Forecasts

FARMER CONFIDENCE FORECAST

29 March 2010

Results at a Glance:

• Australian rural confidence has recovered from last quarter’s fall and now sits at its highest level since June 2008.
• Favourable seasonal conditions across the major eastern agricultural regions, coupled with relatively high commodity prices in some sectors, have driven this improvement.
• Confidence improved in all states, except South Australia, and among all farm types. Australian.

Australian rural confidence has rebounded strongly as welcome summer rainfall and favourable commodity prices in a number of sectors have fuelled farmer optimism, according to the latest quarterly Rabobank Rural Confidence Survey.

Farmer confidence is now at its highest level since June 2008.

The rural confidence index is back in positive territory, with more farmers expecting conditions to improve over the next 12 months than those expecting conditions to deteriorate.

The latest survey – taken last month – found 30 per cent of farmers expected conditions to improve in the coming year, up from 23 per cent in the previous quarter. The number of farmers expecting conditions to worsen decreased to 19 per cent, down from 37 per cent last survey.

A comprehensive monitor of outlook and sentiment in Australian rural industries, the Rabobank Rural Confidence Survey questions approximately 1200 farmers across a wide range of commodities and geographical areas throughout Australia on a quarterly basis.

Rabobank general manager Rural Australia Peter Knoblanche said the survey had seen a general lift in farmer confidence as a result of consistent summer rainfall across much of the country, with positive sentiment strongest among those sectors also enjoying relatively high commodity prices, such as sheep, dairy and cotton.

"Favourable summer rainfall in many parts of the country has provided encouraging signs for farmers that the coming season could be a good one," he said. "Early season rain and more recent falls through February and March have provided relief for stock and pasture in many areas and very good summer crops in several key regions. The strong Australian dollar remains a frustration for many exporters however good prices for sheep, dairy, cotton and, still to some extent, sugar will buoy confidence in these sectors."

Mr Knoblanche cautioned that the strong rebound in confidence seen this quarter should not be mistaken as a sign that Australia had fully recovered from drought.

“Farmers in some areas, particularly SA, WA, northern regions of Victoria and southern NSW are still relying on a good autumn break with significant follow-up rain to come, which is going to be essential for them to have a reasonable season ahead and also to impact on confidence levels in the longer term,” he said.

Mr Knoblanche noted that much of the recent rain in the south east of the country had effectively fallen between seasons and so had limited benefit for cash flows.

The Rabobank Rural Confidence Survey showed, not surprisingly, that an expectation of more favourable seasonal conditions was the main driver behind increased farmer confidence this survey. Of those primary producers who expected conditions to improve over the next 12 months, 41 per cent nominated seasonal conditions as a major contributing factor.

Increasing commodity prices were also top of mind, cited by 36 per cent of respondents.

Conversely, commodity prices were also cited as a concern though among those farmers who felt conditions were going to worsen – primarily grain and mixed farm operators impacted by lower grain prices.

Rabobank’s Food & Agribusiness Research and Advisory unit says a sharp recovery in world grain stocks will continue to weigh on prices and this is unlikely to change over the course of this year. Wheat has been most affected, while prices for pulses are holding up well and cotton has lifted strongly.

The survey found that rising input costs were an additional concern for those farmers who indicated a reduction in confidence. Of those primary producers who had expected conditions to decline over the next 12 months, 29 per cent nominated rising input costs as a major contributing factor, up from 14 per cent the previous quarter.

Mr Knoblanche said that while livestock producers had benefited from a reduction in feed grain prices, manufactured farm inputs – such fertiliser and agrichemicals – had experienced higher prices in the early part of 2010.

“This resulted from tighter global supply conditions due to inventory pipelines being re-stocked in a more concentrated time period than usual,” he said. “More recently though, these pressures have eased as the price outlook for the large input users, such as the grain sectors, has deteriorated. As a result, manufactured farm input prices are expected to be relatively flat over the next few months.”

Farm business performance, income and investment

In terms of farmers’ own operations, the Rabobank survey found 36 per cent of respondents expected to see improved performance in their business over the next 12 months, compared to 31 per cent last quarter. This is significantly higher than farmers’ expectations of the overall agricultural economy.

Consistent with the increase in business confidence, farmers’ income expectations have also increased. Overall, 32 per cent of respondents expected to have higher incomes over the next 12 months, compared with 28 per cent with that expectation in the previous survey. The number of producers expecting lower gross farm incomes decreased to 16 per cent, compared to 33 per cent last quarter.

The improvement in income expectations comes after a mixed year for gross farm incomes in 2009. A total of 31 per cent of Australian producers reported higher gross farm incomes in 2009 compared to the previous year, with 41 per cent reporting lower incomes.

The survey showed little change in farmers’ investment intentions despite the rise in headline confidence. A total of 88 per cent intended to maintain or increase the level of investment in their business, the same percentage recorded last quarter. Sugar producers continue to be the most likely to increase their investment in their farm businesses, with just four per cent of cane farmers expecting to reduce their investment over the next 12 months.

States

With the exception of South Australia, the Rabobank survey found rural confidence was stronger in all states, with the largest increases observed in New South Wales and Queensland.

Mr Knoblanche said the situation was similar in both these states, with sentiment driven by solid summer rainfall and a positive outlook in many commodities.

Queensland registered the biggest increase in confidence of all the states.

“The season in Queensland would be considered above average in most regions with a good soil profile now being established for most of the winter cropping areas. This will enable a decent wheat planting, while many southern cotton producers are likely to stack their water supplies to shore up prospects for next summer’s planting,” he said.

Mr Knoblanche said the recent flooding, which had damaged crops and farm operations in some regions, had occurred after the survey had been taken, so any impact on Queensland farmer confidence would not be reflected in the results. “Cyclone Ului this month has also impacted on some areas in the Mackay/Prosperine region, though its effect on sugar cane planting is yet to be fully established,” he said.

In South Australia, the Rabobank survey showed a slight deterioration of sentiment, with confidence now at a negative level (with more producers expecting conditions to worsen than those expecting an improvement).

Mr Knoblanche said the weaker sentiment in South Australia was being driven principally by concerns about lower grain prices, along with dry weather in many parts of the state.

“Low wheat prices are not helping the situation and are certainly impacting producers in South Australia, as well as in Western Australia,” he said.

“February, in particular, was a hot and dry month in South Australia although the northern pastoral areas are in good shape with some pastoralists rating it the best season in 20 years.”

In all states, confidence has been eroded by the rising Australian dollar and the effect it is having on farm gate returns, Mr Knoblanche said.

“Had it not been for the strong dollar, and its impact on exporters’ term of trade, I believe we would have seen sentiment hit levels not seen for many years. Conditions especially are favourable in Tasmania and many western regions of the eastern states that had been hit hard by drought for several years,” he said.

Sectors

Farmer sentiment was stronger across all agricultural sectors, with marked increases observed among dairy and sugar producers.

Over the past two years, sugar has moved from one of the most pessimistic sectors to the most optimistic. However, Mr Knoblanche said, more recent softening of global sugar prices may be reflected in the next survey.

“Since the start of February we have witnessed a substantial correction of the sugar price, although world prices do still remain above long-term averages. Many producers have opted to lock in future returns by entering into six to nine month forward contracts and I think this has enabled many to manage price risk and so shored up confidence. There is some speculation that India and Brazil may look to increase supply, however this is always a tough one to predict and, given other fundamentals, the outlook appears positive,” he said.

The improvement in sentiment amongst dairy producers has been driven by several factors.

Mr Knoblanche said seasonal conditions had been favourable across key dairy regions all along the eastern seaboard.

“This has pushed up water levels in irrigation storages, setting up much of the industry for an autumn break. Additionally, price gains in export markets have fed through to milk price increases for local suppliers whilst feed costs have continued to hold well below the levels seen in previous seasons,” he said.

Confidence among sheep and beef producers has improved. Tight supply has positively impacted prices for lamb and mutton with many producers looking to re-stock to take advantage of improved pastures and availability of feed. The situation is similar within the beef industry, with tight supply of cattle offsetting continued subdued demand in Japan and concerns about the dollar.

Grain producers reported a slight increase in confidence in this survey period, however the weak price outlook has kept sentiment at relatively low levels.

Rural Confidence Index*

The most robust study of its type in Australia, the Rabobank Rural Confidence Survey has been conducted since 2000 by an independent research organisation interviewing an average of 1200 farmers throughout the country each quarter. The next results are scheduled for release in June 2010.