) na 2.1 0.6 (150) na


Northern Territory Australia

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

Total cash receipts $ 2 782 490 1 692 200 (17) 866 000 338 650 336 600 (3) 311 000Total cash costs $ 1 894 400 1 793 600 (19) 810 000 274 430 260 700 (3) 250 000Farm cash income $ 888 090 –101 400 (237) 55 000 64 220 76 000 (6) 62 000Farms with negative farm cash income % 43 59 (15) 34 34 29 (6) 29Farm business profit $ 382 950 –112 600 (211) 43 000 –11 310 –1 500 (280) –18 000Farms with negative farm business profit % 47 64 (8) 51 68 68 (2) 70

Profi t at full equity

– excl. cap. appreciation $ 502 270 62 300 (384) 226 000 29 380 36 600 (12) 18 000– incl. cap. appreciation $ 2 002 680 –346 200 (73) na 84 360 40 600 (28) naFarm capital at 30 June a $ 20 553 980 17 089 700 (14) na 3 898 150 3 800 300 (2) naNet capital additions $ 173 940 115 300 (120) na 40 110 43 500 (22) naFarm debt at 30 June b $ 1 308 610 2 178 700 (29) 2 379 000 413 060 409 000 (5) 418 000Change in debt –1 July to 30 June b % 1 5 (79) 2 8 4 (40) 4Equity at 30 June bc $ 12 347 250 11 184 500 (14) na 3 362 320 3 234 200 (2) naEquity ratio bd % 90 84 (3) na 89 89 (1) naHarvest loans at 30 June e $ 0 0 () na 5 870 2 200 (28) naFarm liquid assets at 30 June b $ 227 310 78 800 (38) na 142 710 153 300 (8) naFarm management deposits (FMDs) at 30 June b $ 136 460 25 700 (79) na 28 160 28 800 (8) naShare of farms with FMDs at 30 June b % 23 5 (55) na 22 22 (7) na

Rate of return g

– excl. cap. appreciation % 2.6 0.4 (384) 1.7 0.8 1.0 (11) 0.5– incl. cap. appreciation % 10.3 -2.0 (73) na 2.2 1.1 (28) na


a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. g Rate of return to farm capital at 1 July. s Preliminary estimates. z Provisional projection. na Not available.

Farm performance


VictoriaFarm cash income for Victorian cropping farms is estimated to have increased in 2009-10, relative to 2008-09, with improved seasonal conditions resulting in a large increase in grain production, more than offsetting the effect of lower grain and oilseed prices and raising crop receipts.

Receipts from sheep, lambs and wool are projected to increase because of higher prices and to underpin farm cash incomes for many livestock producers. However, receipts from beef cattle farms are projected to be reduced, with lower turn-off, as better seasonal conditions particularly in the south-west encourage farmers to hold on to stock.

On average, farm cash incomes for broadacre farms in Victoria are projected to rise to average $79 000 a farm in 2009-10 (tables 2 and 3) which is 25 per cent above the average farm cash income recorded for the 10 years to 2008-09.

QueenslandQueensland farm cash incomes are projected to fall significantly in 2009-10 because of substantial reductions in crop production combined with lower grain prices, reduced beef cattle turn-off and lower cattle prices. Receipts from summer crops are expected to be significantly reduced in 2009-10 relative to 2008-09. Yield prospects for summer crops appear good at this time, being boosted by late summer rainfall. However, the area planted to grain sorghum is estimated to be lower in 2009-10 than 2008-09 because of a dry spring and early summer, the large area planted to winter crops and continued rainfall through the latter part of the summer planting period.

Improved seasonal conditions in 2009-10 are expected to result in a reduction in turn-off of beef cattle as farmers commence rebuilding herds following dry conditions in 2008-09. Lower turn-off, combined with a small reduction in beef cattle prices is projected to reduce beef cattle receipts.

Overall, farm cash incomes for broadacre farms in Queensland are projected to fall to average $47 000 a farm in 2009-10 (tables 2 and 3) which is around 45 per cent below the average farm cash income recorded for the 10 years to 2008-09.

Reduction in grain stocks on-farm and little change overall in beef cattle numbers during 2009-10 are projected to result in a fall in the average value of stocks on-farm resulting in a slightly larger reduction in farm business profit in 2009-10.

Western AustraliaWestern Australian broadacre farm cash incomes are projected to fall in 2009-10, but nevertheless remain relatively high in historical terms. Winter crop production is estimated to have declined slightly compared with 2008-09 and, with lower grain prices, is projected to result in lower receipts from the 2009-10 crop. However, substantial pool payments for grain delivered in 2008-09 will cushion the reduction in crop receipts in 2009-10. Overall, crop receipts are projected to decline by around 12 per cent in 2009-10 compared with 2008-09.

Farm performance


Receipts from sheep, lambs and wool are expected to increase slightly, but receipts from beef cattle are projected be reduced by slightly lower turn-off.

Farm cash income for Western Australia broadacre farms is projected to average $115 000 (tables 2 and 3). While significantly lower than the record farm cash income is estimated for 2008-09 of $216 600, the average farm cash income projected for 2009-10 is only around 3 per cent below the average for the 10 years ending 2008-09.

South AustraliaDespite lower grain prices, South Australian broadacre farm cash incomes are projected to increase substantially in 2009-10 as a result of much higher grain production compared with 2007-08 and 2008-09. Beef cattle receipts are expected to be reduced because of reduced turn-off. Receipts from sheep and lambs are expected to increase because of higher prices and despite a reduction in sheep turn-off. Wool receipts are projected to increase slightly as higher prices are mostly offset a small reduction in wool sold.

Farm cash incomes for broadacre farms in South Australia are projected to rise to average $104 000 a farm in 2009-10 (tables 2 and 3) which is around 4 per cent above the average farm cash income recorded for the 10 years to 2008-09.

TasmaniaTasmanian broadacre farm cash incomes are projected to increase in 2009-10 with improved seasonal conditions and higher wool prices. This follows several years in which dry seasonal conditions reduced sheep and cattle numbers and severely constrained crop and livestock production. Turn-off of sheep and cattle is expected to be reduced as farms hold onto stock to rebuild flocks and herds. Reduced cattle turn-off together with weaker prices is expected to reduce receipts from beef cattle, but increases in sheep and lamb prices are expected to result in higher sheep and lamb receipts. A reduction in average total cash costs is also expected to contribute to increased farm cash income with lower expenditure on fodder and interest payments, although some increase is expected in livestock purchase expenditure.

Farm cash incomes for broadacre farms in Tasmania are projected to rise to average $60 000 a farm in 2009-10 (tables 2 and 3), which is around 10 per cent above the average farm cash income recorded for the 10 years to 2008-09.

A small increase in livestock numbers, grain and fodder stocks on farm are projected to increase the value of on-farm inventories and build on higher farm cash income to result in average farm business profit being positive ($5000 per farm) for the first time in several years (table 2).

Northern TerritoryIn 2008-09, dry seasonal conditions throughout much of the southern and eastern Northern Territory led to increased cattle turn-off (but of less finished cattle) increasing cash incomes but reducing herd sizes and farm business profits.

Farm performance


With improved summer rainfall in 2009-10 grazing conditions are projected to improve across most of the Northern Territory and many cattle stations are expected to begin rebuilding cattle numbers. Cattle turn-off is projected to be reduced and cattle purchases and transfers, in the case of corporate properties, are projected to increase, resulting in relatively low farm cash income in 2009-10.

Performance, by industry Summary information on financial performance in Australian broadacre and dairy industries is provided in table 4 and fi gures e and f.

Wheat and other crops industry Average farm cash income for the wheat and other crops industry improved in 2008-09 on the back of increased grain production in New South Wales, Queensland and Western Australia. The increase occurred despite lower grains prices, and increases in total cash costs resulting mainly from higher expenditure on crop chemicals and costs of harvesting and marketing a larger crop than in 2007-08 (fi gure e).

4 Financial performance of broadacre farms, by industry average per farm

farm cash income farm business profi t a

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s 2009-10 z

$ $ $ $ $ $

Wheat and other crops 115 440 175 800 132 000 2 390 52 000 3 000Mixed livestock crops 76 730 74 700 65 000 –10 880 –4 900 –25 000Beef industry 40 090 48 400 26 000 –15 490 –13 700 –33 000Sheep 56 860 42 800 57 000 –13 670 –22 900 –2 000Sheep beef 35 050 60 900 64 000 –20 280 –5 100 –8 000

All broadacre industries 64 220 76 000 62 000 –11 310 –1 500 –18 000

Dairy 129 310 88 000 50 000 65 830 6 700 –44 000

rate of return rate of return excluding capital appreciation including capital appreciation

2007-08 2008-09 s 2009-10 z 2007-08 2008-09 s % % % % %

Wheat and other crops 1.9 2.9 1.7 4.3 3.3Mixed livestock crops 0.9 1.0 0.4 2.9 1.5Beef industry 0.3 0.4 –0.2 0.8 0.1Sheep 0.5 0.0 0.8 3.8 0.5Sheep beef 0.3 0.6 0.4 0.7 0.0

All broadacre industries 0.8 1.0 0.5 2.2 1.1

Dairy 3.7 1.9 0.4 10.4 1.2 a Defined as profit at full equity, excluding capital appreciation, as a percentage of total opening capital. Profit at full equity is defined as farm business profit plus rent, interest and lease payments less depreciation on leased items. s Preliminary estimate. z Provisional projection.

Farm performance


In 2009-10, lower grain and oilseed prices, together with reduced crop production in New South Wales and Queensland are projected to result in average farm cash income declining despite increased grain production in Victoria and South Australia. Total cash costs are projected to fall slightly with lower fertiliser expenditure, the largest cost item for wheat and other crops industry farms as well reductions in interest payments. Farm cash income is projected to average $132 000 a farm in 2009-10 which is around 4 per cent below the industry average for the previous 10 years (table 4 and fi gure e).

Despite lower farm cash incomes, wheat and other crops industry farms are projected to still record the highest rates of return among the surveyed industries in 2009-10 (table 4).

Mixed livestock–crops industry Average farm cash income for mixed livestock-crops industry farms in 2008-09 was similar to that recorded in 2007-08, but there were marked differences in performance across states. Overall, reductions in grain and wool receipts, resulting from lower grain prices combined with reductions in both wool prices and production, were mostly offset by reductions in cash costs, particularly fertiliser expenditure and interest payments.

In 2009-10, despite lower grain prices, increased crop production in Victoria and South Australia combined with higher sheep and wool receipts are projected to result in a small increase in total cash receipts. However, increases in expenditure required to harvest and market the larger grain crop, together with increased expenditure on sheep purchases, are projected to increase average total cash costs by around 5 per cent. Average farm cash income for mixed livestock-crops industry farms is projected to decline to average $65 000 in 2009-10 which is around 4 per cent below the industry average for the previous 10 years (table 4 and fi gure e).

Farm cash income, grains industries average per farm

250

200

150

100

50

2009-10$’000

2009-10 z

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

wheat and other cropsmixed livestock crops

e1

Farm cash income, sheep industries average per farm

100

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2009-10$’000

2009-10 z

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Farm cash income, beef industry average per farm

120

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2009-10$’000

2009-10 z

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1997-98

1994-95

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Farm performance


Sheep industry In 2008-09, a fall in wool prices together with a small reduction in the number of sheep and lambs sold resulted in a fall in sheep industry farm cash income despite support from strong sheep and lamb prices and reduced expenditure on fertiliser, fuel and interest payments (table 4).

In 2009-10, farm cash income for sheep industry farms is projected to increase to average $57 000 a farm (table 4 and fi gure f ) which is around 30 per cent above the average for the past 10 years. This increase is mainly because of increases in sheep receipts resulting from higher saleyard prices together with a small increase in wool receipts. The increase in wool receipts is projected to be small as higher wool prices will be mostly offset by reductions in wool for sale as a result of dry seasonal conditions in many regions and reductions in sheep numbers during 2008-09. Total cash costs are projected to be reduced by around 4 per cent, mainly because of lower interest payments and reduced fodder expenditure resulting from an improvement in seasonal conditions and lower fodder prices in 2009-10.

Sheep–beef industry In 2008-09, farms in southern states and northern New South Wales increased turn-off of beef cattle and sheep. This increased turn-off combined with higher sheep and lamb prices resulted in higher total cash receipts that more than offset the effect of lower wool receipts as a consequence of lower wool prices and production. Total cash costs were lower because of interest payments and a reduction in expenditure on purchase of beef cattle and sheep. Increased receipts and lower cash costs resulted in farm cash income rising to average $60 900 a farm in 2008-09 (table 4 and fi gure f ).

In 2009-10, turn-off of beef cattle and sheep is expected to be reduced and wool production is also expected to be lower. Despite increases in sheep and wool prices, reduced sales volumes are projected to result in lower total cash receipts. However, total cash costs are also projected to fall with reductions in fodder expenditure and interest payments. Farm cash income is projected to average $64 000 a farm in 2009-10 (table 4 and fi gure f ) which is around 8 per cent above the average for the previous 10 years.

Beef industry In 2008-09, turn-off of beef cattle increased markedly on beef industry farms and average sale prices per head also increased resulting in total cash receipts increasing by around 5 per cent. Fodder expenditure increased as seasonal conditions remained dry, partly offsetting the increase in receipts. Farm cash income increased to average $48 400, but overall cattle numbers were reduced.

With improved seasonal conditions in 2009-10, beef cattle turn-off is expected to be reduced and, in combination with lower beef cattle prices, to result in average total cash receipts for beef industry farms falling by around 5 per cent. Total cash costs are also expected to be reduced with significant reductions expected in fodder expenditure and interest payments. Farm cash income is forecast to be reduced to average $26 000 a farm for the beef industry in 2009-10 which is around 25 per cent below the average farm cash income for the previous 10 years.

Farm performance


Dairy industry Average farm cash income for dairy industry farms fell from $129 310 per farm in 2007-08 to $88 000 a farm in 2008-09 (table 5) as a result of lower manufacturing milk prices. Average milk prices received by dairy farms fell sharply in Victoria and Tasmania and in regions such as southern New South Wales which produce mainly manufacturing milk. In contrast, average milk prices received were maintained or increased in New South Wales, Queensland, South Australia and Western Australia. Milk production increased in all states, but increases were small in Victoria and Tasmania and, in combination with lower milk prices, resulted in substantial reductions in average milk receipts per farm in these states. In the other states milk receipts increased on average.

In 2008-09, total cash costs increased in all states except Victoria as producers increased inputs to boost milk production. In northern Victoria and southern New South Wales irrigated dairy farms continued to receive low irrigation water allocations leaving many farms critically dependent on purchased feedgrains and hay exacerbating the effect of reductions in farm receipts in these regions.

5 Financial performance, dairy industry average per farm

2007-08 2008-09 s 2009-10 z

Total cash receipts $ 625 530 611 800 (3) 471 000Total cash costs $ 496 220 523 800 (4) 420 000Farm cash income $ 129 310 88 000 (11) 50 000Farms with negative farm cash income % 11 26 (20) 44Farm business profit $ 65 830 6 700 (138) –44 000Farms with negative farm business profit % 38 52 (10) 68

Profi t at full equity – excl. cap. appreciation $ 120 990 69 600 (14) 13 000– incl. cap. appreciation $ 338 620 45 200 (74) naFarm capital at 30 June a $ 3 550 230 3 714 700 (4) naNet capital additions $ 74 150 168 800 (26) naFarm debt at 30 June b $ 567 970 663 200 (7) 683 000Change in debt - 1 July to 30 June b % 7 11 (30) 5Equity at 30 June bc $ 3 002 320 3 071 700 (4) naEquity ratio bd % 84 82 (1) naFarm liquid assets at 30 June b $ 107 130 104 400 (10) naFarm management deposits (FMDs) at 30 June b $ 30 050 23 500 (18) naShare of farms with FMDs at 30 June b % 20 20 (19) naAnnual payment from DSAP and SDAS f $ 15 630 0

Rate of return g – excl. cap. appreciation % 3.7 1.9 (13) 0.4– incl. cap. appreciation % 10.4 1.2 (74) na

Off-farm income of owner manager and spouse b $ 20 070 24 000 (15) na

a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equity expressed as a percentage of farm capital. e Harvest loans are not included in farm debt. f Dairy Structural Adjustment Program and Supplementary Dairy Assistance Scheme. g Rate of return to farm capital at 1 July. s Preliminary estimates. z Provisional projection. na Not available.

Farm performance


Farm cash income, dairy industry average per farm

150

120

90

60

30

2009-10$’000

2009-10 z

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

f

In 2009-10, the financial performance of Australian dairy farms is projected to decline further because of more reductions in farm-gate prices received for milk used in manufactured dairy products. In response to lower prices, milk production is expected to be reduced in all states except Queensland and New South Wales. The effect of lower milk prices and reduced production on farm receipts is expected to be partly offset by lower interest payments and by reductions in other expenditure, particularly fodder and fertiliser as farmers reduce production.

Lower fodder prices in 2009-10 are expected to assist cost reductions, but overall fodder expenditure is expected to remain high, particularly in regions including northern Victoria and southern New South Wales where allocations of irrigation water remain relatively low.

Nationally, average farm cash income for dairy farms fell from an historical high of $129 310 in 2007-08 to $88 000 in 2008-09 and is projected to fall to $50 000 in 2009-10 (table 5 and fi gure f ) which is well below the average for the 10 years to 2008-09 of $91 000 and similar to the average farm cash income recorded in the drought of 2006-07 (in real terms – fi gure f ).

Farm equity On average, farm business equity remained strong for broadacre and dairy farms and debt servicing capacity improved in 2008-09. The proportion of broadacre and dairy farms estimated to have a farm business equity ratio of greater than 70 per cent increased from 84 per cent in 2007-08 to 91 per cent in 2008-09, and the proportion of these farms recording negative farm cash incomes declined from 35 per cent in 2007-08 to 27 per cent in 2008-09 (fi gure g). The proportion of farms estimated to have a farm business equity ratio of less than 70 per cent declined from 16 per cent in 2007-08 to 9 per cent in 2008-09, and the proportion of these farms recording negative farm cash incomes declined from 9 per cent to 4 per cent.

Despite the projected reduction in average broadacre farm cash income in 2009-10, the proportion of broadacre farms recording negative farm cash income and therefore potentially needing to borrow working capital is projected remain at around 29 per cent in 2009-10, similar to the percentage in 2008-09 (table 2). This result occurs mainly because of increases in the number of grain farms in South Australia and Victoria, and sheep farms across all states, recording higher farm cash incomes in 2009-10. However, for the dairy industry, the proportion of farms recording negative farm cash income is projected to increase from 26 per cent in 2008-09 to 44 per cent in 2009-10 (table 5).

Farm performance


Use of debtAverage farm business debt has increased for broadacre and dairy farms over recent years. Farm businesses interviewed by ABARE in November 2009 expected to increase farm debt in 2009-10 by an average of 5 per cent among dairy farms and 4 per cent among broadacre farms.

Overall, debt to fund land purchase still accounts for the largest share of total farm debt for both broadacre and dairy farms. Increase in land purchase debt is estimated to have accounted for 55 per cent of the increase in total farm debt for both dairy and broadacre farms in the five years ending 2005-06.

Increases in land purchase debt are confined to a relatively small proportion of farms. However, in recent years there has been a substantial increase in debt to fund working capital as many farms have had low cash incomes because of adverse seasonal conditions. In contrast to increases in land purchase debt, increased borrowing for working capital has occurred across a high proportion of farms. In 2006-07, 60 per cent of the total increase in broadacre farm debt was to fund working capital.

In 2008-09, land purchase accounted for the largest share of the increase in dairy farm debt. With increased new investment, debt to finance purchase of farm vehicles, farm machinery and improvements also increased markedly and there was a substantial increase in debt classified as restructured debt. The increase was particularly large for dairy farms but also occurred for broadacre farms. Debt may have been restructured in response to lower interest rates for some categories of farm debt. A substantial proportion of this restructured debt may have been additional borrowing to provide working capital.

Distribution of farms, by equity and farm cash income, broadacre and dairy industries

%

20

2008-09 s

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

60

40

80

100

g

low equity - negative income

low equity - positive income

high equity - negative income

high equity - positive income

Farm performance


Debt servicingThe proportion of farm cash income needed to meet interest payments on farm debt (debt servicing ratio) has trended upward since 2001-02 (fi gure h). Interest rates rose throughout the period 2001-02 to 2007-08 and farm cash incomes have been highly variable since 2001-02, being particularly low in 2002-03 and 2006-07 when the debt servicing ratio rose sharply. Partially offsetting the increase in interest paid in the period 2001-02 to 2007-08 were increases in interest subsidies paid to farm businesses via exceptional circumstances assistance. However, notwithstanding these factors, most of the increase in debt servicing ratio between 2001-02 and 2007-08 was because of increases in farm debt.

With improved cash flow for broadacre and dairy farms in 2007-08, the debt servicing ratio fell, but remained relatively high in historical terms. In 2008-09, the debt servicing ratio fell only slightly despite increases in farm cash income and reductions in interest rates as farm debt increased. In 2009-10, reductions in farm cash income and an increase in farm debt are projected to result in the debt servicing ratio rising further despite interest rates being relatively low.

The increase in the overall level of farm debt for broadacre and dairy farms has been the main driver of the increase in the proportion of farm cash income needed to service interest payments on debt over the past decade rather than increases in interest rates.

Farm investmentThe proportion of broadacre and dairy farms acquiring land increased slightly to 5 per cent in 2008-09, but remained below the average for the previous 20 years of 6 per cent (fi gure i). In contrast, there was a large increase in the acquisition of non-land farm capital in 2008-09. The value of additions of non-land capital, including vehicles, plant, machinery and farm improvements, were the highest since 1990-91 in real terms. These increased by 10 per cent for broadacre farms and by 80 per cent for dairy farms in 2008-09 compared with the previous year (fi gure j).

In part, the increased investment in plant, machinery and farm improvements in 2008-09 is likely to have been partly stimulated by the investment allowance offered to businesses committing to investing in depreciating assets between 31 December 2008 and 31 December 2009 as part of the Federal Government’s Nation Building and Jobs Plan to support economic activity in the face of the global financial crisis. Government assistance was also provided to irrigators in the Murray-Darling Basin in 2007-08 and 2008-09 in the form of grants to help irrigators respond to reduced water allocations by improving on-farm practices. Grants may have been used to fund replacement irrigation plant and structures or reconfigure irrigation systems.

Debt servicing ratio, broadacre and dairy farms

50

40

30

20

10

%2009-10 z

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

h

Farm performance


High levels of new investment in 2007-08 and 2008-09 have also been a response to improved cash flow for some farms, particularly dairy industry farms in 2007-08. In addition, high prices for fertiliser, low availability of irrigation water and a decade of reduced rainfall in cropping areas has provided strong incentives to change farm technologies toward more efficient use of these inputs. Most common innovative changes made by broadacre farms in 2006-07 and 2007-08 were the introduction of new cropping equipment, new fertiliser practices and new soil management practices. For dairy farms, the introduction of new irrigation and new fodder conservation practices were highly ranked (Liao and Martin 2009).

The reduction in farms acquiring additional land and increased non-land investment may also indicate that farmers may be aiming to improve the productivity of their existing land base rather than purchasing additional relatively high priced land.

Proportion of farms acquiring land, broadacre and dairy farms

%

2

6

4

8

10

2004-05

2006-07

2008-09 s

2002-03

2000-01

1998-99

1994-95

1992-93

1996-97

1990-91

i

Additions of non-land capital, broadacre and dairy industries average per farm

2009-10$’000

10

30

20

40

50

2004-05

2006-07

2008-09 s

2002-03

2000-01

1998-99

1994-95

1992-93

1996-97

1990-91

j

Farm performance


ABARE surveys indicate the largest category of new capital expenditure on both broadacre and dairy farms in 2007-08 and 2008-09 was tractors followed closely by motor vehicles (fi gure k). Crop harvesting and handling machinery was another major item of expenditure for both farm types and expenditure on farm houses and accommodation was also high, particularly in 2008-09. For broadacre farms, additions of cultivation, sowing, fertiliser, spraying equipment were also high and expenditure on livestock handling facilities and irrigation and water supply structures were high for dairy farms in both 2007-08 and 2008-09.

For dairy farms there was a large increase recorded in expenditure on dairy sheds in 2008-09 and for broadacre farms a large increase in expenditure on silos and grain storage sheds in 2008-09.

Better performing farmsAverage farm incomes and rates of return on investment in agricultural industries are usually low when reported across a whole industry or state. However, low average returns are partly a consequence of the generally high proportion of small farms in many industries, particularly

Capital additions, broadacre farms

Capital additions, dairy farms

2009-10$’000 12108642

kother plant and equipmentlivestock handling facilitiesirrigation and water supply

farm buildings - otherhay sheds

grain silos / grain storage sheds

crop harvesting and handling equipmenthouses and accommodation

cultivation, sowing, fertiliser, spraying equipmentvehiclestractors

2009-10$’000

2015105

2006-07

other plant and equipmentlivestock handling facilitiesirrigation and water supplydairy shed and equipment

farm buildings - otherhay sheds

grain silos / grain storage sheds

crop harvesting and handling equipmenthouses and accommodation

cultivation, sowing, fertiliser, spraying equipmentvehiclestractors

2007-08 2008-09 s

Farm performance


dimensions of finance are likely to be more resilient to external changes and better placed to improve productivity over time (Kokic, Davidson and Rodriguez 2006).

Land valuesThe high proportion of farms estimated to have strong business equity ratios in 2008-09 has mainly resulted from increases in land values across most regions. This increase was sufficient to more than offset the effect of rising farm debt on farm equity in recent years.

Increases in land values were reported for broadacre farms in the high rainfall and wheat-sheep zone, but a small decrease was reported for farms in the pastoral zone in 2008-09 (fi gure m). In the period since 2004-05, increases in reported land values have been relatively smaller in the cropping zone where the majority of broadacre production occurs. This possibly reflects the greater effect of adverse seasonal conditions and the lesser influence in this zone of non-agricultural factors, including competition for land from population growth, urban and peri-urban developments and economic growth driven by mining developments that may support increases in land values in other zones.

In recent years, average land prices for broadacre farms have increased relative to the cash receipts per hectare generated by farming activity. The

Land prices and receipts per hectare, broadacre farms

750

600

450

300

150

2009-10dollars

2008-09 s

2005-06

2002-03

1999-2000

1996-97

1993-94

1990-91

land value per hectarereceipts per hectare

n

Land values and returns per hectare, broadacre and dairy industries

-10

2009-10$/ha

10

20

30

40

2008-09 s

2005-06

2002-03

1999-00

1996-97

1993-94

1990-91

1987-88

1984-85

1981-82

1978-79

o

capital appreciation per hectare (left axis)

net value of production per hectare a (left axis)

index of land values (right axis)

index-20

60

120

180

210

240

300

a Net value of production is defined to be farm cash income at full equity plus the buildup in the value of trading stocks less government payments.

Farm performance


ratio of average land price per hectare to total cash receipts per hectare has increased from around 5:1 prior to 2001-02 to around 7:1 in 2008-09 on broadacre farms (figure n). The increase in this ratio is relatively similar across all agricultural zones and industries.

Determinants of land valuesIn general, an assets price should reflect expectations about the future return the asset can generate. Farmers’ expectations about future returns from land investments should be strongly influenced by two main components: net value of farm production per hectare and unrealised growth in capital values.

During the late 1980s and 1990s, the dominant component of returns realised by broadacre and dairy farm businesses was the return from using the land for production purposes (fi gure o). During this period, growth in land values closely followed growth in the net value of farm production per hectare.

However, during much of the 2000s, producers in many parts of Australia experienced higher returns from capital appreciation than from agricultural production, which experienced considerable volatility because of adverse climatic conditions. The strong growth in capital values during this period may have had an effect on land prices.

However, it is also possible that the growth in land values may have been generated by strong demand from producers’ operating the better performing farm businesses that generate significantly higher returns than average. During the 2000s, the top 25 per cent of farms in the broadacre and dairy industries generated average annual total returns per hectare operated that were almost 11 times greater than the average for all other farms in these industries. During this period, the proportion of top performing farms that acquired additional land averaged almost 8 per cent per annum, which is more than 50 per cent higher than the proportion for other broadacre and dairy producers.

Farmers’ expectations are influenced by a range of other, non-agricultural factors which may result in a sustained growth in land prices. These include real interest rates (or cost of capital), access to and availability of irrigation water, economic growth, distance to markets and urban centres, aesthetic and lifestyle factors, particularly in the areas close towns and cities, and non-agricultural land use options, including the potential for mining, tourism and commercial/residential development.

Government policies can also affect agricultural land prices. International studies have shown that capitalisation of the benefits of public policies can have a strong influence on land prices (Vantreese et al.; Seed et al.; Weersink et al.; Moss). Examples sited in these studies include favourable tax treatment of realised capital gains and government payments to primary producers that are perceived to be long-term in nature. Public policies that reduce income risk and boost the expected return to farming and land ownership can unintentionally alter farmers’ supply of and demand for land resulting in higher prices.

As the gap between land values and production returns widens, farmers’ reliance on land ownership as part of their farming business may become an impediment to structural

Farm performance


adjustment. This is because strong growth in land values could reduce the willingness of producers who are operating underperforming farms to sell their land. Likewise, the best performing producers’ capacity to purchase land will be restricted by the high cost of buying land.

In countries such as the United States and Great Britain, this barrier to structural adjustment has been to some extent addressed by land leasing rather than land purchase as the dominant method of farm expansion. In so doing, land resources can be reallocated to the more profitable farm businesses without land ownership having to change.

ReferencesABS 2009, Agricultural commodities, Australia, 2007-08. Cat 7121.0, Canberra, May 2009.

Kokic, P, Davidson, A and Boero Rodriguez, V 2006, Australia’s grains industry: Factors influencing productivity growth, ABARE Research Report 06.22 prepared for the Grains Research and Development Corporation, Canberra, November.

Liao, B, and Martin, P, 2009, ‘Farm innovation in the broadacre and dairy industries, 2006-07 to 2007-08’, ABARE research report 09.17, Canberra, November.

Moss, C, 1997, ‘Returns, Interest Rates, and Inflation: How They Explain Changes in Farmland Values’, American Journal of Agricultural Economics, Vol 79, No 9, pp. 1311-1318.

Seed, P, Sandrey, R, and Ward, B, 1986, ‘A study of the determinants of fattening and grazing farm land prices in New Zealand, 1962 to 1983’, Research report 186, Agricultural Economics Research Unit, Lincoln College, Canterbury.

Vantreese, V, Skees, J, and Reed, M, 1986, ‘Using Capitalization Theory to Model Farmland Prices’, North Central Journal of Agricultural Economics, Vol 8 No 1, pp, 135-142.

Weesink, A, Clark, S, Turvey, C, and Sarker, R, 1999, ‘The effects of Agricultural Policy on Farmland values’, Land Economics, Vol. 75 No 3, pp. 425-439.

Zhao, S, Sheng, Yu, Kee, H J, 2009, Determinants of total factor productivity in the Australian grains industry, ABARE Conference paper 09.16, presented at the 2009 Australian Conference of Economists, 28-30 September, Adelaide.

Farm performance


Energy and minerals overviewApsara Maliyasena, Robert New and Michael Lampard

• Over the outlook period to 2014-15, renewed demand from emerging economies such as China and India is expected to continue to have a significant influence over energy and minerals commodity markets.

• After falling considerably in early 2009, world prices for many energy and minerals commodities are forecast to recover in 2010 and 2011, supported by the improved outlook for world economic growth and the continued weakness of the US dollar. Beyond 2011, prices are generally projected to decline in real terms but to remain above historical averages.

• In the short term, supply capacity is expected to increase, although there could be challenges such as higher project costs, price volatility and sovereign risk in some countries.

• Australian export earnings from energy and minerals are projected to increase over the medium term, from $130 billion in 2009-10 to $175 billion in 2014-15 (in 2009-10 dollars), underpinned by recovering world demand and prices.

World price outlookAfter falling considerably in late 2008 and the first quarter of 2009, prices for energy and minerals commodities have risen since the second quarter of 2009. The increase in prices has largely been assisted by the growing expectation of a global economic recovery, cuts to production, strong import demand from China and a declining US dollar. In addition to increased demand because of stronger world economic growth, the continued weakness of the US dollar against other major international floating currencies has encouraged investors to purchase commodities such as gold, oil and copper as a hedge against the falling US dollar. Over the past six months, this has provided support for the prices of many energy and minerals commodities. Prices have also been supported by restocking across some major consumers.

With industrial and economic activity in key consuming regions assumed to increase in 2010 and 2011, the outlook for energy and minerals commodities is generally positive. Prices for most minerals and energy commodities in 2010 and 2011 are forecast to be higher on average than in 2009. However, the extent of the forecast increases for many commodities is relatively modest, given the price gains that have already occurred and the assumed gradual recovery in developed economies.

Beyond 2011, world prices for many energy and minerals commodities are projected to decline in real terms, but to remain above historical averages. The global supply of energy and minerals

Commodity price movements

indexJan 08=100

crude oilaluminium - PHGcopper - grade A

iron ore – finesnickel

20

40

60

80

100

120

140

160

180

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08


commodities is projected to increase over the medium term, as investment in new capacity translates into production.

A key risk to this generally positive outlook is the timing and strength of the assumed recovery in world economic activity. For example, slower than assumed world economic growth and, hence, energy and minerals commodity demand, will result in actual price outcomes being lower than currently forecast. Another downside risk to the price outlook is the rate at which idled production capacity is restarted. If the mining and processing facilities restart more rapidly than currently anticipated, actual price outcomes could also be lower than currently forecast. Alternatively, slower than anticipated restart of idled capacity represents an upside risk to the current price outlook.

Global demand outlookOver the medium term, assumed strong world economic growth and industrial production is expected to translate into increased consumption of energy and minerals commodities. The demand growth in energy and minerals commodities will continue to be driven by the strength of economic growth in China and other emerging economies. Consumption is also forecast to recover in OECD economies, under the assumption of gradually strengthening economic and industrial production growth.

In addition, most OECD economies saw substantial inventory destocking during the global economic slowdown, which reinforced the sharp weakening of underlying demand. In the short term, the rebuilding of stocks for developed economies, including the United States, the European Union and Japan, is expected to provide additional support for energy and minerals commodity demand.

The possible introduction of climate change policies in some countries could impose a carbon price on greenhouse gas emissions involved in the production and consumption of energy and minerals commodities. The potential effect of these policies on energy and minerals demand is expected to occur over the long term rather than over the current projection period.

China and other emerging economies to drive demandThe materials intensive nature of China’s urbanisation and industrialisation has resulted in China being the major source of demand growth in global energy and minerals commodities. China is now the world’s largest consumer of aluminium, copper, lead, nickel, tin, zinc, iron ore and coal. However, the intensity of energy and minerals consumption per person in China remains relatively low compared with industrialised economies such as the Republic of Korea, Japan, the United States and the European Union.

Over the outlook period, assumed strong economic growth, and continued industrialisation and urbanisation, is expected to underpin growth in China’s energy and minerals consumption. Rising per person income is expected to increase the demand for resource intensive goods, such as motor vehicles, consumer durables and electronics, that use large quantities of energy and minerals in both their manufacture and consumption.

Energy and minerals overview


Over the medium term, India’s consumption of energy and minerals commodities is also projected to grow strongly, in line with strong economic and population growth, and increased urbanisation. The construction of electricity transmission and distribution networks is expected to increase the consumption of materials such as steel, copper and aluminium. Also, increased electricity supply will require inputs such as coal, natural gas and uranium. Per person consumption of energy and minerals in India is low relative to industrialised countries. Nevertheless, the rate of increase in per person consumption is likely to be higher than in China in the medium term, as India’s consumption growth is occurring from a much lower base.

China's urbanisation

million

300

600

900

1200

1500

200820062004200220001998

urban populationrural population

Intensity of commodity use in 2008

kg/person

Germany

aluminium refinedcopper

refinedzinc

JapanUnited States

ChinaIndia

t/person

Germany

oil steel

JapanUnited States

ChinaIndia

5

10

15

20

25

1

2

3

4



Global supply outlookSupply projected to increase in the medium termIn 2009, world production of many energy and minerals commodities declined in response to weaker demand and lower prices. A significant amount of production capacity was idled, and many development projects were put on hold. Over the medium term, the supply of energy and minerals commodities is projected to increase significantly in response to growing demand, underpinned by forecast higher prices for most commodities which, if achieved, will support strong growth in capital expenditure in the minerals and energy sector. Also leading to increased production over the outlook period is the expected restart of many operations which were placed on care and maintenance in 2008 and 2009 in response to falling demand.

Rising production costsThe rate of capacity expansion in the mining sector could be adversely affected by a number of key factors, including rising production costs and longer lead times for key mining equipment, and price volatility, all of which can affect the level, timing and location of investment.

As the construction of large mining projects proceeds worldwide, resource scarcity could become an issue. Higher demand for labour, particularly for skilled professionals such as experienced mining engineers, could result in upward pressure on wages. Similarly, higher demand for key mining equipment could also result in upward pressure on input prices, which would translate to higher costs of production for many energy and minerals commodities. Reflecting the possibility of constraints such as these, BHP Billiton announced in January 2010 US$1.93 billion of capital expenditure to underpin further accelerated growth of its Western Australia iron ore business. The funding will allow for early procurement of long lead items and detailed engineering work, prior to a final investment decision being made on its Rapid Growth 6 project.

China's consumption of consumer durables per 100 urban households

0

30

60

90

120

150

1990

0.34

air conditioners

2000

refrigerators

2008

colour televisions



Volatility in pricesIn recent years, prices for many traded energy and minerals resources have become considerably more volatile. Recent volatility in prices and the uncertainty regarding the sustainability of higher price levels have increased the risks associated with investment in mining projects, and resulted in higher rates of return required to induce investment in large projects.

Some projects subject to increased sovereign riskOver the outlook period, significant mine capacity is scheduled to open in countries with higher perceived sovereign risk. Sovereign risk in the mining industry refers to risks surrounding changes in government policy (e.g. changes in royalty payments or government ownership), enforcement of property rights and security concerns. While many developments planned to enter production over the next five years, there is potential that some production may be adversely affected by issues relating to sovereign risk. For example, in late 2008, the Government of Guinea effected a compulsory relinquishment of the northern half of the Simandou Mining Concession, the site of a major iron ore project planned for development by Rio Tinto. Rio Tinto maintained that it had complied with all its obligations, and was therefore entitled to hold and retain the entire concession.

Freight rates and international trade

The competitiveness of seaborne trade in bulk commodities is affected by movements in freight rates. Lower freight rates reduce transport costs, which allows low cost bulk commodity producers in countries such as Australia, Brazil, Indonesia and South Africa to compete more effectively with higher cost production in some importing countries. For example, Chinese imports of metallurgical coal increased significantly in 2009 in response to falling spot prices and lower freight rates which increased the competitiveness of imports.

Since reaching historic highs in 2008, international shipping rates have declined sharply as demand for ships used to transport bulk commodities has fallen. While demand for shipping services is expected to increase over the outlook period, in line with increased trade in bulk commodities, upward pressure on shipping rates may be limited by growth in the supply of ships. Over the next three years, around 120 million deadweight tonnes of Capesize (above 100 000 deadweight tonnes) ship capacity and around 85 million deadweight tonnes of Panamax (60 000 to 80 000 deadweight tonnes) and Handymax (around 50 000 deadweight tonnes) ship capacity is scheduled to enter operation. This is equivalent to the capacity commissioned in these three ship classes over the past 10 years. If a large proportion of this scheduled capacity enters the world shipping market as scheduled, downward pressure on shipping rates is likely to remain, encouraging growth in the seaborne trade of bulk commodities.



Together, these above mentioned factors have the potential to undermine investment in the mining sector. The rate at which production costs increase, and the reliability of projected returns from development projects in light of increasing price volatility, are key factors that could have a significant effect on global supply expansions over the outlook period.

Australian minerals and energy outlookMine output to rise in the short termThe volume of Australian mine production is forecast to rise by 3 per cent in 2009-10, with increases in both energy commodities and metals and other minerals. Production of metals and other minerals is forecast to increase by 6 per cent in 2009-10, which mainly reflects a strong increase in iron ore production (up 21 per cent). In 2010-11, production is forecast to increase by around 7 per cent as higher production is expected from a number of commodities including iron ore and gold.

Production of energy commodities is forecast to increase by around 1 per cent in 2009-10, with increased production of metallurgical coal, natural gas and thermal coal. Production of energy commodities is forecast to increase by 10 per cent in 2010-11, which mainly reflects increased metallurgical and thermal coal production.

Over the medium term, Australian energy and minerals production is projected to increase by around 25 per cent in 2014-15 compared with 2009-10 volumes, as new mine capacity is commissioned and infrastructure expansions are completed. Minerals production is projected to increase by an average of 4 per cent a year over the period to 2014-15, while energy production is projected to increase by around 5 per cent a year.

Despite forecast higher export volumes for 2009-10, export earnings from Australia’s energy and minerals commodities are forecast to decline by 20 per cent to around $130 billion. The combined effect of forecast lower bulk commodity contract prices for Japanese Fiscal Year 2009 (JFY, April 2009 to March 2010), and an assumed stronger Australian dollar is expected to more than offset the positive effect of forecast higher export volumes.

Export earnings from energy commodities are forecast to decrease by 29 per cent to $55 billion in 2009-10, in line with forecast lower export earnings for metallurgical coal, thermal coal and liquefied natural gas. In 2010-11, export earnings are forecast to increase by 20 per cent to $66 billion.

Australian mine production

index:1997-98

= 100

energy

minerals

75

100

125

150

175

200

2014-15 z

2010-11 f

2006-07

2002-03

1998-99

1994-95

1990-91



Export earnings from metals and other minerals are forecast to decline by 11 per cent in 2009-10 to $75 billion, which largely reflects a forecast decrease in earnings from iron ore. Export earnings in 2010-11 are forecast to increase to $88 billion, being underpinned by expectations of increased iron ore earnings.

Over the medium term, increased export volumes are projected to more than offset the effect of a projected decline in prices in real terms. Reflecting this, the value of energy and minerals exports is projected to be around $175 billion (in 2009-10 dollars) by 2014-15.

Australian export earnings

2009-10$b

energy

minerals

20

40

60

80

100

120

2014-15 z

2010-11 f

2006-07

2002-03

1998-99

1994-95

1990-91

Australian energy and minerals exports

volume value

average average annual annual 2008-09 2014-15 z growth 2008-09 2014-15 z growth

Oil mL 16 588 15 766 –0.8% $m 8 757 12 723 6.4%LNG Mt 15 28 10.4% $m 10 079 15 288 7.2%Thermal coal Mt 136 200 6.6% $m 17 885 17 132 –0.7%Uranium kt 10 114 13 125 4.4% $m 990 1 951 12.0%Iron ore Mt 324 546 9.1% $m 34 239 48 749 6.1%Metallurgical coal Mt 125 181 6.3% $m 36 813 36 952 0.1%Gold t 437 474 1.4% $m 16 146 18 221 2.0%Alumina kt 16 395 22 436 5.4% $m 6 015 8 763 6.5%Aluminium kt 1 748 1 650 –1.0% $m 4 724 3 828 –3.4%Nickel kt 189 218 2.4% $m 2 656 4 806 10.4%Copper kt 900 925 0.4% $m 5 863 8 220 5.8%Zinc kt 1 502 1 447 –0.6% $m 1 858 2 633 6.0%

z Projection.



OilOutlook to 2015

Suwin Sandu and Alan Copeland

In 2010 and 2011, world oil prices are forecast to increase as demand rises associated with stronger economic growth. Most of this demand growth is expected to come from non-OECD economies. Over the next two years, higher world supply will reflect the start-up of a number of fields in non-OPEC members. From 2012, higher oil prices are likely to be supported by demand growth and will reflect increasing supply of crude oil from higher cost fields.

Oil prices to increase over outlook periodIn 2009, oil prices in West Texas Intermediate (WTI) terms averaged around US$62 a barrel, which was a fall of 37 per cent from 2008. During the year, oil prices exhibited significant volatility, trading at US$35 a barrel in February, before increasing to around US$80 a barrel by the end of 2009.

The sharp rise in oil prices during 2009 reflects a combination of expectations of higher oil consumption because of world economic recovery and continued weakness in the US dollar against other major international floating currencies. While oil prices have risen steadily since March 2009, this has occurred at a time of high oil stocks in OECD economies and significant spare production capacity in OPEC—two factors which would normally be expected to place significant downward pressure on oil prices. This appears to suggest that investment and speculative demand was also a significant factor contributing to the increase in world oil prices in 2009.

In 2010, the WTI oil price is forecast to average around US$77 a barrel, which is an increase of 25 per cent from 2009. The higher oil price outlook is underpinned by the assumed world economic recovery and the associated growth in world oil consumption over the course of 2010. Growth in oil consumption is expected to be particularly strong in many emerging and

US$/bbl

Yukos announces potential bankruptcy

Iran resumesnuclear program

OPEC announces lower output

Hurricane Ivan

Strikes in NigeriaOPEC

announcesincreased

production

Hurricane Dennis

Hurricane Rita

Hurricane Katrina

Cease-fire in the Middle East

Tensions between Turkey and Iraq

Refinery firein Texas

Lower production from Venezuela

and Russia

Tension betweenIran and Israel Global financial crisis

North Korea test-fires missiles Increased US

oil stocks

Iraq reducesoutput

Attacks on Nigeria's oil infrastructure

Increased geopolitical

tensions in Iran

Warm northern hemisphere winter

Hurricanes Ikeand Gustav

OPEC announcesproduction cut

Outlook for worldeconomy improves

Russia increases output

Cold northern hemisphere winterRecord oil imports

from China

Exports from Iraq reaches highest level since the US

led invasion

20

40

60

80

100

120

140

Weekly oil pricesWTI prices ended 31 January 2010

2006Jan Jan Jan JanJanJan

2004 2005 2007 2008 2009 2010


developing regions such as Asia, the Middle East, the Russian Federation and Latin America. In addition, investment and speculative demand in world oil markets as well as weakness in the US dollar could continue to place upward pressure on oil prices in 2010.

However, an increase in oil production from non-OPEC producers and natural gas liquids, particularly in Qatar and the Russian Federation, means OPEC spare production capacity will remain high in 2010. This could limit significant price increases.

By 2015, the WTI oil price is projected to increase to US$88 a barrel (in 2010 dollars). This increase is expected to be supported by increasing oil consumption and higher oil production costs. Between 2011 and 2015, world oil consumption is projected to increase at an average rate of 1.7 per cent a year, associated with an assumed return to stronger world economic growth. Non-OECD economies are projected to account for the majority of consumption growth during this period.

Increased oil demand will increasingly be met by OPEC production, which will result in its spare capacity declining. Over the medium term, non-OPEC production will be characterised by increasing production costs associated with the development of high cost oil fields.

Volatility in price movements to continue Over the medium term, oil prices are expected to continue to show considerable volatility. Oil stocks and OPEC spare production capacity are currently at their highest in many years. Over the outlook period, oil stocks and spare capacity are expected to fall as world oil consumption increases. This could lead to market perceptions of a weakening in the ability of stocks and spare capacity to meet sudden or unexpected increases in oil demand and short-term disruptions associated with temporary shortfalls in oil supply (including geopolitical or security risks). As a result, a sudden increase in risk premium could emerge in the oil price.

OPEC spare production capacitymonthly, ended January 2010

mb/d

Jan 2010

Jan 2009

Jan 2008

Jan 2007

Jan 2006

Jan 2005

Jan 2004

Jan 2003

Jan 2002

1

3

2

5

4

7

6

8

Oil


Another source of potential market volatility over the outlook period is market perceptions of future oil supply. Significant changes to government policies or political interference in a number of oil producing countries creates uncertainty for oil supply. For example, the ongoing nationalisation of oil industry assets in Venezuela has the potential to compromise foreign investment and limit significant expansions of production.

Security risks can also affect oil production. For example, in Nigeria some oil production capacity has been shut down since 2006 as a result of attacks on production facilities. As a result, Nigeria’s production in August 2009 fell to its lowest point in more than two decades. Although, the Nigerian Government succeeded in securing a ceasefire agreement with militant groups at the end of 2009, the recent attack on Chevron’s oil pipeline highlights further risks around future oil supply from the Niger Delta region.

On the demand side, oil prices will remain sensitive to the actual and expected pace of world economic growth. As the global economic recovery continues over the next few years, the pace of world economic growth could be relatively uneven, which could lead to periods of stronger or weaker oil demand, and hence volatility in world oil prices.

Medium-term prices depend on OPECThe projection of an increase in world oil prices (in 2010 dollars) over the medium term is based on the assessment that non-OPEC oil production will decline in the second half of the outlook period. The decline in non-OPEC supply will result in an increasing role for OPEC in the world oil market. OPEC share of world oil supply is projected to increase from 40 per cent in 2009 to 45 per cent in 2015.

The majority of new oil field developments in non-OPEC regions are likely to be offshore, further below the seabed and a greater distance from shore. These factors can often create a challenging technical environment which often leads to higher development and production costs. Recent discoveries, including the Tupi (off the coast of Brazil) and Tiber (Gulf of Mexico) oil fields, are examples of such prospects in frontier regions. Each of these fields contains sufficient reserves to support large scale production. However, developing these fields will pose a challenge because they are located 7000 metres (Tupi) and 12 000 metres (Tiber) below the ocean floor and in deep water. In addition to high development and production costs, these fields will have a long development lead time—neither field is expected to be operating at full production capacity until the end of this decade.

In response to falling oil prices at the end of 2008, a number of oil companies cut their investment budgets. One indicator of falling investment in the oil industry is activity in the drilling sector. In May and June 2009, the Baker Hughes worldwide drilling rig count fell below 2000 for the first time since April and May 2003. This compares with a rig count of 3550 in September 2008 just after the peak in oil prices. The rig count has increased since mid-2009, as oil prices increased; however, it is still well below the average seen over the past five years.

The International Energy Agency estimates that global cuts to investment budgets were around US$90 billion in 2009. This is reflected in a number of projects either being delayed or cancelled. The IEA estimated that, in total, these projects amounted to a production capacity of around 5.8 million barrels a day, of which the majority were in the non-OPEC region.

Oil


The fall in exploration and development expenditure is not expected to have significant implications for oil production in the short term. However, if the fall in expenditure continues for an extended period, it could significantly affect projects that are being planned or awaiting final investment decisions. Under that scenario, the effect on production could be more severe over the medium to longer term given the common lead time of three to five years to develop and commission a project.

Oil consumption efficiency to continue increasingOn the demand side, technological progress is expected to lead to a continued reduction in oil intensity (oil consumption per unit of gross domestic product), particularly in OECD economies. Oil intensity in OECD economies has been declining since the oil shocks of the 1970s, as oil-fired electricity generation capacity was replaced by coal, gas or nuclear power. The increase in oil prices from 2005 to mid-2008 is likely to reinforce this trend and will encourage analogous responses in other areas of demand such as the transport sector. Improved vehicle fuel efficiency, increased uptake of alternative transport fuels and development of alternative transport modes could all lead to lower oil intensity. For example, in the United States, a target has been set for the nation’s vehicle fleet to have an average fuel consumption rate of 31.6 miles a gallon by 2015. This compares with the previous target of 25 miles a gallon.

World oil consumption growth to resume in 2010In 2009, world oil consumption is estimated to have averaged around 84.9 million barrels a day, which is a fall of 1.5 per cent from 2008. It is the second consecutive year that world oil consumption has fallen. OECD oil consumption fell by 4 per cent, while non-OECD oil consumption increased by 2 per cent in 2009, a much slower rate of growth compared with the previous five years.

Growth in world oil consumption is expected to resume in 2010, reaching 86.3 million barrels a day. Over the medium term, world oil consumption is projected to increase to 93.5 million barrels a day by 2015.

Worldwide drilling rig countmonthly, ended January 2010

rigs

Jan 2010

Jan 2009

Jan 2008

Jan 2007

Jan 2006

Jan 2005

Jan 2004

Jan 2003

500

1500

1000

2500

2000

3500

3000

4000

Oil


Non-OECD economies to drive world demand growthOver the outlook period, non-OECD economies, including China, India and those in South-East Asia, Latin America and the Middle East, are projected to provide the main source of growth of world oil consumption. In 2010, oil consumption in the non-OECD region is forecast to increase by 2 per cent to 40.2 million barrels a day, which reflects the assumption of stronger economic growth throughout most non-OECD economies. Between 2011 and 2015, oil consumption in non-OECD economies is projected to increase at an average rate of 3 per cent a year, to 46.9 million barrels a day by 2015.

China is the world’s second largest oil consumer (behind the United States), accounting for around 10 per cent of world oil consumption. Over the outlook period, per person income in China is projected to rise strongly, which will support increased demand for industrial fuel oil and transport fuels. China’s oil consumption is projected to grow by an average 4.4 per cent a year over the medium term, to average 10.7 million barrels a day in 2015. At this rate, China will remain one of the largest contributors to growth in world oil demand.

In other developing Asian economies, oil demand is also projected to grow relatively strongly over the outlook period. An important driver of oil consumption growth is expected to be increased demand for transport fuels. By 2015, oil consumption in other developing Asia (excluding China) is projected to reach 11.3 million barrels a day, which is an increase of 13 per cent from 2010.

Oil consumption in the Middle East has been increasing strongly over the past five years and this trend is expected to continue in the short to medium term. In 2010 and 2011, oil consumption is forecast to increase by 3 per cent and 4 per cent to 7.4 million barrels a day and 7.7 million barrels a day, respectively. Higher oil consumption in the region reflects the continued use of oil as an energy source for electricity generation. In addition to the current uses of oil, demand for air transport is expected to increase over the medium term as the region markets itself as one of the world’s main air travel hubs. Over the outlook period, oil demand in the Middle East is projected to increase at an average annual rate of 3.9 per cent, to 9 million barrels a day in 2015.

OECD demand to remain flatIn OECD economies, oil consumption is projected to remain flat over the outlook period. Projected oil consumption of 46.6 million barrels a day in 2015 is well below the peak of 49.7 million barrels a day in 2005. The fall in oil demand over the past four years reflects the substitution toward other energy sources, most notably natural gas, for heating purposes and electricity generation.

In North America, oil consumption in 2009 is estimated to have fallen by 4 per cent to average 23.2 million barrels a day. In 2010, oil consumption in North America is forecast to increase by around 1.2 per cent to 23.5 million barrels a day, which reflects improving economic growth across the continent. Over the outlook period, oil consumption is projected to grow at an average annual rate of 0.4 per cent to 24 million barrels a day in 2015. The moderate rate of growth reflects stronger economic growth being balanced by the effect of increased vehicle

Oil


fuel efficiency standards in the United States and the continued switching to gas for heating purposes.

Oil consumption in the European Union is estimated to have declined by 5 per cent to 14.6 million barrels a day in 2009. Over the course of the outlook period, oil consumption in the European Union is expected to remain flat. However, this trend is not expected to be uniform across the region. In key consuming countries such as Germany, France, Italy, Spain and the United Kingdom, substitution of natural gas for oil in electricity generation will reduce oil consumption. However, in some of the faster growing economies of the European Union, including Hungary and Poland, oil consumption is expected to grow, associated with increased demand in the transport sector as these economies develop.

In 2010, oil consumption in OECD Asia is forecast to increase by 4 per cent to 8 million barrels a day, being underpinned by increased economic activity in the region. However, oil consumption is projected to fall moderately to 7.8 million barrels a day in 2015. Projected consumption growth in the Republic of Korea, Australia and New Zealand is expected to be offset by a reduction in demand from Japan.

The Republic of Korea’s growth in oil consumption over the outlook period will be supported by increased demand for naphtha, which is used in its expanding petrochemical industry. In Japan, reduced oil consumption from the transport and electricity generation sectors is projected to be an important driver of overall lower oil demand. Oil consumption for electricity generation has been steadily decreasing and this trend is expected to continue, as increased quantities of gas and nuclear power are used. In addition, Japan’s oil consumption is expected to decline as a result of demographic and structural changes, including a declining and ageing population, increased fuel efficiency of vehicles and increasing use of electricity instead of oil for heating purposes.

World oil productionIn 2009, world oil production (including biofuels) averaged 84.9 million barrels a day, which was a reduction of 1.8 per cent from 2008 as producers, particularly in OPEC, responded to lower prices. Growth in oil production is forecast to resume in 2010 as producers respond to increased world demand and higher prices. In 2010, oil production is forecast to average 86.3 million barrels a day.

By 2015, oil production is projected to reach 93.5 million barrels a day. Higher OPEC crude oil production and increases in natural gas liquids production capacity is expected to underpin world oil supply growth over the medium term. While OPEC production is projected to grow, non-OPEC production is projected to decline marginally toward 2015.

OPEC supply will remain influentialIn 2009, OPEC crude oil production averaged 28.7 million barrels a day, which was a decrease of 8 per cent from 2008. In 2010, total oil production (including natural gas liquids) from OPEC member countries is forecast to increase by 4 per cent to 34.8 million barrels a day. Most of this increase reflects additional output from natural gas liquids, which is forecast to reach 5.8 million barrels a day.

Oil


Beyond 2010, OPEC production is projected to grow at an average rate of more than 4 per cent a year as world demand increases and non-OPEC supply decreases. As a result, OPEC spare capacity is expected to decline relatively rapidly.

The largest share of increased OPEC output will come from Saudi Arabia, where production capacity could reach 12.5 million barrels a day by 2015. Increased production will be supported by the Khurais (capacity 1.2 million barrels a day), Shaybah (250 000 barrels a day) and Nuayyim (100 000 barrels a day) projects, which commenced production during 2009 and will increase production toward capacity over the outlook period. The Manifa project (1 million barrels a day), which was originally scheduled to start up in 2012, is now rescheduled for production in 2015.

In Qatar, increased oil production over the medium term will be associated with increased gas production to provide feedstock for the expansion of the RasGas and Qatargas LNG plants. It is estimated that around 500 000 barrels a day of condensate will be produced as a by-product of the gas production when all LNG trains are in operation by 2011.

In Iraq, there is potential for strong growth over the outlook period following an improvement in security, and contracts being signed for new field developments and expansion of existing fields. During 2009, a number of agreements were signed with foreign oil companies. By 2015, Iraq’s oil production could increase to 3.3 million barrels a day, from 2.5 million barrels a day in 2009. Fields that could add to production capacity include West Qurna-1, Rumaila and Zubair. However, there is still uncertainty associated with sovereign and security risks, particularly with the enactment of the hydrocarbon law, which could see an increase in opposition to the involvement of foreign companies in Iraq’s oil sector.

Non-OPEC production to decline after 2012In 2010, non-OPEC production is forecast to average 51.5 million barrels a day, which is a 1 per cent increase from 2009. Increased oil production in the United States, Brazil, the Russian Federation, Azerbaijan and Kazakhstan will be offset by falling production from fields in Mexico and the North Sea.

Non-OPEC production is forecast to rise to 52 million barrels a day during 2011 and 2012, before declining to 51 million barrels a day in 2015. Declining production in Mexico and the North Sea is expected to offset production increases in other non-OPEC countries. However, high oil prices could trigger the development of higher cost oil fields such as those in deepwater in the Gulf of Mexico or Canadian oil sands.

In North America, increased oil supply from the US Gulf of Mexico and Canada is expected to offset lower production from mature fields on the US mainland and in Mexico. In the Gulf of Mexico, a number of projects have been completed during 2009, including Thunder Horse, Blind Faith, Tahiti, Shenzi and Thunder Hawk, which will support increased production in the short term. There are also projects currently under development that are scheduled to commence production in the next two years. These include Great White, Trident and Chinook, which are expected to underpin production growth in the second half of the outlook period.

Oil


Further, increases in oil production in the second half of the outlook period will, in part, depend on the success of exploration and development of resources which are located in deep water areas in the Gulf of Mexico.

An increasing proportion of North America’s oil production over the medium term is projected to come from Canada’s large oil sands deposits. Canada’s oil sands reserves are estimated to contain the equivalent of 151 billion barrels of oil. Only Saudi Arabia has larger oil reserves, estimated to be around 264 billion barrels (BP 2009).

Production from Canada’s oil sands could increase from around 1.2 million barrels a day in 2009 to 1.8 million barrels a day in 2015. Increased production will be supported by new projects such as Nexen’s Long Lake (200 000 barrels a day) and Statoil’s Kai Kos Dehseh (120 000 barrels a day), as well as additions to capacity at existing projects, including EnCana’s Christina Lake (200 000 barrels a day) and Foster Creek (90 000 barrels a day). The growth of output from Canada’s oil sands is important because Canada is regarded to have relatively low sovereign and security risks.

Brazil’s oil production (including biofuels) was around 2.5 million barrels a day in 2009. This is projected to increase to 3.5 million barrels a day in 2015, which is an average annual increase of 5 per cent. The start-up of production from the Parque das Conchas project during 2009, which has a peak production capacity of 100 000 barrels a day, is expected to support this growth. In addition, the start-up of other new fields, such as Jabuti, BC-10, Cachalote and Peregrino, in the first half of the outlook period, with annual production capacity of around 100 000 barrels a day for each project, will also underpin oil production growth.

Further expansion of production in Brazil is anticipated over the medium term, being underpinned by the doubling of capacity at the Marlim (addition capacity of 150 000 barrels a day) and Jabuti fields in 2011, and first production from the Tupi field in 2013.

Oil production in the Russian Federation is estimated to have averaged 10.1 million barrels a day in 2009, which is an increase of 1.4 per cent from 2008. The increase in production was supported by the start-up of new crude oil fields (Vankor and Alinskoye) in Eastern Siberia and the production of natural gas liquids from the Sakhalin project. The increase in production from the above mentioned crude oil and natural gas liquids fields will further boost output in the short term. However, oil production from the Russian Federation is projected to decline after 2012 as the decline from mature fields outweighs production increases from new fields.

Declining production in the Russian Federation over the medium term is expected to be partly offset by increasing production from the Caspian region. Over the outlook period, oil production from this region is projected to increase by around 3 per cent a year to 3.7 million barrels a day in 2015.

The two main producing countries in the Caspian region are Kazakhstan (1.5 million barrels a day) and Azerbaijan (1 million barrels a day). Increased production in Kazakhstan in 2010 will be from new projects such as Tengiz and Karachaganak, with production capacity of 100 000 barrels a day each, as well as additions to capacity at the Tengiz project in 2011. In

Oil


addition, the Kashagan project, which has been subject to considerable delays since 2005, is scheduled for first production in 2013. At its peak production rate, the Kashagan field could produce 1.5 million barrels a day.

In Azerbaijan, the main source of supply growth is expected to come from the Azeri-Chirag-Guneshi (ACG) complex. It is estimated that the complex contains more than 5 billion barrels of recoverable oil and could ultimately support production of 1.5 million barrels a day. Production from the ACG complex commenced in 2007, but the ramp-up of new incremental production has been delayed because of technical problems. In 2009, production from the complex was around 0.85 million barrels a day, but this could increase to full capacity by 2011, and be maintained throughout the outlook period.

Australian production and exportsIn 2009-10, Australia’s crude oil and condensate production is forecast to total 27.8 gigalitres, which is similar to 2008-09. Two new oil fields are scheduled to commence operation in the first quarter of 2010—Pyrenees (15.3 million litres a day) and Van Gogh (10 million litres a day). While these fields are large by Australian standards, the effect of their initial output on total Australian production in 2009-10 will be offset by continued maintenance at the Woollybutt field and natural decline from other mature fields.

Australian crude oil and condensate production is forecast to increase by 6 per cent in 2010-11 to 29.5 gigalitres and by 4 per cent in 2011-12 to 30.6 gigalitres, which reflects ramping up of production from Pyrenees and Van Gogh. Beyond 2011-12, Australia’s oil production is projected to decline gradually to 25 gigalitres in 2014-15. Contributing to increased oil production in the second half of the outlook period is the expected development of new oil fields such as Kipper, Crux and Turrum, expansions at existing oil fields and the tie-in of the Conniston field to infrastructure at the Van Gogh field.

Australian crude oil and condensate exports

5000

10 000

15 000

20 000

25 000

30 000

2014-15 z

2008-09

2010-11 f

2012-13 z

2006-07

2004-05

2002-03

2000-01

volume (left axis)

value (right axis)

ML

2

4

6

8

10

12

2009-10A$b

Oil


Australia’s oil exports over the outlook period are projected to follow a similar profile to production. Exports are forecast to rise by 2 per cent to 17 gigalitres in 2009-10. Reflecting increased production in these basins over the outlook period, Australia’s oil exports are projected to increase in 2011-12 to 19 gigalitres, before declining moderately to 15.8 gigalitres in 2014-15. It is assumed that a significant proportion of production from fields in the Bonaparte and Carnarvon Basins will be exported given their proximity to Asian refineries and markets in South-East Asia.

The value of Australia’s crude oil and condensate exports is forecast to increase by 12 per cent to $10.1 billion in 2010-11, which reflects higher export volumes and higher oil prices. Export earnings are projected to increase further to $11.6 billion in 2012-13 (in 2009-10 dollars). The effect of higher world oil prices on export earnings is expected to more than offset lower export volumes. However, by 2014-15, export earnings are projected to fall to $11.3 billion (in 2009-10 dollars).

unit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 z

WorldProduction a mbd 86.5 84.9 86.3 87.4 88.9 90.4 91.9 93.5Consumption mbd 86.2 84.9 86.3 87.4 88.9 90.4 91.9 93.5Trade weighted crude oil price b– nominal US$/bbl 94.60 59.09 73.92 76.13 80.08 86.95 89.83 93.22– real c US$/bbl 95.84 60.08 73.92 74.82 77.14 81.96 82.85 84.13West texas intermediate crude oil price– nominal US$/bbl 98.62 61.68 77.38 79.98 84.16 91.26 94.16 97.63– real c US$/bbl 99.92 62.71 77.38 78.60 81.07 86.02 86.84 88.10

2007 2008 2009 2010 2011 2012 2013 2014-08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

AustraliaCrude oil and condensateProduction a ML 25 789 27 788 27 797 29 456 30 619 28 406 26 229 25 026Export volume ML 15 975 16 588 16 955 17 671 18 984 17 754 16 525 15 766Export value– nominal A$m 10 484 8 757 8 973 10 080 12 114 12 512 12 631 12 723– real d A$m 11 066 8 962 8 973 9 851 11 554 11 641 11 466 11 268Imports ML 26 223 24 302 26 164 25 565 27 221 28 148 28 904 29 564LPG Production e ML 3 971 3 930 4 068 4 070 4 072 4 073 4 075 4 077Export volume ML 2 589 2 500 2 878 2 646 2 384 2 376 2 266 2 159Export value– nominal A$m 1 182 1 044 1 107 1 108 801 801 766 730– real d A$m 1 247 1 068 1 107 1 083 764 745 696 647Petroleum productsRefinery production ML 39 575 39 546 37 995 38 709 38 619 38 558 38 524 38 760Other g ML 2 953 3 013 3 073 3 131 3 176 3 207 3 208 3 212Exports h ML 1 807 1 164 1 319 1 592 1 449 1 488 1 438 1 485Imports ML 17 982 19 697 20 589 19 637 20 794 21 653 22 505 23 391Consumption – total net i ML 57 590 58 119 57 877 58 754 59 643 60 546 61 463 62 262

a One megalitre a year equals about 17.2 barrels a day. b Official sales prices or estimated contract terms for major internationally traded crude oils. c In 2010 US dollars. d In 2009-10 Australian dollars. e Primary products sold as LPG. f ABARE forecast. g Refinery swells and losses, stock changes, petrochemical byproducts and naturally occurring LPG for domestic consumption. h Excludes LPG. i Liquid petroleum products including refinery fuel, feedstocks and losses, and international ships and aircraft stores. z ABARE projection.Sources: Energy Information Administration (US Department of Energy); ABARE.

Oil outlook

Oil


Natural gasOutlook to 2015

Suwin Sandu, Alan Copeland and Farah Beaini

World LNG tradeWorld LNG trade is characterised by two distinct import markets, the Asia Pacific and the Atlantic. In 2009, the vast majority of Australia’s LNG exports were delivered to economies in the Asia Pacific, particularly Japan, the Republic of Korea, Chinese Taipei and China. These countries accounted for around 60 per cent of world LNG trade in 2009.

In 2009, world LNG trade is forecast to have increased by 5 per cent to around 178 million tonnes. The relatively steady volume of trade reflects falling demand in northern Asia being balanced by increased imports by the European Union, the United States and China. The global economic downturn resulted in lower gas consumption and LNG imports by countries such as Japan, the Republic of Korea and Chinese Taipei. Lower demand in northern Asia, particularly for spot cargoes, resulted in LNG spot prices falling significantly. This led to shipments being sold into the European market and the United States, as buyers took advantage of low prices to fill storage tanks.

World LNG trade is forecast to increase by 15 per cent in 2010 to 205 million tonnes, as gas consumption in Asia and Europe increases in line with improved economic conditions. The forecast growth in trade will be underpinned by increased LNG production and export capacity in the Middle East, the Russian Federation and Indonesia. A significant proportion of the increased trade in 2010 will be supplied under long-term sales agreements.

Over the medium term, gas consumption in many countries is expected to increase, being underpinned by a range of factors including energy diversity and security, and cost and environmental competitiveness of gas compared with other fuels. In many of these economies, especially those in Asia and Europe, increased gas consumption will require higher imports of LNG. By 2015, world LNG trade is projected to increase to 220 million tonnes, which is an average annual growth rate of 4 per cent a year.

Imports by northern Asian market to rebound in 2010 …LNG imports in 2010 by northern Asia are forecast to increase by 5 per cent to 102 million tonnes, as gas consumption increases with an improvement in regional economic growth. Uncertainty associated with climate change policies and concerns over energy security are expected to underpin LNG import growth in important markets such as Japan and the Republic of Korea. By 2015, LNG imports by the northern Asian market are projected to reach 117 million tonnes, which is an increase of 3 per cent a year.

Japan, the world’s largest LNG buyer, is expected to import 66 million tonnes of LNG in 2010, which is an increase of 4 per cent from 2009. The return to economic growth in 2010 will underpin an increase in electricity demand and gas consumption for industrial production.


Beyond 2010, LNG imports by Japan are projected to grow steadily at an average annual growth rate of 2 per cent to reach 74 million tonnes by 2015. Increasing imports are expected to be strengthened by government policies aimed at increasing the share of gas in Japan’s energy mix. The Japanese Government has encouraged increased natural gas consumption because it is cost effective compared with oil, has lower greenhouse gas emissions than coal and is more reliable than nuclear power.

A large proportion of Japan’s increased LNG imports over the outlook period will be consumed in new gas-fired power stations. A number of new gas-fired power stations were brought into operation during 2008 and 2009, with a combined capacity of 5000 megawatts. Over the outlook period, an additional 5000 megawatts of capacity are scheduled to enter operation. New capacity includes Kansai Electric’s 800 megawatts Sakaiko power plant (scheduled to operate later in 2010), Tokyo Electric Power Company’s 500 megawatts Futtsu (2010) and 500 megawatts Kawasaki (2013), Tohoku Electric’s 450 megawatts Sendai (2010), Okinawa Electric’s 500 megawatts Yoshinoura plant (2011-12) and Chubu Electric’s 1785 megawatts power plant (2012-13).

In the Republic of Korea, LNG imports in 2010 are forecast to increase by 10 per cent to27 million tonnes. Increased imports in 2010 will be assisted by forecast higher average oil and thermal coal prices and the assumed economic recovery, which will support an increase in demand for gas from the electricity generation sector.

LNG imports by the Republic of Korea are projected to increase to around 32 million tonnes by 2015 as the government continues to implement policies aimed at enhancing energy security and environmental outcomes. In addition to the increased gas demand in the industrial and residential sectors, a large proportion of higher LNG imports will also be used in the 3000 megawatts gas-fired electricity generation capacity that is scheduled to be added over the outlook period. Increased gas imports will be supplied by new long-term contracts with suppliers in Indonesia, Australia, the Russian Federation and Yemen.

LNG imports and contracted volumes in northern Asia market

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Natural gas


In Chinese Taipei, LNG import demand over the medium term is projected to be underpinned by increased gas consumption in electricity generation. This increase reflects government policies which encourage gas consumption, because it has lower greenhouse gas emissions than coal. For example, a government policy which allows independent power producers to build only gas-fired and renewable electricity generation capacity could increase the share of gas in Chinese Taipei’s total electricity generation. By 2015, LNG imports are projected to increase to 12 million tonnes, which is an average growth rate of 4 per cent a year.

… while Chinese and Indian imports continue to grow …China imported around 5.5 million tonnes of LNG in 2009, which was 64 per cent higher than imports in 2008. China’s growth in LNG imports was a result of increased gas-fired electricity generation capacity and new LNG import capacity. The fall in LNG prices has also encouraged the purchase of spot cargoes. In 2010 and 2011, China’s LNG imports are forecast to rise to 8 million tonnes and 11 million tonnes, respectively, as LNG import capacity continues to grow.

Beyond 2011, China will be able to import gas via pipeline from its neighbours on the western border, including Turkmenistan, Uzbekistan and Kazakhstan. The recently completed Turkmenistan-China pipeline will transport gas from central Asia to Xinjang province in western China. In 2011, a second west to east pipeline will be commissioned, enabling gas to be transported from central Asia to the Yangtze and Pearl River deltas in eastern China. Despite the increased competition from pipeline gas, LNG imports are projected to continue growing. LNG is assumed to be price competitive with gas transported from central Asia, which reflects the cost of piping gas several thousand kilometres. LNG imports are projected to continue to be an important source of gas supply over the outlook period, reaching 17 million tonnes by 2015.

A significant proportion of imports will be supplied by long-term contracts from suppliers in Australia, Indonesia, Malaysia, Papua New Guinea and Qatar.

In India, consumption of natural gas is projected to increase over the medium term associated with increased consumption for electricity generation and in the industrial sector. This

China’s current and potential LNG supply agreements imports supplier contract

company terminal country project volume start duration mtpa years

CNOOC Guangdong Australia North West Shelf 3.3 2006 25CNOOC Fujian Indonesia Tangguh 2.6 2009 25CNOOC various Qatar Qatar Gas III 2 2009 25CNOOC Shanghai Malaysia MLNG Tiga 3 2009 25CNOOC various various Total Gas and Power 1 2010 15PetroChina Jiangsu Qatar Qatar Gas IV 3 2011 25PetroChina Dalian various Shell portfolio 2 2011 20PetroChina various Australia Gorgon/Shell portfolio 2 2014 20CNOOC various Australia Curtis LNG 3.7 2014 20Sinopec various PNG PNG LNG 2 2015 20

Natural gas


increased demand will be met by a combination of domestic production and imported gas. The ramping up of gas production from the Krishna-Godavari Basin, which started during 2009, has been slower than expected. Despite the size of the gas field, estimated to contain reserves of up to 2.3 trillion cubic metres, production will be insufficient to meet growing demand. This will support increased demand for imports which are projected to reach 15 million tonnes by 2015.

The 9 million tonne increase in imports is expected to be underpinned by long-term supply agreements with RasGas in Qatar (7.5 million tonnes a year from 2009) and Gorgon (1.5 million tonnes a year from 2015).

… with potential for higher imports from developing AsiaImports of LNG in the Asia Pacific region are also expected to be strengthened by increasing demand in emerging Asian economies. Most of the growth in gas demand in developing Asia will be for electricity generation. However, increasing demand for gas will also come from the road transport sector, being underpinned by increasing growth of natural gas vehicles. The Asia Pacific Natural Gas Vehicle Association estimates that natural gas vehicle use in Asia will rise by more than 10 per cent in 2010, mainly across Pakistan, China, India, Bangladesh and Thailand.

Thailand, Singapore, Philippines, Bangladesh and Pakistan have limited energy resources and rely on energy imports to support economic growth. Viet Nam, while currently energy self sufficient, could also import LNG to support its proposed expansion of gas-fired electricity generation capacity. In each of these countries, there are plans for LNG imports within the outlook period.

LNG imports and contracted volumes in China and India

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Natural gas


Indonesia, which was the world’s largest exporter until 2005, could also begin to import LNG before the end of the outlook period. The Indonesian Government has put emphasis on increasing utilisation of gas for domestic consumption in order to reduce its dependence on oil, particularly for electricity generation. Although Indonesia currently exports a large volume of LNG, these export plants are located in the eastern and northern islands of Natuna and Sulawesi while the main demand centres are in the western and southern islands (Java and Bali). Because of this geographical mismatch, LNG import terminals are being planned in west Java, east Java and north Sumatra, with one of the re-gasification plants scheduled to become operational in 2013.

Atlantic imports to continue increasingDespite a decline in natural gas consumption in the Atlantic market in 2009 associated with the economic downturn, regional LNG imports have risen by 11 per cent to 60 million tonnes. Lower spot LNG prices and the availability of natural gas storage capacity in the European Union and the United States have underpinned LNG imports in this market. In the European Union, natural gas storage capacity has been increasing as a measure to mitigate potential supply disruptions, such as that which occurred in early 2009 as a result of the dispute between the Russian Federation and Ukraine. In addition, the start-up of a number of re-gasification terminals in the United Kingdom and Italy has supported imports since early 2009.

LNG imports in the Atlantic market

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Potential new LNG importers in developing Asian economiescountry import project capacity planned status (location) mtpa start-up

Thailand Map Ta Phut 5 2011 under constructionSingapore Jurong Island 3 2013 under constructionPakistan Marshal (Karachi) 3.5 2012 proposedPhilippines Mariveles (Bataan) 1.5 2012 proposedViet Nam Floating LNG 1.5 2013 plannedIndonesia Cilegon (West Java) 1.5 2013 plannedPhilippines Calaga (Manila Bay) na 2015 plannedBangladesh 3.5 na planned

Natural gas


In 2010, Atlantic imports are forecast to increase by 4 per cent to 63 million tonnes. A continuation of lower spot LNG prices and higher gas consumption associated with increased economic activity are expected to be the main drivers of import growth. Beyond 2010, Atlantic LNG imports are projected to grow at a more moderate rate of 2 per cent a year to 70 million tonnes by 2015.

In addition to the traditional Atlantic importers, increased LNG imports could also come from the emerging economies, particularly in the Latin America. Concerns about the security of natural gas supply, including the nationalisation of the energy sector in Bolivia, have spurred development of LNG re-gasification terminals in the region. Besides Argentina, which started to import LNG in late 2008, a number of countries are expected to start importing LNG during the outlook period. For example, Brazil and Chile have commissioned their first import terminals during 2009 and have plans to add additional terminals over the medium term.

LNG supplyWhile the world LNG import market can be split into two regions, there are three broad LNG supply regions: the Asia Pacific, the Atlantic and the Middle East. Over the medium term, an increasing proportion of imports by the Asia Pacific market are expected to be sourced from suppliers in the Atlantic and Middle East. This reflects the quantity of LNG imported by the Asia Pacific market relative to the export capacity of suppliers in the Asia Pacific. For this reason, supply of LNG to the Asia Pacific needs to be viewed from a global perspective.

In 2009, LNG liquefaction capacity increased by around 22 per cent to 247 million tonnes. More than half of this capacity is located in Qatar, where trains four and five of the Qatargas II project and train six of the RasGas III project were commissioned. Each train has a capacity of 7.8 million tonnes. Other LNG projects to commence operation during 2009 include Yemen LNG (annual capacity of 3.4 million tonnes), Sakahlin in the Russian Federation (9.6 million tonnes) and Tangguh in Indonesia (7.6 million tonnes).

Global liquefaction capacity in 2010 is expected to increase by a further 11 per cent to 274 million tonnes, under the assumption that projects scheduled for completion during the year are completed on time. Most of the capacity scheduled for completion in 2010 is located in the Middle East, with Qatar accounting for more than 23 million tonnes. LNG liquefaction capacity is also expected to increase in Peru (4.4 million tonnes) and Yemen (3.4 million tonnes).

Beyond 2011, there is only 35 million tonnes of LNG liquefaction capacity under construction and scheduled to be completed by 2015. In the Asia Pacific market, notable projects include Gorgon off the coast of north-west Australia (annual capacity of 15 million tonnes) and Papua New Guinea LNG (6.6 million tonnes). There are a number of projects, with a potential capacity of 25 million tonnes, that are scheduled to be in operation before the end of the outlook period; however, a final investment decision is yet to be made on these projects. Given the four to five year construction timeframe, it is unlikely that any project currently not under construction will make any significant contribution to global LNG supply before the end of the outlook period.

Natural gas


Australia’s gas production to increaseAustralia’s gas production, including coal seam gas, in 2009-10 is forecast to increase by 8 per cent to 47.6 billion cubic metres. This increase is underpinned by the start-up of production at the Blacktip field (annual capacity of 0.65 billion cubic metres) Henry field (0.3 billion cubic metres) and Longtom (0.4 billion cubic metres). Gas production from the Blacktip field will be supplied into the Northern Territory, while production from the Henry and Longtom fields will be piped into the eastern market. In addition, gas production from the North West Shelf project is expected to increase associated with the fifth LNG train operating at close to full capacity for the whole year. Coal seam gas production is also forecast to increase in 2009-10 associated with the expansion of the Spring Gully field in south-east Queensland.

In 2010-11, Australia’s gas production is forecast to increase by a further 10 per cent to 52.2 billion cubic metres. Increased gas production will be underpinned by the commencement of operations at the Xena and Pluto fields, which will supply gas to Woodside Energy’s Pluto LNG project. First gas is scheduled to be delivered to the LNG plant in late 2010. In the Gippsland Basin, off the Victorian coast, initial production from the Kipper and Turrum gas fields will also support increased gas production.

Coal seam gas production is also forecast to increase in 2010-11 as the Spring Gully field ramps up to capacity and production commences from the Talinga field. CSG production from the Spring Gully and Talinga fields will be supplied to the Darling Downs power station and to Rio Tinto’s Yarwun alumina refinery in Gladstone.

Over the remainder of the outlook period, Australia’s gas production is projected to increase at an average annual rate of 14 per cent, to reach around 86 billion cubic metres by 2014-15. The increase in production reflects the expansion of LNG production, including coal seam gas from Queensland, and higher domestic demand. The rapid growth of gas production, particularly toward the end of the outlook period, reflects the expansion of LNG capacity. In addition, a number of gas-fired power stations are scheduled to start operation during the outlook period, which will also support increased gas production.

Australia’s LNG exportsIn 2009-10, Australia’s LNG exports are forecast to increase by 13 per cent to 17.4 million tonnes, which reflects the fifth train at the North West Shelf project operating at close to capacity throughout the year.

In late 2010, Australia’s third LNG project, Woodside Energy’s Pluto, is scheduled to be in operation. The project has a capacity of 4.3 million tonnes, with the majority of production expected to be exported to Japan. The start-up of the Woodside project is forecast to underpin a 3 per cent increase in LNG exports in 2010-11 to 18 million tonnes.

Beyond 2010-11, Australia’s LNG exports are projected to increase at an average annual rate of 9 per cent, reaching almost 28 million tonnes by 2014-15. The ramp-up of production and exports from Pluto and the Fisherman’s Landing LNG project are expected to be the major drivers of LNG export growth during the outlook period. In 2014-15, Australia’s LNG exports

Natural gas


could increase significantly, associated with first production and export from the Gorgon Project. In addition, there is the potential for exports from two new CSG-LNG projects in Queensland: Curtis Island (initial annual capacity of 7.4 million tonnes) and Gladstone LNG (initial annual capacity of 3.5 million tonnes). A final investment decision for both projects is expected in 2010, with first production scheduled for 2014. It is assumed that production and exports at full capacity from Gorgon, Curtis Island and Gladstone LNG will occur after 2014-15.

There is the potential for Australia’s LNG exports to increase beyond 2014-15. Feasibility and design studies are continuing on a number of conventional projects off the north-west coast of Australia, such as Ichthys, Wheatstone, Browse and Pluto’s second train, as well as projects in Queensland based on coal seam gas. Some of these projects are expected to receive a final investment decision during 2010 or 2011. Given the four to five year construction timeframe, they are not expected to be in operation until after the outlook period.

In 2009-10, Australia’s export values of LNG are forecast to fall by 29 per cent to $7.2 billion, which reflects lower oil prices and an appreciation of the Australian dollar against the US dollar. The value of LNG exports (in 2009-10 dollars) is projected to grow at an average annual rate of 25 per cent, reaching $13.5 billion in 2014-15. The increase in export earnings reflects the growth of export volumes and projected higher oil prices over the course of the next several years.

Australian LNG exports

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Natural gas outlook

2007 2008 2009 2010 2011 2012 2013 2014unit -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

AustraliaProduction Gm3 41.7 44.1 47.6 52.2 58.4 63.6 68.5 86.1LNG export volume Mt 13.7 15.4 17.4 18.0 21.3 22.2 22.9 27.9LNG export value– nominal A$m 5 854 10 079 7 169 7 660 9 471 10 624 11 899 15 288– real a A$m 6 179 10 315 7 169 7 486 9 032 9 885 10 802 13 539

a In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: ABARE.

Natural gas


Thermal coalOutlook to 2015

Rebecca Petchey, Michael Lampard and Alan Copeland

In 2010, thermal coal contract prices are forecast to increase, which reflects a forecast increase in import demand from India, the Republic of Korea, Chinese Taipei and Japan. China’s imports in 2010 are forecast to remain steady, following growth of 137 per cent in 2009, as domestic production increases. Increased exports are forecast from Australia, Indonesia and Colombia, reflecting expanded mine and infrastructure capacity.

Over the medium term, coal prices are assumed to remain above long-term historical averages, being underpinned by strong import demand from developing economies, especially China and India. In addition, higher prices are likely to partly reflect rising production costs in key producing countries.

Contract prices to increase in 2010 . . .Over the course of 2009, Newcastle thermal coal spot prices increased by 60 per cent, averaging US$72 a tonne for the year as a whole. The increase in prices was largely attributable to strong import demand growth from China. Throughout 2009, the average Newcastle thermal coal contract price was close to the contract price for Japanese Fiscal Year 2009 (JFY, April 2009 to March 2010) which was settled at around US$70 to US$72 a tonne. This was a decrease of 44 per cent from the previous year.

Thermal coal contract prices for JFY 2010 are assumed to increase, which reflects the significant increase in the spot price in late 2009 and early 2010. In early February, Newcastle thermal coal spot prices were more than US$90 a tonne. The increase in price largely reflects higher import

Thermal coal indicator pricesweekly, ended February 2010

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demand from China, driven by a colder than average winter and increased electricity demand, combined with constrained Chinese domestic production and transport infrastructure.

. . . before declining over the medium termOver the outlook period to 2015, thermal coal contract prices are assumed to remain above US$65 a tonne in real terms. This is significantly higher than average prices between 1990 and 2007. The higher prices partly reflect increasing supply costs in China, the world’s largest producer of thermal coal, and in Australia and Indonesia, the largest exporters. Production costs are projected to increase over the medium term as coal deposits which are deeper underground and further away from existing infrastructure are developed. In Australia, increased export capacity associated with new infrastructure projects is expected to have a significantly higher unit cost compared with existing infrastructure.

Growth in demand for thermal coal to be driven by China and India

Global thermal coal imports are projected to increase by 19 per cent from 730 million tonnes in 2009 to around 872 million tonnes in 2015. Rising electricity demand in developing Asia is expected to be the main driver of growth in thermal coal imports over the outlook period. In particular, China and India’s thermal coal imports are projected to grow strongly, which reflects significant investment in coal-fired electricity generation capacity. In contrast, import demand growth is projected to be relatively weak in developed economies, largely as a result of com-paratively weaker economic growth, greater access to natural gas and, in the European Union, policies that encourage increased consumption of nuclear and renewable energy.

Growth in China’s imports to moderate in 2010China’s imports of thermal coal in 2009 are estimated to have increased by 137 per cent to 84 million tonnes. The significant increase in imports was a result of high domestic prices and low freight rates which improved the competitiveness of imports. In addition, domestic coal consumption growth outpaced production growth.

Chinese domestic spot price and landed import pricemonthly

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Thermal coal


The strong growth in China’s imports is forecast to ease through 2010, with imports remaining at around 85 million tonnes. Strong demand for thermal coal in early 2010 as a result of electricity consumption associated with a colder than average winter is expected to moderate throughout the year. Domestic production is also forecast to increase as mines are re-opened following the consolidation of the Shanxi coal mining industry. Higher international prices and freight rates are also expected to reduce import demand. Between January and October 2009, freight rates from Australia to Asia have doubled.

Over the medium term, the ability of domestic production growth to keep pace with demand for thermal coal will be a key driver of import demand. A significant proportion of China’s production growth is expected to occur in the four largest coal producing regions: Inner Mongolia, Shanxi, Henan and Shaanxi. These regions accounted for 44 per cent of China’s total coal production in 2009 and have recorded annual growth rates since 2005 of 20 per cent, 1 per cent, 8 per cent and 13 per cent, respectively. However, these provinces are located in the northern region of China, which is distant from large consuming regions on the south-east coast. Increasing transportation costs and rail infrastructure constraints associated with the increasing geographic distance between production and consumption centres will continue to support thermal coal imports over the outlook period, with imports forecast to increase to 100 million tonnes in 2015 from 85 million tonnes in 2010.

Between 2004 and 2009, China’s thermal coal exports fell by 73 per cent to 22 million tonnes. This largely reflects strong domestic demand and policies aimed at ensuring sufficient supply for domestic consumers. In addition, in 2008 and 2009, falling exports reflected weak import demand in important markets, particularly Japan. Over the outlook period, China’s exports are projected to decline moderately to around 15 million tonnes by 2015. Strong domestic demand and weak import demand in north Asia are expected to limit China’s thermal coal export performance.

China's coal production, major regions

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a Annualised production figure from data to November.

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Thermal coal


The importance of China to the world thermal coal market is highlighted by its share of world imports increasing from 5 per cent in 2008 to 12 per cent in 2009. However, because China’s thermal coal consumption is significantly larger than total volumes traded on the global coal market, imports are estimated to have accounted for only 3 per cent of total consumption in 2009, compared with 2 per cent in 2008. While changes in imports tend to have a relatively small effect on China’s domestic market, the implications of these changes are of significant importance to the world traded coal market.

India to remain one of the fastest growing importers of thermal coalIndia is projected to remain one of the fastest growing thermal coal import markets over the outlook period, with imports expected to double between 2009 and 2015. This is underpinned by the planned expansion of coal-fired electricity generation capacity. India is the world’s second largest coal producer and, although production is forecast to increase, the rate of growth is anticipated to be slower than demand, leading to increasing imports.

India has significant resources of thermal coal and is currently in the process of developing additional coal mines. However, most of India’s coal resources are located in the centre of the country, which is distant from the coastal sites of a number of the planned power stations. This could result in high transport costs and potentially unreliable deliveries.

India’s electricity generation is predominantly coal-fired, supplemented by nuclear and hydro electricity. According to India’s Ministry of Power, most of the additions to electricity generation capacity as planned under the 11th Power Plan (2007 to 2012) will be coal-fired. Coal-fired electricity generation is favoured in India for security of supply reasons (hydro can be unreliable in the monsoon season) and because of India’s abundant coal resources.

Over the medium to longer term, Indian Government policy is aimed at increasing the rate of electrification across the country. To enable the implementation of this policy, a number of ultra mega power plants are being planned. These plants will each have a capacity of around 4000 megawatts, and could each consume up to 16 million tonnes of coal a year.

The first of these ultra mega projects, Mundra, in the state of Gujarat, is scheduled to be commissioned in 2012, with all five units in operation by mid-2014. Sasan, in the state of Madhya Pradesh, is scheduled to commence initial operations in 2013 and to be operating

India’s ultra mega power projects project state developer capacity start up

Mundra Gujarat Tata Power 4000 MW 2012Sasan Madhya Pradesh Reliance Power 4000 MW 2013Krishnapatnam Andhra Pradesh Reliance Power 4000 MW naTilaiya Jharkhand Reliance Power 4000 MW naAkaltara Chharttisgarh na 4000 MW naTadri Karnataka na 4000 MW naGirye Maharastra na 4000 MW naCheyyur Tamil Nadu na 4000 MW naSundargarh Orissa na 4000 MW na

Thermal coal


at full capacity in early 2016. The development of these ultra mega projects, combined with other capacity additions outlined in the 11th and 12th Power Plans, is projected to support rapid coal consumption growth over the outlook period.

Limited growth potential in Japan, the Republic of Korea and the European UnionJapan’s thermal coal imports are projected to increase by 5 per cent over the outlook period, to 122 million tonnes in 2015. This compares with imports of 128 million tonnes in 2008. Japan’s import growth is forecast to be strongest in 2010 and 2011 as economic activity and electricity demand are assumed to increase at the fastest rate over this period. Thermal coal import growth is projected to be moderate beyond 2011, as increasing electricity demand is met by nuclear, gas and renewable energy. The potential introduction of policies to reduce carbon emissions, possibly toward the end of the outlook period, presents a downside risk to this forecast.

Thermal coal imports by the Republic of Korea are estimated to have increased by 11 per cent to 84 million tonnes in 2009. This growth was underpinned by the commissioning of significant coal-fired electricity generation capacity in 2008 and early 2009. Growth between 2010 and 2015 is projected to average around 2 per cent a year, which reflects the end of the program to expand coal-fired generation capacity.

Thermal coal imports by the European Union are estimated to have declined by 3 per cent to 179 million tonnes in 2009. In 2010, imports are forecast to increase by 2 per cent as economic growth resumes and supports increased demand for electricity generation.

Over the medium term, imports are projected to remain steady. EU policies are expected to reduce the utilisation of coal-fired electricity generation and, hence, coal demand. However, coal production within the European Union, particularly in Germany, is anticipated to decline, resulting in imports accounting for a larger share of consumption. In Germany, coal production is anticipated to fall, until it ceases in 2018. In that year, subsidies to the coal industry, which exceed US$2 billion annually, will be phased out. Germany currently has eight operating coal mines, one of which is scheduled for closure in 2010.

Global supply to increase over the medium termMost of the projected increase in demand for thermal coal over the outlook period is expected to be met by producers in Australia, Indonesia, Colombia and South Africa. Significant plans to expand production in these countries are well underway.

Indonesia’s supply to increase despite growing domestic demandIndonesia’s exports are estimated to have increased by 4 per cent in 2009 to around 200 million tonnes, as strong demand from China supported export demand. In 2010, a gradual recovery in traditional Asian export markets is expected to support an increase in exports to around 210 million tonnes. Over the remainder of the outlook period, Indonesia’s thermal coal exports are projected to increase at an average annual rate of 4 per cent, to reach 250 million tonnes by 2015. Key expansion projects supporting increased exports include Bumi Resources’

Thermal coal


plan to expand its KPC and Arutmin mines from 53 million tonnes in 2009 to 111 million tonnes by 2013 and PT Adaro Energy’s plan to increase its mine capacity to 80 million tonnes by 2014.

One possible downside risk to this projection is the ability of Indonesia’s coal producers to meet projected growth in export and domestic thermal coal demand. The Indonesian Government plans to increase the proportion of people with access to electricity from around 65 per cent in 2006 to 93 per cent by 2025. To meet this target, 57 gigawatts of electricity generating capacity is planned to be built over this period. The first phase of this project involves the construction of 10 gigawatts of coal-fired electricity generating capacity by 2011. Phase two of this expansion project is expected to begin in 2011 and will involve the construction of an additional 10 gigawatts of coal-fired generating capacity.

To meet increased domestic demand for thermal coal, the Indonesian Government announced that 30 per cent of producers’ output should be set aside to supply new coal-fired electricity generation. However, Indonesia has large coal reserves and has been able to increase coal production quickly over the past decade. It is therefore expected that Indonesia’s production will increase to meet demand.

Strong supply growth from Colombia and South AfricaThermal coal exports from Colombia are estimated to have declined by around 5 per cent in 2009 to 70 million tonnes. This mainly reflects lower import demand from the Atlantic market, which is the major export destination for coal from Colombia. In 2010, an expected recovery in thermal coal import demand from the European Union and the United States is expected to support a 6 per cent increase in Colombia’s thermal coal exports.

Over the medium term, significant investment is planned to expand production in Colombia. Demand for Colombia’s thermal coal is expected to increase, which reflects the relatively low cost of production and high energy and low sulphur content of Colombian coal. Colombia’s geographical proximity to major importing markets such as the Europe Union and the United States also provides a comparative advantage to Colombian producers over other suppliers to the Atlantic market. On this basis, exports are projected to reach around 110 million tonnes by 2015.

South Africa is estimated to have exported 65 million tonnes of thermal coal in 2009, which was an increase of 6 per cent on 2008 volumes. Thermal coal exports from South Africa increased in 2009 despite significant declines in import demand from the Atlantic market. Primarily supporting increased exports was demand from India, which took advantage of the availability of lower priced coal compared with that in the Pacific market. In 2010, thermal coal exports from South Africa are forecast to increase by 5 per cent as the expansion of rail infrastructure supports increased capacity at the Richards Bay Coal Terminal. Export demand in 2010 is expected to be strengthened by growth in the Atlantic market and strong growth in demand from Asia, particularly India.

Over the remainder of the outlook period, South Africa’s exports are projected to increase by around 7 per cent a year, reaching 88 million tonnes by 2015. Infrastructure expansions are expected to be complemented by expanded production capacity at key South African coal mines. Nevertheless, potential energy supply disruptions and domestic infrastructure bottlenecks are risks to this forecast.

Thermal coal


Strong export growth in Australia to continue over the medium term. . .In 2009-10, Australia’s thermal coal exports are forecast to increase by 3 per cent to around 141 million tonnes. The increased exports reflect increased demand for thermal coal in the Asian market and are facilitated by projects either recently completed (including Belmont with a capacity of 1.5 million tonnes a year) or those scheduled to be completed in early 2010 (such as the Narrabri Coal Project with a capacity of 1.5 million tonnes a year).

In 2010-11, Australia’s coal exports are forecast to increase by 6 per cent to 149 million tonnes. Mine production scheduled to commence in 2010, including Moolarben, Blakefield South and Ashton South East, will underpin this expansion.

Between 2011-12 and 2014-15, Australia’s thermal coal exports are forecast to grow at an average annual rate of 9 per cent to total 200 million tonnes in 2014-15. Mining companies are expected to invest in the expansion of the coal industry to take advantage of strong export demand and assumed relatively high coal prices. For example, Xstrata’s Mangoola (8 million tonnes a year) and Rio Tinto’s Mount Pleasant (10 million tonnes a year) projects are scheduled to be brought into production during the outlook period. In addition, it is assumed that expansions to the Narrabri coal project, Mount Arthur North and Moolarben will contribute to increased production and exports over the medium term.

. . . supported by infrastructure expansionsThe completion of the Newcastle Coal Infrastructure Group Terminal in 2010 and a recently completed upgrade to the Kooragang Island Terminal will provide the necessary port infrastructure to support export growth in 2009-10 and 2010-11. Over the medium term, increases in production capacity will be matched by the expansion of rail and further upgrades to port infrastructure. In New South Wales, upgrades to the Kooragang Island Terminal could increase capacity from 113 million tonnes to 140 million tonnes, while a second stage of the Newcastle Coal Infrastructure Group Terminal could add another 30 million tonnes of coal

loading capacity. Planning is under way for a number of rail projects in the Hunter Valley, to enable increased rail capacity. Queensland’s export capacity will expand through projects such as the Goonyella-Abbot Point Expansion, the Surat Basin Rail and new coal loading terminals at Wiggins Island and Balaclava Point.

In 2009-10, thermal coal export earnings are forecast to fall by 38 per cent to $11.1 billion. Higher export volumes are not forecast to be large enough to offset the fall in contract prices for JFY 2009 and the appreciation of the Australian dollar. From 2010-11, higher export volumes are projected to be the key driver of an increase in export earnings to $15.2 billion (in 2009-10 dollars) in 2014-15.

Australia's thermal coal exports

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Thermal coal


unit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 zWorldCoal trade Mt 704.0 730.0 750.4 768.3 785.5 811.7 842.6 871.7

ImportsAsia Mt 388.0 434.6 445.0 459.3 472.6 493.4 521.4 544.1

China Mt 35.4 84.0 85.0 87.0 89.0 92.0 95.0 100.0Chinese Taipei Mt 60.3 57.0 58.0 58.8 59.3 61.5 68.4 71.0India Mt 34.0 45.0 50.0 55.0 60.0 70.0 80.0 90.0Japan Mt 128.2 116.0 117.0 118.0 119.0 120.0 121.0 122.0Korea, Rep. of Mt 75.5 84.0 85.0 86.0 87.0 89.4 93.3 95.0Malaysia Mt 16.6 16.0 16.5 17.0 18.0 18.5 19.5 20.0other Asia Mt 37.9 32.6 33.5 37.4 40.3 42.1 44.1 46.1

Europe Mt 222.5 212.7 219.2 220.0 220.8 222.0 220.9 221.9European Union a Mt 184.6 178.5 182.0 182.3 182.7 183.2 181.4 181.7other Europe Mt 37.9 34.2 37.2 37.6 38.2 38.8 39.4 40.2

Other Mt 93.5 82.7 86.2 89.1 92.1 96.3 100.4 105.7

ExportsAustralia Mt 126.4 138.6 146.0 150.0 160.0 176.0 185.0 207.5China Mt 42.7 21.5 20.0 19.0 18.0 17.0 16.0 15.0Colombia Mt 73.6 70.0 74.0 81.0 88.0 95.0 102.0 109.0Indonesia Mt 193.0 200.0 210.0 222.0 230.0 240.0 250.0 250.0Russian Federation Mt 85.8 90.0 92.0 94.0 96.0 98.0 100.0 102.0South Africa Mt 61.3 65.0 68.0 71.0 75.0 79.0 84.0 88.0United States Mt 35.1 20.0 22.0 24.2 26.6 29.3 32.2 35.4Other Mt 86.1 124.9 118.4 107.1 91.9 77.4 73.4 64.7

2007 2008 2009 2010 2011 2012 2013 2014-08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

AustraliaProduction Mt 185.9 204.5 213.0 218.0 228.0 250.0 270.0 300.0ExportsVolume Mt 115.1 136.4 140.7 148.5 155.0 170.0 180.0 200.0Value– nominal A$m 8 365 17 885 11 138 12 790 12 927 14 296 15 276 17 132– real b A$m 8 829 18 304 11 138 12 500 12 328 13 302 13 866 15 173

a Regarded as 27 countries for all years. b In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: International Energy Agency; Coal Services Pty Ltd; Queensland Department of Mines and Energy; ABARE.

Thermal coal outlook

Thermal coal


UraniumOutlook to 2015

Michael Lampard and Rebecca Petchey

World uranium oxide (U3O

8) prices averaged US$46.30 a pound in 2009, 25 per cent lower than

the 2008 average price of US$61.80 a pound. Falling spot prices reflected strong growth in mine production, particularly in Kazakhstan, which outpaced growth in demand.

Spot uranium prices are forecast to decrease in 2010, averaging around US$44 a pound, as supply of uranium exceeds demand for the second consecutive year. Over the medium term, world uranium spot prices, in real terms, are projected to increase steadily through to 2013 as demand from developing economies continues to increase and expectations of a tightening market place upward pressure on prices. By 2014 and 2015, uranium prices are projected to increase significantly as a large increase in the number of nuclear reactors coincides with the conclusion of the United States–Russian Federation Highly Enriched Uranium (HEU) purchase agreement.

Large scale uranium producers sell most of their output through long-term contracts rather than on the spot market, with smaller operations selling the majority of their output on the spot market. The indicative long-term contract price, quoted by Ux Consulting, has not been as volatile as the spot price in recent years, although it has increased substantially. Long-term contract prices vary between companies because of differences in contract lengths, volumes and market conditions at the time of signing. For example, in Australia, the average long-term contract price has historically been lower than the world indicator contract price as contracts were signed at a time of lower world prices. As a result, there are considerable differences between spot prices, world indicator prices and Australian export unit prices for uranium.

World uranium spot prices, indicative long-term contract prices and Australian export unit values

2009US$/lb

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140

120

100

spot price

June2009

Dec2009

June2007

June2008

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long-term contract priceAustralian export unit value


World demand The only significant commercial use for uranium is as a fuel in nuclear power plants. As of February 2010, there were 436 operational nuclear power plants worldwide, with a total generating capacity of more than 373 gigawatts electric (GWe). Commissioning a reactor (based on a 1 GWe light water reactor) typically requires around 600 tonnes of uranium for its initial core, after which uranium requirements are lower as the reactor reaches a steady state level of operation.

Six nuclear reactors with a capacity of 3.5 gigawatts electric are scheduled to be commissioned in 2010 and are to be located in India, Iran and the Russian Federation. India is forecast to have the largest increase in nuclear capacity in 2010, as four nuclear reactors with a combined capacity of 1.6 gigawatts electric are expected to commence operations. Given growth in installed capacity, world consumption of uranium is forecast to increase by 3 per cent to around 79 900 tonnes U

3O

8 in 2010.

Strong growth in nuclear reactors over the medium termBetween 2011 and 2015, 58 nuclear power reactors are scheduled to start-up. This significant increase in nuclear power reactors reflects energy security issues, environmental considerations, the cost of nuclear power relative to alternatives and rapid growth in electricity demand in developing economies. Reflecting higher electricity generation from nuclear power, world uranium demand is projected to increase at an average annual rate of 4 per cent to reach 97 100 tonnes U

3O

8 by 2015.

Uranium demand to increase in OECD economies…Underpinning growth in nuclear generating capacity in OECD economies over the medium term are energy security concerns and environmental considerations. Many developed countries such as Japan and the Republic of Korea do not have significant indigenous energy resources and, thus, rely on imports to satisfy energy requirements. Nuclear power reactors are an attractive generating option as they have lower fuel requirements than coal or gas-fired power plants.

Nuclear reactors commissioned or scheduled to be commissioned worldwide

no.

8

16

24

32

40

2015 z2010 f200520001995199019851980

commissioned reactors

reactors scheduled for commissioning

Uranium


Also supporting demand for uranium has been the introduction or consideration of policies aimed at reducing carbon emissions. For example, in the European Union, the cost competitiveness of nuclear power compared with coal and gas electricity generation has been enhanced by the introduction of an emissions trading policy.

In total, 17 nuclear reactors with a combined capacity of 18.4 gigawatts electric are scheduled to be completed in OECD economies over the outlook period. Ten nuclear reactors in the Republic of Korea and Japan as well as three in Slovakia and Finland account for most of the capacity expected to be installed over this period. Reflecting increased nuclear generation capacity, OECD uranium demand is projected to increase by 1 per cent a year to around 68 000 tonnes U

3O

8 by 2015.

New capacity to be commissioned over the outlook period country number of reactors capacity (Mwe)

2010 India 4 1 556 Iran 1 950 Russian Federation 1 950

2011 Canada 2 1 538 China 2 1 730 Chinese Taipei 2 2 600 India 1 950 Pakistan 1 300 Republic of Korea 1 1 000 Russian Federation 1 950

2012 Argentina 1 692 China 2 1 730 France 1 1 630 India 1 470 Japan 1 1 375 Republic of Korea 1 1 000 Russian Federation 2 1 820 Slovakia 1 440

2013 China 3 2 360 Finland 1 1 600 Republic of Korea 3 3 350 Russian Federation 2 2 140 Slovakia 1 440

2014 China 10 10 740 Republic of Korea 1 1 350 Russian Federation 1 1 200 United States 1 1 180

2015 Brazil 1 1 340 Bulgaria 1 1 000 China 9 10 220 Japan 3 3 510 Russian Federation 1 1 070

Uranium


… but developing economies to underpin demand growthSupported by rapidly growing demand for electricity, non-OECD economies, particularly China, India and the Russian Federation, are expected to account for most of the growth in nuclear capacity over the outlook period. China plans to expand nuclear power capacity sixfold in the period to 2020, with 26 reactors scheduled to be completed over the outlook period. To meet rapidly expanding electricity demand, India is also planning to increase nuclear power capacity. India currently has seven plants under construction, with six reactors expected to commence operations over the outlook period. The Russian Federation is also expected to expand capacity, with eight reactors planned. In Chinese Taipei, two plants are currently under construction and there are plans to increase the capacity of some existing plants through power up-rates (the process of increasing a nuclear reactor’s generating capacity).

Over the period to 2015, 47 nuclear reactors with a combined capacity of 44.8 gigawatts electric are projected to be completed in non-OECD economies. Underpinned by growth in installed capacity, uranium consumption in non-OECD economies is projected to grow by around 13 per cent a year to 2015.

Given the projected large increase in nuclear capacity, a downside risk to growth in world uranium demand is delays in the start-up of planned nuclear reactors. Construction times for nuclear power plants are long (5-6 years), and are often subject to delays. Many factors can delay construction including safety concerns, technical difficulties and political issues. Many of the delays in construction are associated with the complexity of the reactor. A nuclear reactor requires highly specialised knowledge and skills to build, as well as specialist equipment. In addition, strict safety protocols must be fulfilled at each stage of the construction process. These protocols can change during the construction period, requiring further work to ensure compliance.

Uranium supplyUranium supply can be divided into two categories: primary mine production and secondary sources. Secondary sources of uranium include spent nuclear fuel, down blended HEU from nuclear weapons and mixed oxide fuels (MOX).

From the late 1950s to 1989, uranium production consistently exceeded requirements for energy demand with the excess primarily used for military purposes and uranium inventories. However, since 1990, uranium requirements for energy purposes have exceeded mine production, with the shortfall met from secondary sources. While the proportion of uranium supplied from the secondary market peaked at nearly 50 per cent in 1999, the proportion of uranium supplied from secondary sources has declined sharply in recent years reflecting strong growth in mine production. In 2009, secondary supplies of uranium accounted for around 25 per cent of uranium requirements.

Secondary supplies projected to decline over outlook periodSecondary supplies of uranium are expected to decline over the outlook period following the expected completion of the US-Russian Federation HEU purchase agreement (commonly known as the ‘Megatons to Megawatts’ agreement) in 2013. Once completed, the HEU feed deal is expected to have resulted in the down blending of 500 tonnes HEU (equivalent to around 180 000 tonnes U

3O

8) from the Russian Federation’s nuclear weapons stockpile.

Uranium


The conclusion of this agreement is expected to result in secondary supplies of uranium declining from around 23 000 tonnes U

3O

8 in 2009 to 10 000 tonnes U

3O

8 in 2015. Uncertainty

surrounding the possibility of an extension to this agreement presents an upside risk to this supply forecast.

Mine production forecast to grow strongly in 2010…In 2010, uranium mine production is forecast to increase by 5 per cent to around 60 190 tonnes U

3O

8, because of higher mine production in Kazakhstan and Africa. In Kazakhstan,

uranium production is forecast to increase by around 17 per cent to 16 800 tonnes U3O

8, having

increased by around 40 per cent to 14 300 tonnes U3O

8 in 2009. Higher mine production will be

underpinned by increased production from in situ recovery (ISR) mines commissioned over the previous three years and the continued ramp-up of Irkol (750 tonnes U

3O

8 a year) and Semisbai

(500 tonnes) ISR operations.

In Africa, mine production is forecast to increase by 15 per cent to 11 500 tonnes U3O

8, which

reflects the start-up of UraMin’s Trekkopje in Namibia and increased production in South Africa where the Buffelsfontein and Ezulwini operations commenced production in 2009. Paladin Energy’s Kayelekera project in Malawi (1500 tonnes), which started production in 2009, is also forecast to contribute to increased mine production in 2010.

…and to increase further over the medium termOver the remainder of the outlook period, uranium mine production is projected to increase by 7 per cent a year to reach 84 180 tonnes U

3O

8 in 2015. Most of this increased production is

projected to come from Kazakhstan, Australia, Africa and the United States.

Uranium production in Africa is projected to increase at around 9 per cent a year to around 18 640 tonnes U

3O

8 in 2015, as significant new production in Nigeria and Namibia

Uranium consumption, production and secondary supplies

kt

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consumption

2009199919891979196919591949

production

secondary supplies

Uranium


is commissioned. Nigerian production is projected to increase by around 2500 tonnes U

3O

8 following the start-up of Sino Uranium’s Azelik project (1000 tonnes) in 2013 and

initial production from Areva’s Imouraren project (8900 tonnes) in 2014. In Namibia, higher production at Rio Tinto’s Rossing operation and the commissioning of UraMin’s Trekkopje mine (3600 tonnes) is expected to support an increase in mine production to around 9300 tonnes U

3O

8 in 2015. Elsewhere, production in Malawi is projected to increase to around 1500 tonnes

U3O

8 over the outlook period as Paladin Energy’s Kayelekera (1500 tonnes) reaches full capacity.

In the United States, four uranium mines are scheduled to commence operations over the outlook period. As a result, uranium production is projected to increase by around 18 per cent a year, reaching 4000 tonnes U

3O

8 by 2015. ISR mines likely to enter production over the

outlook period include Uranium One’s Moore Ranch (1000 tonnes), UR-Energy’s Lost Creek (450 tonnes) and Uranium Energy Corporation’s Goliad (500 tonnes).

Kazakhstan to support production over the medium termIn 2005, Kazatomprom, Kazakhstan’s state uranium mining company, announced plans to expand uranium production to around 30 000 tonnes U

3O

8 by 2018. Between 2005 and

2009, uranium production in Kazakhstan more than tripled, with production estimated at around 14 300 tonnes U

3O

8 in 2009. Given Kazatomprom’s ambitious production target

and ability to rapidly increase uranium production, Kazakh mine production is projected to increase at around 10 per cent a year reaching nearly 27 000 tonnes U

3O

8 by 2015. Higher

uranium production is expected to be underpinned by increased production from recently commenced ISR projects and the start-up of Kazatomprom’s Budenovskoye three and four ISR operations (2000 tonnes) and Uranium One’s North Kharasan two ISR operation (2000 tonnes). An ISR operation typically takes around three years to approach full capacity.

In situ recovery operations

In situ recovery (ISR) is a uranium mining process which involves extracting uranium without removing ore from the ground. The process uses water which generally contains sulphuric acid and in most cases an oxidant (hydrogen peroxide). This solution is pumped into the underground ore body through a series of injection wells, where it moves down the deposit leaching the uranium bearing ore. At the bottom of the ore body, extraction wells capture and return the solution to the surface using submersible pumps. Once returned to the surface, uranium is recovered from the solution which is then replenished with sulphuric acid and hydrogen peroxide before being returned to the injection wells.

The in situ recovery method is increasingly used to mine uranium as the process requires limited surface disturbance, generates no tailings, has low capital costs compared with conventional mining and is often more efficient at mining low-grade uranium deposits.

In situ recovery is only possible from deposits which are permeable to liquids and are located in areas which will not pollute groundwater. As a result, uranium deposits suitable for ISR generally occur in sand or sandstones, which are confined by impermeable rock. It is estimated that sandstone-hosted uranium deposits account for approximately 18 per cent of world uranium resources and 7 per cent of Australia’s total uranium reserves.

Uranium


There are a number of factors which could limit growth of Kazakhstan’s uranium production including infrastructure constraints such as transport and equipment, technical expertise, shortages of electricity and sulphuric acid. If some of these emerge, Kazakhstan’s uranium production over the medium term could be lower than currently projected.

Australia’s uranium production Australia’s uranium mine production is forecast to decline by 13 per cent to around 9000 tonnes U

3O

8 in 2009-10. Most of this forecast decline reflects a production disruption at BHP Billiton’s

Olympic Dam operation. Following a mechanical failure in the main haulage shaft at Olympic Dam, the mine is not expected to be fully operational before March 2010.

In 2010-11, Australia’s uranium mine production is forecast to increase by around 17 per cent to 10 510 tonnes U

3O

8, as Quasar Resources Four Mile and Uranium One’s Honeymoon mines

are expected to commence production in late 2010. The expected return to full production at Olympic Dam is also forecast to support higher mine production.

Over the remainder of the outlook period, uranium mine production is projected to increase at an average annual rate of 7 per cent to reach 13 125 tonnes in 2014-15. Mines in South Australia and Western Australia are projected to account for most of this growth. In Western Australia, Toro Energy’s Wiluna uranium project (730 tonnes U

3O

8) and Mega Uranium’s

Lake Maitland project (750 tonnes U3O

8) are expected to enter production, while in South

Australia, Curnamona Energy’s Oban project (200 tonnes U3O

8) is scheduled to be completed.

These three projects are yet to receive a final investment decision and, hence, any delays to announced completion dates could result in lower Australian production and exports than currently projected.

Export earnings expected to increase with higher productionAs all of Australia’s uranium production is exported, export volumes will be closely associated with changes in mine production. In 2009-10, the value of Australia’s uranium export earnings is forecast to decrease by 1 per cent to $981 million, as lower export volumes more than offset higher export prices. In 2010-11, increased export volumes and assumed higher export prices are forecast to underpin a 24 per cent increase in export earnings to around $1.2 billion.

Over the medium term, Australia’s uranium export earnings are projected to reach $1.7 billion (in 2009-10 dollars) by 2014-15. Supporting increased export earnings is the projected combination of increased export volumes, higher export prices and an assumed gradual depreciation of the Australian dollar. Export prices for existing operations are assumed to increase significantly over the outlook period as contracts negotiated during periods of low uranium prices are renegotiated. Australian contract prices are assumed to approach the uranium spot price over the outlook period.

Uranium


Australian uranium exports

t U30

8

2000

6000

4000

8000

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10 000

14 000

16 000

2014-15 z

2010-11 f

2006-07

2002-03

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volume (left axis)

value (right axis)

2009-10A$m

750

500

250

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1500

2000

unit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 zWorld Production kt 51.6 57.2 60.2 65.0 69.7 74.4 77.3 84.2 Africa a kt 9.4 10.0 11.5 13.2 14.5 15.4 17.0 18.6 Canada kt 10.6 11.7 10.1 10.1 9.8 9.8 9.5 11.2 Kazakhstan kt 10.0 14.3 16.8 19.4 22.4 23.9 25.4 26.8 Russian Federation kt 4.2 4.2 4.6 4.7 4.8 4.8 4.9 5.0Consumption kt 76.2 77.4 79.9 84.3 85.5 88.4 92.7 97.1 China kt 1.8 1.8 1.8 3.0 3.3 4.1 10.1 11.9 European Union b kt 27.2 24.6 24.3 24.3 25.7 26.0 25.0 25.0 Japan kt 10.0 10.1 10.3 10.2 10.5 10.8 10.1 12.3 Russian Federation kt 4.1 4.1 4.8 5.0 5.7 6.1 5.9 6.0 United States kt 24.7 24.7 24.8 24.9 25.0 25.0 25.8 25.3Spot price US$/lb 61.8 46.3 44.4 50.2 56.1 61.9 67.3 69.5– real c US$/lb 62.6 47.0 44.4 49.3 54.0 58.4 62.0 62.7

2007 2008 2009 2010 2011 2012 2013 2014-08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Australia Production t 10 114 10 311 8 973 10 510 10 810 11 890 12 480 13 125Export volume t 10 139 10 114 8 973 10 510 10 810 11 890 12 480 13 125– nominal value A$m 887 990 981 1 213 1 285 1 450 1 646 1 951– real value d A$m 936 1 014 981 1 185 1 225 1 349 1 494 1 728Average price A$/kg 87.4 97.9 109.3 115.4 118.8 122.0 131.9 148.6– real d A$/kg 92.3 100.2 109.3 112.8 113.3 113.5 119.7 131.6

a Includes Niger, Nambia, South Africa, Malawi and Zambia. b Regarded as 27 countries for all years. c In 2010 US dollars. d In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; DRET; Ux Consulting; ABARE.

Uranium outlook

Uranium


Metals

Steel and steel-making raw materialsOutlook to 2015

Robert New

The outlook for steel and steel-making raw materials (iron ore and metallurgical coal) in the short to medium term is positive, which reflects assumptions of an improvement in the global economic outlook. Over the outlook period, steel consumption is projected to grow rapidly, being underpinned by continued industrialisation in developing economies and an economic recovery in OECD economies. In turn, raw material demand is projected to be assisted by higher steel production, particularly in China and India. As the world’s largest exporter of iron ore and metallurgical coal, increased import demand will underpin significant increases in Australia’s exports of steel-making raw materials over the medium term.

Steel outlookWorld steel outlook

2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 zCrude steel consumption (Mt) European Union 27 215 161 171 179 187 192 198 204United States 103 77 85 91 96 99 102 105Brazil 25 22 24 25 26 27 28 30Russian Federation 48 45 48 51 54 56 59 62China 452 484 527 575 627 683 745 812Japan 82 66 70 73 75 77 79 82Korea, Rep. of 59 53 56 57 59 62 64 66Chinese Taipei 23 19 21 22 23 24 24 25India 60 60 65 71 77 84 92 100World steel consumption 1 347 1 226 1 320 1 411 1 500 1 590 1 688 1 774 Crude steel production (Mt) European Union 27 198 137 149 158 165 170 175 182United States 91 58 70 77 84 89 90 92Brazil 34 27 30 34 37 41 45 49Russian Federation 69 60 62 64 67 69 72 75China 502 568 613 659 709 762 819 880Japan 119 88 102 113 117 118 120 121Korea, Rep. of 53 49 58 63 66 69 72 74Chinese Taipei 20 16 18 19 20 21 21 22India 55 57 63 70 76 82 89 97World steel production 1 330 1 220 1 336 1 436 1 529 1 616 1 698 1 795


In 2010, global steel consumption is forecast to increase by 8 per cent to 1.3 billion tonnes, having declined by 9 per cent in 2009. The key factors underpinning this increase are expectations of continued strong economic growth in China and India, and the assumed improvement in economic conditions in many developed economies.

Over the medium term, steel consumption is projected to grow steadily, as further growth in the BRIC economies (Brazil, the Russian Federation, India and China) is expected to be supported by recovering OECD economic conditions. In 2015, world steel consumption is projected to be around 1.8 billion tonnes, which represents average annual growth of 6 per cent over the outlook period.

China to underpin increases in steel consumptionGovernment stimulus was a key factor supporting China’s growth in steel consumption throughout 2009. Of particular importance was the funding for large steel-intensive infrastructure projects such as the construction of roads and railways. This allowed China’s steel industry to increase production as domestic consumption more than offset weaker demand for its steel-intensive exports.

Over the medium term, the growing middle class will underpin growth in Chinese steel demand, through increasing demand for consumer durables and urban housing and infrastructure. In addition, the continued investment in infrastructure to support the development of provinces in western China is also expected to underpin steel demand. Over the medium term, Chinese steel consumption is projected to increase by 9 per cent a year to 812 million tonnes by 2015.

Medium-term drivers of Chinese steel demand

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Steel and steel-making raw materials


India’s growth to remain steadyIndia’s consumption of steel is projected to increase at an average annual rate of 9 per cent over the outlook period, to 100 million tonnes by 2015. Like China, the key drivers of increasing steel consumption include a growing and increasingly wealthy middle class, and continued government investment in infrastructure to support income growth.

Steel consumption growth in OECD economies over the outlook period is projected to be slower than in non-OECD economies. This reflects weaker economic growth and the expectation that an increasing proportion of manufacturing activity will take place in developing economies such as those in South-East Asia. Reflecting these developments, steel consumption in the United States, Japan and the European Union is projected to increase by 5 per cent, 4 per cent and 4 per cent a year, respectively. In 2015, total steel consumption in these three markets is projected to be 2 per cent lower than in 2008.

Steel production increasingly concentrated in BRIC economiesIn the period to 2015, global steel production is projected to increase strongly. This growth reflects a gradual return to full capacity utilisation in many OECD economies and strong growth in production in the BRIC economies.

Steel production in the BRIC economies is projected to increase at an average annual rate of 8 per cent over the outlook period, increasing to 1.1 billion tonnes by 2015, which represents 61 per cent of global steel production. The major contributing factors to the increasing concentration of steel production in these major developing economies include strong domestic demand, relatively low production costs and, in some cases, large domestic reserves of raw materials.

In China, continuing strong domestic demand for steel, and a recovery in demand from key export markets, is expected to support continued increases in China’s production over the outlook period. China’s steel production is projected to increase at an average annual rate of 8 per cent over the outlook period, to reach 880 million tonnes in 2015.

India’s steel production is projected to continue to grow strongly throughout the outlook period, increasing to 97 million tonnes in 2015 compared with 57 million tonnes in 2009. Despite rapid projected production growth, India is expected to remain a net importer of steel, as domestic demand growth is expected to outpace domestic supply.

Over the outlook period, iron and steel capacity utilisation in OECD economies is expected to increase in line with the assumed economic recovery. Significant OECD capacity was idled in late 2008 and early 2009 in response to falling demand. Some idled capacity was restarted in the second half of 2009, and this trend is expected to continue in the short term as steel demand rises. Reflecting this, steel production in OECD economies is forecast to increase by 16 per cent to 355 million tonnes in 2010, and reach 442 million tonnes in 2015.



Raw material pricesIron ore and metallurgical coal contract prices for Japanese Fiscal Year 2010 (JFY, April 2010 to March 2011) are assumed to increase significantly, as a result of higher demand for raw materials from steel mills compared with the same time the previous year. Significantly higher demand, without a commensurate supply response in the short term, will result in a tight market condition over the course of JFY 2010.

Price outcomes for JFY 2010 will be largely dependent on movements in the price of steel. Metallurgical coal and iron ore import demand currently exceeds export capacity, so producers will aim to set prices based on what steel mills can afford to pay.

Monthly global steel production (annualised)

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rest of world share (right axis)

China share (right axis)

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Steel price: hot rolled coil

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United States

Western Europe

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12 Feb2007



Over the medium term, there are several factors which will influence the movement in contract prices for metallurgical coal. As demand for metallurgical coal continues to increase, production costs in key producing countries are also expected to increase. In China, metallurgical coal will be increasingly sourced from deeper deposits in locations more remote from existing infrastructure, which will result in higher production and transport costs. New mines in Australia are also likely to have higher production and transport costs compared with existing mines. Capital costs have increased over the past five years and the cost of using new infrastructure is significantly higher compared with existing port and rail facilities. Therefore, prices for hard coking coal are unlikely to remain less than $100 a tonne for any sustained period.

In contrast, contract prices will be capped by prices steel mills are able to accept given the prevailing steel price. Therefore, in the absence of significantly higher steel prices, or unanticipated supply disruptions, contract prices are unlikely to reach the record high achieved in JFY 2008.

Similar factors will influence movements in iron ore contract prices over the period to 2015. While contract prices are expected to increase significantly in JFY 2010, significant supply expansions in Australia and Brazil to be completed over the course of 2010 and 2011 have the potential to place downward pressure on prices over the next few years.

Raw materials outlook

Metallurgical coalGlobal demand for imported metallurgical coal is expected to remain strong over the outlook period, being underpinned by higher steel production in OECD economies and strong growth in imports in key developing steel economies. Reflecting this, world trade of metallurgical coal in 2010 is forecast to increase by 9 per cent to 231 million tonnes, and to reach 304 million tonnes in 2015, which is an average annual growth rate of 6 per cent

Outlook for world metallurgical coal trade (Mt)

2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 zMetallurgical coal imports European Union 27 56 42 45 47 49 50 51 53Japan 57 46 49 53 55 56 57 57China 7 34 28 33 34 35 41 47Korea, Rep. of 24 16 26 26 27 28 29 30Chinese Taipei 6 5 6 6 6 6 7 7India 29 21 23 27 30 34 39 44Brazil 11 9 11 12 13 15 16 18World imports 238 211 231 250 265 276 289 304

Metallurgical coal exports Australia 135 135 150 158 167 173 178 183Canada 27 20 25 28 30 33 35 36United States 39 33 35 38 40 43 42 40Russian Federation 16 17 19 21 23 24 25 26World exports 238 211 231 250 265 276 289 304



The three major growth markets for imported metallurgical coal are Brazil, India and China. Over the outlook period, imports by Brazil and India are projected to increase at an average annual rate of 12 per cent and 13 per cent, respectively, while imports by China are projected to increase at an average rate of 6 per cent. The strong growth in imports by these economies reflects relatively high cost production in China, and limited domestic reserves in Brazil and India. Together, these countries are projected to account for 48 per cent of growth over the outlook period.

China to remain net importer of metallurgical coalIn 2009, China imported 34 million tonnes of metallurgical coal, which is almost a fivefold increase from the previous year. China’s imports accounted for 16 per cent of world imports; however, because its metallurgical coal consumption is much larger than world trade, imports only accounted for 8 per cent of China’s consumption. In the first half of 2009, lower international coal prices and freight rates increased the competitiveness of imports. This resulted in a number of metallurgical coal mines in China reducing production or shutting down. The increase in prices in the second half of 2009 encouraged an expansion of metallurgical coal production in China and imports declined modestly from a peak in July.

Price movements in international coal markets over the short to medium term are expected to play an important role in the outlook for imports by China. In 2010, China’s imports are forecast to decline by 18 per cent to 28 million tonnes, which reflects increased production in China in response to high international prices. Over the medium term, China’s imports are projected to increase, which reflects the increased competiveness of imports. China’s metallurgical coal reserves have a higher cost associated with development because they are often located deeper underground and away from existing infrastructure. In addition, the majority of increased production is expected to occur in the north of the country, some distance from demand centres in the southern coastal regions. In 2015, China’s imports are projected to reach 47 million tonnes.

Imports by Japan and the European Union to gradually recoverIn 2008, the European Union and Japan were the two largest import markets for metallurgical coal, together accounting for 47 per cent of world trade. However, in 2009, imports by these two markets experienced sharp declines, falling by 25 per cent and 19 per cent, respectively. In 2010, recovering demand from steel mills is expected to underpin moderate increases in imports by these markets, as idled steel mills are restarted and stockpiles are replenished. Over the medium term, increases in imports are projected to reflect the rate of growth of steel production. In 2015, imports by the European Union are projected to reach 53 million tonnes, compared with 56 million tonnes in 2008, and imports by Japan are projected to reach 57 million tonnes, which is the same volume of imports as in 2008.

Australian exports to remain at capacityAustralia accounted for 64 per cent of world exports of metallurgical coal in 2009, and is expected to continue to be the largest metallurgical coal exporter over the outlook period. In 2010, Australian exports of metallurgical coal are forecast to increase by 11 per cent to 150 million tonnes, supported by the expansions of the Dalrymple Bay Coal Terminal and the Jilalan Rail Yard, which were both completed in 2009.



Over the medium term, significant infrastructure expansions and proposed mining developments are expected to support growth in Australian exports. Port infrastructure projects scheduled for completion in the outlook period include the port of Abbot Point (three stages – X50, X80 and X110), the Hay Point Coal Terminal (phase 3), Wiggins Island Coal Terminal and Balaclava Island Coal Terminal. The development of this infrastructure (port with associated rail capacity) will depend on the concurrent development of mining projects in the respective infrastructure corridors. Some of the larger projects being considered include the 5.5 million tonne annual capacity Caval Ridge, into which BHP Billiton Mitsubishi Alliance has injected $US267 million (for Caval Ridge, Peak Downs and Hay Point) to accelerate development, the 4.6 million tonne a year Eagle Downs project, and the 2 million tonne a year Lake Vermont project. Australia’s exports are projected to reach 183 million tonnes in 2015, which represents an average annual growth rate of 5 per cent over the outlook period.

Planned coal port capacity expansions in Queenslandas at October 2009

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Greenfield projects planned to commence later in outlook period

Global supply of metallurgical coal may increase significantly in the latter half of the outlook period, but this will depend on the timely development of greenfield projects in Mozambique and Mongolia.

In Mozambique, two projects are currently planned for completion before the end of the outlook period. Vale is developing the Moatize project (12.7 million tonne annual capacity), and Riversdale is planning to develop the Benga project (3.3 million tonnes). However, because of the extent of development required (mining and infrastructure), export capacity is not assumed to be completely utilised before the end of the outlook period.

Mongolia is considered to have some world class metallurgical coal deposits, and would be a logical supplier to steel mills in China’s north and west. There is also the potential for Mongolia to export to other Asian markets such as Japan and the Republic of Korea, although this would require freighting through a port in China or the Russian Federation. However, there are a number of challenges to development: ownership rights to deposits, lack of fiscal and regulatory certainty and insufficient infrastructure. In addition, agreements between Mongolia and China would need to be completed prior to significant increases in coal being exported to or through China.



In 2009, Canada’s metallurgical coal exports decreased by 26 per cent to 20 million tonnes, reflecting weaker demand and lower international prices. The larger fall in exports compared with Australia (in percentage terms) is attributable to Canadian producers generally having a higher cost base. In particular, Canada’s mines are exposed to freezing temperatures during winter and transport costs are higher because of the distance coal is railed to ports. With higher prices forecast for the outlook period, Canada’s production and export capacity is expected to increase. For example, Teck, the world’s second largest metallurgical coal exporter, could expand production to 32 million tonnes in 2013, from 19 million tonnes in 2009. This expansion would underpin Canada’s metallurgical coal exports increasing to a projected 36 million tonnes by 2015.

Iron oreWorld trade of iron ore is projected to increase at an average annual rate of 6 per cent between 2009 and 2015, growing to 1.3 billion tonnes by the end of the outlook period. The majority of export growth is expected to come from Australia and Brazil.

Chinese iron ore imports to continue to increaseIn 2010, Chinese imports of iron ore are forecast to increase by 1 per cent to 634 million tonnes, as higher domestic production is forecast to be more than offset by higher demand. The timing and speed at which high cost domestic production capacity is restarted is a key factor in determining imports in the short term, as the proportion of Chinese consumption supplied by imports and domestic production is expected to fluctuate depending on the domestic and import prices.

Over the medium term, China’s iron ore imports are projected to continue growing as iron ore demand rises at a faster rate than domestic production. This is projected to underpin China’s import growth of 5 per cent a year, to reach 854 million tonnes in 2015.

Outlook for world iron ore trade (Mt)

2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 zIron ore imports European Union 27 161 113 123 131 136 141 146 151Japan 140 106 122 135 141 142 144 145China 444 628 634 685 738 776 815 854Korea, Rep. of 50 44 53 57 60 63 65 68Chinese Taipei 15 12 14 15 15 16 16 17World imports 895 954 1 019 1 103 1 186 1 244 1 284 1 324

Iron ore exports Australia 309 363 397 422 486 523 540 552Brazil 282 266 305 370 399 427 444 467India 101 105 94 87 81 74 66 63Canada 28 27 29 28 27 27 28 28South Africa 33 39 41 44 48 51 54 58Sweden 18 20 21 22 23 24 25 26World exports 895 954 1 019 1 103 1 186 1 244 1 284 1 324



Economic recovery in developed countries to support iron ore tradeA recovery in demand is expected to mirror the assumed economic recovery in many developed countries. As such, iron ore imports by economies such as the European Union, Japan, the Republic of Korea and Chinese Taipei are projected to increase over the outlook period, having declined significantly in 2009.

Australian expansions to meet growing iron ore demandAustralian exports of iron ore are projected to increase at an average annual rate of 7 per cent over the outlook period. By 2015, Australia’s iron ore exports are projected to account for 42 per cent of world trade, as several large projects scheduled for completion during the period are expected to meet the projected demand growth. In addition to BHP Billiton’s Rapid Growth Project 4 (additional 26 million tonne annual capacity) completed in late 2009, several large projects are scheduled for completion in 2010. Rio Tinto is scheduled to complete the Mesa A (25 million tonne capacity) and Hamersley Iron Brockman 4 (22 million tonnes) projects, CITIC Pacific Mining is scheduled to complete the Sino Iron project (28 million tonnes), and Fortescue Metals Group is scheduled to complete the Christmas Creek project (16 million tonnes). Furthermore, completion of BHP Billiton’s Rapid Growth Project 5 (45 million tonnes) is scheduled for 2011. Although the full capacity of these projects is not expected to be utilised until the second half of the outlook period, the combined effect of these projects will support export growth in the short and medium term.

In 2009, demand from Brazil’s traditionally strong markets for iron ore, mainly in the European Union, declined sharply. This was partially offset by higher demand from Asian customers, and resulted in a 6 per cent decline in exports to 266 million tonnes. In 2010, restarted steel mills in the European Union and continued growth in demand from Asian customers will underpin a forecast 15 per cent increase in Brazilian exports to 305 million tonnes.

Over the medium term, Brazil’s exports of iron ore are projected to grow strongly, supported by several large development projects. Vale, the world’s largest exporter of iron ore, plans to

China's iron ore imports

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develop several projects that will significantly increase export capacity. The majority of Vale’s expansion plans are centred on Carajás, and include a 10 million tonne a year expansion and a 30 million tonne a year expansion, due to commence in 2010 and 2012, respectively. In 2015, the Carajás Serra Sul greenfield project, which is the largest ever proposed project in the iron ore industry, is due for completion. The proposed addition of 90 million tonnes a year of production and export capacity from this project would increase the North System export capacity to 230 million tonnes a year. Although the effect of the additional capacity from these projects will not be fully captured within the outlook period, they will provide support for the sustained growth of Brazilian exports to 2015. As such, Brazilian exports are projected to reach 467 million tonnes in 2015, representing an average annual growth rate of 10 per cent.

Australian exportsIn 2009-10, the value of Australia’s metallurgical coal exports is forecast to decline by 36 per cent to $23 billion. The fall in export earnings reflects the significantly lower contract prices for JFY 2009. However, export earnings in 2010-11 are forecast to increase by 30 per cent to $30 billion, which reflects higher assumed contract prices and export volumes.

Over the remainder of the outlook period, export earnings are projected to increase to $33 billion (2009-10 dollars), as increases in export volumes are largely offset by assumed modest falls in real contract prices.

In 2009-10, export earnings from iron ore are forecast to decline by 15 per cent to $29 billion. Like metallurgical coal, this is primarily a reflection of a sharp decline in contract prices in JFY 2009, partially offset by a 21 per cent increase in export volumes. Export earnings in 2010-11 are forecast to increase by 21 per cent to $35 billion, which reflects assumed higher contract prices for JFY 2010.

Metallurgical coal exports

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Over the medium term, the value of iron ore exports is projected to increase by 4 per cent a year, to reach $43 billion (2009-10 dollars) in 2014-15. The main driver underpinning this increase is higher export volumes, while real contract prices are assumed to ease toward the end of the outlook period.

Iron ore exports value and volume

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unit 2007 2008 2009 2010 2011 2012 2013 2014 -08 -09 -10 f -11 f -12 z -13 z -14 z -15 zProduction Iron and steel as Mt 8.15 5.57 7.23 8.24 8.37 8.45 8.45 8.45Iron ore Mt 324.7 353.0 423.9 427.8 491.0 536.3 562.5 576.9Metallurgical coal Mt 139.4 130.6 158.3 162.1 168.8 176.3 181.6 187.1

ExportsIron and steel as Mt 2.13 1.74 1.96 2.16 2.24 2.29 2.60 2.65Nominal value A$m 1 562 1 363 1 203 1 188 1 232 1 257 1 427 1 455Real value b A$m 1 649 1 395 1 203 1 161 1 175 1 169 1 296 1 288

Iron ore Mt 294.3 323.5 390.9 398.4 460.9 505.9 532.1 546.5Nominal value A$m 20 511 34 239 29 036 35 144 38 742 43 727 47 312 48 749Real value b A$m 21 648 35 041 29 036 34 347 36 949 40 686 42 948 43 172

Metallurgical coal Mt 136.9 125.2 152.8 155.8 162.5 170.0 175.3 180.7Nominal value A$m 16 038 36 813 23 490 30 491 32 709 33 741 35 139 36 952Real value b A$m 16 928 37 676 23 490 29 799 31 194 31 394 31 898 32 725

a Includes all steel items in ABS, Australian Harmonized Export Commodity Classification, chapter 72, ‘Iron and steel’, excluding ferrous waste and scrap and ferroalloys. b In 2009-10 Australian dollars. f ABARE forecast. s ABARE estimate. z ABARE projection.Sources: International Iron and Steel Institute; Coal Services Australia; Queensland Coal Board; United Nations Conference on Trade and Development; ABARE.

Iron ore, metallurgical coal and steel outlook



GoldOutlook to 2015

Andrew Schultz

In 2009, the gold price averaged US$973, which represented an 11 per cent increase on the 2008 average of US$873 an ounce. In real terms, the annual gold price has risen for the past eight years and in 2009 was around three times higher than in 2001. While the average gold price in 2009 remained well short of the historical peak of $1609 an ounce (in 2009 US dollars) reached in 1980, it was the highest annual price since 1981.

Gold price movements in 2009 largely reflected strong growth in investment demand. As an asset class, the appeal of gold during the year stemmed from its role as an alternative store of value during periods of economic uncertainty. Significant fiscal stimulus spending undertaken by most major economies led to increasing budget deficits and declining returns from government securities, further enhancing gold’s attraction as a low-risk asset. Reversing a trend of net official sector sales, purchases of gold by central banks during the year reinforced a growing sentiment toward gold by investors.

During the first quarter of 2009, the price of gold increased by more than US$100 an ounce, as retail demand for gold bars, coins and other physical gold products grew in response to a weakening in the outlook for the world economy. In late 2009 and into early 2010, the gold price increased further, briefly rising to more than US$1200 an ounce during early December. Supporting this growth was a depreciation of the US dollar, which increased demand for gold by increasing the purchasing power of other floating currencies.

In 2010, the gold price is forecast to rise by 11 per cent to average US$1080 an ounce. Uncertainty surrounding the pace of global economic recovery is expected to sustain the

Gold pricemonthly, ended January 2010

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investment appeal of gold and continued weakness in the US dollar in the short term is expected to increase gold demand. Also influencing gold demand in 2010 is the continuation of expansionary monetary and fiscal policy in the United States, which is likely to place downward pressure on the global demand for US Treasury bonds in favour of other low-risk assets such as gold.

Gold price to fall in the medium termIn 2011, the gold price is forecast to fall by 11 per cent to US$960 an ounce. The assumption of an ongoing recovery in world economic growth is forecast to lead to a reduction in speculative investment demand for gold. Similarly, as the appetite for higher risk assets such as shares and property increases, investment demand for retail gold, such as gold bars and coins, is forecast to moderate.

As world economic growth returns to levels which are more consistent with its longer term potential, further falls in investment demand in 2012 are projected to lead to an 11 per cent fall in the price, in real terms, to around US$840 an ounce.

Between 2013 and 2015, the real gold price is projected to increase moderately, rising from

US$834 an ounce in 2013 to US$880 an ounce in 2015. On the supply side, lower net sales from central banks, lower supply from recycled jewellery and stable gold mine production are projected over this period. Over the same period, investment demand for gold, mainly through exchange traded funds and commodity exchanges, is projected to remain strong by historical standards.

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As a result of the role of investment demand in the gold market, there are significant risks associated with the price outlook for gold. These risks are largely related to macroeconomic conditions over the outlook period. The strength, duration and composition of economic recovery across regions are likely to influence the risk-profile of investors, and consequently affect the demand for gold as an alternative store of value and a hedge against economic and financial market uncertainty. Furthermore, the fiscal, monetary and regulatory policies of large economies in the aftermath of the global financial crisis have the potential to influence relative returns across asset classes and affect investment and official sector demand for gold. Prolonged interest rate differentials between regions also have the potential to stimulate speculative investment demand, which could lead to a significantly higher gold price than projected.

Modest growth in gold fabrication forecast for 2010Gold fabrication consists of gold used in jewellery, electronics, dental applications, medals, coins and other industrial uses. In 2009, gold fabrication is estimated to have fallen by 19 per cent to 2326 tonnes, which reflects higher prices and a decline in global economic activity. Gold used in jewellery, the largest component of gold fabrication, is estimated to have fallen by 23 per cent in 2009 to its lowest amount since 1988.

In line with an assumed increase in global economic growth, gold fabrication in 2010 is forecast to increase by 3 per cent to 2389 tonnes. Purchases of gold jewellery are forecast to increase as rising household incomes stimulate demand for precious metals. However, the forecast rise in the price of gold is likely to dampen prospects of a significant rebound in purchases of gold jewellery in 2010.

Over the medium term, gold fabrication consumption is forecast to grow at an average annual rate of 1.5 per cent. Reflecting a longer term change in preferences away from traditional gold jewellery, demand in Europe and North America is expected to fall, though at a somewhat slower rate compared with the past five years. Reduced import demand for jewellery from developed economies is also projected to limit growth of fabrication demand in the Middle East. Projected falls in the gold price over the outlook period are expected to stimulate demand for jewellery in the price sensitive region of the Indian Subcontinent. Continued strong economic growth in China over the medium term is also expected to underpin an increase in gold jewellery demand.

Jewellery fabrication demand, by region

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Sales of gold scrap to decline from record highsIn 2009, the supply of gold scrap, largely sourced from recycled jewellery, is estimated to have risen by 27 per cent to a record 1541 tonnes. Falling returns across other asset classes during the first half of the year and a high gold price encouraged holders of gold jewellery to sell old and unwanted gold to scrap collectors.

A forecast rise in the gold price in 2010 is expected to encourage strong sales of gold scrap in 2010. However, the historically high sales of recent years are likely to have reduced the remaining stocks of gold jewellery available to be sold. This is projected to result in gold scrap sales falling by 22 per cent to 1200 tonnes in 2010. Projected falls in the gold price in 2011 are expected to lead to a further fall in gold scrap sales to a low of 700 tonnes in 2011, before gradually rising to 900 tonnes by the end of the outlook period in line with a modest rise in the price between 2013 and 2015.

World gold production stable over the medium termIn 2009, world gold mine production is estimated to have risen by 6 per cent to 2553 tonnes, the highest annual production since 2003. While most gold producing regions recorded increased production during the year, the largest estimated increases in production were in Asia and the Russian Federation, where combined production increased by 118 tonnes, or 16 per cent. Continuing the trend of recent years, mine production in South Africa and the United States fell in 2009.

In Indonesia, the scheduled mining of higher grade ore led to production from Freeport McMoran’s Grasberg mine more than doubling to 80 tonnes in 2009. China’s production increased by 13 per cent to 330 tonnes as numerous smaller mining operations started up in response to a higher gold price. In the Russian Federation, production from several new projects resulted in more than 200 tonnes of gold being produced, which was the highest rate of production in 20 years.

In 2010, world gold mine production is forecast to increase by 2 per cent to 2614 tonnes. This growth mainly reflects the continued ramping up of a number of new projects that started production in 2009. China is expected to remain the largest producer of gold, with a higher forecast gold price stimulating the further rapid development of prospective deposits. In the United States, a decrease in scheduled maintenance activities at several larger mines, and the start-up of Barrick Gold’s Cortez Hills project are forecast to lead to a 4 per cent increase in production to 225 tonnes. The new Harmony/Newcrest Hidden Valley joint venture in Papua New Guinea is expected to produce around 6 tonnes during the year. In Indonesia, the scheduled mining of lower grade ores from the Grasberg mine is forecast to result in production decreasing in 2010 by around 34 per cent.

In the medium term, global gold mine production is projected to grow at an average annual rate of 1.1 per cent. In Latin America, Agnico-Eagle Mines’ Pinos Altos project in Mexico (5 tonnes a year), Barrick Gold/Goldcorp’s Peublo Viejo project in the Dominican Republic (31 to 34 tonnes a year) and Barrick Gold’s Pascua Lama project in Chile (23 to 25 tonnes a year) are expected to contribute to production growth. Growth in gold mine production in Africa is

Gold


expected to be flat as declines in South Africa are offset by increases in production from new projects elsewhere in Africa. The projected fall in the medium-term gold price is expected to dampen production growth in China and the Russian Federation as smaller operations become unprofitable.

Official sector sales below historical average over outlook periodNet sales of gold by the official sector are estimated to have fallen by more than 200 tonnes in 2009 to 24 tonnes. While there have been purchases of gold by the central banks of India, Sri Lanka and Mauritius, the fall in net official sector sales largely reflects decreased sales of gold by central banks that are signatories to the Central Bank Gold Agreement (CBGA).

The CBGA places a collective limit of 400 tonnes a year on the quantity of gold which signatories (comprising 18 European central banks, including the European Central Bank) are permitted to sell from their reserves. The current CBGA began in September 2009 and is set to expire in 2014. For the year to November 2009, only around 113 tonnes of gold had been sold by CBGA members.

As official sector gold sales are dependent on the domestic policies that determine the composition of an economy’s official sector reserves, considerable uncertainty remains in the outlook for central bank gold sales. However, the current appeal of gold as a strategic low-risk asset is expected to limit sales by CBGA members and could encourage gold purchases by other central banks, particularly in 2010 and 2011. Over the remainder of the outlook period, official sector sales are projected to average around 200 tonnes a year until 2015, well below the average of the past decade.

Producer dehedging to diminish in importance over the medium termProducer hedging involves gold producers borrowing gold from central banks and selling it on to the spot market, to reduce exposure to the risk of lower gold prices at the time of actual production. As a result, the value of future mine production of gold is effectively brought forward.

Dehedging, through the buying back or unwinding of these hedged positions, has largely occurred because of producers’ expectations of a higher gold price in the future. Net dehedging, occurring when gold repayments to central banks exceed new producer hedging, imposes upward pressure on the current gold price through the reduction of gold supplied to the spot market.

In 2009, the outstanding hedge positions of global gold producers were reduced by an estimated 242 tonnes of gold, which was a fall of 31 per cent compared with the rate of dehedging in 2008. Anglogold Ashanti and Barrick Gold were the main contributors to dehedging activity during the year. The limited size of remaining hedged positions is expected to result in the rate of dehedging continuing to fall, with around 65 tonnes forecast to be returned to central banks by gold producers in 2010.

Gold


Over the medium term, ongoing reductions of remaining hedged positions are projected to be largely offset by new producer hedging. With the large accumulated hedged positions formed during the 1990s now largely unwound, significant net activity in this sector is not expected over the outlook period.

Australian gold production to rise in the short term….Australian gold mine production is forecast to increase by 11 per cent to 242 tonnes in 2009-10. Supporting this growth is the start-up of Newmont’s $3 billion Boddington redevelopment in Western Australia, which is expected to produce around 31 tonnes a year over the first five years of its operation. Also contributing to this rise is the increase to full capacity of several medium-sized projects including Apex Minerals’ Wiluna redevelopment, Avoca’s Higginsville project (each 6 tonnes a year) and OzMinerals’ Prominent Hill mine (2 to 3 tonnes a year).

In 2010-11, Australian gold production is forecast to increase by 10 per cent to 267 tonnes. The ramp-up of the Boddington redevelopment is expected to be the largest contributor to this growth; however, a number of new projects are also expected to begin production. These include the recommencement, under new owners, of Crocodile Gold’s Northern Territory tenements (6 tonnes a year) and Swan Gold Mining’s Mt Ida and Carnegie projects (3 tonnes a year). Also contributing to growth are Citigold’s Charters Tower’s operation (increasing to 9 tonnes a year by 2013), St Barbara’s Gwalia Deeps (increasing to 6 tonnes a year by 2012), Saracen Minerals’ South Laverton operations (3 to 4 tonnes a year) and Newcrest’s Ridgeway Deeps project (6 tonnes a year).

…before stabilising over the medium termAustralian annual gold mine production is projected to be between 266 tonnes and 276 tonnes until the end of the outlook period. In addition to the above-mentioned projects, there are a number of mines scheduled to be in operation in the second half of the outlook period. These include Newcrest’s Cadia East underground project (producing 22 tonnes a year by 2013) and Anglogold Ashanti/Independence Group’s Tropicana Joint Venture project (10 to 13 tonnes from 2013). Offsetting the increased production from these new mines is lower production from existing mines which are close to exhausting gold reserves.

Medium-term gold exports to remain strongFollowing a record 437 tonnes of gold exported in 2008-09, Australian gold export volumes

are forecast to fall by 14 per cent to 378 tonnes in 2009-10. This fall reflects a lower volume of imported gold to be refined in Australia and re-exported, partly offset by higher exports of Australian mined gold.

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In 2010-11, higher Australian gold mine production is projected to lead to export volumes rising by 19 per cent to 449 tonnes. Relatively stable Australian gold mine production and the expectation of continued refining of overseas sourced gold is projected to result in the quantity of Australian gold exports remaining at between 460 and 475 tonnes a year for the remainder of the outlook period.

The value of Australian gold exports is forecast to fall by 9 per cent to $14.7 billion in 2009-10, as the effect of a marginal rise in the Australian dollar denominated gold price is more than offset by the fall in export volumes. In 2010-11, stronger export volumes are projected to result in the value of Australian gold exports rising to $16.7 billion.

In 2011-12 and 2012-13, the value of Australia’s gold exports (in 2009-10 dollars) is projected to fall to between $14 billion and $15 billion as the gold price falls. However, by 2014-15, the real value of Australia’s exports is projected to return to around $16 billion, which reflects a strengthening of export volumes and prices.

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Gold outlook

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WorldFabrication

consumption t 2 886 2 326 2 389 2 454 2 485 2 544 2 589 2 582Mine production t 2 409 2 553 2 614 2 685 2 679 2 742 2 730 2 765Scrap sales t 1 217 1 541 1 200 700 750 800 850 900Residual net stock t – 741 –1 768 –1 425 – 931 – 944 – 998 – 991 –1 083

official sector a t 236 24 70 110 150 180 210 210private sector a t (628) (1550) (1430) (1019) (1084) (1178) (1201) (1293)producer hedging b t (349) (242) (65) (22) (10) 0 0 0

Price c– nominal US$/oz 873 973 1 080 960 873 885 933 975– real d US$/oz 884 989 1 080 943 840 834 860 880

2007 2008 2009 2010 2011 2012 2013 2014 -08 -09 -10 f -11 f -12 z -13 z -14 z -15 zAustralia Mine production t 230 218 242 267 272 266 273 276

Export volume t 382 437 378 449 459 458 469 474Export value – nominal A$m 10 903 16 146 14 702 16 656 15 679 15 132 16 699 18 221– real e A$m 11 508 16 525 14 702 16 278 14 953 14 080 15 158 16 137Price– nominal A$/oz 917 1 186 1 219 1 154 1 064 1 028 1 107 1 195– real e A$/oz 967 1 213 1 219 1 128 1 015 957 1 005 1 059

a Sales (purchases). b Net additions (net reductions). c London Bullion Market Association AM price. d In 2010 US dollars. e In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Gold Fields Mineral Services; Australian Bureau of Statistics; London Bullion Market Association (LBMA); ABARE.

Gold


AluminiumOutlook to 2015

Apsara Maliyasena

Aluminium prices averaged considerably lower in 2009, primarily because of weaker demand for aluminium in major consuming countries, including the United States, Japan and those in Western Europe. Lower consumption and a relatively weaker response from global aluminium production resulted in stocks increasing to around 10 weeks of world consumption by the end of 2009.

World aluminium prices are forecast to increase in 2010, which primarily reflects forecast stronger demand growth in China and many developed economies. Developments in China, particularly on both production and consumption, will have a significant effect on the global aluminium market.

Over the medium term, significant additions to aluminium production capacity are projected to be more than sufficient to satisfy growth in aluminium consumption. Stocks are project to rise gradually, which is expected to lead to a gradual decline in aluminium prices in real terms.

Aluminium prices to ease over the medium termAluminium prices averaged US$1663 a tonne on the London Metal Exchange (LME) in 2009, which was 33 per cent lower than the average for 2008. Aluminium prices were trading at around US$2025 a tonne in mid-February 2010. The recent increase in aluminium prices mainly reflects expectations of stronger demand as a result of the improved outlook for

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world economic growth. The weakness in the US dollar against other major international floating currencies has also provided support for aluminium prices denominated in US dollars. Nevertheless, higher prices have come at a time of increasing aluminium stocks held in LME warehouses. Official LME stocks stood at around 4.6 million tonnes in mid-February 2010.

For 2010 as a whole, aluminium prices are forecast to average around US$2150 a tonne, which is a rise of 29 per cent from 2009. Assumed stronger world economic activity in the short term is forecast to lead to an increase in aluminium consumption and, hence, prices. However, aluminium stocks are forecast to remain at close to 10 weeks of consumption, which is expected to limit any significant increase in prices.

Over the medium term, aluminium stocks are projected to increase to around 13 weeks of consumption by the end of 2015, which reflects significant additions to aluminium production capacity, particularly in regions with relatively low cost energy supplies. Aluminium prices are projected to fall, averaging around US$1660 a tonne in 2015 (in 2010 dollars), which is 23 per cent lower than the forecast average for 2010.

Consumption to grow strongly

In 2009, world aluminium consumption is estimated to have decreased by 6 per cent to around 34.8 million tonnes, as a result of slower construction and manufacturing activity in most developed economies. Reflecting the assumed recovery in world economic growth, world aluminium consumption is forecast to increase by 11 per cent in 2010 to 38.4 million tonnes and by a further 9 per cent in 2011 to 41.7 million tonnes.

Over the medium term, world aluminium consumption is projected to increase by an average of 6 per cent a year to around 50 million tonnes by 2015. Developing economies such as China and India are expected to be the main drivers of this forecast growth in consumption. The assumed economic recovery in developed economies (especially the United States and Western Europe) is also expected to support growth in aluminium consumption over the outlook period.

Consumption growth in China and other developing economies Per person aluminium consumption in emerging economies, especially in China and India, is low relative to industrialised countries. With the combined effect of urbanisation and industrialisation, aluminium consumption is expected to grow significantly in emerging economies over the outlook period. This forecast growth will most likely be underpinned by growth in end use markets such as building and construction, packaging, transportation and electrical and electronics.

In 2009, China’s aluminium consumption is estimated to have increased by 16 per cent to 14.4 million tonnes, accounting for around 40 per cent of global aluminium consumption. This increase mainly reflects strong growth in the construction and motor vehicle industries. Motor vehicle production in China is estimated to have grown by 48 per cent in 2009. Producer restocking and strategic stock building may also have supported demand throughout 2009.

Aluminium


China’s consumption of aluminium is forecast to increase by 6 per cent in 2010 to 15.3 million tonnes and by a further 13 per cent in 2011 to around 17.3 million tonnes. The forecast growth in consumption in China is expected to be driven by continued strong growth in industrial production, especially in intensive aluminium consuming sectors.

Over the medium term, China is expected to remain the major driver of growth in world aluminium consumption. Aluminium consumption in China is projected to increase at an average rate of 7 per cent a year to reach around 21 million tonnes in 2015. Over the outlook period, China is projected to account for almost half of the growth in world aluminium consumption.

Aluminium consumption in India is also projected to grow strongly over the short to medium term. Indian consumption is forecast to increase by 6 per cent in 2010, and by a further 10 per cent in 2011, mainly driven by increased use of aluminium in the construction of electricity networks. Aluminium consumption in India is projected to increase at an average rate of 7 per cent a year over the remainder of the outlook period, which mainly reflects growing demand from the electrical, transportation and building construction sectors. Smaller major aluminium consuming countries, including those in developing Asia and the Middle East, are also expected to achieve strong growth in aluminium consumption over the outlook period.

Consumption to recover in the United States and EuropeAluminium consumption in the United States is estimated to have declined by 23 per cent in 2009, driven largely by weak demand in the construction and motor vehicle industries. Aluminium consumption in the United States is forecast to increase by 4 per cent in 2010 and by a further 5 per cent in 2011. The forecast increase in US consumption is expected to come from an assumed recovery in industrial production, including a recovery in building construction, consumer durables and machinery. Toward 2015, aluminium consumption in the United States is projected to increase at a modest rate of around 3 per cent a year.

Consumption intensity of refined aluminium - 2008

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Aluminium


In 2009, aluminium consumption in Europe declined by an estimated 28 per cent. Consumption of aluminium in Europe is forecast to increase by 2 per cent in 2010 and by 4 per cent in 2011, supported mainly by an expected recovery in the transportation and construction industries. With the assumed economic recovery in Europe likely to lag behind that of the United States, aluminium consumption in the region is not expected to recover significantly until late 2010. Over the medium term, aluminium consumption growth in Europe is projected to increase by around 3 per cent a year.

World aluminium production to increase World aluminium production fell by an estimated 6 per cent in 2009 to 36.7 million tonnes because of the weak demand for aluminium and low prices. World aluminium production is forecast to increase by around 8 per cent to 39.7 million tonnes in 2010 and by 5 per cent to 41.8 million tonnes in 2011. Production growth in China is expected to account for most of this increase, as Chinese production capacity expands in response to increasing domestic demand. World aluminium production is also expected to be affected by developments in other major producing regions, including the Middle East and Canada.

Over the medium term, world aluminium production is projected to increase by an average of 6 per cent a year to around 53 million tonnes. Forecast higher prices in the next two years or so are expected to stimulate investment of previously marginal projects and the start-up of previously idled capacity. Production of aluminium over the medium term is expected to rise significantly in China, the Middle East and the Russian Federation, as new capacity comes into production.

New capacity and expansions in 2010In 2010, the start-up of new capacity in China and the Middle East will support growth in world aluminium production. In China, an estimated 0.5 million tonnes of new smelter capacity is expected to be commissioned in 2010. Recent higher prices have encouraged producers in China to restart an estimated 5 million tonnes of idled smelter capacity. This, combined with new smelter capacity, is estimated to result in production of aluminium in China increasing to around 14.8 million tonnes in 2010.

In the Middle East, Hydro Aluminium and Qatar Petroleum commissioned their 585 000 tonne Qatalum smelter in Qatar in late December 2009, which is expected to reach full capacity by the September quarter 2010. In the United Arab Emirates, the first phase of a 700 000 tonne joint venture between Dubai Aluminium and Mubadala is on track for commissioning in the first half of 2010. These developments in the Middle East are forecast to result in aluminium production increasing in 2010 to 3.8 million tonnes.

In 2010, significant new aluminium smelting capacity is also expected to commence in Canada. Alcan’s expansion of its Kitimat smelter in western Canada is expected to increase its current production from 245 000 tonnes to around 400 000 tonnes in 2010. Also in Canada, a planned expansion at Alcan’s aluminium plant in Alma is expected to increase production by 190 000 tonnes to more than 600 000 tonnes by 2011.

Aluminium


Production growth in China, the Middle East, the Russian Federation and IcelandOver the medium term, aluminium production is projected to increase by around 6 per cent a year to reach 53 million tonnes by 2015. Aluminium production in China is projected to grow at an average annual rate of 7 per cent to reach around 20 million tonnes by 2015, which represents nearly two-fifths of world production.

The development of new aluminium smelting capacity is determined, to a large extent, by access to relatively low cost and secure supplies of electricity. Reflecting this, a significant proportion of planned new smelting capacity is expected to come from the Middle East, the Russian Federation and Iceland. In the Russian Federation, UC Rusal is planning to develop a 750 000 tonnes a year greenfield aluminium smelter in Taishet, which is expected to be completed by 2013. Also, Nordural plans to restart its Helguvik aluminium project in Iceland in 2010, which is expected to produce around 360 000 tonnes a year by 2013.

Over the outlook period, the Middle East is also expected to contribute significantly to growth in aluminium capacity, driven by the availability of low cost natural gas and oil resources. In Saudi Arabia, Alcoa has formed a $US10.8 billion joint venture with Ma’aden to develop an aluminium complex in the industrial zone of Ras Az Zawr. The first phase of the complex will include a 740 000 tonne a year aluminium smelter, as well as a rolling mill, with initial hot-mill capacity of 250 000 to 460 000 tonnes a year. Production from the smelter is expected in 2013.

Australian production and exports to remain stable Australian aluminium production in 2009-10 is forecast to decline by 3 per cent to around 1.9 million tonnes, which mainly reflects lower production from the Portland aluminium smelter in Victoria and the Kurri Kurri smelter in New South Wales. The value of Australia’s aluminium exports is forecast to decline by 21 per cent to around $3.7 billion in 2009-10, which reflects lower export volumes and export prices.

Aluminium value and volume

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Aluminium


In 2010-11, aluminium production is forecast to be around 1.9 million tonnes. Export earnings in 2010-11 are forecast to be around $4.1 billion, in line with higher forecast prices.

Australian aluminium production is projected to remain largely unchanged over the outlook period. No committed expansions to Australia’s aluminium production capacity are scheduled to commence over the five years to 2014-15. As a result, Australia’s aluminium exports are projected to remain largely unchanged at around 1.6 million tonnes a year over the outlook period. In real terms, export earnings are projected to be around $3.4 billion in 2014-15.

Alumina

Prices to ease over the medium termIn 2009, the spot price of alumina averaged around US$249 a tonne. In mid-February 2010, prices have recovered to an average of US$340 a tonne, which mainly reflects the improved outlook for aluminium as the recovery in the world economy gathers pace.

For 2010 as a whole, alumina prices are forecast to average US$325 a tonne, which is around 30 per cent higher than the average for 2009. In the short term, prices are expected to be supported by higher assumed world economic activity and, thus, the increased demand for aluminium.

Over the medium term, spot alumina prices are projected to ease, as production increases following the commissioning of new refining capacity. For example, the Baode alumina refinery in China’s Shanxi province is expected to produce 1 million tonnes a year from 2013. Also, the Barcarena alumina refinery in Brazil is expected to establish a capacity of 1.86 million tonnes a year from 2013. In Australia, substantial new alumina capacity is expected to come from expansions at Rio Tinto’s Yarwun and BHP Billiton’s Worsley refineries.

Australian production to increase stronglyAustralia’s alumina production is projected to increase steadily from 2010-11 onward, assisted by a number of production expansions. The expansion of BHP Billiton’s Worsley alumina refinery in Western Australia is expected to be completed in 2011. This expansion will add more than 1.1 million tonnes a year of alumina capacity to the existing 3.5 million tonnes capacity. Rio Tinto’s Yarwun alumina refinery expansion in Queensland is expected to increase production by 2 million tonnes a year to around 3 million tonnes by 2012. Australia’s production of alumina is projected to increase over the outlook period to around 26 million tonnes by 2014-15.

With Australia’s aluminium production capacity projected to be largely unchanged over the outlook period, the majority of the projected increase in alumina output will be exported. Accordingly, alumina exports are projected to increase from around 16.4 million tonnes in 2009-10 to around 22.4 million tonnes in 2014-15.

With forecast higher export volumes and prices in the short term, the value of Australian alumina exports is forecast to increase from $4.6 billion in 2009-10 to $5.7 billion in 2010-11.

Alumina


Toward the end of the outlook period, export earnings are expected to increase to around $7.8 billion (in 2009-10 dollars) by 2014-15, as projected higher export volumes and an assumed depreciation of the Australian dollar more than offset lower projected world alumina prices.

Alumina value and volume

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Alumina


Aluminium and alumina outlook

unit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 z

WorldProductionPrimary aluminium kt 39 256 36 713 39 672 41 814 44 053 47 199 49 940 52 683

Consumption Primary aluminium kt 37 020 34 765 38 439 41 720 43 990 46 417 48 411 50 527

Closing stocks Primary aluminium a kt 4 672 6 620 7 853 7 948 8 010 8 793 10 322 12 478– weeks consumption wks 6.6 9.9 10.6 9.9 9.5 9.9 11.1 12.8

Prices World aluminium b– nominal US$/t 2 487 1 663 2 150 2 213 2 250 2 050 1 913 1 838

USc/lb 113 75 98 100 102 93 87 83– real c US$/t 2 519 1 691 2 150 2 174 2 167 1 932 1 764 1 658

USc/lb 114 77 98 99 98 88 80 75

Alumina – nominal spot US$/t 381 249 325 330 334 318 315 310– real spot c US$/t 386 253 325 324 321 299 291 280

2007 2008 2009 2010 2011 2012 2013 2014-08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

AustraliaProductionPrimary aluminium kt 1 964 1 974 1 920 1 932 1 948 1 945 1 937 1 941Alumina kt 19 359 19 597 20 204 21 370 24 440 25 880 26 080 26 220Bauxite Mt 63 64 66 67 76 80 85 91

ConsumptionPrimary aluminium kt 345 345 345 294 294 294 294 294

ExportsPrimary aluminium kt 1 650 1 748 1 605 1 642 1 656 1 653 1 646 1 650Nominal value A$m 4 967 4 724 3 732 4 106 4 261 4 281 3 966 3 828Real value d A$m 5 243 4 835 3 732 4 013 4 063 3 983 3 600 3 390Alumina kt 15 739 16 395 16 440 17 603 20 641 22 088 22 303 22 436Nominal value A$m 5 809 6 015 4 624 5 693 7 954 8 511 8 636 8 763Real value d A$m 6 131 6 156 4 624 5 564 7 586 7 919 7 839 7 761Bauxite kt 7 917 7 470 7 771 6 434 5 678 6 775 10 855 16 656Nominal value A$m 206 192 162 136 121 144 231 354Real value d A$m 218 197 162 133 115 134 209 314Total value– nominal A$m 10 983 10 932 8 517 9 935 12 335 12 935 12 832 12 945– real d A$m 11 592 11 188 8 517 9 709 11 764 12 036 11 648 11 465

a Producer and LME stocks. b LME cash prices for primary aluminium. c In 2010 US dollars. d In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: London Metal Exchange; World Bureau of Metal Statistics; ABARE.

Alumina


NickelOutlook to 2015

Chloe Haseltine

In the five years to 2015, nickel prices are forecast to peak at around US$21 700 a tonne (in real terms) in 2012, before easing over the remainder of the outlook period. In the short term, higher nickel prices are forecast to be underpinned by stronger demand and moderate supply growth. Beyond 2012, nickel consumption is projected to increase faster than production, resulting in falling stocks.

Nickel price to increase in 2010… The significant volatility that has been evident in the nickel price continued in 2009, with prices rising from US$9000 tonne in March to almost US$20 000 tonne at the end of the year. For 2009 as a whole, the nickel price averaged US$14 600 a tonne, which was a decline of 30 per cent from 2008. In 2010, the world nickel spot price is forecast to increase by 26 per cent to average US$18 400 a tonne as it increases in line with an expected recovery in world economic growth and industrial production. Growth in supply in 2010 is forecast to be slower than demand. However, stocks of nickel are forecast to increase marginally in 2010 as consumption remains lower than supply. Stocks are forecast to remain around 7.2 weeks of consumption.

Nickel prices in 2011 are forecast to increase by a further 13 per cent to around US$20 700 (in real terms) a tonne as demand continues to grow. The higher price in 2011 reflects increased demand associated with consumers responding to increased economic activity. Nickel production growth is forecast to again be lower than consumption growth in 2011, resulting in stocks falling to 6.9 weeks of consumption.

World nickel prices and stocks to 2015

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2010US$’000/t


…and stabilise over the outlook periodOver the medium term, the nickel price is forecast to ease to around US$18 000 a tonne (in real terms). Nickel demand between 2012 and 2015 is projected to grow more strongly in developing economies. However, nickel production is projected to increase at a faster rate as mines currently under construction are completed and commence production. There are a number of projects scheduled to start operations in 2010 and 2011; however, in general there will be a ramp-up period of 1 to 2 years.

Over the outlook period, significant increases in the nickel price are expected to be limited by opportunities to substitute nickel pig iron. Nickel pig iron is a ferronickel pig iron containing 3 to 5 per cent nickel. It contains much less nickel than conventional ferronickel (25 to 40 per cent) and has higher concentrations of sulphur and phosphorous. Nickel pig iron production generally becomes profitable when the nickel price is around US$20 000 a tonne. If the nickel price were to remain above this for a significant period of time, nickel pig iron production would increase and be used as a substitute for ferronickel.

One possible downside risk to the nickel price outlook is falling costs of nickel pig iron production. The technology to produce nickel pig iron in China has been improving over the past few years along with production capacity, which is now estimated between 150 000 to 200 000 tonnes a year. Nickel pig iron is increasingly produced from electric arc furnaces instead of blast furnaces which are higher cost and produce low grade nickel pig iron with nickel grades of only 2 to 6 per cent. Electric furnaces are lower cost and produce nickel pig iron with nickel grades of up to 20 per cent. The newest electric furnaces are being built with rotary kilns to reduce electricity consumption, are specific to nickel pig iron production and close to sea ports to reduce transportation costs. As nickel pig iron projects become cheaper to operate, the nickel price at which they operate profitably has declined, with cost estimates for high grade nickel pig iron production as low as US$7300 a tonne.

Conversely, significant price declines are not expected, judging by information on production costs. The relatively slow rate at which closed nickel capacity has been restarted implies that a significant proportion of that capacity cannot be operated at a price below US$16 000 a tonne, as prices have remained above this since July 2009.

Consumption recovery to strengthen in 2010…World nickel consumption is forecast to increase by around 10 per cent in 2010 to 1.32 million tonnes, after declining by 7 per cent in 2009. In China, higher nickel demand is expected because of increased construction and manufacturing activity. In OECD economies, nickel consumption is forecast to increase by 15 per cent following a 23 per cent decline in 2009. Economic growth is assumed to underpin increased non-residential construction activity and demand for consumer durables, which are nickel-intensive. The rebuilding of stocks by nickel consumers, particularly in the OECD region, will also boost demand in 2010. Nickel consumers ran down stocks in late 2008 and early 2009 in response to rapidly falling prices and demand. As the outlook for nickel consumption improves, these stocks will need to be replenished. Demand for nickel use in industrial applications, such as stainless steel and superalloys, is expected to recover first. Historically, industrial production recovers more rapidly than general economic activity and nickel price movements, in association with an improvement in market sentiment toward the market outlook.

Nickel


…and gather strength from 2011 to 2015 as emerging economies growOver the medium term, nickel consumption is projected to grow steadily, by around 6 per cent a year, to reach around 1.73 million tonnes by 2015. Growth in industrial production in emerging economies is expected to lead to significant increases in nickel consumption to 2015. Assumed stronger economic growth during this period is expected to result in increased construction and consumption activity, driving demand for stainless steel and, therefore, demand for nickel.

China is expected to remain the largest source of growth for nickel in the medium term. In line with assumed economic growth, India is also projected to become an increasingly important destination for stainless steel production and manufacturing, supporting a 30 per cent increase in nickel consumption over the outlook period.

An uncertainty surrounding the outlook for nickel demand is its rate of use in stainless steel manufacturing. Increased use of 200 and 400 series stainless steels could result in nickel consumption being lower than currently projected over the outlook period (see the accompanying box).

Another risk to the outlook for nickel demand is increased competition in the growing battery market including for electric cars and mobile devices, such as phones, cameras and computers. Recent improvements to lithium-ion batteries have created competition for the nickel metal hydride battery. For example, Toyota recently announced that the more energy-efficient lithium-ion batteries will be used instead of nickel-hydride batteries in new plug-in electric cars from 2012. However, the replacement of nickel based batteries by lithium batteries will be limited by the different properties in each type. Traditionally, nickel based batteries have superior shelf life and are more durable than lithium batteries. In contrast, lithium batteries can fill a variety of shapes, are much lighter than nickel-hydride batteries and do not suffer from the ‘memory effect’ where batteries gradually lose their maximum energy capacity. These

Nickel consumption, by region, to 2015

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Nickel


characteristics of each type have led to technology developments combining lithium and nickel to produce a battery which has higher energy and fewer fire risks. Increased purchases of both electronic consumer goods and energy-efficient motor vehicles are expected to create a larger market for these batteries and subsequently for nickel.

Mine and refined production to recover in 2010…World nickel mine production in 2010 is forecast to increase by around 8 per cent to 1.4 million tonnes as higher prices encourage producers to restart some capacity idled over the past 18 months. In addition, a number of nickel mines scheduled to start in 2009 were delayed until 2010. For example, URSA Major Minerals resumed operations at their Shakespeare Nickel Copper Mine in Canada in February 2010, as a result of higher nickel prices.

Refinery production in 2010 is expected to increase as more ores and concentrates from increased mine production become available for processing. As a result of increased mine production and higher expected revenues at refineries, refined nickel production in 2010 is forecast to increase by 7 per cent to 1.34 million tonnes.

…and continue to increase to 2015In 2011, rising nickel prices are expected to further encourage mine and refined nickel producers to increase production. Increased production will be assisted by the ramping up of production from mines that commenced operations in 2010 and by those starting up in 2011. Mines which have announced start-up for 2011 include Anglo American’s Barro Alto project (36 000 tonnes full capacity) in Brazil and European Nickel’s Joint Venture Caldag project (20 400 tonnes full capacity) in Turkey. In 2015, mine production is projected to increase to 1.85 million tonnes, which is 42 per cent higher than 2009.

There is an estimated 221 400 tonnes of nickel ores and concentrate production scheduled to come online over the outlook period. Much of this production is expected to come from

Stainless steel

Stainless steels are a group of corrosion resistant steels that contain at least 10 per cent chromium and other alloying elements such as nickel and manganese. The 300 series has the largest market share and contains the most nickel, at around 8 to 12 per cent nickel. This high nickel content imparts superior thermal resistance properties to the steel. The 200 series stainless steels contain a high level of manganese and only around 1 to 5 per cent nickel. The 200 series steels tend to cost less than the 300 series, but generally have inferior corrosion and thermal resistance properties and poorer surface appearance. As a result, the use of 200 series stainless steels is concentrated in construction industries. The 400 series stainless steels contain no nickel but have higher chromium content. These steels are priced between 200 and 300 series stainless steels because of the high price of chromium. These steels tend to have superior corrosion resistance properties compared with the other series and are used mainly in automotive exhaust systems.

Once consumers have substituted from 300 series stainless steels to cheaper 200 and 400 series, they may not return to 300 series stainless steels. This could be because of improvements to 200 and 400 series stainless steels that overcome some of the previous shortcomings, which makes them suitable to more uses.

Nickel


laterite ore deposits. However, difficulties continue to hamper laterite projects and there are significant costs associated with project development and production. The ability of production from laterite ore deposits to meet ramp-up and capacity targets over the outlook period is a key risk to the projected supply growth.

Refined nickel production is forecast to follow increases in nickel mine production, with producers developing integrated projects including both mines and refineries, or negotiating agreements with existing refineries to expand capacity in line with any new mines or developments. Refined nickel production is projected to grow at an average rate of 5 per cent a year over the medium term, to reach 1.7 million tonnes by 2015.

Australian mine production lower in 2010…Australian nickel mine production in 2009-10 is forecast to fall by 4 per cent to 177 000 tonnes, which reflects the effect of capacity shutdowns during 2008-09. The majority of these mines have not resumed production and there have been no announcements suggesting restarts are imminent. However, in the first half of 2010, some new production capacity is scheduled to be brought online, including Western Area’s Spotted Quoll project and the T5 expansion at Forrestania. The production decline in 2009-10 has been partially offset by increased production from BHP Billiton’s Nickel West operations as well as by Xstrata and Independence Group.

In 2010-11, nickel production is forecast to increase to 182 000 tonnes as Western Area’s Spotted Quoll and T5 expansion operate at full capacity during the year. A potential upside to this forecast is unanticipated restarts of some currently idled capacity.

Refined production in 2009-10 is forecast to increase by 15 per cent to around 128 000 tonnes as a result of full production at BHP Billiton’s smelting and refining operations over the year. In

Nickel laterite projects expected to start up toward 2015name company country production start up (tonnes a year full capacity)

Goro Vale Inco New Caledonia 60 000 January 2010Ramu various Chinese Papua New Guinea 31 150 June 2010Onca Puma Vale Inco Brazil 58 000 Late 2010Barro Alto Anglo American Brazil 36 000 2011Caldag European Nickel Turkey 20 400 2011Koniambo Société Minière du Sud Pacifique (SMSP) and Xstrata New Caledonia 60 000 2011Ambatovy Sherritt, Sumitomo Corp, SNC-Lavalin Madagascar 60 000 2012various various Philippines 90 000 from 2010

Total 415 550

Sources: Company websites; INSG.

Nickel


2010-11, refined production is forecast to increase to 131 000 tonnes. Refined production could be moderated by the announced scheduled triennial shutdown for maintenance at Minara’s Murrrin Murrin in the second half of 2010, which will reduce refined capacity.

…but recovering toward 2014-15Over the medium term, Australia’s nickel mine production is projected to increase as producers respond to higher prices. Increased production will be sourced from new projects such as Xstrata’s Cosmos project and Heron Resources’ joint venture Yerilla project. In addition, it is assumed that some of the capacity that is currently idled will be restarted over the outlook period. As a result, Australian nickel mine production is projected to increase to 228 000 tonnes by 2014-15.

Associated with higher mine production, refined production is also projected to increase over the outlook period, by 7 per cent to 137 000 tonnes by 2014-15.

Australian mines placed on care and maintenance, 2008-09 estimatedcompany project capacity reduction (t) timing

Norilsk Cawse 10 000 June 2008Fox Resources Radio Hill 1 500 September 2008Palmary Kambalda 4 000 November 2008Norilsk Waterloo, Silver Swan 6 000 November 2008Australian Mines Blair 1 000 December 2008OZ Minerals Avebury 8 000 December 2008BHP Billiton Ravensthorpe 50 000 January 2009Norilsk Black Swan, Lake Johnston 25 000 February 2009Total 105 500

Australian mines scheduled to be developed by 2014-15 estimated expectedcompany project capacity (t/yr) a start-up

Proto Resources and Investments Barnes Hill 2 200 2010Xstrata Nickel Australia Cosmos Project (includes Alec Mairs 2 deposits) 10 000 2012Heron Resources/ Ningbo Shanshan Yerilla 21 000 2012Metallica Minerals Nornico 10 000 2012Gladstone Pacific Nickel Marborough Heap Leach Project 24 000 2014Gladstone Pacific Nickel Gladstone Nickel Project (stage 1) 63 000 2015Total 130 200

a Tonnes per year at full capacity.Source: ABARE major projects October listing 2009.

Nickel


Australian export value to increaseThe value of Australia’s nickel exports is forecast to increase by 14 per cent to $3 billion in 2009-10 as higher nickel prices offset lower export volumes. Export volumes are forecast to decline by 7 per cent to 176 000 tonnes.

In 2010-11, higher nickel prices and strong demand for Australian nickel are forecast to lead to an increase in export value by 16 per cent to $3.5 billion. Export volumes are forecast to increase by 2 per cent to around 180 000 tonnes in line with increased mine production.

Over the medium term, as mine production increases, nickel export volumes are projected to increase to 218 000 tonnes by 2014-15. Higher export volumes, combined with favourable world prices, are projected to underpin an increase in export earnings to $4.3 billion (in 2009-10 dollars) in 2014-15.

Australian nickel exports

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Nickel outlookunit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 z

World Production – mine kt 1 509 1 302 1 405 1 515 1 630 1 725 1 767 1 854– refined kt 1 396 1 246 1 336 1 455 1 536 1 607 1 650 1 707Consumption kt 1 278 1 193 1 317 1 447 1 532 1 620 1 667 1 726Stocks kt 155 164 183 191 196 183 166 146– weeks consumption 6.3 7.2 7.2 6.9 6.6 5.9 5.2 4.4

Price lme– nominal US$/t 21 116 14 642 18 367 20 700 22 500 21 125 19 750 20 500

Usc/lb 958 664 833 939 1 021 958 896 930– real a US$/t 21 393 14 887 18 367 20 344 21 674 19 911 18 215 18 499

Usc/lb 970 675 833 923 983 903 826 839

2007 2008 2009 2010 2011 2012 2013 2014 -08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

AustraliaProduction – mine bs kt 190 185 177 182 195 206 215 228– refined kt 121 111 128 131 133 134 136 137– intermediate kt 45 21 26 25 25 27 27 28

Export volume cs kt 211 189 176 180 189 207 214 218Export value– nominal s A$m 5 655 2 656 3 035 3 513 3 989 4 554 4 727 4 806– real ds A$m 5 968 2 719 3 035 3 434 3 804 4 237 4 291 4 256

a In 2010 US dollars. b Nickel content of domestic mine production. c Includes metal content of ores and concentrates, intermediate products and nickel metal. d In 2009-10 Australian dollars. f ABARE forecast. s ABARE estimate. z ABARE projection.Sources: Australian Bureau of Statistics; International Nickel Study Group; London Metal Exchange; World Bureau of Metal Statistics; ABARE.

Nickel


CopperOutlook to 2015

Michael Lampard and Rebecca Petchey

In 2009, the copper price averaged US$5067 a tonne, which was 27 per cent lower than the 2008 average. Despite this lower average price, copper prices increased from less than US$3000 a tonne in January to finish 2009 at US$7350 a tonne. Copper prices increased as strong demand from China offset lower demand from most developed economies. Nevertheless, copper stocks continued to increase, finishing the year at 2.8 weeks of consumption, which was a rise of 23 per cent on the previous year.

Higher copper prices over the outlook periodCopper prices are forecast to average US$7080 a tonne in 2010, which is 40 per cent higher than the 2009 average, as the assumed recovery in global economic activity supports copper prices. During the outlook period, copper prices in real terms (2010 dollars) are projected to peak at around US$7780 a tonne in 2012 as projected demand exceeds supply and stocks decline. However, with production projected to grow at a faster rate than consumption beyond 2012, world stocks are projected to gradually increase, placing downward pressure on prices. World copper prices in 2015 are projected to average around US$6600 a tonne (2010 dollars).

Consumption to increase moderately in 2010…World copper consumption is estimated to have increased by 1 per cent to around 18.4 million tonnes in 2009, as increased copper consumption in China offset sharp declines in consumption in other major copper consuming economies. In 2010, growing demand for copper in developed economies is forecast to offset the effect of an end to restocking in China, resulting in world copper consumption increasing to 18.7 million tonnes.

OECD copper consumption, which accounts for around one-half of the world’s copper consumption, is expected to increase by 7 per cent in 2010, following a decline of 15 per cent in 2009. Higher copper consumption in OECD economies is forecast in response to the assumed improvement in economic activity, particularly industrial production, in major consuming countries such as Germany, Japan, Italy and the United States.

In the United States, the world’s second largest copper consumer, consumption is forecast to increase by 4 per cent to 1.8 million tonnes in 2010 following a decline of 16 per cent in

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2009. Copper consumption is forecast to recover slowly in the United States in the short term, as demand in key copper consuming sectors of the US economy, such as housing and manufacturing, is assumed to remain relatively weak. US housing starts and permits, two leading indicators of housing construction, remained historically low at the end of 2009.

China’s apparent consumption of copper increased by 38 per cent to 7.1 million tonnes in 2009. Driving increased apparent copper consumption was China’s fiscal stimulus package and producer restocking. In 2009, Chinese buyers took advantage of lower copper prices to increase their strategic reserves. In 2010, copper consumption in China is forecast to increase in line with continued urban infrastructure development and growth in export demand for copper-intensive manufacturing goods.

…before returning to strong growth over the medium termOver the projection period, world copper consumption is expected to grow at around5 per cent a year, reaching 23.5 million tonnes by 2015. Following moderate growth in copper consumption in 2010, world consumption is forecast to increase at a faster rate in 2011 and 2012, supported by growth in copper demand from both developing and developed economies. Beyond 2012, copper consumption is projected to continue to grow strongly, with China and other developing economies accounting for most of this growth. In contrast, growth in OECD consumption is projected to ease.

Over the outlook period, movements in China’s copper consumption will be an important factor in the growth of world copper demand. Chinese copper consumption is projected to increase by 7 per cent a year to reach 9.3 million tonnes (40 per cent of world consumption) by 2015, being underpinned by continued industrialisation and urbanisation where copper is used in electricity infrastructure and housing construction. Growth in China’s vehicle manufacturing industry will also support increased copper consumption.

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Copper


Chinese consumption of copper is also expected to be supported by increased demand from key export markets for copper-intensive goods such as motor vehicles and consumer durables.

In other developing economies such as India, the Russian Federation and Brazil, copper consumption is also projected to increase over the medium term. As in China, increased copper consumption in these countries reflects growing demand for electricity infrastructure, housing and consumer durables.

Following a forecast recovery in demand in 2011 and 2012, copper consumption in the European Union and other developed economies is projected to remain relatively steady over the outlook period. Declining copper consumption has been a trend in some developed economies in recent years, as manufacturing of copper-intensive goods has moved to lower cost countries. This trend is expected to continue over the medium term, limiting growth in OECD copper consumption. Over the outlook period, OECD copper consumption is projected to remain at around 8.7 million tonnes, which is around 2008 consumption.

In the United States, the world’s second largest copper consumer, copper consumption has declined in recent years to reflect weaker demand in construction and manufacturing industries. Copper consumption is forecast to increase gradually over the outlook period as industrial production and economic growth strengthen. However, copper consumption is not projected to return to the peaks of the early 2000s, as some copper-intensive manufacturing has moved offshore over the past decade.

Copper applications

Copper is the third most widely used industrial metal following steel and aluminium. Copper’s high conductivity as well as ductile and malleable properties make it the preferred metal for many applications in the communications, electrical, electronics and plumbing industries. Because of copper’s key role in household infrastructure (plumbing, electrical and communications), as well as in electric motors and industrial applications, demand for copper is highly correlated to industrial production and economic growth.

The largest use for copper is in industrial equipment, electricity infrastructure and transportation (see the accompanying table). It is estimated that around 200 kilograms of copper is used in the construction of a standard home, while an automobile requires around 22 kilograms of copper, with electric vehicles thought to require up to 50 kilograms.

continued...

Major uses of copper, by end use, 2008

Building and construction Plumbing 6.4%Communications 0.8%Electricity 15.5%Other 2.7%

Infrastructure Power utilities 11.0%Telecommunications 3.6%

Equipment manufacturing Industrial 19.2%Transportation 12.5%Consumer products 8.4%Coiling 6.9%Electronic 3.6%Other 9.4% Total 100.0%

Source: International copper study group

Copper


Mine production to increase over the medium termMine production in 2010 is forecast to increase by 1 per cent to 16 million tonnes, assisted by production growth in Africa and Chile. In Africa, mine production is forecast to increase to around 1.3 million tonnes, as Vedanta’s Konkola Deep mining project in Zambia enters production and other operations started in 2009 approach full capacity. In Chile, production is forecast to increase by 7 per cent to 5.7 million tonnes as operations at Codelco Norte, Escondida, Los Pelambres and Collahuasi increase production and the Frankie solvent extraction electrowinning (SX-EW) operation (30 000 tonnes) commences production.

Over the outlook period, mine production is forecast to increase by around 5 per cent a year, reaching 20 million tonnes by 2015, as new projects in Africa, Chile and Peru are completed. Production in Africa is forecast to continue to increase, which reflects the start-up of Anvil Mining’s Kinsevere SX-EW (60 000 tonnes) in the Democratic Republic of Congo and First Quantum’s Fishtie (50 000 tonnes) in Zambia.

Mine production in Chile is projected to grow at around 2 per cent a year, reaching 6.3 million tonnes by 2015 as Esperanza (195 000 tonnes) and Caserones (150 000 tonnes) mines commence production and expansions at existing operations are completed. In Peru, mine production is projected to increase to around 2 million tonnes by 2015 as operations such as Zijin Mining Group’s Rio Blanco (200 000 tonnes), Chinalco’s Toromocho (285 000 tonnes) and Xstrata’s Las Bambas (300 000 tonnes) are scheduled to commence production.

Other major operations scheduled to start production over the outlook period include Yamana Gold’s Agua Rica (136 000 tonnes) mine in Argentina, Xstrata’s Tampakan (200 000 tonnes) in the Philippines and Ivanhoe Mine’s Oyu Tolgoi (750 000 tonnes) operation in Mongolia. Production at Oyu Tolgoi is scheduled to commence in 2013 and take five years to reach full capacity.

Mine production to increase over the medium term

Copper applications continued

Copper’s use in the construction of electricity, plumbing and communication infrastructure is a key factor supporting future growth in copper consumption. For example, around half of China’s copper consumption is used in the expansion of its electricity generation and distribution networks. With China, as well as other developing nations, expected to continue expanding its generating capacity into the future, demand for copper is expected to remain strong. Continued increases in the consumption of consumer durables and automobiles in developing economies will also support growth in copper consumption over the longer term.

A risk to growth in copper consumption is the extent to which copper can be substituted with lower cost materials. Reflecting higher copper prices (relative to other metals) in recent years, aluminium has been substituted for copper in some electric motors, housing wire and electrical transmission infrastructure. However, aluminium’s increased electrical resistance means a trade-off exists between lower upfront costs and efficiency losses. Although sustained higher copper prices (relative to aluminium) may result in increased substitution of copper with aluminium, copper’s higher conductivity is likely to result in continued use of copper in many electric devices in the future.

Copper


Only a small number of projects are currently committed for development beyond 2013. Given the long lead time to develop mines and the likelihood of delays in the start-up of currently planned copper mines, some mines which are scheduled for completion toward the end of the outlook period may not commence production by 2015.

Growth in refined copper production to continueRefined copper production is forecast to increase by around 1 per cent to 18.8 million tonnes in 2010 as both primary and secondary refined copper production increases. Primary refined copper is forecast to increase in Africa and Europe as SX-EW production increases at operations that commenced production in 2009. An expected increase in the availability of copper scrap is also forecast to support higher secondary refined copper production.

Over the remainder of the outlook period, growth in world refined copper production is expected to come from SX-EW operations in Africa and Peru and new refining capacity in China and Europe. In all, refined production is projected to grow at around 5 per cent a year, reaching 23.7 million tonnes by 2015.

Over the period to 2015, refined copper production is projected to grow faster than mine production, with the difference filled by increased secondary refined production (copper scrap). Projected strong growth in refining capacity, particularly in China, is expected to lead to continued downward pressure on treatment and refining charges (see the accompanying box), as smelters compete for limited feedstock. If low treatment and refining charges persist, downward pressure on smelters’ profitability may occur, potentially limiting growth in smelting capacity toward the end of the outlook period.

Treatment and refining charges

Unlike copper metal, there is no formal exchange for copper concentrates. Instead, prices are established through negotiation between the buyer (smelter) and the seller (mine). When the mine sells concentrates to the smelter, the mine is paid for a portion of the copper metal and any by-products, and penalised for impurities contained in the concentrate. In addition, the smelter will impose a treatment and refining charge and retain some exposure to the copper price, when it is above or below a prespecified value, through what is called ‘price participation’.

Price participation typically involves an extra payment to smelters when the price of copper exceeds a certain value. The payment is equal to a prescribed percentage of the difference between the purchase price and the market price.

Treatment and refining charges are negotiated annually and fluctuate depending on the underlying balance in the copper concentrates market. Usually, treatment and refining cost contracts are two years in duration, and known as a ‘brick contract’. Under a brick contract, half of the copper concentrates will be taken under the current year’s terms and the other half under the previous year’s terms.

Copper


Australian copper production to increase In 2009-10, Australian copper mine production is forecast to remain steady at around 890 000 tonnes. This reflects increased production at Newmont’s Boddington gold mine and Oz Minerals’ Prominent Hill operation being offset by lower output at BHP Billiton’s Olympic Dam. In October 2009, there was a mechanical failure in the main haulage shaft which transports 75 per cent of the mine’s ore to the surface. As a result of this incident, production at Olympic Dam may be 55 000 tonnes lower in 2009-10, compared with the previous financial year.

Largely reflecting lower production at the Olympic Dam operation, Australia’s refined copper production is forecast to decline by 14 per cent to 427 000 tonnes in 2009-10. The closure of Straits Resources’ Whim Creek SX-EW operation is also forecast to contribute to lower refined production. Australian mine production is expected to increase by 9 per cent to 971 000 tonnes in 2010-11, as Olympic Dam returns to full production capacity.

Over the medium term, Australian copper mine production is projected to grow at an annual average rate of 3 per cent to 1 million tonnes in 2014-15. Underpinning this growth is a number of projects which are scheduled to enter production over the outlook period, including Copper Strike’s Einasleigh project (8000 tonnes), Universal Resources’ Roseby project (26 000 tonnes), Exco Resources’ Cloncurry project (20 000 tonnes), and Havilah Resources’ Kalkaroo project (19 000 tonnes). Additional capacity is also expected from expansion at existing mines such as Rio Tinto’s Northparkes.

Export earnings to increaseIn 2009-10, the metallic content of copper exports is forecast to decline by 6 per cent to796 000 tonnes, as increased exports of ores and concentrates only partially offset lower refined copper exports. Despite lower export volumes, higher export prices are forecast to result in export earnings increasing to $6.2 billion. In 2010-11, higher export volumes and export prices are forecast to result in the value of Australia’s copper exports increasing by10 per cent to $6.8 billion.

Australian exports of copper ores and concentrates are projected to increase over the outlook period, associated with higher mine production. Refined copper exports are expected to increase until 2011-12, as previously closed SX-EW operations re-start production. However, over the remainder of the outlook period, refined exports are projected to remain stable as no significant expansions to refinery capacity are planned. The value of Australia’s copper export earnings is projected to reach $7.3 billion (2009-10 dollars) in 2014-15, as higher export volumes offset a projected decline in export prices in real terms toward the end of the outlook period.

Copper


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Copper outlookunit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 z

World Production– mine kt 15 529 15 935 16 045 16 901 17 925 18 744 19 116 20 050– refined kt 18 484 18 765 18 846 19 311 20 226 21 359 22 516 23 734Consumption kt 18 102 18 367 18 650 19 367 20 242 21 188 22 328 23 495Closing stocks kt 808 990 1 186 1 130 1 114 1 285 1 473 1 712– weeks consumption wks 2.3 2.8 3.3 3.0 2.9 3.2 3.4 3.8Price LME– nominal US$/t 6 976 5 067 7 080 7 563 8 075 7 888 7 613 7 300

USc/lb 316.4 229.9 321.1 343.0 366.3 357.8 345.3 331.1– real a US$/t 7 067 5 152 7 080 7 432 7 779 7 434 7 021 6 588

USc/lb 320.6 233.7 321.1 337.1 352.8 337.2 318.5 298.8

2007 2008 2009 2010 2011 2012 2013 2014-08 -09 -10 f -11 f -12 z -13 z -14 z -15 z

Australia Mine output kt 863 890 890 971 981 991 1 000 1 037Refined output kt 444 499 427 469 490 494 494 494Exports – ores and conc. b kt 1 694 1 797 1 887 1 857 1 818 1 838 1 872 1 981– refined kt 296 361 287 318 335 337 334 330Nominal value A$m 6 730 5 863 6 173 6 820 7 544 7 998 7 905 8 220Real value c A$m 7 104 6 000 6 173 6 666 7 195 7 441 7 176 7 280

a In 2010 US dollars. b Quantities refer to gross weight of all ores and concentrates. c In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; International Copper Study Group; World Bureau of Metal Statistics; ABARE.

Copper


ZincOutlook to 2015

Apsara Maliyasena

After falling considerably in 2009, world zinc prices are forecast to increase in 2010, which mainly reflects an increase in zinc consumption as growth in world industrial production gathers pace. Zinc prices are expected to be maintained at relatively high levels in the short term, reflecting a combination of increased zinc demand, particularly in the emerging economies, and modest supply growth. Over the medium term, zinc prices are forecast to decline in real terms. Higher forecast mine and metal production toward 2015 is expected to lead to increased stocks and place downward pressure on prices.

Zinc prices to moderate in the medium termIn 2009, the zinc price on the London Metal Exchange (LME) averaged US$1595 a tonne. The zinc price has improved considerably in recent months, reaching US$2220 a tonne in mid-February 2010. The significant increase in zinc prices appears to have been associated with increased investment demand as a result of growing confidence about an expected recovery in zinc demand because of the improved outlook for world economic growth. In addition, a weakening US dollar against other major international floating currencies has provided support for world zinc prices that are denominated in US dollars.

Notwithstanding the recent price increase, there has also been an increase in zinc stocks held in LME warehouses. In mid-February 2010, LME closing stocks were around 500 000 tonnes, the highest since late October 2005.

In 2010, world zinc prices are forecast to average around US$2235 a tonne, which is a rise of 40 per cent from the average of the previous year. Zinc prices are expected to remain relatively high in the short term. On the supply side, growth is expected to be relatively weak as a result

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of the large number of closures of both mine and refinery capacity in late 2008 and early 2009 and limited additional capacity scheduled to come on line in 2010. On the demand side, assumed stronger world economic growth is expected to lead to higher zinc consumption, with zinc stocks forecast to fall to around 4.2 weeks of consumption by the end of 2010.

A significant downside risk to this price outlook stems from the uncertainty associated with the timing and extent of possible restarts of idle zinc capacity worldwide. Given the more favourable price outlook, producers may reverse some of the production cuts implemented in late 2008 and early 2009, which could lead to a higher than currently expected increase in production and place significant downward pressure on prices.

Over the medium term, zinc prices (in year average terms) are projected to increase to around US$2450 a tonne (in 2010 dollars) in 2012, before easing gradually to around US$1860 a tonne by 2015. Zinc prices are projected to ease toward the end of the outlook period as new projects are completed and idled capacity resumes production. By the end of 2015, zinc stocks are projected to increase to around 4.6 weeks of consumption.

World refined zinc consumption to grow The main use of zinc is in galvanising steel to prevent corrosion. Galvanised (zinc coated) steel represents about half of total refined zinc consumption. Primary end uses for galvanized steel are in the construction and automobile industries, which account for around 70 per cent of total galvanized steel consumption. Therefore, the demand for zinc is highly responsive to activity in these industries. Other uses of zinc include the production of brass, bronze and other zinc based alloys, which accounts for approximately 17 per cent of total world consumption. Zinc oxide is mainly used in tyres and rubber products, which represent around 6 per cent of world zinc consumption.

World refined zinc consumption is estimated to have fallen by 7 per cent in 2009 to around 10.6 million tonnes. China and India were the only two major consumers that increased consumption in that year. As activity in the manufacturing and construction industries recovers in the short term, world refined zinc consumption is forecast to increase by 5 per cent to 11.2 million tonnes in 2010, and by a further 5 per cent in 2011 to reach 11.8 million tonnes. Over the medium term, world zinc consumption is projected to grow by around 5 per cent a year, to reach 14.1 million tonnes by 2015.

China and India to drive world consumption growthOver the outlook period, zinc consumption is expected to grow strongly in China and India. Zinc per person consumption is relatively low in these economies, compared with industrialised nations such as the Republic of Korea, Germany and Italy. As strong economic growth continues in China and India, rising per person incomes will lead to higher demand for zinc intensive consumer goods, such as motor vehicles and whitegoods.

China is the world’s largest consumer of zinc, accounting for around 35 per cent of global refined zinc consumption. Over the next five years, China is expected to increase its share of total world zinc consumption to reach a projected 44 per cent by 2015.

Zinc


Over the past decade, refined zinc consumption in China has increased by an annual average rate of 15 per cent, to an estimated 4.6 million tonnes in 2009. Zinc consumption in China is forecast to grow by 8 per cent to around 5 million tonnes in 2010. This growth is expected to be driven by higher galvanised steel consumption in its construction, automotive and domestic appliance industries.

Developments in India will also have a significant effect on global zinc consumption. Refined zinc consumption in India has increased by an average of 7 per cent a year over the past decade, reaching an estimated 520 000 tonnes in 2009, mainly driven by the increased demand for galvanised steel. Zinc consumption in India is expected to grow over the short to medium term as a result of ongoing investment aimed at improving India’s power generation and transport infrastructure. Increasing motor vehicle production in India is also a substantial source of zinc demand. Zinc consumption in India is forecast to rise by 7 per cent to around 555 000 tonnes in 2010. Toward 2015, India’s zinc consumption is projected to rise by around 8 per cent a year.

Modest consumption growth in the United States and Europe The United States is the world’s second largest zinc consumer. In 2009, US refined zinc consumption fell by an estimated 11 per cent as a result of weaker activity in the US automotive and construction industries. In 2010, growth in zinc consumption in the United States is forecast to be around 3 per cent, driven by expected higher galvanised steel demand in the manufacturing and construction industries. The United States is expected to account for around 8 per cent of world zinc consumption in 2010.

In Europe, refined zinc consumption decreased by an estimated 23 per cent in 2009 but is expected to recover in the short term. European zinc consumption is forecast to grow by 2 per cent in 2010, before increasing to 4 per cent in 2011, as activity in the industrial sector gradually strengthens.

Over the medium term, modest growth in zinc consumption is projected for both the United States and Europe. Toward 2015, refined zinc consumption in both the United States and Europe is projected to increase by around 2 per cent a year, in line with assumed growth in industrial production.

Consumption intensity of refined zinc - 2008

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Zinc


World zinc mine production to increase despite cuts in 2009 World zinc mine production is estimated to have fallen by around 8 per cent in 2009 to 10.8 million tonnes. Significant amounts of global zinc capacity were closed in 2009 because of weaker demand for zinc, leading to sharply lower prices. It is estimated that the closures of world zinc mine capacity amounted to around 500 000 tonnes in 2009.

In response to an improved price outlook, there have been announcements of start-ups scheduled for 2010, which will contribute to higher mine production. In 2010, world zinc mine production is forecast to increase by 3 per cent to around 11 million tonnes, and by a further 3 per cent in 2011 to 11.4 million tonnes. Increases in mine production in the short term are expected to come from the continued expansion of Hindustan Zinc’s Rampura Agucha zinc-lead mine (additional capacity of 100 000 tonnes by 2011) and Sindesar Khurd deposit in India (75 000 tonnes by 2011). In China, a planned expansion at the Lanping mine in Yunnan is expected to increase production by 100 000 tonnes to around 200 000 tonnes by 2011.

Over the medium term, zinc mine production is forecast to increase by around 5 per cent a year to 13.9 million tonnes by 2015. A significant portion of the forecast increases in world mine supply is expected to come from the planned expansion of the large Antamina copper-zinc mine in Peru. Construction at Antamina is expected to start in the first half of 2010, with the mine expected to be operational in the second half of 2011. The planned expansion of Teck Resources’ Red Dog mine in Canada, the world’s largest zinc mine, could also contribute significantly to world mine production over the medium term. This planned expansion, if approved, would effectively double the mine’s lifespan to 2029.

Increases in zinc mine capacity over the outlook period are also expected to come from a number of brownfield expansions. For example, the Colquijirca mine in Peru plans to increase zinc production from 60 000 tonnes to around 90 000 tonnes in 2011. Also, zinc production from the Neves Corvo mine in Portugal is expected to resume in 2011 (50 000 tonnes a year). Forecast more favourable world prices in the next few years are expected to lead to the revival of previously marginal projects and the start-up of previously idled capacity.

Refined production to increase World refined zinc production is forecast to rise by 3 per cent in 2010 to around 11.2 million tonnes and a further 5 per cent in 2011 to 11.8 million tonnes. New capacity is expected to come from a number of refineries that had previously announced cutbacks or had shut down during the global economic downturn. These include Votorantim’s Cajamarquilla zinc refinery in Peru, which plans to double its current capacity to around 320 000 tonnes in 2010, and Nyrstar’s Balen (255 000 tonnes a year) plant in Belgium, which was restarted in early October 2009.

Over the medium term, refined zinc production is forecast to rise by 5 per cent a year to 14.2 million tonnes by 2015. New zinc smelting capacity is expected to come from several projects in China, India and Peru. In China, the new JCC zinc plant (100 000 tonnes a year) in Hukou County is scheduled to start up in 2011. The Rajpura Dariba facility in India is expected to contribute a capacity of 210 000 tonnes a year from 2011. In Peru, new smelting capacity is expected to come from the planned restart of Doe Run’s La Oroya zinc refinery (80 000 tonnes

Zinc


a year). Operations at this facility were temporarily suspended in June 2009 because of financial and environmental concerns.

Australian zinc production to increase over the medium termIn 2009-10, Australian zinc mine production is forecast to decline by 5 per cent to around 1.34 million tonnes, which primarily reflects production cutbacks announced in the previous financial year. Lower production is expected to come from a number of mines including Minerals and Metals Group’s Golden Grove mine in Western Australia and Perilya’s Broken Hill mine in New South Wales. Lower production is also forecast for the Century zinc mine in Queensland, mainly as a result of lost production from the suspension of the concentrator between October and December 2009.

In 2010-11, zinc mine production is forecast to increase by 6 per cent to around 1.42 million tonnes. Higher production is forecast for CBH Resources’ Endeavor mine in New South Wales, which has a plan to ramp up production from mid-2010, Terramin’s Angas zinc mine in South Australia and Xstrata’s Mt Isa lead zinc mine in Queensland.

Over the medium term, Australia’s mine production is forecast to increase to around 1.54 million tonnes by 2014-15. Contributing to this forecast increase in mine production is the ramp-up to full capacity (400 000 tonnes a year) at the Mt Isa mine, and the Golden Grove mine (141 000 tonnes a year). In addition, CBH Resources has received the approvals for the first stage of the Rasp lead and zinc mine development in Broken Hill (30 000 tonnes a year), which is expected to commence in mid-2010.

Several other projects could also come on stream over the latter part of the outlook period, although they remain uncommitted at this stage. Potential developments include Xstrata’s Lady Loretta (125 000 tonnes a year) and Minerals and Metals Group’s Dugald River zinc lead mine in Queensland (200 000 tonnes a year). In addition, Meridian Minerals is considering reopening the idled Lennard Shelf (80 000 tonnes a year) mine in Western Australia by 2011, pending the results of a feasibility study. The Lennard Shelf mine was closed in August 2008 because of falling zinc prices at the time.

Refined zinc production in Australia is projected to be around 500 000 tonnes a year in 2014-15, as no major expansions or new refineries are scheduled to commence production over the outlook period.

Australian export earnings to ease over the medium termAustralia’s exports of zinc ores and concentrates are forecast to decrease by around 14 per cent in 2009-10 to around 1.8 million tonnes, in line with forecast lower mine production. Exports of refined zinc are forecast to fall by 4 per cent to around 433 000 tonnes in 2009-10, while the total value of zinc exports is forecast to increase to around $2.2 billion. Higher forecast world prices are expected to more than offset the combined effect on revenues of lower export volumes and an assumed appreciation of the Australian dollar.

Zinc


Exports of zinc ores and concentrates are forecast to increase to 2.1 million tonnes by 2014-15, while exports of refined zinc are projected to remain relatively stable at around 380 000 tonnes over the outlook period. In real terms, the total value of zinc exports is projected to be around $2.3 billion in 2014-15.

unit 2008 2009 2010 f 2011 f 2012 z 2013 z 2014 z 2015 z

World Production– mine kt 11 690 10 755 11 024 11 409 11 866 12 400 13 082 13 867– refined kt 11 655 10 839 11 164 11 778 12 367 12 924 13 570 14 215Consumption kt 11 438 10 637 11 222 11 784 12 373 12 868 13 447 14 052Closing stocks kt 764 966 908 903 897 953 1 077 1 240– weeks consumption wks 3.5 4.7 4.2 4.0 3.8 3.9 4.2 4.6Price lme– nominal US$/t 1 878 1 595 2 235 2 450 2 540 2 280 2 125 2 060

USc/lb 85 72 101 111 115 103 96 93– real a US$/t 1 903 1 622 2 235 2 408 2 447 2 149 1 960 1 859

USc/lb 86 74 101 109 111 97 89 84

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Australia Mine output kt 1 571 1 411 1 336 1 421 1 485 1 497 1 522 1 539Exports Ore and conc. b kt 2 323 2 101 1 811 1 818 2 010 2 035 2 091 2 127Refined kt 411 451 433 419 387 378 384 383Total value– nominal A$m 3 350 1 858 2 199 2 561 2 888 2 886 2 661 2 633– real c A$m 3 536 1 902 2 199 2 503 2 754 2 685 2 416 2 331

a In 2010 US dollars. b Quantities refer to gross weight of all ores and concentrates. c In 2009-10 Australian dollars. f ABARE forecast. z ABARE projection.Sources: Australian Bureau of Statistics; International Lead Zinc Study group; World Bureau of Metal Statistics; ABARE.

Zinc outlook

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Zinc


Productivity growth: Trends, drivers and opportunities for broadacre and dairy industriesKatarina Nossal and Yu Sheng

Increasing agricultural productivity continues to be a core objective of rural industries and Australian governments. Given limitations to the land, labour, water and other resources available to agriculture, long-term growth in food production depends largely on increases in productivity. Productivity growth, measured using total factor productivity (TFP) indices, measures the increases in output in excess of additional input use. The additional production comes about through efficiency gains, mostly associated with new technologies and better production and management methods.

Productivity growth in Australian agriculture has been strong relative to other sectors of the economy and comparable with other OECD countries (Nossal and Gooday 2009). Broadacre and dairy industries, accounting for 65 per cent of agricultural gross value of production, have achieved long-term productivity growth of 1.4 per cent and 0.8 per cent a year for the period 1977-78 to 2007-08, respectively. This growth has helped maintain competitiveness in export markets and offset changes in the terms of trade. The terms of trade, being a ratio of the prices farmers receive to the prices paid for inputs, have declined over this period at an average annual rate of 1.6 per cent a year. Over the past decade this rate has softened to 0.6 per cent a year (fi gure a).

Productivity growth in Australian agriculture has also slowed over the past decade, most notably in the broadacre cropping and dairy industries. There are many factors that could

explain this decline, with major influences likely to include extended poor seasonal conditions and a long-term slow down in growth in public investment in research and development. The sources of slowing productivity growth and options for improving the future outlook remain a priority for research and discussion.

TFP is estimated by taking a ratio of an aggregate output index to an aggregate input index. Compared with partial measures such as yield or labour productivity, TFP provides an indication of overall productivity progress. However, it should be noted that non-market inputs such as rainfall and soil quality are not included, and that TFP estimates also reflect peripheral factors such as measurement

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constraints, seasonal variability and changes in industry scale. A description of ABARE’s methods for productivity estimation can be found in Nossal et al. (2009).

Aggregate TFP growth estimates provide an indication of historical changes in technological progress. However, given the vast differences in industry and regional characteristics, they are not sufficient to prescribe solutions to lifting agricultural productivity growth. Further analysis of productivity changes among farms, industries and regions, and their likely causes, is therefore required.

Broadacre productivity growthProductivity growth in the broadacre sector has averaged 1.4 per cent a year between 1977-78 and 2007-08. The gain reflects a long-term decline in input use, averaging 0.6 per cent a year, coupled with an increase in output averaging 0.8 per cent a year, albeit with notable year to year fluctuations (fi gure b).

Between 1977-78 and 2000-01, broadacre productivity grew at 2 per cent a year, but since 2000-01 growth has averaged -1 per cent a year. More detailed statistical analysis suggests that this slowdown in agricultural productivity growth began earlier than 2000-01. However, this has undoubtedly has been exacerbated by the effect of drought conditions in recent years (Sheng, Mullen and Zhao 2010).

The broadacre sector includes those farms generating most of their income from dryland cropping, beef and sheep farming activities. Comparing industry productivity growth across the sector shows that the cropping industry has consistently achieved the highest long-term growth, followed by beef, mixed crop-livestock and sheep (fi gure c and table 1).

Broadacre inputs, outputs and TFP

total factor productivitytotal outputstotal inputs

50

100

150

200

2007-08

1997-98

1987-88

1977-78

index

b Broadacre total factor productivity

croppingmixed crop-livestockbeefsheep

index

2007-08

1997-98

1987-88

1977-78

50

100

150

200

250

c

Productivity growth


However, estimating productivity trends across different periods provides an alternative perspective on industry performance. Long-term productivity growth in the cropping and mixed crop-livestock industries was significantly higher in the earlier period between 1977-78 and 2001-02 than over the whole period from 1977-78 to 2007-08 (fi gure d).

In comparison, the beef and sheep industries have increased their long-term productivity growth rates compared with earlier periods. Between 1977-78 and 1995-96, beef and sheep

industry productivity growth averaged 0.9 and -1 per cent a year, respectively, compared with 1.5 and 0.3 per cent a year over the period 1977-78 to 2007-08.

Productivity growth estimates do not indicate causes behind their trends or differences and several explanations can often appear plausible. During the 1980s and 1990s, the cropping industry achieved considerable technological advances, in seed varieties, fertilisers and advances in the use of crop rotations and tillage techniques. Comparatively, improvements in livestock technologies appear to have had smaller productivity effects. The longer production cycle observed by livestock farmers could also make the transition to better technologies and production methods slower (Mullen 2007).

Technological advances have enabled the cropping industry to benefit from input substitution. In particular, there have been productivity benefits from substituting labour for capital and

1 Broadacre industry productivity growth, 1977-78 to 2007-08 average annual growth

TFP output input growth growth growth % % %Total broadacre 1.4 0.8 –0.6Cropping 1.9 2.1 0.2Mixed crop–livestock 1.4 –0.1 –1.6Beef 1.5 1.6 0.2Sheep 0.3 –1.5 –1.7

Changes in broadacre productivity growth trendsaverage annual growth

-1

1

2

3

4

sheepbeefmixed crop-livestockcroppingtotal broadacre

d

1977-78 to 1995-961977-78 to 2001-021977-78 to 2007-08

average annualTFP growth (%)

Productivity growth


more recently for materials and services (Nossal et al. 2009). Labour and capital productivity growth has been higher in cropping than in other broadacre industries.

Contrasting the recent decline in cropping productivity, the improvements in beef and sheep productivity growth over the past decade are likely to reflect industry changes and could partly be the result of starting from a lower base. For example, the wool stockpile had an adverse effect on industry confidence and profitability during the 1990s, and clearing of the stockpile has been positive for sheep industry productivity growth (Rowe and Atkins 2004). The sheep industry has also improved productivity through advanced breeds, higher stocking rates, product diversification, and the use of supplementary feeding and within flock variation as a risk management tool (Rowe and Atkins 2004).

Improved productivity growth rates are also likely to be associated with declining sheep numbers from the early 1990s onward. In general, those farms remaining in an industry are likely to be more productive than those choosing to exit farming or change their production mix. Nevertheless, some farms are unable to change their enterprise mix because of agronomic circumstances, which could explain why the sheep industry continues to underperform other broadacre sectors.

It is well known that productivity estimates are susceptible to seasonal variations. Drought conditions over the past decade have affected productivity through two pathways. Most obviously, drought has caused sharp downturns in output which have led to sharp downturns in productivity. Perhaps less apparently, the ongoing series of poor seasonal conditions has caused adjustments in input use. While the use of fixed inputs such as land and machinery tends to be adjusted over the long term, use of variable inputs changes from year to year. Livestock farmers have increased their purchases of feed to supplement pasture growth. This has increased input use among these farms and reduced overall productivity gains.

Cropping farms have also changed their input use and management practices to address the riskiness caused by drought. Some have ceased to use summer crop rotations or removed some crops because of their inherent riskiness. In many cases, these crops enabled more efficient use of farm machinery and labour, and so removing them has reduced productivity and overall production. Other cropping farmers have adjusted input applications in response to uncertainty. These changes have had mixed results and have commonly led to inputs being either over or under committed, with negative consequences for productivity growth.

Both the cropping and livestock industries have been affected by poor seasonal conditions over the past decade. While livestock productivity growth has accelerated, it is likely to have been even higher had conditions been more favourable.

Factors that have been identified as being of particular importance to productivity growth in the cropping sector are outlined in box 2.

Productivity growth


box 1 Why do ABARE’s long-term productivity estimates change each year?

Understanding movements in productivity growth can be a challenge, particularly in agricultural industries where year to year fluctuations are high. Productivity is simply a ratio of output to input, so it is natural that estimates change as outputs and inputs change. Nevertheless, productivity estimates in agriculture can be particularly erratic because of the influence of weather conditions.

Long-term estimates of productivity growth are considered the most reliable indicators of performance as the effect of year to year fluctuations are softened. These are estimated by regressing the logarithm of the productivity index over time to give an annual average growth rate. However, movements in any given year can still affect long-term estimates. Each year, ABARE collects and incorporates another year of farm survey data into the productivity estimates. The additional year of data can sometimes produce vastly different results to productivity estimates if the new observation diverges from the long-term trend.

In 2007-08, the level of inputs, outputs and productivity increased from the previous year (figure e). However, long-term growth rates actually fell when this year was included, with TFP growth falling from an average of 1.47 per cent in 2006-07 to 1.39 per cent in 2007-08 (table 2).

Based on the regression methods used for estimating annual TFP growth, the growth pattern is fit to an exponential trajectory over time (figure e). As a new year of TFP data is added, the trajectory is re-estimated. In 2007-08, the new TFP was below the previously estimated trajectory, so the annual average growth rate was indeed lower, despite the increase from the previous year.

Any changes in the sample size, data variables or time periods are likely to lead to different productivity growth estimates. This is important to keep in mind when interpreting changes in productivity growth and their potential causes.

Estimating TFP growth over time

TFP 1977-78 to 2006-07TFP 1977-78 to 2007-08trajectory 1977-78 to 2006-07trajectory 1977-78 to 2007-08

index

2007-08

2002-03

1997-98

1992-93

1987-88

1982-83

1977-78

100

150

200

e

2 Comparing estimates from year to year

TFP growth output growth input growth % % %

1977-78 to 2007-08 1.39 0.81 –0.581977-78 to 2006-07 1.47 0.83 –0.62

Productivity growth


Changes in input use between industriesAs mentioned above, changes in input use can explain some of the long-term productivity trends experienced in agricultural industries. Productivity gains can arise from increasing output, reducing input use or by changing input mix to achieve efficiency gains. As operating environments change and as new technologies become available, farm managers may change their production systems, and hence input mix, to become more efficient.

Overall, broadacre industries have reduced their input use by 0.6 per cent a year on average between 1977-78 and 2007-08. There has been a reduction in the use of land, labour and capital over this period although the use of materials and services has increased (fi gure f, table 3). This suggests that the ability of farm managers to reduce input requirements, and improve productivity, has come partly from additional use of seed, fodder, fuel, fertilisers and services (Nossal et al. 2009).

box 2 Findings from the 2009 workshops on cropping productivity

In July 2009, as part of a project funded by GRDC, ABARE conducted a series of workshops with cropping farmers and agronomists to gather regional information about the drivers of productivity growth. Workshops were held in Toowoomba, Dubbo, Perth, Adelaide, Horsham and Melbourne with grain growers and consultants from the surrounding region. The participants discussed the strong productivity growth during the 1980s and 1990s, the recent slowdown experienced by the cropping industry, and prospects for future productivity gains.

The participants agreed that the uptake of new technologies, expansion of cropping areas, increased farm size and improved varieties were major contributors to productivity gains in the past. Conservation farming was believed to have productivity benefits for some farmers through improved soil quality, water use efficiency and timing flexibility.

Many farms had faced a decline in productivity owing to drought conditions over the past decade. The drought reduced crop yields, increased input costs and reduced the viability of some break crops to the point where rotations were ceased. Drought conditions also reduced overall confidence and investment in new technologies, although many growers were using the opportunity to improve risk management and water use efficiency.

Farmers and consultants also highlighted other factors believed to have led to the productivity slowdown. These included a decline in the gains from new technologies, slower adoption rates for new technologies and knowledge constraints in effectively using technologies. The shift in research priorities away from productivity growth was also a concern.

The main limitations to the adoption of new technologies were human capital and knowledge constraints, with farmers not having the necessary skills, incentives or information necessary for successfully integrating innovations into existing farming systems. Farmers expressed a desire for improved extension services, especially given the greater level of knowledge and diversity of skills required for effective farm management. Regional specific knowledge and farming system options were also desired.

Future productivity gains were predicted to come from improved cropping systems, human capital and risk management skills, as well as new crop varieties. Improved varieties to address climatic variability, reduce frost-susceptibility and increase nutrient efficiency and yields were considered to be a priority as well as break crops that could be viable in dry seasons. Research and development was indicated as the key solution to the slowdown, although a strong focus on extension was considered critical for R&D efforts to be successful.

Productivity growth


Changes in input use amongbroadacre industries

landlabourcapitalmaterial and services

index

2007-08

1997-98

1987-88

1977-78

40

80

120

160

f Changes in farm land use and livestock numbersrelative to 1977-78 levels

total farm areacrop areasheepdairy cattlebeef cattle

% of levelin 1977-78

0.4

0.8

1.2

1.6

2.0

2007-08

1997-98

1987-88

1977-78

g

However, input use changes have differed between industries. Land used for broadacre farming has decreased overall, despite an increase among cropping farms (fi gure g, table 3). Cropping specialists increased land use by 1.4 per cent a year on average between 1977-78 and 2007-08. Expanding cropping area to enable better use of technologies and improve economies of size is a recognised source of productivity gains (Kokic, Davidson and Boero Rodriguez 2006; Zhao, Sheng and Kee 2009).

All broadacre industries have improved their labour productivity over the long term (table 3). The cropping sector achieved the greatest improvements in labour productivity, although because of strong output growth total labour use fell only marginally.

Beef producers increased capital intensity over the past three decades by an average of 1.1 per cent a year, with below average gains in capital productivity. The use of materials and services inputs also increased, by 2.2 per cent a year, which indicates a shift toward more intensive beef production. The increased use of purchased feed, partly in response to poor pasture growth in drought affected areas, is likely to be a main cause of growth in input use.

3 Broadacre industry input use and partial factor productivity, 1977-78 to 2007-08 average annual growth

land labour capital materials and services

input use PFP input use PFP input use PFP input use PFP % % % % % % % %

Total broadacre –0.7 1.5 –1.7 2.6 –1.1 1.9 0.9 0.0Cropping 1.4 1.7 –0.2 3.3 –0.3 3.4 2.6 0.4Mixed crop-livestock –1.3 1.2 –2.6 2.4 –2.6 2.5 –0.2 0.1Beef –0.3 2.1 –0.6 2.4 1.1 0.7 2.2 –0.4Sheep –1.2 –0.2 –2.6 1.2 –2.8 1.4 –1.1 –0.4

Productivity growth


Regional disparitiesDisparity in local environmental and market circumstances between states and regions has implications for productivity performance. Comparing the level of total factor productivity across Australia shows variability in performance between 1977-78 and 2007-08 (fi gure h). In particular, increasing productivity levels have been identified in recent years for the Northern Territory, where cattle enterprises have intensified along with export trade. In contrast, the south-eastern states of South Australia, New South Wales and Victoria are characterised by significantly slower productivity growth compared with a decade ago.

During the 1980s and 1990s, the composition of the South Australian broadacre industry shifted from mostly livestock to mostly cropping, where productivity gains and returns were higher. More recently, drought conditions have seen some shift back to livestock as farms aim to diversify and minimise risk exposure. This trend has been observed across most states.

Interstate comparisons show that long-term broadacre productivity growth has been highest in Western Australia and lowest in Tasmania and Queensland between 1977-78 and 2007-08 (table 4). These trends are a consequence of the different structure of the broadacre industry in each state as well as differences in average farm size, environmental and seasonal conditions and other historical factors.

Productivity estimates at the state and regional level relate to a smaller sample size and therefore are not as precise as national estimates. Nevertheless, the trends observed do offer some additional insights about the performance of broadacre agriculture. All states reduced their overall input use over the long term as a result of improved efficiency and technological progress. With the exception of Tasmania, all states also expanded their output of broadacre products.

Tasmania’s broadacre industry is dominated by livestock production, predominately beef and wool. As with other beef and sheep industries, productivity growth did not pick up until the late 1990s. The state has seen variability in performance since then as a consequence

4 Broadacre productivity growth by state, 1977-78 to 2007-08average annual growth

short-term input growth output growth productivity growth productivity growth 1977-78 to 2007-08 1998-99 to 2007-08 % % % %

WA –0.5 1.8 2.4 0.5SA –0.4 1.4 1.8 –3.6NT (beef ) a –0.2 1.5 1.7 0.8VIC –0.6 0.7 1.3 –1.5NSW –0.7 0.3 1.0 –4.0QLD –0.1 0.6 0.8 –1.5TAS –2.8 –2.1 0.7 –1.1

a NT includes only beef specialists.

Productivity growth


of ongoing drought. Comparatively, the Northern Territory, where the broadacre industry comprises mostly beef production, has achieved strong productivity growth over the past decade with an expansion of the industry in terms of herd size, output and trade.

Long-term productivity growth in Western Australia has exceeded other states, despite a deviation from the upward trend over the past decade (fi gure h). The broadacre industry in Western Australia is dominated by large cropping enterprises which have achieved strong productivity growth by increasing farm size and benefiting from the technological improvements possible with a larger scale. However, Western Australia has not been exempt from the slowdown in cropping productivity experienced more generally, despite drought conditions being more moderate than in eastern states.

Productivity growth has slowed in all states over the past decade (table 4). Western Australia and the Northern Territory were the only states to experience positive growth between 1998-99 and 2007-08. Nevertheless, productivity growth rates in these states were also well below their long-term average.

Dairy productivity growthThe dairy industry expanded output by an average of 4.7 per cent a year between 1988-89 and 2007-08. Unlike the broadacre industry, the majority of the additional output was gained from increasing inputs rather than improvements in productivity. Total input use by dairy farms increased by an average of 3.9 per cent a year, compared to an average 0.8 per cent a year productivity growth (table 5).

In the decade before deregulation (in 2000), the dairy industry did not achieve any substantial productivity gains (fi gure i). Since then, some farms have left the industry while others have increased the size and intensity of operations. While higher milk yields and labour productivity improvements did enable some overall total factor productivity gains during the early 2000s, the effect of these improvements has been less pronounced in recent years and dairy productivity growth has fallen. Comparing the long-term productivity gains between 1988-89 and 2004-05 with those from 1988-89 to 2007-08 shows a fall from 1.3 per cent a year on average to 0.8 per cent a year (fi gure j). The slowdown has been most pronounced in those states affected by low irrigation water allocations. Western Australia has seen an insignificant change in long-term productivity growth in recent years, potentially because of

Broadacre productivity growthby state

South AustraliaWestern AustraliaVictoriaQueenslandTasmaniaNorthern Territory (beef )New South Wales

index

2007-08

1997-98

1987-88

1977-78

50

100

150

200

250

300

h

Productivity growth


lower variability in seasonal conditions and the greater prevalence of mixed dairy and beef cattle operations.

As with the broadacre industry, the slowdown in dairy productivity is likely to be an outcome of a combination of factors. One factor has been poor seasonal conditions and limited water allocations, which have inhibited productivity gains by reducing pasture growth and output, and increasing input use through additional purchases of fodder and feed grains.

In 2007-08, dairy productivity fell to below the level in 1988-89 (fi gure i). Short-term output and input-side factors contributed to the fall with the output index falling to below the input index. Total output declined because milking cow numbers were lower after some vulnerable farms reduced herd size to offset rises in fodder and feed grain prices. Input use increased through relatively higher use of supplementary feeding and a substantial rise in capital investment. Investment in vehicles, plant, machinery and other farm improvements increased by more than two-thirds in 2007-08 as a result of improved cash flow and the strong Australian dollar. Dairy farm cash income in 2007-08 was the highest in the past 20 years (ABARE 2009).

Underlying short-term TFP shifts, the investments made by the dairy industry are likely to improve their ability to materialise productivity gains over the long term. Therefore, the severe fall in short-term productivity reflects rational decision-making and is not likely to be of any long-term detriment to the industry (see box 3 for further discussion). Technologies and management systems continue to improve with ongoing growth in milk yields.

At this stage, expenditure on supplementary feed is likely to remain high because of low allocations of irrigation water, particularly in the

Dairy inputs, outputs and TFP1988-89 to 2007-08

total farm productivitytotal outputtotal inputs

index

50

100

150

200

250

2007-08

2003-04

1999-2000

1995-96

1991-92

1988-89

i

6 Dairy industry input use and partial factor productivity growth

Input use PFP

Land 2.3 3.9Labour 0.8 2.4Capital 2.3 2.4Materials and services 6.4 –1.7

5 Dairy industry productivity growth by state

TFP output input growth growth growth

Australia 0.8 4.7 3.9NSW 1.8 5.2 3.4VIC 0.1 4.2 4.1QLD 1.4 4.2 2.8SA 1.3 7.7 6.4WA 1.7 4.1 2.5TAS 0.8 5.4 4.6

Note: Dairy industry estimates are from 1988-89 to 2007-08.

Productivity growth


eastern states. Using supplementary feed can reduce productivity, particularly if inputs were already committed to growing on-farm pastures. Reduced water has led many farms to switch to a feedlot based system, leaving the pasture system under-utilised.

While the substantial growth in output achieved by the dairy industry over the past two decades has been achieved by increasing inputs, the composition of these inputs has changed. Large improvements have been made to labour productivity (2.4 per cent a year) which appears to have been enabled by high growth in the use of materials and services (averaging 6.4 per cent a year) (table 6). The partial factor productivity estimate for materials and services was negative, at -1.7 per cent a year. One aspect of this trend is the increased use of supplementary feeding, at a faster rate than growth in output. At this stage, growth in materials and services use has not generated substantial productivity improvements overall, with TFP growth averaging just 0.8 per cent a year.

Explaining the slowdown in agricultural productivity growthIn the past, the key to productivity growth in Australian agriculture has been improvements across three areas: the creation of new knowledge and technologies; improved use of available innovations; and structural changes that have led to fewer farms with larger operating area and shifts in production and enterprise mix.

Although there has been a fall in long-term productivity growth, technological progress has not stalled or regressed. Australian agriculture continues to focus on research and innovation with more than 80 per cent of broadacre farms and more than 90 per cent of dairy farms

Changes in dairy industry productivity growthj

TASWASAQLDVICNSWAustralia

0.5

1.0

1.5

2.0

2.5

3.0

1988-89 to 2000-011988-89 to 2004-051988-89 to 2007-08

annual averageTFP growth

(%)

Productivity growth


undertaking some innovative activity between 2006-07 and 2007-08 (Liao and Martin 2009). There continues to be improvements made to the sophisticated set of crop varieties, livestock breeds, soil and water management practices, pasture types and precision agriculture technologies. In addition, farm managers have a greater set of tools for record keeping and decision-making, particularly since the introduction of advanced ICT technologies. Environmental and market pressures have also provided a strong incentive to improve productivity as farm managers seek to overcome climate variability, land degradation, water restrictions and price fluctuations to maintain viability and competitiveness.

Statistical analysis has confirmed a break in the upward trend in broadacre productivity growth during the mid-1990s. It is well recognised that a decade of poor seasonal conditions has caused volatility in broadacre productivity estimates and affected the ability of farm managers to materialise productivity gains from the innovative activities they have undertaken. The effects of climate variability are minimised by considering productivity growth over a long time period. However, given the persistent drought conditions over much of the past decade, with eight consecutive years of below average rainfall in some regions, a lower long-term growth pattern has been observed. More detailed analysis has found that the slowdown in productivity growth cannot be explained by drought conditions alone.

Another factor used to explain much of the productivity slowdown has been the long-term slowdown in public investment in agricultural research. Public expenditure on R&D in Australian agriculture increased from $140 million in 1953 to $829 million in 2007 (in 2008 dollars). Between 1953 and 1980, the growth in research investment averaged 6.5 per cent a

box 3 Productivity and farm incomes/profitability

Productivity and profitability are related concepts. While profitability is typically the objective of farm managers, producers most commonly influence their profits through changes in productivity.

Profitability is determined by two factors: productivity and the terms of trade, which is the ratio of prices received to prices paid. As agricultural output and input prices are determined largely on global markets, farm managers have a negligible influence over their terms of trade. Therefore, it is only productivity that farm managers can improve through innovation in technologies and management systems.

In seeking to maximise profits, farm managers respond to changes in the production environment in a variety of ways including changing their input or output mix, using different technologies or practices or changing the size of their operations (Jackson et al. 2010). The success of the changes in increasing profitability will depend on their effect on productivity through increasing output (or output quality) or reducing input costs.

It should be noted that declining productivity in the short term is not always bad for profitability over the long term, particularly if there is a change in the terms of trade. For example, if input prices fall, farm managers may choose to invest in new technology. Large capital investments increase input use, but may take time to influence output. Consequently, while the investment is likely to add new capacity and increase potential for future productivity gains, it may adversely affect short-term productivity growth.

Productivity growth


year, compared with 0.6 per cent a year since 1980. As a share of agricultural gross value of production (GVP), investment peaked at 5 per cent in the late 1970s, but has progressively fallen to slightly more than 3 per cent in 2007 (fi gure k). In the statistical analysis by Sheng et al. (2010), slowing agricultural productivity growth could only be explained when the effects of both water stress and the reduction in public R&D were jointly considered.

Investment in R&D has a lagged effect on productivity, with the effects often continuing for more than 35 years (Alston et al. 2009; Mullen 2007). Hence, the long-term slowing of investment growth could continue to affect productivity gains for many decades. As well as a slowdown in R&D investment growth, agricultural R&D

investment in Australia and internationally has recently been spread across a wider variety of areas (for example food safety, environmental management, biosecurity and climate change) than has been the case historically. While research in these areas has complementary benefits for agricultural productivity growth, spreading resources more thinly could reduce the effect of research outputs on productivity growth.

While dry seasons and R&D are the two major drivers behind the changing trend in broadacre productivity growth, other factors could also play a contributing role. For example, it has been argued that the uptake of new technologies and farming systems has slowed compared with previous decades and that the largest gains from innovating have already been made. Innovation adoption is affected by a number of factors including awareness, accessibility, suitability and adaptability. Ageing farm populations could also affect innovation uptake, with older farmers often less willing to invest in new technologies or skills (Jackson 2010).

Perhaps associated with the ageing farm population, structural adjustment on farms has also begun to slow. Compared with previous decades, the 2000s saw fewer farm sales and hence fewer farm aggregations. Increasing farm size through the amalgamation of farms is a commonly recognised productivity driver from the 1990s. This slowing structural change has also seen fewer farmers leaving the land, despite a run of poor seasons and many farm managers acknowledging that they do not have succession plans in place (Jackson 2010).

On-farm adjustments have also been lagging because of reduced confidence among farm managers, with many becoming more risk averse. Coupled with the financial effects of drought, this has been a contributor to the reduced investment in new technologies, fewer adjustments in farm practices and a hesitation to change production mix in response to the changing conditions. In addition, many farms have stopped their typical rotation systems because of the riskiness associated with double cropping.

Public agricultural research investmentand intensity, 1953 to 2007

public R&D expenditure (left axis)

research intensity (right axis)

2008A$ %

200

400

600

800

1000

2007199819891980197119621953

2

4

6

8

10

k

Source: Sheng, Mullen and Zhao 2010

Productivity growth


Opportunities for lifting productivity growthThe solution to lifting productivity growth is likely to lie in targeting the well-known drivers that accelerated farm productivity in the past: the development of new innovations, the adoption of existing innovations and overall structural change. The productivity growth slowdown has made it apparent that adjustments in these areas are not happening fast enough. Further research into the effect of each of these productivity drivers will therefore play a constructive role in progressing productivity growth.

The potential for advancing the development and adoption of agricultural innovations is likely to be high. There have been continuous advances in technologies and in identifying superior strategies and farming systems. Over the long term, these advances have made the greatest contribution to productivity growth and therefore productivity growth is commonly interpreted as a measure of technological progress. Such innovation has enabled Australian agriculture to become more competitive and has been a key driver of economic growth.

Additional investment in R&D and improved targeting of R&D investments (toward productivity gains alongside other objectives) will therefore be a major contributor to long-term productivity growth. A clearer definition of objectives and better coordination and alignment of rural R&D toward these objectives is necessary. Achieving an appropriate balance between public and private research expenditure will also be important given the cross-cutting issues and high public good and industry benefits (Mallawaarachchi et al. 2009).

Nevertheless, innovations do not affect productivity until they are integrated into farm operations and used to generate net benefits. In the short to medium term, productivity gains are likely to come about by making better use of existing opportunities. Quality information and extension services that inform farm managers about technologies and production systems which can be easily integrated into existing productivity systems will be important in facilitating innovation. Additional research is also needed to identify innovations likely to have the greatest benefit for productivity and profitability. Identifying such innovations is not simple given the regional and farm level variability in production methods, farm environments and managerial capabilities. More regionally specific knowledge is critical.

Potentially, the most important aspect of increasing productivity will be in improving the ability of farm managers to adjust farming systems in response to changing conditions and to make the best use of more efficient technologies as they become available. There remain opportunities for Australian governments to facilitate improvements in this area. Some rural policy settings impede structural adjustment, with adverse effects on the capacity for innovation among top performing farms. For example, the drought policy settings currently under review are an area where reform could improve efficiency and reduce impediments to change.

Productivity growth


ReferencesABARE 2009, Australian commodity statistics 2009, Canberra.

ABARE 2008, Australian Dairy 08.1, Canberra.

Jackson, T 2010, Harvesting productivity: ABARE-GRDC productivity workshops, client report prepared by ABARE for the Grains Research and Development Corporation, Canberra, March.

Kokic, P, Davidson, A and Boero Rodriguez, V 2006, Australia’s grains industry: factors influencing productivity growth, ABARE research report 06.22 prepared for the Grains Research and Development Corporation, Canberra, November.

Liao, B and Martin, P 2009, Farm innovation in the broadacre and dairy industries, 2006-07 to 2007-08, ABARE research report 09.16, Canberra, November.

Mallawaarachchi, T, Walcott, J, Hughes, N, Gooday, P, Georgeson, L and Foster, A 2009, Promoting productivity in the agriculture and food sector value chain: issues for R&D investment, ABARE and BRS report for the Rural R&D Council, December.

Mullen, JD 2007, ‘Productivity growth and the returns from public investment in R&D in Australian broadacre agriculture’, Australian Journal of Agricultural and Resource Economics 51, 359-384.

Nossal, K and Gooday, P 2009, Raising productivity growth in Australian agriculture, ABARE research report, Issues Insights 09.7, Canberra.

Nossal, K, Zhao, S, Sheng, Y and Gunasekera, D 2009, ‘Productivity movements in Australian agriculture’, Australian commodities, March quarter 09.1, pp. 206-216.

Rowe, JB and Atkins, KD 2004, Strategies for lifting productivity in the sheep industry, paper presented at the ABARE National Outlook Conference, Canberra.

Sheng, Y, Mullen, JD and Zhao, S 2010, Has growth in productivity in Australian broadacre agriculture slowed?, paper presented to the Australian Agricultural and Resource Economics Society Conference, Adelaide, 10-12 February.

Zhao, S, Sheng, Y, Kee, HJ 2009, Determinants of total factor productivity in the Australian grains industry, paper presented at the 2009 Australian Conference of Economists, Adelaide, 28-30 September.

Productivity growth

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