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Agricultural trade outlookHuw McKaySenior international economist
November 2007
DISCLAIMERCropLife Australia’s 2007 Perspective Conference aimed to provide general information on issues relevant to the agricultural chemical industry. CropLife Australia took all care to ensure that the views conveyed during the course of the conference were accurate and up to date. However, CropLife Australia makes no representations, warranties or assurances (express or implied) as to the accuracy, currency or completeness of such information. CropLife Australia shall not be liable for any damage or injury that may arise from the use or reliance upon information provided at the Conference. We would encourage you to make your own enquiries and take independent advice tailored to your specific circumstances prior to making any decisions.
The agenda
• World growth outlook: emerging world will be resilient
• Macro fundamentals: agriculture demand and supply• China: net opportunity from diet mega-trends• Why FTAs might actually achieve something• Rural commodity prices and the Australian dollar
Farm commodity prices hitting highs
60
80
100
120
140
160
180
Sep-84 Sep-88 Sep-92 Sep-96 Sep-00 Sep-04
index
60
80
100
120
140
160
180
index
AUDUSD
Sources: Bloomberg, ABS, USDA, Westpac Economics
World growth far more upbeat
0
1
2
3
4
5
6
1982 1986 1990 1994 1998 2002 2006
%
0
1
2
3
4
5
6
forecasts in early 2006
actual
Sources: Westpac EconomicsWestpac forecasts
The IMF world growth forecast: July 2007
4.2
4.4
4.6
4.8
5.0
5.2
5.4
Apr 2007forecast
US China Otheradvanced
Otheremerging
Jul 2007forecast
ppt
4.9%
= 5.2%
– 0.04+0.19
Sources: IMF, Westpac EconomicsCalendar year 2007
+0.09
+0.06
The IMF world growth forecast: Oct 2007
4.2
4.4
4.6
4.8
5.0
5.2
5.4
Jul 2007forecast
US China Otheradvanced
Otheremerging
Oct 2007forecast
ppt
5.2% = 4.75%
– 0.18–0.08
Sources: IMF, Westpac Economics.Calendar year 2008.
– 0.14 – 0.05
China: de-coupling from what?
6
8
10
12
14
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
%yr
0
1
2
3
4
5
6%yr
China (lhs)OECD (rhs)US (rhs)
Sources: OECD, CEIC
forecast
Caterpillar: year to 2007Q3 sales revenues
-12
43
23
35
-20
-10
0
10
20
30
40
50
North America EAME Latin America Asia-Pacific
%
Sources: Westpac, Caterpillar
The world scaled by land area
Source: Worldmapper
The world scaled by biocapacity (soil fertility)
Source: Worldmapper
The world scaled by water resources
Source: Worldmapper
The world scaled by water use
Source: Worldmapper
The world scaled by meat production
Source: Worldmapper
Cereal exports
Source: Worldmapper
Urbanisation in Asia
0
20
40
60
80
100
China India Indonesia0
100
200
300
400
5002010 2015 20202025 2030
mns of internal migrants*
Sources: Westpac, UN
mns of internal migrants^
*five years ended
t̂otal 2000 to 2030
420
320
95
China’s overall diet is cereal & veg heavy
0
50
100
150
200
250
300
350
China Australia USA
kg per capita
CerealsStarchy rootsFruitVegetablesMeatDairy
Sources: ABARE, Westpac Economics
Chinese urban diets more balanced
0
50
100
150
200
250
300
350
Rural Urban
kg per capita
CerealsStarchy rootsFruitVegetablesMeatDairy
Sources: ABARE, Westpac Economics
Basic resources: deep fundamentals
Global normBrazilChinaIndiaIndonesiaJapanRussiaUnited States
arable land per capita
Source: Westpac, UN, CIA, OECD, World Bank. Indices: global norm = 100.
water resources per capita
rainfallper capita
China is labour rich but land poor
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Argenti
naAus
tralia
Canad
a
Brazil
EU
Russia
China
India
USA
Africa
billion
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4billion
population
arable land (ha)
Sources: USDA, Westpac Economics
China is also facing deteriorating land and water quality and availability.
Chinese trade balances by sector
-425
-325
-225
-125
-25
75
175
275
Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06
USDmn
-425
-325
-225
-125
-25
75
175
275USDmn
cerealsanimal feedstuffsmeat
Sources: CEIC, Westpac Economics
exports
imports
FTAs: three balls in the air
• We have a unique opportunity to play Japan against China, China against India, India against Japan.
• Reciprocal interests clearly evident.• Private ownership of resources a stumbling block.• Asian SWFs might go the side route.• Japanese political change not favourable.• Indian democracy too fragmented.• Chinese leadership focussed and pragmatic.
Farm commodity prices hitting highs
60
80
100
120
140
160
180
Sep-84 Sep-88 Sep-92 Sep-96 Sep-00 Sep-04
index
60
80
100
120
140
160
180
index
AUDUSD
Sources: Bloomberg, ABS, USDA, Westpac Economics
Long run CBOT wheat prices
150
250
350
450
550
650
750
850
Jun-83 Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07
US¢/bu
150
250
350
450
550
650
750
850US¢/bu
CBOT wheat futures
Sources: Factset, Bloomberg Westpac Economics,
May 96
Oct 02Apr 04
Dec 06
Feb 92
Feb 94
Sep 94 Apr 97
Oct 97 Dec 89
Feb 89
Dec 85 Aug 84
Aug 83
The Australian dollar over the long run
0.5
1.0
1.5
2.0
2.5
1923 1933 1943 1953 1963 1973 1983 1993 2003
USD
50
150
250
350index
AUD/USD (lhs)Westpac metals index, real (rhs)
Sources: RBA, Westpac Economics
Australian dollar: actual versus fitted
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Jan-91 Jan-95 Jan-99 Jan-03 Jan-07
USD
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10USD
fair value band (Oct point estimate 99¢)
AUD/USD actual
Source: Westpac Economics
The Australian dollar: USD trend is crucial
70
80
90
100
110
120
130
Jan-93 Jan-97 Jan-01 Jan-05
USDindex
0.45
0.55
0.65
0.75
0.85
0.95USD majors index (lhs)AUD/USD (rhs)
Source: RBA
Prices will hold a good level
%yr %yr %yr %yrannual averages 2005 2006 2007 2008 2005 2006 2007 2008all commodities 150 188 211 235 33.7 25.7 12.3 11.0crude oil (USD/bbl) NYMEX 57 67 70 81 39.6 17.6 4.0 14.9gold (USD/oz) 448 610 691 770 9.0 36.0 13.4 11.4rural commodities 72 85 109 108 -3.6 18.4 28.0 -0.3wool AUD¢/kg 766 814 956 866 -9.3 6.3 17.4 -9.4wheat USD¢/bu 330 415 616 613 -6.9 25.9 48.5 -0.6sugar USD¢/lb 10 15 10 10 32.4 47.0 -32.1 -0.3cotton USD¢/lb 52 54 59 63 -7.7 4.7 9.0 5.8
Disclaimer
Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac’s financial services guide can be obtained by calling 132 032, visiting www.westpac.com.auor visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is regulated for the conduct of investment business in the United Kingdom by the Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to [email protected] or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2007 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.
US corn used for ethanol production
0
20
40
60
80
1995-96 1998-99 2001-02 2004-05 2007-08
Mt
0
20
40
60
80Mt
Mt used
Sources: ABARE, Westpac Economics
Estimated cost of fuel production (2005)
equiv. crude pricefeedstock US$/bbl*
USA corn 42-56Canada corn 53EU sugar beet 105Brazil sugar cane 16-38China corn & wheat 65-97India sugar cane 41-37Source: IEA, ABARE*The estimate takes into account the conversion of crude oil into petroleum fuels, refining costs and the different energy content between biofuels and petroleum fuels.
Ethanol has lost its spread to gasoline
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Sep-05 Jan-06 May-06 Oct-06 Feb-07 Jul-07
US$/gal
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5US$/gal
CBOT ethanol
NYMEX gasoline
Source: Factset, Westpac Economics
Coarse grains face upside demand
70
90
110
130
150
170
190
210
1980-81 1986-87 1992-93 1998-99 2004-05 2010-11
US$/tonne
0
5
10
15
20
25
30
35
40% consumpt.
stocks (rhs)stocks fcs (rhs)world price (lhs)forecasts (lhs)
ABARE forecasts
Sources: ABARE, Westpac
Economics