Australian Commodities March Quarter 07.1

australian commodities march quarter 07.1

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contents

economic overview 5 outlook for Australia’s commodity sector 19 australian agriculture – key issues for the future 22 jammie penm and phillip glyde commodity outlook to 2011-12 grains – wheat, coarse grains, oilseeds 27 sugar 42 wine 46 natural fi bres – wool, cotton 52 meat – beef and veal, sheep meat, pigs, poultry 62 dairy 73 energy – oil and gas, thermal coal, uranium 81 metals – steel and steel making raw materials, metallurgical coal, gold, aluminium and alumina, nickel, copper, zinc 111 abare papers presented at outlook 2007 global trade liberalisation – opportunities for Australian farmers 157 roneel nair, q.t. tran, caroline gunning-trant, roslyn wood and don gunasekera adapting to climate change – issues and challenges in the agriculture sector 167 edwina heyhoe, yeon kim, phil kokic, caroline levantis, helal ahammad, karen schneider, steve crimp, rohan nelson, neil fl ood and john carter farm fi nancial performance – Australian farm income, debt and investment, 2004-05 to 2006-07 179 peter martin, colin mues, paul phillips, walter shafron, thuy van mellor, phil kokic, rohan nelson and rhonda treadwell groundwater management - issues affecting the effi cient allocation of groundwater 201 tim goesch, simon hone and peter gooday

outlook for biofuels in Australia – the challenges ahead 212 graham love and clara cuevas-cubria

australian food industry – performance and competitiveness 221 christopher short, courtney chester, peter berry and lisa elliston statisical tables 227 abare management 264

australian commodities > vol. 14 no. 1 > march quarter 2007 3 R

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> jammiecontact penm > +61 > +61 2 6272 2 6272 ???? 2030 > [email protected]> [email protected] economic overview prospects for world economic growth, 2007 to 2012

» World economic growth is assumed to be 4.3 per cent in 2007, compared with an estimated 4.9 per cent in 2006. Over the medium term (to 2012), world economic growth is assumed to ease gradually to around 3.9 per cent a year. » Economic growth in China is expected to remain strong over the short to medium term. Continued growth in commodity demand in China is expected to provide support for commodity prices on world markets. » Under the assumption that the drought will break in the fi rst half of 2007, economic growth in Australia is assumed to increase from 2.5 per cent in 2006-07 to 3.75 per cent in 2007-08. Toward 2011-12, Australian economic growth is assumed to average around 3.0 per cent a year. world economic outlook relatively strong world economic growth in 2006 The global economy experienced robust growth in 2006, despite concerns about higher world oil prices in the fi rst half of the year. In the world’s largest economy, the United States, economic growth was particularly strong in early 2006, before an easing in the latter part of the year. In China, strong economic activity continued, with growth of 10.7 per cent recorded for 2006 as a whole. This impressive growth was achieved despite a number of measures taken by China’s government to slow economic growth, including two interest rate rises and four increases in bank reserve ratios during 2006. In Japan, the economic expansion continued, with gross domestic product, in real terms, rising by an estimated 2.2 per cent in 2006. In western Europe, a number of regional economies, including Germany and France, recorded higher economic growth in 2006. Despite the economic improvements, considerable uncertainty remains about the economic outlook for Japan and western Europe, as the performance of these economies could be adversely affected by continued structural weakness and relatively high unemployment. In other parts of the world, economic growth remained strong in east and south east Asia, Latin America and the Middle East. While higher oil prices pushed up infl ationary pressures in many south east Asian countries in the early part of 2006, a signifi cant rise in world prices for minerals and energy commodities provided support for economic activity in Latin America, cental Asia and the Middle East. On average, world economic growth is estimated to have been around 4.9 per cent in 2006, compared with 4.9 per cent in 2005 and 5.3 per cent in 2004. australian commodities > vol. 14 no. 1 > march quarter 2007 5 economic overview

strong world growth supporting commodity prices In response to continued strong global economic growth, and hence higher demand for commodities, prices of many minerals and energy commodities on world markets have risen markedly over the past twelve months. In the year ended January 2007, for example, spot prices (denominated in US dollars) for metals on the London Metal Exchange (LME) rose by around 20–30 per cent for copper, lead and aluminium, 80 per cent for zinc and more than doubled for nickel. Partly refl ecting strong demand growth in China, negotiated contract prices for bulk commodities, including iron ore, metallurgical coal and thermal coal, either rose or remained relatively high in 2006. Prospects for commodity prices are crucial to commodity producers and exporters. Currently, a major issue facing the commodity sector is whether strong growth in world commodity demand will continue, leading to a continued increase in world prices in 2007 and beyond. Specifi cally, an important issue in the current commodity outlook is whether robust economic growth will continue in China. The emergence of China as a major world economy has attracted signifi cant attention in recent years. Nowhere has China’s growing economic infl uence been felt more signifi cantly than in world commodity markets. A substantial increase in China’s demand for base metals, minerals and fuels has contributed to the recent strong price rises on world markets for these commodities. world economic growth to ease in 2007 World economic growth is expected to ease in 2007. Economic indicators released recently have provided support for this assessment. In the United States, the pace of economic expansion in 2007 is expected to be lower than in 2006, as weaker activity in the housing market slows residential investment and growth in consumer spending. Nevertheless, business investment is likely to remain strong, especially in light of a recent signifi cant decline in world oil prices, strong corporate profi ts and favourable long term interest rates. In China, economic growth is expected to remain relatively strong in 2007. China’s exceptional economic performance has generated concerns that the economy may be ‘overheating’. In response, China’s government is likely to continue in its efforts to rebal- ance the economy, as it attempts to make growth less dependent on exports and fi xed asset investment, while introducing measures to boost consumer spending. Despite strong economic growth, infl ationary pressures remain low in China, with the consumer price index rising year world economic growth on year by less than 2 per cent in late 2006. While signs of economic improvements are emerging in Japan and western Europe, economic 5 growth in these countries/regions is expected to remain modest in the next few years. In the principal 4 economies of east and south east Asia, including Chinese Taipei, Thailand, Malaysia and Indonesia, 3 economic performance is assumed to remain relatively robust in 2007. Continued strong economic growth in 2 China is expected to provide support for economic performance in this region. In early January 2007, 1 China signed a free trade agreement, covering sixty services industries, with the Association of South East % Asian Nations (ASEAN). Trade between ASEAN 19881992 1996 20002004 2008 2012 and China was around US$160 billion in 2006.

6 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview

In other parts of the world, economic growth is expected to remain strong in Latin America and the Middle East. The short term outlook for the Russian Federation is positive, with an expected increase in foreign investment induced by favourable commodity prices. In the Ukraine, economic growth could be adversely affected in the short term by a possible wors- ening in the terms of trade — mainly reﬂ ecting the repricing of gas imports from the Russian Federation and weaker international prices for the Ukraine’s steel exports. medium term economic growth to be marginally lower In preparing ABARE’s projections, world economic growth is assumed to be 4.3 per cent in 2007, before easing to 4.2 per cent in 2008. Over the medium term (to 2012), world economic growth is assumed to ease marginally to an annual rate of 3.9 per cent. The assumed average growth in the world economy over the medium term is similar to the annual average achieved over the ﬁ rst half of the current decade. key macroeconomic assumptions

Unit 2005 2006 2007 a 2008 a 2009 a 2010 a 2011 a 2012 a

Economic growth b OECD % 2.7 2.9 2.3 2.4 2.5 2.4 2.3 2.3 United States % 3.5 3.3 2.5 2.8 3.0 3.0 3.0 3.0 Japan % 1.9 2.2 2.0 2.0 1.8 1.8 1.5 1.5 Western Europe % 1.6 2.5 2.0 1.9 1.9 1.7 1.7 1.7 Germany % 0.9 2.6 1.6 1.5 1.5 1.2 1.2 1.2 France % 1.4 2.0 2.0 1.8 1.8 1.6 1.6 1.6 United Kingdom % 1.8 2.6 2.4 2.5 2.5 2.5 2.5 2.5 Italy % 0.1 1.8 1.2 1.2 1.2 1.2 1.2 1.2 Korea, Rep. of % 4.0 5.0 4.3 4.5 4.5 4.5 4.0 4.0 New Zealand % 2.1 1.7 2.1 2.8 2.5 2.5 2.5 2.5 Developing countries % 6.9 7.2 6.7 6.4 6.0 5.9 5.7 5.7 Non-OECD Asia % 7.9 8.3 7.5 7.2 6.8 6.7 6.5 6.5 South East Asia c % 5.3 5.7 5.3 5.3 4.9 4.7 4.7 4.7 China d % 10.2 10.7 9.5 9.0 8.5 8.5 8.0 8.0 Chinese Taipei % 4.0 4.1 4.0 4.0 4.0 3.8 3.8 3.8 India % 8.4 8.4 7.8 7.5 7.0 7.0 7.0 7.0 Latin America % 4.2 4.8 4.3 4.0 3.5 3.5 3.5 3.5 Middle East % 5.9 5.8 5.8 5.0 4.5 4.5 4.5 4.5 Russian Federation % 6.4 6.7 6.5 5.5 5.5 5.0 5.0 5.0 Ukraine % 6.0 6.0 5.8 5.0 4.5 4.0 4.0 4.0 Eastern Europe % 5.3 5.3 5.0 4.5 4.0 4.0 4.0 4.0 World e % 4.9 4.9 4.3 4.2 4.1 4.0 3.9 3.9 Industrial production b OECD % 2.4 3.0 2.4 2.5 2.4 2.4 2.4 2.4 Inflation b United States % 3.4 3.2 2.3 2.3 2.3 2.3 2.3 2.3 Interest rates US prime rate g % pa 6.2 8.0 8.3 8.3 7.8 7.8 7.8 7.8 US exchange rates h Yen/US$ Yen 110 116 121 120 120 120 120 120 Euro/US$ Euro 0.80 0.80 0.78 0.79 0.80 0.80 0.80 0.80

a ABARE assumption. b Change from previous period. c Indonesia, Malaysia, the Philippines, Singapore, and Thailand. d Excludes Hong Kong. e

Weighted using 2006 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. australian commodities > vol. 14 no. 1 > march quarter 2007 7 economic overview

important issues for world commodity markets While the most likely scenario for world economic growth in the next few years continues to be relatively robust growth, there are a number of risk factors that could signifi cantly affect world economic developments over the short to longer term. In addition to the risks associated with an easing of economic growth in the United States — which would especially affect the economies in Asia and Latin America — the global economy confronts a number of other issues with signifi cant implications for the economic outlook. These include the risks stemming from global trade imbalance and the prospects for economic growth in China. China’s importance in world commodity markets has increased signifi cantly over the past decade. For many commodities, China’s import demand has risen signifi cantly, leading to a marked increase in its share of world trade. With rapid industrialisation and relocation of manufacturing to China from developed countries, the importance of China in world commodity markets can be expected to continue to increase in the foreseeable future. Importantly, per person incomes have been rising rapidly in China, leading to a signifi - cant increase in consumer demand. According to the Chinese Academy of Social Science (CASS), China’s middle income class grew from around 15 per cent of the population in 1999 to around 19 per cent in 2003. This income class In China can be defi ned as well educated professionals with annual incomes of between 25 000 and 30 000 yuan (or US$3125–3750). CASS projects that China’s middle income class will increase to around 40 per cent of the society (or around 587 million people) by 2020. Such an increase in China’s middle income class, if it is achieved, will lead to a signifi cant increase in consumer demand in China. Continued strong economic growth, industrialisation and urbanisation in China are putting pressure on domestic resources. This has the potential to make China a strategi- cally important player in global markets and to provide increased export opportunities for Australia’s commodity industries. More discussions on the short to medium term effects of China’s economic development on Australian commodity exports are presented in the individual notes in this issue.

economic prospects for major economies

weaker US economic growth in the short term Following strong economic growth of around 4 per cent in the fi rst half of 2006, economic activity in the United States slowed to an annualised rate of close to 3 per cent in second half of 2006. In year average terms, the US economy is estimated to have grown by around 3.3 per cent in 2006, compared with growth of 3.5 per cent in 2005. Partial indicators released in early 2007 have provided signals of weaker growth in the short term. For example, industrial production remained largely unchanged between July and November 2006 in seasonally adjusted terms. This compares with a rise of around 2.5 per cent during the fi rst half of 2006. Despite signifi cant price competition, retail sales in the November–December holiday season grew only modestly, well below commenta- tors’ expectations. In preparing this set of commodity projections, economic growth in the United States is assumed to ease to 2.5 per cent in 2007, before increasing to 2.8 per cent in 2008. A major issue in the US economic outlook is whether infl ationary pressures will increase signifi cantly as a result of tightening capacity constraints. While the rate of core infl ation (infl ation excluding volatile items such as food and energy) moderated in late 2006,

8 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview growth in wages and salaries has trended upwards since early 2006. Despite the assumed easing of economic growth in the short term, a tight labour market and continued wages growth are likely to keep growth in consumer spending relatively strong. Against this backdrop, further monetary policy response in the US economy cannot be ruled out completely, especially if world prices for energy and, perhaps to a lesser extent, other mineral resources were to increase substantially. Another risk in the economic outlook is associated with the future course of the housing market. House prices in the United States have grown strongly in recent years, providing support to economic activity through the effects on consumption, residential investment and employment. However, signifi cantly higher house prices have reduced consumers’ housing affordability, especially in conjunction with rising interest rates. As a result, housing activity has weakened, with a decline of 13 per cent in housing starts in 2006. In response to weaker housing demand, house prices have fallen markedly in the United States. There are several channels through which house price movements could affect aggregate demand in the economy. First, through the impact on household net wealth, lower house prices (in real terms) could adversely affect consumer spending and households’ capacity to borrow from the fi nancial sector. Second, a slowdown in housing activity will lead to weaker activity and employment in residential construction, real estate, household goods manufacturing and other related sectors. Sharply weaker housing activity could have serious consequences for economic growth. sustainability of US trade and current account defi cits Over the past few years, the trade and current account imbalances in the United States have increased signifi cantly. The US trade defi cit, seasonally adjusted, was around US$61.2 billion in December 2006. For 2006 as a whole, the trade defi cit was around US$763.6 billion. This compares with a defi cit of US$716.7 billion in 2005. The bilateral trade defi cit of the United States with China was around US$19.0 billion in December 2006, the largest that the United States exhibits with any single trading partner. For 2006 as a whole, the bilateral trade defi cit with China was around US$232.5 billion, compared with a defi cit of around $201.5 billion in 2005. In the September quarter 2006, the US current account imbalance, seasonally adjusted, increased year on year by 23 per cent to a defi cit of US$225.6 billion. In the fi rst nine months of 2006, the US current account defi cit rose year on year by 15 per cent from the same period a year earlier. The increases in both US trade and current account defi cits have generated considerable concern in fi nancial markets about their sustainability. The signifi cant increase in the US trade defi cit means that strong US consumer demand is providing support for economic performance in other parts of the world. To sustain the increase in household spending, however, US consumers have been running down savings or increasing their borrowings. The savings rate was a negative 0.5 per cent in December 2006. A negative savings rate means that consumers take on additional debt, or sell assets, so that they can spend more than their take-home pay. A substantial increase in the current account defi cit in the United States could rekindle downward pressure on the value of the US dollar, especially against other international fl oating currencies (including the Australian dollar). It could also aggravate pressures for a revaluation of managed exchange rates of developing countries, especially those of the Asian economies.

australian commodities > vol. 14 no. 1 > march quarter 2007 9 economic overview

While a signifi cant decline in the value of the US dollar can be expected to help correct the US trade and current account imbalances, the gain for US export and import competing industries would be a loss for the economies of its trading partners. A sharp depreciation of the US dollar could also adversely affect US economic performance. International investors could lose confi dence in the US dollar, leading to a signifi - cant reduction in capital infl ows, or even capital outfl ows, in that economy. Under this scenario, interest rates in the United States would increase signifi cantly, adversely affecting its economic performance. A marked weakening of economic growth in the United States would pose a threat to economic prospects elsewhere in the world. medium term outlook for the US economy Over the medium term, growth in the US economy is assumed to average around 3.0 per cent a year toward 2012. This is similar to the average over the fi ve years ended 2006. One factor that has contributed to the widening trade imbalance in the United States is the monetary and fi scal stimulus in the economy. While monetary policy has been tight- ened to a more neutral stance, considerable fi scal stimulus remains in the economy. The federal budget defi cit was around US$248 billion in fi nancial year 2005-06 (October– September), compared with a defi cit of US$318 billion in 2004-05. Relative to gross domestic product, the federal budget defi cit fell from 2.6 per cent in 2005 to 1.9 per cent in 2006. Based on Congressional Budget Offi ce information, the budget defi cit is projected to decline to US$172 billion in 2006-07 and, as a percentage of gross domestic product, to be around 1.3 per cent. A continued reduction of the fi scal defi cit in the next few years would provide support for increased savings in the economy, contributing to a lowering of the trade imbalance over the medium term. On the other hand, if the fi scal defi cit were to persist or even increase over the medium term, its effects on the trade and current accounts would continue. The prospects for US economic growth over the medium term will also depend on continued technological innovation and growth in productivity. Productivity growth in the United States is estimated by the Federal Reserve Bank of New York to have increased from around 1.5 per cent a year between 1973 and 1995 to an annual average of 3.0 per cent between 1996 and 2004. While signifi cant growth in productivity has been achieved in the so-called ‘new economy’ industries, such as the information technology and telecommu- nications, there have also been rapid productivity US inflation expectations increases in the services sector, including retailing daily, ended 22 January 2007 and wholesaling, fi nancial services and real estate. Growth in US productivity is projected by the Federal Reserve Bank of New York to average around 2.6 2.5 per cent a year over the next decade. Continued productivity growth will provide support for sustained economic growth. 2.0 On the other hand, if technological progress and productivity growth slow signifi cantly over the medium term, then the annual average rate of economic growth 1.5 achieved around 2012 could be markedly lower than currently assumed. Refl ecting strong economic growth and higher % energy prices, infl ation expectations — measured by 20032004 2005 2006 the difference between yields of infl ation indexed and

10 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview nonindexed long term (10 years) government bonds — increased markedly between early 2003 and mid-2004. Expectations of annual infl ation fl uctuated around a rate of 2.5 per cent during 2005 and most of 2006, before declining to around 2.3 per cent in late 2006 and early 2007, following a signifi cant decline in world oil prices. In preparing this set of commodity projections, the US infl ation rate is assumed to ease from 3.5 per cent in 2006 to around 2.3 per cent a year to 2012. economic growth in China As discussed earlier, an important factor that can signifi cantly infl uence world economic prospects and prices on world commodity markets is economic performance in China. There has been signifi cant interest in prospects for economic growth in China, especially over the medium to longer term. China has a relatively large economy compared with other high growth emerging markets, including India, Brazil and the Russian Federation. China’s economy is more than twice the size of India’s and more than six times larger than those of Brazil and the Russian Federation. China’s economy is also more open than many emerging economies, with a lower average tariff on manufactured products. China’s economic growth and the nature of its industrialisation have led to a signifi cant increase in its demand for resources. On the other hand, relatively low costs of production in China and other emerging economies have helped to ease upward pressure on prices of manufactured goods on international markets. In 2006, China recorded the fourth consecutive year of double digit growth, which was fuelled by continued strong growth in exports and fi xed asset investment. The strong performance in 2006 was achieved despite a number of measures implemented by China’s government to slow investment activity and credit growth. The exceptionally high growth in fi xed asset investment has led to concerns about the possibility of an investment boom–bust cycle in China, as rapid growth in investment could lead to overcapacity, falling profi ts and balance sheet problems in the corporate and fi nancial sectors. China’s reliance on export performance for economic growth has also raised concern about its vulnerability to unexpected changes in the international economic environment. In 2006, China’s exports rose by more than 27 per cent to around US$969 billion, while imports increased by 20 per cent to around US$792 billion (leading to a trade surplus of around US$177 billion for the year). Foreign exchange reserves were more than US$1.0 trillion at the end of 2006, the largest in the world. In the short term, China’s government is expected China’s economic and industrial to continue its efforts to ease strong economic production growth activity. Economic growth in China is assumed to GDP growth average 9.5 per cent in 2007 and 9.0 per cent in industrial production growth 2008. 20 China’s strong trade and economic performance has resulted in signifi cant international pressure for 15 a substantial revaluation of China’s currency. In July 2005, China changed its foreign exchange 10 regime to a so-called ‘managed’ fl oat from being ‘pegged’ to the US dollar. Despite this change in the foreign exchange regime, international pressure 5 for China to further revalue its currency has intensifi ed. Critics have maintained that the ‘managed’ % fl oat has failed to operate effectively, with the value 19901994 1998 2002 2006 australian commodities > vol. 14 no. 1 > march quarter 2007 11 economic overview

average hourly compensations costs of of China’s currency appreciating only gradually since manufacturing workers, 2004 then. China’s government has reiterated its commitment to pursue a fully market based exchange rate, 100 US$22.87=100 but only through a gradual process. China’s currency was trading around 7.76 yuan against the US dollar 80 in mid-February 2007. This compares with 8.11 yuan against the dollar in July 2005. 60 A move by China toward greater exchange rate fl exibility would have to be supported by a continua- 40 tion of complementary fi nancial sector reforms, which would strengthen the economy’s capacity to cope 20 with greater interest rate and exchange rate movements. A signifi cant appreciation in China’s currency index would also increase households’ purchasing power. KFQBA EFK> O>WFI BUF@L ¨ >M>K PF>K Also, higher domestic consumption in China will be Q>QBP P an effective means of reducing China’s increasing trade surplus, especially with the United States. China’s longer term economic prospects China’s strong economic performance in recent years can be attributed, to a signifi cant extent, to relatively low labour costs and a substantial increase in foreign direct investment. While wages for manufacturing workers have been increasing rapidly in China, hourly costs per worker in China continue to be signifi cantly lower than in other developed and developing countries. Given its competitive labour costs, substantial labour supply and rapid growth in foreign direct investment, China has the potential to continue its impressive economic achievements over the next decade. On a purchasing power parity basis, China accounted for around 16 per cent of world income in 2006. If signifi cant foreign direct investment and productivity growth continue in China, it is not inconceivable that China’s share of world income could increase signifi - cantly over the next few decades. However, China’s economic success is not guaranteed. China still requires signifi cant structural reform, especially in its fi nancial sector, legal system and state owned enterprises. If signifi cant reform can be achieved, China share of world income will be able to sustain high economic growth into the medium to longer term. Otherwise, bottlenecks 2050 and capacity constraints will emerge and economic growth in China will inevitably slow down. Another rest of world United States 16% 32% issue of concern is the inequality of incomes United Kingdom 2% other Europe 8% between rural and suburban regions, which has the potential to threaten social stability. The government has announced plans for signifi cant expenditure on India China 28% 2006 14% rural infrastructure, education and health care. rest of world In preparing this set of commodity projections, 37% United States 20% economic growth in China is assumed to average United Kingdom 3% around 8.0 per cent a year toward 2012. other Europe 18% economic activity in Japan India 6% China 16% After solid economic growth in late 2005 and early 2006, Japan’s economic growth eased in the June

12 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview quarter 2006, before strengthening in the second half of the year. Economic growth in the second half of 2006 was characterised by strong exports and business investment, but consumer spending remained sluggish. Partial indicators released recently indicate that economic growth is continuing, albeit at a modest rate. Industrial production, for example, rose year on year by 4.6 per cent in December 2006 but retail trade declined by 0.2 per cent in November. The unemployment rate was 4.1 per cent in December 2006, slightly lower than the 4.2 per cent recorded in September and the 4.4 per cent in December 2005. The foundation of Japan’s current economic growth has been corporate restructuring. Firms have gradually moved away from costly and infl exible employment practices; at the same time, stronger regulatory pressure has forced the major banks to deal with nonper- forming loans. Overall profi tability has risen, and in turn this has led to higher investment and growth in employment. Economic growth in Japan is assumed to be around 2.0 per cent in both 2007 and 2008. There are risks associated with the short term outlook for Japan. On the upside, growth could be higher than currently assumed, as business confi dence is high and the pace of household spending growth may pick up with the continued economic expansion. On the downside, the economy is vulnerable to adverse external developments, including a more signifi cant slowdown in economic growth in the United States. After almost a decade of falling prices, Japan has fi nally escaped from entrenched defl ation. In December 2006, the headline consumer price index rose year on year by 0.3 per cent and the producer price index increased year on year by 2.5 per cent. With the economic expansion now established, the infl ation rate in 2007 is expected to be low and steady. Over the past decade, Japan implemented signifi cant fi scal stimulus to support economic growth. Japan has the largest fi scal imbalance (as a percentage of gross domestic product) of the world’s developed economies, with public sector debt forecast to reach around 178 per cent of gross domestic product by the end of the Japanese fi nancial year 2007-08 (April– March). Fiscal policy in Japan continues to face formi- dable challenges. It involves not only questions about the extent of continued support to economic activity but also the balance to be struck between short term requirements and medium term consolidation. The extent to which Japan is able to return to sustained economic growth over the medium term will depend on the progress of reforms to its economic structure. This is especially the case when account is taken of the presence of an aging and declining population. Japan’s source of economic growth over the medium term relies on productivity growth. Based on information from the Japan Productivity Center for Socio-Economic Development, labour productivity for the economy as a whole ranked nineteenth among thirty OECD countries in 2004 and was the lowest among the world’s seven largest industrialised countries. There has been a signifi cant difference in productivity growth between manufacturing and agricultural and services industries. While labour productivity in Japan’s manufacturing sector ranks third among OECD countries, the lack of competition has discouraged productivity improvement in businesses oriented to the domestic market. Facing an aging population, Japan requires substantial economic restructuring of the non-traded sector. Slow progress of structural reform will result in weakness in economic performance and further pressure on the fi scal position. Refl ecting an aging population and the need for signifi cant economic restructuring, economic growth in Japan is assumed to average around 1.5 per cent a year to 2012. australian commodities > vol. 14 no. 1 > march quarter 2007 13 economic overview

outlook for western Europe Following growth of only 1.6 per cent in 2005, economic growth in western Europe strengthened to an estimated 2.5 per cent in 2006. Looking forward, partial indicators released recently suggest that economic growth continues, albeit at a modest rate. The unemployment rate in the euro zone declined to 7.5 per cent in December 2006, compared with 8.4 per cent in late 2005. Retail trade, in volume terms, grew year on year by 1.3 per cent in December. Industrial production rose year on year by 2.5 per cent in November. For western Europe as a whole, economic growth is assumed to be around 2.0 per cent in 2007 and 1.9 per cent in 2008. A critical challenge for western Europe is to ensure that the current cyclical economic upturn translates into a sustained expansion. Over the past decade, economic growth in western Europe has fallen short of that in the United States. In particular, productivity growth has declined in the region, while it has increased in the United States. With the exception of the United Kingdom, the decline in productivity growth in western Europe has been widespread across sectors, refl ecting extensive product and labour market regulations that limit competition and impede the movement of resources between industries in response to technological change and globalization. The current higher economic growth provides an important opportunity for many western European countries to make progress in reducing fi scal defi cits. Under the revised Stability and Growth Pact, most countries in the euro area are aiming for budget balance or even a small surplus over the medium term. Yet how such consolidation will be achieved has not been announced. Welfare reforms and reductions in government spending are necessary, not only for lower defi cits, but also for income tax reforms in order to increase employment. Population aging will put increased pressure on pension and healthcare spending over the medium to longer term, with European Commission estimates suggesting that age related spending will rise by around 4 per cent of the region’s gross domestic product by 2050. While some reforms to pension systems are under way in France, Germany, and Italy, more policy initiatives will be necessary in order to achieve sustainable balance in the fi scal position. Structural reform and further economic integration will be important for growth prospects in the region. If successful, productivity growth, and hence the potential rate of economic growth, will increase in the region. Otherwise, economic underperformance will continue. Economic growth in western Europe is assumed to average around 1.7 per cent a year over the medium term. economic growth in east and south east Asia Economic growth in non-OECD Asia strengthened in 2006, supported by strong economic growth in China. Although infl ationary pressures rose signifi cantly in the fi rst half of 2006, the recent decline in world oil prices has led to weaker consumer price increases and eased market concern on infl ation. In Thailand, for example, consumer prices rose year on year by 3.5 per cent in December 2006, compared with a rise of 5.8 per cent in the same month in 2005. In Indonesia, annual infl ation was running at 6.6 per cent in the same month, compared with 17 per cent in the same month a year earlier. In Chinese Taipei, consumer prices rose year on year by 0.7 per cent in December 2006, compared with a rise of 2.2 per cent in December 2005.

14 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview

Looking forward, economic growth in the region is expected to remain relatively robust. For non-OECD Asia as a whole, economic growth is assumed to average around 7.5 per cent in 2007, compared with an estimated 8.2 per cent in 2006. In Chinese Taipei, the economy is estimated to have grown by 4.1 per cent in 2006, compared with 4.0 per cent in 2005. Partial indicators released recently suggest that economic growth is continuing, supported by higher manufacturing output and exports. Economic growth in Chinese Taipei is assumed to be 4.0 per cent in both 2007 and 2008, before easing to an annual rate of 3.8 per cent over the medium term. In Malaysia, the manufacturing sector has benefi ted from strong export demand. Industrial production increased year on year by 7.2 per cent in December 2006. The trade surplus was around US$28.6 billion in the year ended November 2006. Economic growth in Malaysia is assumed to be 5.4 per cent in 2007 and 5.5 per cent in 2008, before easing to 5.0 per cent a year toward 2012. For south east Asia as a whole, economic growth is assumed to be 5.3 per cent in both 2007 and 2008, compared with an estimated 5.7 per cent in 2006. Since the Asian fi nancial upheaval in 1997, non-OECD Asia has achieved impressive economic growth over the past decade. To sustain rapid economic growth into the economic growth in Asia medium term, the regional economies need 10 to meet a number of challenges. First, steps to promote trade openness, widespread access 2005 to education and fi nancial sector develop- 8 2006 2007 ment will be important to facilitate continued foreign investment and industrialisation. 6 Second, policies to speed up productivity growth, especially in the services sector, will 4 be required. Third, structural reforms need to be implemented in order to reduce the region’s vulnerability to unexpected changes 2 form other economies. Toward 2012, economic growth in non- % OECD Asia is assumed to ease to around E>FI>KA >I>VPF> FKD>MLOB EFK> LOB> EFKBPB 6.5 per cent a year. KALKBPF> EFIFMMFKBP BMLC >FMBF economic prospects in Australia Economic growth in Australia eased in late 2006, with real gross domestic product increasing, seasonally adjusted, by 0.3 per cent in the September quarter, compared with 0.5 per cent in the June quarter and 0.6 per cent in the March quarter. Refl ecting the impact of drought on the rural sector, farm production is estimated to have reduced economic growth in the September quarter by 0.3 percentage points. Australia’s trade account, seasonally adjusted, recorded a defi cit of around $1.3 billion in the September quarter 2006, compared with a defi cit of $3.3 billion in the June quarter. The current account defi cit, seasonally adjusted, was around $12.1 billion in the September quarter 2006. This compares with a defi cit of $13.3 billion in the June quarter. Looking forward, economic growth in Australia is expected to remain relatively subdued in the next few quarters, largely refl ecting the adverse effects on economic growth of drought in rural Australia. The drought has had a signifi cant effect on the farm economy in Australia, resulting in large falls in farm production, exports and incomes. The cropping australian commodities > vol. 14 no. 1 > march quarter 2007 15 economic overview

sector has been signifi cantly affected, with winter crop production in 2006-07 estimated to have fallen by around 60 per cent relative to the previous year. The drought has also had an impact on the prospects for summer crops this year, with production forecast to fall by around 60 per cent from last year. The livestock sector has also been signifi cantly affected through increased feed costs, higher slaughterings and deaths and lower wool production. The impact of drought is expected to lead to a sharp decline in farm incomes. Using survey information provided by farmers, ABARE has forecast that farm cash incomes for broadacre farmers, on average, will decline by around 67 per cent to $27 400 in 2006- 07. Dairy industry farm cash incomes, on average, are forecast to fall from $86 030 in 2005-06 to $17 800 in 2006-07 (for details, see the article on ‘farm performance’). The forecast sharp decline in farm incomes mainly refl ects the adverse effect of drought on agricultural industries. While the agriculture sector now accounts for around 2.7 per cent of gross domestic product in Australia, the drought will have a signifi cant effect on economic growth through the direct and indirect linkages between agriculture and other industries. The drought is estimated to reduce the rate of economic growth in Australia in 2006-07 by around 0.75 percentage points from what would otherwise have been achieved. Economic growth in Australia is assumed to average around 2.5 per cent in 2006-07, before increasing to 3.75 per cent in 2007-08. The assumption of economic growth in 2007-08 is based on an underlying assumption that the drought will break in the fi rst half of 2007. Over the medium term, the Australian economy is assumed to grow at a rate of around 3.0 per cent a year. Infl ation Australia’s infl ationary pressures eased in late 2006, with the consumer price index rising year on year by 3.3 per cent in the December quarter, compared with a rise of 3.9 per cent in the September quarter. Contributing most to the increase in the December quarter index were rises in vegetables and domestic holiday travel and accommodation. Partially offsetting these increases were falls in the cost of automotive fuels, fruit and pharmaceuticals. Looking forward, other price indexes released recently suggest that infl ationary pressures are likely to continue to moderate in the remainder of 2006-07. For example, the producer price index for fi nal commodities increased year on year by 3.5 per cent in the December quarter 2006, compared with a rise of 4.0 per cent in the September quarter.

key macroeconomic assumptions for Australia

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 a -08 a -09 a -10 a -11 a -12 a Economic growth b % 2.7 2.9 2.5 3.75 3.0 3.0 3.0 3.0 Inflation b % 2.4 3.2 3.1 2.5 2.5 2.5 2.5 2.5 Interest rates c % pa 8.9 9.1 9.8 9.9 9.5 9.5 9.0 9.0 Nominal exchange rates d – US$/A$ US$ 0.75 0.75 0.77 0.75 0.73 0.70 0.68 0.66 Trade weighted index for A$ e index 63.0 63.0 64.0 63.0 62.0 60.0 58.0 56.0

a ABARE assumption. b Change from previous period. c Prime lending rate to large businesses. d Average of daily rates. e Base: May 1970 = 100. Sources: Australian Bureau of Statistics; Reserve Bank of Australia; ABARE.

16 australian commodities > vol. 14 no. 1 > march quarter 2007 economic overview

While the domestic component increased year on year by 4.3 per cent, this was partially offset by a decline of 1.5 per cent in the imports component. Australia’s infl ation rate is assumed to be 3.1 per cent in 2006-07, before easing to 2.5 per cent in 2007-08. Over the medium term, annual infl ation in Australia is assumed to be around 2.5 per cent. short term direction of the Australian dollar After remaining relatively stable against the US dollar between July and October 2006, the Australian dollar appreciated against the US dollar in late 2006. The value of the Australian dollar increased from US75c and TWI 63 in mid-October to US80c and TWI 65 in early January 2007. Against the Japanese yen, the Australian dollar appreciated from ¥89 in mid-October 2006 to ¥96 in early January 2007. Since early January 2007, the Australian dollar has depreciated both against the US dollar and on a trade weight basis. In mid-February, the Australian dollar was trading around US77c and TWI 64. In the fi rst eight months of 2006-07, the Australian dollar is estimated to have averaged around US77c and TWI 64. This compares with an average of US75c and TWI 63 in 2005-06. One factor that has contributed markedly to the recent movements in the Australian dollar is the strength of the US dollar against other international currencies. For example, the US dollar was trading around 0.77 euro in mid-February 2007. This compares with 0.75 euro in early January and 0.80 euro in mid-October 2006. The recent movements in the value of the US dollar mainly refl ect changes in market expectations on the direction of US interest rate movements in the short term. In late 2006, there was growing speculation in fi nancial markets about a possible easing of US monetary policy, which generated considerable downward pressure on the value of the US dollar at that time. Since the beginning of 2007, there has been a change in market sentiment. The Federal Reserve is now expected to hold its monetary policy setting in the short term, as economic growth remains at a reasonable pace and the possibility of a re-emergence of infl ationary pressures cannot be ruled out completely. Despite the effect of recent movements in the value of the US dollar on the Australian exchange rate, a factor that has provided support for the Australian dollar is movements in Australia’s terms of trade, especially continued strength in mineral resources prices on world markets. In the September quarter 2006, for example, Australia’s terms of trade rose year on year by around 6.8 per cent, and was around 20 per cent higher than the level in the same quarter in 2004. In the short term, movements in Australia’s exchange rate are likely to continue to be infl u- enced by the factors mentioned above. Interest rate differentials between Australia and the major world economies are expected to affect movements in the Australian dollar. The main factor affecting Australian interest rates will be the outlook for economic growth and infl ation. Given the outlook for easing infl ationary pressures and strengthening economic growth in Australia (under the assumption that the drought will break in the fi rst half of 2007), Australia’s prime lending rates are assumed to remain relatively stable in the short term. Australia’s prime lending rates are assumed to average 9.8 per cent in 2006-07 and 9.9 per cent in 2007-08, compared with 9.1 per cent in 2005-06. From an historical perspective, the value of the Australian dollar has been associated with changes in Australia’s terms of trade and hence movements in commodity prices on world markets. In response to the outlook for a gradual easing of world economic

australian commodities > vol. 14 no. 1 > march quarter 2007 17 economic overview

growth, prices of some Australian commodities on world markets (in US dollar terms) are forecast to average lower in the next few years. This could place downward pressure on the Australian dollar, especially in the latter part of 2007. Taking the above into account, the Australian dollar is assumed to average around US77c and TWI 64 in 2006-07 and US75c and TWI 63 in 2007-08. There is considerable uncertainty surrounding the outlook for the Australian dollar. This is because movements in the Australian dollar can be signifi cantly infl uenced by changes in sentiment in fi nancial markets, leading to strong volatility in the Australian exchange rate. Over the past twelve months, the Australian dollar fl uctuated from a low of US70c and TWI 60 in late March 2006 to a high of US80c and TWI 65 in early January 2007. Since the fl oating of the Australian dollar in December 1983, the Australian currency has had an average fl uctuation range of around US10 cents a year. Australian dollar assumptions over the medium term Over the medium term, it is reasonable to assume that movements in Australia’s exchange rate will continue to be infl uenced by Australia’s terms of trade, interest rate differentials and economic performance in Australia relative to the exchange rate major world economies. Toward 2011-12, Australia’s Australia real prime lending rates are assumed to average around 6.5 per cent, similar to that averaged in the fi ve years ended 2005-06. The differential with real 0.8 lending rates in the Untied States is assumed to narrow from around 1.5 percentage points currently to 1.0 0.7 percentage point by 2011-12. Consistent with the assumption of moderating world economic growth, Australia’s terms of trade is projected to ease gradu- 0.6 ally from the current high to a level that is more consistent with the historical trend. 0.5 Toward the end of the outlook period, the Austra- lian dollar is assumed to depreciate both against the US$/A$ US dollar and on a trade weighted basis. By 2011-12, 1986 1991 1996 2001 2006 2011 the Australian dollar is assumed to average around -87 -92 -97 -02 -07 -12 US66c and TWI 56.

18 australian commodities > vol. 14 no. 1 > march quarter 2007 commodity outlook outlook for Australia’s commodity sector aggregate commodity export prices The index of unit export returns for Australian commodities, in aggregate, is forecast to decline slightly in 2007-08, following a forecast rise of 8.3 per cent in 2006-07. While higher unit export returns for farm commodities are forecast for 2007-08, the effects are offset by a forecast decline in export prices for mineral resources. For farm commodities, the index of unit export returns is forecast to increase by 2.5 per cent in 2007-08, major Australian commodity exports following an expected rise of 1.3 per cent in 2006-07. While world indicator prices are forecast to average lower in 2007-08 for wheat, wool and sugar, the effects ¦ S>IRB S>IRB SLIRJB TLOIA are more than offset by forecast higher prices for corn, iron ore, MOF@B soybeans, cotton and dairy products. pellets metallurgical Unit export returns for mineral resources are forecast coal to decline by 1.0 per cent in 2007-08, compared with gold a forecast rise of 10 per cent in 2006-07. Unit returns nickel for energy exports are forecast to decline by 1.8 per thermal coal cent in 2007-08, following a forecast fall of 7.3 per cent crude oil in 2006-07. Unit export returns for metals and other copper minerals are forecast to decline marginally in 2007-08, alumina compared with a forecast rise of 25 per cent in 2006- 2007-08 lng 07. 2006-07 Unit returns for Australian commodity exports are zinc projected to ease in real terms over the reminder of aluminium the outlook period. Reﬂ ecting a projected signiﬁ cant beef, veal decline in export prices for mineral resources (in 2006- wheat 07 dollars), the real index of unit export returns in 2011- wine 12 is projected to be around 21 per cent lower than its wool value in 2006-07. titanium, zircon ?

medium term outlook for Australia’s commodity sector unit export returns 2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 s -08 f -09 f -10 f -11 f -12 f

Farm index 98.9 98.7 100.0 102.5 101.5 100.0 100.1 99.5 – real index 105.3 101.8 100.0 100.0 96.6 92.9 90.7 87.9 Mineral resources index 68.9 90.8 100.0 99.0 96.2 91.4 88.1 87.6 – real index 73.4 93.6 100.0 96.6 91.5 84.9 79.8 77.4 Energy minerals index 79.6 107.9 100.0 98.2 95.9 95.3 96.1 96.9 – real index 84.8 111.3 100.0 95.8 91.3 88.5 87.0 85.6 Metals and other minerals index 62.4 80.2 100.0 99.5 96.3 89.2 83.8 82.5 – real index 66.4 82.7 100.0 97.0 91.7 82.8 75.9 72.9 Total commodities index 74.9 92.3 100.0 99.6 97.0 92.8 90.2 89.7 – real index 79.7 95.2 100.0 97.1 92.3 86.2 81.7 79.3 a Base: 2006-07 = 100. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 19 commodity outlook

medium term outlook for Australia’s commodity sector

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 s -08 f -09 f -10 f -11 f -12 f

Commodity exports Exchange rate US$/A$ 0.75 0.75 0.77 0.75 0.73 0.70 0.68 0.66 Value of exports Farm A$m 27 650 27 654 26 322 27 211 29 221 30 253 31 374 32 205 – real a A$m 29 431 28 524 26 322 26 547 27 813 28 093 28 424 28 465 Crops A$m 13 542 13 967 12 669 13 185 14 905 15 953 16 866 17 604 – real a A$m 14 415 14 406 12 669 12 863 14 186 14 814 15 279 15 559 Livestock A$m 14 108 13 688 13 653 14 026 14 316 14 300 14 509 14 601 – real a A$m 15 016 14 118 13 653 13 684 13 626 13 279 13 144 12 905 Forest and fisheries products A$m 3 630 3 655 3 846 3 877 4 061 4 204 4 369 4 328 – real a A$m 3 864 3 770 3 846 3 783 3 865 3 904 3 958 3 825 Mineral resources A$m 69 461 92 152 107 653 116 495 122 226 121 448 119 916 122 592 – real a A$m 73 936 95 048 107 653 113 654 116 337 112 776 108 638 108 354 Energy minerals A$m 29 696 39 328 39 705 41 182 42 808 43 449 44 129 46 829 – real a A$m 31 609 40 564 39 705 40 177 40 745 40 346 39 979 41 390 Metals and other minerals A$m 39 765 52 823 67 949 75 313 79 419 77 999 75 787 75 763 – real a A$m 42 327 54 484 67 949 73 476 75 592 72 430 68 659 66 963 Total commodities A$m 100 741 123 461 137 821 147 583 155 508 155 904 155 659 159 125 – real a A$m 107 231 127 342 137 821 143 984 148 015 144 773 141 020 140 644 Farm sector Farmers’ terms of trade a index 89.9 93.8 100.0 100.0 97.3 95.5 94.1 91.3 Gross value of farm prodn b A$m 34 996 37 900 33 753 40 084 40 335 41 472 42 672 43 449 – real a A$m 37 251 39 091 33 753 39 106 38 392 38 511 38 659 38 403 Crops A$m 17 172 20 176 14 877 20 238 20 563 21 629 22 736 23 613 – real a A$m 18 278 20 810 14 877 19 744 19 572 20 084 20 598 20 870 Livestock A$m 17 824 17 723 18 876 19 846 19 773 19 843 19 936 19 836 – real a A$m 18 973 18 281 18 876 19 362 18 820 18 426 18 061 17 532 Net value of farm production A$m 5 028 7 026 2 206 7 836 7 208 7 813 8 299 8 346 – real a A$m 5 352 7 247 2 206 7 645 6 861 7 256 7 519 7 377 Volume of farm production a index 127.2 126.4 100.0 117.4 120.7 123.7 127.1 130.2 – crops index 158.3 157.7 100.0 141.8 146.6 149.4 153.3 157.2 – livestock index 102.3 101.4 100.0 98.0 100.2 103.3 106.3 108.8 Minerals and energy sector Volume of mine production a index 94.1 93.5 100.0 111.2 122.1 130.6 133.6 134.1 – energy index 93.8 92.2 100.0 104.8 112.6 113.2 113.5 114.4 – metals and other minerals index 94.2 94.6 100.0 115.5 128.5 142.7 147.6 147.9 Gross value of mine prodn A$m 66 682 88 465 103 347 111 835 117 337 116 590 115 120 117 688 – real a A$m 70 978 91 246 103 347 109 107 111 683 108 265 104 293 104 019

a In 2006-07 Australian dollars. b For a definition of the gross value of farm production see table 21. s ABARE estimate. f ABARE forecast. 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.

20 australian commodities > vol. 14 no. 1 > march quarter 2007 commodity outlook

Australia’s commodity export earnings Reﬂ ecting assumed relatively strong world economic growth, and hence higher commodity demand and export shipments, the value of Australia’s commodity exports is forecast to be around $147.6 billion in 2007-08, 7.1 per cent higher than a forecast $137.8 billion in 2006-07. Over the medium term, the value of Australian commodity exports is projected to rise in real terms in 2008-09, before gradually easing toward the end of the projection period. By 2011-12, Australian commodity exports are projected to be worth around $140.6 billion (in 2006-07 dollars), 2.0 per cent higher than the forecast value in 2006-07. Under the assumption of average seasonal conditions, export earnings for farm commodities are forecast to be around $27.2 billion in 2007-08, a rise of 3.4 per cent from a forecast $26.3 billion in 2006-07. For many agricultural commodities, including most grains and oilseeds, beef and veal, lamb and cheese, export earnings are forecast to increase in 2007-08. Over the medium term, the value of Australian farm exports is projected to rise gradually in real terms. commodity exports Australian farm exports are projected to be worth Australia around $28.5 billion (in 2006-07 dollars) in 2011- minerals and energy 12, around 8.1 per cent higher than the forecast value 120 forestry and fishing in 2006-07. farm Export earnings from Australia’s mineral resources 100 sector are forecast to be around $116.5 billion in 80 2007-08, compared with a forecast $107.7 billion in 2006-07. For energy commodities, export earn- 60 ings are forecast to increase by 3.7 per cent to $41.2 billion in 2007-08. For metals and other minerals, 40 export earnings are forecast to rise by 11 per cent to 20 $75.3 billion in 2007-08. 2006-07 Over the medium term, export earnings from $b Australia’s mineral resources sector in real terms are 1992 1995 1998 2001 2004 2007 projected to increase in 2008-09, before easing -93 -96 -99 -02 -05 -08 gradually toward the end of the projection period. By 2011-12, mineral resources exports are projected to be worth $108.4 billion (in 2006-07 dollars), slightly higher than the forecast value in 2006-07. For metals and other minerals, export earnings in 2011-12 are projected to be around $67.0 billion (in 2006-07 dollars), while export earnings for energy commodities are projected to be worth $41.4 billion (in 2006-07 dollars).

australian commodities > vol. 14 no. 1 > march quarter 2007 21 contentsaustralian agriculture

>> phillip contact glyde > >+61 +61 2 26272 6272 ????2100 > [email protected]@abare.gov.au

australian agriculture key issues for the future

> jammie penm and phillip glyde

» In the face of continued declines in export prices in real terms, Australian farmers rely on productivity increases to maintain the competitiveness of their exports in international markets. » Changes and developments in water and natural resource management, access to new biotechnologies, climate and moves toward renewable transport fuels will affect land use and land use intensity and have a signiﬁ cant impact on agricultural productivity. These developments, if not managed well, can undermine the continued productivity improvements made by Australian farmers and threaten competitiveness of the farm sector. » It will be important that government policy settings encourage and facilitate the way in which farmers respond to these key issues and undertake appropriate on- farm and off-farm changes to ensure the long term sustainability of Australia’s rural sector.

sustained high productivity growth Sustained productivity improvements have long been the engine of growth in Australian agriculture. Australia exports around 65 per cent of its agricultural production to international markets. Rural producers and exporters in real Australian export prices Australia are price takers on world markets. Over the past three decades, export prices for farm products have declined more signifi cantly than for other resources manufacturing 100 exports. Rural export prices (in real Australian dollar terms) declined on average by 2.4 per cent a year services 80 between 1974-75 and 2005-06. This is higher than the average decline of around 2.0 per cent a 60 rural year for mineral resources exports, 1.4 per cent for manufacturing exports and 0.8 per cent for services exports. 40 average annual decline Given the signifi cant declines in agricultural prices services 0.8% 20 manufacturing 1.4% in real terms, Australian farmers rely on productivity resources 2.0% increases to maintain the competitiveness of their rural 2.4% index exports in international markets and sustain profi t- 1975 1985 1995 2005 ability in Australian farming. Based on Productivity -76 -86 -96 -06 Commission estimates, productivity growth in agri-

22 australian commodities > vol. 14 no. 1 > march quarter 2007 australian agriculture

culture, forestry and fi shing averaged around 2.3 per productivity growth, by industry cent a year over the period 1974-75 to 2004-05. After removing from the calculation the years during average annual growth which farm production declined signifi cantly because agriculture, forestry retail trade 0.7% and fishing of adverse seasonal conditions (1980-81, 1982-83, wholesale trade 0.8% 200 manufacturing 1.7% 1994-95 and 2002-03), the average rate of produc- agriculture 2.3% tivity growth increases to 2.6 per cent a year over the same period. 150 Strategies employed by farmers to improve produc- manufacturing tivity depend on a broad range of factors. There has been a growing realisation that the environment in 100 retail trade which farmers operate in the future could affect farmers’ access to key inputs, such as water. Issues such as wholesale trade climate change and variability, natural resource index management, aging rural populations and continued 1974 1984 1994 2004 rural migration could have a signifi cant impact on the -75 -85 -95 -05 effectiveness of the strategies for sustaining productivity gains. Improved understanding of the relative importance of factors affecting farm productivity is essential for delivering continuous productivity improvements. Using data collected through its farm surveys, ABARE has undertaken a study for the grains industry to examine a broad range of factors (including physical, natural, fi nancial and human capital) that infl uence productivity (Kokic, Davidson and Rodriguez 2006). The study reveals that the factors that can signifi cantly infl uence agricultural productivity are more diverse than have been reported in previous research. Moisture availability is obviously the main factor infl uencing productivity in the grains industry. Land use intensity also affects productivity in the grains industry substantially and its impact depends on natural soil fertility and management practices. Other factors that have signifi cant impacts on productivity in the grains industry include crop specialisation, access to fi nance, education and corporate ownership. The results of ABARE research also indicate that changes to a wide range of policy settings could have signifi cant effects on agricultural productivity. For example, the Austra- lian Government recently announced policy initiatives aiming at improving the management of water resources, including water infrastructure. These initiatives will be an important factor affecting future productivity growth in Australian agriculture. Other policy issues, including improved natural resource management, access to new biotechnologies, such as genetically modifi ed crops, and adaptation to climate change, will affect land use and land use intensity and have a signifi cant impact on farm sector productivity. importance of natural resource management The ability of Australian farmers to remain viable in the face of continued declines in real agricultural prices and variability in natural phenomena such as climate will depend largely on their ability to maintain or improve the productivity of their land. For example, Australian soils tend to be fragile, and easily damaged, and sustaining the productive capacity of these soils may require farmers to change their farming practices. In 2004-05, the National Landcare Programme commissioned ABARE to undertake a survey of natural resource management on Australian broadacre and dairy farms (Hodges and Goesch 2006). This is the fi fth in a series of triennial surveys undertaken by ABARE since the early 1990s.

australian commodities > vol. 14 no. 1 > march quarter 2007 23 australian agriculture

In 2004-05 around 60 per cent of broadacre and dairy farmers reported signs of land degradation. This is higher than reported in the 2001-02 survey report. The most common problem identifi ed by farmers was degradation resulting from weed and animal pest infestations. These problems were reported more heavily in the nondairy livestock industries, whereas erosion and dryland salinity were identifi ed as signifi cant problems in the cropping and mixed livestock–cropping industries. Of the farmers reporting degradation in 2004-05, 46 per cent had already altered their management practices to help deal with the problem. Improved natural resource management will help sustain the productive capacity of farmland. To achieve sustained productivity improvements, natural resource management programs may need to include a range of approaches for increasing the adoption of sustainable agricultural practices. If, for example, the main benefi ts of adoption of sustainable agricultural practices are on-farm, and relevant information and skills are not constraints, governments and industry have the greatest potential to increase adoption of such practices by investing in research and development into technologies that can address land degradation at a lower cost to the farmer. If, however, the main benefi ts generated by changes to sustainable agricultural practices are off-farm, suasive measures are unlikely to lead to signifi cant adoption, since adoption of such practices will often lead to higher costs and lower profi ts. Where the benefi ts of adoption of sustainable agricultural practices are primarily off-farm, governments may need to consider more aggressive policies that provide fi nancial incentives to farmers to adopt more sustainable practices. understanding environmental tradeoffs An issue that has growing importance to Australian farming is increased regulatory controls that aim to improve environmental outcomes (which also involve a negative impact on farming). Understanding the nature of the tradeoffs between improving environmental outcomes and sustaining effi cient agricultural production is important when assessing the impact of these policies on the economy as a whole. In recent years, for example, the Queensland Government has strengthened regulatory controls over native vegetation in an effort to improve environmental outcomes. However, enforced conservation of native vegetation by governments means that farmers, and society more generally, will have to forgo potential increases in farm performance in order to realise potential improvements in environmental outcomes. To investigate the opportunity cost of public vegetation conservation in broadacre agricultural areas, data were collected by ABARE in face to face interviews with 351 farmers in the rangeland and cropping areas of southern and western Queensland (Davidson et al. 2006). The interviews indicate that approximately half of the farmers had aspirations to improve their farm’s performance by undertaking further development of rangeland areas but were unable to do so because they are constrained by a number of factors. Regula- tions intended to conserve native vegetation were identifi ed as by far the most important constraint to development. Public policies designed to increase the stock of native vegetation above privately optimal levels can impose negative impacts on farmers (Productivity Commission 2004). In the regions surveyed by ABARE, it is estimated that the cost of forgone agricultural development opportunities is around $520 million in net present value terms and the impacts are variable across the region (Davidson et al. 2006).

24 australian commodities > vol. 14 no. 1 > march quarter 2007 australian agriculture

Policy approaches that involve fees for service, incentives and trading opportunities could offer more fl exibility in motivating farmers to provide a greater level of environmental benefi ts. It is also important to recognise that the costs and benefi ts of native vegetation conservation are likely to change over time. For example, land prices in some parts of the survey region have more than doubled in recent years (partly in response to increased cattle prices), implying that the opportunity costs of forgone development has also increased substantially. To ensure that land is allocated to its highest valued use (agriculture or conservation) over time, there is a strong need to develop policies that allow adaptation to changes in the costs and benefi ts of conservation. improved water management regimes Australian irrigators face a number of adjustment pressures. In addition to continued declines in real commodity prices, there will be pressures from potential reductions in access to irrigation water because of lower water infl ows as a result of climate variability and change and redirection of fl ows to environmental uses. Costs of water and water delivery services are likely to increase. The long term viability of irrigated agriculture will depend on the ability of the industry to adapt to these pressures. Costs associated with reduced access to irrigation water can be mitigated if the restrictions on interregional trade are removed (where these restrictions are not based on environmental grounds). Removing restrictions on interregional trade will facilitate adjustment and assist risk management by ensuring that irrigators who value water most get access to it. As a result of interregional trade, the higher price for water received in some regions will encourage less viable users to exit the industry and speed up the adjustment process. Water prices under free interregional trade will more accurately refl ect the true opportunity cost of water use in irrigation, and provide more appropriate price signals for irrigators to invest in more effi cient water use technologies. Increased investment in water use technologies will reduce the impact of lower water availability on the irrigated agriculture. The need for investment in water use technologies will also provide the opportunity for a greater private sector involvement. renewable transport fuels In recent years, there has been a signifi cant increase in interest in biofuels production internationally in response to the signifi cant increase in world oil prices and environmental concerns (table 1). For some oil importing countries, domestic biofuels production holds the prospect of replacing oil imports and of diversifying sources of energy supply. Other countries pursue domestic biofuels production because of the perceived benefi ts in reduced greenhouse gas emissions (Beer et al. 2003). Internationally, biofuels production has been undertaken under signifi cant government subsidy. The long biofuels production, 2005 term viability of biofuels production depend on three 1 thousand barrels a day main factors — world oil prices, local exchange rate and production cost. The subsidy required to maintain ethanol biodiesel total the viability of biofuels production in the long term will United States 254 5 259 increase with lower world oil prices and/or a rise in Canada 4 0 4 European Union 16 56 72 production costs, especially feedstock cost. Brazil 277 1 278 Given the economics of biofuels production, biofuels China 17 – 17 producers need to carefully assess the long term viability India 5 – 5 of biofuels over a range of possible scenarios of oil prices World total 579 64 643 and feedstock costs. For example, world oil prices have Source: IEA (2006). australian commodities > vol. 14 no. 1 > march quarter 2007 25 australian agriculture

estimated biofuels production declined by around 25 per cent since mid-2006. Signifi - 2 cost in selected countries, 2005 cantly lower world oil prices will place substantial competitive pressures on biofuels production (table 2). Under this equivalent crude scenario, signifi cantly higher government assistance will feedstock oil price a US$/bbl be required to sustain biofuels production in many international economies, especially over the long term. United States corn 42–56 European Union sugar beet 105 Similarly, land availability, climatic infl uences and Brazil sugar cane 16–38 food and feed demand will also impact on the prospects Canada corn 53 for biofuels production that uses sugar cane and beet, China corn and wheat 65–97 cereals and oilseeds as feedstock. About 14 million India sugar cane 41–73 hectares of land are currently used for the production a The calculation takes into account the conversion of crude oil to petroleum fuels, petroleum refi ning costs and different of biofuels — about 1 per cent of the world’s available energy contents between biofuels and petroleum fuels. a ra b l e l a n d ( I E A 2 0 0 6 ) . A s b i o f u e l s p ro d u c t i o n i n c re a s e s , this share will also rise. In 2005, biofuels production was equivalent to less than 1 per cent of world crude oil production. Unless signifi cant technological advancement can be achieved in either biofuels production or crop yields, increased demand for feedstock from biofuels will compete with human food consumption and feed demand from livestock production. This increased demand will place signifi cant upward pressure on crop prices. While higher crop prices will provide benefi ts to the associated agricultural industries, signifi cantly higher costs will result for biofuels, as well as livestock, production. Higher production costs will reduce the competitiveness of biofuels and increase the requirement for continuing government subsidy. role of government policies To sustain Australian agriculture, government policy settings should aim to encourage and facilitate the way in which farmers respond to on-farm and off-farm changes. Government policies should also aim at removing or minimising any controls or constraints that limit farmers’ ability to adjust farm sizes, location and enterprise mix in order to remain viable, productive and competitive. An important issue in government policy settings is to ensure the long term sustainability of the industries involved and to eliminate or minimise the potential for any misallocation of valuable resources as a result of government policy initiatives over the medium to longer term.

references Beer, T., Grant, T., Morgan, G., Lapszewicz, J., Anyon, P., Edwards, J., Nelson, P., Watson, H. and Williams, D. 2003, Comparison of Transport Fuels, Final Report to the Austra- lian Greenhouse Ofﬁ ce on the Stage 2 study of Life-cycle Emissions Analysis of Alterna- tive Fuels for Heavy Vehicles, CSIRO, Canberra. Davidson, A., Beare, S., Gooday, P., Kokic, P. Lawson, K. and Elliston, L. 2006, Native Vegetation: Public Conservation on Private Land, ABARE Research Report 06.13, Canberra. IEA (International Energy Agency) 2006, World Energy Outlook 2006, Paris. Kokic, P, Davidson, A. and Boero Rodriguez, V. 2006, Australia’s Grains Industry: Factors Inﬂ uencing Productivity Growth, ABARE Research Report 06.22, Canberra. Hodges, A. and Goesch, T. 2006, Australian Farm: Natural Resource Management 2004-05, ABARE Research Report 06.12, Canberra. Productivity Commission 2004, Impacts of Native Vegetation and Biodiversity Regula- tions, Report no. 29, Melbourne.

26 australian commodities > vol. 14 no. 1 > march quarter 2007 contentsgrains

> johncontact hogan > +61 > +61 2 6272 2 6272 ???? 2056 > [email protected] > [email protected] grains outlook for wheat, coarse grains and oilseeds to 2011-12

> amelia brown, leanne lawrance and vince o’donnell short term outlook world prices mixed The world wheat market in 2006-07 has been marred by drought in some of the world’s largest producing and exporting countries. This has resulted in the world wheat indicator price (US hard red winter, fob Gulf ports) increasing to a forecast average US$210 a tonne, the highest price in both nominal and real terms in the past ten seasons. In 2007-08, production and consumption of wheat are forecast to increase by 6 per cent and 2 per cent respectively. The forecast increase in production is likely to outweigh the increase in consumption and, as a result, the world wheat indicator price is forecast to decline by 8 per cent to average US$193 a tonne. The world indicator price for coarse grains (US corn, fob Gulf) in 2007-08 is forecast to reach new highs, averaging US$171 a tonne. Although world production of coarse grains in 2007-08 is forecast to increase by around 6 per cent to over 1 billion tonnes, continued strong growth in demand, particularly for corn for ethanol production, is forecast to result in a further decline in already low world stocks, placing upward pressure on prices. The world indicator price for oilseeds (soybeans, world grain prices cif, Rotterdam) is forecast to increase by 4 per cent in 2007-08 to average US$307 a tonne. Global demand for oilseeds and oilseed products is forecast to remain strong in 2007-08, while supplies are fore- 400 cast to decline slightly. soybeans 300 world grain production 200 wheat wheat production to rebound in 2007-08 On the basis of assumed average seasonal condi- 100 corn tions, a recovery in world wheat production is forecast 2006-07 for 2007-08, with production increasing by around US$/t 36 million tonnes to 625 million tonnes. The forecast 1991 1996 2001 2006 2011 increase in production is the result of both an increase -92 -97 -02 -07 -12 australian commodities > vol. 14 no. 1 > march quarter 2007 27 grains

in the area sown to wheat and yield improvements in many of the major producing and exporting countries. The forecast high wheat price in 2006-07 is likely to encourage an increase in wheat plantings in many northern hemisphere countries in the coming year. India, on average, plants the largest area to wheat in the world. For 2007-08, it is estimated that the area sown to wheat will be 6 per cent higher than in the previous season. Along with higher world wheat prices, the Indian Government has increased the minimum support price for wheat. This support price has been increased by 50 rupees from that applying to the 2006-07 wheat crop (700 rupees). The new support is equivalent to a guaranteed minimum price of nearly US$170 a tonne. The minimum support price is for wheat that is delivered into the Public Distribution System (a government initiative to ensure the availability of food grain). Assuming average yields, India’s wheat production is forecast to increase to around 74 million tonnes, 7 per cent higher than in the previous season. Total area sown to wheat in the United States (winter and spring wheat) in 2007-08 is forecast to increase by 4 per cent from the previous season. In the United States, winter wheat is planted from September to early November. Plantings for 2007-08 are estimated to have increased by 9 per cent, when compared with the 2006-07 season. In contrast, the area sown to spring wheat is forecast to decline as growers switch to other grains, particularly corn. Wheat yields are forecast to increase to around their historical average, following the drought reduced yields in the previous season. The increased areas and higher yields mean total wheat production in the United States is forecast to increase by 12 per cent to around 55 million tonnes in 2007-08.

wheat outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z World Area million ha 217 216 207 215 214 213 213 213 Yield t/ha 2.90 2.86 2.84 2.90 2.93 2.96 3.00 3.04 Production Mt 629 618 589 625 628 631 640 647 Consumption Mt 616 622 607 621 622 633 643 651 Closing stocks Mt 138 135 116 121 127 125 122 118 Trade Mt 110 107 106 112 112 114 116 117 Stocks to use ratio % 22.4 21.7 19.1 19.4 20.4 19.7 18.9 18.2 Trade to use ratio % 17.9 17.2 17.5 18.0 18.0 18.0 18.0 18.0 Price a – nominal US$/t 154 176 210 193 189 200 206 213 – real b US$/t 164 181 210 189 181 187 189 190 Australia Area ’000 ha 13 399 12 980 11 138 13 000 13 146 13 253 13 316 13 382 Yield t/ha 1.63 1.93 0.88 1.92 1.97 2.01 2.04 2.07 Production kt 21 905 25 090 9 819 24 980 25 877 26 594 27 166 27 663 Export volume kt 15 779 15 168 12 680 15 663 19 707 20 560 21 080 21 320 Export value – nominal A$m 3 488 3 296 3 118 3 778 4 801 5 256 5 645 5 849 – real c A$m 3 713 3 399 3 118 3 686 4 570 4 881 5 114 5 170 APW 10 net pool return d – nominal A$/t 199 191 242 216 211 227 235 246 – real c A$/t 212 197 242 210 200 210 213 217

a US hard red winter wheat fob Gulf, July–June. b In 2006-07 US dollars. c In 2006-07 Australian dollars. d Australian premium white wheat, 10 per cent protein. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Grains Council; US Department of Agriculture; ABARE.

28 australian commodities > vol. 14 no. 1 > march quarter 2007 grains

In the other major producing countries — the European Union and the Russian Federa- tion — production is forecast to rise. However, in China, the world’s second largest wheat producer, production is forecast to decline by 3 per cent when compared with 2006-07. The area sown to wheat in China is estimated to be similar to the previous season at around 23 million hectares. However, yields are forecast to decline. In 2006-07, China’s wheat crop yielded 4.5 tonnes per hectare, compared with the fi ve year average of 4 tonnes per hectare. Assuming average seasonal conditions, yields are forecast to return to historical averages and wheat production in China is forecast to decline by around 4 million tonnes. coarse grains production higher World coarse grains production is forecast to rise by 6 per cent to over 1 billion tonnes in 2007-08, with a signifi cant increase in production in the United States and Canada. Production in the European Union and Australia is also expected to increase relative to the drought affected 2006-07 crop. Production is expected to continue to expand in China, south America and the Russian Federation. The area planted to corn in the United States is forecast to rise by to around 9 per cent to 35 million hectares. Higher returns from corn relative to soybeans and other crops will encourage increased plantings. Assuming average seasonal conditions in 2007-08, US corn production is forecast to rise by 13 per cent to around 303 million tonnes. Canadian barley production fell by around 20 per cent in 2006-07 to 10 million tonnes, refl ecting a decline in area planted combined with dry seasonal conditions. Cana- dian barley production is forecast to recover in 2007-08 to reach around 12.5 million tonnes, refl ecting an increase in the area planted. Canadian corn production is also forecast to increase, by around 18 per cent to 11 million tonnes. Corn production in the European Union is expected to recover from last year’s drought affected levels to reach around 54 million tonnes in 2007-08. Barley production is forecast to be 61 million tonnes, an increase of 11 per cent. In China, corn production is forecast to increase from the record 143 million tonnes produced in 2006-07 as a result of increased area planted as farmers respond to expectations of continued relatively high corn prices. El Niño conditions in south America have brought additional rainfall, boosting yield potential for corn crops. Corn production in Argentina in 2006-07 is estimated to increase by around 40 per cent to 22 million tonnes. In Brazil, corn production in 2006-07 is estimated to increase to around 43 million tonnes (2006-07 crops in south America are harvested until June 2007). In the Ukraine, the 2007 spring grain area (including corn and barley) may decline as growers switch into oilseeds, because of the uncertainty surrounding government restrictions on cereal exports. Export quotas — introduced in late 2006 to curb increasing grain prices — are set to end on 30 June 2007. production of oilseeds to fall slightly World oilseed production is forecast to decline by 2 per cent in 2007-08 to be around 388 million tonnes. Soybean production, which accounts for an average 57 per cent of oilseeds production, is forecast to fall in 2007-08. In the United States, the world’s largest soybean producer, production is forecast to decline in 2007-08 as growers switch from the production of soybean into corn. Strong demand for US corn based ethanol has resulted in high returns for corn relative to soybeans. In the other major soybean producing countries, Brazil and Argentina, soybean production is also likely to decline in 2007- 08. The 2006 - 07 soybean crop in both Argentina and australian commodities > vol. 14 no. 1 > march quarter 2007 29 grains

Brazil is estimated to be the highest on record. Seasonal conditions have been favourable and yields are estimated to be above average. In 2007-08 the area sown to soybeans in these two countries is likely to increase, but an assumed return to average yields will mean production declining. Balanced against the decline in soybean production is a forecast increase in world canola/rapeseed production in 2007-08. Canola and rapeseed are genetically similar, with the exception that canola has had erucic acid bred out of it. Canola/rapeseed production on average accounts for 12 per cent of global production of oilseeds. Strong

coarse grains outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z World Area million ha 300 301 303 315 317 319 320 322 Yield t/ha 3.38 3.24 3.17 3.23 3.28 3.33 3.38 3.40 Production Mt 1 014 974 962 1 020 1 041 1 061 1 083 1 093 Consumption Mt 975 986 1 008 1 039 1 052 1 063 1 073 1 084 Closing stocks Mt 178 167 118 99 87 86 95 105 Trade Mt 102 104 106 107 107 108 108 109 Stocks-to-use ratio % 18.28 16.93 11.70 9.51 8.29 8.09 8.88 9.67 Price a – nominal US$/t 97 106 161 171 179 186 192 196 – real b US$/t 104 109 161 167 171 174 175 175 Australia Area Barley ’000 ha 4 645 4 739 3 990 4 668 4 482 4 526 4 572 4 595 Oats ’000 ha 894 859 794 866 875 883 892 901 Triticale ’000 ha 389 347 328 335 341 348 355 362 Sorghum ’000 ha 755 889 427 739 761 791 823 856 Maize ’000 ha 72 76 50 70 74 76 78 79 Total ’000 ha 6 755 6 910 5 589 6 678 6 532 6 625 6 719 6 793 Production Barley kt 7 740 9 869 3 722 8 870 8 685 8 860 9 092 9 283 Oats kt 1 282 1 416 633 1 368 1 403 1 438 1 474 1 511 Triticale kt 611 676 300 659 679 699 721 742 Sorghum kt 2 011 2 019 996 1 862 1 938 2 036 2 139 2 247 Maize kt 418 380 259 385 406 423 433 444 Total kt 12 062 14 360 5 910 13 144 13 112 13 456 13 858 14 228 Domestic use c kt 6 606 6 812 5 280 6 299 6 490 6 703 6 916 7 146 Export volume kt 7 187 5 683 3 329 4 825 5 769 6 022 6 275 6 510 Export value – nominal A$m 1 412 1 193 865 1 224 1 421 1 483 1 548 1 612 – real d A$m 1 503 1 230 865 1 195 1 353 1 377 1 403 1 425 Price – nominal Feed barley e A$/t 169 187 270 202 208 215 221 225 Malting barley e A$/t 198 202 314 251 259 266 274 280 Grain sorghum A$/t 134 175 264 238 198 206 210 213 Price – real d Feed barley A$/t 180 193 270 197 198 199 200 199 Malting barley A$/t 211 208 314 245 246 247 249 247 Grain sorghum A$/t 143 180 264 233 188 192 191 188

a US corn, fob Gulf, October–September. b In 2006-07 US dollars. c Includes changes to stocks. d In 2006-07 Australian dollars. e Gross unit pool returns to Australian growers. f ABARE forecast. z ABARE projection. Sources: US Department of Agriculture; ABARE.

30 australian commodities > vol. 14 no. 1 > march quarter 2007 grains demand for biodiesel, particularly from the European Union, is likely to encourage increased canola and rapeseed plantings. In the major producing countries, the European Union and Canada, the area planted to canola/rapeseed in 2007-08 is forecast to be the highest ever. With an increase in area sown worldwide and improved seasonal conditions in many of the major producing and exporting countries (including Australia and the European Union), canola/rapeseed production is forecast to be higher in 2007-08. oilseeds outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z World Oilseeds Production Mt 381 390 395 388 403 416 429 441 Consumption Mt 367 382 393 401 411 423 432 440 Closing stocks Mt 56 62 63 50 42 34 32 33 Indicator price a US$/t 275 261 295 307 297 306 312 319 – real b US$/t 293 268 295 300 284 286 285 284 Protein meals Production Mt 206 215 224 217 226 233 240 247 Consumption Mt 204 215 224 233 243 252 260 268 Closing stocks Mt 7 6 5 4 10 11 11 12 Indicator price c US$/t 212 203 242 251 244 251 256 261 – real b US$/t 226 209 242 246 233 235 234 233 Vegetables oils Production Mt 111 118 124 112 117 121 124 128 Consumption Mt 108 116 122 130 134 137 139 142 Closing stocks Mt 10 10 10 10 9 9 9 8 Indicator price d US$/t 545 573 630 656 636 655 668 681 – real b US$/t 581 589 630 641 608 612 610 608 Australia Total production kt 2 641 2 519 1 013 1 991 2 203 2 430 2 679 3 090 Winter kt 1 580 1 479 540 1 302 1 404 1 515 1 638 1 768 Summer kt 1 061 1 039 473 689 799 915 1 041 1 321 Canola Area ’000 ha 1 377 962 944 1 001 1 071 1 124 1 183 1 242 Production kt 1 542 1 441 513 1 271 1 373 1 485 1 609 1 740 Export volume e kt 892 831 277 826 961 1 040 1 191 1 270 Export value e – nominal $m 326 310 142 342 378 393 427 428 – real g $m 347 320 142 334 360 365 387 379 Price h A$/t 338 386 567 454 417 430 438 447 – real g A$/t 360 398 567 442 397 399 397 395 Sunflowers Area ’000 ha 46 79 34 54 62 71 78 90 Production kt 62 95 33 54 77 93 105 125 Exports i kt 3 3 3 2 5 5 6 7 Price j A$/t 364 436 458 366 337 347 354 361 – real g A$/t 387 450 458 358 321 322 321 319

a Soybean, cif Rotterdam, October–September basis. b In 2006-07 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 2006-07 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. australian commodities > vol. 14 no. 1 > march quarter 2007 31 grains

Production of the other major oilseed, cottonseed (on average 11 per cent of total oilseed production), is forecast to remain relatively stable in 2007-08. World raw cotton production in 2007-08 is forecast to remain largely unchanged from the previous season. Increased production in India and Pakistan is expected to be offset by declines in China and the United States.

world grain consumption

wheat consumption to increase World wheat consumption in 2007-08 is forecast to increase to 621 million tonnes, 2 per cent above the previous season. Much of the increase in consumption is expected to stem from increased demand for wheat for animal world wheat consumption feeding purposes. Wheat used for human consumption is by far the biggest user of wheat, accounting feed for an average 71 per cent of total wheat use. 500 food However, wheat used for human consumption is relatively stable, increasing by around 1 per cent 400 a year. Short term changes in wheat consumption are 300 therefore linked to the more volatile animal feed market. The use of wheat in livestock feeding 200 rations in 2007-08 is forecast to increase by 10 per cent when compared with 2006-07. The Euro- 100 pean Union is the largest consumer of feed wheat, accounting for over half of the wheat used for Mt animal feeding purposes. The demand for wheat for 1995 1998 2001 2004 2007 livestock feed in the European Union is forecast to -96 -99 -02 -05 -08 increase in 2007-08. A lower forecast price of feed quality wheat, when compared with feed barley, is expected to result in the substitution of increased amounts of feed wheat for feed barley in EU livestock feeding rations. US corn used for ethanol ethanol driving record coarse grains consumption World consumption of coarse grains is forecast 80 to reach a record 1.04 billion tonnes in 2007-08, driven by increasing ethanol demand, combined 60 with continued growth in global feed demand. There is expected to be a signiﬁ cant increase in the consumption of coarse grains in the United States 40 for corn based ethanol production. Feed use by livestock industries in developing Asian and Latin 20 American countries is forecast to continue to grow in line with population and income growth. Mt The use of corn in ethanol production in the United 1995 1998 2001 2004 2007 States is estimated to increase by 25 million tonnes -96 -99 -02 -05 -08 in 2007 to a total of 80 million tonnes — around 30

32 australian commodities > vol. 14 no. 1 > march quarter 2007 grains per cent of the US corn production in 2006-07. US net exports of corn made up nearly 54 per cent of world corn trade in 2006. Therefore, major changes in the US corn market brought about by the emerging ethanol market, may have a signifi cant impact on world coarse grains trade. Feed demand is expected to remain strong in the United States in 2007-08, with meat, milk and egg production all expected to rise. However, feed corn consumption in the United States is forecast to remain subdued in 2007-08 as increased corn prices result in other feedgrains being substituted into feed rations. Increased use of distillers grains — a byproduct of ethanol production (see box) — is likely to displace some corn in feed rations. Feed barley demand is expected to remain strong in 2007-08. The rise in corn prices is expected to result in increased demand for feed barley as a substitute for corn in livestock rations. Increased amounts of wheat are also likely to be used to meet some of the increased demand from livestock feeders. Malting barley demand is expected to remain strong in 2007-08 as world beer consump- Distillers’ grains are a byproduct from ethanol that tion continues to trend upward. can be used as a high protein ingredient in livestock feed rations. In the process of converting corn into biodiesel driving growth in ethanol, starch is removed from the grain. Once this consumption of oilseeds process has been completed, the spent grain has a higher proportion of fat, minerals, vitamins and fi bre World consumption of oilseeds is forecast to than the original corn. The yeast used to ferment the continue increasing in 2007-08, as demand starch contributes positively when added back to the for oilseed products increases. Demand for grains in the form of solubles. vegetable oils for use in the processed food Distillers’ grains are marketed as three products: sector and in biodiesel production in particular distillers wet grains (DWG) or wet cake; distillers dried grains (DDG); and distillers dried grains with is expected to continue to increase in 2007- solubles (DDGS), which includes some portion of 08. Demand for oilseed meal by the livestock the condensed distillers’ solubles (the condensed, sector is also set to increase. Total consump- thin stillage from the fermentation process). Dry tion of oilseeds is forecast to increase to a mill ethanol refi neries, which make up the majority record 401 million tonnes in 2007-08. of production, can vary the production of wet and Over the past six years, industrial use dry distillers’ grains. Most feed is dried and sold as of vegetable oil has more than doubled, distillers’ dried grains with solubles (DDGS). Ruminants, such as cattle, sheep and goats, differ increasing from 9 million tonnes in 1999-00 to from monogastrics, such as pigs and poultry, in their a forecast 22 million tonnes in 2006-07. With ability to use various feeds. Distillers’ grains are used rising investment in biodiesel plants around in feed rations as an inexpensive high fi bre protein the world, industrial use of vegetable oils is and energy source that also contains vitamins and expected to continue to increase in 2007-08. minerals. Distillers’ grains are a source of linoleic acid, By far the largest producer of biodiesel is the methionine, phosphorous, B vitamins and vitamin E. European Union, where production capacity According to the US Department of Agriculture, feed inclusion rates for distillers’ grains can be as high has tripled from around 2 million tonnes in as 40 per cent for cattle, up to 25 per cent for pigs 2003 to an estimated 6.1 million tonnes in and 5 per cent for poultry. With continuing research, 2006. Germany is the largest producer in DDGS use in pig and poultry diets is expected to the European Union, accounting for over half expand. of total EU biodiesel production. The main It is estimated that the supply of distillers’ grains will vegetable oil used in the European Union reach 12–14 million tonnes by 2012. In addition to to make biodiesel is canola/rapeseed oil. expanding consumption among traditional livestock feed markets, new markets and new uses (such as It is expected that biodiesel production, and fertiliser, pet litter, packaging materials and food) are therefore demand for canola/rapeseed oil in being researched. Europe, will continue to increase in 2007-08. australian commodities > vol. 14 no. 1 > march quarter 2007 33 grains

EU industrial use of vegetable oils consumption of oilseed meals to increase too 8 Global consumption oilseed meals has increased every year for at least the past ten years. This trend is forecast to continue in 2007-08, with world consump- 6 tion of oilseed meals forecast to rise to 233 million tonnes. The increase in meal consumption has been driven largely by increasing consumption in China, 4 rapeseed where rising consumption of meat and poultry products has resulted in consumption of oilseed meals rising, on average, by 9 per cent a year over the past ten years. 2 soybean Consumption oilseed meals in China has increased palm from 20.6 million tonnes in 1996-97 to around 47.4 million in 2006-07. Production and consumption of Mt other pigs and poultry are forecast to increase in China this 2000 2002 2004 2006 year, which is expected to result in increased consump- -01 -03 -05 -07 tion of oilseed meals in 2007-08.

world grain stocks falling Although end of season world stocks of wheat are forecast to increase by around 4 per cent in 2007-08, they are expected to remain relatively low. End of season stocks peaked at 205 million tonnes in 1999-2000 and have been declining steadily ever since. In the fi ve major exporting countries — Argentina, Australia, Canada, the European Union and the United States — stocks at the end of 2006-07 are forecast to be the lowest in over ten years. Unfavourable seasonal conditions, particularly in Australia, the Euro- pean Union and the United States, contributed to an estimated 30 per cent fall in end of season stocks. With higher production forecast for 2007-08, stocks held by the major fi ve exporters are expected to increase. For coarse grains, world stocks in 2007-08 are forecast to decline by around 16 per cent to below 100 million tonnes. This will be the lowest level of stocks since 1975-76. A large proportion of the decline is expected to occur in the United States and China as a result of continued strong feed demand, combined with rising demand for corn for ethanol production. world coarse grains ending stocks World barley stocks are also forecast to decline as feed barley demand increases. rest of world United States 200 Australian production China The severe drought that sharply curtailed winter 150 grains production in 2006-07 has continued over the summer, with severe adverse effects on Austra- lian summer grain crops. In the case of the principal 100 crop, grain sorghum, rainfall in early December 2006 enabled some planting to take place in 50 northern New South Wales and Queensland. Lack of followup rainfall since planting in most Mt areas except central Queensland, has prevented 1991 1995 1999 2003 2007 any late sowing of grain sorghum and reduced -92 -96 -2000 -04 -08 yields of the already planted crop. Refl ecting the

34 australian commodities > vol. 14 no. 1 > march quarter 2007 grains reduced area planted and relatively poor yields in prospect in most regions, grain sorghum production in 2006-07 is forecast to decline by half to approximately 1 million tonnes. winter crop production to rebound in Australia Forecasts for the Australian grains industry in 2007-08 take into account recent climate outlook information from the Australian Bureau of Meteorology. In its latest El Niño status report (21 February 2007), the bureau indicated that the 2006-07 El Niño has ended. However, the bureau has cautioned that the end of the El Niño should not be seen as a precursor to drought breaking rains. This particularly applies to water supplies in parts of eastern and southern Australia, which in some instances require several years of healthy rainfalls to recover to a satisfactory level. In its national seasonal rainfall outlook for March–May (22 February 2007), the bureau has suggested that there is no strong swing in the odds toward wetter or drier conditions. Across signifi cant parts of South Australia there is a greater than 50 per cent probability of receiving median rainfall over the next three months. Using the Bureau of Meteorology assessments as a base for assuming average seasonal conditions, it is reasonable to expect a sharp increase in the area sown to winter crops in 2007-08. Many livestock producers signifi cantly reduced their animal numbers during the Australian cropping area and sheep second half of 2006 as the drought intensifi ed. Prices numbers of replacement livestock are likely to be high during sheep numbers pulses 2007, and where possible producers will be turning 150 20 to additional cropping to improve farm incomes in oilseeds the short term. The area sown to winter grain crops is consequently forecast to increase by around 15 per 125 coarse grains 15 cent to 21.4 million hectares in 2007-08. The area sown to the various winter crops will be 100 10 dependent on the timing and extent of the autumn rains. A late break to the season could result in increased areas sown to wheat and barley at the expense of 75 wheat 5 canola and pulse crops. Crop rotation factors will million million also be a consideration for individual growers. sheep ha The area sown to wheat in 2007-08 is forecast to 1991 1996 2001 2006 2011 increase to 13 million hectares, 17 per cent higher -92 -97 -02 -07 -12 than in the previous season. The areas sown to barley, canola and pulse crops are forecast to increase by 17 per cent, 10 per cent and 2 per cent respectively when compared with 2006-07. Assuming average seasonal conditions, total winter crop production is forecast to be 38.4 million tonnes, an increase of 22.7 million tonnes from the drought affected 2006- 07 harvest. wheat exports to increase Australian wheat exports in 2006-07 are forecast to be around 12.7 million tonnes a 16 per cent fall from the previous year. Large volumes of carryover stocks from the 2005-06 wheat crop are being drawn on to meet current export demand. With an increase in production forecast for 2007-08, Australian wheat exports are forecast to increase by around 3 million tonnes to almost 16 million tonnes. The value of wheat exports is also forecast to increase, by 21 per cent to $3.8 billion.

australian commodities > vol. 14 no. 1 > march quarter 2007 35 grains

In making these forecasts it is assumed that if any changes are made to wheat export marketing arrangements in the wake of the report of the Cole inquiry into the UN Oil-For- Food Program, they are likely to have little effect on wheat export performance. The Wheat Export Marketing Committee, appointed by the Australian Government, is consulting with wheat growers on the future of single desk marketing of export wheat. Its report is due to government at the end of March 2007. The report will be used by government to make a decision on the future of wheat marketing arrangements in Australia. barley exports to increase Australia’s barley exports are forecast to fall by around 40 per cent in 2006-07, to about 3.1 million tonnes. The total value of coarse grains exports in 2006-07 is forecast to fall by 27 per cent to around $865 million. Total Australian barley exports are forecast to recover to around 4.6 million tonnes in 2007-08, an increase of about 48 per cent from the drought affected volume exported in 2006-07. The value of Australia’s barley exports is forecast to reach $1.2 billion dollars in 2007-08, reﬂ ecting larger shipments from the post-drought crop and relatively good prices. Australian grain prices to fall The drought in Australia and elsewhere in 2006-07 and a rundown in global stocks of wheat and coarse grains have contributed to a substantial rise in international and domestic grain prices. The pool return for Australian premium white wheat (APW 10) in 2006-07 is forecast to be A$242 a tonne, A$51 a tonne higher than in the previous year. Australian feed barley and canola prices are forecast to increase by A$83 a tonne and A$181 a tonne respectively to average A$270 a tonne and A$567 a tonne respectively in 2006-07. In response to a forecast substantial improvement in production, Australian grain prices are likely to fall in 2007-08 as some of the previous drought related pressures on supplies to the market prices ease. The pool return for Australian premium white wheat (APW 10) is forecast to decline by A$26 a tonne to average A$216 a tonne in 2007-08. Australian feed barley and canola prices are forecast to fall by 25 per cent and 20 per cent to average A$202 a tonne and A$454 a tonne respectively in 2007-08.

medium term outlook

price trends In real terms, world prices for grains and oilseeds were on a declining trend from early in the 1990s to mid-2000. In the past, short term price spikes have been linked to production shortfalls in key producing and exporting countries. Over the medium term, the world supply–demand situation for grains and oilseeds is expected to remain relatively tight. Grain stocks are currently low and over the medium term there is expected to be little increase in their size. Continued relatively low stocks will provide support for real prices to remain stable over the medium term. Productivity improvements in grains production will result in increased volumes of grains being produced, placing some downward pressure on prices. However, increased demand for grains, particularly for biofuels production, is expected to provide support for prices.

36 australian commodities > vol. 14 no. 1 > march quarter 2007 grains

Low grain stocks mean that abrupt changes in production (such as can happen with poor seasonal conditions), particularly among the world’s largest producers and exporters, are likely to be translated quickly into signifi cant price fl uctuations. world demand Over the medium term, demand for grains and oilseeds is expected to increase, driven largely by increasing demand for use in the production of biofuels (particularly for coarse grains and oilseeds). World wheat consumption is projected to increase to 651 million tonnes by 2011-12, compared with forecast consumption of 607 million in 2006-07. The main use of wheat is for human consumption and this will increase with changes in world population. Over the outlook period to 2011-12 there is expected to be an increase in the use of wheat for livestock feeding purposes as some substitution occurs out of coarse grains and into wheat. Coarse grains and oilseeds consumption is projected to reach 1.08 billion tonnes and 440 million tonnes respectively by 2011-12. Although there is expected to be a shift in demand for grains and oilseeds into industrial use over the medium term, traditional uses such as in animal feed and for human consumption are also expected to continue to grow. biofuels demand being driven by government policies World demand for biofuels is expected to be a key driver to demand for grains and oilseeds over the medium term. Government policies in many countries are favourable for increased biofuels production, with mandatory use targets being set and various subsidies made available to encourage higher output. The major renewable fuels are ethanol (with corn the major grain used) and biodiesel (with canola and rapeseed oils currently being the most used vegetable oils). ethanol driving new demand for coarse grains Ethanol has become a major driver of coarse grains demand, boosted by government mandated use in motor vehicle fuels, production subsidies of various types and high oil prices. Growth in biofuels production will represent a major new demand for grains in addition to traditional livestock feed and industrial uses. The European Union, United States, China, Brazil, Malaysia and Canada are all seeking to ensure that a percentage of all fuel used contains biofuels. A major driver for relatively high corn prices over the medium term will be the rapid rate of expansion of corn based ethanol production in the United States, the world’s largest producer and exporter of corn. In 2000 about 6 billion litres of corn based ethanol were produced in the United States, using around 6 per cent of that year’s corn harvest. In 2006 an estimated 19 billion litres were produced, accounting for 20 per cent of the corn harvest, or 55 million tonnes. In 2007 an estimated 80 million tonnes of corn is expected be used to produce 24 billion litres of ethanol. There are now 110 operational ethanol plants in the United States, with a capacity of 20 billion litres. Another 73 plants are under construction and a further eight facilities are expanding their capacity. US capacity is projected to increase to 43 billion litres a year by 2008-09. With the addition of more ethanol plants that are currently in the planning stage, and assuming ethanol production remains profi table, it is estimated that US production capacity could reach 49-57 billion litres by 2012.

australian commodities > vol. 14 no. 1 > march quarter 2007 37 grains

In the United States, the rapid expansion in ethanol production capacity and output has been facilitated by a combination of: high oil prices, the US13 cents a litre tax credit provided to blenders, low corn prices up until the second half of 2006, a duty of US14 cents a litre on ethanol imports, the Renewable Fuels Standard (the majority of the mandate will be met by ethanol); and the banning of ethanol’s main oxygenate competitor, methyl tertiary butyl ether (MTBE) because of environmental concerns. Reductions in production costs over time are also helping the expansion. Despite an import duty of US14 cents a litre, US imports of ethanol from Brazil rose to 1.7 billion litres in 2006, up from 117 million litres in 2005, as domestic production has been unable to keep up with demand. US Government policy remains strongly supportive of biofuels, with recently introduced legislation calling for even stronger support, and greater biofuels production and use. In his 2007 State of the Union address, the President of the United States set a goal of reducing US gasoline consumption by 20 per cent in the next ten years. It was proposed that the scope of the current Renewable Fuel Standard, expand to an Alternative Fuel Standard. The President has asked Congress to set a mandatory fuels standard to require 133 billion litres of renewable and alternative fuels, from fuels like corn ethanol, cellulosic ethanol, biodiesel, methanol, butanol and hydrogen by 2017. Under current law, fuel blenders must use 28.5 billion litres of renewable fuels by 2012. Production incentives would remain largely the same under the proposal, with the current US13 cents a litre tax credit for each gallon of blended ethanol remaining. The Biofuels Security Act that was recently submitted to Congress contains a new renewable fuels standard that calls for 228 billion litres of ethanol and biodiesel to be included in the US motor vehicle fuel supply annually by 2020. The bill also calls for increasing the number of gasoline stations that carry blends of 85 per cent ethanol (E85) and directs automakers to gradually increase ﬂ ex-fuel vehicle production. Currently, ﬂ ex-fuel vehicles — those able to use both regular gasoline and blends of up to 85 per cent ethanol (E85) — make up only 2 per cent of vehicles in the US market. The 2007 farm bill proposed by the US Administration will seek US$1.6 billion over ten years to fund ethanol and other renewable fuels, focusing on developing cellulosic fuel made from switch grass, straw and farm waste. The plan also offers US$210 million a year in loan guarantees and US$15 million in annual grants for cellulosic projects. A US$15 million a year ‘wood to energy’ program would fund research using forest products for fuel. With the addition of cellulosic and other biomass feedstock in the production of ethanol, the structure of the market will change. As a result the importance of corn as an ethanol feedstock may decline over time. biodiesel driving demand for oilseeds Biodiesel is a product derived from sources such as vegetable oils and can be used as a transport fuel. The main vegetable oil used in biodiesel production is canola and rapeseed oil. However, potential exists for other oils such as palm and soybean to be used. In the European Union — the largest producer and consumer of biodiesel — the biofuels directive of 2003, indicates that member states must have a renewable fuel inclusion rate of 5.75 per cent (share of the market for petrol and diesel in transport) by 2010 and in the interim to have had a 2 per cent inclusion rate by 2005. Expansion in biodiesel production capacity is already occurring in the European Union. Biodiesel production capacity has grown from around 2 million tonnes in 2003 to 6.1 million tonnes in 2006. With the industry in the European Union expected to continue to expand over the medium term, the

38 australian commodities > vol. 14 no. 1 > march quarter 2007 grains demand for canola/rapeseed oil is expected to increase, providing further support for demand for oilseeds. Over the medium term, biodiesel production is expected to increase in many countries including Canada, China and the United States. In the United States, it is estimated that biodiesel production was 950 million litres in 2006, up from 346 million litres in 2005. The National Biodiesel Board indicates that there are 87 biodiesel plants in the United States, with 65 new plants under construction and thirteen under expansion. Tax incentives such as US26 cents a litre biodiesel tax credit until 2008 are also encouraging biodiesel production in the United States. Given the tax incentives and capacity being built by investors, biodiesel production and therefore demand for soy oil, is expected to grow over the medium term. In Canada the government has mandated that by 2010, 5 per cent of all motor vehicle fuels will be biofuels. Most of the biofuel used in Canada will be ethanol, with production capacity forecast to be 1.5 billion litres by 2008. However, biodiesel production is likely to grow rapidly from a current estimate of 9 million litres to a projected 100 million litres by 2008. The main source of biodiesel in Canada is rendered animal byproducts. However, with increased production capacity it is likely that canola oil will become more important as a feedstock. Biodiesel production in China is also projected to increase to 2 million tonnes by 2010. Canola oil is considered an attractive feedstock for biodiesel production in China. world supply Over the past twenty years, the harvested area of grains has remained fairly constant, falling by an average of half a per cent a year. Over the same period the area under oilseeds has increased by just over 2 per cent a year. Production of grains and oilseeds has increased over this time, largely through productivity improvements. Over the past twenty years, wheat yields have increased by an average 1 per cent a year, coarse grains by 1.5 per cent and oilseeds by 1.7 per cent a year. Over the medium term, it is expected that with continued productivity improvements, production will continue to rise. Wheat production is projected to increase to 647 million tonnes in 2011-12, coarse grains to 1.1 billion and oilseeds to 441 million tonnes. productivity improvements There has been a rapid adoption of genetically modiﬁ ed (GM) crops such as corn, soybean and canola, particularly in Argentina, Canada, China and the United States. In 2006-07, GM canola in Canada accounted for 77 per cent of the area harvested, while in the United States GM crops accounted for 89 per cent of soybean production and 61 per cent of corn production. In Argentina and Brazil the area of GM soybeans harvested was 98 per cent and 45 per cent respectively. The adoption of GM grains has resulted in an improvement in cropping yields. In Canada, canola producers estimate that GM varieties increased yields by up to 10 per cent compared with non-GM varieties. The US Department of Agriculture estimates that with continued adoption of GM corn, yields (in the United States) will increase from the current ﬁ ve year average of 9.15 tonnes per hectare to 10.5 tonnes per hectare by 2012. The acceptance and adoption of GM grains is likely to increase over the medium term, especially given the increased demand for grains for ‘nonfood’ purposes (biofuels).

australian commodities > vol. 14 no. 1 > march quarter 2007 39 grains

changes in areas sown to grains and oilseeds The area sown to grains and oilseeds is likely to increase over the medium term in response to higher prices. Various government policies in the major grain growing countries (particularly Brazil, China, India, the European Union, United States and the Russia Federation) are likely to infl uence cropping decisions. In the European Union and the United States, higher prices for grains and increased demand for biofuels could encourage the use of land that had previously been removed from production through government initiatives. In the European Union, the Common Agricultural Policy (CAP) has traditionally infl u- enced EU crop production through support prices, planting restrictions, intervention buying US Conservation Reserve Program and stock management. Under current CAP arrangements the percentage of eligible land The Conservation Reserve Program (CRP) was established by the Food Security Act of 1985 to be ‘set aside’ is decided each year. Set- with the dual purpose of preventing soil erosion aside land refers to farmland that is taken out of and achieving crop supply control. The program’s production. This set-aside land is subsidised by emphasis has evolved through a series of farm bill payments from the European Union at a rate of amendments, now focusing on soil erosion, water 406 euros per hectare. Under the current CAP and air quality, and wildlife habitat. It is proposed rules this set-aside land can then be used to that the 2007 farm bill reauthorise the CRP with produce crops, provided it is contracted solely added focus on the most environmentally sensitive lands and give priority to lands used for biomass for products that are not used in either the food production. or feed market. This rule allows for additional The CRP is a voluntary, long term cropland retire- land to be sown to canola for use in the produc- ment program, which provides participants (farm tion of biofuels. owners or operators) with an annual per acre rent In the United States, policies and payments and half the cost of establishing a permanent land surrounding the Conservation Reserve Program cover (usually grass or trees) in exchange for retiring (CRP) will infl uence planting decisions of highly erodible and/or environmentally sensitive cropland from production for ten to fi fteen years. growers who have participated in the program. Environmentally sensitive land targeted by the CRP A large proportion of land that was included is not necessarily of marginal productivity; CRP can in the program will become available for crop- sometimes retire highly productive land if it is of an ping in 2007 (see box for more detail). This environmentally sensitive nature. land could be used for the production of grains The program currently has 37 million acres and oilseeds in the United States to meet the enrolled. Over 27 million acres of CRP contracts are rising demand for biofuel. on farmland suitable for growing crops. Producers bid to participate in the CRP and bids are evaluated based on the environmental benefi ts and fi nancial Australian medium term outlook costs of the CRP contracts. Around 40 per cent of the land enrolled in CRP was previously planted Over the medium term, the area sown to grains to wheat, corn or cotton. A majority of CRP acres and oilseeds is forecast to remain above 20 enrolled in 1998 (16 million acres) could come out million hectares, increasing to around 24 of the program in 2007. However, CRP land may million hectares by 2011-12. In 2006-07 the have lower yields and take some time before it can be made suitable for crop production. area sown to grains and oilseeds in Australian As CRP contracts expire, high commodity prices fell to below 20 million hectares for the fi rst will provide an incentive for producers to return time in nine years. The area sown to grains contracted land to agricultural production. The and oilseeds in 2007-08 is forecast to respond release of these acres from the CRP could have a sharply as growers rebound from the drought signifi cant impact on crop production in the United of 2006. States. The acreage that could be released in 2007 Competition for cropping land largely is located throughout the major wheat producing regions and the western and southern corn belt. comes from the sheep industry, particularly in the wheat–sheep zone in Australia. Over the

40 australian commodities > vol. 14 no. 1 > march quarter 2007 grains medium term the sheep fl ock is expected to increase as farmers rebuild fl ocks that were reduced during the 2006 drought. By 2011-12 the Australian sheep fl ock is projected to be around 103 million sheep an increase of around 3 million compared with predrought numbers. However, this is well below sheep numbers from the early 1990s. While the area sown to crops is expected to increase over the medium term, the cropping mix will depend on individual grower rotations and the relative price of the respective grains. With continued productivity improvements, total production of grains and oilseeds is projected to reach 47 million tonnes by 2011-12. Wheat production is projected to be around 28 million tonnes, coarse grains around 14 million tonnes and oilseeds around 3 million tonnes. The expansion in Australia’s intensive livestock industries is expected to result in increased domestic demand for feedgrains. However, the increase in demand will be well below production levels, allowing for Australian grain exports to continue to grow.

australian commodities > vol. 14 no. 1 > march quarter 2007 41 contentssugar

> contactterry sheales > +61 > 2 +61 6272 2 6272???? 2054> [email protected] > [email protected]

sugar outlook to 2011-12

> anton wood and terry sheales

The world indicator price for sugar (New York no.11 raw spot fob Caribbean) is forecast to fall by 27 per cent in 2006-07 to average US11.5 cents a pound (c/lb). High sugar prices during 2005-06 prompted a substantial increase in global production in 2006-07 and an associated rise in stocks as consumption grew by less than output. In 2007-08 production is expected to increase further and again exceed consumption, with the result that prices are forecast to fall by 17 per cent to average US9.5c/lb. Sugar prices are projected to decline in real terms over the majority of the outlook period. This is despite rising ethanol demand and production and export limiting reforms in the EU sugar industry. Although ethanol consumption is expected to rise, cane production is projected to grow suffi ciently to facilitate increases in both sugar and ethanol production. Despite lower sugar prices in the next few years, world production is forecast to continue to rise because sugar cane, from which 80 per cent of the world’s sugar is derived, is a long lived crop that does not need annual replanting. Once sugar cane is planted, producers have little economic incentive to move land into other enterprises in the short term as long as acceptable returns can be maintained by, for example, altering the use of inputs such as fertiliser. As well, sugar beet plantings and production are unlikely to be signifi cantly affected by lower world prices unless market conditions or government support programs change suffi ciently to make substitute crops relatively more attractive to grow. After 2009-10, prices are expected to recover world indicator price for raw sugar slightly as consumption surpasses production and weekly, ended February 2007 stocks begin to fall. Despite the late improvement, real prices in 2011-12 are projected to average around 18 US9c/lb (in 2006-07 dollars), over 20 per cent less 16 than the 2006-07 estimated price.

14 sugar consumption Sugar consumption is projected to grow by around 2 12 per cent a year over the period to 2011-12 as rising 10 incomes and lower sugar prices make sugar more affordable, particularly in Asia where per person 8 consumption of sugar remains low relative to the world average. Sugar consumption is also forecast to grow USc/lb strongly in north Africa and the Middle East as a result 2004 2005 2006 of rising incomes and population growth.

42 australian commodities > vol. 14 no. 1 > march quarter 2007 sugar

Consumption in China will increase in response sugar consumption per person to rising incomes and lower sugar prices, as well as some substitution of sugar for starch sweeteners by food and beverage manufacturers. Consumption of world starch sweeteners has been relatively high in China, 20 but they have become more expensive as China’s India domestic ethanol programs have resulted in increases 15 in the price of corn, the main ingredient in their manufacture. 10 In contrast, to the above countries, sugar consumption in the Russian Federation has been declining China since 2002-03 and is projected to fall to 6.4 million 5 tonnes by 2011-12. Lack of population growth and higher domestic prices caused by import tariffs are kg likely to be key contributors to the declining consump- 1995 1998 2001 2004 2007 tion. developments in major exporters and importers Although the most signiﬁ cant increases in sugar production are projected to come from Brazil, major importing and exporting countries such as India, Thailand, China and the Russian Federation, are also expected to increase their production over the next ﬁ ve years.

Brazil As the world’s largest producer of sugar, changes in supply in Brazil have a direct effect on global prices. In 2007-08, Brazilian sugar production is forecast increase by 5 per cent to around 35 million tonnes as production of sugar cane remains economically attractive. The National Confederation of Agriculture has reported that there will be ninety new sugar cane mills coming into operation in Brazil over the next few years. As Brazil is an efﬁ cient low cost producer of sugar, and all of their sugar is produced from cane, falling prices are expected to have a limited effect on sugar production over the outlook period. sugar outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z

World a Production Mt 144.4 149.7 159.8 162.0 165.0 166.0 164.0 160.0 Consumption Mt 147.6 150.6 153.1 156.2 159.3 162.5 165.7 169.0 Stocks b Mt 61.4 60.5 67.2 73.1 78.8 82.3 80.6 71.6 Price – nominal USc/lb 10.5 15.8 11.5 9.5 8.0 7.5 9.0 10.0 – real c USc/lb 11.2 16.3 11.5 9.3 7.6 7.0 8.2 8.9 Australia d Production e kt 5 196 5 108 4 650 5 100 5 150 5 200 5 250 5 300 Export volume kt 4 153 3 896 3 650 3 970 4 010 4 050 4 090 4 130 Export value – nominal A$m 1 098 1 508 1 060 930 790 750 900 1 010 – real g A$m 1 169 1 556 1 060 907 752 696 816 892 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 2006-07 US dollars. d July–June years. e Raw tonnes actual. g In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Sugar Organisation; ABARE. australian commodities > vol. 14 no. 1 > march quarter 2007 43 sugar

raw sugar production In addition, demand for ethanol generated by the large fl ex-fuel vehicle fl eet, the compulsory blending of ethanol in petrol, and growing export demand for Brazil 30 fuel alcohol, provides cane producers with some security against lower sugar prices. 25 By 2011-12, the area planted to sugar cane in Brazil European Union 20 is projected to increase by 50 per cent. Given that most new mills that are being built are designed to produce 15 India around half ethanol and half sugar, production of sugar China in Brazil is projected to increase by 19 per cent to a 10 little over 40 million tonnes by 2011-12. Although there Thailand 5 appears to be plenty of scope to convert more land Russia into sugar cane growing in Brazil, production costs Mt may rise as additional infrastructure is required and 2001 2003 2005 2007 transport costs rise as more land further from the main -02 -04 -06 -08 processing centres is brought into production. Demand for imports of Brazilian ethanol from the United States has the potential to support sugar prices by reducing the amount of cane available for sugar production. However, US tariffs on imports of ethanol impose signifi - cant barriers to growth in the trade from Brazil. In addition, US government subsidies and policies on biofuels are contributing to a massive expansion in domestic US ethanol production capacity based on corn. These expansions and tariffs on imports will signifi - cantly impede the ability of Brazilian ethanol to make large inroads into the US motor vehicle fuels market. It is for these reasons that the strong growth in US ethanol demand seems likely to have little effect on sugar prices over the projection period.

China, India and Thailand to increase sugar production In 2007-08, sugar production in China is forecast to increase by 3 per cent to over 12 million tonnes as a result of plans by the Guangxi province to increase sugar production by 17 per cent to 7.5 million tonnes by 2010. Despite a recent drop in domestic prices, incentives for increased sugar production are expected to remain strong as prices are still 50 per cent higher than they were three years ago. As a result, sugar production in China is projected to increase by 8 per cent to nearly 14 million tonnes over the period to 2011-12, reducing the requirement for imports by 300 000 tonnes. Sugar production in India is forecast to rise by 5 per cent to 26 million tonnes in 2007- 08 because growers’ returns from sugar cane are expected to remain high relative to other crops. As a result, exports are expected to rise signiﬁ cantly to nearly 4 million tonnes. Thai sugar production is forecast to increase by 2 per cent to 7 million tonnes in 2007- 08. Over the period to 2011-12, Thailand is projected to remain one of the world’s largest sugar exporters, providing over 4.5 million tonnes a year of sugar for export.

European Union EU sugar production is currently undergoing a period of signiﬁ cant contraction. Production quotas are being reduced in order to limit subsidised exports to 1.4 million tonnes a year in order to comply with a World Trade Organisation panel ruling that the European Union was in breach of its obligations under the Uruguay Round Agreement on Agriculture. In 2006-07, nearly 1.5 million tonnes of production quota was surrendered as part of quota buyback arrangements. In 2007-08, the same buyback rate applies and the Euro-

44 australian commodities > vol. 14 no. 1 > march quarter 2007 sugar pean Commission has announced that it will try to reduce production quotas by a further 2 million tonnes. However, the buyback is not going according to plan as the deadline for applications for quota buyback was 31 January 2007 and producers so far have sold back less than 650 000 tonnes of quota. As a result, EU production is forecast to fall by only 4 per cent to 16.5 million tonnes in 2007-08. Over the medium term, it appears that the European Union will need to strengthen its efforts to contain domestic production of sugar and avoid an excessive buildup of stocks. Providing that further buyback arrangements are successful, EU production could fall to around 15 million tonnes a year. To the extent that production cuts work and consumption grows further, there is potential for the European Union to become a large net importer of sugar, possibly up to 4 million tonnes.

Russian imports to fall Production of sugar in the Russian Federation, the world’s largest importer, is forecast to increase by 9 per cent to 3.8 million tonnes in 2007-08 as a result of an increase in the area planted to beet. Based on the assumption that import tariffs will remain high enough to support the expansion of the domestic industry, sugar production in the Russian Federa- tion is projected to increase further, to around 5 million tonnes by 2011-12. As a result of increased domestic production and declining consumption, imports are projected to fall by around half to 1.5 million tonnes.

NAFTA developments As of 1 January 2008, there will be no further restrictions on trade in sweeteners between the United States and Mexico. With Mexico agreeing to remove its soft drink and distribution taxes, there is expected to be greater imports of high fructose corn syrup from the United States. At the same time, since returns from exporting sugar to the United States are higher than in alternative markets, signifi cant additional quantities of Mexican raw sugar can be expected to fl ow north. Australian outlook Australian sugar production is forecast to increase by 10 per cent to 5.1 million tonnes in 2007-08. The increase refl ects a recovery from the damage caused by cyclone Larry in early 2006 and less severe effects of sugar cane smut than originally expected. Providing that the areas under cane are moved into non smut susceptible varieties as normal replanting occurs, sugar cane smut is not expected to have a signifi cant effect on sugar production in 2007-08, or over the period to 2011-12. Higher production is forecast to fl ow through to a 9 per cent increase in the volume of exports to nearly 4 million tonnes in 2007-08. However, lower world prices mean that the value of exports is forecast to fall by 12 per cent to $930 million. Given the limited availability of land for expanding the area planted to cane, there appears to be signifi cant agronomic constraints on the extent to which Australian production of sugar can expand — especially in Queensland. Nevertheless, between 2007-08 and 2011-12, Australian sugar production is projected to increase by 4 per cent to 5.3 million tonnes as a result of higher yields and higher CCS values. With higher production, Australian exports of sugar are projected to rise to 4.1 million tonnes by 2011-12. Although higher shipping volumes will offset some of the effect on earnings of lower world prices, the value of sugar exports is projected to fall to around $900 million (in 2006-07 dollars) in 2011-12.

australian commodities > vol. 14 no. 1 > march quarter 2007 45 winecontents

> vincecontact o’donnell > +61 > 2 +61 6272 2 6272 ???? 2255 > [email protected] > [email protected]

wine industry outlook to 2011-12

> natalie currey and vince o’donnell

Australian wine grape production is expected to fall by nearly 30 per cent in 2006-07 as a result of drought, frost and reduced availability of irrigation water. While wine grape prices are anticipated to rise as some wineries move to secure grape supplies, the impact will not be substantial given that current high stocks mean that there is ample supply to meet market requirements this year. With Australian wine export volumes accounting for a little over 60 per cent of Austra- lian wine sales in 2005-06, the economic future of the industry will be heavily dependent on developments in international markets. With relatively fl at world demand, increasing world supplies and declining prices, Australia’s challenge is to become more effi cient and innovative in an increasingly competitive environment. While the volume of Australia’s wine exports are projected to increase in the medium term, growth is expected to occur at a decreasing rate and, with intense global competition, unit values of exports are projected to fall in real terms. world wine supply rising steadily World wine production has been rising on average by 2 per cent a year over the past fi ve years and is forecast to continue to increase steadily in the medium term. ‘Old world’ wine producing countries — France, Italy and Spain — remain the world’s largest producers, accounting for around 71 per cent of wine production in 2006. world wine production Production in France, Italy and Spain decreased in total by 12 per cent between 2000 and 2005 new world in line with a reduction in the area of vineyards old world in the European Union, but is estimated to have 20 000 increased by 3 per cent in 2006. Further increases are expected over the medium term as a result of 15 000 the European Union’s subsidised restructuring of vineyards, with new plantings of higher quality vines 10 000 beginning to bear over the next fi ve years. Over the past decade, wine production has grown substantially in ‘new world’ wine producing 5000 countries — Australia, Argentina, Chile, South Africa and the United States. Growth has been greatest ML in Australia, where output has risen by 67 per cent 19972000 2003 2006 since 2000. However, in contrast to the high growth

46 australian commodities > vol. 14 no. 1 > march quarter 2007 wine

in recent years, new world countries’ production is estimated to decline by around 5 per cent in 2006 as a result of a decline in production in Australia and the United States. The rate of growth in production in new world countries is expected to continue to decline in the medium term in response to lower world prices and slowing demand. The rate of wine grape area expansions has slowed since 2000 in new world producing countries, reﬂ ecting high world stocks and falling prices. In the short term, it is expected that the total area under wine grapes globally will remain stable. New world wine producing countries are growing similar varieties of wine grapes, which has resulted in increased competition. Red wine varieties predominate across all the new world producers. Cabernet sauvignon tends to dominate the red varieties and chardonnay the whites. There are exceptions to this — for example, large areas of shiraz grown in Australia and a focus on white wine in South Africa. Thus, not only has there been a substantial increase in grape and wine production worldwide, but an increase in supplies of similar grape and wine varieties. drought conditions affect Australian production The drought conditions, frosts and reduced water allocations throughout most of Australia’s wine grape growing regions have had a signiﬁ cant impact on wine grape production in 2006-07. Wine grape production for the 2007 vintage is estimated to be around 1.3 million tonnes, nearly 30 per cent below the 2006 vintage, and Australia’s smallest harvest since 2000. The drop in wine grape production in 2006-07 has varied between cool and warm regions. Cool climate production areas are estimated to have been more affected by drought, frost and water availability than the warm climate regions. Total wine grape production in cool climate regions in 2006-07 is estimated to fall by 35 per cent to approximately 426 000 tonnes. In the major cool climate regions (the Barossa Valley, Langhorne Creek and McLaren Vale), wine grape production is estimated to be around 33 per cent less than in 2005-06. Cool climate wine grape production is forecast to recover in 2007-08 to around 536 000 tonnes, an increase of 26 per cent. Total production in warm climate regions (principally the Murray Darling – Swan Hill, Riverina and Riverland) is estimated to drop by 25 per cent to 896 500 tonnes in 2006-

new world wine grape area, by variety, 2006

Australia United States South Africa Argentina Chile ‘000 ha ‘000 ha ‘000 ha ‘000 ha ‘000 ha red cabernet sauvignon 29 26 29 11 47 merlot 11 19 15 5 15 shiraz 42 6 21 7 0 other 19 a 49 b 35 c 78 d 38 a share of total area (%) 58 62 41 77 73 white chardonnay 44 53 12 10 29 sauvignon blanc 7 9 12 2 29 colombard 4 16 17 – – other 45 e 23 f 59 f 87 g 42 share of total area (%) 42 38 59 23 24 a Mainly pinot noir (Australia 23 per cent, Chile 4 per cent). b Mainly zinfandel (36 per cent). c Mainly Pinotage (40 per cent). d Mainly malbec (18 per cent). e Mainly semillon (20 per cent). f Mainly chenin blanc (United States 26 per cent, South Africa 49 per cent). g Mainly torrontes riojano (19 per cent). Sources: Australian Bureau of Statistics; US Department of Agriculture; South African Wine Industry Information and Systems; Instituto Nacional de Vitivinicultura.

australian commodities > vol. 14 no. 1 > march quarter 2007 47 wine

07. Assuming average seasonal conditions, warm climate production in 2007-08 is forecast to increase in the Murray Darling - Swan Hill and Riverina by approximately 28 per cent and 15 per cent respectively. In contrast, production in the Riverland region is forecast to fall by 14 per cent owing to reduced water availability. Falls in wine grape production are likely to affect both red and white premium grape varieties to a similar extent in 2006-07. Production of major premium red varieties (shiraz, cabernet sauvignon and merlot) are estimated to decrease by 35 per cent in 2006-07, with shiraz representing the greatest proportion of red wine production and the largest fall. Chardonnay is estimated to represent 58 per cent of premium white wine grape production in 2006-07, with total premium white wine grape production estimated to decrease by 24 per cent in 2006-07. Despite assuming a return to average seasonal conditions, reduced water availability for irrigation is likely to affect the 2008 vintage. It is forecast that Australian wine grape production in 2007-08 will increase to 1.5 million tonnes, still well below the 2005-06 harvest of almost 1.9 million tonnes. In 2008-09, total domestic wine grape production is projected to recover to 1.9 million tonnes and gradually increase to nearly 2 million tonnes by 2011-12. Growth in production will occur in both warm and cool climate regions, with warm climate production projected to grow by 39 per cent and cool climate production projected to increase 64 per cent over the medium term, when compared with the drought affected production of 2006-07. Australian stocks to fall from their record highs Although Australian wine consumption and exports have increased they have not kept pace with production in recent years. This contributed to domestic stocks increasing to a record high of 2.1 billion litres at the end of 2005-06. However, with the expected drop in wine grape production in 2006-07, and low production forecast in 2007-08, domestic stocks are forecast to fall to 1.7 billion litres by June 2008. Australian wine grape prices Substantially reduced production in 2006 - 07 is expected to result in some increase in wine grape prices as a number of wineries move to secure grape supplies in order to service particular markets. However, as stocks are relatively Australian wine high, wine grape price rises are not expected to be substantial nor experienced in all regions or across all varieties of wine grapes. Stocks of wine from warm opening stocks climate regions are understood to be larger than stocks 2000 from cooler climate regions. Therefore the drop in wine grape production is expected to have less effect on 1500 wine grape prices in warm climate regions. Wine grape prices are being inﬂ uenced by current 1000 large stocks of wine, the potential for stocks to cover wine wine production the expected fall in production in 2006-07 and the sales forecast relatively low 2007-08 harvest. The average 500 wine grape price is estimated to rise by 5.5 per cent to $650 per tonne in 2006-07. With forecast higher ML production in later years, Australia’s wine grape prices 2002 2005 2008 2011 are projected to fall to $600 a tonne (2006-07 -03 -06 -09 -12 dollars) by 2011-12.

48 australian commodities > vol. 14 no. 1 > march quarter 2007 wine demand for Australian wine World wine consumption has remained relatively stable over the past ten years. In the principal wine consuming countries, despite rising incomes, wine consumption appears to be relatively stagnant. Changing demographics are likely to be a signifi cant contributor to this situation. In both traditional and nontraditional wine consuming countries, more wine drinkers are moving into retirement (with attendant lower income) and younger age groups are exhibiting a preference for other alcoholic and nonalcoholic beverages. Wine consumption per person is positively affected by rises in consumer incomes and negatively affected by price rises and growth in the proportion of the population over 65 years of age, with consumer preference for alcoholic beverages also having a signifi cant infl uence. However, while these relationships exist they are not always good indicators for the future. For example, French, Italian and Spanish consumers have been steadily decreasing their wine consumption for several decades even though incomes have been rising. The lack of consumption growth in traditional wine consuming countries has disguised rapidly increasing wine consumption (as a proportion of alcohol consumption) in Australia’s major export markets. In Australia’s two largest export destinations — the United Kingdom and the United States — rising economic growth and incomes along with changing consumer preferences have fuelled a signifi cant increase in demand for wine. Australia’s market share has increased signifi cantly across the major export destinations since 2000. Australia’s top fi ve export destinations have increased their imports of wine on average by 17 per cent since 2000, with the United Kingdom and the United States showing the greatest growth, at 20 per cent and 66 per cent respectively. Domestic sales of Australian wine are estimated to remain stable at 437 million litres in 2006-07 and are projected to increase gradually to around 458 million litres by 2011-12, with bottled wine sales expected to continue to increase in line with consumer preferences. Australian imports of wine to fall in 2006-07 Imported wine represented 5 per cent of Australia’s domestic wine sales in 2005-06, with around half coming from New Zealand. In 2006-07, Australian imports of wine are fore- wine outlook – Australia

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Bearing area ’000 ha 153 149 155 157 158 160 161 162 Wine grape production s Red wine kt 1 071 995 657 794 1 003 1 009 1 013 1 016 White wine kt 773 760 587 642 825 836 843 850 Multipurpose kt 94 95 78 77 76 83 83 84 Total kt 1 938 1 850 1 322 1 513 1 904 1 928 1 939 1 950 Wine exports Volume ML 661 736 806 794 803 940 958 978 Value – nominal A$m 2 750 2 799 2 910 2 950 3 115 3 395 3 360 3 320 – real a A$m 2 927 2 887 2 910 2 878 2 965 3 153 3 044 2 934 Australian wine grape price – nominal A$/t 715 616 650 690 674 683 681 679 – real a A$/t 761 635 650 673 642 634 617 600 a In 2006-07 Australian dollars. s ABARE estimate. f ABARE forecast. z ABARE projection. Sources: ABS, International Trade, electronic data service, cat. no. 8504.0; Australian Wine Export Council; Australian Wine and Brandy Corporation, Approved Wine Shipments, Adelaide; ABS, Australian Wine and Grape Industry, cat. no. 1329.0; ABARE. australian commodities > vol. 14 no. 1 > march quarter 2007 49 wine

cast to fall by 25 per cent to just over 20 million litres. The fall in imports may be attributed to average unit import values increasing by 55 cents a litre in the fi rst six months of 2006- 07, predominantly as a result of higher New Zealand wine prices driven by low supply in that country. Wine imports are projected to grow on average by 5 per cent a year to 25 million litres in 2011-12. Australia in world trade Total world exports of wine reached 8.1 billion litres in 2005, an 18 per cent increase since 2000. The new world’s increasing share of total exports is a result of both increased exports by new world countries and decreased exports by old world countries since 2000. In 2005, Australia accounted for 8.7 per cent of world wine sales, making it the fourth largest exporter. The previously rapid growth in Australian exports has begun to subside as competition in the world wine market intensifi es. While the annual rate of growth averaged around 17 per cent in the fi ve years to 2005-06, the rate of growth over the next fi ve years is projected to slow to an average of 5 per cent a year. Low production in 2006-07, a forecast 14 per cent production increase in 2007-08 and some increases in wine grape prices are expected to result in exports remaining relatively stable over the next couple of years. Exports in 2007-08 at a forecast 794 million litres will be slightly down from the previous year. Bottled wine remains Australia’s dominant wine export, making up 70 per cent of total exports in 2005-06. However, Australia’s bulk wine exports, which comprised 25 per cent of the total in 2005-06, are estimated to increase to 29 per cent in 2006-07. This trend to more bulk wine as a proportion of shipments is expected to continue in the medium term as world demand for lower value bulk wine for bottling or blending increases. While the United States and United Kingdom are expected to remain Australia’s major export destinations, trends in recent Australian wine exports indicate that emerging markets such as China may become more important to the Australian wine industry. Australia’s exports of wine to nontraditional markets are projected to increase by 21 per cent in the medium term. At current rates of growth, it is projected that Australia’s exports to China will be greater than to New Zealand and Germany by 2011-12. China’s demand for wine is growing rapidly in response to rising consumer incomes and a reduction in import duties and tariffs. Australia’s wine exports to the United States grew signifi cantly in the fi ve years to 2005 and currently account for 28 per cent of total US wine imports, competing with Italy (30 per cent share) as the largest foreign supplier. Australian exports to the United States are projected to grow by an average of 7 per cent a year over the next fi ve years as incomes rise and wine consumption per person increases. Australia was also the largest exporter to the United Kingdom in 2005 but with slower growth projected for the medium term as competition from other new world producers intensifi es. It is expected that over the medium term, capturing a greater share of the United Kingdom on-licence trade may become increasingly important as margins on wine sold to supermarkets tighten. As incomes rise over time, opportunities for sales in restaurants and other on-licensed outlets will increase. With Australia’s wine industry heavily reliant on overseas markets for sales, maintaining market share in international markets is of great importance to continued industry viability. With little growth in domestic consumption, the vast majority of future increases in Austra- lian wine production will need to be marketed internationally.

50 australian commodities > vol. 14 no. 1 > march quarter 2007 wine export prices Australian wine exports In recent years, intense competition between producers has placed downward pressure on prices as they compete against each other in producing often similar 3000 value 750 wine styles. This competition has been refl ected in 2500 declining Australian wine export receipts. In 2006-07 unit value A$/L the average unit export price for Australian wine is 2000 estimated to be $3.61 a litre. The average unit value ¦ ¦ ¦ 500 of Australian wine exports is forecast to increase to 1500 volume $3.72 a litre in 2007-08. Over the medium term, wine 1000 grape prices are projected to decline in real terms to 250 $3.00 per litre (in 2006-07 dollars) by 2011-12. 500 The proportion of Australian wine exports in lower price brackets has been increasing across its major $m ML export markets. The placement of increasing amounts 1990 1997 2004 2011 of wine in export markets at lower prices means -91 -98 -05 -12 grape growers and wineries will need to work hard at improving productivity and reducing costs in order to maintain longer term profi tability. In 2006, nearly 80 per cent of Australian wine exports were sold for less than $5 a litre, an increase of 15 per cent in this lower price category since 2000. The United States remains Australia’s largest export destination by volume for sales above A$5 a litre. However, the proportion of Australian wine sold to the United States for under A$5 a litre increased from 31 per cent in 2000 to 75 per cent in 2005. While China is an emerging export destination for Australian wine exports, it is not expected to be a high value market for Australia, with 85 per cent of current exports sold for under $5 per litre. challenges for the future With prices of wine and wine grapes projected to decline over the medium term (in 2006- 07 dollar terms), it is clear that the Australian industry will need signifi cant new investment in the technology needed to drive down costs and increase global competitiveness. To remain successful in international markets, the Australian wine industry will need to invest in research and development to improve productivity and drive competitiveness. This can be achieved through innovation in production and processing, enhanced effi ciency and improved economies of scale. Both wine grape growers and wineries will need strong productivity growth to remain competitive in the global market. Australian producers will be forced to make further effi - ciency and productivity gains as cost-price pressures increase. proportion of Australian exports, by price point

United United New States Kingdom Zealand Germany Canada China 2000 2006 2000 2006 2000 2006 2000 2006 2000 2006 2000 2006 $2.49 and under % 5 22 17 33 43 45 21 70 9 24 37 64 $2.50 to $4.99 % 26 53 58 50 34 38 61 23 31 30 38 21 $5.00 to $7.49 % 42 17 20 13 15 12 9 5 40 35 8 9 $7.50 to $9.99 % 19 4 3 2 6 3 4 1 14 7 16 7 $10.00 and over % 8 4 2 1 2 2 5 1 6 4 0 0 volume of wine exports ML 50 213 139 269 20 27 9 38 13 51 0.4 12 Sources: Australian Wine and Brandy Corporation (www.awbc.com.au). australian commodities > vol. 14 no. 1 > march quarter 2007 51 contentsnatural fibres

> ian shaw > +61 2 6272 2223 > [email protected]

natural ﬁ bres outlook for wool and cotton to 2011-12

> anton wood, frank drum, ian shaw and dale ashton

wool

> anton wood and dale ashton

The structure of the Australian sheep industry has changed signifi cantly over the past decade. In particular, increased production of prime lambs and the movement of resources away from wool production in favour of cropping have reduced sheep producers’ reliance on income from wool. More recently, persistent drought in many regions has contributed to further declines in sheep numbers and wool production. Looking ahead, the short term outlook for the sheep industry will depend heavily on seasonal conditions, particularly the timing and extent of any break in the drought. Assuming there is an improvement in seasonal conditions in 2007-08, sheep producers will be faced with a variety of choices concerning enterprise mix in both the short and medium terms. These choices will be infl uenced by a range of factors, including the relative returns available from various enterprises, and the current fi nancial situation of individual farmers. At the same time, longer term issues such as competition between wool and other fi bres and changes in demand for wool and sheep meat will continue to be important factors infl uencing market outcomes. Australian eastern market indicator prices refl ect supply concerns weekly, ended 16 February 2007 The Australian eastern market indicator of wool prices rose sharply in the fi rst half of 2006-07. Between July 110 0 and October 2006, the eastern market indicator aver- 1000 aged around 748 cents a kilogram clean, before rising to around 920 cents a kilogram in February 2007. 900 The sharp increase in wool prices was largely a result of growing concerns about the duration of the 800 drought and its likely impact on future wool supplies, 700 together with stocks of wool currently held on farms and in brokers’ stores being low. In December 2006, 600 the Australian Wool Innovation Production Forecasting Committee revised its forecast of Australian shorn wool c/kg clean production to 420 000 tonnes in 2006-07, down 8 2003 2004 2005 2006 per cent from the previous year. Poor seasonal condi-

52 australian commodities > vol. 14 no. 1 > march quarter 2007 wool tions through winter and spring 2006 contributed to Australian sheep numbers lower numbers of sheep shorn and reduced average at 30 June fl eece weights. In 2007-08, the Australian eastern market indicator is forecast to decline by 1 per cent to average around 150 830 cents a kilogram clean, as competition from alternative fi bres remain strong and the outlook for wool supply improves. 100 Australian wool production to rise Assuming seasonal conditions improve over the 50 coming year and result in higher average fl eece weights, Australian shorn wool production is forecast to rise slightly in 2007-08. Although the numbers of million sheep shorn is forecast to be down, the Australian 1991 19951999 2003 2007 sheep fl ock is forecast to remain around 94 million by June 2008, largely through improved lambing rates. However, the rate of fl ock rebuilding is likely to be subdued as producers turn off greater numbers of lambs for slaughter in response to improved lamb prices. The timing and extent of a seasonal break and the resulting prospects for pasture growth are likely to be important to wool outcomes. Sheep producers’ current decisions about joining ewes, including numbers and breeds, will be partly infl uenced by the likelihood of feed being available through winter 2007. Over the medium term, shorn wool production is projected to increase to 473 000 tonnes in 2011-12 as the sheep fl ock is gradually rebuilt.

wool outlook – Australia

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Eastern market indicator (clean) – nominal Ac/kg 767 713 835 830 820 815 810 800 – real a Ac/kg 816 736 835 810 781 757 734 707 Auction price (greasy) Ac/kg 485 464 526 523 516 513 510 504 Sheep numbers b million 101 100 94 94 96 98 100 103 Sheep shorn million 104 103 101 97 98 100 102 105 Cut per head kg 4.57 4.43 4.16 4.35 4.39 4.40 4.45 4.50 Wool production (greasy) – shorn kt 475 456 420 422 430 440 455 473 – other c kt 45 53 52 43 45 52 53 51 – total kt 520 509 472 465 475 491 508 524 Total closing stocks d – weight (greasy) kt 157 158 154 154 154 154 154 154 Wool exports (balance of payments basis) – volume (greasy equiv.) kt 515 498 472 472 475 491 508 526 – nominal value A$m 2 838 2 544 2 829 2 810 2 794 2 867 2 951 3 020 – real value a A$m 3 021 2 624 2 829 2 741 2 660 2 662 2 673 2 669 a In 2006-07 Australian dollars. b Closing sheep and lamb numbers at 30 June. c Includes wool on sheepskins, fellmongered and slipe wool. d

Privately held stocks of unsold wool. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Australian Wool Exchange; ABARE. australian commodities > vol. 14 no. 1 > march quarter 2007 53 wool

Australian shorn wool production modest growth in wool consumption With world economic activity and consumer incomes assumed to continue to grow over the next few years, demand for textiles and apparel is forecast to be stronger. However, the 800 degree to which this is translated into higher wool consumption will be affected by how wool producers and textile manufac- 600 turers respond to the recent higher prices. The extent to which stronger consumer demand for textiles and apparel translates 400 into stronger demand for any particular fi bre — such as Austra- lian raw wool — will depend largely on competition among fi b r e s a t i n t e r m e d i a t e processing stages. 200 Apart from the particular attributes of individual fi bres, competition among fi bres at intermediate processing stages kt is largely based on price. Prices for synthetic fi bres, the main 1991 1995 1999 2003 2007 substitute for wool, have trended downward in real terms since -92 -96 -2000 -04 -08 the 1960s. Because of the ready substitutability of synthetic fi bres for wool in most apparel, wool prices have also trended down, thus maintaining their overall competitiveness. Continuing productivity improvements in synthetic fi bre manufacture means that synthetic fi bre prices can be expected to continue trending down over the longer term. The ratio of wool prices to synthetic fi bre prices provides a guide to wool’s competitiveness relative to synthetic fi bres. Following the recent sharp rise in wool prices, the ratio of wool prices to synthetic fi bre prices was 3.7:1 in January 2007, compared with the long term average of around 3:1. In mak ing pro duc t ion decisions , pro ces s ors w ill at tempt to minimis e t he cos t of combining raw fi bres with other inputs to meet the requirements of apparel retailers. Substitution of fi bres will occur in response to relative price changes, depending on the extent to which different fi bres can be spun into yarns with similar end use characteristics. wool prices to ease from current highs Over the medium term, competition from other fi bres will continue to place downward pressure on wool prices. At the same time, modest economic growth in key wool consuming markets is expected to result in improvements in overall wool to polyester price ratio demand for textiles and apparel, some of which will include monthly, ended February 2007 increased demand for items made from wool. In the fi ve years to 2011-12, the eastern market indicator is projected to fall by 15 per cent to around 710 cents a 4 kilogram (in 2006-07 dollars). However, there is likely to be considerable volatility in wool prices from time to time resulting from periodic supply shocks, given the current situation of low 3 wool stocks and uncertainty about seasonal impacts over the medium term. There are a number of risks associated with the outlook. On 2 the production side, the timing of an end to the current Austra- lian drought remains uncertain. In particular, the duration and geographic spread of the drought will have important implica- 1 tions for the size of the sheep fl ock and the volume of wool 1996 1998 2000 2002 2004 2006 production over the next few years.

54 australian commodities > vol. 14 no. 1 > march quarter 2007 wool

On the demand side, some potential downside risk is posed by developments in world economic growth, consumer incomes and demand for textiles and apparel in major wool consuming countries. Also, because of the decline in Australian wool availability over the past year, the extent to which increased spending on textiles and apparel as a whole will translate into increased demand for raw wool remains unclear. From a longer term perspective, the major reduction in availability of wool in recent years may mean a largely permanent shift out of wool by some processors. Lower supplies of wool (compared with availability over the past decade) are likely to mean that there is a substantial excess of wool processing capacity. As currently underutilised wool textile machinery is converted to processing other fi bres, the demand for raw wool will decline until it eventually reaches a more sustainable supply–demand equilibrium. changes in Australian wool export destinations A feature of the Australian wool market over the past decade has been some major shifts in the destinations of Australian wool exports. — in particular, the increased importance of China in the world wool market, both as an importer of raw wool and an exporter of fi nished woollen apparel. Despite declines in Austra- lian shorn wool production, shipments of Australian Australian wool exports, by destination wool to China in 2005-06 are estimated to have been around 9 per cent higher than in 1999-2000. In 2005-06 percentage terms, China accounted for 58 per cent other14% EU27 18% of Australian wool exports in 2005-06, compared Korea 2% with 34 per cent in 1999-2000. Japan 1% China is also a signifi cant producer of raw wool India 7% and has a large domestic market for woollen textiles China 58% and apparel. Australian Wool Innovation Limited 1999-2000 has estimated that around 65 per cent of Australia’s raw wool exports to China are absorbed by China’s other19% EU27 32% domestic market. Refl ecting assumed strong income Korea 6% growth over the medium term, China’s domestic Japan 4% demand for woollen textiles and apparel is expected India 5% to strengthen. China 34% In contrast, although the European Union remains an important fi nal consumer of woollen products, movement of processing capacity to lower cost countries has meant a signifi cant reduction in the volume of Australian wool exported to the European Union — down from 256 000 tonnes in 1999-2000 to around 84 000 tonnes in 2005-06. Since 1999-2000, there have also been signifi cant declines in Australian wool exports to Japan and the Republic of Korea, both formerly major destinations for shipments of Australian wool. Total shipments to these two countries fell from 81 000 tonnes in 1999- 2000 to around 14 000 tonnes in 2005-06. potential for rebuilding the fl ock An issue of critical importance to the future of the Australian sheep industry is the ability of the national fl ock to recover from the effects of the drought. In particular, present fl ock numbers cannot be maintained if the slaughter of adult sheep and lambs continues at present rates. The number of lambs marked, minus sheep and lambs slaughtered, live exports and deaths defi nes the change in sheep numbers during any given year. In recent

australian commodities > vol. 14 no. 1 > march quarter 2007 55 wool

years, the number of sheep and lambs slaughtered plus live exports and deaths has exceeded the number of lambs marked and resulted in declining sheep numbers. Despite an overall decline in sheep numbers, the proportion of breeding ewes in the fl ock is estimated to have risen over the past year as wethers would most likely have been the fi rst animals turned off as the drought worsened. If this was the case, the current fl ock would be well positioned to increase lambing numbers once seasonal conditions allow. Also, lamb marking rates have generally increased over the past decade. With increased emphasis on fi rst and second cross lamb production, the trend toward higher lambing rates for the fl ock as a whole is expected to continue over the medium term. Increased lambing each year will better allow both higher lamb slaughter and a greater number of lambs to be retained for the adult fl ock. Total sheep slaughterings will also be important. With the trend toward increased prime lamb production occurring over the past decade, any reduction in slaughterings is more likely to be from the adult sheep population as returns from wool and prime lambs encourage fl ock rebuilding. enterprise mix will be important The amount of resources (including land) devoted to wool, beef and crop production in Australia has varied over time. Resource use in the different broadacre agricultural enterprises is infl uenced by many factors, including changes in the relative prices of the commodities being produced, and different rates of productivity improvement among each enterprise. In deciding on strategies for recovering from the drought, Australian broadacre agricultural producers will be faced with important decisions on how best to allocate resources between various production activities. The many individual decisions that will be made, when aggregated across the sector, will have important implications for how the farm sector develops over the next few years. Among the most critical decisions, in terms of their aggregate effect, may occur on mixed livestock–cropping farms. In deciding on the mix and scale of farm activities, producers take into account returns from a range of enterprises, such as wool, lamb, mutton, beef cattle and crops. Over the next fi ve or six years it is likely that the area under grains and other crops will be largely maintained or increased to some extent from predrought plantings. This is not surprising given the large on-farm investment in grain growing equipment and infrastructure in recent years and prospects for continued relatively good returns from grains. Nevertheless, with wool prices projected to remain relatively attractive to producers over the medium term there are likely to be increased incentives for some movement of resources back into sheep and wool production. Within the sheep industry itself, the likelihood that production costs in many areas may not vary much between the different types of sheep enterprises means that prices received by farmers for wool and sheep meat will be the most important determinant of incomes from these enterprises. Relative movements in wool and sheep meat prices infl uence the breed, age and sex composition of the fl ock. Prices will therefore have a strong effect on the types of sheep run and, hence, on the production of wool, lamb and mutton.

56 australian commodities > vol. 14 no. 1 > march quarter 2007 cotton cotton

> frank drum and chloe haseltine prices to rise in early 2007 and over the medium term Growth in world cotton consumption in 2006-07 is forecast to exceed production, leading to a decline in stocks. Refl ecting this, the Cotlook ‘A’ price index is forecast to increase by 5 per cent in 2006-07 to average US59 cents a pound. In 2007-08, the Cotlook ‘A’ index is forecast to increase by 4 per cent to average around US61 cents a pound, underpinned by a forecast increase in demand for cotton in China, India and Pakistan. With world cotton production forecast to remain relatively unchanged in 2007-08 at 25.3 million tonnes, world cotton stocks are forecast to fall to around 9.2 million tonnes, the lowest in four seasons. World cotton consumption is projected to exceed production over the fi ve years to 2011-12, leading to a decline in stocks and some increase in prices in real terms. However, the increase in cotton prices is expected to be constrained by two key factors — the price competitiveness of cotton relative to synthetic fi bre substitutes, and increased availability of lower quality cotton, particularly from India, Pakistan and China. In 2011-12, cotton prices in real terms (2006-07 dollars) are projected to average around US63 cents a pound, around 7 per cent above the current estimate for 2006-07. world production to change little in 2007-08 World cotton production is forecast to remain relatively unchanged in 2007-08 at 25.3 million tonnes, with forecast higher production in India and Pakistan likely to offset lower production in China and the United States.

China Cotton production in China is estimated to have increased by 17 per cent in 2006-07 to 6.7 million tonnes, underpinned by an increase in both the area planted and yields. Ideal growing conditions and the increased adoption of genetically modiﬁ ed cotton varieties contributed to increased yields to an estimated record 1.25 tonnes per hectare, 6 per cent above the previous record in 2002-03. The area planted to cotton in China is forecast to world cotton stocks and price increase by 4 per cent in 2007-08 to 5.6 million hectares, as farmers responded to the increased returns from the crop in 2006-07. However, with an assumed stocks 100 10 return to average yields, cotton production in China is forecast to fall by 3 per cent in 2007-08 to 6.5 million 80 8 tonnes. 60 6 India Cotlook ‘A’ High domestic cotton prices in the leadup to planting 40 index 4 of the 2006-07 cotton crop, resulted in the area planted to cotton in India increasing by 5 per cent to 20 2 9.2 million hectares. Reﬂ ecting this, and a 4 per cent 2006-07 increase in cotton yields, cotton production in India is USc/lb Mt estimated to increase by 9 per cent in 2006-07 to 4.6 1995 1999 2003 2007 2011 million tonnes. -96 -2000 -04 -08 -12 australian commodities > vol. 14 no. 1 > march quarter 2007 57 cotton

In 2007-08, cotton production in India is forecast to increase by a further 9 per cent to 4.8 million tonnes, driven largely by an increase in planted area and expected higher yields. Underpinning the improvement in yields, will be the continued adoption of genetically modiﬁ ed (GM) cotton varieties. The area planted to GM cotton increased from 1.35 million hectares in 2005-06 to 3.5 million hectares in 2006-07 (38 per cent of Indian cotton area).

United States US cotton production is estimated to have fallen by 9 per cent in 2006-07 to 4.7 million tonnes as relatively poor seasonal conditions in some regions resulted in lower yields and a higher abandonment rate (the percentage of the area planted that is abandoned before harvest), compared with recent seasons. In 2007-08, expected lower returns from cotton production, relative to alternative crops such as corn and soybeans are likely to lead to some reduction in the area under cotton and, hence, to lower production. In the Mississippi Delta region, for example, it has been estimated that US cotton prices would need to average US67 cents a pound and US72 cents a pound, respectively, to be as profi table as corn and soybean production. To the extent that such estimates are refl ective of likely relative returns across areas of the United States with broadly similar growing environments, it is likely that, with domestic cotton prices in the United States having averaged around US47c/lb in the fi rst fi ve months of 2006 - 07, growers will be moving some of their land from cotton into these more profi table crops where agronomically feasible.

cotton outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z

World a Production Mt 26.25 24.88 25.31 25.28 25.82 26.56 27.14 28.04 Consumption Mt 23.72 25.26 26.30 26.85 27.10 27.51 28.06 28.73 Closing stocks Mt 11.79 11.73 10.74 9.18 7.89 6.94 6.03 5.34 Stocks-to-consumption ratio % 49.7 46.4 40.8 34.2 29.1 25.2 21.5 18.6 Cotlook ’A’ index – nominal USc/lb 52 56 59 61 64 66 68 71 – real b USc/lb 56 58 59 60 61 62 62 63 Australia c Area harvested ’000 ha 321 336 143 190 222 260 304 356 Lint production kt 645 597 250 335 400 477 569 679 Value of production – nominal d A$m 1 222 1 105 419 607 780 1 000 1 265 1 611 – real e A$m 1 301 1 140 419 592 743 929 1 146 1 424 Export volume kt 410 650 482 279 357 426 508 606 Export value – nominal A$m 770 1 137 815 499 694 890 1 126 1 434 – real e A$m 820 1 173 815 487 661 827 1 020 1 268 Export unit value – nominal A$/kg 187.96 174.91 169.20 179.12 194.49 209.12 221.76 236.83 – real e A$/kg 200.07 180.41 169.20 174.75 185.12 194.19 200.90 209.32

a August–September years. b In 2006-07 US dollars. c July–June years. d Includes cottonseed value. e In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; US Department of Agriculture; ABARE.

58 australian commodities > vol. 14 no. 1 > march quarter 2007 cotton

Consistent with the above estimates, a recent National Cotton Council of America acreage survey has found that producers plan to reduce US cotton areas by 14 per cent in 2007-08. The largest reductions are expected in the south east and the midsouth, with producers expected to plant 20 per cent fewer hectares. Smaller declines are expected in the south west and far west. With yields assumed to be consistent with recent averages, cotton production in the United States is forecast to decline by 9 per cent to 4.3 million tonnes in 2007-08. production of genetically modifi ed cotton increasing Average global cotton yields are projected to rise over the outlook period, driven largely by the increased adoption of GM cotton varieties and improvements in growing techniques — particularly in India, Pakistan, Brazil and Africa. Refl ecting these trends, world cotton production is projected to increase by 11 per cent over the next fi ve years to reach 28 million tonnes in 2011-12. In 2006-07, the proportion of world cotton area planted to GM cotton varieties increased by 7 per cent to 12.5 million hectares (around a third of the total world area planted to cotton) — the largest annual increase since the introduction of GM cotton varieties ten years ago. world GM cotton area Although adoption of GM cotton in India represented the vast majority of this growth — increasing from 1.35 million hectares to 3.5 million hectares in 2006-07 10 — a number of other key cotton producing countries made signifi cant steps toward legalising the commer- 8 cial cultivation of Bt cotton. In Pakistan, a biotechnology safety commission 6 has been created by the government to assess the benefi ts of genetically modifi ed cotton varieities 4 — with around 200 000 hectares of GM cotton planted in trials in 2006-07. Assuming the commer- 2 cial cultivation of GM cotton in Pakistan is legalised, million cotton yields in Pakistan are projected to increase by ha 22 per cent over the outlook period to around 0.8 1996 1998 2000 2002 2004 2006 tonnes per hectare. -97 -99 -01 -03 -05 -07 Prior to the planting of the 2006-07 cotton crop, the Brazilian Government implemented laws allowing the planting of GM cotton. This resulted in around 13 per cent of the cotton area being planted to GM varieties. The use of GM cotton varieties is not expected to affect yields signifi cantly over the medium term, but their use is likely to reduce production costs for some farmers. Lower production costs combined with stable cotton prices and hence potentially higher returns from the crop are projected to result in the area planted in Brazil increasing by 17 per cent over the fi ve years to 2011-12. In Africa, where yields were estimated to be 53 per cent below the world average in 2006-07, the impending adoption of GM cotton varieties has the potential to dramatically improve cotton yields. Field trials of GM cotton have been conducted in a number of countries including Burkina Faso (formerly Upper Volta), Egypt, Kenya and Senegal. Commercial releases of GM cotton are expected to be approved in Burkina Faso and Egypt in time for planting the 2007-08 cotton crop.

australian commodities > vol. 14 no. 1 > march quarter 2007 59 cotton

textile fibre consumption cotton consumption is growing 60 industrial countries World cotton consumption is forecast to increase by developing countries 4 per cent in 2006-07 to 26.3 million tonnes, driven Europe and former USSR 50 largely by a 9 per cent increase in consumption in China, India and Pakistan. 40 In 2007-08, world cotton consumption is forecast to increase by 2 per cent to around 26.9 million tonnes. 30 The lower rate of growth in consumption refl ects easing demand for raw cotton in China and lower assumed 20 world economic growth. Moderating this slowing in growth in consumption of raw cotton will be continued 10 government support and investment in clothing and textile production, particularly in China, India and Mt Pakistan. World cotton consumption is projected to 1996 19982000 2002 2004 2006 increase to 28.7 million tonnes by 2011-12 Import restrictions on Chinese textiles imposed by the United States and European Union are likely to constrain growth in Chinese textiles production in the short term. In 2007-08, reduced growth in textile production, combined with changes to the sliding scale duty system (see China changes duties on cotton box), is likely to restrict growth in Chinese imports of imports raw cotton. In India, the government has announced plans to In 2005, the Chinese Government imple- secure $20.5 billion in new investment in the Indian mented a sliding scale duty system for imports of raw cotton other than that imported under textile industry over the next fi ve years, as it aims to the tariff rate quota system. Under the system, increase India’s share of world textile production to a reference price was set at US56.86 cents 10 per cent (currently around 3 per cent) by 2015. a pound, whereby imports at or above the In addition, Pakistan recently established a National reference price attracted an import duty of 5 Textiles Strategy Committee aimed at lowering per cent. Imports below the reference price production costs in its domestic textile industry. attracted increasing amounts of duty up to Toward the end of the outlook period, growth in a maximum tariff of 40 per cent — providing an economic incentive for Chinese mills to cotton consumption is expected to increase, under- import higher grades of cotton. pinned by two key factors — increased demand for Under the new sliding scale system, from textiles and clothing from developing countries and 1 January 2007, two reference prices have increased availability of lower value cotton fi bre. With been set — at US66 and US47 cents a developing countries accounting for around 53 per cent pound. Prices above US66 cents a pound of textile fi bre consumption (end use) in 2006, growing attract fi xed duties of 6 per cent, while prices incomes in these countries, in line with stable economic below US47 cents a pound will attract fi xed duties of 40 per cent. A sliding scale duty will growth, is expected to lift demand for clothing and apply to prices within that range. For prices textiles, thus increasing the demand for raw cotton. between US57.5 and US66 cents a pound (the current range of international prices) the Australian production to recover cost to the importer after tax will be greater Below average rainfall in most areas of northern New then under the old system. As a result, the South Wales and southern Queensland over the past margin between domestic and international twelve months has resulted in water storages in key prices will need to increase signifi cantly to stimulate increased import demand by cotton growing regions falling to historically low levels. Chinese mills for imports additional to those Refl ecting this, the area planted to cotton in 2006-07 under the tariff rate quota which attract a is estimated to have fallen by 57 per cent to 143 000 duty of 1 per cent. hectares — the smallest area planted since 1983-84. In addition, lower water availability and extreme

60 australian commodities > vol. 14 no. 1 > march quarter 2007 cotton temperatures have affected the development of crops in many areas and is likely to lead to a reduction in yields. As a result, Australian cotton production is forecast to fall by 58 per cent in 2006-07 to 250 000 tonnes. Assuming a return to average seasonal conditions in 2007-08 and an associated improvement in water storage levels, the area planted to cotton is forecast to increase by 33 per cent to 190 000 hectares. However, it must be emphasised that such an increase will be critically dependent on infl ows into water storages. Any signifi cant increases in water allocations to cotton producers for next season are likely to be contingent on the receival of above average rainfall over the next six months. water availability a likely constraint on industry growth Over the medium term, availability of water will be a key constraint on cotton plantings in Australia. Any major increase in the area planted to cotton will be contingent on a number of factors including: increased water allocations to cotton producers, outcomes from the National Water Initiative and the returns from cotton relative to substitute crops. Refl ecting these factors, research into and development of more water effi cient irrigation technology will be a key component in achieving expanded areas under cotton. Currently, signifi cant research is being conducted into methods designed to improve water use effi ciency in the cotton industry. However, the cost of implementing this technology relative to the potential benefi ts is currently constraining the adoption of some existing water use effi ciency technologies on a wider scale. As the market for trading water use entitlements develops and competition for available water grows and its price rises, some of these technologies will become economically profi table to use. The returns from cotton relative to substitute crops, may also constrain the area planted to cotton over the medium term. Increased feed grain demand from an expanding feedlot sector and the potential expansion of ethanol production over the medium term, can be expected to place upward pressure on grain prices — especially for grain sorghum. With returns from cotton production expected to remain relatively constant in real terms over the outlook period, some cotton producers may switch part of their land to growing irrigated sorghum crops. water storage and availability

capacity Feb 2003 Feb 2004 Feb 2005 Feb 2006 Feb 2007 GL % of % of % of % of % of capacity capacity capacity capacity capacity Southern Queensland Beardmore 82 4 100 70 56 4 Fairbairn 1 301 29 46 33 20 25 Glenlyon 254 12 24 29 30 13 Leslie 106 8 12 15 14 10 Northern New South Wales Copeton 1 362 9 26 27 24 11 Keepit 426 12 36 33 23 3 Pindari 312 20 68 72 60 22 Southern New South Wales and Victoria Blowering 1 631 0 31 23 52 12 Burrendong 1 188 16 17 21 37 6 Burrinjuck 1 026 8 44 25 38 27 Dartmouth 3 906 38 48 44 65 20 Hume 3 038 5 42 38 55 3 Menidee Lakes 1 731 0 0 0 0 0 Wyangala 1 220 18 13 10 31 7 australian commodities > vol. 14 no. 1 > march quarter 2007 61 contentsmeat

> contactian shaw > >+61 +61 2 26272 6272 ???? 2223 > [email protected] > [email protected]

meat outlook for beef and veal, sheep meat, pigs and poultry to 2011-12

> frank drum, ian shaw, anton wood, dale ashton and patrick lindsay

beef and veal

> frank drum, ian shaw and patrick lindsay

The Australian weighted saleyard price of beef is forecast to increase by 10 per cent in 2007-08 to average 330 cents a kilogram (dressed weight) reﬂ ecting increased demand from restockers and forecast lower Australian beef production. In addition, in 2007- 08, demand for Australian beef in Japan is expected to remain relatively unchanged — assuming that the import protocols relating to BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) applied by Japan against US beef imports remain unaltered. Over the medium term, Australian saleyard prices are expected to ease in line with higher domestic beef production and increased competition in key export markets. With the Republic of Korea and the United States expected to sign a free trade agreement in the next six months, Korea’s import protocols relating to US beef imports may be relaxed. Reﬂ ecting this, US exports to Korea are projected to return to pre-BSE levels over the outlook period. With Australian production forecast to increase Australian beef over the medium term and competition in key export markets likely to intensify, Australian saleyard prices production are forecast to decline. In real terms, Australian sale- saleyard price yard prices are projected to average 230 cents a kilo- 320 2000 gram (in 2006-07 dollars) in 2011-12.

240 1500 herd rebuilding to constrain supply In 2006-07, drought conditions across much of 160 1000 Australia are estimated to result in slaughterings increasing by 5 per cent to around 8.9 million. Largely as a result of increased turnoff, the Australian cattle 80 500 herd is forecast to fall to 27.7 million by June 2007. Assuming the drought breaks in autumn in southern 2006-07 c/kg kt Australia, there is likely to be greater retention of 1995 1999 2003 2007 2011 female cattle for herd rebuilding. By June 2008, the -96 -2000 -04 -08 -12 Australian cattle herd is forecast to increase to 28.2

62 australian commodities > vol. 14 no. 1 > march quarter 2007 beef and veal million. However, with the widespread nature of the drought it is expected to take several years before cattle numbers recover to predrought levels. With production projected to increase over the outlook period, saleyard prices are expected to ease, reducing the incentive to expand the herd. Australian cattle numbers are consequently projected to peak at 29.1 million in 2009-10. domestic markets to be affected by lower slaughterings In 2007-08, production will be constrained by lower overall cattle numbers, a reduced calf crop and the retaining of stock to build herd numbers. As a result, slaughterings in 2007-08 are forecast to decline by 3 per cent to 8.6 million and production to fall by 2 per cent to 2.1 million tonnes. Over the medium term, beef and veal production is expected to increase in line with the expanding cattle herd. Increases in average slaughter weights, reﬂ ecting a return to average seasonal conditions and an expanding feedlot sector, will also contribute to higher production. Beef and veal production is projected to reach 2.3 million tonnes in 2011-12. In 2006, fed cattle turnoff reached 2.6 million, 25 per cent above turnoff in 2003, as increased demand for Australian beef in Japan and Korea (following the exclusion of US beef from those markets in December 2003) supported further expansion in the Austra- lian lot feeding sector. In addition, drought conditions across much of Australia in 2006, resulted in increased placements in feedlots to ﬁ nish cattle for the domestic market. With demand for Australian grain fed beef likely to remain strong over the medium term, further investment in the Australian lot feeding sector is expected. Higher prices in 2007-08 are forecast to lead to a 3 per cent fall in domestic consumption to an average of 34.3 kilograms per person. Australian beef consumption is projected beef and veal outlook – Australia

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Saleyard price a – nominal Ac/kg 320 322 299 330 310 290 275 260 – real b Ac/kg 340 332 299 322 295 269 249 230 Cattle numbers c million 27.8 28.6 27.7 28.2 28.6 29.1 28.9 28.7 – beef million 24.7 25.5 24.8 25.3 25.7 26.1 25.7 25.4 Slaughterings ’000 8 853 8 401 8 863 8 600 8 800 9 100 9 200 9 300 Production kt 2 162 2 077 2 175 2 111 2 172 2 240 2 286 2 322 Consumption per person kg 35.6 35.4 35.3 34.3 34.7 35.5 35.7 35.8 Retail price – nominal Ac/kg 1 449 1 540 1 550 1 580 1 560 1 550 1 565 1 585 – real b Ac/kg 1 542 1 588 1 550 1 541 1 485 1 439 1 418 1 401 Export volume d kt 948 892 952 925 955 985 1 007 1 025 – to United States kt 363 295 286 270 280 300 330 355 – to Japan kt 419 388 400 390 380 390 410 430 – to Korea, Rep. of kt 91 121 161 120 100 90 100 115 Export value – nominal A$m 4 584 4 272 4 332 4 645 4 505 4 347 4 214 4 055 – real b A$m 4 879 4 406 4 332 4 532 4 288 4 036 3 818 3 584 Live cattle exports ’000 574 549 600 660 710 745 775 790 a Dressed weight equivalent. b In 2006-07 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. australian commodities > vol. 14 no. 1 > march quarter 2007 63 beef and veal

Australian fed cattle turnoff to rise to almost 36 kilograms per person by 2011- 12, around 1 per cent higher than in 2006-07. This increase largely reﬂ ects projected relatively modest 2500 rises in retail prices of beef compared with lamb.

2000 Australian beef exports to increase over the medium term 1500 Australian beef exports are forecast to fall by 3 per cent to 925 000 tonnes in 2007-08, refl ecting lower 1000 domestic beef production. However, the value of Australian beef exports is forecast to increase by 7 500 per cent to $4.6 billion, with an increase in export unit values more than offsetting the effects on earnings ‘000 of a fall in export volumes. Over the medium term, 2000 2002 2004 2006 beef exports are projected to increase as slaughterings, and hence production, increase in line with an expanding herd. By 2011-12 exports are projected to be more than 1 million tonnes (shipped weight), around 8 per cent greater than in 2006-07. Despite greater export volumes, the value of beef exports is projected to be around $3.6 billion in real terms (2006-07 dollars) in 2011-12 as prices in export markets ease with rising competition in markets such as Japan and the Republic of Korea. resumption in US–Japan beef trade In July 2006 the Japanese food safety commission approved the resumption of imports of US beef, ending a 31 month ban. Under the conditions of re-entry, Japan will only accept shipments of US beef from cattle aged twenty months or younger. Age can be verifi ed by registering calves in a US Department of Agriculture approved ‘quality system assessment’ (QSA) program or cattle can be determined to be A40 physiological maturity or younger using US standards. Currently only 5 per cent of US fed cattle have documentation proving chronological age, and the A40 classifi cation is such a tight measure that on average less than 9 per cent of cattle slaughtered are classifi ed as A40 carcasses or below. Although Japanese imports of US beef are classification of US beef carcasses expected to increase in the short term in line with the peak slaughter period for these animals in the United States (April–June) they are likely to remain 25 well below pre-BSE levels. Refl ecting the diffi culties of sourcing animals that meet Japan’s import criteria, 20 in the fi ve months since July 2006, Japan imported only 4200 tonnes (shipped weight) of US beef. Prior 15 to the closure of the Japanese market in late 2003, exports of US beef to Japan were 260 000 – 300 10 000 tonnes (shipped weight) a year. The US Government is currently negotiating with 5 Japan over changes to the existing import protocols, with negotiations focusing on the potential for Japan % to adopt the current World Organisation for Animal Health (OIE) risk standard, for determining the safety

64 australian commodities > vol. 14 no. 1 > march quarter 2007 beef and veal of beef. Current OIE standards allow for the trade in beef products from cattle up to thirty months of amendments to Japan’s snapback age, after specifi ed BSE risk materials have been tariff removed. However, given that the adoption of OIE In anticipation of a signifi cant increase in total standards is not mandatory, Japan appears unlikely beef imports, the Japanese Government has to move to them. recently announced an amendment to its beef Over the medium term, exports of US beef tariff snapback mechanism. The snapback tariff to Japan are likely to be constrained by two key is a safeguard arrangement negotiated by the factors — the availability of beef carcasses classifi ed Japanese Government as a side agreement to the WTO Uruguay Round Agreement on Agri- A40 or below and the limited number of cuts that culture in 1994. The provisions are safeguard the Japanese want to import from the United States. measures that apply separately to Japanese According to the US Meat Export Federation, imports of both chilled and frozen beef and exports of US beef to Japan typically comprise are calculated on cumulative import volumes seven cuts, representing 15 per cent of the carcass. for the Japanese fi nancial year. If cumulative Assuming that there is limited adoption of age verifi - quarterly imports in the current year exceed the cation programs, it is estimated that with US produc- volume in the same period of the previous year by 17 per cent, the safeguard may be applied tion forecast to increase in 2007, the volume of beef for the remainder of the fi nancial year. Under eligible for export to Japan could be as little as snapback, the ad valorem tariff on imports of 165 000 tonnes (shipped weight). beef would increase from 38.5 per cent to 50 By 2011-12, US beef supplies eligible for export per cent. to Japan could rise to around 180 000 tonnes as a However, Japan’s Tariff Council recently result of increased availability and slaughter of suit- endorsed a proposed amendment to the able animals. However, this level of exports is still Temporary Tariff Measures Law for 2007. Under the new law, the safeguard will be considerably below the 270 000 tonnes exported amended for the 2007-08 Japanese fi nan- in 2003, before the BSE outbreak. cial year (April–March) in recognition of the resumption of trade between the United States Japanese demand for Australian beef to and Japan and an anticipated increase in US remain strong beef exports to Japan over the next twelve Australian exports to Japan are forecast to increase months. The new amendment is similar to the amendment to the Temporary Tariff Measures by 3 per cent in 2006-07 to 400 000 tonnes, under- Law introduced for the fi rst time in 2006. The pinned by increased demand for Australian beef in new law changes the base period for calcu- that market. Refl ecting this, Australian export prices lation of the tariff snapback measure and is for grain fed and grass fed beef are estimated to now an average of imports during the Japa- increase by 4 per cent and 11 per cent respectively nese fi nancial years 2002-03 and 2003-04. in 2006-07, to 522 cents and 480 cents a kilogram. In addition, in the event that a trigger level In 2007-08, higher Australian beef prices and calculated using fi nancial years 2002-03 and 2003-04 is below the trigger level calculated increased competition from the United States is fore- using fi nancial year 2005-06; the actual cast to lead to Australian exports to Japan falling by import volume in 2005-06 will be used as 2 per cent to 390 000 tonnes. a base for calculation of a trigger level. This By 2011-12, Australian exports of beef to Japan exception will apply to frozen beef in the fi rst are projected to increase to 430 000 tonnes quarter 2007 (shipped weight). This growth refl ects lower Austra- The change in the safeguard law allows for lian saleyard prices, and increased total demand an increase in the volumes of chilled and frozen beef that can be imported without triggering for imported beef in Japan. In addition, US exports an increase in the tariff from 38.5 per cent to to Japan are expected to be constrained over the 50 per cent. Thus, despite trade between the medium term by the limited availability of A40 beef. United States and Japan expected to increase Australian and Japanese government offi cials over the medium term, it is unlikely that the have agreed to start negotiations over the develop- snapback will be triggered in 2007.

australian commodities > vol. 14 no. 1 > march quarter 2007 65 beef and veal

Australian beef exports to Japan ment of a Free Trade Agreement (FTA) between the two countries. If an agreement is reached Australian exports of beef to Japan could increase by more than currently projected. Beef exports to Japan 400 currently face a tariff of 38 per cent and eliminating or reducing that tariff, as a result of an FTA, would 300 increase demand for Australian beef in Japan and bring about considerable gains to the beef industry. 200 Korean demand to increase With an increasing population, higher assumed 100 economic growth, and increased income per person, beef consumption in the Republic of Korea kt is expected to trend higher over the outlook period. 2002 2005 2008 2011 Therefore, despite an expected increase in domestic -03 -06 -09 -12 beef production, total demand for imported beef in Korea is expected to increase over the outlook Korean beef imports, by cut period. Prior to the discovery of BSE in 2003, the United States accounted for 70 per cent of total Korean beef 140 United States imports, with around 60 per cent of the trade being in New Zealand 120 rib product. However, since the exclusion of US beef, Australia Korean demand for Australian beef has increased 100 signiﬁ cantly. In calendar 2006, Australian exports to 80 Korea increased by 40 per cent to 150 000 tonnes (shipped weight). Although Australian exports have 60 increased, the composition of cuts has remained rela- 40 tively unchanged, with rib cuts representing around 25 per cent of Australian exports in 2006. Consequently, 20 if the United States is able to gain greater access to kt the Korean market in the short term, their comparative 2003 2006 2003 2006 advantage in producing rib cuts is likely to result in the rib other displacement of some Australian product. Australian exports to Korea are expected to decline in 2007-08, assuming Korea agrees to relax its current restrictive import protocols as part of the free trade agreement currently being negotiated between the United States and Korea. If the protocols are relaxed within the next six months, then demand for Australian beef will fall. Reﬂ ecting the likely greater competition from US beef, Australian exports to Korea in 2007-08, are forecast to fall by 25 per cent to 120 000 tonnes. With the import protocols applied against US beef in Korea likely to be eased over the outlook period, competition for Australian exports in Korea is expected to intensify. As a result, Australian exports to Korea are projected to decline to 115 000 tonnes by 2011-12, 28 per cent below the estimate for 2006-07. increased competition from Uruguay in the US market In 2006, Uruguayan exports to the United States fell by 47 per cent year on year, driven largely by high Uruguayan beef prices, resulting from increased demand from Chile

66 australian commodities > vol. 14 no. 1 > march quarter 2007 beef and veal and the Russian Federation. Exportable beef supplies in south America in 2006 were disrupted by a short self imposed beef export ban in Argentina and trade restrictions against Brazilian beef following outbreaks of foot and mouth disease. These restrictions resulted in increased demand for Uruguayan beef from Chile and the Russian Federation, placing upward pressure on beef prices in Uruguay. In 2007, however, with the Argentinean beef export ban having been relaxed, many countries easing import bans on Brazilian beef, and production in Uruguay forecast to increase, beef prices in Uruguay are expected to fall. Consequently, demand for Austra- lian beef in the US manufacturing beef market may ease over the outlook period. Australian exports to the United States to increase over the medium term In 2006, dry seasonal conditions in the United States resulted in US cow slaughter increasing by 10 per cent year on year, constraining herd expansion activity in the United States. Assuming a return to average seasonal conditions in 2007, US cow and heifer slaughter is expected to fall, as beef producers rebuild herds. As a result, US cow prices are forecast to increase, leading to increased demand for imported beef. Despite the prospect of higher prices in the United States, Australian exports are forecast to fall in 2007-08, driven largely by two key factors — reduced Australian female cattle slaughter, as the domestic herd is rebuilt and increased competition from Uruguay. Consequently, Australian beef exports to the United States are forecast to decline by 5 per cent in 2007-08 to 270 000 tonnes. Over the medium term, however, Australian exports to the United States are projected to increase as Australian saleyard prices are forecast to fall. By 2011-12, Australian exports to the United States are projected to reach 355 000 tonnes, 24 per cent above forecast 2006-07 levels. Australian exports of live cattle to increase over the outlook period Live cattle exports increased by 24 per cent year on year in the fi rst six months of 2006- 07, refl ecting improved seasonal conditions in northern Australia and increased demand in Indonesia and Israel, Australia’s largest two export markets. Above average seasonal conditions in northern Australia led to higher calving rates, increasing the available supply of animals for live export. In addition, a 12 per cent depreciation of the Australian dollar against the Israeli shekel in the fi rst nine months of 2006 led to increased import demand for Australian live cattle in Israel. As a result, live cattle exports to Israel more than doubled in 2006, to around 80 000, and Israel displaced Malaysia as Australian live cattle exports the second largest market for live cattle. In 2007-08, Australian live cattle exports are fore- other cast to increase by a further 10 per cent to 660 000, Malaysia driven largely by an expansion in the supply of cattle. 800 Israel Over the medium term, lower cattle prices and an Indonesia assumed depreciation of the Australian dollar will make 600 live exports more attractive to importing countries and are forecast to underpin further increases in live cattle 400 exports. In addition, assuming average seasonal conditions over the outlook period, an increase in available supply of cattle for live export is expected to further 200 underpin growth in live cattle exports. Refl ecting this, live cattle exports are projected to rise by 32 per cent ‘000 to 790 000 by 2011-12. 2000 2002 2004 2006 australian commodities > vol. 14 no. 1 > march quarter 2007 67 sheep meat

sheep meat

> anton wood and dale ashton

The outlook for sheep meat over the next few years will be heavily infl uenced by producers’ responses to the drought in 2006-07 and uncertainty about the extent and timing of a break in the drought. For adult sheep, developments in the wool market will also have a strong infl uence on outcomes over the coming year. As the drought worsened during calendar 2006, many sheep producers reduced the number of wethers and older ewes in their fl ocks. Consequently, the number of adult sheep slaughtered in 2006-07 is forecast to rise by around 10 per cent to 13 million. Although wool prices are forecast to ease slightly in 20 07- 08, returns from wool growing are expected to remain favourable enough to encourage producers to be rebuilding sheep fl ocks — contingent on there being a widespread break in the drought. In the short term, the most likely avenue for fl ock rebuilding will be the retention of adult sheep from slaughter. In 2007-08, adult sheep slaughter is forecast to fall in response to an assumed improvement in seasonal conditions relative to 2006-07 and as producers seek to rebuild their fl ocks.

sheep meat outlook

2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Saleyard price for sheep – nominal Ac/kg 166 172 145 170 180 170 160 150 – real a Ac/kg 177 177 145 166 171 158 145 133 Saleyard price for lambs – nominal Ac/kg 352 340 324 370 350 340 335 330 – real a Ac/kg 374 351 324 361 333 316 303 292 Retail price for lamb – nominal Ac/kg 1 170 1 216 1 192 1 290 1 300 1 310 1 320 1 330 – real a Ac/kg 1 245 1 254 1 192 1 259 1 237 1 216 1 196 1 176

Sheep numbers b million 101 100 94 94 96 98 100 103 Slaughterings Sheep ’000 11 443 11 830 13 000 10 000 10 000 10 500 11 000 11 000 Lamb ’000 17 331 18 666 19 000 18 800 19 100 19 300 19 500 19 700 Production c Mutton kt 237 244 252 200 210 221 232 232 Lamb kt 354 382 390 387 395 401 408 414 Consumption per person Mutton kg 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 Lamb kg 10.1 10.2 10.1 9.7 9.7 9.7 9.7 9.6 Exports Mutton exports d kt 144 148 154 103 106 115 125 125 Lamb exports d kt 128 146 157 160 164 167 172 177 – to United States kt 36 41 44 46 48 49 51 53 Lamb export value d – nominal $m 700 782 783 872 906 899 909 922 – real a $m 746 806 783 851 863 835 823 815 Live sheep exports ’000 3 233 4 248 3 800 3 700 4 000 4 100 4 150 4 200

a In 2006-07 Australian dollars. b At 30 June. c Carcass weight. d Fresh, chilled and frozen, shipped weight. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

68 australian commodities > vol. 14 no. 1 > march quarter 2007 sheep meat

Australian lamb slaughter Australian sheep slaughter quarterly, ended June 2007 quarterly, ended June 2007

400 price 5000 250 price 5000

300 4000 200 4000

200 3000 150 3000

100 2000 100 2000 slaughter 0 1000 50 1000 2006-07 2006-07 slaughter c/kg dressed ‘000 c/kg dressed ‘000 1994 1997 2000 2003 2006 1994 1997 2000 2003 2006

In the case of lambs, total slaughter is also estimated to rise in 2006-07, with many producers ﬁ nishing lambs on failed crops. Looking ahead, the number of lambs marked in 2007-08 is forecast to fall because of lower ewe numbers coming out of the drought. As a result, the number of lambs slaughtered in 2007-08 is forecast to fall by 1 per cent to 18.8 million. With reduced supplies, saleyard prices for lambs in 2007-08 are forecast to rise by around 14 per cent to average 370 cents a kilogram. Continuing strong growth in demand in export markets means that lamb prices are expected to stay relatively attractive to producers over the projection period. Neverthe- less, with prices of lambs projected to ease over the medium term there will be some incentive for movement of farm resources from cropping back into sheep and wool production. As sheep numbers gradually rise over the medium term, the number of lambs slaughtered is projected to increase to 19.7 million by 2011-12. lamb demand to remain strong Following several years of strong growth in demand, Australian domestic demand for lamb is projected to Australian lamb exports, by destination remain ﬁ rm over the medium term. However, growth in demand is likely to be constrained by higher lamb 2005-06 retail prices relative to prices for other meats. European Union 8% In Australia’s key export markets, US import Japan 9% other 34% Papua New demand for lamb is expected to continue to rise Guinea 8% as consumption of sheep meat increases and US United Arab domestic production continues to decline. Also, ship- Canada 3% Emirates 6% Mexico 4% ments of New Zealand lamb to the United States United States 28% are expected to rise only slightly over the next few 1999-2000 years because of continuing strong demand for New European Union 14% Zealand lamb in the European Union. However, the other 29% Japan 5% extent to which these factors translate into further Papua New Guinea growth in Australia’s lamb exports will be limited by 13% Canada 3% the availability of supplies, with lamb production United Arab Emirates 6% Mexico 11% projected to rise modestly over the medium term. United States 19%

australian commodities > vol. 14 no. 1 > march quarter 2007 69 pig meat

Strong demand for lamb in Japan — primarily associated with the introduction of a chain of restaurants featuring barbecued lamb on the menu — contributed to a 58 per cent increase in shipments of Australian lamb to Japan between 2004 and 2006. Demand for lamb in Japan has also been boosted by lower supplies and higher prices of beef and poultry. Over the next few years, however, the growth in Australian exports of lamb to Japan is expected to moderate. Growth in consumer incomes and spending the Middle East has contributed to strong demand for lamb over the past year. Aided also by reduced supplies from New Zealand, shipments of Australian lamb to the Middle East rose in 2006-07. With higher prices and reduced Australian supplies over the coming year, shipments of Australian lamb to the Middle East are forecast to fall slightly in 2007-08. live sheep exports to decline The number of live sheep exported is forecast to decline in 2006-07 due to reduced supplies and increased competition for suitable sheep from restockers as producers seek to rebuild ﬂ ocks. Nevertheless, demand for live sheep exports to the Middle East remains strong because of ongoing increases in consumer incomes. Over the medium term, further growth in Australia’s trade in live sheep is likely to be constrained by the availability of suitable sheep and strong competition from other supplying countries (such as South Africa).

pig meat

> frank drum and patrick lindsay

In 2006-07, Australian pig meat prices are forecast to increase by 14 per cent to average 265 cents a kilogram, refl ecting lower Australian production and fi rm domestic demand. In the short term, high prices for substitute meats, such as beef and lamb, following the drought, are expected to underpin increased demand for pork, resulting in saleyard prices for pigs increasing 4 per cent in 2007-08 to average 275 cents per kilogram. In the second half of 2007-08, saleyard prices are expected to ease, in line with increased competition from beef and lamb, as supplies of these meats increase. Over the outlook period to 2011-12, Australian pig meat saleyard prices are expected to fall in pig meat production costs real terms, driven largely by increased imports from Denmark and Canada and declining real retail prices for substitute meats, particularly beef and 2.0 lamb. In 2011-12, Australian pig meat saleyard prices are projected to average around 200 cents a kilogram (in 2006-07 dollars). 1.5 feed costs 1.0 Feed inputs represent around 60 per cent of the total cost of pig meat production in Australia, and of this amount, feedgrain accounts for approxi- 0.5 mately 70 per cent. In 2006, a report by the Pork A$/kg Co-operative Research Centre found that produc- live weight tion costs in Australia were signifi cantly higher than Brazil Canada United China Australia major competitors’ costs, including Brazil, the United States

70 australian commodities > vol. 14 no. 1 > march quarter 2007 pig meat

States and Canada, driven largely by the comparatively higher feed grain costs experienced by pork producers in Australia. Research programs are being developed in the Australian pig meat industry to reduce the high costs of production. However, Australia is unlikely to achieve similar cost advantages in feed and processing costs over the medium term compared with its major competitors. The preference for higher pork slaughter weights in Canada and the United States means that producers in these countries are able to obtain lower labour and feed costs per animal — with many of the slaughter processes requiring the same amount of labour regardless of animal size. As a result, the labour ‘overhead’ with smaller pigs is likely to be higher per unit of meat produced than with larger pigs. Refl ecting some easing in prices and the need to become more competitive in the market place, fi rms in the Australian pork industry can be expected to consolidate over the outlook period. The Australian sow herd is projected to decline to almost 280 000 by 2011-12, nearly 5 per cent below the estimated June 2007 fi gure. As a result, Australian pig meat production is projected to fall to 355 000 tonnes in 2011-12, around 5 per cent below that estimated for 2006-07. Australian pig meat imports higher Australian imports of pig meat increased by 15 per cent year on year in the fi rst six months of 2006-07, as the strengthening of the Australian dollar lowered the price of imported

pig and poultry outlook – Australia 2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Pig meat Breeding sows a ’000 329 305 296 300 297 292 287 281 Saleyard price – nominal Ac/kg 243 232 265 275 260 250 235 225 – real b Ac/kg 259 239 265 268 247 232 213 199 Slaughterings ’000 5 342 5 370 5 200 5 300 5 225 5 150 5 075 4 975 Production kt 389 389 374 381 375 369 362 355 Consumption per person kg 23.9 22.8 23.2 23.6 23.5 23.6 23.7 23.7 Imports c – fresh kt 79.0 69.9 84.4 86.0 89.6 95.6 99.6 104.6 – preserved kt 2.5 2.4 2.5 2.4 2.4 2.4 2.4 2.4 – total kt 81.5 72.3 86.9 88.4 92.0 98.0 102.0 107.0 Exports cd kt 43.5 43.3 41.5 40.8 40.0 38.5 35.0 32.5 Retail price – nominal Ac/kg 1 071 1 158 1 170 1 214 1 220 1 235 1 245 1 260 – real b Ac/kg 1 140 1 194 1 170 1 184 1 161 1 147 1 128 1 114 Poultry meat Production kt 792 817 842 847 861 878 892 907 Consumption per person kg 37.8 38.5 38.9 39.1 39.3 39.6 39.8 39.9 Exports kt 19.8 21.6 22.0 22.0 22.0 23.0 24.5 26.0 Retail price – nominal Ac/kg 396 368 360 368 380 387 395 404 – real b Ac/kg 422 380 360 359 362 359 357 357 a numbers at 30 June. b In 2006-07 Australian dollars. c Shipped weight. d Excludes preserved pig meat. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; ABARE. australian commodities > vol. 14 no. 1 > march quarter 2007 71 poultry meat

pork products. In 2007-08, imports are forecast to increase by a further 2 per cent, reﬂ ecting high domestic saleyard prices for pork and the relatively high Australian dollar. In addition, lower pig meat prices in major exporting countries like the United States and Canada will be conducive to a small rise in imports. Despite an assumed depreciation of the Australian dollar over the medium term, the trend to higher imports is expected to continue, with imports of pig meat projected to reach 107 000 tonnes (shipped weight) in 2011-12, 23 per cent above forecast 2006-07 levels. Australian exports to decline Australian pork exports are forecast to fall by 4 per cent in 2006-07 to 41 500 tonnes (shipped weight), as a result of a relatively strong Australian dollar against the US dollar and reduced Australian production. In 2007-08, this trend is expected to continue, with Australian pork exports forecast to fall slightly to 40 800 tonnes, as higher Australian pig meat prices and increased competition from the United States and Canada reduces export demand for the Australian product. Over the medium term, demand for Australian pig meat exports is projected to fall, reﬂ ecting increased competition from lower priced pig meat from key exporting countries. By 2011-12, Australian pig meat exports are projected to fall to around 33 000 tonnes, 21 per cent below the estimated 2006-07 amount.

poultry meat

> frank drum and patrick lindsay

Following a forecast production increase of 3 per cent to 842 000 tonnes in 2006- 07, higher feed grain prices as a result of the drought are expected to restrict growth in Australian poultry meat production to only 5000 tonnes in 2007-08. Over the medium term, poultry production is projected to increase at a slower rate than over the past ﬁ ve years as a result of expected higher feedgrain prices in Australia. By 2011-12, Australian poultry meat production is projected to reach 907 000 tonnes, 8 per cent above forecast production in 2006-07. Australian poultry meat consumption is forecast to increase only slightly to just over 39 kilograms per person in 2007-08, as relatively high prices of substitute meats aid the competitiveness of poultry. Over the medium term, consumption is projected to increase moderately to around 40 kilograms a person by 2011-12. An assumed depreciation in the Australian dollar over the medium term is expected to aid an increase in Australian poultry meat exports. In 2011-12, poultry meat exports are projected to reach around 26 000 tonnes, 18 per cent above estimated 2006-07 levels.

72 australian commodities > vol. 14 no. 1 > march quarter 2007 contentsdairy

> jammiejohncontact hogan penm > +61 >> +61 +612 6272 2 2 6272 6272 ???? 2030 2056 > [email protected] > [email protected] > [email protected] dairy outlook to 2011-12

> peter berry and john hogan dairy prices to rise out to 2008-09… World prices for the major dairy products rose sharply late in 2006 and have remained relatively high in the fi rst quarter of 2007. Higher world dairy prices have been driven by constraints on growth in supplies from the three major exporters — the European Union, New Zealand and Australia — at a time of rising global demand. The ongoing nature of some of these production constraints (both seasonal conditions and institutional arrangements) means that world dairy product prices are expected to remain relatively high over the next few years. In Australia, the current drought will result in sharply reduced production and exports in 2006-07 and 2007-08 as dairy farmers reduce herds in order to control expenditures — particularly the higher feed costs associated with reduced irrigation water allocations. Poor seasonal conditions were also evident in New Zealand, with limited growth in production expected for the year. In the European Union — the world’s largest producer of dairy products — milk production is estimated to be relatively fl at in 2006-07 (despite increased milk quotas) as a result of poor seasonal conditions (heat and drought) in many dairying regions. Also contributing to lower growth in EU milk production has been the impact of Common Agricultural Policy (CAP) reforms that have reduced incentives to produce milk. However, increased dairy supplies are expected from some emerging exporters such as Argentina and the Ukraine, while China’s dairy production (which is mostly used in world dairy prices domestic consumption) continues to rise strongly. quarterly, ended June 2008 In contrast to the supply situation, world demand for dairy products — particularly in the key growth cheese markets of south east Asia, the Russian Federation, the 2500 whole skim milk milk Middle East and north Africa — continues to increase powder powder as a result of strong economic growth and rising 2000 average incomes in these countries. With world dairy supplies expected to remain 1500 constrained in the short term, prices for most dairy products are forecast to average higher over the two butter years to 2008- 09. Prices received by Australian dairy 1000 farmers in 2006-07, however, may not fully refl ect the 2006-07 recent increase in world prices because of forward US$/t selling of substantial quantities of manufactured prod- Dec Dec Dec Dec Dec Dec Dec Dec ucts for export. Australian milk prices will increasingly 2000 20022004 2006 2008 australian commodities > vol. 14 no. 1 > march quarter 2007 73 dairy

refl ect higher world prices as new export supply contracts are progressively struck during 2007 and 2008. prices to decline after 2008-09 Over the fi ve years to 2011-12, demand for dairy products is expected to remain strong, with fi rm economic growth projected for all major importers of dairy products. However, from 2008-09, growth in production in major exporting countries is forecast to exceed growth in world import demand and this is expected to put downward pressure on prices. In addition, the further expansion of dairy industries in developing countries, such as China and India, may lead to domestic production accounting for an increasing proportion of their domestic consumption. The latter development can be expected to reduce import demand in those countries and contribute to increased world supplies. world milk production rising In 2006, world cow milk production rose by around 2 per cent to 425 million tonnes. This rise was mainly driven by increased production in China (up 19 per cent on 2005), Argentina (up 8 per cent), and Brazil and India (both up 3 per cent). Among the major dairy exporters, New Zealand production was up almost 5 per cent, while production fell by around 1 per cent in the European Union and in Australia. In 2007 and 2008, world dairy production is forecast to grow — albeit at a slow rate — with expanding production in emerging dairy producers such as China, India and Argentina expected to contribute most of the forecast increase. In the major exporting countries — Australia, New Zealand and the European Union — slow growth in production is expected as a result of recovery from poor seasonal conditions and irrigation water supply constraints in Australia, as well as changes to production incentives under the Euro- pean Union’s Common Agricultural Policy. Over the remainder of the outlook period, moderate increases in world milk production are expected as a result of the continued expansion of the dairy industries in China, India and Argentina. In these countries, new investment in dairy production has been spurred by rising average incomes, increasing domestic demand and higher world prices. Growth in dairy production in the major established producers, however, is expected to be relatively slow. In the United States, for example, growth in production is expected to be hindered by increased competition for grains (particularly for use in producing biofuels) and conse- quent higher feed costs. In Australia and New Zealand, with average seasonal conditions assumed to return from 2007-08, dairy production is forecast to grow moderately as cow numbers begin to recover. world consumption of dairy products continues to rise World consumption of milk and processed dairy products has continued to rise steadily in recent years, driven by higher incomes and changing consumption patterns, particularly in major developing countries in Asia. For example, between 2000 and 2006, total annual world fl uid milk consumption rose by more than 13 per cent from 150 to 170 million tonnes. In 2006, fl uid milk consumption in the major emerging economies China and India is estimated to have increased 18 per cent and 6 per cent respectively. Milk and dairy product consumption per person in these countries remains relatively low compared with that in more developed countries, and there remains considerable potential for further rises in consumption over time. Of the major dairy products, total world consumption of butter increased by 10.5 per cent in the fi ve years to 2006, cheese by 9.5 per cent and whole milk powder by 8.5

74 australian commodities > vol. 14 no. 1 > march quarter 2007 dairy per cent. Consumption of skim milk powder, however, was down by 9 per cent over the period. Increases in world consumption of dairy products were driven largely by increased consumption in China, India, the Russian Federation and the Ukraine. Continued strong economic growth and rising incomes in these countries — particularly in China and India — together with the adoption of more western style diets are expected to promote moderate growth in import demand for milk and dairy products over the medium term. world stocks of dairy products low and falling As a result of strong world demand for dairy products, set against constrained growth in supply, stocks of the main dairy products fell to relatively low levels in 2006. Stocks of dairy products remain highest in the European Union as a result of CAP production incentives. In December 2006, EU butter stocks were around 122 000 tonnes; however, stocks of cheese, whole milk powder and skim milk powder had been effectively eliminated. Over the short term, further falls in stocks of dairy products are expected as the recent CAP reforms have greater effect, world demand remains strong and growth in global production slows. growth in world exports of dairy products to slow Growth in world exports of dairy products is expected to slow in 2007-08 and 2008-09 as a result of production constraints in the major exporting countries, the European Union, Australia and New Zealand. Reﬂ ecting a trend that has been apparent over the past few years, the mix of dairy product exports is expected to continue to change as producers seek to maximise earnings. Over the medium term, however, moderate growth in world dairy product exports is expected in response to production growth in the European Union, Australia and New Zealand. However, with low stocks in the United States and the European Union, the growth in global dairy exports over the next few years may be fairly limited. An additional factor in the market is that, with increasing dairy production in China, Mexico and Brazil, these countries may be able to supply an increasing proportion of their dairy consumption needs from internal sources, thus potentially reducing their import demand. outlook for dairy product prices World prices for most dairy products are forecast to be higher in 2007-08 and 2008-09 as a result of world dairy prices strong growth in global demand exceeding limited growth in production. cheese World demand for the various dairy products 2500 has diverged over the past few years, with demand whole increasing for cheese relative to other products such milk powder as butter and skim milk powder. Increases in cheese 2000 production in response to growing demand have come at the expense of other dairy products — particu- 1500 skim milk larly milk powder production. As a consequence of powder their lower availability relative to demand, prices of butter milk powders have risen strongly and are expected 1000 to remain relatively high over the next few years. 2006-07 Butter prices, however, are expected to remain rela- US$/t tively weak, reﬂ ecting a lack of growth in per person 1995 1999 2003 2007 2011 consumption in the major markets. -96 -2000 -04 -08 -12 australian commodities > vol. 14 no. 1 > march quarter 2007 75 dairy

cheese Strong growth in global demand for cheese largely reﬂ ects rising consumer incomes, leading to increasing per person cheese consumption, particularly in the major developing countries of Asia and eastern Europe. Japan — the world’s large importer of cheese for many years — has consistently accounted for around 20 per cent of world imports, or 200 000 tonnes a year. However, in 2005 the Russian Federation overtook Japan to become the world’s largest importer of cheese. Russia imported 230 000 tonnes of cheese in 2006, a 77 per cent increase since 2002. With growth in cheese consumption consistently exceeding production in the Russian Federation, cheese imports are expected to continue to rise strongly in 2007 and over the remainder of the outlook period. Mexico and the Republic of Korea have also become relatively large importers of cheese, increasing their respective imports by 57 per cent and 43 per cent since 2000 to collectively account for over 13 per cent of world imports in 2005.

dairy outlook 2004 2005 2006 2007 2008 2009 2010 2011 Unit -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z World Indicative price Butter – nominal US$/t 2 208 1 998 1 915 2 000 2 050 2 000 1 950 1 900 – real a US$/t 2 356 2 053 1 915 1 955 1 959 1 868 1 780 1 696 Skim milk powder – nominal US$/t 2 210 2 175 2 700 2 850 2 900 2 850 2 750 2 630 – real a US$/t 2 358 2 235 2 700 2 786 2 771 2 662 2 511 2 347 Cheese – nominal US$/t 2 856 2 792 2 850 2 950 3 050 3 000 2 900 2 780 – real a US$/t 3 047 2 869 2 850 2 884 2 914 2 802 2 648 2 481 Australia Cow numbers b ’000 2 076 2 050 1 940 1 900 1 930 2 018 2 090 2 133 Yield per cow L 4 877 4 923 4 665 4 641 4 663 4 710 4 836 4 980 Production Total milk ML 10 125 10 092 9 050 8 815 8 998 9 502 10 105 10 625 Milk sales ML 2 024 2 066 2 150 2 186 2 219 2 261 2 313 2 373 Manufacturing usage ML 8 101 8 026 6 900 6 630 6 779 7 241 7 792 8 252 Butter c kt 147 146 130 122 123 135 147 158 Cheese kt 388 373 360 350 355 365 375 385 Skim milk powder kt 191 212 190 180 181 200 219 238 Wholemilk powder kt 189 158 150 145 148 160 185 199

Milk price d – nominal Ac/L 31.5 33.1 32.6 34.7 36.7 37.7 37.8 37.0 – real e Ac/L 33.5 34.1 32.6 33.9 34.9 35.0 34.2 32.7 Export volume Butter c kt 69 82 64 57 59 64 68 71 Cheese kt 227 202 183 168 170 181 191 202 Skim milk powder kt 141 181 160 141 142 157 171 185 Wholemilk powder kt 105 110 87 73 76 88 112 126 Export value – nominal A$m 2 488 2 570 2 151 2 160 2 474 2 507 2 720 2 888 – real e A$m 2 649 2 650 2 151 2 108 2 355 2 328 2 464 2 553

a In 2006-07 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 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; Dairy Australia; ABARE. 76 australian commodities > vol. 14 no. 1 > march quarter 2007 dairy

Over the medium term, signifi cant increases in world cheese production are projected in response to continuing strong growth in global cheese demand. After 2009, growing cheese production and exports from major producers is projected to lead to an easing in cheese prices. EU cheese exporters are expected to become more price competitive in global markets as the EU dairy industry is forced to become more effi cient following reductions in subsidies under the revised Common Agricultural Policy. In response to continuing strong growth in global demand for cheese, world cheese prices are forecast to be higher over the next two years. In 2007-08, world cheese prices are forecast to average US$2950 a tonne. Looking further ahead, continuing growth in cheese production and exports from major producers is projected to lead to cheese prices falling to US$2480 a tonne in real terms (2006-07 dollars) in 2011-12, about 13 per cent below the forecast 2006-07 average. whole milk powder A strong increase in world prices for whole milk powder in 2006-07 is mainly the result of a signifi cant drop in production in the European Union. With higher prices on offer for cheese, EU cheese makers increased production, using milk that would otherwise have gone toward the production of whole milk powder. The reduction in whole milk powder supplies relative to demand resulted in the depletion of EU stocks of whole milk powder, and contributed to reduced global exports and higher world prices. Also contributing to higher whole milk powder prices was strong import demand from some countries, particularly Algeria and China, where imports grew by 48 per cent and 10 per cent respectively between 2002 and 2006. Algerian demand has risen steadily in line with increases in oil revenues to a point where, in 2006, it accounted for 36 per cent of total world imports of whole milk powder (up from 24 per cent in 2000). Increased import demand in China refl ects rising consumer incomes, greater government recognition and promotion of the health benefi ts of milk, as well as increased interest by consumers in western style foods. Total consumption of whole milk powder in China is estimated to have increased by 73 per cent to 1.08 million tonnes between 2002 and 2006. Over the medium term, growth in the demand for whole milk powder and trade in the product is expected to be underpinned by a signifi cant shift in demand in some countries (particularly China, Chinese Taipei and Peru) away from the commercial reconstitution of skim milk powder toward decentralised reconstitution of whole milk powder by end consumers. This shift refl ects the greater reconstitution fl exibility of whole milk powder and advances in packaging technology that enables the product to retain its fl avour longer. However, continued growth in production of whole milk powder in China and India is expected to supply a greater proportion of domestic consumption and displace some imports over the medium term. In addition, growing production in both China and India has potential to result in expanded exports that may have some impact on prices toward the end of the outlook period. After a strong rise in 2006-07, world prices of whole milk powder are forecast to remain high over the next two years: rising by 5 per cent to average around US$2760 a tonne in 2007-08. However, with growth in export supplies projected to exceed import demand from 2009-10 to the end of the outlook period, world prices are projected to fall by around 17 per cent in real terms to US$2210 a tonne (in 2006-07 dollars) in 2011-12. skim milk powder World prices for skim milk powder increased sharply in 2006-07, with fi rm demand and lower world production reducing stocks and export availabilities, particularly in the Euro-

australian commodities > vol. 14 no. 1 > march quarter 2007 77 dairy

pean Union. Largely as a result of reduced export supplies, world imports of skim milk powder fell by 21 per cent to 649 000 tonnes in 2006. The main increases in imports of skim milk powder between 2002 and 2006, were Indonesia, with imports up more than 27 per cent, China (up 86 per cent), the Russian Federation (up 20 per cent) and Egypt (up more than 55 per cent). Over the past few years, world demand for skim milk powder has continued to grow, driven largely by rising incomes in developing countries in Asia and eastern Europe. Increased demand has also been driven, in part, by EU food regulations in the wake of concerns about BSE (bovine spongiform encephalopathy or ‘mad cow’ disease) that have resulted in increased EU domestic use of skim milk powder in animal feeds. Despite strong world demand, global production of skim milk powder fell in 2006 as a result of major SMP exporting countries directing a higher proportion of their milk output toward the production of higher priced cheese products. This reduced the amount of milk available for the production of skim milk powder (particularly in the European Union), reduced exports and led to a rundown of stocks in the United States and European Union — with EU stocks exhausted in 2006. Depleted stocks of skim milk powder and a relatively slow recovery in dairy production in the Oceania region, are expected to support world prices of skim milk powder in 2007 and into the medium term. World prices are forecast to rise by 6 per cent to average around US$2850 a tonne in 2007-08. Over the remainder of the outlook period, as export supplies expand faster than import demand, world prices are forecast to fall to average around US$2350 a tonne (in 2006-07 dollars) in 2011-12. butter World butter prices declined in 2006-07, largely as a result of higher production in some butter importing countries offsetting the effects on prices of reduced butter production in some major butter exporters. Exports of butter from New Zealand, the European Union and the Ukraine declined in 2006-07 and are expected to fall further in 2007-08. World butter prices are forecast to be slightly higher in 2007-08 and 2008-09, refl ecting moderate growth in demand and lower world production. However, butter prices are projected to decline over the remainder of the outlook period (in real terms) as a result of declining import demand in major western markets, particularly in north America and the European Union, and expected small increases in supplies from Australia, New Zealand, the Ukraine and India. From a forecast average price of around US$1915 a tonne in 2006-07, the world price of butter is projected around US$1700 a tonne (in 2006-07 dollars) in 2011-12. CAP reform expected to limit growth in EU milk output The European Union is the world’s largest producer and one of the top exporters of dairy products. Over the fi ve years to 2006, EU dairy product exports accounted for around 42 per cent of total world cheese exports, 36 per cent of world butter exports, 22 per cent of world skim milk powder exports and 32 per cent of world whole milk powder exports. With EU dairy exports accounting for such large proportions of world trade in dairy products, changes in EU dairy output can have a large effect on trade fl ows and world prices. Milk production in the European Union is forecast to increase slowly over the medium term, refl ecting the countervailing infl uences of relatively small increases to production quotas and some decoupling of dairy farmer support payments from production under CAP reform. Production quotas are expected to have the biggest impact on dairy production in the European Union. These quotas, which will be the subject of a midterm revue in 2008, are expected to grow relatively slowly to 2015.

78 australian commodities > vol. 14 no. 1 > march quarter 2007 dairy

The constraining effect on EU dairy output of reforms to support payments, is not clear cut as there is some question as to whether EU dairy farmers will consider support payments under the single farm payment policy to be decoupled from production, given that these payments are linked to previous milk output. If EU dairy producers considered the payments to be decoupled, they may have an incentive to supply only what the market demands (at given price levels) and reduce production. However, if EU producers do not perceive the single farm payment as being decoupled, continued production in excess of market demand may be expected. Under CAP reforms put in place in 2005, the EU dairy product output mix is expected to shift toward the production of higher value products like cheese, with bulk commodities — such as milk powders that compete for raw milk as an input — expected to decline. This change in product mix also reﬂ ects the relative strength of demand (and price differentials) for various dairy products within the European Union, with demand for cheese being particularly strong and expected to continue growing over the outlook period.

prospects for the Australian dairy industry

access to water — a key challenge With the dairy industry’s heavy reliance on access to irrigation water in key regions such as northern Victoria, drought can seriously reduce milk production. More generally, the drought currently gripping much of Australia has adversely affected pasture availability in virtually all of the country’s key dairying regions (with the exception of some parts of coastal New South Wales and far north Queensland). Some developments in the Australian dairy industry in recent years mean that drought conditions may have a greater impact on production than previously. In particular, over the past decade, there has been a signifi cant locational shift of dairying into some inland areas — particularly into the southern parts of the Murray Darling Basin — where land and water resources have typically been cheaper than in some of the more traditional dairying areas. As a result of this migration, the dairy industry has become more reliant on irrigation water to provide improved pasture and supplementary fodder. The increased reliance on irrigation water can leave affected users more vulnerable in times of drought when water supplies are reduced. In the current drought, reduced water allocations have resulted in lower milk production from affected farms as pasture growth has been insuffi cient to support milking herds to the usual extent. In addition, widespread drought means that purchased feeds such as grains and hay become signifi cantly more expensive. Taken together, drought driven increases in input costs induce dairy farms to reduce their milking herds and cut milk production — and this is what occurred in late 2006 and early 2007. Since the drought of 2002-03, the amount of water in Australia’s storages — particularly across the south east of the country — has remained relatively low. Despite a return to average rainfall in subsequent years, net infl ows to the system (that is infl ows less consumption) have not been suffi cient to replenish major water storages. For the drought of 2006- 07, particularly low net infl ows have resulted in water allocations for many irrigators being greatly reduced, while prices for traded water have risen sharply in response to the scar- city of the resource. Over the medium term, the availability of irrigation water supplies for the dairy industry will depend on the amount of rainfall received in catchments over the next few years. The availability of irrigation water and competition for available supplies from higher value uses such as horticulture are therefore likely to constrain the rate of growth in Australia’s milk production in regions where irrigation is important.

australian commodities > vol. 14 no. 1 > march quarter 2007 79 dairy

Australian milk production and real milk prices rise in Australia in 2007-08 prices Australian milk prices are forecast to rise by 6 per cent price production to 34.7 cents a litre in 2007-08. The forecast for higher 40 10000 farmgate Australian prices for milk refl ect the ability of the export oriented dairy industry to benefi t from the 35 8000 expected stronger world prices for dairy products. Over the remainder of the outlook period, prices are 30 6000 projected to ease to around 33 cents a litre (in 2006-07 dollars) in 2011-12, similar to that forecast for 2006-07. 25 5000 production 20 2000 Refl ecting the severity of the drought, Australian milk 2006-07 production is estimated to fall by 10 per cent in 2006- c/L ML 07, to around 9.05 billion litres and is forecast to fall 1995 1999 2003 2007 2011 by a further 3 per cent to 8.8 billion litres in 2007-08. -96 -2000 -04 -08 -12 Total Australian milk production is projected to recover slowly from 2008-09, to around 10.6 billion litres in 2011-12. The trend toward fewer, larger dairy farms and new investment are expected to lead to increases in dairy cow numbers and yield per cow over the medium term. However, these factors are not expected to be suffi cient to return milk production to the predrought level of more than 11 billion litres a year by the end of the outlook period. The total dairy herd is projected to rise by 12 per cent and milk yields increase by an average of more than 7 per cent between 2007-08 and 2011-12. For Australia’s manufactured dairy products, changes in product mix and total output will be driven by relative changes in price and returns from the various manufactured products over the outlook period. For example, prices for cheese and milk powders are projected to be fi rmer than prices for other dairy products. This expectation of higher prices largely refl ects fi rm import demand for cheese in Asia, Brazil and the Russian Feder- ation together with strong cheese demand in the European Union where production of that commodity uses milk that would otherwise go to the production of milk powders. As a result of the higher prices for these products, production of cheese and milk powders is expected to be the increasing focus of growth in output of manufactured dairy products and Australian real value of Australian dairy product dairy exports over the next few years. exports Australian export returns to fall, before cheese recovering slowly 1000 Refl ecting the decline in Australian dairy export volumes 800 as a result of drought reduced milk production, the total value of Australian dairy product exports is forecast to 600 fall by more than 16 per cent to $2.2 billion in 2006- skim milk 07. From 2007-08, the total value of dairy exports powder 400 whole milk is forecast to recover slowly, to reach around $2.6 powder billion (in 2006-07 dollars) in 2011-12. An assumed butter 200 depreciation of the Australian dollar against the US 2006-07 dollar is expected to limit the impact of the projected A$m fall in dairy product prices (which are expressed in US 1995 1999 2003 2007 2011 dollar terms) on Australian dairy export earnings over -96 -2000 -04 -08 -12 the latter part of the outlook period.

80 australian commodities > vol. 14 no. 1 > march quarter 2007 contentsenergy

> contactandrew dickson > +61 2 > 6272 +61 ????2 6272 > [email protected] > [email protected] energy outlook for oil and gas, thermal coal and uranium to 2011-12

> alan copeland, chris rumley, kate penney and william mollard oil and gas

> alan copeland and chris rumley

The world price of West Texas Intermediate (WTI) crude oil averaged around US$66 a barrel during 2006, an increase of 17 per cent on 2005. Prices reached a record US$78 a barrel in July, refl ecting strong growth in demand in the fi rst half of 2006 and concerns over supply security from the Middle East associated with the confl ict between Israel and Lebanon and tensions over Iran’s proposed nuclear program. However, prices quickly retreated during the second half of 2006, as a result of some easing of tensions in the Middle East, and strong growth in non-OPEC supplies, including from the Gulf of Mexico where there was a relatively calm hurricane season. Demand for heating oil in the United States was also weaker than usual, refl ecting unseasonably mild temperatures in the north east of the United States during November and December 2006. In response to falling oil prices in the latter part of 2006, OPEC twice cut production quotas by a total of 1.7 million barrels a day – or 5 per cent of its 2006 estimated oil production capacity. By mid- January 2007, oil prices in WTI terms were as low as US$50.30 a barrel. Looking forward, world oil prices are forecast to world oil production continue to retreat from the records in 2006, refl ecting 60 higher production from non-OPEC countries and an non OPEC increase in OPEC spare capacity. Growth in global 50 OPEC oil consumption is also forecast to be moderate as increased demand in developing economies is 40 partially offset by lower demand in the European Union and Japan. In 2007, the WTI oil price is fore- 30 cast to fall by 13 per cent to US$57 a barrel, and remain close to that in 2008. Although there is poten- 20 tial for prices to fall further, OPEC is expected to manage production through adjustments to produc- 10 tion quotas in order to provide support for prices. In real terms (2007 dollars), prices of WTI crude mbd oil are forecast to fall moderately to around US$45 a 20042006 2008 2010 2012 australian commodities > vol. 14 no. 1 > march quarter 2007 81 oil and gas

barrel by 2012. Growth in world consumption is projected to increase by around 1–2 per cent a year and is centred on developing Asia (including China), the Middle East and the Russian federation. The completion of new projects within OPEC is expected to increase the organisation’s nominal spare capacity to a projected 5 million barrels a day by 2012. This increase in spare capacity is expected to reduce supply volatility and lead to a reduction in the large price swings of the past few years. In addition, signiﬁ cant new capacity is scheduled to be introduced in non-OPEC countries.

oil and gas outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production mbd 84.5 85.3 85.8 87.7 89.6 91.4 93.4 95.1 Consumption mbd 83.6 84.5 86.2 87.7 89.6 91.5 93.5 95.1 Trade weighted crude oil price b – nominal US$/bbl 49.57 60.21 52.73 51.29 50.50 48.75 47.38 46.03 – real c US$/bbl 52.50 61.59 52.73 50.13 48.25 45.54 43.26 41.39 West Texas Intermediate crude oil price – nominal US$/bbl 56.51 66.02 57.18 56.13 54.81 52.88 51.30 50.25 – real c US$/bbl 59.85 67.53 57.18 54.86 52.38 49.39 46.84 45.19 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Crude oil and condensate Production ML 27 311 24 320 27 988 29 190 34 074 31 550 29 213 27 049 Export volume ML 15 731 13 026 15 589 16 675 18 850 17 352 16 067 14 877 Export value – nominal A$m 6 330 6 638 7 766 7 870 9 018 8 305 7 686 7 145 – real d A$m 6 737 6 846 7 766 7 678 8 583 7 712 6 963 6 315 Imports ML 26 054 24 416 23 688 22 235 18 633 20 178 21 562 23 381 Natural gas Production Gm3 41.3 42.2 45.2 50.1 56.2 60.2 62.9 66.0 LNG export volume Mt 10.6 12.5 15.2 15.4 16.9 19.0 19.4 25.1 LNG export value – nominal A$m 3 199 4 416 5 393 5 567 6 570 7 121 7 404 9 619 – real d A$m 3 405 4 554 5 393 5 432 6 254 6 612 6 708 8 502 LPG Production e ML 4 628 4 722 4 997 5 180 5 450 5 550 5 670 6 150 Export volume ML 2 844 2 800 3 063 3 150 3 266 3 033 2 914 2 998 Export value – nominal A$m 804 1 002 1 047 1 029 1 040 983 962 1 008 – real d A$m 856 1 033 1 047 1 003 990 913 872 891 Petroleum products Refinery production ML 40 202 36 274 36 876 35 200 33 375 32 707 32 053 31 412 Other g ML 4 366 5 827 2 844 3 315 5 220 5 464 5 925 6 185 Exports h ML 1 847 2 082 2 067 2 125 2 241 2 013 1 896 1 772 Imports ML 11 188 15 124 18 827 21 200 22 370 23 491 24 739 26 020 Consumption – total net i ML 54 017 55 151 56 510 57 590 58 724 59 650 60 821 61 845

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 2007 US dollars. d In 2006-07 Australian dollars. e Primary products sold as LPG. 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. f ABARE forecast. z ABARE projection. Sources: Energy Information Administration (US Department of Energy); ABARE.

82 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas

OPEC and non-OPEC production to continue to grow In recent years, production from non-OPEC producers has contributed signifi cantly to the increase in world oil supplies. Over the period to 2012, production from non-OPEC suppliers is projected to grow at an average rate of 1.4 per cent a year. Production grew at an annual rate of 1.7 per cent between 2000 and 2006. A range of projects are well advanced in the Gulf of Mexico, the Russian Federation, the Caspian Republics (Azer- baijan and Kazakhstan) and Canada. In the Gulf of Mexico, production is still below that achieved prior to hurricanes Katrina and Rita in 2005. Nevertheless, output is expected to continue to increase as repairs to damaged production platforms are completed. Over the outlook period, new projects within OPEC are also expected to increase production capacity by at an average rate of 2 per cent a year to around 3.4 million barrels a day by 2012. Capacity expansions are expected in most member countries, including Saudi Arabia, United Arab Emirates, Kuwait, Nigeria and Qatar. Refl ecting a faster rate of production growth compared with non-OPEC suppliers, OPEC’s share of world oil supply is projected to grow over the outlook period. volatility in price movements to continue in the short term Over the past few years world oil prices have been particularly sensitive to market perceptions about WTI vs OPEC spare production capacity actual and potential supply disruptions and changes monthly, ended January 2007 in spare production capacity. In particular there has been a strong relationship between increases in 70 6 world oil prices and declines in spare oil production 60 WTI price 5 capacity. However, with OPEC cutting its production quotas and adding to its production base, OPEC’s 50 4 spare capacity is forecast to increase from 2 million 40 3 barrels a day in 2006 to between 3 and 4 million barrels a day in 2007. While this amount of spare 30 2 capacity is higher than in the previous two years, it 20 1 represents only around 5 per cent of current global average spare demand and is unlikely to be large enough to signifi - US$/bbl capacity mbd cantly reduce volatility in prices. June June June June June World oil prices are expected to continue to 20022003 2004 2005 2006 remain sensitive to factors that may alter or disrupt future oil supplies. These factors include increased costs of production, associated with developing new projects, geopolitical and security risks and, over the longer term, reduced expenditure on exploration. increased costs Costs of developing new projects and production have increased universally across the world’s minerals and energy industries over the past four or fi ve years. Increased costs have been associated with an almost unprecedented increase in the demand for a range of inputs, such as equipment, materials, skilled labour and mining services, required to bring on new capacity. In some cases the available supplies simply cannot meet demand and the associated delays add further costs, reducing production and delaying the start up of new projects.

australian commodities > vol. 14 no. 1 > march quarter 2007 83 oil and gas

political and security risks may impede supply growth In a number of oil producing countries, sovereign, geopolitical and security risks have the potential to adversely affect supply. In 2006, it is estimated that 10 per cent of production capacity in Nigeria was lost as a result of attacks on production facilities. Sovereign risk, which includes signifi cant changes to government policies or political interference, also creates uncertainty for oil supply. Recent examples include national governments changing agreements with oil companies or nationalising industries. For example, in the Russian Federation, Royal Dutch Shell and its partners, Mitsui and Mitsubishi were obliged to sell a share of their stakes in the Sakhalin project to Gazprom, the Russian government owned gas company. In Venezuela, the government is converting previous agreements with foreign investors into joint venture agreements in which the nationally owned PDVSA is required to hold a minimum 60 per cent interest. In addition, royalties and corporation taxes applied to the oil industry have been increased by 33 per cent and 50 per cent respectively. Such unpredictable changes to the regulatory and fi scal environment represent an important risk and have the potential to compromise foreign investment and limit signifi cant expansions of supply. Another area of concern for the oil industry over the longer term is the decreasing trend in exploration expenditure. According to the International Energy Agency, in 2005, 10 per cent of wells drilled were for exploration purposes, compared with 20–25 per cent in the 1990s. The implication is that an increasing proportion of capital is being spent on fewer, but larger oil and gas projects. To the extent that this suggests that there is less capital available for greenfi eld exploration programs, the long term growth of the global oil industry could be affected. medium term prices depend on world oil supply The projection of a decline in world oil prices (in 2007 dollars) over the next few years is based on the assessment that world oil production will continue to increase. Such a view is not universally accepted as some analysts have suggested that oil prices will continue to increase from current high levels because, in their view, global oil production has peaked. However, such arguments typically fail to properly recognise the effect of market forces, as refl ected in price movements, in encouraging the development of new supplies and the cutting of consumption. Many international agencies, including the International Energy Agency, OPEC and the International Monetary Fund, disagree that global oil production has peaked. They argue that only around a quarter of world oil reserves have been used and oil supplies will keep pace with demand. Oil reserves have been increasing, rather than declining, over the past decade and this growth in oil reserves is expected to continue. The US Energy Information Agency projects that world oil supplies in 2025 will exceed the 2001 level by 53 per cent. technological progress to reduce oil dependency On the demand side, technological progress is also expected to lead to a continued reduction in oil dependency. Despite the remarkable economic expansion over the past two decades, many major oil consuming countries have become much less dependent on oil than they were in the 1970s. Energy conservation and substitution of other energy sources have resulted in a signifi - cant reduction in oil consumption, when measured in terms of per unit gross domestic product. For example, in major OECD countries the oil intensity of gross domestic product,

84 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas which is what is often referred to as oil dependency, is estimated to have declined by more than 50 per cent since the 1970s. The development and adoption of new fuel effi cient technology, such as hybrid cars have the potential to produce even more rapid reductions in demand for oil. Technological progress will also be critical to future increases in exploration success and recovery of oil from existing oil fi elds. According to the International Energy Agency, technological improvements have contributed to an increase in the success rate of oil exploration from about 20 per cent in the 1940s to over 40 per cent in recent years. Technological improvements have also contributed to a long term decline in the average cost of oil production (in real terms). Even with recent high prices, and increases in the costs of many inputs, oil is still cheaper (in real terms) now than in the early 1980s. increased production from oil sands and ‘gas to liquids’ Relatively high oil prices in recent years have stimulated signifi cant interest in the production of liquid fuels from alternative resources, such as oil sands, gas to liquids, and biofuels. Synthetic oil production from oil sands is centred in the Canadian province of Alberta, where there are currently twelve oil sands projects under construction. Investment of around US$80 billion is projected for the next ten years. Canada’s nonconventional oil production was around 1 million barrels a day in 2005 and has been estimated to be around 1.35 million barrels a day in 2006, rising to a forecast 1.42 million barrels a day in 2007. A relatively small but growing proportion of total oil and gas investment has been going to ‘gas to liquids’ production (GTL), which converts natural gas into high quality petroleum products. There are three existing GTL plants in operation — Shell’s 15 000 barrels a day plant in Bintulu, Malaysia; PetroSA’s 25 000 barrels a day plant in Mossel, South Africa; and the joint venture 34 000 barrels a day Oryx plant built by Qatar Petroleum, Chevron and Sasol in Qatar, which was commissioned in early 2006. Another 34 000 barrels a day plant is being built by Chevron and the Nigerian National Petroleum Corporation at Escarvos in Nigeria. Two further GTL plants are at an advanced planning stage — the Shell/QP Pearl plant in Qatar, with a fi nal capacity of 140 000 barrels a day and Sonatrach’s 36 000 barrels a day plant at Tinhert in Algeria. The GTL projects currently under construction or recently completed involve investment of US$24 billion and have the potential to add 280 000 barrels of petroleum products a day to world supply by 2010. increases in biofuel production Production of biofuels — liquid transport fuels derived from biomass — has increased in many countries. There are several types of biofuels and many different methods of production. Almost all biofuels currently produced around the world are either ethanol or biodiesel. Global production of biofuels amounted to around 0.65 million barrels a day in 2005 — equal to around 1 per cent of total road transport fuel consumption in energy terms. Brazil and the United States together account for around 80 per cent of global production, but production in the European Union is growing rapidly in response to government incentives. While ethanol is the major biofuel produced in Brazil and the United States, the bulk of EU production has been biodiesel. Elsewhere in the world, China and India have also markedly increased their production of biofuels. The growing interest in biofuels stems from perceived environmental benefi ts of its use relative to conventional fuels and the potential for lowering the costs of production through

australian commodities > vol. 14 no. 1 > march quarter 2007 85 oil and gas

technological advances. High production costs have been a critical barrier to commercial biofuel development. Outside of Brazil, the costs of producing biofuels with current technologies are generally higher than for conventional petrol or diesel, with producers reliant on government subsidies in various forms to be ﬁ nancially viable. Global biofuel production is estimated to have been around 0.8 million barrels a day in 2006, rising to a forecast 0.9 million barrels a day in 2007.

crude oil supply In 2006, it is estimated that world oil production increased by around 1 per cent to average a little over 85 million barrels a day, refl ecting increased production within OPEC, the Russian Federation and the Gulf of Mexico. In 2007, world production is forecast to increase by an average of 500 000 barrels a day to average around 86 million barrels a day. Increases in non-OPEC supply, primarily from north America and the Russian Federa- tion is forecast to offset decreased OPEC output. Over the medium term, global oil production is projected to increase to 95 million barrels a day by 2012. non-OPEC production increases In 2006, non-OPEC oil production is estimated to have averaged 50.9 million barrels a day, an increase of 1.2 per cent compared with 2005. Over the outlook period, non- OPEC oil production is projected to account for just over half the growth in world oil production. In 2012, non-OPEC oil production is projected to average 56.3 million barrels a day and account for approximately 60 per cent of total world production. In north America in 2007, oil production is expected to continue to recover following lost output from hurricanes Katrina and Rita. Complete recovery from the damage caused by the hurricanes in 2005 is not anticipated until 2008. In 2007, north American oil production is forecast to average 14.6 million barrels a day, and is projected to increase to around 15.1 million barrels a day in 2012. Over the medium term, increased Canadian output is expected to be supported by increased oil sands production, which is expected to remain economic, despite weaker oil prices. In the Gulf of Mexico, new projects such as Blind Faith, Neptune (2008), Shenzi, Great White and Clipper (2009) and Puma and Tubular Bells (2010) will offset declining production from existing oil fi elds. Russian Federation and Caspian Republic to increase production and exports Between 2000 and 2004, annual growth in Russian oil production varied between 6 and 11 per cent a year. However, since then, growth in production has been slowed by a combination of factors, including resource nationalisation, industry restructuring, uncertainty associated with political, fi scal and regulatory changes and decreasing capital expenditure on oil exploration and production. Nevertheless, there are now signs that investment in the upstream oil industry in the Russian Federation is starting to increase, with a number of new projects that include Sakhalin, Kharyaga, Salym and Vankor. The successful completion of these projects is projected to result in Russia’s oil production capacity increasing on average by 2 per cent a year to approximately 11 million barrels a day by 2012. Production from the Caspian region was an estimated 2.4 million barrels a day in 2006. The two main producers in the region are Kazakhstan (2006 production of 1.3 million barrels a day) and Azerbaijan (0.6 million barrels a day). Over the outlook period, production in these two countries is projected to increase to 1.7 million barrels a day and

86 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas

1.4 million barrels a day respectively. Successful expansions of Caspian oil production capacity will be reliant on the completion of additional infrastructure necessary for the transportation of oil to export markets. Currently, there is a heavy dependence on pipeline infrastructure that passes through the Russian Federation. New pipelines that avoid Russian territory include the 1.0 million barrel a day Baku–Tiblisi–Ceyhan pipeline that commenced operations in 2006. OPEC capacity to increase In 2007, oil production from OPEC members is forecast to decline by approximately 3 per cent, refl ecting cuts to production quotas. In line with OPEC’s objective to stabilise world oil prices within a price range of US$50–60 a barrel (WTI), OPEC production is projected to grow at an average rate of around 2.6 per cent a year between 2007 and 2012, with production reaching 38.9 million barrels a day in 2012. In Saudi Arabia, production capacity is projected to increase by 18 per cent over the outlook period to 12.6 million barrels a day. Production from the Khursaniyah, Shaybah, Nuayyim and Khurais oil fi elds is expected to provide new capacity of 2 million barrels a day. Additional capacity in Algeria, Qatar and the United Arab Emirates is also projected to be brought on line over the outlook period, refl ecting these economies’ willingness to encourage foreign investment in their oil industries. The potential for further increases in OPEC production is expected to be limited by sovereign risks in Iran, Nigeria and Venezuela. The Iranian Government has set targets to increase production capacity by 20 per cent over the medium term. However, there is a signifi cant likelihood that these targets will not be met. Concerns over geopolitical tensions and the mandatory involvement of Iranian based companies could make foreign investors hesitant to commit to projects. There are also concerns over the marketability of some of the very heavy and sour crude oil that is currently produced in Iran. Increases in Iranian production will need to offset decreasing production from existing oil fi elds that are estimated to be declining at around 8 per cent a year. In the Niger Delta, an important oil producing region of Nigeria, a lack of security presents a large downside risk to the Nigerian Government’s target of increasing oil production capacity by over 25 per cent to 4 million barrels a day by 2010. Increased capacity from new offshore production facilities are currently being offset by production shut- OECD oil consumption downs ashore in the Niger Delta. 1979 world oil consumption 20 2006 In 2006, global oil consumption is estimated to have increased by 1 per cent to 15 84.5 million barrels a day as high world oil prices began to infl uence demand. The 10 growth in oil consumption refl ects continued strong growth in China and developing Asia more broadly, and in the Middle East. 5 Consumption growth in China is estimated to have been 5.8 per cent in 2006, following mbd growth rates of 15 per cent and 3 per cent United Western Japan Korea Mexico Canada for 2004 and 2005, respectively. Partially States Europe

australian commodities > vol. 14 no. 1 > march quarter 2007 87 oil and gas

offsetting this growth was a decline in north American consumption. Lower oil consumption in north America in 2006 was caused by above average temperatures and record high oil prices during the middle of the year. Global oil consumption in 2007 is forecast to increase to 86.2 million barrels a day. Higher oil consumption is forecast in China, Asia, north America and the Middle East. Over the medium term, global oil consumption is projected to increase gradually to 95.1 million barrels a day in 2012. OECD consumption to grow moderately Growth in demand from north America is projected to account for the majority of OECD oil consumption growth over the outlook period. Assumed strong economic growth in the United States and Mexico is expected to provide support for oil consumption, particularly as oil prices are expected to ease (in real terms) over the medium term. In Europe, growth in oil demand growth is projected to be modest in the medium term. In key consuming countries in Europe, such as Germany and Italy, substitution of gas for oil in electricity generation will reduce oil consumption. However, in some of the more rapidly developing economies of the European Union, such as Hungary and Poland, oil demand is expected to grow. OECD Asian demand is projected to remain stable over the outlook period. Projected consumption growth in the Republic of Korea, Australia and New Zealand is expected to be offset by a reduction in demand from Japan. In Japan, reduced oil consumption from the transport and electricity generation sectors is projected to be an important driver of lower overall oil demand. Over time, consumers are expected to continue to shift preferences toward smaller and more fuel effi cient cars. Demand for oil for electricity generation has been steadily decreasing and this trend is expected to continue, as increased quantities of gas and nuclear power are used. While the utilisation of oil fi red electricity generation is expected to continue to decrease, spikes in oil demand may continue to occur. In recent years, spikes in demand for oil have been associated with nuclear outages in 2003 and diffi culties associated with Indonesian LNG supply in 2006. Chinese oil demand to continue to grow China is the world’s second largest oil consumer vehicle sales in China (behind the United States), accounting for over 8 per cent of global consumption. In 2006, Chinese oil consumption is estimated to have averaged 7 million barrels a day, an increase of 6 per cent from 6 2005. Growth in China’s oil demand is projected to continue over the medium term, albeit at a more moderate rate. Fuel oil, which is used for electricity 4 generation, has been an important driver of oil demand in the past. In the future, the importance of fuel oil is expected to decrease, replaced by lower 2 cost alternatives such as natural gas and coal. Over the outlook period, transport fuels are expected to become increasingly important in million supporting demand growth. Vehicle sales, air travel 20002002 2004 2006 and road transport are all expected to increase over

88 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas the medium term, associated with projected growth of the Chinese economy of around 8 per cent a year. China is now the world’s largest market for new vehicles, with vehicle sales growing by around 25 per cent to 7.2 million in 2006. Refl ecting the increasing wealth of China’s middle class, vehicle sales growth has averaged over 40 per cent a year since 2000. In 2006, it is estimated there were 160 million passengers carried on airlines in China, up 15 per cent from 2005. Refl ecting further anticipated growth in air travel, Chinese airline companies are expected to receive 150 new aircraft in 2007. China’s oil consumption is projected to grow by 4 per cent a year over the outlook period, to average 9.8 million barrels a day in 2012. This growth rate will ensure China remains the world’s fastest growing oil consumer and the second largest consumer. Australian production and exports Over the short term, Australia’s production of crude oil is forecast to increase. New additions to production capacity will offset declining production from some mature fi elds. Additions to production capacity include the Puffi n development, which is scheduled to commence in the Australian oil exports second half of 2007, and the Vincent and Stybarrow fi elds, which are scheduled to be completed in early volume 2008. In addition, increased production is expected from the rampup of production at the Enfi eld and 8 20 000 Basker and Manta projects, where production value commenced in 2006. Australia’s oil production is forecast to increase by 6 15 000 15 per cent in 2006-07 and 4 per cent in 2007-08, respectively, before peaking at 34 gigalitres in 2008- 09. In that year, it is anticipated that the fi ve above- 4 10 000 mentioned projects will be operating at combined full capacity of 250 000 barrels a day (14.5 gigalitres 2006-07 a year), accounting for around 40 per cent of Austra- A$b ML lia’s production. 2003 2005 2007 2009 2011 Beyond 2008-09, Australia’s oil production is -04 -06 -08 -10 -12 projected to decline as falling production from some mature fi elds offsets anticipated new additions to capacity. In 2011-12, Australian production of crude oil production is projected to be 27 gigalitres. Australian oil exports are estimated to increase moderately over most of the projection period. With close proximity to Asian markets, it is assumed that additional production from fi elds such as Vincent and Stybarrow will be exported. In 2006-07, crude oil exports are forecast to total 15.6 gigalitres, increasing to 18.9 gigalitres in 2008-09 and then declining to a projected 14.9 gigalitres by 2011-12. Refecting the trend in export volumes, the value of Australia’s crude oil and condensate exports is projected to increase to $8.6 billion (in 2006-07 dollars) by 2008-09, and then fall to $6.3 billion in 2011-12. outlook for LNG Global liquefi ed natural gas (LNG) trade is estimated to have increased by 10 per cent to almost 160 million tonnes in 2006. However, growth in trade in that year was constrained by a slow buildup of output from some newly commissioned production facilities and gas supply capacity problems at several gas liquefaction plants, including in Malaysia and australian commodities > vol. 14 no. 1 > march quarter 2007 89 oil and gas

Indonesia. Recent increases in LNG demand and lower than expected production rates have resulted in LNG prices increasing rapidly. In 2006, Australian exports accounted for the majority of increased LNG exports from the Pacifi c basin, and served to offset lower exports from Indonesia and Malaysia. Increases in Australian exports refl ected additional capacity associated with the completion of the Darwin LNG plant in early 2006. Increased European imports in 2006 were sourced from Egypt, Trinidad and Tobago, and Nigeria, where signifi cant new capacity was commissioned in 2005 and early 2006. projected growth in the Pacifi c market In the Asia Pacifi c market, growth in LNG demand is expected from a number of quarters, including Japan, the Republic of Korea, Chinese Taipei and China. The fi rst three countries produce very little natural gas and rely on LNG imports, to meet gas demand. China has substantial gas fi elds but most of them are located in the western part of the country or offshore, a considerable distance from the main demand centres, which are located in the coastal regions in the east. In Japan, increased gas fi red electricity generation capacity over the medium term will be an important driver of increased LNG imports. The Tokyo Electric Power Company, for example, is expected to add a fourth unit (1520 megawatts) to the Futtsu power complex between 2008 and 20101, while Chubu Electric is proposing to add an additional unit to the Shin Nagoya plant by 2008 and the fi rst unit at the Jouetsu plant by 2012. Japan’s imports of LNG are likely to increase by around 5 million tonnes to 64 million tonnes by 2012. In the medium term, gas consumption in Korea’s residential and industrial sectors, which account for around two-thirds of Korea’s total gas consumption, is expected to increase at around 5 per cent a year. In the industrial sector, higher oil prices have resulted in fuel switching away from oil to gas. In the domestic sector, increased gas consumption is expected to be driven by the increased use of gas fi red heating and cooling systems. Gas consumption in Korea’s power sector is expected to remain at close to 2006 levels over the medium term. The lack of growth refl ects Korea’s increased electricity demand being met by additions to coal fi red capacity between 2007 and 2009, and proposals to increase nuclear power generation capacity beyond 2010. However, there is potential for gas demand in Korea’s electricity generation sector to grow beyond the outlook period, refl ecting uncertainty about coal fi red power stations associated with environmental concerns. The Republic of Korea’s imports of LNG could increase to around 29 million tonnes by 2012. In Chinese Taipei, LNG import capacity is expected to increase by around 3 million tonnes a year from 2008 following the completion of the Taichung LNG terminal. Around 1.7 million tonnes a year will be supplied to the 4000 megawatt Tatan gas fi red power station. In 2008 and 2009, Taipower, the state owned power utility, will require an additional 1.5 million tonnes of natural gas to offset the delayed operation of its fourth nuclear power station. The commissioning of the power station has been delayed by three years because of high costs and shortages of construction inputs. Imports of LNG are expected to grow from 8 million tonnes in 2006 to about 12 million tonnes in 2012. strong demand growth in less mature LNG markets in the Asia Pacifi c region In 2006, China imported its fi rst LNG cargo into the Guangdong receival terminal. The terminal, which has a capacity of around 3.7 million tonnes, will receive around 3 million tonnes a year from Australia’s North West Shelf Venture for 25 years. Refl ecting increased

90 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas demand for natural gas, China’s LNG import capacity in the short term will be boosted with the rampup of capacity at the Guangdong terminal and the completion of a new terminal in Fujian. The Fujian terminal is expected to be completed during 2007 and will have a regasifi cation capacity of 3 million tonnes of LNG a year. LNG for the Fujian terminal will be sourced from British Petroleum’s Tangguh LNG project in Indonesia. A third LNG import terminal, near Shanghai, could be in operation by the end of the outlook period, following a 25 year agreement between the owners of the project (including China National Offshore Oil Corporation and Shenergy) and Malaysia’s Petronas. The agreement requires 3 million tonnes a year of LNG to be supplied by 2012. However, smaller amounts of LNG may be supplied if the LNG terminal is completed earlier. There are also a number of other planned or proposed LNG import terminals. However, recent increases in LNG prices have delayed the approval of these projects as their proponents have been unable to agree to long term supply contracts with LNG suppliers. By 2012, China could import around 13 million tonnes into LNG terminals near Guang- dong, Fujian and possibly Shanghai, although there is considerable uncertainty around this fi gure. The majority of LNG is likely to be sourced from Australia, Indonesia and Malaysia under long term contracts. In India, consumption and imports of natural gas are forecast to increase, associated with increased demand from the fertiliser industry and the domestic and industrial sectors. Increased natural gas imports are likely to be delivered through a combination of LNG and pipelines. Over the outlook period, there are plans to increase the capacity of the two existing LNG receival terminals, located on the west coast. The majority of increased imports by India are likely to be sourced from the nearby Middle East. However, there could be opportunities for Australian exporters of LNG if India seeks regional diversifi cation of LNG supply. There is also the potential for the west coast of the United States to become an important new market for Australian LNG producers. A number of LNG import terminals have been proposed on the US west coast. However, the approval process has been slow, in part because of strong public opposition to terminal siting, particularly in southern California. US LNG imports to grow rapidly Recently, the United States has emerged as an important driver of world LNG demand. In 2006, the United States consumed 22 000 billion cubic feet (bcf) of natural gas, making it the world’s largest gas consumer. US imports of LNG were around 12 million tonnes or around 2.6 per cent of total US gas consumption in 2006. US imports of LNG are currently delivered to fi ve regasifi cation terminals, which are located on the east coast and in the Gulf of Mexico. Refl ecting lower imports of natural gas via pipeline, the United States Energy Informa- tion Administration projects that LNG imports will increase their contribution to total natural gas imports from 17 per cent in 2006 to 48 per cent by 2012. US imports of LNG are therefore projected to increase from around 12 million tonnes in 2006 to around 50 million tonnes by 2012. The majority of US LNG imports are currently expected to be sourced from suppliers such as Trinidad and Tobago, Egypt, Nigeria and Qatar, refl ecting the location of current and proposed receival terminals on the east coast or in the Gulf of Mexico. While increased demand for LNG on the east and gulf coasts of the United States will largely be sourced from suppliers located in the Atlantic Basin, there could also be opportunities for Australian exporters to increase sales into the region. The global LNG australian commodities > vol. 14 no. 1 > march quarter 2007 91 oil and gas

market no longer comprises regionally isolated gas markets as was largely the case in the past. There is active arbitrage within and between both the Pacifi c and Atlantic markets for LNG, with LNG cargoes diverted between Asia, the United States and Europe. challenges to global LNG supply growth Factors such as higher raw material prices, longer lead times for equipment and diffi culties in sourcing skilled labour in the majority of LNG exporting countries are expected to continue to constrain LNG project developments over the medium term. In Australia, for example, the economics of some projects have been adversely affected by higher material costs and limited supply of skilled labour. In addition, signifi cantly increased capital costs of building new facilities (liquefaction plants, ships and regasifi cation terminals) in the past two years has affected project economics. As a result of such developments, a number of LNG projects that are currently in the planning stage are potentially facing signifi cant delays. Furthermore, declining gas feedstock from mature fi elds — particularly in Indonesia and Malaysia — will partially offset expected LNG production increases in Qatar, Nigeria and Australia. In the case of Indonesia, production shortfalls from LNG plants at Arun in Aceh and Bontang in east Kalimantan have resulted in a number of trains being mothballed and have resulted in a corresponding decline in output at those plants. Furthermore, Indo- nesia’s government is planning to increase its domestic use of gas for industry, fertiliser production and power generation. Plans to pipe gas to east Java from east Kalimantan (gas that would otherwise go to processing trains at the Bontang liquefaction plant) may lead to a further reduction in LNG output at Bontang. substantial expansion ahead for Australian LNG Australian production and exports of LNG are expected to grow substantially over the medium term. The fi fth train of the North West Shelf project is scheduled to be completed in 2008 and will result in additional production capacity of 4.2 million tonnes a year. The expansion of the North West Shelf is the only project in Australia currently under construction, but construction on a number of other projects is Australian LNG exports expected to commence over the outlook period. These include the Gorgon project, which could produce 10 volume million tonnes a year by 2011, and the Pluto project, which could produce 5–6 million tonnes by 2010. 8 20 The Gorgon project has received all necessary government approvals and is now awaiting a fi nal 6 15 investment decision by proponents Chevron, Exxon- value Mobil and Shell. It is estimated that the fi nal cost of the 4 10 project might exceed $15 billion, a signifi cant increase in cost from when the project was initially proposed. The Pluto project has also received all government 2 5 approvals and is awaiting a fi nal investment decision by project owner, Woodside. It is expected 2006-07 A$b Mt that Woodside will proceed with Pluto following the 2005 2007 2009 2011 company’s decision to approve capital expenditure of -06 -08 -10 -12 $1.4 billion for preparation of site works.

92 australian commodities > vol. 14 no. 1 > march quarter 2007 oil and gas

Looking beyond 2012, Australian LNG production capacity could increase signifi - cantly. A number of projects are in the planning stages, although these projects are not expected to commence until after 2012, refl ecting potential construction lead times of almost fi ve years. These projects include Browse, Ichthys, Pilbara and potentially Sunrise. The timing and size of these projects will ultimately depend on the global demand for LNG and, more particularly, whether suffi cient contracts can be secured with consumers to cover signifi cant capital costs. Australian exports of LNG in 2006-07 are forecast to total 15.2 million tonnes, up from 12.5 million tonnes in 2005-06. The increase in exports is attributable to the commencement of production at the 3.5 million tonne capacity Darwin LNG plant in early 2006. In 2008-09 exports are projected to increase to 16.9 million tonnes, refl ecting additional capacity associated with completion of the fi fth train at the North West Shelf. By 2011-12, exports are projected to reach 25.1 million tonnes under the assumption that production will have commenced at either or both of the Gorgon or Pluto LNG projects. The value of Australia’s LNG exports is forecast to increase substantially. In 2006-07, the value of exports is forecast to be $5.4 billion. This fi gure is projected to grow to $8.5 billion (in 2006-07 dollars) in 2011-12, refl ecting increased export volumes.

australian commodities > vol. 14 no. 1 > march quarter 2007 93 thermal coal

thermal coal

> alan copeland

In 2006, a combination of strong growth in coal fi red electricity generation in Asia and a reduction in exports from China and Australia’s Hunter Valley region resulted in spot prices for Newcastle thermal coal averaging US$49 a tonne, US$1 a tonne more than in 2005. At the beginning of 2007, spot prices for Newcastle thermal coal were above US$50 a tonne, refl ecting strong seasonal demand in Asia, lower production in Indonesia associated with the wet season and a lengthy vessel queue off Newcastle. With this situation unlikely to improve before thermal coal contract prices are scheduled to be negotiated, and strong demand growth from Asia expected to continue over the short term, there are promising prospects for an increase in thermal coal contract prices for Japanese fi nancial year 2007-08 (JFY, April–March). Over the medium term, prices of thermal coals are expected to fall moderately in real terms. Increased production and infrastructure capacity in major thermal coal exporting countries, such as Indonesia, Australia, South Africa and Colombia, are expected to place downward pressure on prices. Factors likely to have a positive effect on prices over the next fi ve years will be continued strong growth in demand, particularly across the rapidly developing Asian economies and the need to recoup increased production costs. price outlook for the short and medium term Negotiations between Australian suppliers and Japanese power utilities for JFY 2006-07 were not completed until June 2006. Traditionally, pricing negotiations are completed before the commencement of the year for which they are due to take effect; however for JFY 2006-07 Japanese utilities held off settling prices believing that spot prices would decline. In the fi rst quarter of 2006, thermal coal spot prices increased by over 25 per cent to US$51.45 a tonne and remained at those levels until August. Reduced thermal coal exports from China and limited growth from Australia, coupled with strong import demand throughout Asia, provided strong support for thermal coal prices in the Asian market. Offsetting these factors was a substantial increase in exports from Indonesia during the fi rst half of 2006. Contract prices for the coming JFY 2007-08 are forecast to be moderately higher than for JFY thermal coal prices 2006-07. Growth in thermal coal demand in Asia weekly, ended 25 January 2007 is expected to continue, particularly in China, India, the Republic of Korea and Malaysia. On the supply European spot side, Indonesian exports are forecast to increase, 60 albeit at a reduced rate compared with 2005 and 2006. Firm prices in China’s domestic coal market are also encouraging Chinese suppliers increasingly 40 Asian to redirect coal supplies from export markets to the spot domestic (Chinese) market. The full supply benefi ts of Japan contract upgraded transport and port infrastructure capacity 20 in Australia are not expected to be delivered until 2008. Over the medium term, real thermal coal prices US$/t are forecast to decline, refl ecting increased produc- 2004 2005 2006 tion and export capacity in Australia, Indonesia,

94 australian commodities > vol. 14 no. 1 > march quarter 2007 thermal coal

South Africa and Colombia, as well as increases in coal sector productivity. However, price reductions are projected to be moderate, refl ecting continued growth in demand for thermal coal in Asia, reduced exports from China and higher production costs, refl ecting cost increases for inputs such as oil, equipment and labour. growth in world thermal coal trade World thermal coal trade is estimated to have increased by 7 per cent in 2006 to 619 million tonnes, refl ecting strong global demand, particularly from Asia. In 2007, thermal coal trade is forecast to increase by a further 3 per cent to 636 million tonnes. Over the remainder of the outlook period, global thermal coal trade is projected to increase at an average rate of around 3 per cent a year to total nearly 727 million tonnes in 2012. thermal coal imports, by region The key drivers of growth in world thermal coal trade over the outlook period are expected to be increased imports by Asian countries such as China, India, the Republic of Korea and Malaysia. These 600 countries have advanced plans to increase coal fi red other Asia power generation capacity to meet increasing electricity demand. The United States is also expected to 400 be an important driver of growth as it uses increased others quantities of low sulfur Colombian and Indonesian coal in its power sector. 200 In other markets, such as Japan and Europe, Europe thermal coal import growth is projected to be modest, Japan although these markets are expected to continue to Mt remain important in world thermal coal trade. 2006 20082010 2012

Japan Japanese imports of thermal coals are forecast to fall slightly to 114 million tonnes in 2007. In subsequent years imports are projected to grow at a modest average rate of 0.6 per cent a year, reaching 117.5 million tonnes in 2012. Despite the projected modest growth in thermal coal imports over the medium term, Japan is expected to remain the world’s largest importer of thermal coal. The modest growth profi le refl ects Japan’s stated intention to reduce greenhouse gas emissions as part of its commitments under the Kyoto protocol. Net additions to coal fi red power generation capacity in Japan over the outlook period are projected to total 2.25 gigawatts. This will result in a small decrease in the share of coal used for total electricity generation, although utilisation of existing thermal coal fi red capacity is expected to remain high.

Republic of Korea Korea’s thermal coal imports are estimated to have increased by 5 per cent in 2006. In 2007, thermal coal imports are forecast to rise by a further 7 per cent to 63 million tonnes, reﬂ ecting increased electricity demand that will be supplied from coal ﬁ red electricity generation capacity commissioned in 2005 and 2006. Over the rest of the outlook period, it is assumed that Korea’s economy will grow at an average rate of 4–5 per cent a year. With thermal coal a preferred fuel for electricity generation because of its low cost (on a per unit of heat basis) and high reliability of supply,

australian commodities > vol. 14 no. 1 > march quarter 2007 95 thermal coal

an additional 6.3 gigawatts of coal fi red electricity generation capacity is expected to be added in Korea between 2007 and 2009. Since Korea produces negligible quantities of hard coal, increases in thermal coal demand from the power sector will need to be met through imports. Korea’s thermal coal imports are forecast to grow by an average of 5 per cent a year over the outlook period to 80 million tonnes in 2012. China to become an important import market China is the world’s largest producer of thermal coal, with production in 2006 estimated to total around 2.2 billion tonnes. Although China’s coal production has more than doubled since 2001, thermal coal imports have increased from 2 million tonnes in 2001 to an estimated 31.5 million tonnes in 2006. The rise in imports refl ects, in large measure, the diffi culties (and cost) associated with moving large quantities of coal from the north of China (where the majority of China’s coal resources are located) to the rapidly developing manufacturing centres in the south east. Thermal coal consumption in China is forecast to increase by around 150 million tonne in 2007, refl ecting increased electricity demand associated with continued strong

world thermal coal outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Coal trade Mt 578.0 619.1 635.5 652.4 674.4 695.5 712.2 726.7 Imports Asia Mt 300.7 329.4 345.7 359.2 377.8 394.2 405.6 415.7 China Mt 18.2 31.5 36.0 38.0 41.0 45.0 48.0 50.0 Chinese Taipei Mt 56.8 58.7 60.0 60.6 61.2 61.8 64.0 66.0 India Mt 18.2 23.5 26.0 29.0 32.0 35.0 38.0 41.0 Japan Mt 114.3 114.5 114.0 114.2 115.0 116.9 117.2 117.5 Korea Mt 56.2 58.9 63.0 67.4 75.5 79.2 79.7 80.2 Malaysia Mt 10.0 12.1 13.7 15.7 17.6 19.5 20.3 21.1 Other Asia Mt 27.0 30.2 33.0 34.4 35.5 36.7 38.3 39.8 Europe Mt 202.6 209.4 206.7 208.1 209.4 210.7 213.6 215.4 European Union a Mt 165.5 171.6 168.0 168.5 168.9 169.3 170.9 171.4 Other Europe Mt 37.0 37.8 38.7 39.6 40.5 41.4 42.7 44.0 Other Mt 76.4 80.3 83.1 85.1 87.2 90.5 93.1 95.6 Exports Australia Mt 107.6 111.6 118.5 124.0 131.4 138.0 144.9 150.7 China Mt 65.7 58.9 56.0 54.0 51.0 49.0 47.0 45.0 Colombia Mt 54.6 58.0 65.0 70.0 75.0 80.0 85.0 90.0 Indonesia Mt 123.3 158.0 168.0 175.0 183.0 189.0 195.0 200.0 Russian Federation Mt 63.6 76.0 75.0 75.9 76.8 77.7 79.1 80.2 South Africa Mt 71.9 69.0 71.0 77.0 81.0 84.0 87.0 89.0 United States Mt 19.1 19.7 19.3 18.9 18.5 18.1 17.8 17.4 Other Mt 72.2 67.9 62.7 57.6 57.5 59.6 56.4 54.4 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Production Mt 170.4 175.0 180.1 187.5 195.0 203.0 211.0 218.5 Exports Volume Mt 106.4 110.8 114.6 121.1 127.7 134.7 141.5 147.8 Value – nominal A$m 6 336 7 206 7 311 8 362 8 484 9 012 9 406 9 875 – real b A$m 6 744 7 432 7 311 8 158 8 075 8 369 8 522 8 728

a Twenty five countries to 2006, then twenty seven countries from 2007. b In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection.

96 australian commodities > vol. 14 no. 1 > march quarter 2007 thermal coal economic growth. However, with the expansion of transport and port infrastructure in the main producing regions not expected to keep pace with demand growth, imports of thermal coal are forecast to increase by 14 per cent to reach 36 million tonnes. The expectations of strong thermal coal demand and possible transport capacity constraints in 2007 have allowed Chinese suppliers to negotiate higher contract prices with domestic consumers. Domestic coal prices in China are now higher than international spot prices, with domestic contract prices for calendar year 2007 (for export quality coal) estimated to have increased by 10–15 per cent. Refl ecting these higher prices, China’s thermal coal exports in 2007 are forecast to fall by 5 per cent to 56 million tonnes as Chinese suppliers target the domestic market. The Chinese Government is continuing to implement a number of policies aimed at rationalising the coal mining industry. Consolidation of China’s highly China’s thermal coal trade fragmented coal supply industry is expected to lead 80 to increased effi ciency, including higher rates of imports mechanisation, and a reduction in mining accidents. exports However, recent attempts to close small and unsafe 60 mines have been met with mixed success, with the rate of closure of small and illegal coal mines behind target. Nevertheless, China’s State Administration of Coal 40 and Mine Safety reports that deaths from mining accidents were below 4800 in 2006, down from 5900 in 2005, continuing a downward trend in mine site 20 fatalities. Assuming that Chinese authorities continue to close small mines and consolidate the industry in general, coal production growth is likely to slow and Mt imports rise. 20042006 20082010 2012 An additional factor likely to support higher coal imports is the appreciation of China’s currency, the renminbi, in recent times. Further appreciation of the renminbi relative to the US dollar would make imported coal more competitive and reduce the returns received by Chinese exporters. Refl ecting these developments, China’s imports of thermal coal are projected increase by nearly 40 per cent to 50 million tonnes by 2012. Conversely exports are projected to decline over the outlook period by almost 20 per cent to 45 million tonnes. China is projected to become a net importer of thermal coal by around 2010 to 2011.

ASEAN Economic growth throughout the ASEAN region is assumed to average around 4–5 per cent over the outlook period, resulting in strong growth in electricity demand and new electricity generation capacity. With a large proportion of new additions to generation capacity likely to be coal fi red, thermal coal imports by the ASEAN region, particularly by Malaysia and Thailand, are projected to increase signifi cantly. The growth in coal fi red electricity generation capacity in Malaysia is supported by government policies aimed at diversifying fuel sources for electricity generation. Historically, much of Malaysia’s electricity generation has been gas fi red.

australian commodities > vol. 14 no. 1 > march quarter 2007 97 thermal coal

A number of coal fi red power projects are in the fi nal stages of construction and are scheduled to be in operation in the near future. The fi rst unit of three 700 megawatt units of the Tanjung Bin power station (2100 megawatts) was commissioned in late 2006, while the remaining two units are expected to be commissioned during 2007. In 2008, the 1400 megawatts (two 700 megawatt units) Jimah power station is scheduled to be completed and commissioned. Since Malaysia has poor domestic coal reserves and low production, additional demand for thermal coal will be met by imports. In 2012, Malaysia’s imports are projected to total 21 million tonnes, up from an estimated 12 million tonnes in 2006.

India India is the world’s third largest producer of hard coal. However, much of the coal mined in India has a high ash content and imported thermal coals (particularly coal sourced from Indonesia) are used for blending to reduce the average ash content. Domestic rail transport infrastructure in India is a major constraint to the efﬁ cient movement of coal from the principal domestic producing regions to the main consumption centres. Although the Indian Government is expected to invest heavily in rail, road and port infrastructure over the outlook period, the combination of distance and reliability often make it more cost effective for electricity generators to use imported coal. India’s imports of coal are forecast to increase by 11 per cent in 2007 to 26 million tonnes. Over the medium term, thermal coal imports are projected to increase by 61 per cent to 41 million tonnes in 2012. The majority of the projected increase in India’s thermal coal imports is expected to be low caloriﬁ c value coals sourced from Indonesia.

European Union In 2006, EU thermal coal imports were estimated to have been around 172 million tonnes, an increase of 4 per cent from the previous year. Increased demand for thermal coal imports in 2006 was supported by higher prices for alternative fuels used for electricity generation (such as oil and gas) and reduced coal production in the United Kingdom. In addition, reduced availability of some nuclear and wind power generation during the summer months resulted in increased utilisation of coal ﬁ red electricity generation capacity. In 2007, thermal coal imports are forecast to fall to around 168 million tonnes as increased thermal coal exports, by country electricity demand will be met by expanded utilisation of gas and renewable energy electricity generation capacity. 500 Over the remainder of the outlook period, the Colombia prospects for growth in EU thermal coal imports 400 South Africa are mixed. Factors that may positively affect import growth are reduced domestic production in 300 Germany and the United Kingdom, higher prices of Indonesia other fuels (such as oil and gas) as well as concerns 200 over the security of supply of these fuels. Conversely, China countries within the European Union have made 100 commitments to reduce greenhouse gases under Australia the Kyoto Protocol. These commitments may limit Mt the potential for any signiﬁ cant growth in thermal 2006 20082010 2012 coal imports, as emphasis is placed on nuclear and

98 australian commodities > vol. 14 no. 1 > march quarter 2007 thermal coal renewable energy sources to meet increased electricity demand. Balancing these factors, EU thermal coal imports in 2012 are projected to total around 171 million tonnes. supply The majority of the projected increase in the global demand for thermal coal over the outlook period is expected to be met by producers in Indonesia, Australia, South Africa and Colombia. Signiﬁ cant production and infrastructure capacity expansion plans to meet this demand are already well advanced in these countries.

Indonesia Indonesian exports are estimated to have grown by 25 per cent in 2006 to 158 million tonnes, with Indonesian producers rapidly expanding production in response to the rapid demand growth in Asia. Over the medium term, growth in Indonesian exports will be chal- lenged by a number of factors. These include competing demand from domestic coal fi red generators, weak investment in exploration, increases in production costs associated with mining operations moving inland, and potential land rights issues. Indonesia has plans to rapidly increase coal fi red electricity generation capacity toward the end of the decade in order to meet forecast growth in domestic electricity requirements, and to replace existing oil fi red power plants. At present, most of Indonesia’s coal production is located close to the coast or rivers, which are used to barge coal to ports for loading on to larger vessels. Over the medium to longer term the location of Indonesia’s production is expected to move away from these waterways as currently mined deposits are exhausted. As a result, the transport of large quantities of coal will become more costly, particularly where the terrain includes dense jungle. In some coal producing regions, villagers’ are prosecuting claims for compensa- tion associated with the rights to mine on their land. Going forward, this continues to be an issue that has the potential to cause disruptions to supply. Despite the expected slowdown in the growth in Indonesian exports over the outlook period, Indonesia is still expected to remain the world’s largest exporter of thermal coal over the outlook period. Exports are projected to grow at an average rate of 4 per cent a year to total 200 million tonnes in 2012.

Colombia Thermal coal exports from Colombia are estimated to have increased by 6 per cent in 2006 to 58 million tonnes. Growth in Colombian exports in 2006 was disrupted by industrial disputes and heavy rainfall that affected production in the fi rst half of the year. Assuming normal seasonal weather patterns and the absence of prolonged labour disputes, exports in 2007 are forecast to increase by 12 per cent to 65 million tonnes. Over the medium term, signifi cant investment is planned to expand production in Colombia, refl ecting the relatively low cost of production and the high energy, low sulfur qualities of Colombian coal. In addition, Colombia’s suppliers can take advantage of their proximity to the US market where imports are projected to grow rapidly.

South Africa In 2006, South Africa’s thermal coal exports fell by 4 per cent to 69 million tonnes as production was disrupted by wet weather and exports were hampered by a reduction in rail network availability (associated with outages and derailments). The vast majority of South Africa’s thermal coal exports are loaded at the Richards Bay Coal Terminal, which

australian commodities > vol. 14 no. 1 > march quarter 2007 99 thermal coal

has an annual capacity of around 70 million tonnes. In 2007, exports are forecast to increase to around 71 million tonnes. Over the medium term, South African exports have the potential to increase as new production and infrastructure capacity is brought into operation toward the end of the decade. Phase V of the Richards Bay Coal Terminal has now been approved and is due for completion in 2009. Annual throughput capacity at the port will be increased by 20 million tonnes to 91 million tonnes. Reﬂ ecting increased production and export capacity, exports from South Africa are projected to grow to 89 million tonnes in 2012.

Australia Since 2004, infrastructure constraints within the coal supply chains in New South Wales and Queensland have, to some extent, limited Australian exporters’ ability to respond to the rapid growth in thermal coal demand in Asia. Infrastructure providers have responded by investing in projects designed to alleviate capacity constraints. In New South Wales, upgrades to the rail and ship loading capacity of the Hunter Valley coal chain are expected to be completed in early 2007, increasing annual capacity to 102 million tonnes. At the port of Gladstone, Queensland’s largest thermal coal export port, capacity is being progressively expanded from 40 million tonnes to 68 million tonnes by the end of 2007. The ﬁ rst effects of capacity expansions were seen at the Port of Gladstone in 2006, where coal loadings increased by 7 million tonnes as a result of a capacity upgrade. While Australian coal loadings are forecast to increase in 2007, the full effects of the expansion programs are not expected to be seen until 2008. In 2006-07, Australian thermal coal exports are forecast to total 114.6 million tonnes (valued at $7.3 billion), an increase of 3.8 million tonnes from the previous year. In 2007-08, an increase in exports to around 121 million tonnes is forecast to more than offset the effects on earnings of moderate contract and spot price decreases. The value of thermal coal exports in 2007-08 is forecast to rise by 14 per cent to $8.4 billion. Australian thermal coal exports New projects that have recently been completed or are under construction that are expected to contribute to increased Australian output of thermal coal over the volume 9000 125 medium term include Ashton underground, Boggabri, Dawson Valley and Moolarben. In addition, expan- 8000 100 sions are proposed to the Mount Owen, Ensham, Mount Arthur and Kogan Creek mines. 7000 75 In 2011-12, Australian thermal coal production value is projected to be 219 million tonnes, with exports 6000 50 accounting for 148 million tonnes. Increased volumes of exports and an assumed depreciation of the Austra- 5000 25 lian dollar against the US dollar are both expected to offset the effects on earnings of a moderate fall in 2006-07 A$m Mt prices. Over the outlook period the value of Australian 2005 2007 2009 2011 thermal coal exports in real terms (2006-07 dollars) -06 -08 -10 -12 is projected to increase to $8.7 billion.

100 australian commodities > vol. 14 no. 1 > march quarter 2007 uranium

uranium

> william mollard, kate penney, chris rumley

prices increased substantially in 2006

World uranium oxide (U3O8) prices averaged US$49.30 per pound in 2006, an increase of 73 per cent over the average 2005 price of US$28.50 per pound. From a

low of US$5.97 per pound (in 2007 US dollars) in late 2000, real U3O8 prices have increased over twelvefold to US$85 per pound in February 2007. The dwindling supply of uranium stocks and increased concerns over the future supply of secondary sources of uranium, coupled with an improvement in the outlook for growth in global nuclear electricity generating capacity, were the major factors behind the substantial increase in uranium prices. Also providing support for uranium prices, particularly in late 2006, was an announcement by Cameco Corporation that production from the Cigar Lake mine in Canada is expected to be delayed by at least a year following ﬂ ooding in the mine shaft. The Cigar Lake mine had previously been expected to commence production in early 2008 at an annual rate of more

than 8000 tonnes of U3O8 (around 10 per cent of global uranium requirements). prices to increase further in the short term… Despite a substantial forecast increase in global uranium mine production in 2007, the spot uranium price is forecast to increase by 91 per cent to average over US$94.2 per pound. With secondary uranium supply forecast to fall and global reactor requirements to increase, the current tight supply demand balance in the uranium market is expected to persist throughout 2007. In 2008, the spot uranium price is forecast to increase by a further 10 per cent to average US$103 per pound (in 2007 dollars). Although total supply of uranium (mine production plus secondary sources of uranium) is expected to exceed consumption in 2008, uranium prices are expected to remain high until there is consistent evidence that mine production is sufﬁ cient to meet uranium requirements. …but to ease over the medium term From 2008, world uranium prices in real terms are projected to decline as the tight supply demand world uranium supply and requirements balance eases over the remainder of the outlook period to 2012. Substantial recent increases in global uranium prices have encouraged a large increase in 80 requirements expenditure on uranium exploration and the aggressive development of uranium projects, particularly in Kazakhstan. 60 secondary production

world supply 40 The supply of uranium can be divided into two catego- mine production 20 ries — primary mine production and secondary sources — with the latter including reprocessed spent nuclear kt U 0 fuel, blended down highly enriched uranium (HEU) 3 8 from nuclear weapons and mixed oxide fuel (MOX). 20042006 2008 2010 2012

australian commodities > vol. 14 no. 1 > march quarter 2007 101 uranium

world uranium From the late 1950s to 1989, uranium production consistently exceeded commercial requirements. The requirements excess supply was accumulated in nuclear weapons 70 and uranium inventories. However, since 1990 global 60 uranium requirements have exceeded mine production, secondary with the gap ﬁ lled by secondary sources of uranium. 50 production 40 secondary supplies to decline moderately over the outlook period 30 Overall, secondary supplies of uranium are expected 20 to decline moderately over the projection period. Tech- snabexport (Tenex) — a representative of the Russian 10 mine production kt Federal Agency for Atomic Energy — has indicated U3O8 that, from 2008, it will no longer export uranium from 19451955 1965 1975 1985 1995 2005 the Russian Federation. However, the continuation of the US–Russian HEU purchase agreement (see box) and additional secondary supplies from the United States will largely offset the expected decline in exports from the Russian Federation. The US–Russian HEU agreement is scheduled to end in 2013. Over the projection period, there remains the potential for the United States and the Russian Federation to release additional inventories of HEU and plutonium, which are deemed to be surplus to military requirements. However, any further releases of HEU from stockpiles are likely to occur in a controlled manner in order to reduce the impact on the world uranium market.

secondary sources of uranium The United States and Russian Federation have large stocks of HEU, which were previously used for military applications but are now downblended for use in nuclear reactors. Weapons grade uranium is highly enriched to over 90 per cent U-235 but can be blended with uranium containing low levels of U-235 to produce low enriched uranium (typically less than 5 per cent U-235). It is estimated that the dilution of HEU from weapons stockpiles replaces around 10

000 tonnes of U3O8 globally, or around 15 per cent of global reactor requirements. United States–Russian Federation HEU purchase agreement This agreement, commonly known as the ‘megatons to megawatts’ agreement, took effect in 1993. The aim of the program is to contribute to the nonproliferation of nuclear weapons

by diluting 500 tonnes of HEU (equivalent to around 180 000 tonnes of U3O8) from the nuclear weapons stockpile of the Russian Federation for sale to commercial nuclear power plants over a twenty year period. As of December 2006, 292 tonnes of HEU had been downblended under the agreement. The Russian Government has indicated that it does not expect to extend the agreement, following its expiry in 2013.

HEU feed deal In early 1999 another bilateral agreement, commonly known as the HEU feed deal, was signed between the United States and the Russian Federation, which provided for the creation of stockpiles of uranium in both countries. Stockpiles of up to 22 000 tonnes of

uranium hexaﬂ uoride (UF6) equivalent (or 26 000 tonnes of U3O8) will be held by both the Russian and US Governments until 2009. The day after the deal was signed, Tenex announced that it had signed a commercial deal with Cameco, Cogema and Nukem (known collectively as the Western Consortium) to have an exclusive option to purchase

102 australian commodities > vol. 14 no. 1 > march quarter 2007 uranium

secondary sources of uranium continued the majority of the natural uranium component of the low enriched uranium (LEU) being delivered to the United States.

other sources of HEU Aside from the supply of HEU under bilateral agreements between the United States and the Russian Federation, the US Government has also made available surplus HEU for use in nuclear reactors, following downblending. In September 2005, the US Department of Energy announced that 17.4 tonnes of HEU will be downblended to low enriched uranium fuel by 2010 as part of a Reliable Fuel Supply initiative. Under this initiative the United States will keep a reserve of low enriched uranium that, in the event of a market disruption, can be sold to countries that forgo the construction of enrichment and reprocessing facilities. Also in late 2005, the United States Secretary of Energy announced plans to remove an additional 200 tonnes of HEU from the US nuclear weapons stockpile. Of this total, only 20 tonnes is currently designated for use in nuclear reactors. The remainder will be used for naval propulsion (160 tonnes) and space missions and research reactors (20 tonnes). For power reactors, the downblended HEU will become available over a 25 year period. In 1996, the United States declared that 174.3 tonnes of HEU was excess to military requirements. The US Enrichment Corporation has downblended some of this material, with the ﬁ rst program (14.2 tonnes of HEU) completed in mid-1998 and the second program (50 tonnes HEU) completed in late 2006.

mixed oxide fuel (MOX) MOX is a reactor fuel made from a mixture of uranium oxide and plutonium (which can be extracted from spent reactor fuel). MOX fuel, which is used in light water reactors, typically contains around 5 per cent plutonium. The use of MOX currently forms only a small part of the nuclear fuel market; as a result, it is not expected to have a signiﬁ cant impact on uranium demand over the outlook period.

Plutonium Management and Disposition Agreement In September 2000, the United States and Russian Federation agreed to reduce their respective stockpiles of surplus plutonium. Under the agreement, the United States and the Russian Federation each committed to the disposal of 34 tonnes of surplus plutonium. The Organisation for Economic Cooperation and Development – Nuclear Energy Agency and International Atomic Energy Agency estimate that the 68 tonnes of weapons grade plutonium will displace 7000–8000 tonnes of uranium over the life of the agreement. In early 2005, the US Nuclear Regulatory Commission (NRC) authorised the construction of a MOX facility at the Department of Energy’s Savannah River site in South Carolina, which will convert the plutonium to fuel for nuclear reactors. However, this facility is unlikely to commence production before the end of the projection period.

US Enrichment Corporation stocks

USEC currently holds stocks of UF6 from inventory transferred to the company by the US Department of Energy, following its privatisation in 1998, and from ‘underfeeding’ in the enrichment process. The majority of this inventory is committed under long term sales contracts. In late 2006, however, USEC indicated that sales of uranium from inventory will be largely completed by the end of 2007.

re-enrichment of depleted uranium tails There is a substantial quantity of depleted uranium stocks that could potentially displace primary uranium production if re-enriched. However, the re-enrichment of depleted uranium is currently limited as a secondary source of uranium as it is only economically viable for centrifuge enrichment plants with spare enrichment capacity and low enrichment costs.

australian commodities > vol. 14 no. 1 > march quarter 2007 103 uranium

global mine production to increase signiﬁ cantly in 2007… In 2007, global uranium mine production is forecast to increase by 17 per cent to 55 100

tonnes of U3O8, driven largely by higher expected production in Africa and Kazakhstan. Initial production from Uranium One’s Dominion mine in South Africa (1800 tonnes

U3O8 a year) is expected to commence in early 2007, with the mine expected to reach full capacity in 2011. In addition, Paladin Resources’ Langer Heinrich project in Namibia

(1180 tonnes U3O8 a year) is expected to ramp up production during 2007, after being commissioned in late 2006. In late 2005, Rio Tinto approved an extension of the operating life of the Rossing mine in Namibia to 2016. Work is currently being undertaken that will enable the Rossing mine

to operate at its full production capacity of 4000 tonnes U3O8 a year within the next year. In late 2006, Anglo Gold Ashanti indicated that it plans to increase uranium production in South Africa by 40 per cent in 2007 largely through the reprocessing of tails. In Kazakhstan, a number of in situ leaching (ISL) mines are expected to increase production progressively over the course of 2007, as they ramp up to full capacity, after being commissioned in mid to late 2006. An ISL uranium mine typically takes around three years

to ramp up to full production. The Eastern Mynkuduk mine (1180 tonnes U3O8 a year) and

Southern Moinkum mine (590 tonnes U3O8 a year) were both commissioned in mid-2006,

with the Zarechnoye mine (590 tonnes U3O8 a year) commissioned in late 2006. …and over the medium term Over the medium term, global mine production is projected to increase signiﬁ cantly, particularly in Kazakhstan, Canada, the Russian Federation and Africa. Recent increases in

uranium outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production kt 49.3 47.2 55.1 61.3 65.5 70.0 74.4 78.1 Africa a kt 8.2 8.3 10.3 11.1 11.5 11.7 12.6 12.6 Canada kt 13.7 12.0 12.8 13.9 13.9 16.5 18.9 21.8 Kazakhstan kt 5.1 5.8 8.4 10.2 13.3 14.8 16.5 18.0 Russian Federation kt 3.9 4.0 4.2 4.8 5.4 6.4 6.5 6.5 Consumption kt 78.8 77.2 80.3 79.5 80.6 86.6 86.5 90.7 China kt 1.6 1.5 2.3 1.9 1.9 3.4 3.0 4.0 European Union b kt 27.2 25.7 25.3 24.7 24.7 25.6 24.7 27.1 Japan kt 9.7 9.6 9.7 9.7 10.3 9.9 12.8 11.7 Russian Federation kt 4.0 4.1 4.8 5.5 5.0 7.5 6.7 7.8 United States kt 24.8 23.2 25.4 25.1 25.1 25.1 25.2 25.2 Spot price US$/lb 28.5 49.3 94.2 105.8 91.3 83.3 72.7 62.8 – real c US$/lb 30.2 50.4 94.2 103.4 87.2 77.8 66.3 56.4 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Production t 10 964 9 974 10 357 11 534 11 882 11 800 11 540 11 060 Export volume t 11 249 10 253 10 376 11 534 11 882 11 800 11 540 11 060 Nominal exp value A$m 475 546 726 972 1 165 1 295 1 469 1 558 Real exp value d A$m 506 563 726 948 1 109 1 203 1 331 1 377 Average price A$/kg 42.2 53.2 70.0 84.2 98.1 109.8 127.3 140.9 – real d A$/kg 45.0 54.9 70.0 82.2 93.3 101.9 115.3 124.5

a Includes Niger, Nambia, South Africa, Malawi and Zambia. b Twenty five countries to 2006, then twenty seven countries from 2007. c In 2007 US dollars. d In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources:Australian Bureau of Statistics; ABARE.

104 australian commodities > vol. 14 no. 1 > march quarter 2007 uranium

uranium prices have encouraged uranium exploration, the development of new mines from existing and newly discovered ore deposits and investment that prolongs the operating lives of existing mines. Reﬂ ecting this, world uranium production is projected to increase at an average annual rate of 9 per cent to exceed 78 000 tonnes in 2012. production to rise strongly in Kazakhstan over the medium term Uranium mine production in Kazakhstan is expected to increase strongly over the remainder of the projection period as a number of uranium mines continue to ramp up to full capacity and a number of new projects commence production. Kazatomprom has

set a target for Kazakhstan’s annual production to reach just under 17 700 tonnes U3O8 by 2010 — a threefold increase on 2006 production. Under the plans, there is around 10 300 tonnes of capacity scheduled to come on line in 2007 and beyond. However, regulatory constraints, skilled labour shortages and insuffi cient infrastructure, may result in some delays to these projects. Overall, Kazakhstan’s uranium production is projected to increase at an average annual rate of 21 per cent to reach 18 000 tonnes in 2012. Production in Kazakhstan is expected to have a signifi cant infl uence on world production growth over the medium term. Cameco to expand production in Canada Uranium production in Canada is expected to increase substantially toward the end of the projection period as production commences at Cameco’s Cigar Lake mine. Initial production from Cigar Lake is now expected to occur in late 2009 or early 2010, following fl ooding in the mine in October 2006. The operation is expected to take three years to

ramp up to full production capacity of more than 8000 tonnes U3O8 a year. In addition, Cameco has applied for a licence to increase production by around 20 per cent at its McArthur River and Key Lake operations. The application is currently undergoing an environmental impact assessment. If the licence is approved, Cameco has estimated that it will take around two years to increase annual production to approximately

10 000 tonnes U3O8 (from current levels of around 8500 tonnes U3O8).

The Midwest project (2600 tonnes U3O8 a year), a joint venture between Areva and Denison mines, is currently subject to an environmental assessment. If the application to mine is approved, production is likely to commence in 2010. Canada’s uranium production is projected to increase at an average annual rate of 10 per cent to reach 21 800 tonnes in 2012. production expansions to occur in the Russian Federation and Africa TVEL, the Russian Federation’s state run uranium mining company, has targeted an increase

in uranium mine production from around 3800 tonnes U3O8 to 5000 tonnes U3O8 in

2010. In addition, ﬁ rst production is expected from the Yuzhnaya mine (1180 tonnes U3O8 a year), a joint venture between Mitsui and Tenex, in 2009. Full capacity is expected to be reached in 2015. Uranium mine production in Africa is projected to increase to 12 600 tonnes by 2012, largely because of higher production in Namibia and South Africa, which together account for around 9 per cent of global uranium production. Paladin Resources’ Langer Heinrich project in Namibia and SXR Uranium One’s Dominion project in South Africa are expected to ramp up production over the medium term, after being commissioned in late 2006 and early 2007 respectively. A number of foreign companies are also planning to develop uranium mines in other African countries over the period to 2012. For instance, Paladin Resources’

Kayelekera mine in Malawi (1000 tonnes U3O8 a year) is expected to commence produc-

australian commodities > vol. 14 no. 1 > march quarter 2007 105 uranium

tion in 2008. In addition, Denison Mines’ Kariba uranium project in Zambia (680 tonnes

U3O8 a year) is expected to commence production between 2009 and 2011.

world uranium demand

world demand for U3O8 to increase in the short term… Growth in nuclear power generating capacity is the fundamental driver of growth in uranium demand. As at February 2007, there were 435 operating nuclear power plants globally, with a combined capacity of 367 788 megawatts electric (MWe). World consumption of uranium is forecast to increase by 4 per cent in 2007, largely because of the commencement of a number of nuclear reactors in India and China. Commissioning a reactor (based on a 1000 MWe light water reactor) typically requires around 600 tonnes of uranium for its initial core, after which annual uranium requirements are lower as the reactor reaches a steady state level of operation. In India, four reactors with a combined generating capacity of 1940 MWe are expected to commence commercial operation in early 2007. In China, unit 2 of the Tianwan nuclear power plant (1000 MWe) in Jiangsu Province is also expected to commence operations in early 2007. In the United States, unit 1 of the Browns Ferry nuclear power plant (1098 MWe) is expected to resume operation in 2007, after being idled since 1985. In addition, unit 2 of the Cernavoda reactor (706MWe) in Romania is expected to commence operation in 2007. … and in the medium term Over the medium term, additions to nuclear capacity in China, India, the Republic of Korea and the Russian Federation, as well as further power uprates (a power ‘uprate’ is the process of increasing the maximum power level at which a commercial power plant may operate) at existing nuclear power plants in the United States, are expected to be the major factors behind an increase in world uranium demand. Over the outlook period, world uranium consumption is projected to increase at an average annual rate of 3 per

cent to around 90 700 tonnes U3O8 in 2012. As at February 2007, there were 29 reactors under construction globally, with another 48 reactors planned. The majority of the reactors that are currently under construction are situated in India and China, where rapid economic expansion has underpinned strong increases in demand for electricity. The expansion of nuclear capacity in these countries has also been designed, in part, to address electricity supply concerns in areas where economic growth is high but that are located far from lower cost supplies of domestic fossil fuel. While increases in the prices of non-nuclear energy sources and a growing desire by signatories to the Kyoto Protocol to reduce greenhouse gas emissions are expected to encourage the construction of new nuclear reactors in the United States and European Union, the major impact of these trends is expected to occur beyond the end of the projection period. Even if a number of new reactors were approved for construction in the short term, it typically takes ﬁ ve to seven years for a light water reactor to be constructed. As such, these policies are not expected to have a major impact on uranium demand over the medium term. power uprates to increase nuclear energy output in the United States As at February 2007, there were 103 operating nuclear reactors in the United States, the world’s largest consumer of uranium. Over the outlook period, an increase in uranium

106 australian commodities > vol. 14 no. 1 > march quarter 2007 uranium

requirements in the United States is expected to refl ect mainly power uprates and operating life extensions at existing reactors, rather than the construction of new nuclear reactors. While the Energy Policy Act 2005 is expected to increase the incentive to construct nuclear reactors in the United States, its major effect is assumed to occur beyond the outlook period. The move to increase nuclear generating capacity in the United States through power uprates has been occurring since the early 1990s. This has enabled considerable additions to nuclear generating capacity without signifi cant additions to the number of reactors in operation. Power uprates allow the maximum power at which a nuclear reactor operates to be increased through the use of more highly enriched uranium fuel. The US Nuclear Regulatory Commission (NRC) has granted approval for an additional 4845 MWe of generating capacity through power uprates since 1977. A further 1057 MWe of generating capacity is currently pending approval. The NRC expects applications for a further 1383 MWe capacity through power uprates to 2011. A number of reactors in the United States have also been granted operating life extensions. As at February 2007 the NRC had granted twenty year operating life extensions to 48 reactors. The NRC is currently reviewing seven other licence renewal applications. In early November 2006 the NRC granted a twenty year licence extension for the single reactor of the Monticello nuclear power plant in Minnesota (capacity 600 MWe). nuclear output to increase in China, India, Japan and the Republic of Korea Over the medium term, substantial additions to nuclear capacity are projected to occur in Japan, China and the Republic of Korea. In Korea, four reactors with a combined capacity of 3800 MWe are expected to be connected to the electricity grid over the outlook period. Japan currently has 55 operating reactors, with a combined capacity of 47 700 MWe, or 30 per cent of total electricity generation capacity, with a further fi ve reactors to be commissioned. Local opposition to new nuclear power plants remains an impediment to meeting Japan’s nuclear energy targets over the medium term. However, nuclear generation capacity in Japan is expected to increase by 6216 MWe over the outlook period. In China and India, rapid economic growth, rural–urban migration and substantial growth in expenditure on infrastructure development have supported strong growth in nuclear capacity over the past decade, albeit from a low base. In early 2007, China had ten operating nuclear reactors (combined capacity of 7587 MWe), the electricity from which accounts for around 2 per cent of China’s total electricity generation. India currently has sixteen nuclear reactors in operation, with a combined capacity of 3483 MWe. Given the typical amount of time required to construct a nuclear reactor, additions to nuclear capacity in China and India over the medium term will come from reactors that are either currently under construction or in the fi nal stages of planning. China and India currently have fi ve and seven reactors respectively under construction, with a combined capacity of 4533 MWe and 3380 MWe. Russian Federation Russia’s nuclear generation capacity is expected to grow over the projection period despite the closure of a number of reactors that have reached the end of their operating lives. Over the medium term, nine reactors, with a combined capacity of 8225 MWe, are expected to commence production. A majority of existing nuclear reactors in the Russian Federation have aging technology; the 31 operating reactors have an average age of around 25 years, with Kalinin-3 and Volgodonsk-1 the only reactors commissioned in

australian commodities > vol. 14 no. 1 > march quarter 2007 107 uranium

the past decade. Further, only seven of these reactors have been operating for less than twenty years. As the working life of a nuclear reactor is considered to be around thirty years, a number of reactors are likely to be shut down over the outlook period unless lifetime extensions are granted. nuclear output to decline in the European Union Nuclear power has historically accounted for a signiﬁ cant share of total electricity generation in a number of EU member countries. However, despite the expected start of operation of the Olkiluoto 3-reactor in Finland in 2010 (1600 Mwe) and the Flamanville reactor in France in 2012 (1630 MWe), EU nuclear generating capacity is projected to decline over the medium term. This reﬂ ects the expected decommissioning of a number of nuclear reactors, particularly in the United Kingdom and Germany. In the United Kingdom, eight reactors with a combined capacity of 3824 MWe are expected to be decommissioned over the outlook period.

longer term drivers of nuclear generating capacity Growth in nuclear generating capacity will be a key determinant of uranium consumption over the long term. The choice of fuel mix in electricity generation is expected to be driven by a number of factors, including energy security, environmental considerations and the relative cost of nuclear power generation. Increases in population, coupled with an expanding global economy, are expected to support large increases in energy demand, particularly in countries where growth in gross domestic product per person is expected to be rapid.

energy security Energy security has been an important element driving growth in nuclear power capacity over the past three decades. In a number of countries, particularly those with limited indig- enous energy resources, nuclear power has enhanced energy security by diversifying the fuel mix in the electricity sector.

environmental considerations Concerns about climate change and other environmental issues have renewed interest in the use of nuclear power as a means of addressing greenhouse gas emissions and localised pollution. The changing perception of nuclear power as a clean energy source in a number of countries has led to new nuclear reactors being proposed or under construction. However, in some regions, concerns about the negative environmental consequences of nuclear waste have deterred the use of nuclear power.

relative cost of nuclear power generation The cost competitiveness of electricity generated by nuclear power compared with fossil fuels differs between countries, and is infl uenced by factors such as domestic fossil fuel endowments. The relative levelised cost of generating electricity (LCGE) is the most comprehensive measure of the relative cost competitiveness of alternative electricity generation technologies. The method is used to calculate a real price of electricity for each alternative technology that represents the price of electricity required over the life of the plant to cover all expenses. The relative cost of nuclear power generation is typically dependent on a country’s resource endowment and government policy on nuclear power. Coal and gas fi red plants can typically be established faster and at a lower cost than nuclear power plants, but they incur relatively higher operating and maintenance costs (of which fuel is a signifi cant proportion). Refl ecting this, and in the absence of pricing for carbon emissions, nuclear power is less economic in regions with signifi cant fossil fuel resources.

108 australian commodities > vol. 14 no. 1 > march quarter 2007 uranium slow growth in enrichment capacity Large commercial enrichment plants are currently in operation in France, Germany, the Netherlands, the United Kingdom and the Russian Federation. World enrichment capacity is expected to increase moderately over the outlook period as gaseous diffusion capacity begins to be phased out and replaced with centrifuge technology. The United States and France are currently building enrichment plants with centrifuge technology to replace aging diffusion plants. The centrifuge plant in the United States is planned to have an annual production capacity of 3.5 million separative work units (SWU) and is expected to commence production in 2011. In France, initial production from the Georges Besse II plant is planned to commence in 2009 and is expected to reach its nominal capacity of 7.5 million SWUs around 2016. An increase in global enrichment capacity can increase the opportunity to substitute enrichment for uranium, both via enrichers changing tails assays and the potential for the re-enrichment of tails material. The tails assay is a measure of the amount of ﬁ ssile uranium (U-235) remaining in the waste stream from the uranium enrichment process. However, the extent to which a higher level of SWUs can be used in the enrichment process is currently limited, as enrichment facilities in western countries are already operating at close to full capacity. As such, demand for U3O8 over the projection period is expected to largely grow in line with nuclear power generation. Australia’s export earnings to increase in the short term

All of Australia’s production of U3O8 is exported. In 2006-07 Australia’s production of

U3O8 is forecast to increase by 4 per cent to almost 10 400 tonnes largely from higher expected production from BHP Billiton’s Olympic Dam mine in South Australia and Energy Resources of Australia’s Ranger mine in the Northern Territory. In 2005-06, production at the Ranger mine fell by 6 per cent following heavy rainfall associated with cyclonic activity, while production at the Olympic Dam mine declined by 10 per cent, as BHP mined ore containing lower grades of uranium. With production and export prices both

enrichment Natural (mined) uranium contains approximately 0.7 per cent U-235. Natural uranium cannot be used in light water reactors because the content of ﬁ ssile U-235 is too low to sustain a nuclear reaction. Enrichment is the process of increasing the concentration of U- 235, while decreasing the concentration of U-238. The majority of nuclear power reactors require low enriched uranium of between 3 and 5 per cent U-235. The work required to perform enrichment is measured in terms of separative work units (SWUs). An SWU is a unit that expresses the energy required to separate U-235 and

U-238. The amount of uranium enriched depends on: the quantity of uranium feed (UF6) (uranium needs to be in a gaseous form to be enriched) at the beginning of the process; the amount of SWUs used in the enrichment process; and the concentration of U-235 left over (tails assay) at the end of the process. By varying the tails assay, a reactor operator can ﬁ nd

the most economical combination of UF6 feed and SWU required for enrichment. As the price of uranium rises relative to the cost of enrichment, there is an increased incentive to lower the tails assay (and hence uranium requirements) by increasing the amount of SWUs used in the enrichment process (assuming spare capacity). As such, if the relative price increase of uranium is greater than the relative increase in the price of enrichment, the demand for mined uranium may decline as nuclear utilities seek to reduce tails assays.

australian commodities > vol. 14 no. 1 > march quarter 2007 109 uranium

expected to increase in 2006-07, Australia’s export earnings are forecast to increase by 33 per cent to $726 million. In 2007-08, Australia’s mine production is forecast to increase by 11 per cent to 11 500 tonnes, stemming largely from the commencement of production at SXR Uranium One’s Honeymoon mine. The Honeymoon mine is expected to commence production in the ﬁ rst

quarter of 2008, and will eventually ramp up to an annual rate of 400 tonnes U3O8 a year. In addition, Energy Resources of Australia is planning to construct a plant at the Ranger mine that will enable the processing of stockpiled lateritic ore (ore with high clay content).

The new plant will enable the Ranger mine to produce an additional 400 tonnes U3O8 a year, with the fi rst lateritic ore scheduled for processing in the fi rst quarter of 2008. Australian production to remain steady over medium term Over the remainder of the projection period, Australia’s uranium mine production is expected to be largely dictated by production from existing operations and, as such, is forecast to remain relatively steady at 11 000–12 Australian uranium exports 000 tonnes a year. Only a number of relatively small projects such as Energy Metals’ Bigrlyi project and Compass Resources’ Mount Fitch project, both in the 1250 10 Northern Territory, have been included in the medium value term projections for Australia’s uranium production. 1000 volume 8 There are a signifi cant number of undeveloped uranium deposits in South Australia, Queensland and 750 6 Western Australia. However, the current policy of governments in these states does not allow the devel- 500 4 opment of additional uranium mines. If state government policies on the development 250 2 of new uranium mines were to change, projects such

2007 kt as Summit Resources and Paladin Resource’s Valhalla A$m U3O8 project in Queensland, Mega Uranium’s Ben Lomond 1976 1983 1990 1997 2004 2011 project in Queensland, Marathon Resource’s Mount -77 -84 -91 -98 -05 -12 Gee project in South Australia and Nova Energy’s Lake Way and Centipede projects in Western Australia could be developed reasonably quickly. If there were an easing of current state policy constraints in the next year or two, Australian uranium production toward the end of the outlook period could be greater than projected. BHP Billiton’s Olympic Dam has the world’s largest resources of low cost uranium (extractable at less than US$40/kgU). BHP is currently considering the potential to

increase uranium production threefold (to 15 000 tonnes U3O8 a year) from 2013. Since the scheduled completion of the expansion is beyond the outlook period, it has not been included in the projection of Australian uranium production. Australia’s real export earnings are projected to reach $1.4 billion in 2011-12, reﬂ ecting increased export volumes and higher assumed contract prices.

110 australian commodities > vol. 14 no. 1 > march quarter 2007 contentsmetals

> andrewcontact dickson > +61 2 > 6272 +61 ????2 6272 > [email protected] > [email protected] metals outlook for steel, iron ore, metallurgical coal, gold, aluminium, nickel, copper and zinc to 2011-12

> rohan kendall, chris rumley, kate penney and rebecca mccallum steel and steel making raw materials

> rohan kendall

Global steel production is projected to rise at an average rate of 4.7 per cent a year to more than 1.6 billion tonnes in 2012, underpinned by continued strong growth in Asian steel demand. The positive outlook for world steel production indicates that demand for iron ore and metallurgical coal, particularly that sourced from Australia, is likely to remain strong over the medium term. negotiated iron ore prices higher for 2007-08 Negotiated iron ore contract prices for Japanese fi nancial year (JFY, April–March) 2007- 08 were settled in late December 2006. Contract iron ore prices rose by 9.5 per cent to reach US81.7c/dltu (dry long ton unit) for fi nes and US104.3c/dltu for lump, the fi fth consecutive year of price increases for fi nes and lump. Contract prices for iron ore pellets rose by 5.3 per cent — after falling by 3 per cent in JFY 2006-07 — to be priced at approximately US97.6c/dltu. Factors that contributed to the rise in contract prices include rising global iron ore demand, led in negotiated iron ore and coal prices particular by China’s steel industry, combined with limited growth in iron ore supply capacity in the hard coking coal (US$/t) world’s major producers — Australia and Brazil. The 100 limited growth in iron ore supply by the world’s major suppliers, and associated high prices, has encour- 80 aged a large increase in iron ore production in China from deposits that typically contain lower quality ore 60 and are more costly to access. The latest increase in contract prices means that 40 semi soft coking coal negotiated benchmark iron ore fi nes and pellet prices (US$/t) have almost tripled since 2003. Negotiated prices 20 iron ore fines (USc/dltu) increased by 19 per cent for JFY 2006-07, 71 per cent for JFY 2005-06, 19 per cent in JFY 2004-05 0 and 9 per cent in JFY 2003-04. 19881994 2000 2006 2012 australian commodities > vol. 14 no. 1 > march quarter 2007 111 steel

coal price negotiations for 2007-08 In contrast to iron ore prices, contract negotiations for hard coking coal resulted in price cuts of 16 per cent for JFY 2007-08. Specifi cally, hard coking coal prices were settled between BHP Mitsubishi Alliance (BMA) and Japanese blast furnace steel producers for benchmark Peak Downs and Saraji coal at US$98 a tonne fob (down from US$116 in JFY 2006-07). Prices for Rio Tinto’s Hail Creek hard coking coal have also been settled, with prices falling by the same amount. Contract prices for semisoft and PCI (pulverised coal injection) coals are expected to be settled higher for JFY 2007-08. Factors pointing toward a price rise are short term export infrastructure constraints in Australia, which is affecting supply of Australian semisoft metallurgical coal, combined with strong demand from steel producers in Asia. raw material prices expected to ease over the medium term Rising iron ore prices over the past four years have stimulated substantial investment in new iron ore production and transport capacity, much of which came on stream in the second half of 2006 and is expected to ramp up to full capacity around 2008 or 2009. With further increases in capacity anticipated for 2007 and beyond, capacity utilisation rates are expected to decline and stocks to rise throughout the supply chain. Supply capacity of the world’s three largest producers (CVRD, Rio Tinto and BHP Billiton) is expected to increase by around 100 million tonnes (20 per cent) by late 2008. This substantial increase in the availability of iron ore, particularly from low cost suppliers, is projected to contribute to an easing of prices over the medium term. Negotiated iron ore contract prices are projected to remain stable in 2008-09 before declining by 5 per cent in 2009-10 and a further 9 per cent in the following year. However, even with such declines, iron ore prices would be relatively high over the outlook period. Metallurgical coal prices are expected to come under downward pressure over the medium term, refl ecting increased supply and improvements in steel plant effi ciencies, including the more effi cient use of coke and increased use of pulverised coal injection. The increased supply of metallurgical coal is expected to be sourced principally from Australia and China, while improvements in global steel plant effi ciencies are expected to result from further substantial investments in new blast furnaces, particularly in China.

steel

global consumption projected to grow strongly over the outlook period World steel consumption is projected to grow by 4.8 per cent a year to over 1.6 billion tonnes over the six years to 2012. However, this positive outlook for global steel consumption masks signiﬁ cant differences in growth across regions. In the short and medium term, China’s industrialisation and rapid urbanisation will continue to be the most important drivers of growth in world steel consumption. In addition, countries such as India that have rapidly growing steel consumption will become increasingly important to the outlook for world steel. Steel consumption in developed economies such as the United States, Japan and the European Union is expected to remain ﬂ at.

China Driven by rapid industrialisation, consumption of steel in China has almost doubled over the past four years, rising from 207 million tonnes in 2002 to an estimated 396 million

112 australian commodities > vol. 14 no. 1 > march quarter 2007 steel tonnes in 2006. In 2007, steel consumption in China is China's fixed asset investment forecast to rise by a further 13 per cent to 448 million tonnes. Over the balance of the outlook period, steel steel consumption consumption in China is projected to grow at a slightly 300 left axis 9000 slower rate of 8 per cent a year to reach 649 million tonnes in 2012. Underpinning the projected increase in steel consumption is an anticipated continued 200 6000 strong growth in output across a range of steel intensive manufacturing industries, such as motor vehicles, fixed asset investment ship building and household appliances. At the same 100 right axis 3000 time, strong growth in China’s economy will continue to be refl ected in the demand for new factories, buildings and associated infrastructure (such as electricity, Mt billion yuan gas, water and transport), all of which use construc- 20002002 2004 2006 tion steels intensively. Rapid urbanisation in China is also a key driver of world steel consumption trends. Between 2000 and 2006 an estimated 100 million people migrated from rural to urban areas in China. To cope with the infl ux of people from rural areas, investment in fi xed assets, such as urban housing and associated infrastructure, more than tripled over the same period. Growth in fi xed asset investment averaged 22 per cent a year between 2000 and 2006 to total 11 billion yuan in 2006. This is signifi cantly higher than the government target rate of around 16 per cent a year, and highlights the strong underlying growth in infrastructure investment in China. The United Nations Conference on Trade and Development (UNCTAD) expects strong rural–urban migration to continue, with a further 60 million people expected to move to China’s urban areas by 2010, requiring yet further substantial investment in urban fi xed assets and, hence, growth in steel consumption. A major downside risk to steel consumption growth in China is attempts by the Chinese Government to curb China’s rapid economic growth. Steel consumption growth is closely linked to the overall performance of the economy. An important additional driver of Chinese demand for steel will be economic conditions in major OECD countries, especially the United States, Japan and western Europe, as these countries are major markets for Chinese exports of steel intensive manufactured goods.

India Inadequate infrastructure in India, particularly in transport, and relatively low investment in infrastructure compared with that in other emerging economies are major constraints on India’s economic growth. Nevertheless, with an assumed rate of economic growth of around 7 per cent a year in the period to 2012, demand for steel in India will be strong. The Indian Government estimates that rail and road transport capacity will need to triple and port capacity to double by 2020 in order to meet the growing domestic demand for steel and raw material inputs. Reﬂ ecting such requirements, the Indian Government is expected to invest heavily in rail, road and port infrastructure over the outlook period, leading to a large increase in steel consumption. As a result, Indian steel consumption is projected to rise by an average of 9 per cent a year to 79 million tonnes by 2012. Despite such growth, consumption of steel in India would be only around an eighth of that in China.

australian commodities > vol. 14 no. 1 > march quarter 2007 113 steel

United States, Japan and the European Union The relocation of US manufacturing fi rms to countries with lower production costs, such as developing Asian countries and Mexico, is expected to reduce the likelihood of substantial growth in US steel consumption over the outlook period. Similarly, steel consumption in Japan and the European Union is also expected to remain fl at over the outlook period. In the six years to 2012, steel consumption in the European Union is projected to grow by only 0.8 per cent a year, while in Japan it is projected to fall by an average of 0.3 per cent a year. increasing steel production to stimulate demand for raw materials Refl ecting the positive outlook for global steel demand, signifi cant new steel making capacity is expected to be constructed over the outlook period, leading to strong growth in global steel production — projected to increase on average by 4.6 per cent a year between 2006 and 2012 or by around 380 million tonnes to over 1.6 billion tonnes in 2012. The majority of the growth in output of steel is expected to occur in China, although strong growth in steel production is also expected in India where large steel plant projects are in the pipeline. Overall, China is projected to account for over two-thirds of the growth in projected global steel production over the outlook period, while India is projected to account for about 7 per cent. Most of the growth in capacity is expected to come from integrated blast furnace operations, which are projected to raise their share of world steel production from 69

world steel outlook

2005 2006 2007 2008 2009 2010 2011 2012 Mt Mt Mt Mt Mt Mt Mt Mt Crude steel consumption European Union 27 182 194 199 201 202 203 203 204 United States 113 122 120 121 122 122 123 124 Brazil 19 19 20 21 22 23 25 26 Russian Federation 36 39 43 45 47 49 51 53 China 350 396 448 493 540 583 618 649 Japan 83 86 88 88 88 87 86 85 Korea, Rep. of 49 49 49 50 50 50 50 51 Chinese Taipei 24 24 24 24 24 24 24 24 India 41 47 52 57 63 68 74 79 World total 1126 1225 1308 1380 1 450 1 515 1 572 1 625 Crude steel production European Union 27 196 206 208 211 213 215 217 218 United States 95 98 97 98 98 99 99 100 Brazil 32 31 32 34 35 37 38 40 Russian Federation 66 71 75 78 80 83 85 88 China 356 419 473 521 565 604 641 673 Japan 112 116 116 117 117 118 118 118 Korea, Rep. of 48 48 49 49 49 50 51 51 Chinese Taipei 19 21 21 21 21 21 22 23 India 38 43 47 51 56 61 66 70 World total 1140 1239 1314 1382 1447 1509 1567 1620

114 australian commodities > vol. 14 no. 1 > march quarter 2007 steel per cent in 2006 to 72 per cent by 2012. The likelihood of substantial growth in blast furnace production of steel means that demand for iron ore and metallurgical coal will be strong. China to dominate the outlook for steel production In the eleven years from 1995 to 2006, sustained high rates of economic growth and rising production of steel intensive manufactured goods resulted in crude steel production in China growing by 14 per cent a year to reach 419 million tonnes. Over this period China accounted for 66 per cent of the total increase in global steel production. Over the six years to 2012, China’s steel production is projected to grow by over 250 million tonnes (8 per cent a year) to total around 670 million tonnes. The majority of this increase in production is expected to be consumed domestically, with China’s net exports of crude steel projected to grow by an average of only 1.2 per cent a year over the outlook period. Most importantly, developments in China will continue to have a signifi cant impact on global steel and steel making raw materials markets. In particular, China is projected to account for around 90 per cent of the growth in global iron ore imports between 2006 and 2012. consolidation of China’s steel industry Over a number of years, Chinese authorities have become increasingly concerned about the proliferation of small scale steel mills that lack state of the art technology and typically consume more energy and produce more pollution per tonne of steel than larger mills. Refl ecting these concerns, Chinese authorities have sought to implement a number of policies aimed at rationalising the domestic steel industry around fewer, larger scale steel makers. A specifi c goal of China’s National Development and Reform Commission (NDRC) is to encourage the expansion and consolidation of large fi rms to achieve economies of scale, while reducing the number of small scale producers. The NDRC’s Development Policy for the Steel Industry aims to have the largest ten steel mills in China account for 50 per cent of total output by 2010, and 70 per cent by 2020. According to the NDRC plan, the fi rst production cuts will take place among 26 fi rms in China’s Hebei Province, which will eliminate almost 4 million tonnes of small scale capacity. The central govern- China’s manufacturing output ment is determined to ensure that these cuts take place and has threatened to suspend production licences and cut power and water supplies to blacklisted fi rms if they 1995 2000 fail to abide. 2005 In the past some provincial Chinese governments 60 have shown a reluctance to comply with the central government’s steel industry policy. However, this may 40 now be changing and the cooperation of the provinces would assist the NDRC in achieving its objectives — as shown in the table on the following page. 20 India million Steel production in India is projected to rise by 8.5 per units cent a year over the outlook period, from 43 million @LILRO >FO JF@OL¦ OBCOFDBO>QLOP T>PEFKD tonnes in 2006 to 70 million tonnes in 2012. A key driver QBIBSFPFLKP @LKAFQFLKBOP @LJMRQBOP J>@EFKBP australian commodities > vol. 14 no. 1 > march quarter 2007 115 steel

steel industry policy initiatives in China

April 2004 Slowed bank lending to industries that used steel products intensively June 2004 Increased equity required to match new ﬁ xed asset borrowing for new steel making capacity June 2004 Forced closure of small scale blast furnaces and announced timetable for the closure of larger (though still comparatively small) operations. Late 2004 Limits placed on the development of new capacity aimed at the production of low value long products May 2005 Reduced export rebates on steel exports May 2005 Reduced the number of companies allowed to purchase iron ore on the spot market July 2005 Development Policy for the Steel Industry announced August 2005 Formation of Anben Iron and Steel Group through the merger of Anshan Iron and Steel Group and Benxi Iron and Steel — capacity 20 million tonnes a year December 2006 Announcement that 26 steel plants in Hebei province will be demolished in 2007 January 2007 Shandong province sets steel production capacity limit of 42 million tonnes for 2010

behind this increase is strong growth in industrial activity (assumed to be supported by signifi cant investment in road, rail and port infrastructure). Also underpinning future growth in output is the Indian Government’s National Steel Policy (2005) that has a central goal of increasing steel production to 100 million tonnes by 2020. Projects that may come on line during the outlook period include Tata Steel’s addition of 12.4 million tonnes of capacity through two greenfi eld projects and one brownfi eld expansion and the Steel Authority for India Limited’s intention of increasing total capacity by 8 million tonnes by expanding all of its four integrated steel mills. In addition, companies considering expanding operations in India include Rashtriya Ispat Nigam Limited, Essar Steel, Jinadal Vijayanagr Steel Limited, Ispat Industries, Mittal, Bhushan, Murugappa and Posco that have developments under consideration with a combined capacity of around 42 million tonnes. The majority of the growth in steel production in India is set to come from blast furnace operations. Consequently, India is expected to become a more signifi cant consumer of steel making raw materials. While India has signifi cant reserves of coking coal, they are generally of inferior quality compared with internationally traded coals. As a result, imports from Australia are expected to account for the majority of the projected increase in India’s use of metallurgical coal. In contrast, India has substantial reserves of high quality iron ore that are expected to be suffi cient to meet domestic requirements over the outlook period.

United States US steel producers have been cutting production in an effort to reverse recent declines in steel prices. US producers have the ﬂ exibility to do this because the majority of US steel is produced in electric arc furnaces (EAF), which are relatively easy to shutdown and restart at short notice. Data from the American Iron and Steel Institute show that US steel mills were operating at only 76 per cent of capacity in the ﬁ rst week of January, 10 percentage points lower than at the same time in 2006. Over the medium term, increased output from lower cost steel producers in Asia is expected to erode the competitiveness of the US steel industry. As a result, growth in US steel consumption over the outlook period is expected to be met by increased imports. Furthermore, as the United States produces around half of its total steel output in electric arc furnaces, rising energy prices and sustained high scrap steel prices are expected to result in the raw material cost of producing steel in EAF mills remaining above that of their

116 australian commodities > vol. 14 no. 1 > march quarter 2007 steel integrated counterparts. Overall, US steel production is projected to total 100 million tonnes in 2012, only 2 million tonnes more than in 2006. An upside risk to the projected growth in US steel production is the possibility that the United States could strengthen its antidumping trade regulations in response to rising steel imports from China. However, recent ﬁ ve year sunset reviews by the US International Trade Commission have resulted in the elimination of US antidumping duties on a range of steel products from various countries. As a result, no allowance has been made in the outlook for signiﬁ cant changes in US antidumping regulations.

Japan In 2006, Japan remained the world’s largest net exporter of steel, with net exports estimated at 30 million tonnes, the vast majority of which were destined for Asia. However, over the outlook period, a number of countries (notably China and Thailand) that have traditionally imported steel from Japan are expected to invest in new steel production capacity to reduce their import requirements. Reﬂ ecting this situation, steel production in Japan is expected to remain relatively ﬂ at and is projected to grow by only 0.3 per cent a year to 118 million tonnes in 2012.

Brazil Supported by strong growth in industrial activity, in addition to the availability of large domestic reserves of high grade iron ore, Brazil is projected to increase its production of crude steel substantially over the outlook period — by 9 million tonnes to reach 40 million tonnes in 2012. Blast furnace capacity in Brazil was recently boosted by CST’s no. 3 blast furnace at Serra (2.5 million tonnes a year), which came on line in 2006. Included in this outlook is the assumption that CVRD and Shanghai Baosteel will proceed with the construction of a 3.7 million tonne a year integrated steel mill in Sao Luis, with a further expansion to 7 million tonnes a year capacity likely in the medium term. Other increases include the potential doubling of capacity at Arcelor’s SA Joao Monlevade and Juiz e Fora plants, with capacity projected to increase by 2.2 million tonnes. A further 4.4 million tonnes of slab steel may be sourced from the CVRD and Thyssen Krupp owned CSA steel plant in Sepetiba in 2008.

Iran The Iranian Government plans to triple steel production capacity to around 30 million tonnes by 2012. To achieve this growth, Iran plans to partially decentralise the steel industry and introduce laws to streamline foreign investment procedures and guarantee profi t repatriation. Iran has substantial reserves of raw materials, particularly iron ore and gas (used in direct reduced iron production), and potential projects in the pipeline that would be suffi cient to achieve this growth over the outlook period. However, while Iran is under threat of United Nations economic sanctions because of its nuclear ambitions, it is unlikely to be able to attract suffi cient foreign investment to fully achieve these growth targets. Consequently, steel production in Iran is projected to double, rather than triple, over the outlook period to reach 18 million tonnes by 2012. steel making raw material supply World production of iron ore is projected to grow by around 5.2 per cent a year to reach 2 billion tonnes in 2012. The majority of this increase is expected to come from new iron ore mines and expansions in Australia and Brazil that are scheduled to come into produc- australian commodities > vol. 14 no. 1 > march quarter 2007 117 iron ore

tion during the outlook period. Substantial iron ore production growth is also expected in India and China in response to strong demand from their growing steel industries. World metallurgical coal production is projected to increase by an average of 4.6 per cent a year to reach 950 million tonnes in 2012, reﬂ ecting strong production growth in Australia and China. Australia’s proximity to the rapidly expanding Asian markets means that Australian exporters are well placed to take advantage of the rapidly growing markets for steel making raw materials in Asia. With the anticipated development of new mine supplies as well as the expansion of port handling capacity, Australia is expected to increase its share of world iron ore and metallurgical coal trade over the outlook period.

iron ore

Australia Over the outlook period, signiﬁ cant new additions to Australia’s mine, rail and port capacity are expected. Consequently, iron ore production in Australia is projected to rise by 177 million tonnes (9 per cent a year) to 441 million tonnes in 2011-12. In 2006, Rio Tinto successfully completed commissioning of Hamersley Iron’s port capacity expansion from 74 million tonnes a year to 116 million tonnes a year. The mine capacity required to feed the port has been progressively commissioned over the past two years, including a 12 million tonnes a year expansion of its Yandicoogina mine and ramping up of the new 10 million tonnes a year capacity Eastern Ranges mine. These developments have been further complemented by the 15 million tonnes a year expansion of the Tom Price and Marandoo mines and construction of new mine capacity at Nummuldi that were completed toward the end of 2006. Over the medium term, Rio Tinto is expected to continue to increase iron ore capacity with a further 16 million tonnes a year expansion at the Yandicoogina mine due to come on line in late 2007, taking total capacity to 52 million tonnes a year. A 24 million tonne

iron ore, steel and metallurgical coal outlook – Australia

Unit 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Production Iron and steel s Mt 7.39 7.87 8.04 8.51 8.81 8.81 8.81 8.81 Iron ore Mt 251.9 263.8 299.7 324.1 355.4 391.4 422.5 440.5 Metallurgical coal Mt 128.2 133.2 131.8 140.9 144.7 150.4 155.4 159.2 Exports Iron and steel as Mt 2.34 2.43 2.67 3.04 3.28 3.17 3.05 2.98 Nominal value A$m 2 031 1 674 1 756 1 834 1 875 1 753 1 678 1 640 Real value b A$m 2 162 1 727 1 756 1 789 1 784 1 627 1 520 1 449 Iron ore Mt 228.5 239.4 274.8 296.7 324.7 358.3 387.8 405.0 Nominal value A$m 8 120 12 854 16 955 20 021 22 065 23 860 24 452 25 128 Real value b A$m 8 643 13 258 16 955 19 533 21 002 22 156 22 152 22 210 Metallurgical coal Mt 124.9 120.5 126.6 135.6 139.4 145.1 150.1 153.9 Nominal value A$m 10 758 17 003 15 027 14 986 14 084 14 401 14 938 15 453 Real value b A$m 11 451 17 538 15 027 14 620 13 406 13 373 13 533 13 658

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 2006-07 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.

118 australian commodities > vol. 14 no. 1 > march quarter 2007 iron ore capacity expansion at the Dampier port is also on track for completion in late 2007, which will raise total shipping capacity at the Dampier port to 140 million tonnes. The Hope Downs iron ore project and associated infrastructure (22 million tonnes a year) was also approved during 2006 and fi rst production is expected in early 2008. A further development being undertaken is the 25 million tonnes a year expansion of Robe River’s Cape Lambert port, taking capacity to 80 million tonnes a year in 2008. When completed, Rio Tinto’s export capacity from the Pilbara region is expected to be approximately 220 million tonnes a year. BHP Billiton is also expected to increase its iron ore supply capacity signifi cantly in the Pilbara during the outlook period, with the development of the Rapid Growth Projects 3 and 4. The US$1.5 billion Rapid Growth Project 3 is under construction and will add 20 million tonnes to BHP Billiton’s annual iron ore production capacity when completed in late 2007. BHP Billiton is also expected to proceed with its US$1.6 billion Rapid Growth Project 4, which will add a further 25 million tonnes of iron ore capacity by 2010. These BHP Billiton commitments (including rail and port upgrades) constitute a $5 billion injection of funds to the Pilbara region in Western Australia and are expected to take the company’s Western Australian iron ore capacity to 152 million tonnes a year by the end of the outlook period. The recent signifi cant rise in iron ore prices and the prospect of continued strong demand growth is also encouraging new entrants to the industry in Australia. In particular, emerging iron ore producer Fortescue Metals is on track to deliver ore from its Pilbara iron ore project (45 million tonne capacity) in early 2008. On a smaller scale, higher output is expected from Portman mining following the expansion of its Koolyanobbing mine in south west Western Australia, which increased its annual production capacity by 2.8 million tonnes to 8 million tonnes in 2006. In addition, the Mount Gibson Iron project (4 million tonnes a year) and OneSteel’s project magnet expansion (additional 3 million tonnes of iron ore a year) are expected to start up during 2007. Other iron ore projects that are not yet committed but may come on line over the outlook period include stage 2 of Murchison Metals’ Jack Hills project (up to 25 million tonnes a year), the Cape Lambert iron ore project (up to 15 million tonnes a year) and Mount Gibson Iron’s Extension Hill magnetite project (5 million tonnes a year). In assessing the potential for Australian production of iron ore to rise during the projection period, it should be noted that diffi culty in attracting suffi cient skilled labour and materials may cause the startup of some of these projects to be delayed. By way of example, of 66 advanced Australian projects in ABARE’s October 2006 energy and minerals development project list that also appeared in the April 2006 list, 47 per cent of those projects showed a later scheduled completion date than was envisaged six months earlier. With an exceptionally large number of energy and minerals projects currently committed to or under development in the next few years, competition for skilled labour and materials is unlikely to ease in the medium term. Refl ecting the increase in supply, Australian iron ore exports are projected to increase by 165 million tonnes over the outlook period (9 per cent a year) to 405 million tonnes by 2011-12. At that time, Australia is projected to account for 37 per cent of world iron ore trade (32 per cent in 2006). Australian iron ore export earnings are projected to rise from $17 billion in 2005-06 to $20 billion in 2007-08, and to continue rising to $22 billion (in 2007 dollars) by the end of the outlook period. Substantially greater export volumes are expected to more than offset any easing in iron ore prices in real terms.

australian commodities > vol. 14 no. 1 > march quarter 2007 119 iron ore

Brazil Signiﬁ cant expansions from CVRD (the world largest iron ore producer), MBR and CSN are expected to underpin a projected 127 million tonne rise in Brazilian iron ore production over the outlook period to around 448 million tonnes. Substantially higher output is expected from the continued expansion of CVRD’s Carajàs mine where annual capacity will be increased by a further 30 million tonnes (following the completion of two 15 million tonne expansions over the past eighteen months) to reach 130 million tonnes in 2009. In addition, CVRD is ramping up production following completion of stage 2 of the Brucutu iron ore mine that doubled capacity to 24 million tonnes a year, and are expecting to complete a 14 million tonne expansion of the Fazendao iron ore mine and a 5 million tonnes a year expansion of the Fabrica iron ore mine during 2007. CVRD also has two pellet plant projects under consideration, each with a nominal capacity of 7 million tonnes a year that may start up in the second half of 2008. In 2008, MBR — an 85 per cent owned subsidiary of CVRD — is expected (subject to board approval) to increase combined production at its Brazilian operations by 15 million tonnes. The MBR controlled Guaiba Island port facilities are also undergoing an upgrade involving a new shiploader and pier extension. This will increase loading capacity at the site from 33 million tonnes to 50 million tonnes. CSN, Brazil’s largest steel producer, has announced intentions to expand capacity at its Casa de Pedra iron ore mine to 40 million tonnes by 2010. With anticipated growth in Brazil’s domestic steel production, the growth in iron ore exports is not expected to keep pace with production. Overall, Brazil’s iron ore exports are projected to rise by 104 million tonnes to reach 354 million tonnes in 2012.

India India is estimated to have produced 172 million tonnes of iron ore in 2006. Over the outlook period, iron ore production in India is projected to grow by an average of 6.5 per cent a year to reach 250 million tonnes by 2012. In contrast, India’s exports of iron ore are projected to grow by a lower rate of 4.6 per cent a year over the six years to 2012. The outlook for exports reﬂ ects strong growth in India’s domestic iron ore requirements and the lack of suitable transport and export infrastructure. In addition, many of the iron rich states restrict access to mines until construction of an associated steel plant is under way.

China Over the outlook period, China’s production of iron ore is projected to increase from 263 million tonnes in 2006 to 345 million tonnes in 2012 (average growth of 4.6 per cent a year). Underpinning this increase is investment in greenﬁ eld iron ore projects by Chinese steel makers as they attempt to offset increases in contract prices of imports of iron ore. Beijing Shougang, China’s sixth largest steel maker, has an agreement with the Yichang city government in China’s Central Hubei province to develop the high phosphorus iron ore deposits there. In addition, Wuhan Iron and Steel, China’s third largest steel maker, has increased iron ore exploration in the western region of Hubei province, which is estimated to contain 2 billion tonnes of iron ore. The projected growth in China’s iron ore production is well below steel mills’ anticipated requirements. Chinese iron ore is typically of lower quality and more costly than ores sourced from the world’s three main producers, CVRD, BHP Billiton and Rio Tinto.

120 australian commodities > vol. 14 no. 1 > march quarter 2007 metallurgical coal

Consequently, China’s imports of iron ore are projected to grow rapidly over the outlook period and be sourced primarily from Australia.

South Africa South Africa’s iron ore output is projected to grow by 5.6 per cent a year to reach 56 million tonnes in 2012 as new projects and mine expansions are completed. The supply of iron ore from South African based Kumba Iron Ore is expected to expand substantially over the outlook period through a number of new mines and mine expansions. The Sishen mine expansion project, which is currently under construction, will raise Kumba Iron Ore’s capacity to 42 million tonnes by 2009. The company has a further ﬁ ve iron ore projects at the feasibility stage that could potentially raise Kumba Iron Ore’s production to 70 million tonnes over the longer term. To facilitate the planned 13 million tonne increase in output from Sishen mine, the railway from Sishen to Saldanha Bay is being upgraded to handle 42 million tonnes of iron ore a year by 2009. The bulk of this upgrade is expected to commence in mid-2007. The agreement between Kumba Resources and Transnet Rail also allows for a possible further expansion to Sishen mine and rail capacity to 58 million tonnes a year. metallurgical coal

Australia Relatively high prices in metallurgical coal markets in recent years combined with Austra- lia’s geographic proximity to Asia are encouraging many new metallurgical coal developments and expansions of existing mines. Over the outlook period, Australian metallurgical coal production is projected to rise from 133.2 million tonnes in 2005-06 to 159 million tonnes in 2011–12. Australian exports of metallurgical coal are projected to grow in line with production, rising from 121 million tonnes in 2005-06 to 154 million tonnes in 2011- 12. However, despite higher export volumes, the real value of Australian metallurgical coal exports is projected to fall below $14 billion (in 2007 dollars) because of an easing in prices over the outlook period. In Queensland, there are several metallurgical coal projects scheduled to begin or expand production in 2007. Specifi cally, BHP Billiton’s Poitrel project (3 million tonnes a year) produced its fi rst coal in the last quarter of 2006 and is expected to ramp up production during 2007. In addition, Anglo Coal Australia’s US$835 million Dawson project is expected to begin production during 2007. This project will increase production capacity at Dawson by 5.7 million tonnes a year of thermal and metallurgical coal combined. Finally, Wesfarmers Curragh North expansion, which will increase metallurgical coal capacity by 2.4 million tonnes a year, is also expected to start producing in 2007. Beyond 2007, metallurgical coal projects under consideration in Queensland include BHP Billiton Mitsubishi Alliance’s (BMA) 7 million tonne Goonyella Riverside expansion and the 6 million tonne Peak Downs expansion. Anglo Coal Australia has also begun prefeasibility studies for a 5–6 million tonne underground mine at Grosvenor and 3.5 million tonne mine at Moranbah South. Other smaller scale projects include Mcarthur Coal’s Olive Downs project, Qcoal’s Sonoma coal project and Bowen Basin Coal’s Vermont Coal project. In New South Wales, Resource Pacifi c Limited completed its $75 million Newpac long- wall expansion project in Januray 2007, which will increase metallurgical coal capacity by 4 million tonnes a year. Felix Resources, in a joint venture with Itochu, are on target to australian commodities > vol. 14 no. 1 > march quarter 2007 121 metallurgical coal

commission the $150 million Ashton underground mine in March 2007, which will produce 3 million tonnes a year of thermal and metallurgical coal combined. In subsequent years, further additions to New South Wales metallurgical coal supplies may be sourced from Anglo Coal’s Saddler’s Creek underground and opencut development and Donaldson Coal’s Abel underground project, both of which may commence production during the outlook period. More broadly, a number of additional coal mine developments have been announced, but not committed to, by Australian operators to commence production before 2012. Accordingly there is signiﬁ cant upside potential to Australian production (and exports) over the medium term. On the downside, metallurgical coal prices are projected to ease over the medium term, which may result in some planned development projects being delayed or abandoned.

outlook for world iron ore and metallurgical coal trade

2005 2006 2007 2008 2009 2010 2011 2012 Mt Mt Mt Mt Mt Mt Mt Mt Iron ore imports European Union 27 160 171 172 174 175 177 179 180 Japan 132 134 137 138 139 140 141 142 China 275 326 367 425 477 531 578 615 Korea, Rep. of 43 44 44 44 44 45 46 46 Chinese Taipei 15 15 16 16 16 16 17 17 World total 744 780 842 908 969 1022 1068 1107

Iron ore exports Australia 239 249 292 307 342 375 397 410 Brazil 223 250 272 311 333 344 351 354 India 81 99 110 118 122 121 123 130 Canada 28 25 25 25 24 25 25 27 South Africa 27 28 28 32 37 40 41 43 Sweden 18 19 20 23 25 26 27 28 World total 744 780 842 908 969 1022 1068 1107

Metallurgical coal imports European Union 27 48.7 49.9 51.6 52.2 52.8 53.5 54.6 55.6 Japan 63.4 62.0 62.2 62.8 63.3 63.9 64.1 64.3 China 7.2 4.7 8.9 12.0 15.6 18.6 20.4 24.0 Korea, Rep. of 20.6 21.2 21.0 20.6 20.5 20.7 20.9 21.1 Chinese Taipei 5.2 5.0 9.0 9.0 9.0 9.2 9.3 9.5 India 19.6 19.4 21.2 23.3 25.7 28.3 30.8 33.2 Brazil 14.7 14.0 14.7 15.6 16.4 16.9 17.8 18.6 World total 207.3 208.8 219.5 226.5 233.4 242.9 251.8 261.5

Metallurgical coal exports Australia 124.9 126.8 130.0 136.5 142.1 148.2 152.1 155.8 Canada 27.1 25.6 28.2 28.5 28.8 29.1 30.0 31.0 United States 26.0 24.6 26.7 23.0 19.1 19.4 20.9 22.8 Russian Federation 12.1 16.7 16.9 15.7 14.4 15.2 16.8 18.6 World total 207.3 208.8 219.5 226.5 233.4 242.9 251.8 261.5

122 australian commodities > vol. 14 no. 1 > march quarter 2007 metallurgical coal

Canada Projections for Canada’s metallurgical coal export have been downgraded since the previous medium term outlook owing to increasing costs of equipment, materials, fuel, labour, an appreciating Canadian dollar and easing coal prices. This has forced Canada’s metallurgical coal producers to reconsider expansion plans as Canadian coal exporters are not as price competitive on the world market as Australian producers. In addition, Pine Valley Mining closed the Willow Creek opencut mine (2 million tonnes a year capacity) after just two years of operation following equipment failures and lower than expected coal output. On a more positive note, Western Canadian Coal Corporation began operations at its Wolverine mine in British Columbia during the second half of 2006. This mine has a nominal capacity of 3 million tonnes a year over the outlook period. Possible production expansions over the outlook period include Hillsborough Resources’ Horizon metallurgical coal mine (1.7 million tonnes a year capacity), which has progressed to a feasibility study following a positive outcome from the scoping study. In addition, Hillsborough Resources, Anglo Coal Canada and Northern Energy and Mining have consolidated their resources to form the Pearce River Coal Limited Partner- ship. This joint venture has metallurgical coal properties in commissioning phase and under development in north eastern British Columbia.

United States Metallurgical coal production in the United States is projected to remain stable over the outlook period based on the expectation that demand from the US steel industry will remain ﬂ at and coal prices will ease. High prices for sulfur credits in the United States are also having an effect on US production of metallurgical coal. As sulfur credit prices have increased, returns from low sulfur thermal coals have improved, encouraging producers to switch production capacity out of metallurgical coal. As a result, some reduction is expected in the quantity of metallurgical coal available for export from the United States. According to the US Energy Information Administration, exports of metallurgical coal to Japan fell from 1.5 million tonnes in 2005 to 0.3 million tonnes in 2006. Over the outlook period, US metallurgical coal exports to Asia are expected to return to well below 1 million tonnes from the high of 3 million tonnes in 2005.

Russian Federation Solid growth in Russian metallurgical coal production is expected over the medium term as a result of government measures to stimulate the domestic steel industry. Overall, Russian metallurgical coal output is projected to grow by 3.3 per cent a year to reach 84 million tonnes by 2012. Reﬂ ecting incentives provided by the Russian Government to stimulate the domestic steel industry, the majority of increased metallurgical coal production will be consumed domestically rather than exported. In the short term, Russian coal production will be boosted by the commencement of the Tagaryshskaya coal mine in 2006, which has a production capacity of 2.5 million tonnes a year. Over the medium term, the Greenﬁ eld Denisovskaya coal mine is expected to begin production at the end of 2008. This mine will have a production capacity of 2.7 million tonnes a year of metallurgical coal.

australian commodities > vol. 14 no. 1 > march quarter 2007 123 metallurgical coal

China Strong growth in steel production in China over the medium will increase its metallurgical coal requirements, which are not expected to be fully met by increased domestic production. Consequently, China’s imports of metallurgical coal are projected to rise from about 5 million tonnes in 2006 to 24 million tonnes in 2012. One factor limiting growth in China’s coal production is a government policy to reduce the number of small coal mines. There are estimated to be 17 000 – 18 000 small coal mines in China, with the government wishing to reduce this fi gure to around 10 000, with 4000 mines scheduled to be closed in 2007. In addition, the Chinese Government will not approve the development of any new coal mines with a capacity of less than 300 000 tonnes a year. Australia is currently a major source of China’s metallurgical coal imports. However, over the medium term, Australian exports of metallurgical coal to China are likely to come under increasing pressure from developments in Mongolia. Mongolia is estimated to have signifi cant coal resources but is landlocked, with China the only economically feasible market for its coal exports. Mongolia’s central administration has recently introduced reforms encompassing all local coal operations to consolidate the industry, increase plant size and improve the effi ciency of coal production. Over the outlook period, Mongo- lia’s metallurgical coal production is projected to increase by 10 million tonnes to reach 12 million tonnes in 2012, with almost all of this output expected to be exported to China.

European Union Metallurgical coal production is expected to decline in the European Union with the gradual reduction in subsidies to the high cost German coal industry over the projection period. Germany produced over 16 million tonnes of metallurgical coal in 2006 and, given the expected reduction in subsidies, German coal production is expected to decline substantially over the outlook period. German coal producer Duetsche Steinkohle, which operates the remaining eight coal mines in Germany, has indicated that, unless subsidies are increased, at least one of its coal mines will closed before the end of 2007. However, the German Government has stipulated that there will be no change to its coal subsidy package until 2008. After that time, subsidies will be gradually reduced and eliminated by 2018.

124 australian commodities > vol. 14 no. 1 > march quarter 2007 gold gold

> chris rumley

The US dollar denominated gold price averaged US$605 an ounce in 2006, 36 per cent higher than in 2005. Increased global oil prices in 2006 and the potential for these to fl ow into higher infl ation may have encouraged investment demand for gold as a hedge against infl ation. After initial weakness in early 2007, the gold price rebounded to exceed US$660 an ounce in early February. This was supported by factors such as an increase in investment demand for gold as well as continued subdued growth in global mine production and a reduction in offi cial sector sales. In 2007, the world gold price is forecast to increase by 11 per cent to average US$670 an ounce, largely because of expected strength in investment demand. Uncertainty over the outlook for interest rate movements in the United States, concerns about the large US current account defi cit and indications that a number of central banks may consider reducing their holdings of US dollars are all expected to encourage investment demand for gold by funds as a hedge against a potential depreciation of the US dollar. In addition, investment gold price demand for gold may be supported by geopolitical monthly, ended January 2007 uncertainty such as in relation to lingering concerns about Iran’s nuclear program. A number of other factors in the gold market are 1500 also expected to provide support for prices over the remainder of 2007. On the supply side, global mine production is forecast to recover only modestly from 1000 last year’s downturn and gold sales by central banks are expected to fall, with sales by signatories to the second Central Bank Gold Agreement (CBGA) fore- 500 cast to remain below 500 tonnes. On the demand side, dehedging is forecast to continue, albeit at lower 2007 rates, and fabrication demand is also expected to US$/oz recover modestly in response to increases in consumer 19761981 1986 1991 1996 2001 2006 incomes in key consuming regions such as India and the Middle East. gold prices to ease over the medium term Gold prices (in 20 07 dollars) are projected to ease moderately over the fi ve years to 2012. An assumed gradual easing of prices, in real terms, for the majority of mineral and energy commodities over the outlook period is expected to lessen fund interest in commodities generally, including in gold. In addition, concerns about a signifi cant increase in global infl ationary pressures are expected to subside over the projection period as world oil prices ease gradually. A number of fundamental factors are expected to be supportive of the gold price over the medium term and limit falls in prices. Growth in world mine production is projected to remain modest and offi cial sector gold sales are projected to fall over the medium term. In addition, major gold producers are expected to continue to reduce their outstanding hedge positions. In the case of demand, gold fabrication consumption is likely to be supported by continued growth in consumer incomes in China and India, which is expected to fl ow through to increases in jewellery demand. australian commodities > vol. 14 no. 1 > march quarter 2007 125 gold

US$/euro and gold price While gold prices are projected to ease gradu- daily, ended 1 February 2007 ally in real terms over the projection period, a number of risk factors remain that have the potential to affect 1.35 gold price 700 the medium term outlook. An increase in geopolitical tensions could provide signifi cant scope for a rise in 1.30 600 gold prices through increased investment demand for gold. A substantial increase in central bank diversifi ca- 1.25 500 tion into currencies other than the US dollar, if it even- tuated, could also prompt a depreciation of the US 1.20 400 dollar and an increase in the price of gold. However, if infl ationary pressures are lower than US$/euro 1.15 300 market participants expect over the projection period, the demand for gold as a hedge against global infl a- US$/euro US$/oz tion may decline, placing signifi cant downward pres- SeptDec MarJun Sept Dec sure on gold prices. 2005 2006 production to increase modestly in 2007 World gold mine production is estimated to have declined by around 2 per cent in 2006 to 2463 tonnes as higher production in China and south America was more than offset by lower production in South Africa, Australia, the United States and Indonesia. In 2007, global gold mine production is forecast to increase by 2.8 per cent to 2531 tonnes as increases in Australia, the United States and Peru are expected to more than offset a decline in South African output of gold. In the United States, Newmont’s Leeville and Phoenix mines (combined production of around 750 000 ounces a year) both commenced commercial operation at the end of 2006 and will build up to full production in 2007. In Peru, Gold Fields’ Cerro Corona mine (expected annual production of 300 000 ounces a year) is expected to commence operations in 2007. In addition the Jinfeng mine (expected annual production 180 000 ounces a year) in Guizhou province, China, is due to commence production in the fi rst quarter of 2007. South African gold production is forecast to decline slightly in 2007 to around 270 tonnes. A 37 per cent increase in rand denominated prices in 2006 has moderated the impact of production cost increases and has lessened the likelihood of additional mine closures. Repairs to the main shaft at Gold Fields’ South Deeps mine were completed in January 2007 and production recommenced in February. Harmony Gold’s Tshepong Decline project (172 000 ounces a year) in South Africa is expected to begin production in early 2008. ….and increase slowly over the medium term Global mine production is projected to increase only moderately over the remainder of the outlook period, as the number of large greenfi eld projects due to commence operations is small. While recent increases in gold prices have encouraged an increase in expenditure on greenfi eld exploration for gold, it is unlikely that any recently discovered deposits will commence production before the end of the outlook period. It typically takes a minimum of around ten years (following the initial discovery) to bring a major gold deposit into operation.

126 australian commodities > vol. 14 no. 1 > march quarter 2007 gold

The majority of mines that are anticipated to commence production between 2007 and 2012 are expected to be brownﬁ eld developments, production from which will be largely offset by mine closures and declining output at other operations. Agnico Eagle’s Kittilä project in northern Finland is expected to produce 150 000 ounces a year after commencing in 2008. Harmony Gold’s Hidden Valley project in Papua New Guinea is expected to commence production in late 2008. The project is expected to produce around 250 000 ounces of gold a year over its estimated seven year life.

south America South America has been the most successful region for the discovery of large gold deposits over the past ﬁ fteen years. Reﬂ ecting this exploration success, the region is accounting for an increasing share of world mine production, rising from 13 per cent in 1996 to an estimated 20 per cent in 2006. However, with only a limited number of large projects expected to commence production over the outlook period, growth in south gold prices in major currencies American gold production is projected to be slow. daily, ended 2 February 2007 Gold Fields’ Cerro Corona project in Peru is rand expected to commence production in late 2007. 140 The project is expected to produce an average of around 300 000 ounces of gold a year over its esti- 130 mated seventeen year life. Barrick’s Pascua Lama project, located in the high Andes frontier region of 120 US$ Chile and Argentina, is expected to produce around A$ 750 000–775 000 ounces a year starting in 2010. 110

South Africa 100 euro Gold production in South Africa has declined substantially over the past ten years. After accounting index for around 21 per cent of world production in Jan Mar MayJuly Sep Nov Jan 1996 (495 tonnes), South Africa’s mine production 2006 declined to an estimated 279 tonnes in 2006 (11 per cent of global production). The fall in South African gold mine production largely reﬂ ected an increase in production costs between 2001 and 2005 and a decline in rand denominated gold prices. However, an increase in rand denominated gold prices — particularly in the latter half of 2006 — and a reduction in production costs may limit further falls in South African gold output. South Africa’s gold output is forecast to stabilise over the medium term as a number of mothballed gold operations recommence production. Production at Harmony Gold’s Phakisa Shaft project (280 000 ounces a year peak production) is expected to begin in 2009. Another Harmony Gold operation, the Elandsrand new mine project (445 000 ounces in 2010), is expected to ramp up production toward the end of the outlook period.

China In 2006, China was the world’s fourth largest gold producer behind South Africa, Australia and the United States. Gold production in China has increased by around 4 per cent a year since 2001 and reached an estimated 240 tonnes in 2006. China’s gold

australian commodities > vol. 14 no. 1 > march quarter 2007 127 gold

gold holdings CBGA signatories mine production is expected to continue to increase monthly, ended October 2006 over the projection period as favourable minerals prospectivity and policies provide encouragement to 12.5 overseas companies, leading to an increase in exploration and project developments. Greater investment 10.0 by international mining companies is expected to translate into better exploration technology being 7. 5 used and more efﬁ cient mining techniques being adopted — factors that are likely to support growth in 5.0 China’s gold output over the medium term.

2.5 central bank gold sales In 2006, central bank sales of gold are estimated to kt have declined by 50 per cent to 330 tonnes, mainly 20012002 2003 2004 2005 2006 because of a fall in sales by signatories to the second Central Bank Gold Agreement (CBGA). Offi cial sector sales in 2007 are expected to continue to be less than 500 tonnes. The second agreement (September 2004 – September 2009) specifi es a total 2500 tonne sales limit over the fi ve year period of the agreement. Over the remainder of the projection period, net offi cial sector sales are forecast to decline further as sales of gold by signatories to the CBGA are expected to continue to be below 500 tonnes a year and purchases of gold by central banks, that are not signatories to this agreement, increase only moderately.

gold outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Fabrication consumption t 3 280 2 910 3 047 3 292 3 349 3 390 3 395 3 402 Mine production t 2 519 2 463 2 531 2 626 2 671 2 703 2 713 2 717 Scrap sales t 861 1 050 1 000 850 800 700 700 700 Residual net stock t – 100 – 603 – 484 – 184 – 122 – 13 – 18 – 15 Official sector a t 656 330 320 300 280 280 280 260 Private sector a t (625) (513) (604) (304) (252) (173) (198) (195) Producer hedging b t (131) (420) (200) (180) (150) (120) (100) (80) Price c – nominal US$/oz 445 605 670 680 670 645 628 615 – real d US$/oz 471 619 670 665 640 602 573 553 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Mine production t 266 250 255 289 319 335 331 327 Export volume t 309 315 335 379 415 431 427 423 Export value – nominal A$m 5 523 7 089 9 202 11 124 12 416 12 927 12 876 12 766 – real e A$m 5 878 7 312 9 202 10 853 11 817 12 004 11 665 11 283 Price – nominal A$/oz 562 707 834 913 929 932 938 939 – real e A$/oz 598 730 834 891 885 866 849 830

a Sales (purchases). b Net additions (net reductions). c London Bullion Market Association AM price. d In 2007 US dollars. e In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Gold Fields Mineral Services; Australian Bureau of Statistics; London Bullion Market Association (LBMA); ABARE.

128 australian commodities > vol. 14 no. 1 > march quarter 2007 gold

CBGA gold sales Although the Bank of France and a number of other central banks are expected to continue to sell gold in the fi nal two years of the second agreement, the amount is unlikely to reach 500 tonnes unless Germany, or another central bank with large gold holdings, commences sales. Currently, the central bank of Germany (3423 tonnes of gold reserves) has given no indication on whether it intends to exercise the option to sell a portion of its holdings under the agreement. In addition, other signatories to the CBGA that hold signifi - cant reserves of gold — in particular Italy (2452 tonnes of gold reserves) and Switzerland (1290 tonnes) — have not announced their intentions for future gold sales. The outlook for a third CBGA commencing in October 2010 will depend largely on the macroeconomic and gold market specifi c factors that infl uence CBGA member central bank policies on holding gold as a reserve asset. As signatories to the second CBGA appear unlikely to meet their 2500 tonne sales limit by September 2009, the prospects for a third CBGA remains unclear. other central banks likely to increase their holdings Over the medium term, the actions of central banks with relatively low gold holdings will have an important bearing on overall central bank sales. Recently, the central bank of the Russian Federation indicated it was considering a further increase in its holdings of gold. Subsequently, between August and December 2006, it increased its offi cial holdings by around 10 tonnes. As the Russian Federation’s gold holdings represent only 3 per cent of the value of its total reserves (around US$ 270 billion in January 2006), a substantial increase in its gold holdings may partially offset sales by other central banks. There has been ongoing speculation regarding the potential for the central banks of China and oil exporting nations to increase their gold holdings, in order to reduce the weighting of US dollar holdings in their asset portfolios. In early October 2006, the value of China’s foreign exchange reserves exceeded US$1 trillion (a tenfold increase from the same period in 1996), the majority being US dollar denominated assets. At current gold prices, gold accounts for the equivalent of only 1 per cent of total asset reserves in China. A signifi cant rise in crude oil prices has also led to a substantial increase in the US dollar reserves of oil exporting nations, such as the United Arab Emirates (UAE) and Nigeria. However, if the central banks in these countries decided to reduce their holdings of US dollar denominated assets, it is likely that they would choose to diversify into other currencies, rather than gold. Indeed, the governor of the Central Bank of the United Arab Emirates (UAE) recently indicated that the UAE will increase the share of euros in its foreign exchange holdings before the end of 2007. gold sales by the International Monetary Fund The International Monetary Fund (IMF) is the world’s third largest holder of gold, with around 3620 tonnes. Recently, an advisory panel to the IMF released a report on its sustainable, long term fi nancing. One proposal from the study is to diversify the IMF’s income stream through sales of a portion of its gold holdings (around 400 tonnes) and investment of the proceeds in other assets. However, the likelihood of the IMF commencing gold sales over the outlook period and the volume of potential sales is uncertain.

australian commodities > vol. 14 no. 1 > march quarter 2007 129 gold

fabrication to remain little changed in 2007 World fabrication demand eased in 2006 largely because of a decrease in gold jewellery consumption in India (which accounted for 23 per cent of global gold jewellery purchases in 2005) and the Middle East (23 per cent) in response to high and volatile gold prices. In 2007, world gold fabrication consumption is forecast to increase moderately, largely because of a recovery in gold jewellery demand in key markets. In China, continued strong economic growth and rising urban incomes are expected to result in increased demand for gold jewellery in 2007. Gold fabrication consumption in China is expected to be supported by jewellery purchases and investment in gold bars and coins. Gold jewellery consumption in the Middle East (in particular Turkey) and India is expected to increase in 2007 despite a forecast increase in US dollar denominated gold prices. The anticipated pickup in consumption mainly refl ects continued growth in household disposable incomes. Continued strong economic growth and rising urban incomes in many developing countries over the medium term is expected to be an important determinant of growth in gold fabrication demand over the medium term. Given strong growth in consumer incomes, particularly in the urban areas of China, and a corresponding potential for an increase in purchases of luxury items (such as gold), demand for gold jewellery in China is projected to increase signifi cantly in the medium term. Likewise, income growth in India and a traditional affi nity for gold are factors that are expected to sustain an increase in gold jewellery consumption in that country over the medium term. However, partially offsetting these factors will be a likely decline in jewellery acquisitions in the United States and Europe as consumers continue to purchase alternative luxury items. dehedging In 2006, gold producers cut an estimated 420 tonnes from their outstanding hedge positions, with the majority of this dehedging conducted by Barrick Gold, Newcrest and AngloGold Ashanti. The signifi cant increase in dehedging in 2006 was driven largely by a one-off reduction by Barrick Gold of the hedgebook it inherited on purchasing Placer Dome. Gold producers are forecast to lower their outstanding hedge positions by around 200 tonnes in 2007. Dehedging is likely to be supported by producer expectations of gold price increases. While major mining companies are expected to continue to favour a reduction in their outstanding hedge positions over the remainder of the outlook period, their ability to do so will be restricted by the reduced size of the outstanding hedge positions. Australian gold production and exports to increase Australia’s gold production in 2006-07 is forecast to increase by 2 per cent to 255 tonnes as higher production from Newcrest’s Cadia Hill operation and the startup of Crescent Gold’s Laverton project more than offsets lower production at some existing operations. Production from Ballarat Goldfi eld’s Ballarat East project (commenced in late 2005) and Bendigo Mining’s Bendigo project (commenced in mid 2006), both in Victoria, has been postponed as further exploration drilling was required owing to diffi cult geology. In addition, production at BMA Gold’s Twin Hills operation in Queensland ceased in early 2007, as the company went into administration.

130 australian commodities > vol. 14 no. 1 > march quarter 2007 gold

Beyond 2007-08, the scheduled commencement of the Prominent Hill mine in South Australia (110 000 ounces a year starting in early 2009) and the Boddington joint venture in Western Australia are expected to be the main sources of growth in Australian gold production. Growth in production will also be supported by expansions of Newcrest operations at Ridgeway Deeps and Cadia East, both in New South Wales. The value of Australian gold exports in 2006-07 is forecast to increase by 30 per cent to $9.2 billion as both export volumes and prices rise. Over the medium term, Australia’s real export earnings are projected to reach $11.3 billion (in 2006-07 dollars) in 2011-12, around 23 per cent higher than the export earnings forecast for 2006-07. The trend for exports to remain above domestic gold production in Australia is expected to continue over the outlook period as gold is sourced from overseas and transported to Australia where it is reﬁ ned into gold bullion.

australian commodities > vol. 14 no. 1 > march quarter 2007 131 aluminium

aluminium

> kate penney

In 2006, global aluminium prices averaged US$2568 a tonne (US116c/lb), 35 per cent higher than the 2005 average price of US$1898 a tonne. Prices were supported by continued strong demand in China and a fall in global aluminium stocks. Developments in China will also have a major impact on world aluminium markets over the medium term. Continued rapid economic expansion is expected to underpin strong demand growth in China and ensure that it will remain the world’s largest consumer of aluminium. In addition, improved availability of alumina in China will enable increased aluminium production from new and existing capacity. Over the outlook period, global aluminium prices are projected to ease. Growth in world aluminium demand is expected to be more than satisfi ed by signifi cant new additions to aluminium capacity, resulting in an increase in stocks and an easing of prices. prices to ease after 2007 In 2007, aluminium prices are forecast to fall by over 8 per cent to average around US$2350 a tonne (US107c/lb) as global aluminium supplies increase in response to recent high prices and stocks rise. Global aluminium production is forecast to increase by 8 per cent to 36.5 million tonnes as new smelting capacity is commissioned and idled capacity, particularly in China, is restarted. Growth in China’s demand for aluminium is expected to remain strong, refl ecting robust growth in motor vehicle production and continued rural–urban migration with the associated requirements for housing and other infrastructure (such as enhanced electricity supplies). Over the remainder of the outlook period, global aluminium prices are projected to ease in response to signifi cant additions to production capacity, particularly in regions with relatively low cost energy supplies. While lower aluminium prices could force some high cost smelters to close, this is not expected to be suffi cient to offset increased production from new large capacity smelters in the Russian Federation, Iceland and the Middle East. Refl ecting this, stocks are projected to increase signifi cantly. In 2012, world aluminium prices in real terms (2007 dollars) are projected to average around US$1500 a tonne, over 40 per cent below the relatively high average price in 2006. world aluminium global aluminium consumption to increase, price driven by China 4000 12 In 2006, global consumption of primary aluminium stocks increased by an estimated 7 per cent to 33.8 million tonnes, with China accounting for around 60 per 3000 9 cent of the total growth. Consumption is forecast to increase by a further 7 per cent in 2007 to 36.1 2000 6 million tonnes, largely refl ecting continued strong demand growth in China. 1000 3 Over the medium term, developments in China and the United States (which accounted for 25 per cent 2007 weeks and 18 per cent respectively of world consumption in US$/t consumption 2006) will continue to have an important bearing on 1972 1982 1992 2002 2012 world aluminium markets.

132 australian commodities > vol. 14 no. 1 > march quarter 2007 aluminium

A key driver of growth in aluminium demand in China is strong growth in infrastructure development, which itself is being driven by rapid industrialisation and urbanisation trends. In 2006, China’s aluminium consumption increased by an estimated 17 per cent to 8.4 million tonnes, and is forecast to increase by a further 22 per cent to just over 10 million tonnes in 2007. Strong growth in the production of motor vehicles in China is also expected to support aluminium demand (a standard car contains approximately 120 kilograms of aluminium). China’s relatively low labour costs and growing domestic market for motor vehicles has alumina and aluminium outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production Primary aluminium kt 32 022 33 669 36 492 38 851 41 043 43 517 45 530 47 068 Consumption Primary aluminium kt 31 703 33 785 36 136 38 240 40 379 42 366 44 198 46 145 Closing stocks Primary aluminium a kt 3 010 2 894 3 250 3 861 4 524 5 675 7 007 7 930 – weeks consumption wks 4.9 4.5 4.7 5.3 5.8 7.0 8.2 8.9 Prices World aluminium b – nominal US$/t 1 898 2 568 2 350 2 085 1 975 1 838 1 763 1 663 USc/lb 86 116 107 95 90 83 80 75 – real c US$/t 2 010 2 627 2 350 2 038 1 887 1 716 1 609 1 495 USc/lb 91 119 107 92 86 78 73 68 Alumina – nominal spot US$/t 443 435 236 208 213 225 233 236 – real spot c US$/t 469 445 236 203 203 210 212 212 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Production Primary aluminium kt 1 890 1 912 1 936 1 937 1 938 1 939 1 940 1 941 Alumina kt 17 161 17 826 18 955 20 530 21 080 21 140 21 720 21 980 Bauxite Mt 58 61 65 67 67 67 69 76 Consumption Primary aluminium kt 380 343 285 288 300 320 330 330 Exports Primary aluminium kt 1 512 1 617 1 651 1 649 1 638 1 619 1 610 1 611 Nominal value A$m 3 726 4 788 5 498 4 697 4 600 4 382 4 262 4 181 Real value d A$m 3 966 4 939 5 498 4 583 4 379 4 069 3 862 3 695 Alumina kt 14 073 14 499 15 507 16 753 17 301 17 359 17 937 18 195 Nominal value A$m 4 383 5 262 6 398 5 949 6 058 5 855 5 920 5 887 Real value d A$m 4 666 5 427 6 398 5 804 5 766 5 437 5 363 5 203 Bauxite kt 4 900 5 639 7 884 8 062 6 934 6 934 7 304 12 927 Nominal value A$m 123 127 186 185 159 159 168 297 Real value d A$m 130 131 186 181 152 148 152 263 Total value – nominal A$m 8 232 10 177 12 082 10 832 10 818 10 397 10 350 10 365 – real d A$m 8 762 10 496 12 082 10 567 10 297 9 654 9 377 9 161

a Producer and LME stocks. b LME cash prices for primary aluminium. c In 2007 US dollars. d In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Commodity Research Unit; London Metal Exchange; World Bureau of Metal Statistics; ABARE. australian commodities > vol. 14 no. 1 > march quarter 2007 133 aluminium

aluminium consumption, 1980–2005 encouraged motor vehicle manufacturers to increase production for both the domestic and export markets. kg/person Korea, Germany According to the National Development and Reform Rep of Commission, motor vehicle production in China is 20 forecast to increase from 8 million vehicles in 2006 United to 10 million vehicles in 2008 and to 20 million States 15 vehicles in 2010. However, a possible impediment Japan to achieving this forecast is the Chinese Government’s 10 Italy introduction of new restrictions on the motor vehicle industry to prevent a buildup of excess production capacity. Under the new restrictions, motor vehicle 5 manufacturers applying to build new plants must have China sold at least 80 per cent of their output in the previous 0 India year. The regulations are directed at small, inefﬁ cient manufacturers and are expected to result in increased 0 5 10 15 20 25 30 35 40 GDP per person (thousands of PPP international dollars) industry consolidation. One PPP dollar has the same purchasing power as US$1 at a given point Chinese motor vehicle exports are dominated by in time. low end models — the average price of cars exported from China is US$10 000. To boost the export of cars and parts, the Chinese Government plans to set higher requirements for car exporters. Under the new requirements, manufacturers must apply for an export licence each year, meet domestic manufacturing standards and provide after sales service abroad. Despite being the world’s largest consumer of aluminium, per person consumption of aluminium in China is still well below that in developed economies. Given China’s population size, low per person consumption of aluminium and potential rate of growth in its economy, there is signiﬁ cant potential for further increases in aluminium consumption. Over the medium term, an increasing proportion of China’s population is expected to be of a working age and have higher incomes. As incomes rise, the composition of household expenditure will increasingly shift toward manufactured products (such as electrical goods and machinery) and services (such as transport, electricity and housing), resulting in increased aluminium consumption. Over the outlook period, China’s aluminium consumption is projected to grow at an average rate of 12 per cent a year to 16.6 million tonnes in 2012. the United States will remain a major consumer Aluminium consumption in the United States declined marginally in 2006 and is forecast to fall by a further 6 per cent to 5.8 million tonnes in 2007 because of a slowdown in the residential housing market and motor vehicle production. In 2006, building permits and housing starts in the United States — typically useful indicators of future residential construction activity — declined by 15 per cent and 13 per cent respectively. Lower motor vehicle sales in 2006 encouraged some motor vehicle manufacturers in the United States to reduce 2007 production targets. For example, the Ford Motor Company, the second largest automobile manufacturer in the United States, plans to build around 223 000 vehicles in 2007, 22 per cent less than 2005. Over the medium term, US aluminium consumption is projected to grow moderately to reach 6.4 million tonnes in 2012. Growth in US construction is expected to pick up moderately toward the end of the outlook period as an assumed easing in mortgage interest rates and government programs to improve housing affordability result in greater demand for housing.

134 australian commodities > vol. 14 no. 1 > march quarter 2007 aluminium

The US domestic motor vehicle manufacturing industry is expected to undergo signifi - cant structural change over the medium term, as large manufacturers close capacity in the United States and move to regions with relatively lower production costs. For example, the Ford Motor Company has announced plans to close fourteen manufacturing plants in the United States by 2012. Declining production in the United States is expected to reinforce the development of the motor vehicle industry in other countries, such as China. signifi cant new capacity and restarts in 2007 Global production of primary aluminium increased by 5 per cent in 2006 to an estimated 33.7 million tonnes, driven largely by strong production growth in China. In 2007, global production is forecast to increase by 8 per cent to 36.5 million tonnes, largely refl ecting the commissioning of new capacity in the Russian Federation and Iceland. In addition, improved availability of alumina has encouraged producers to restart idled smelting capacity in China. New power arrangements and higher metal prices have also encouraged producers in the United States and Germany to restart three smelters, with a combined capacity of around 490 000 tonnes. Over the medium term, aluminium production is projected to grow by around 6 per cent a year to reach 47 million tonnes in 2012, refl ecting higher expected production in China, Iceland the Russian Federation and the Middle East. China to remain a major producer Over the past fi ve years, China’s aluminium production has more than doubled and has accounted for an estimated 64 per cent of total growth in global production. Although developments in China are expected to continue to have an important bearing on world production over the medium term, the combination of a higher export tax and restrictions on new smelters is expected to slow the growth in China’s aluminium production and exports. Aluminium production in China increased by an estimated 18 per cent to 9.2 million tonnes in 2006. In 2007, production of primary aluminium in China is forecast to increase by another 15 per cent to 10.6 million tonnes. Greater availability of alumina is expected to encourage smelters to restart idled capacity and commission new capacity. Given the electricity intensity of aluminium production, the Chinese Government has indicated its desire to limit the production of aluminium in an effort to conserve (or ration) power supplies. Current policy is aimed at curbing the addition of new aluminium smelting capacity through primary aluminium production regulations on the size, capital investment requirements and environmental standards of new smelters. In 2000, there were an estimated 146 smelters in China, world 30 000 with an average capacit y of 30 000 tonnes. By 2006, there were an estimated 89, with an average capacity of 135 000 tonnes. 25 000 As part of an effort to reduce growth in exports of energy intensive products, such as aluminium, in late 20 000 November 2006, the Chinese Government increased world the export tax on aluminium metal from 5 per cent to excluding China 15 000 15 per cent. The tax is expected to result in an increase in exports of value added aluminium products (which receive an export rebate) at the expense of exports of kt the metal (in the form of ingots, billets and slabs). 19881991 1994 19972000 2003 2006

australian commodities > vol. 14 no. 1 > march quarter 2007 135 aluminium

modest production growth in the United States and western Europe In the United States and western Europe, new contracts for the supply of power will allow three smelters with a combined capacity of around 490 000 tonnes to be restarted in 2007. However, growth in aluminium capacity in Europe and the United States is expected to be constrained over the medium term as relatively higher energy costs and aging technology reduce the proﬁ tability of aluminium production. new smelters in Iceland, the Russian Federation and the Middle East Over the medium term, the development of new aluminium capacity will occur largely in countries where companies can secure long term, competitive power contracts. Reﬂ ecting this, a number of aluminium producers are moving production to areas that have access to relatively low cost energy, such as the Russian Federation, Iceland and the Middle East. A common feature among these projects is the concurrent development of integrated electricity generation facilities. The Russian Federation and Iceland have considerable low cost hydroelectric power sources (Iceland also has geothermal power) that can be

aluminium smelting technology Aluminium is produced by dissolving alumina in a molten liquid cryolite solution (at around 1000°C) in large steel furnaces (pots) lined with refractory bricks and containing carbon cathodes and anodes. These furnaces become electric cells when an electric current is passed through the cryolite from a carbon anode (positive electrode) to a carbon cathode (negative electrode). The electrolytic reaction reduces alumina to aluminium. The production of aluminium is extremely energy intensive, requiring around 15 megawatts of power to produce one tonne of aluminium. Electricity typically accounts for around a third of the total cost of producing aluminium. Refl ecting this, signifi cant research is being conducted to fi nd methods that will reduce the use of electricity and hence the marginal cost of producing aluminium.

use of ionic liquids Current production processes require a substantial amount of electricity to ensure that the temperature in the furnace is high enough to keep the cryolite in liquid form. The use of ionic liquids may reduce the amount of electricity used in aluminium smelting. Ionic liquids (a form of molten salt) typically melt at temperatures below 100°C, and as such require a lower temperature to remain in liquid form. If ionic liquids can be substituted for cryolite, the energy needs of a smelter could be reduced dramatically. Current research indicates that the use of ionic liquids may reduce the electricity used in aluminium production by 20–30 per cent.

drained cathode cell technology The use of electricity in the production of aluminium can also be reduced by minimising the distance between the cathode and the anode in the cell. With a smaller distance to travel through the cryolite solution, electrical resistance and hence energy consumption can be reduced. However, if the distance is too small, the strong magnetic ﬁ elds in the cell can cause waves in the pool of molten aluminium. If the liquid aluminium makes contact with an anode, it can form a short circuit or cause the solution to reoxidise which reduces aluminium production. Drained cathode cells can be used to prevent this problem. Drained cathode cells have a titanium diboride/carbon composite coating. Titanium diboride has high electrical conductivity, low solubility in aluminium and cryolite and can be wetted by aluminium, which avoids the problem of short circuits and reoxidation. Research indicates that this technology has the potential to increase the life of cells and reduce electricity use by at least 10 per cent.

136 australian commodities > vol. 14 no. 1 > march quarter 2007 alumina used to provide relatively low cost base load electricity to planned additions to aluminium smelting capacity. In Iceland, additional capacity is expected to come from Alcoa’s Fjardaal smelter (344 000 tonnes a year) and Nordural’s Grundartangi smelter expansion (40 000 tonnes a year) as they ramp up to full production after scheduled commissioning in mid to late 2007. In addition, Alcan’s ISAL smelter expansion (280 000 tonnes a year) is expected to be commissioned in 2010. In the Russian Federation, aluminium production is expected to increase signifi cantly. Rusal, the Russian Federation’s largest aluminium producer, has announced plans to increase total production to 5 million tonnes of aluminium by 2013 (from 2.7 million tonnes in 2005). Rusal’s additional capacity is expected to come from upgrades to existing smelters and the commissioning of new smelters in the Krasnoyarsk and Irkutsk regions (both 600 000 tonnes a year) in 2009 and 2010 respectively. The Middle East is also expected to contribute signifi cantly to growth in aluminium capacity over the outlook period. The region has abundant, relatively low cost natural gas and oil resources that facilitate the development of electricity generation facilities that are integrated with new smelter projects. One example is Ma’aden’s Az Zabirah Aluminium Project (620 000 tonnes a year) in Saudi Arabia that is being developed concurrently with an oil fi red 1800 megawatt power station. In 2006, the Middle East accounted for an estimated 6 per cent of world aluminium production. Over the medium term, combined new capacity approaching 3 million tonnes (see table) is expected to be commissioned, increasing the region’s share of world production capacity to around 8 per cent in 2012.

projects to be commissioned in the Middle East over the outlook period

annual location company capacity start other Sohar Alcan, Oman 350 000 2008 the smelter will have long term access Oil Company tonnes to a dedicated supply of electricity and Abu Dhabi through the construction of a new Water and Electricity 1000 MW power plant, with potential Authority for a second phase expansion to double capacity Qatar Hydro Aluminium 570 000 late the smelter will have a dedicated gas and Qatar tonnes 2009 power plant with an installed capacity Petroleum of 1350 MW Taweelah, Dubai Aluminium 700 000 phase 1 the project will have an initial capacity Abu Dhabi and Mubadala tonnes 2010 of 700 000 tonnes, with the potential Development Company to double capacity Az Zabirah, Ma’aden 620 000 2010 power, steam and desalinated water Saudi Arabia tonnes will be provided by a 1800 MW oil ﬁ red power station Arak, Iran Iralco 130 000 2008 addition of number 6 potline will be tonnes partially offset by the closure of the ﬁ rst three potlines (net change of 60 000 tonnes) australian commodities > vol. 14 no. 1 > march quarter 2007 137 alumina

Australia’s export earnings to ease over the medium term Australia’s production of aluminium is forecast to be little changed in 2006-07 as no new smelting capacity is expected to come on line. However, the value of aluminium exports is forecast to increase by 15 per cent to $5.5 billion in 2006–07, reﬂ ecting increased export volumes and prices. Over the medium term, there are no committed expansions to Australia’s aluminium production capacity. Studies are currently being conducted into the construction of a fourth potline at both the Portland smelter in Victoria and the Kurri Kurri smelter in New South Wales. In addition, Rusal is considering the construction of a new smelter in Queensland (with a dedicated power station). However, Papua New Guinea has emerged as a potential competitor to Australia for the construction of the new smelter, partly because of its abundant reserves of natural gas and the potential for the development of hydropower. In 2011-12, export earnings in real terms (2006-07 dollars) are projected to decline by around a third from their 2006-07 level to $3.7 billion, largely because of expected lower export prices.

alumina

> kate penney

After reaching a high of US$650 a tonne in early 2006, spot alumina prices declined sharply to around US$200 a tonne in December 2006 as the tight global demand– supply situation eased. Increased world production of alumina (particularly in China, Australia and Brazil) contributed substantially to meeting the burgeoning demand in China in particular. For 2006 as a whole, the spot alumina price declined by an estimated 2 per cent to average US$435 a tonne. In 2007, the alumina spot price is forecast to average US$236 a tonne, around half what it was in 2006. The lower prices refl ect the effects of higher production in China, India and Greece. In China, expansions at Chalco’s Pingguo refi nery (of 800 000 tonnes a year), Guizhou refi nery (400 000 tonnes a year) and Coalmine Alumina Sanmexia Company’s refi nery (1.2 million tonnes a year) are expected to be completed by mid- 2007. In addition, expansions at Mytilineos Holding’s Distomo refi nery (of 275 000 tonnes a year) in Greece and Hindalco’s Muri alumina refi nery (of 290 000 tonnes) in India are also expected to be commissioned in 2007. Declining spot and contract alumina prices have forced a number of refi neries to shutdown or reconsider expansion plans (that were made when prices were considerably higher). For example, Ormet’s Burnside alumina refi nery (800 000 tonnes a year) in the United States and Alcoa’s Point Comfort alumina refi nery (2.3 million tonnes a year), also in the United States, commenced closure at the end of 2006. An average alumina refi nery requires an alumina price of around US$230–240 a tonne to cover operating costs. Any further capacity closures will tend to limit the decline of spot alumina prices. Over the remainder of the projection period, growth in demand for alumina is expected to remain strong, refl ecting expansions to aluminium smelting capacity. In response, alumina capacity expansions are expected to occur in Brazil, China, Guinea and Australia. However, with prices projected to remain close to production costs in the next few years, some refi neries may close higher cost capacity or delay expansion plans. Refl ecting these developments, spot alumina prices are projected to increase moderately toward the end of the outlook period, but remain below prices in 2005 and 2006.

138 australian commodities > vol. 14 no. 1 > march quarter 2007 alumina

In 2012, spot alumina prices in real terms (2007 dollars) are forecast to average US$212 a tonne, less than half what they were in 2006. output of alumina to increase in Australia Australia’s alumina production is forecast to increase by 6 per cent to around 19 million tonnes in 2006 - 07, driven largely by the expected completion of the Gove refi nery expansion (of 1.8 million tonnes) in the Northern Territory. In 2006-07, Australia’s export earnings are forecast to increase by 22 per cent to around $6.4 billion, driven largely by higher export volumes. Further expansions to Australia’s alumina refi ning capacity are expected over the medium term. BHP Billiton’s Worsley Effi ciency and Growth project (an expansion of 700 000 tonnes) in Western Australia is expected to begin production in 2010. In addition, CHALCO is considering constructing a 2.1 million tonne refi nery in 2011 at an unde- termined location in north Queensland to process bauxite from the Aurukun mine. With limited growth in Australia’s aluminium production capacity over the outlook period, it is expected that the majority of the projected increase in alumina output will be exported.

australian commodities > vol. 14 no. 1 > march quarter 2007 139 nickel

nickel

> rebecca mccallum

In 2006, nickel prices averaged US$24 250 a tonne, the highest (in real terms) since 1988. Prices are expected to average higher in 2007 as a range of supply constraints, such as long lead times in developing new mines, difﬁ culties in sourcing skilled labour and materials, and strong demand continue to contribute to a tight supply–demand situation. Global stocks are forecast to fall in 2007, to just 1.8 weeks of consumption by year’s end, less than half their level at the end of 2005. In 2008 an easing in demand growth and some increase in mine production is forecast to result in stocks stabilising at around 1.5 weeks of consumption. With stocks staying low, prices are expected to remain high in 2008. The combination of continued supply disruptions and delays in the development of new projects is expected to continue to constrain growth in world nickel production for a number of years. Beyond 2008 the commissioning of a number of new mines and the expansion of capacity at existing mines is projected to allow a slow rebuilding of nickel stocks and an easing in prices. However, developments in the use of nickel pig iron in China to produce mainly low grade stainless steel have the potential to affect the price outlook. If increased Chinese use of nickel pig iron were to satisfy some of the demand more quickly than is currently expected to be the case, nickel prices could fall earlier and faster than projected. prices to remain high over the short term World nickel prices are forecast to average US$36 750 a tonne in 2007, 52 per cent higher than the average for 2006. Strong demand growth from stainless steel producers, particularly in China and India, coupled with labour strike threats at Xstra- ta’s Sudbury mine in Canada, resulted in nickel prices reaching US$41 350 a tonne in late January 2007. Further concerns over falling stocks contributed to a new record of US$43 300 in late February. Growth in demand as nickel pig iron well as constraints to supply are forecast to continue in Nickel pig iron is a ferronickel pig iron 2007 and into 2008, contributing to high prices until containing 3–5 per cent nickel. It contains at least late 2008. Additional nickel supply capacity much less nickel than conventional ferronickel is due to come online in the second half of the outlook (25–40 per cent) and has higher concen- period and is expected to prompt a drop in prices at trations of sulfur and phosphorous. China is currently producing nickel pig iron from low that time. However, prices are still expected to remain grade laterite ores imported primarily from high in historical terms. the Philippines. The ore, containing 0.8–2 Labour disputes have been a feature of the nickel per cent nickel, is processed in small blast industry for some years and current high prices continue furnaces (300 cubic metres or less), previ- to reinforce the bargaining position of labour unions. ously slated to be closed by the Chinese At Xstrata’s Sudbury operation in Canada, strike action Government. The resulting nickel pig iron is was averted at the end of January. Nevertheless, the currently being used to produce 200 series stainless steels, with limited application to potential for further disruption to supply across the the 300 series. There is considerable upside industry will remain high until prices ease. potential for nickel pig iron to be used more Over the medium term an increase in average widely in the production of 300 series stain- production costs driven by a growing reliance on less steels with improvements in technology. laterite ore bodies is projected to hold nickel prices above US$12 000 in real terms (2007 dollars). The

140 australian commodities > vol. 14 no. 1 > march quarter 2007 nickel

laterites Approximately 72 per cent of the world’s nickel resources are held in laterite deposits. Unlike sulfi de deposits that are found deep below the surface, laterite deposits have formed at the surface over millions of years. Leaching and weathering of complex surface rocks dissolve more soluble minerals and metals, leaving behind higher concentrations of valuable metals that would otherwise be in trace form. Laterisation of surface rocks containing 0.2–0.3 per cent nickel form nickeliferous laterites, with overall nickel concentrations of 1–2 per cent. These laterites are predominantly found in tropical zones such as New Caledonia, Indonesia, Cuba and Brazil. Australia’s laterite deposits are unique among this group as they are typically dry, have formed more slowly, and have more clay and lower nickel concentrations. Laterite deposits usually have two layers — limonite and saprolite. The saprolite layer has the higher nickel content of the two and each layer needs to be processed differently. Extraction costs for laterites are lower than for sulfi des; however processing costs are much higher and the technologies are still being developed. The potential methods for processing laterites are high pressure acid leach (HPAL), atmospheric leaching and heap leaching. HPAL is widely preferred because of its ability to process a blend of limonite and saprolite ores and its robustness. HPAL processes have been in operation for some time internationally, but were introduced in Australia for the fi rst time at Murrin Murrin. While there are benefi ts to each of the processes, heap leaching is currently the only other option that yields a high metal content from a range of ore types. Capital costs for setting up either HPAL or heap leaching laterite processing are relatively high, in the range US$14–17 a pound, and operations may only be viable when cobalt can also be extracted from the ore to supplement revenue streams.

nickel outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production kt 1 293 1 349 1 433 1 526 1 620 1 701 1 820 1 948 Consumption kt 1 243 1 388 1 463 1 530 1 609 1 691 1 781 1 878 Stocks kt 112 81 50 45 57 67 107 177 – weeks consumption 4.7 3.0 1.8 1.5 1.8 2.1 3.1 4.9 Price LME – nominal US$/t 14 742 24 252 36 750 35 313 27 500 19 063 16 650 16 500 – real a US$/t 15 614 24 810 36 750 34 519 26 277 17 805 15 202 14 838 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Production – mine bs kt 192 183 202 238 274 340 370 385 – refined kt 126 111 124 143 179 182 182 182 – intermediate kt 115 99 102 106 116 116 116 116 Export volume cs kt 218 202 224 262 305 319 337 348 Export value – nominal s A$m 3 731 3 515 8 406 10 215 11 488 8 166 7 160 7 056 – real ds A$m 3 971 3 626 8 406 9 966 10 935 7 583 6 486 6 237 a In 2007 US dollars. b Nickel content of domestic mine production. c Includes metal content of ores and concentrates, intermediate products and nickel metal. d In 2006-07 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.

australian commodities > vol. 14 no. 1 > march quarter 2007 141 nickel

world nickel cost of producing nickel from laterite ore is considerably higher than from sulﬁ de ore. As a result, nickel metal production costs are rising and the continued stocks expansion of production to meet growing demand 30 000 12 is therefore reliant on prices over the longer term remaining high enough to cover the increased price production costs. 20 000 8 world demand continues to grow… World nickel consumption is forecast to increase by 10 000 4 5 per cent to 1.46 million tonnes in 2007. This growth is expected to occur as a result of strong demand

2007 weeks for stainless steel, and is despite record prices and US$/t consumption some movement to reduced nickel content in lower 1987 1992 1997 2002 2007 2012 grade stainless steels. With world stocks forecast to decline to the equivalent of 1.8 weeks of consumption at year’s end, the nickel market will be vulnerable to short term supply disruptions over the remainder of 2007. The production of stainless steel is the dominant primary use of nickel because of the desirable properties of nickeliferous or austenitic stainless steels (stainless steels that contain nickel), including high heat and corrosion resistance. Typical applications for nickeliferous stainless steels can be found in the construction, food processing and motor vehicle manufacturing industries. High prices and supply disruptions experienced in recent years have encouraged the use of scrap nickel in steel production and made low nickel content stainless steels more attractive. Reﬂ ecting this, the proportion of primary nickel used in the production of stainless steels declined from 65 per cent in 2005 to 61 per cent in 2006. Adding to the effect of easing demand for primary nickel in stainless steel, year on year growth in global stainless steel production is set to moderate in 2007. With world stainless steel production growing by 14 per cent in 2006, producer stocks of stainless steel rose

stainless steels 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 around 8–12 per cent nickel. The high nickel content of the 300 series imparts superior thermal resistance properties to the steel. These steels tend to be used mainly in manufacturing and industrial applications, such as food preparation equipment, oil reﬁ ning, power generation and the petrochemicals production. The 200 series stainless steels contain a high level of manganese and only around 1–5 per cent nickel. The 200 series steels tend to cost less than 300 series steels, but generally have inferior corrosion and thermal resistance properties and poorer surface appearance. As a result, the use of 200 series stainless steel is concentrated in construction industries. The 400 series stainless steels contain no nickel but have higher chromium content. These steels tend to have superior corrosion resistance properties compared with the other series and are used mainly in automotive exhaust systems.

142 australian commodities > vol. 14 no. 1 > march quarter 2007 nickel in the second half of the year (particularly in the United States). In 2007, stainless steel production is forecast to grow by only 7 per cent as some of these stocks are worked off. Demand for nickel from the nonstainless steel sector also remains strong. The aero- space industry is projected to continue its moderate growth in the medium term. The aero- space industry is the second largest end user of nickel (17 per cent). The industry uses nickel in jet engines because of its heat resistant properties when alloyed with other metals to produce superalloys. The use of nickel in batteries is also continuing to grow despite the gradual phasing out of nickel-cadmium batteries, and mainly refl ects the rising popularity of electric and hybrid cars that use nickel metal hydride batteries. …supported by strong growth in demand from China and elsewhere China overtook the United States and Japan in 2002 as the largest consumer of stainless steel, and surpassed Japan in 2005 as the largest consumer of primary nickel. Continued large scale development, including construction of residential and commercial buildings in China, has contributed to average year on year increases in primary nickel consumption of 25 per cent in China over the past six years. Many of China’s cities suffer from high levels of air pollution that, when combined with moisture in the atmosphere, are a signifi cant source of corrosion. Corrosion resistant stainless steels are thus an attractive and in some cases a necessary option for building and other construction. The rural–urban migration of China’s population will also continue to be a key driver of construction activity in China. According to the United Nations (World Urbanisation Pros- pects: The 2005 Revision, table A.2), China’s urban population is projected to increase by 78 million people in the four years to 2010. Construction activity in China will need to continue at a rapid pace in order to accommodate this infl ux of people, providing a strong driver for nickel consumption over the medium term. Urban incomes in China are also growing strongly (10 per cent in 2006) and are assumed to continue to grow. Such growth can be expected to feed rising demand for consumer goods such as motor vehicles, mobile phones and other electronic equipment, thus increasing the demand for nickel in applications such as batteries, stainless steel and nickel alloys. Demand for nickel in north America and the European Union is forecast to continue to increase, albeit at a more modest rate than in China. Consumption of nickel in the United States grew by 11 per cent in 2006 to 150 800 tonnes and in the European Union by 10 per cent to 444 400 tonnes. Much of this growth is attributable to the demand for stainless steel from the residential and commercial construction sectors. Nickel demand in the United States is expected to moderate in 2007 following a slowing in residential construction activity. EU consumption growth is also expected to ease from last year’s high. world production constrained until 2009 World nickel production is estimated to have increased by 4 per cent in 2006. Most of the growth was in Asia, particularly China (a 39 per cent rise), and Indonesia (up 138 per cent). Production in Australia and New Caledonia in 2006 was lower than in 2005 after cyclone disruptions to BHP Billiton’s Nickel West in the fi rst quarter and strike action in New Caledonia in the second half of the year. Looking beyond 2007, no large scale increases in mine capacity are expected during the fi rst half of the outlook period. Few new projects are due to start before mid-2008 and those that are expected to come on line are relatively small. Lead times of over ten years

australian commodities > vol. 14 no. 1 > march quarter 2007 143 nickel

for major new mines effectively rule out any signifi cant supply increases for another few years. Further, current exploration expenditure is not projected to yield increases in production until well beyond the end of the outlook period. One factor that could have an effect on the supply–demand balance is the increased use of nickel pig iron in China. China is increasingly using nickel pig iron as a substitute for conventional primary and secondary nickel sources. Low grade laterite ores are being imported and processed to produce nickel pig iron, which to date is being used mainly in the production of 200 series stainless steels. It is uncertain how much of China’s demand for nickel can or will be met via this source in the future. However, there is the potential for nickel pig iron to replace 20 000 – 30 000 tonnes of nickel if technology is developed to allow it to be widely used in the larger category of 300 series stainless steels. Such a quantity of primary nickel is roughly equivalent to the entire forecast production–consumption defi cit in global nickel production in 2007. Over the medium term, new nickel supplies will derive predominantly from laterite projects that are typically more expensive to develop. Existing sulfi de deposits are rapidly being depleted. Almost 20 per cent of new sulfi de production represents replacement feed as other sulfi de mines wind down or close, while almost all new laterite projects will be additional supply. It is expected that by the end of the outlook period, production from laterite deposits will account for more than half of world output of primary nickel. New capacity is projected to relieve some of the supply constraints around the middle of the outlook period. However, advanced laterite projects such as CVRD Inco’s Goro nickel project in New Caledonia (60 000 tonnes a year) and BHP Billiton’s Raven- sthorpe project in Western Australia (50 000 tonnes a year) have experienced large cost increases, with startup delayed until late 2008. Construction activity at Goro continued in December and January despite a general strike in New Caledonia which is expected to have further delayed the project that is already over four years behind schedule. Looking further ahead, additional production is likely over the longer term from countries such as the Russian Federation, Brazil and New Caledonia, where exploration and new developments are increasing. Norilsk Nickel and BHP Billiton announced plans in 2006 to jointly explore and develop Russia’s mineral resources over the next few years and this, combined with other exploration projects, is likely to eventually result in further increases in Russian nickel production. There is also potential for New Caledonian nickel production to increase with projects like Xstrata’s Koniambo (60 000 tonnes) being developed. However, new projects are unlikely to go ahead in the region if strikes continue to disrupt the development and operation of mines and facilities.

major laterite project delays and costs

startup cost estimate project country company capacity initial current initial current kt US$b US$b Goro New Caledonia CVRD Inco 60 2004 2008 1.45 3.0 Vermelho Brazil CVRD Inco 46 Q3 2008 2009 1.2 1.6 Ravensthorpe Australia BHP Billiton 50 Q2 2007 Q1 2008 1.05 2.2 Koniambo New Caledonia Xstrata 60 2009 2009/ 2010 1.5 2.2–3.0 Caldag Turkey European Nickel 20 2007 Q3 2008 0.3 0.3 Onca Puma Brazil CVRD Inco 57 2008 2008 1.1 1.2

144 australian commodities > vol. 14 no. 1 > march quarter 2007 nickel

Several new projects in Brazil could also result in that country becoming a major world producer over the longer term. Three projects have already been approved, totalling 110 000 tonnes — CVRD Inco’s Onca Puma (57 000 tonnes), Mirabella’s Santa Rita (17 000 tonnes) and Anglo American’s Barro Alto (36 000 tonnes) — while a fourth, with expected capacity of 46 000 tonnes is under consideration. These four projects, if completed, have the potential to make Brazil the world’s fourth largest nickel producer, behind the Russian Federation, Canada and Australia. Australian production and exports High prices and a substantial rise in shipments of nickel are forecast to increase export earnings in 2007-08 by approximately 22 per cent after more than doubling in 2006-07. Record prices are expected to be the primary driver of most of the increase in returns for 2006-07 and 2007-08. Export volumes are estimated to have increased by 22 000 tonnes in 2006-07, while the unit value of exports is estimated to have risen substantially. Beyond 2007-08, increases in export volumes as new projects come on line are expected to partially compensate for the effects of an easing in world prices. The value of exports is projected to fall by around 20 per cent to $6.2 billion (2006-07 dollars) between 2006-07 and 2011-12. Mine production in Australia is forecast to increase by 36 000 tonnes in 2007-08 as a range of projects build output toward nominated capacities. These projects include LionOre projects Waterloo (4000 tonnes total capacity) and Black Swan (13 000 tonnes capacity), Western Areas’ Forrestania (8000 tonnes), the startup of BHP Billiton’s Ravensthorpe project (50 000 tonnes), Sherlock Bay Nickel Corporation’s Sherlock Bay (12 000 tonnes) and Allegiance’s Avebury (8000 tonnes) and the expansion of Sally Malay (19 000 tonnes) by Sally Malay mining. The Ravensthorpe mine is expected to take around two years to achieve full capacity, thus providing production increases into 2009-10. Honeymoon Well, Nornico and the Gladstone Nickel Project are projected to come on line in the second half of the outlook period, with a combined capacity of 74 000 tonnes a year. Output from these mines is expected to more than offset the closure of the Blair and Long mines in Western Australia, which currently produce 11 000 tonnes of nickel a year in total. The Ravensthorpe laterite project in Western Australia continues to suffer from delays and cost blowouts caused by problems with sourcing skilled labour and equipment. Current cost estimates are at $2.2 billion, 110 per cent up on its initial budget of $1.05 billion. There is potential for other major projects in the state to experience similar problems over the next few years given the relatively large numbers of major mining developments in the currently occurring in Western Australia. Production of refi ned nickel is forecast to rise by approximately 12 per cent in 2006-07 as the Murrin Murrin, Kwinana, and Yabulu refi neries expand their output. The expansion to Yabulu will increase the refi nery’s capacity from 31 200 tonnes to 76 000 tonnes and is expected to be completed by the end of March 2007. Further increases in the production of refi ned nickel are expected to occur in 2007-08 and 2008-09, with total output projected to reach approximately 180 000 tonnes by 2010. Less than 1 per cent of the refi ned nickel is expected to be consumed within Australia.

australian commodities > vol. 14 no. 1 > march quarter 2007 145 copper

copper

> kate penney

In 2006, global copper prices averaged around US$6700 a tonne, 83 per cent higher than the 2005 average price of nearly US$3700 a tonne. Copper production was constrained by labour disputes, natural disasters and other production disruptions, with the result that global copper stocks remained low, particularly in the fi rst half of 2006. However, after reaching a high in May 2006 of around US$8800 a tonne, copper prices declined substantially in the latter part of 2006 as the tight demand supply balance eased. Stocks of copper held by metal exchanges (London Metal Exchange, COMEX and the Shanghai Metal Exchange) increased by around 78 000 tonnes in the second half of 2006. Metal exchange stocks continued to increase in early 2007, reaching over 260 000 tonnes in mid-January, the highest since 2004. As a result, prices continued to decline in January 2007 — falling by around 10 per cent from the end December 2006. For much of the remainder of the outlook period, production is expected to exceed consumption, resulting in a steady increase in stocks and an easing in prices. prices to decline in 2007 and over the medium term In 2007, global copper prices are forecast to fall by 18 per cent to average US$5550 a tonne (US252c/lb). World refi ned production is forecast to increase by around 6 per cent in 2007, despite the continued likelihood of disruptions to supply through labour disputes and a shortage of copper concentrates. At the same time, global copper consumption is forecast to increase by around 5 per cent, largely refl ecting strong expected growth in copper demand in China. Accordingly, global copper stocks are forecast to increase to around 2.4 weeks of consumption in 2007, placing downward pressure on prices.

copper outlook

2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production – mine kt 15 076 15 136 16 117 17 238 18 261 19 376 19 992 20 607 – refined kt 16 637 17 431 18 492 19 496 20 224 20 935 21 900 22 729 Consumption kt 16 738 17 360 18 276 19 272 19 940 20 820 21 750 22 620 Closing stocks kt 547 618 834 1 059 1 343 1 458 1 608 1 717 – weeks consumption wks 1.7 1.9 2.4 2.9 3.5 3.6 3.8 3.9 Price LME – nominal US$/t 3 678 6 741 5 550 5 050 4 650 4 275 3 850 3 450 USc/lb 166.8 305.8 251.7 229.1 210.9 193.9 174.6 156.5 – real a US$/t 3 895 6 896 5 550 4 936 4 443 3 993 3 515 3 103 USc/lb 176.7 312.8 251.7 223.9 201.5 181.1 159.4 140.7 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Mine output kt 899 931 939 1 144 1 270 1 419 1 404 1 345 Refined output kt 479 461 460 615 632 626 621 604 Exports – ores and conc. kt 1 326 1 635 1 621 1 762 2 129 2 642 2 611 2 471 – refined kt 322 314 293 428 439 429 421 404 Nominal value A$m 3 082 5 653 6 396 6 678 7 003 7 640 7 016 6 197 Real value b A$m 3 280 5 831 6 396 6 515 6 666 7 094 6 356 5 477

a In 2007 US dollars. b In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Copper Study Group; World Bureau of Metal Statistics; ABARE.

146 australian commodities > vol. 14 no. 1 > march quarter 2007 copper

Over the remainder of the projection period, global copper prices are projected to ease as world refi ned copper production exceeds consumption and stocks rise further. However, a lack of large scale projects is expected to keep stocks growth low and limit falls in prices. By 2012, copper prices in real terms (in 2007 dollars) are projected to be less than half the exceptionally high average price achieved in 2006. copper consumption to increase in 2007… In 2006, global copper consumption increased by 4 per cent to 17.4 million tonnes. Lower consumption in China and the United States was offset by higher consumption in Germany and Italy, largely in response to greater construction activity. In China, copper consumption is estimated to have declined by 1 per cent to 3.6 million tonnes, despite continued strong growth in infrastructure development and in the manufacture of goods containing copper. High copper prices, particularly in the fi rst half of 2006, encouraged consumers to delay purchases of copper and instead draw down existing stocks of refi ned copper. In 2007, world copper consumption is forecast to increase by 5 per cent to 18.3 million tonnes. Despite lower assumed growth in global industrial production, copper demand in China is metal exchange stocks and prices forecast to recover, refl ecting the rebuilding of stocks quarterly by consumers and continued strong growth in the construction and power industries. 2006 Dec qtr 6000 … despite demand easing in the United States, Germany and Italy Copper demand in the United States is forecast to 4000 2005 Dec qtr ease in 2007 largely because of an expected slow- 2004 Dec qtr down in new construction activity. A typical house in the United States contains around 180 kilograms of 2000 copper. Since the construction industry accounts for around half of total US copper consumption, a fall in 2007 the demand for new housing will have a direct (and US$/t negative) effect on US copper demand. In 2006, 01 2 3 4 5 building permits and housing starts — typically useful stocks in weeks consumption leading indicators of future residential construction activity— declined year on year by 15 per cent and 13 per cent respectively, the largest decline since the early 1990s. In 2007, growth in the demand for copper in both Germany and Italy is also forecast to ease. In Germany, growth in consumption of copper intensive goods is forecast to ease as purchases of consumer goods, such as motor vehicles and electronic goods, are expected to decline in response to an increase in the value added tax. In addition, an assumed easing in economic growth and higher interest rates is expected to reduce demand for consumer goods and new housing. medium term prospects for consumption driven by China and the United States Developments in China and the United States (the world’s largest consumers of copper) are expected to continue to have the most important bearing on global copper consumption over the next few years. Between 2006 and 2012, world copper consumption is projected to rise by 30 per cent to 22.6 million tonnes. Growth in China’s copper consumption is forecast to remain strong over the medium term, refl ecting the continued strong growth projected for that economy. In particular, australian commodities > vol. 14 no. 1 > march quarter 2007 147 copper

copper consumption intensity, continued industrialisation, urbanisation and the 1980–2005 expansion of electric power grids are expected kg/person to feed through to strong growth in the demand for copper. The power industry accounts for an 20 estimated half of China’s copper consumption. Korea, According to China’s eleventh fi ve year plan, the 15 Rep of Germany government will increase construction of power grids in an attempt to ease power shortages over 10 Japan the medium term. Continued relatively high economic growth United in China will be refl ected in increased consumer 5 States incomes, particularly in urban areas. As incomes China rise in China, the composition of household 0 India expenditure will increasingly shift toward manu- 0 5 10 15 20 25 30 35 40 factured products (such as electrical goods and GDP per person (thousands of PPP international dollars) machinery) and services (such as transport, electricity and housing), hence increasing copper consumption. Nevertheless, the intensity of copper use in China, while increasing, is still low in comparison with that in other developed Asian countries, such as Japan and the Republic of Korea. This indicates that there is considerable potential for continued strong growth in China’s copper demand over the medium term. Growth in copper consumption in the United States will continue to have an important bearing on the world copper market over the medium term. In 2006, the United States accounted for an estimated 13 per cent of global copper consumption. Growth in the US construction industry is expected to pick up moderately toward the end of the projection period as an assumed easing in US mortgage interest rates and government programs to improve housing affordability result in greater demand for housing. growth in world mine production to increase steadily over the medium term Despite a signifi cant increase in global copper prices since 2004, world copper mine production in 2006 is estimated to have increased by less than 1 per cent to just over 15 million tonnes. An estimated 700 000 tonnes of mine production was lost in 2006 as labour disputes, lower ore grades and other production disruptions (such as rockslides and equipment failure) adversely affected production in a number of major producing regions. In 2007, world copper mine production is forecast to increase by 6 per cent to 16.1 million tonnes. Phelps Dodge’s Cerro Verde expansion in Peru (an increase of approximately 145 000 tonnes a year) was commissioned in early 2007. In addition, a number of smaller scale projects in Peru, the Democratic Republic of Congo and the United States are also expected to commence production in 2007. Over the remainder of the projection period, global copper mine production is forecast to grow steadily, mainly through small scale additions to capacity in Chile, Africa and Asia. Only a small number of major copper projects are expected to commence production over the outlook period. Despite the limited number of major mine developments in prospect, world mine production is projected to increase by 36 per cent to 20.6 million tonnes between 2006 and 2012.

148 australian commodities > vol. 14 no. 1 > march quarter 2007 copper growth in mine production in Chile to remain steady Copper mine production in Chile (which accounted for 36 per cent of global copper mine production in 2006) is expected to increase over the projection period, based on a number of small scale expansion projects. Codelco plans to expand output at Andina (an expansion of 80 000 tonnes a year) in 2008. In addition, Anglo American and Xstrata plan to increase production from Collahuasi by 105 000 tonnes a year following a program to reduce bottlenecks. Further capacity expansions are expected from Aur Resource’s Andacollo project (80 700 tonnes a year) in 2009; Anglo American’s Los Bronces expansion (an increase of 150 000 tonnes a year) in 2010 and Codelco’s Alejandro Hales (250 000 tonnes a year) in 2011-12. Oyu Tolgoi to drive mine production growth in Asia A number of new copper mines are expected to commence production in Asia over the projection period. The largest of these is Ivanhoe Mines’ and Rio Tinto’s Oyu Tolgoi deposit in Mongolia (450 000 tonnes a year) which is scheduled to commence in mid- 2009, subject to the conﬁ rmation of delivery dates of key long lead time equipment. In addition, Indophil Resources’ Tampakan project (210 000 tonnes a year) in the Philippines

trends in exploration for copper Minerals exploration is a high risk activity. Exploration companies must assess whether the expected benefi ts of information gathering outweigh the expected costs. A range of economic, geological and policy factors will infl uence the costs and benefi ts of conducting mineral exploration. These factors include prices of mineral commodities (typically the most important factor); risks relating to location (including the existence of a mineral deposit; and issues of governance and sovereign risk); exploration techniques; land access; and government policies (including taxation arrangements). The importance of prices and price expectations to exploration activity was clearly evident in the latter part of the 1990s and the fi rst years of the current decade. Between 1997 and 2002, when real prices for the most part fl uctuated in a relatively narrow band around US$2000 a tonne, global exploration expenditure for copper (in 2007 dollars) declined by 64 per cent (Metals Economics Group). It takes a substantial amount of time to delineate and develop a world class copper ore body in greenfi eld areas with no previously known minerals deposits or former mines. For instance, it took around fourteen world copper years for the greenfi eld Olympic Dam mine in Australia to begin production after discovery. The combination of low explora- 1200 6000 tion expenditure and higher copper prices between 2003 and 2006 exploration expenditure has encouraged copper producers 800 left axis 4000 to focus on projects that will take less time to develop. As a result, over the outlook period, most addi- 400 2000 tions to capacity are expected to price be expansions, brownfi eld projects right axis 2007 2007 in currently or previously mined US$m US$/t areas or very small scale greenfi eld 19982000 2002 2004 2006 developments.

australian commodities > vol. 14 no. 1 > march quarter 2007 149 copper

is expected to be commissioned in 2011. A number of smaller scale projects in Laos and Indonesia are also expected to commence production over the outlook period. increased SX–EW production to support higher refi ned production over the medium term World refi ned production is estimated to have increased by 5 per cent in 2006 to 17.4 million tonnes. In 2007, world refi ned production is forecast to increase by 6 per cent to 18.5 million tonnes, driven largely by expected higher production in China. Low copper mine production in 2006 forced a number of refi neries to draw down copper concentrate stockpiles. If there are further signifi cant disruptions to mine production in 2007, refi ned copper production could be adversely affected in some countries owing to the lack of adequate stocks of copper concentrates. Growth in solvent extraction–electrowinning (SX–EW) capacity is expected to account for a large proportion of growth in total refi ned production over the projection period. SX– EW production has low capital and operating costs and can be used to extract metal from low grade ore that is otherwise uneconomic to mine. SX–EW projects that are expected to be commissioned over the outlook period include Codelco’s Gaby mine (150 000 tonnes of copper cathode a year) in Chile and Phelps Dodge’s Safford mine (100 000 tonnes a year) in the United States in 2008 and Phelps Dodge’s Tenke Fungurume mine (133 000 tonnes a year) in the Democratic Republic of Congo in 2009. refi ned copper production growth to remain strong in China Over the past fi ve years, China’s refi ned copper production has increased by around 82 per cent, accounting for an estimated 64 per cent of total growth in global refi ned production. China’s refi ning capacity is expected to continue to grow strongly over the outlook period, largely through capacity expansions at existing refi neries. For example, Chinalco’s Daye refi nery expansion (200 000 tonnes a year) is expected to be commissioned in 2010. However, China’s refi ned copper production will be dependent on refi n- eries’ ability to import raw materials, as growth in domestic production of concentrates and blister copper is expected to be slower. production to increase in Australia over the outlook period In 2006-07, Australia’s copper mine production is forecast to increase by 1 per cent to around 939 000 tonnes, as a number of new projects commence production. Kagara Zinc’s Thalanga plant in Queensland (20 000 tonnes a year) commenced production in late 2006. Small additions to production are also expected to come from a number of projects that are scheduled to commence production toward the end of the 2006-07 fi nancial year, including: Xstrata’s Northern 3500 ore body at the Enterprise Mine in Queensland (22 000 tonnes a year); Compass Resource’s Browns Oxide mine in the Northern Territory (10 000 tonnes a year) and Jabiru’s Jaguar mine in Western Australia (9600 tonnes a year). Australia’s refi ned copper production in 2006-07 is forecast to decline by 1 per cent to 460 000 tonnes as lower production from Olympic Dam partially offsets the completion of a 20 000 tonne expansion at Xstrata’s Townsville copper refi nery and the commencement of production from Matrix Metals Leichhardt operation (10 000 tonnes of copper cathode a year) in Queensland. In 2006-07, Australia’s export earnings from copper are forecast to increase by 13 per cent to around $6.4 million, refl ecting higher prices.

150 australian commodities > vol. 14 no. 1 > march quarter 2007 copper

Over the medium term, Australia’s mine production is projected to increase at an average annual rate of 7 per cent to reach 1.35 million tonnes in 2011-12 as the commencement of production at a number of new mines offsets lower forecast production from Xstrata’s Ernest Henry mine in Queensland. Xstrata’s Ernest Henry mine (capacity of 120 000 tonnes a year) is scheduled to cease mining in January 2010, but stockpiled ore will continue to be processed, which will enable the production of copper concentrates (at a lower rate) until 2012. Initial production from Oxiana’s Prominent Hill copper/gold project (104 000 tonnes a year) in South Australia is expected to commence from mid-2008. In addition, a number of comparatively smaller projects are also expected to commence production over the medium term, including Copperstrike’s Einasleigh project (15 000–25 000 tonnes a year) in Queensland and Exco Resources’ Cloncurry copper project (15 000–20 000), also in Queensland in 2008, Golden Cross Resources’ Copper Hill project (32 000 tonnes a year) in New South Wales, and Hillgrove Resources’ Kanmantoo project (14 000– 19 000 tonnes a year) in South Australia, both of which are expected to commence production in 2009. Additional production is also expected to come from gold projects that will produce copper as a byproduct. For example, Newmont’s Boddington project (30 000 tonnes a year) in Western Australia and Newcrest’s Cadia East (42 000 tonnes a year) in New South Wales are expected to commence production in 2008 and 2009 respectively. Australian export earnings from copper are projected to increase in real terms to a peak of $7.1 billion (in 2006-07 dollars) in 2009-10 as a substantial rise in export volumes is partly offset by a projected decline in global copper prices. However, in the remaining two years of the outlook period, export earnings are projected to ease as volumes shipped begin to decline in line with mine output.

australian commodities > vol. 14 no. 1 > march quarter 2007 151 zinc

zinc

> rebecca mccallum

Zinc prices rose substantially in 2006, reaching a record $US4619 a tonne in late November. Prices are forecast to remain high in 2007 as global demand, particularly from Asia, continues to expand. With consumption of zinc forecast to exceed production for a fourth year in a row, there is expected to be another drawdown in global zinc stocks in 2007. Output from new mines is expected to fi ll the production–consumption defi cit by 2008 and stabilise stocks. Over the medium term, supply growth is expected to be suffi cient to meet increased demand, and prices in real terms (2007 dollars) are forecast to weaken to around US$1670 a tonne. prices to remain above average in 2007 Zinc prices continued to rise in 2006, bolstered by strong demand, supply constraints and the continued drawdown of stocks. Prices increased 137 per cent year on year to average US$3276 a tonne in 2006 and are forecast to rise another 7 per cent to average over US$3500 a tonne in 2007 as demand continues to expand faster than supply. Total zinc stocks held by consumers, producers and in London Metal Exchange (LME) warehouses fell to 495 000 tonnes by the end of 2006, equal to 2.3 weeks of consumption and the lowest since 1991. Global stocks are expected to fall further in 2007, as consumption exceeds production, but are projected to increase over the medium term to 2.6 weeks of consumption by 2012. In real terms (2007 dollars), prices are expected to fall toward the end of the outlook period as increased production provides more than enough supply to meet growing demand. Increased supply capacity (from projects such as San Cristobal in Bolivia),

zinc outlook

Unit 2005 2006 2007 f 2008 z 2009 z 2010 z 2011 z 2012 z World Production kt 10 229 10 657 11 296 11 805 12 513 13 014 13 534 13 872 Consumption kt 10 628 11 068 11 356 11 810 12 424 12 896 13 476 13 881 Closing stocks kt 808 495 436 431 520 637 695 687 – weeks consumption wks 4.0 2.3 2.0 1.9 2.2 2.6 2.7 2.6 Price LME – nominal US$/t 1 382 3 276 3 513 3 490 2 700 1 906 1 783 1 854 USc/lb 63 149 159 158 122 86 81 84 – real a US$/t 1 464 3 351 3 513 3 412 2 580 1 781 1 628 1 667 USc/lb 66 152 159 155 117 81 74 76 2004 2005 2006 2007 2008 2009 2010 2011 -05 -06 -07 f -08 z -09 z -10 z -11 z -12 z Australia Mine output kt 1 352 1 380 1 383 1 676 1 846 1 956 2 047 2 156 Exports Ore and conconcentrates kt 1 953 1 821 1 887 2 372 2 706 2 924 3 103 3 321 Refined kt 397 388 396 420 431 437 446 453 Total value – nominal A$m 1 466 2 540 4 278 5 061 4 330 3 774 3 162 3 641 – real b A$m 1 561 2 620 4 278 4 937 4 121 3 504 2 864 3 218

a In 2007 US dollars. b In 2006-07 Australian dollars. f ABARE forecast. z ABARE projection. Sources: Australian Bureau of Statistics; International Lead Zinc Study group; World Bureau of Metal Statistics; ABARE.

152 australian commodities > vol. 14 no. 1 > march quarter 2007 zinc expected to begin coming on line after June 2007, world zinc is forecast to facilitate some easing of prices toward the latter part of the year before further increases in production contribute to prices easing further in 2008 price and 2009. 3000 12 One uncertainty in the outlook for prices is the potential for zinc production in China to be substantially higher than anticipated. The majority of zinc 2000 8 mine production in China is sourced from relatively small mines, with between 10 000 and 20 000 tonne capacity, that have relatively short lead times 1000 4 to start up. Production from these small mines is highly stocks responsive to prices, and hence, if prices remain high 2007 weeks for longer than, say two or three years, more of these US$/t consumption mines may begin production, resulting in signifi cant 1992 1997 2002 2007 2012 additional supply. A combination of increased smelter capacity and expanding mine output may result in much higher zinc production in China than is currently forecast. High treatment charges are encouraging the expansion and construction of new smelters close to mines in the west of China. Based on recent experience, it appears that Chinese smelters with a capacity of 200 000 tonnes can be constructed and on line in around two years. The combination of new mines and smelters is expected to contribute to signifi cant growth in zinc metal production. Refi ned zinc production in China is forecast to rise by 10 per cent in 2007 and by the same amount again in 2008. zinc consumption increasing Global consumption of zinc grew by 4 per cent to 11 million tonnes in 2006 and is forecast to grow a further 3 per cent in 2007 to 11.4 million tonnes. Over the medium term, growth in consumption is projected to average 4 per cent a year, bringing world consumption of zinc to 13.9 million tonnes by 2012. The use of zinc to galvanise steel accounts for approximately two-thirds of global zinc consumption each year. Galvanising (zinc coating) protects steel from corrosion and can increase the life of the steel by at least 500 per cent. Approximately 35 kilograms of zinc are used per tonne of galvanised steel sheet. Galvanised steel is used for applications such as sheet roofi ng, car bodies and housing construction frames. The demand for zinc is therefore highly responsive to movements in the residential construction and motor vehicle manufacturing industries. Other uses of zinc include the production of zinc based alloys such as brass and bronze, used in the manufacturing of household appliances, rubber and pharmaceuticals and in the purifi cation of water. China and India to drive consumption growth China is the world’s largest producer and consumer of zinc. In China, zinc is used principally in the country’s growing steel industry for galvanising and as China’s steel industry expands, its demand for zinc will continue to rise. The majority of the increase in demand for galvanised steel in China is expected to come from the construction and manufacturing sectors. Construction growth driven by rural–urban migration in China is projected to fl ow through to growth across a range of major infrastructure developments. Building construc-

australian commodities > vol. 14 no. 1 > march quarter 2007 153 zinc

vehicle sales in China tion itself and the additional infrastructure required to service this construction will require large quantities of galvanised steel. Strong growth in industries such as motor vehicle 6 manufacturing is also increasing the demand for zinc. As incomes in China rise, local demand for cars is rising rapidly. China is now the world’s second 4 largest market for new vehicles after the United States, with new vehicle sales reaching 7.22 million in 2006. Production and sales of cars grew by 25 2 per cent and vehicle exports more than doubled in 2006. Increased infrastructure development is a main million driver of demand for galvanised steel in India. The 20002002 2004 2006 steel is used in many structural applications such as bridges, electricity transmission towers, utility poles, roads, railways, ports and refi neries. India’s current focus on improvements to road, rail and electricity transmission and distribution infrastructure is expected to lead to strong growth in the production of steel in India and hence in the demand for zinc. The growing demand for motor vehicles in India is also emerging as an important driver of the demand for zinc. Passenger vehicle sales in India rose by 20 per cent in 2006 and sales of multipurpose and utility vehicles grew by 16 per cent and 12 per cent respectively. Increases in vehicle demand are projected to continue as incomes rise in India, increasing global zinc consumption over the medium to long term. modest demand growth in the United States and European Union There is a growing trend toward the use of galvanised steel in housing construction in the United States, where housing has traditionally used timber frames and rising timber prices have made galvanised steel an attractive substitute for construction. However, a downturn in the housing industry in the United States is expected to fl ow through to lower zinc consumption in 2007. Housing permits in the United States (typically useful indicators for future construction activity) in December 2006 were 24 per cent lower than at the same time in 2005. Although US housing construction is likely to slow in 2007, it can be expected to recover over the balance of the outlook period and contribute to US zinc consumption. Over the medium term, the consumption of zinc in the steel and motor vehicle manufacturing industries in both the United States and the European Union is projected to remain relatively constant (the majority of zinc demand is driven by developments in these industries). The combination of increased competition from China’s steel industry and a downturn in motor vehicle manufacturing, particularly in the United States, is projected to result in fl at or declining consumption of zinc in both regions. production to increase from late 2007 World zinc production grew by 4 per cent to 10.7 million tonnes in 2006. An additional 640 000 tonnes of zinc metal is forecast to be produced in 2007, enabling a 6 per cent rise in total output to 11.3 million tonnes.

154 australian commodities > vol. 14 no. 1 > march quarter 2007 zinc

The increase in global production will come from a number of mine expansions and new projects that, in turn, refl ect growing exploration budgets in recent years. Exploration expenditure tends to track prices quite closely and as prices have risen, global exploration expenditure has increased. Global exploration budgets have increased by approximately 150 per cent since 2002 when expenditure dipped below US$2 billion. Increases to supply are expected to come on line progressively over the medium term. The increases in exploration expenditure that have occurred from 2003 onwards are expected to begin delivering increased output later this year. For example, San Cristobal in Bolivia (capacity of 167 000 tonnes a year) and Cerro Lindo in Peru (capacity of 110 000 tonnes a year) are both due to be commissioned in the third quarter 2007. Over the medium term, four large confi rmed projects in Canada, Mexico, the Russian Federation and Indonesia are projected to come on line adding an extra 700 000 tonnes to global capacity. In addition to this, a number of smaller projects, amounting to at least 400 000 tonnes of zinc, are also expected to be completed. This increase in capacity, combined with the new projects and expansions in 2007, is projected to result in world production of zinc reaching 13.9 million tonnes by 2012. Production in Canada is forecast to increase signifi cantly as a number of new mines start up, with expected capacity of approximately 330 000 tonnes. Three projects are due to start production in 2007, increasing Canadian output in the short term by around 120 000 tonnes. However, the largest project, the Perseverance mine owned by Xstrata, which is expected to produce 115 000 tonnes of zinc a year, is not forecast to start up until 2009. Over the medium to longer term, countries in Africa may emerge as major producers of zinc. International investment in exploration by Australian companies has already begun to pay off, with the startup of Aim Resources’ Perkoa zinc project in Burkina Faso expected in early 2008 and the promising results from drilling at Terramin’s Oued Amizour project in Algeria and Mt Burgess Mining’s Kihabe project in Botswana. Further investment by Chinese companies may also result in new zinc projects in Africa. some projects subject to increased sovereign risk New zinc mining projects are increasingly being developed in countries with relatively high sovereign risks (such as where operating rules or taxation arrangements may be changed after a project has commenced). As demand continues to rise and existing zinc deposits are depleted, companies are investing in exploration in countries where there is greater uncertainty about potential returns from existing or new developments. In the case of Bolivia for example, the government is currently seeking to change the mining taxation system in order to increase its revenue take from the industry. Although it is not clear how large the increase in tax will be, future projects in Bolivia may be in jeopardy if companies cannot make suffi cient returns on their investments. Signifi cant sovereign risk issues have arisen also in relation to the joint venture project at Mehdiabad in Iran between Union Resources Itok Gmbh and the Iranian Mining Industries Development and Renovation Organisation (IMIDRO). The project, which was expected to begin production of 400 000 tonnes of zinc a year in 2011, may now not proceed following an apparent termination by IMIDRO of a number of agreements related to the project.

australian commodities > vol. 14 no. 1 > march quarter 2007 155 zinc

Australian output and exports to grow Australian mine production in 2006-07 is estimated to be 1.38 million tonnes following the expansion of the Mount Isa zinc concentrator (additional 75 000 tonnes) and increases in production at Golden Grove (to capacity of 141 000 tonnes), which have offset lower output at some other projects. Production from these mines is expected to grow further as they build up to full capacity. Beyond 2006-07 a number of mines are forecast to commence production, contributing to an average 9 per cent growth rate a year to 2011-12. The largest of these new projects is Xstrata’s Lady Loretta (125 000 tonnes) in Queensland, which is expected to commence production in 2009-10. Other new mines due to commence production over the outlook period include Teck Cominco’s Lennard Shelf (70 000 tonnes), Jabiru Metals’ Jaguar (38 000 tonnes), Terramin’s Angas (31 000 tonnes) and Perilya’s Flinders (36 000 tonnes) projects. Zinifex’s Century mine in Queensland, with a capacity of 515 000 tonnes, has enough reserves to last until 2015. Zinifex is conducting extensive exploration for new deposits in order to extend the life of the Century mine, and is also developing the Dugald River project (capacity of 200 000 tonnes). Reﬂ ecting the above developments, Australian zinc mine production is forecast to be close to 2.2 million tonnes by 2011-12, some 770 000 tonnes greater than in 2005-06. Higher world prices as well as increased export volumes are forecast to boost Austra- lian export earnings from zinc by over 68 per cent to around $4.2 billion in 2006-07. After peaking in 2007-08, export earnings in real terms are projected to ease over the medium term to around $3.2 billion (in 2006-07 dollars) by 2011-12. As export volumes are projected to grow solidly over the medium term, with new projects coming on line, the decline in earnings will reﬂ ect easing world prices of zinc.

156 australian commodities > vol. 14 no. 1 > march quarter 2007 tradetrade reformreform

>> lisadon elliston gunasekera > +61 > 2 +61 6272 2 62722091 2040 > [email protected] > [email protected] global trade liberalisation opportunities for Australian farmers

> roneel nair, q.t. tran, caroline gunning-trant, roslyn wood and don gunasekera

» Global merchandise trade liberalisation would be expected to generate substantial beneﬁ ts for the international community, including Australia. Two illustrative merchandise trade reform scenarios, analysed here, provide broad insights into the probable changes in agricultural trade. » Global merchandise trade liberalisation would boost Australia’s agricultural exports by an estimated US$9 billion (in 2006 dollars) in 2020, relative to what would otherwise be the case (the ‘reference case’). There would also be considerable global beneﬁ ts, with world agricultural trade estimated to expand by more than US$286 billion in 2020, relative to the reference case. » Much of the expansion in Australia’s agricultural exports occurs in the dairy, beef, sugar and wheat industries. Australian dairy product exports are estimated to increase in value by 39 per cent and beef exports by 34 per cent in 2020, relative to the reference case. » If bound merchandise tariffs and subsidies were cut by 50 per cent rather than eliminated, then estimated agricultural exports in 2020, relative to the reference case, would rise by less than half of the estimated gains under the global merchandise trade liberalisation scenario. fig A GDP growth rates introduction China A successful outcome in the Doha Round of India multilateral trade negotiations under the World Indonesia Trade Organisation (WTO) would stimulate the growth of new markets created by evolving Malaysia 2006 consumption patterns internationally, particu- Philippines 2020 larly in rapidly growing developing countries. Thailand For many of these countries, accelerating Viet Nam consumer demand for agricultural products will be met through international trade because the European Union resources required to produce goods domesti- Japan cally are not always located in areas where markets are expanding, and where consump- United States tion is growing at a faster pace than domestic %246810 australian commodities > vol. 14 no. 1 > march quarter 2007 157 trade reform

production. Australian farmers are well placed to secure access to many of these markets, especially those in developing countries where income and population growth translate into increased purchasing power. In China and India, the world’s most populous countries, rates of economic growth in 2006 were 11 per cent and 8 per cent respectively. By 2020, GDP growth rates are projected to be 5 per cent in China and 6 per cent in India (fi gure A). One recent trend that deserves emphasis is the robust economic performance of prominent south east Asian countries: the resurgence of Indonesia, Malaysia, the Philippines and Thailand, and the emergence of Viet Nam, as it integrates into the world economy. In addition to economic growth, rapid urbanisation in developing countries — associated with sustained, broadly based economic growth — will expand demand for livestock products, horticultural products and processed food. Between 1990 and 2020, developing countries’ share of global urban figB share of the global urban population is projected to population rise appreciably. For example, China’s share of the 1990 European Union 12% global urban population is projected to expand from Japan 4% 14 per cent in 1990 to 18 per cent in 2020; for India it United States 8% is projected to increase from 9 per cent in 1990 to 11 Africa 9% per cent in 2020. Together, the Association of South ASEAN 6% East Asian Nations (ASEAN) region and Africa are China 14% also likely to account for a rising share of the global India 9% urban population, albeit from a lower base compared rest of world 38% with China and India (fi gure B). The anticipated expansion in world food consumption, as urban populations in developing countries diversify their diets, will require a sizable shift in global trading patterns. Future growth in Australian agricultural exports, 2005 European Union 11 % however, depends not only on changes in world popu- Japan 3% lation and income but also on the multilateral trade United States 7% rules that countries agree to follow. In an increasingly Africa 11 % competitive global market, Australian farmers rely on ASEAN 7% the existence of a more open, rules based international China 17% trading system. A large proportion of Australian agri- India 10% cultural production is exported, and prices received rest of world 34% for these products are closely linked to world prices that are often distorted by agricultural protectionism and subsidisation in key countries. The potential benefi ts of freer agricultural trade 2020 European Union 10% motivated WTO member countries to initiate the Doha Japan 2% Round of trade negotiations and to revise and expand United States 6% the trade rules that were established in the Uruguay Africa 14% Round. The will to achieve open markets has not ASEAN 8% waned, despite the suspension of the negotiations in China 18% July 2006. It is important that the Doha Round outcome India 11 % offers the prospect for greatly expanded trade, and rest of world 31% opportunities for Australian agriculture to position itself to benefi t from major changes in the world economy in coming decades.

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box 1 commodity programs in the 2007 US farm bill

On 31 January the US Department of Agriculture (2007) announced its 2007 farm bill proposals. The proposals largely correspond to 2002 farm bill titles. The proposed commodity programs (title 1) include:

proposed commodity program ABARE analysis changes to marketing loan rates New loan rates based on the crop’s Loan rates in the proposal have been determined under the average market price over ﬁ ve years assumption that prices for grain and oilseeds are expected (excluding high and low years), with to remain at high levels. Given this, it is anticipated that maximum loan rates as established in marketing loan payments would be lower over the the House of Representatives approved short to medium term. version of the 2002 farm bill.

new countercyclical payments for program crops Replacing countercyclical payments The proposed countercyclical payments program would based on price with countercyclical remain linked to crop prices, but the link is now weaker. payments based on revenue. On the basis of current price projections, spending under the new program is likely to decrease over the short to medium term. additional income support Increasing direct payments by $5.5 The direct payment rate for upland cotton would increase billion over ten years. from 6.67c/lb to 11.08c/lb. Additional direct payments to producers of upland cotton seem to coincide with the WTO Cotton Panel ruling that required the Congress to repeal step 2 provisions for upland cotton. While domestic prices for program crops are generally forecast to increase over the next few years, upland cotton is the exception, partly because step 2 was repealed. planting fl exibility Allowing planting fl exibility for fruits, This modifi cation is consistent with the WTO Cotton Panel vegetables and wild rice on program ruling, and would decrease the vulnerability of US direct crop base acres. payments to any challenges under the WTO. revised dairy and sugar programs Reauthorise the Milk Income Loss The support price for milk would remain unchanged at Contract (MILC) program. US$9.90/cwt. With payments on a historical base, and a declining payment for the price shortfall, expenditure under the reauthorised MILC program is estimated to decline over the short to medium term. Balance sugar supply and demand, The loan rate for sugar would remain unchanged at 18c/lb. and prevent price support forfeitures. It appears that a revised marketing allotment program would be used to enable lower domestic production of sugar, and accommodate the sugar import arrangements with Mexico under the North American Free Trade Agreement.

The changes to farm programs under the US Administration’s farm bill proposals reﬂ ect adjustments to approaches under the 2002 farm bill, rather than an overhaul of existing farm policies. The farm bill proposals appear to be moving in the right direction, and will help to progress the Doha Round negotiations, however there is scope for further cuts to trade distorting support. An opportunity still exists for the Administration and the Congress to reform current trade distorting farm programs and contribute to a successful Doha Round outcome.

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suspension of the Doha Round In suspending the Doha Round on 24 July 2006, WTO Director-General Pascal Lamy urged WTO member countries to take ‘time out to review the situation, time out to examine the available options and time out to review positions’. The progress made on the various elements of the negotiating agenda up to July 2006, including the key outcomes of the Hong Kong ministerial meeting in December 2005, was put on hold, pending the resumption of the multilateral trade talks when the negotiating environment was appropriate (WTO 2006a). On 16 November 2006, the Director-General convened a meeting of the Trade Negotiations Committee in Geneva to propose the resumption of work ‘across all areas of the negotiations’ (WTO 2006b). On 14 December 2006, he reported to the General Council in Geneva and stressed the need to ‘maintain the rhythm of the informal work in order to exploit the window of opportunity that remains in the ﬁ rst quarter of 2007’ (WTO 2006c). The Director-General resumed negotiations ‘fully across the board’ on 7 February 2007. ‘Political conditions are now more favourable for the conclusion of the Round than they have been for a long time. Political leaders around the world clearly want to get fully back to business, although we in turn need their continuing commitment’, he added (WTO 2007). reform ambitions of major players need to aim higher It is essential that the major players in the multilateral trade negotiations move to break the current impasse, and return to the negotiating table with improved offers. The European Union and developing countries have to accept high cuts to agricultural tariffs, and the United States needs to do more by way of both increased cuts and meaningful disciplines on agricultural subsidies. With consideration of a new US farm bill scheduled for 2007, there is an opportunity for the United States to reform its farm policies (Bertini et al. 2006; Thompson 2005). A new farm bill could potentially be shaped to improve the overall welfare of the US farm sector and generate gains for others (Nair et al. 2005; McDonald et al. 2006) — see box 1 for preliminary analysis of the 2007 US farm bill proposals. However, it is unlikely that the Doha Round negotiations could be ﬁ nalised within the term of the current US Trade Promotion Authority, which is scheduled to expire on 1 July 2007. US trade negotiations may be constrained unless the term of the current authority is renewed or temporarily extended (Congressional Research Service 2006).

importance of policy reform Governments often resist trade liberalisation because of concerns about the ability of some domestic industries to adjust to changing market conditions. This perspective ignores the fact that industry adjustment is a continuous process caused by changes in economic conditions and other circumstances. The adjustment process involves resources shifting between alternative uses in the economy, according to changes in relative returns. When the resources required to produce goods domestically are not located in areas where markets are expanding rapidly, policy interventions such as trade barriers and subsidies allow certain industries to attract resources that would otherwise earn a higher return in other areas of the economy. Trade barriers and subsidies enable these industries to divert resources, distort markets and impose costs on other sectors in the economy. As a result,

160 australian commodities > vol. 14 no. 1 > march quarter 2007 trade reform global production patterns will not accord with how much of a commodity should be produced, how it is produced, and where it should be produced. Genuine policy reform improves the allocation of resources, spurs enterprises toward their competitive advantage, and strengthens incentives to respond to market signals and take steps that generate benefi ts associated with improved industry competitiveness. Managing the transitional adjustment pressures from policy reform is an important issue for many countries, most notably in developing countries that have had limited experience in dealing with the domestic consequences of policy reform; partly because of inadequate governance, infrastructure and institutions. However, it is the case that open economies grow faster and are more dynamic. To delay opening up would only serve to attenuate or dilute the process of change, and prolong the period of time during which domestic industries face less competition from imports. This approach to policy reform is likely to perpetuate slow income growth and inhibit economic development. Adjustment is a necessary aspect of the long term performance of industries, and the benefi ts from policy reform can only be obtained if industry adjustment is allowed to occur after reforms are implemented. The advantage of allowing world market prices to facilitate and guide the adjustment process is that it encourages producers to assess future prospects, consider options for change, and take appropriate action. Their response will be to alter production decisions, generate enterprise restructuring and diversifi cation, or switch to activities in other sectors. Policy reform can lead to positive industry adjustment. This is evident in countries that have undergone agriculture sector deregulation and industry restructuring, namely New Zealand and Australia. Consequently, the agricultural adjustment experiences of New Zealand’s agriculture sector and Australia’s dairy industry may provide some useful insights into the future policy reform direction for agricultural industries that are recipients of protection and subsidies. benefi ts of global agricultural trade liberalisation The global agriculture sector has retained more resources than would otherwise have prevailed in the absence of high rates of assistance, primarily because trade barriers and subsidies for agriculture tend to be higher than assistance provided to other sectors. As such, agricultural trade liberalisation presents the greatest potential for realising the economic benefi ts from opening up markets for merchandise products. Additional benefi ts are likely to fl ow from liberalising barriers to trade in other merchandise products, typically manufactured goods. Nonagricultural market access (NAMA) liberalisation has an important role in partially offsetting losses borne in regions dependent on low international food prices or preferential access to agricultural markets. Agricul- tural trade liberalisation, in conjunction with NAMA liberalisation, would offer signifi cant scope for many rural workers in developing countries to take up employment opportunities in labour intensive manufacturing activities. WTO member countries, including Australia, stand to gain signifi cantly from liberalising global merchandise trade. This is refl ected in the estimated potential benefi ts from such an outcome. Two illustrative scenarios are analysed, with the aim of providing broad insights into the prospective changes in agricultural trade, and highlighting the scope for expansion in Australia’s exports of key agricultural commodities, and the gross value of agricultural production.

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description of illustrative trade reform scenarios In the two scenarios described in table 1, it is assumed that the specifi ed illustrative merchandise trade reform will be gradually implemented over a fi ve year period, for both developed and developing countries, commencing in 2007. Scenario 1 aims to provide insights into the maximum potential benefi ts of merchandise trade reform. Scenario 2 demonstrates that a 50 per cent cut is unlikely to guarantee substantial trade expansion. Trade negotiations under the WTO are based on reductions to bound tariffs and subsidies (maximum levels that member countries agree not to exceed). Actual applied levels cannot exceed the bound levels. This distinction between bound and applied levels is crucial to analysing trade policy reform, because many countries maintain applied tariffs and subsidies — for key agricultural industries — beneath the bound levels that they commit to under the WTO. The extent of trade reform under scenario 2 depends key scenario assumptions on the depth of the cut to scheduled bindings, and 1 whether such reductions lower applied tariffs and subsidies. When reform is undertaken in scenario 2, applied scenario 1 scenario 2 agriculture sector tariffs and subsidies would only be lowered when reduc- tariffs tions in bindings eliminate the gap between bound and – applied eliminate applied levels, otherwise known as ‘binding overhang’. – bound 50% cut In these cases, applied tariffs and subsidies would be trade distorting support reduced to the level of the new bindings. Conversely, – applied eliminate – bound 50% cut negotiated cuts that do not remove the ‘binding over- export subsidies hang’ will not allow additional trade to occur. – applied eliminate – bound 50% cut quantitative analysis of scenarios nonagricultural sector ABARE’s global trade and environment model (GTEM) is tariffs used to analyse the two scenarios. GTEM is a dynamic – applied eliminate computable general equilibrium model of the world – bound 50% cut economy and is based on the GTAP version 6 database (Global Trade Analysis Project model). It captures inter- sectoral effects and links regions through trade and investment, making it a suitable tool to analyse the fig C change in agricultural exports, 2020 effects of trade reform. Detailed information on GTEM is available on ABARE’s website (www.abareco- scenario 1 – full liberalisation nomics.com). 250 scenario 2 – 50 per cent cuts The GTEM simulation results are expressed, unless otherwise stated, as deviations from the corresponding 200 levels in the ‘reference case’, where current policies are maintained. Simulation results are reported for 150 2020. Additionally, in reporting the simulation results, values are expressed in 2006 US dollars. 100

50 simulation results The estimated changes in agricultural exports under US$b each of the scenarios, relative to the reference case, Australia developed developing least world countries countries developed are shown in ﬁ gure C. countries

162 australian commodities > vol. 14 no. 1 > march quarter 2007 trade reform scenario 1 – multilateral merchandise trade liberalisation In this scenario, Australian agricultural exports are estimated to expand by US$9 billion in 2020, relative to the reference case (fi gure C). In addition, world agricultural trade is estimated to increase by US$286 billion in 2020, relative to the reference case. Nearly 60 per cent of this total gain would accrue to developing countries. Agricultural exports from Brazil and Argentina together are estimated to account for an eighth of the total gain. Together, agricultural exports from the United States and Canada account for nearly half of the estimated rise in total agricultural exports from developed countries. scenario 2 – multilateral cuts to bound merchandise tariffs and subsidies When bound merchandise tariffs and subsidies are cut by 50 per cent, it is estimated that Australian agricultural exports would rise by just US$3 billion in 2020, relative to the reference case (fi gure C). For the world overall, the estimated expansion in agricultural exports is only US$115 billion in 2020, relative to the reference case. That is, the potential benefi ts attainable under scenario 2 are estimated to be less than half of the benefi ts under scenario 1 where barriers to merchandise trade are eliminated globally. This can be attributed to the presence of ‘binding overhang’ that results in minimal cuts to applied tariffs and subsidies. benefi ts of adding nonagricultural trade liberalisation to reform package » Extending trade liberalisation to the nonagricultural sector (excluding the services sector) would provide for fl ow-on benefi ts to the agriculture sector. In fact, with wider coverage of sectors in trade liberalisation, the estimated resulting increase in global agricultural trade (US$286 billion) would be 12 per cent greater than the expansion under agricul- change in exports with trade tural trade liberalisation alone (US$255 billion) liberalisation, 2020 (table 2). 2 » Liberalisation of agricultural tariffs and subsidies agricultural merchandise with full merchandise trade liberalisation would yield an estimated 24 per cent of the US$1.17 US$b US$b trillion boost to world merchandise exports (table agricultural trade liberalisation alone 255 ne 2). This is signifi cant, given that the share of agri- merchandise trade cultural products in world merchandise exports is liberalisation 286 1 171 currently less than 9 per cent. ne Not estimated. benefi ts for major Australian agricultural industries change in agricultural exports Most of the estimated expansion in the value of Australian agricultural exports occurs in industries such as dairy products, beef, sugar and wheat. The estimated effects on major Australian agricultural exports under each of the scenarios, relative to the reference case, are shown in fi gure D. The dairy industry is expected to experience the largest increase in exports. Under scenario 1, the value of dairy exports is estimated to expand by 39 per cent in 2020, relative to the reference case. Scenario 2 generates a smaller change in trade, increasing the value of exports by 15 per cent in 2020, relative to the reference case (fi gure D). Global merchandise trade liberalisation in scenario 1 would also contribute to increased exports of beef, with the estimated expansion in the value of trade being 34 per cent in 2020, relative to the reference case. Under scenario 2, the value of beef exports rises by australian commodities > vol. 14 no. 1 > march quarter 2007 163 trade reform

fig D change in value of Australian 14 per cent in 2020, relative to the reference case agricultural exports, 2020 (fi gure D). scenario 1 – full liberalisation Similarly, comprehensive merchandise trade reform scenario 2 – 50 per cent cuts would boost the value of sugar and wheat exports by 30 around 35 per cent and 6 per cent in 2020 respectively, relative to the reference case. On the other hand, the expansion in the value of exports under 20 scenario 2 is much more muted — estimated to be 13 per cent and 2 per cent in 2020 respectively, relative to the reference case (fi gure D). 10 While the value of Australian exports of dairy products, beef, sugar and wheat is estimated to increase % under both scenarios, the boost to exports under scenario 2 is less than half of the expansion in exports dairy beef sugar wheat under scenario 1, because of the tariff ‘binding overhang’ in several key markets for major Australian agricultural exports (fi gure E). tariff ‘binding overhang’ in some of Australia’s markets India accounts for 14 per cent of world sugar consumption and has an applied tariff on sugar of 60 per cent. However, the scope for additional trade in sugar is limited because India has a bound tariff of 150 per cent. This tariff would need to be reduced by over 60 per cent before there was any growth in Indian sugar imports. China has a bound tariff on wheat of 65 per cent, and an import tariff quota with an in-quota tariff of 1 per cent. China’s imports of wheat under the tariff quota are well within the specifi ed limit because quota administration regulations allow state trading enterprises to control 90 per cent of the quota. Hence, a cut to China’s bound tariff on wheat would need to be accompanied by reform of tariff quota administration. Increased consumption of cheddar cheese, butter and milk powder in ASEAN member countries is expected to be a driver of future export potential for Australian dairy products. The ASEAN trade weighted bound tariff on fig E tariff ‘binding overhang’ in some dairy products is 30 per cent, but the trade weighted of Australia’s key markets applied tariff is only 10 per cent. This indicates that sizable cuts to bindings would be required to provide 150 140 additional access to the growing ASEAN market. bound tariff 120 applied tariff Japan accounts for only 2 per cent of global beef consumption, but imports nearly 58 per cent of its 100 domestic consumption of beef. The bound tariff on 80 beef is 50 per cent, while the applied tariff is 38.5 65 per cent (when the ‘snapback’ safeguard mechanism 60 60 50 is not in effect). This means that a bound tariff cut in 40 excess of 23 per cent would be required to expand 30 38.5 20 beef exports from Australia. In recent years, beef import volumes in Japan have declined in response % 10 1 to import bans and food safety concerns associated India China ASEAN Japan (sugar) (wheat) (dairy) (beef) with discoveries of BSE (bovine spongiform encepha-

164 australian commodities > vol. 14 no. 1 > march quarter 2007 trade reform lopathy or ‘mad cow’ disease) in the United States fig F change in value of Australian and Canada, and FMD (foot and mouth disease) in agricultural production, 2020 south America. If these countries achieve disease-free scenario 1 – full liberalisation status, there may be greater potential for increased scenario 2 – 50 per cent cuts global trade in beef. 20 change in gross value of agricultural production 15 Under scenario 1, there is also a substantial increase in the gross value of production of major Australian 10 agricultural industries, such as dairy products, beef, sugar and wheat (fi gure F). In the event of global merchandise trade liberalisation, 5 the gross value of dairy production is estimated to rise by 19 per cent in 2020, of beef by 16 per cent, of sugar % by 22 per cent, and of wheat by 6 per cent, relative dairy beef sugar wheat to the reference case. Under scenario 2, the estimated increase in 2020 is much lower than under the fi rst scenario. Again, this refl ects the tariff ‘binding overhang’ in several key markets for major Australian agricultural exports. Relative to the reference case, the expansion in the gross value of production is estimated to be 7 per cent for dairy products, 7 per cent for beef, 8 per cent for sugar and 2 per cent for wheat (fi gure F). concluding remarks Among a range of policy implications that can be drawn from the simulation results, several are worth highlighting. » First, with prospective gains in the order of US$286 billion at stake, all that remains is for the political will to be found to initiate merchandise trade liberalisation. » Second, the analysis suggests that, because of ‘binding overhang’, the benefi ts conferred by a negotiated 50 per cent cut to bindings would pale in comparison with the benefi ts from freeing global merchandise trade. » Third, the fi ndings support the expectation that developing countries would be among the major benefi ciaries of merchandise trade liberalisation — that is, nearly 60 per cent of the total US$286 billion gain would accrue to developing countries. It is important to recognise that the analysis is illustrative, and the magnitudes of the benefi ts realised under the scenarios should be interpreted as only a broad indication of the expected effects of global merchandise trade liberalisation on the agriculture sector. For example, the scenarios do not incorporate changes to tariff quota administration regulations, or any total factor productivity gains associated with domestic and trade policy reforms.

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references Bertini, C., Schumacher, A. and Thompson, R. 2006, Modernizing America’s Food and Farm Policy: Vision for a New Direction, Chicago Council on Global Affairs, Illinois. Congressional Research Service 2006, Trade Promotion Authority (TPA): Issues, Options, and Prospects for Renewal, Washington DC, December. McDonald, D., Nair, R., Podbury, T., Sheldrick, B., Gunasekera, D. and Fisher, B.S. 2006, US Agriculture without Farm Support, ABARE Research Report 06.10, Canberra, September. Nair, R., Chester, C., McDonald, D., Podbury, T., Gunasekera, D. and Fisher, B.S. 2005, Timing of the US Farm Bill and WTO Negotiations – A Unique Opportunity, ABARE eReport 05.11, Canberra, November. Thompson, R. 2005, ‘Essentials for the 2007 farm bill in a global context’, Cordell Hull Institute Trade Policy Analyses, vol. 7, no. 6, July. US Department of Agriculture 2007, Title 1: Commodity Programs, USDA 2007 Farm Bill Proposals, Washington DC (www.usda.gov/documents/07title1.doc). WTO (World Trade Organisation) 2006a, Trade Negotiations Committee meeting on 24 July 2006, Geneva. —— 2006b, Trade Negotiations Committee meeting on 16 November 2006, Geneva. —— 2006c, General Council meetings on 14 and 15 December 2006, Geneva. —— 2007, General Council meeting on 7 February 2007, Geneva.

166 australian commodities > vol. 14 no. 1 > march quarter 2007 australianclimate food industry change

> helallisa elliston ahammad > +61 > 2+61 6272 2 6272 2091 2146 > [email protected] > [email protected] adapting to climate change issues and challenges in the agriculture sector

> edwina heyhoe, yeon kim, phil kokic, caroline levantis, helal ahammad and karen schneider, ABARE > steve crimp and rohan nelson, CSIRO > neil ﬂ ood and john carter, Queensland Department of Natural Resources and Water

» While there is consensus in the global scientifi c community that some degree of climate change is inevitable, there remain large uncertainties surrounding the likely effects of climate change on the agriculture sector, especially at the regional level. Some models predict an increase in agricultural productivity in Australia, whereas other modelling suggests a substantial fall in productivity in many regions. » Analysis in this paper indicates that some regions in Australia that are highly dependent on agriculture could experience considerable economic losses as a result of climate change. However, adaptation to the impacts of climate change, including improved farming technologies and practices, can reduce the size of these losses. » Farmers will require information to make cost effective adaptation decisions. Government is likely to have a role in providing ongoing research and development to support adaptation, improving information dissemination to farmers, and ensuring appropriate policy settings that encourage adaptation. introduction While there is still much uncertainty surrounding the potential magnitude and likely impacts of climate change, there is consensus in the global scientifi c community that some climate change is already occurring and that further change is inevitable. Climate change is evident in both a change in average temperature and rainfall, as well as changes in the frequency and severity of extreme weather events, such as frosts, heat waves, droughts and fl oods (IPCC 2001). It is considered likely that continued greenhouse gas emissions at or above current rates will result in further global warming in this century. Moreover, even if the atmospheric concentrations of all greenhouse gases and aerosols are stabi- lised at 2000 levels, global temperatures are projected to continue rising (IPCC 2007). While measures to reduce the growth of greenhouse gas emissions are an important response to the threat of climate change, adaptation to climate change will also form a necessary part of the response. In this context, adaptation refers to strategies that act to reduce the adverse impacts of climate change. Developing adaptation strategies is

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therefore an important part of ensuring that countries are well prepared to deal with any negative impacts that may occur as a result of climate change. Adaptation to climate variability has been an ongoing necessity for the agricultural sector, particularly in countries such as Australia where extreme climatic conditions are common. Existing strategies to manage climate variability present opportunities for meeting the challenges of future climate change. The objective in this paper is to examine the possible impacts of climate change on Australia’s agricultural industries, including at a regional level, and to explore the potential role of adaptation in reducing some of the economic costs of these impacts.

impacts of climate change on agriculture Despite rising conﬁ dence about the causes of climate change and the likelihood that climate change will occur, considerable uncertainty remains over its magnitude and its potential impacts. Estimates of the increase in potential global average temperatures range from 1.1°C to 6.4°C by 2100 (IPCC 2007). In addition, the range of projections reported in IPCC (2007) illustrates a considerable lack of agreement on the climate change impacts on many regions. In the case of Australia, Whetton et al. (2005) suggest that regional changes in rainfall are highly uncertain. For example, projected changes in rainfall in the Northern Terri- tory range between –40 and +40 per cent of current average levels, depending on the climate models used and the greenhouse gas emission scenarios explored. Nevertheless, there is growing consensus among climate scientists that the southern half of Australia is likely to become drier under the inﬂ uence of higher global temperatures, and in parts of northern Australia wetter. In practice, the impacts of climate change are likely to be widespread, affecting social, economic and biophysical systems. Potential impacts include the consequences of rising sea levels; effects on human health as a result of the increased incidence of tropical diseases; and changes in agricultural productivity. Stern (2006) estimated the cost of future climate change related damage, without adaptation, at between 5 and 20 per cent of global gross product, depending on the assumptions relating to the size of the temperature increase and the range of impacts that are included. For agriculture, climate change is expected to affect productivity through increased average temperatures, changed rainfall patterns, increased levels of atmospheric carbon dioxide and increased climate variability. There may also be indirect effects through changes in the incidence of diseases and pests, and increased rates of soil erosion and degradation (Adams, Hurd and Reilly 1999). The impact of changes in climate on agricultural productivity is likely to vary across agricultural industries. For example, crop production will be affected directly by changes in average rainfall and temperatures, and by possible changes in the distribution of rainfall during the year. The productivity of livestock industries will be affected by changes in the quantity and the quality of available pasture, as well as by the direct impacts of temperature changes and the increased likelihood of greater temperature extremes (Adams et al. 1999). evidence on agricultural productivity changes General circulation models — models of the global climate system — are used to predict future climate change and have, to date, focused on changes in temperature and average annual rainfall. The predicted impacts on these variables vary considerably depending

168 australian commodities > vol. 14 no. 1 > march quarter 2007 climate change on the choice of model and the projected greenhouse gas emissions scenario. In general, however, moderate increases in temperature are projected to lead to an increase in agricultural productivity in temperate regions, whereas in warmer regions, particularly those at lower latitudes, agricultural productivity is predicted to fall. Uncertainty surrounds the global aggregate impact on agricultural productivity, with estimates ranging from a small loss to a potential gain (Stern 2006). At the upper range of projected temperature increases (those above 3°C), agricultural productivity is expected to decline in all regions. Studies of the projected changes in climate variability (that is, changes in the frequency and severity of extreme events) resulting from increased greenhouse gases in the atmosphere are less advanced than those of changes in average rainfall and temperature. Nevertheless, recent studies (for example, Tubeillo 2005) predict increased climate variability, including longer and more frequent droughts and heavy rainfall events. Such an outcome would be likely to increase the negative impacts of climate variability on agricultural production. At the same time, experimental studies have shown that increased levels of carbon dioxide in the atmosphere may enhance the effi ciency with which plants use water during photosynthesis (Steffen and Candadell 2005). Results have varied between crop types, and there is uncertainty about the degree to which experimental results will be validated in the fi eld. However, several studies have shown that increased levels of carbon dioxide in the atmosphere, while benefi cial to plants, will only partially offset the more negative impacts of climate change on agricultural productivity (see, for example, Adams et al. 1999; Stern 2006; Bindi and Howden 2004). options for adaptation in agriculture Adaptation to changes in climatic conditions, and particularly climate variability, has always been a feature of agricultural production, especially in Australia. Although the prospect of adapting to signifi cant climate change is challenging, the historical precedent of managing signifi cant climate variability provides a degree of confi dence that further successful adaptation is possible (Kurukulasuriya and Rosenthal 2003). Farm level strategies for adapting to climate change include, in the crop sector, diversifi cation of crop varieties; species change; shifting planting seasons; changing crop management practices, such as spacing, tillage and rotation; nutrient, erosion and salinity management; moisture conservation; pest management; and taking advantage of seasonal forecasting for the crop sector (Howden et al. 2006). For livestock production, adaptation options include changing livestock breeds, managing pasture productivity and managing pests and disease. Longer term adaptation strategies at the farm level include changing the enterprise mix, diversifying into off-farm employment, investing in nonfarm assets, and migrating to new industries and regions. Beyond the farm gate, potential strategies include the diversifi cation of rural enterprises and research into new technologies (Ellis 2000; Nelson et al. 2005). Options available to irrigated agricultural industries also include improving water use effi ciency and water trading (Beare and Heaney 2002). The effectiveness and effi ciency of adaptation strategies will vary across regions, agricultural activities, existing agricultural practices, as well as over time. Whether adaptation is effective or not can depend on perspective. Relocating agricultural production may be considered to be a successful form of adaptation at a national or international level, but

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as an unsuccessful strategy for rural communities that are highly dependent on agriculture for their livelihood.

regional impacts of climate change: an illustrative analysis The potential impacts of climate change on the productivity of Australia’s agriculture sector will have direct effects on the size and profi tability of farming, and indirect effects on the rest of the economy, particularly on regional communities that are heavily dependent on the agricultural sector for income and employment. To illustrate the importance of the regional dimension to this issue, an assessment of the likely impacts of climate change has been undertaken in two case study regions: the northern and eastern Western Australian wheat belt; and the central western slopes and plains of New South Wales (map 1). In the fi rst region — the northern and eastern Western Australian wheat belt — the local economy is heavily dependent on agriculture, and the agriculture sector is concentrated on the production of two main commodities — wheat and wool. The region is expected to face relatively large changes in agricultural productivity as a result of climate change. It is representative of Australian farming regions that are potentially more exposed to negative climate change outcomes. In the second region — the central western slopes and plains of New South Wales — agriculture is a less dominant component of the regional economy, and tourism, manufacturing and services industries make more signifi cant contributions to regional economic output. Agricultural production in the region is more diverse than in the Western Australian region, and includes beef and barley production, as well as wheat, wool and sheep meat production. The region is representative of regions in Australia that have greater industry diversity and that are expected to face more moderate changes in productivity as a result of climate change. In analysing the likely effects of climate change on the two case study regions, it is important to recognise the high degree of uncertainty surrounding regional differences in the direction and magnitude of climate change. To capture this uncertainty, the regional effects of climate change have been examined under two illustrative scenarios — a low rainfall scenario and a high rainfall scenario. Both illustra- case study regions tive scenarios are based on the midrange SRES A2 1 scenario that assumes that global temperatures will rise by approximately 3.3˚C by 2100. The SRES scenarios were developed by the IPCC, and show projected greenhouse gas emissions growth under differing demographic and technological assumptions (Nakicenovic et al. 2000 ). More detail on the SRES A2 scenario can be found on the IPCC Western website (www.ipcc.ch/pub/sres-e.pdf). Australia New South The two scenarios are developed using two Wales different climate models that calculate the impacts of the SRES A2 temperature change on rainfall and other climate variables. While the SRES A2 scenario projects temperature changes out to 2100, the analysis in this paper is limited to projected impacts over

170 australian commodities > vol. 14 no. 1 > march quarter 2007 climate change the period to 2030. By this time, the increase in temperature under the SRES A2 scenario is projected to be 0.9°C. In the high rainfall scenario, which is based on projections from the Darlam125 model (Whetton et al. 2005), there is projected to be an increase in average rainfall for most regions of Australia. The exceptions are the southernmost area of the Australian continent and all of Tasmania. In contrast, in the low rainfall scenario, which is based on projections from the Hadcm3 model, it is projected that average rainfall will decline over large areas of Australia, including throughout the wheat–sheep zone (Whetton et al. 2005). The two illustrative scenarios are chosen to represent a wide range of possible climate change impacts on the Australian agricultural sector. modelling the regional economic effects of climate change The likely regional impacts of climate change on broadacre agriculture in Australia are estimated in a three step process: » step 1 – the impact of projected climate change (that is, temperature and rainfall changes) on pasture growth is estimated using a point-scale version of the GRASP pasture production model (Littleboy and McKeon 1997). The pasture growth index generated by this model is a predictor of the dry matter pasture productivity of land in any given year, and encapsulates the effect of climate and soil type. » step 2 – the forecast change in the pasture growth index as a result of climate change is used to derive an estimate of the corresponding change in total factor productivity for selected broadacre crop and livestock industries for all Australian states and territories and the targeted regions. » step 3 – the changes in total factor productivity in the agriculture sector are used in ABARE’s AusRegion model to determine the impacts on key agricultural commodity outputs (wheat, beef, sheep meat and wool), as well as on gross regional product. These outputs are expressed as deviations from a reference case at 2030. The reference case represents growth in these variables in the absence of any climate change impacts. Detailed information on the AusRegion model is available from ABARE’s website (www.abareconomics.com). impacts on pasture growth The projected patterns of pasture growth across Australia under the two illustrative climate change scenarios are presented in map set 2. In the high rainfall scenario, pasture growth is projected to increase in most of Australia’s agricultural regions, as increases in rainfall and temperature relative to the historical average enhance conditions for plant growth. However in parts of southern Australia the projected changes in rainfall and temperature in this scenario lead to lower pasture growth. In the low rainfall scenario, pasture growth is projected to decline across nearly all of the major crop growing regions of Australia. Parts of northern Australia are still projected to record increases in pasture growth under this scenario (relative to the reference case), although the size of the increases is small in absolute terms. impacts on productivity Assuming no policy driven or planned productivity improvements, the low rainfall scenario is estimated to result in a loss of agricultural productivity across much of southern Australia, particularly in the south west (map set 3). Productivity losses occur because crop yields decline in the face of lower rainfall, while livestock stocking rates decline as a result of reduced pasture availability. At the same time, an increase in agricultural productivity australian commodities > vol. 14 no. 1 > march quarter 2007 171 climate change

projected change in total factor productivity at is projected in northern Australia where 1 2030 as a result of climate change average rainfall under this scenario is higher change relative to the reference case relative to the reference case (that is, rainfall in northern Australia is generally higher under low rainfall scenario high rainfall scenario this scenario compared with the ‘no climate New Western New Western change’ scenario). South Wales Australia South Wales Australia % % % % Under the high rainfall scenario (and in the absence of any policy driven or planned wheat –4.2 –7.3 2.7 2.8 beef –1.7 na 1.1 na productivity improvements), the produc- sheep meat –1.8 –6.1 1.2 2.3 tivity of wheat and other crop production wool –2.2 –3.5 1.4 1.3 is projected to increase in all crop growing na Not applicable. regions through the positive effect of higher rainfall on crop yields. The projected increases in crop productivity are proportionately higher in much of New South Wales, where the increases in rainfall under this scenario are projected to be higher than in most other regions. Higher rainfall is also expected to lead to higher pasture growth in most regions, leading to increased productivity in the beef and other livestock industries. The increase in livestock sector productivity under this scenario is projected to occur in all regions except the southern most parts of Western Australia, South Australia and Victoria and all of Tasmania. In the two case study regions, the analysis suggests that broadacre agricultural productivity in the Western Australian region will be affected more signiﬁ cantly by climate change than the New South Wales region (table 1). For example, in the low rainfall scenario the productivity of wheat growing in the Western Australian region is estimated to be 7.3 per cent lower by 2030 compared with its level in the absence of climate change. In contrast, the corresponding decline in wheat growing productivity in the New South Wales region is 4.2 per cent. In both regions, however, the absolute magnitude of the impact of climate change on farm productivity, in the absence of any climate change (adaptation) response policy, is projected to be greater on crop industries than on livestock industries. This is because changes in rainfall resulting from climate change are estimated to have a proportionately greater impact on crop yields than they have on livestock production.

change in pasture growth index at 2030 as a result of climate change 2 change relative to the reference case low rainfall high rainfall

<–20% –20 to–10% –10 to–5% –5 to–2% –2 to 0% 0 to 2% 2 to 5% 5 to 10% 10 to 20%

172 australian commodities > vol. 14 no. 1 > march quarter 2007 climate change

change in total factor productivity at 2030 as a result of climate change 3 change relative to the reference case low rainfall high rainfall wheat wheat

low rainfall high rainfall beef beef

low rainfall high rainfall sheep sheep

low rainfall high rainfall wool wool

<–20% –20 to–10% –10 to–5% –5 to–2% –2 to 0% 0 to 2% 2 to 5% 5 to 10% 10 to 20% australian commodities > vol. 14 no. 1 > march quarter 2007 173 climate change

regional economic impacts Assuming that other factors remain unchanged, a loss (or gain) in broadacre agricultural productivity as a result of climate change will lead to a rise (reduction) in agricultural production costs, leading to a loss (gain) in competitiveness and, hence, output. As discussed earlier, climate change is likely to result in productivity changes across different agricultural activities to varying degrees. The associated output effects on key agricultural commodities for each of the case study regions under the low and high rainfall scenarios are presented in table 2, based on analysis using ABARE’s AusRegion model. The output impacts are in line with the productivity impacts discussed earlier (table 1). For example, the modelling results show that wheat production in the Western Australian region will be the most affected, falling under the low rainfall scenario by more than 13 per cent relative to the reference case at 2030 and increasing under the high rainfall scenario by more than 4 per cent relative to the reference case at 2030 (table 2). The analysis undertaken here indicates that the impacts of climate change on gross regional product in the Western Australian region are greater than in the New South Wales region (table 2). This refl ects not only the extent of climate change impacts on particular agricultural activities in the region but also the relative size and structure of agriculture in the Western Australian region. As discussed earlier, agriculture in the regional economic impacts at 2030 Western Australian regional economy is 2 change relative to the reference case more important and less diversifi ed than in the New South Wales regional economy. low rainfall scenario high rainfall scenario At 2030, it is projected that agriculture New Western New Western will account for about 50 per cent of the South Wales Australia South Wales Australia % % % % Western Australian regional economy, compared with about 25 per cent in the gross regional product –1.1 –6.5 0.6 2.2 wheat production –6.8 –13.4 4.4 4.5 New South Wales regional economy. In beef production –0.9 na 0.9 na the same year, the share of wheat in the wool and sheep total value of agricultural production is meat production –2.1 –5.2 1.1 1.5 projected to be more than 50 per cent in na Not applicable. the Western Australian region compared with about 30 per cent in the New South Wales region. Under the high rainfall scenario, where average broadacre farm productivity in the region is expected to increase as a result of climate change, the Western Australian region is projected to be better off, with gross regional product increasing by 2.2 per cent relative to the reference case at 2030. Under the low rainfall scenario, the adverse impacts of a hotter and drier climate are likely to be signifi cantly greater in the Western Austra- lian region than in the New South Wales region. Gross regional product in the Western Australian region is projected to fall by 6.5 per cent relative to the reference case at 2030. The corresponding fall in the central western slopes and plains of New South Wales is projected to be 1.1 per cent (table 2). role of on-farm technological adaptation At a regional level, the role that on-farm adaptation methods, such as diversifi cation of crop varieties, shifting cropping seasons or changing livestock breeds, could play in reducing the impacts of climate change on the agricultural sector is not well understood. Research shows that such methods could reduce the loss in yields associated with changes in temperature and rainfall patterns and, in the case of some commodities, even increase

174 australian commodities > vol. 14 no. 1 > march quarter 2007 climate change yields. Efforts to analyse the effects of adaptation technologies and practices on agricultural productivity under different climatic conditions are ongoing, but the costs and impacts of likely adaptation measures remain highly uncertain. Against this background, an exploratory modelling approach is undertaken in this study. The approach is based on the assumption that a suite of potential adaptation measures in response to climate change would raise agricultural productivity by 0.05–0.15 per cent a year. To put this into perspective, average productivity growth in Australian broadacre agriculture over the past twenty years has been approximately 2 per cent a year. Hence, the assumed productivity growth in this scenario resulting from adaptation measures, in excess of the business as usual productivity growth, is relatively conservative. The change in productivity in the two case study regions by 2030, taking into account both the impacts of climate change and the offsetting changes in total factor productivity effects of assumed adaptation measures under 3 under the low rainfall scenario at 2030, the low rainfall scenario, are presented in table 3. assuming adaptation responses to climate change The effect of the adaptation measures is to reduce (change relative to the reference case) the impacts of climate change by almost 50 per New South Wales Western Australia cent (tables 1, 3). For example, in the Western Australian region, under the low rainfall scenario, % % wheat –2.1 –3.6 climate change is projected to result in a produc- beef –0.8 na tivity loss in wheat production of 7.3 per cent by sheep meat –0.9 –3.0 2030 (table 1). With adaptation measures in wool –1.1 –1.7 place, this climate impact is reduced to a 3.6 per na Not applicable. cent loss in wheat productivity (table 3). Table 4 shows the impacts of climate change regional economic impacts at 2030 on the selected regional economies under the 4 under the low rainfall scenario low rainfall scenario when the assumed adapta- assuming adaptation responses to climate change tion measures are put in place. As expected, the (change relative to the reference case) adverse economic impacts of climate change on the case study regions are reduced substantially New South Wales Western Australia % % as a result of the implementation of the adaptation measures. For example, the impact of climate gross regional product –0.5 –3.3 wheat production –3.4 –6.7 change on gross regional product in the Western beef production –0.5 na Australian region changes from a fall of 6.5 per wool and sheep cent relative to the reference case at 2030 (table meat production –1.1 –2.6 2) to a loss of 3.3 per cent relative to the refer- na Not applicable. ence case when adaptation measures are put in place. While the above analysis provides a preliminary assessment of the regional economic impacts of climate change, there are a number of caveats that should be noted: » the projected impacts of climate change remain highly uncertain, as demonstrated by the very different projections from the two climate models used in the analysis. Hence, the results from the case studies should not be interpreted as deﬁ nitive — the focus in the analysis is on the potential economic impacts of two illustrative climate change scenarios. » the analysis focuses on the impacts of climate change at 2030. Climate change is an ongoing phenomenon and it is projected that more severe impacts will become apparent in the latter half of this century. Nevertheless, examining the effects of

australian commodities > vol. 14 no. 1 > march quarter 2007 175 climate change

climate change at 2030 provides an indication of the consequences of the likely early effects of climate change. » the analysis is confi ned to dryland broadacre agriculture, but the productivity of irrigated agriculture will also change as a result of changes in water availability. However as irrigated crops form a small part of the agricultural industries in the case study regions, the omission of the impacts on irrigated agriculture is unlikely to substantially affect the overall regional results reported in the paper. » the AusRegion model is a model of the Australian economy, and productivity changes in other countries resulting from climate change are not incorporated in the modelling. However, if the impacts of climate change were to be signifi cant in other countries then Australia’s economic outcomes would be affected by changes in relative productivity, as well as changes in international competitiveness, commodity prices and trade fl ows.

enhancing the capacity for adaptation The analysis presented here illustrates the exposure of some regions in Australia to adverse climate change outcomes and the potential role of adaptation in reducing or minimising these outcomes. However, the ability of the farm sector to implement cost effective and effi cient adaptation strategies will depend on a wide range of factors. At a national level, the factors that infl uence adaptive capacity include the level of national income, technological advancement, and relevant infrastructure (Brooks, Adger and Kelly 2005; Nelson et al. 2005, 2006). In general, Australia exhibits many of the characteristics necessary to ensure a high level of adaptive capacity in response to climate change. At the farm level, the factors that infl uence adaptive capacity include farmer education, diversity of on- and off-farm income sources, and levels of income (Nelson et al. 2005; Brooks and Adger 2005). In particular, a lack of diversity of income sources is one of the critical factors constraining adaptation and resulting in high levels of vulnerability to external shocks (Nelson et al. 2005). However it is also an element of adaptive capacity that can be constructively infl uenced by government policy, through investment in technology and infrastructure and the human and social capital necessary to take advantage of new economic opportunities. While there is debate about the relative importance of the roles of farmers and government in enhancing adaptive capacity, both groups have roles to play. Governments have traditionally played an important role in supporting Australian agriculture to deal with the effects of climate variability, particularly through their contribution to agricultural research and development. For example, government funding has played a critical role in facili- tating research into new crop varieties in Australia and other countries, including the United States. More generally, much of the rapid growth in productivity in Australian agriculture over the past thirty years can be attributed to the adoption by farmers of innovations made available by rural research and development providers. Continued government support for research and development, particularly in areas such as the genetic adaptation of crops and new and improved information systems on climate change impacts and adaptation options, are likely to be critical in enhancing the overall capacity of Australian farmers to adapt to climate change. Government is also important in ensuring that general policy settings promote rather than stifl e adaptation. For example, price and income subsidies in agriculture that suppress changes in farm incomes resulting from climate induced changes in yields reduce the

176 australian commodities > vol. 14 no. 1 > march quarter 2007 climate change incentive for farmers to adapt (Fankhauser et al. 1999). Similarly, fi xed or guaranteed water allocations for irrigated farming may reduce incentives for behavioural change in response to falling water supplies. Drought policy needs to take account of the effects that climate change will have on regional farm productivity to ensure the effi cient use of resources. Climate change may alter the relative productivity of farming regions throughout Australia and the world, with the likely effect of changing trade patterns. Hence, over the longer term, trade regimes need to be open and responsive to these changes. In Australia, the state and federal governments are already beginning to address the issue of adaptation through the Council of Australian Governments (COAG) process. The key elements of the National Adaptation Framework will include a schedule for medium to long term adaptation strategies, and a plan to strengthen knowledge of impacts and adaptation (National Resource Management Ministerial Council 2004). This is complemented by the National Resource Management Ministerial Council’s National Agricul- ture and Climate Change Action Plan 2006–2009. The objective in this action plan is to assist Australian governments to provide farmers and natural resource managers with a policy framework that embraces research and development and that promotes climate change adaptation and emission mitigation in agriculture. Adaptation to climate change is an integral part of agricultural production now and will become more important into the future as the impacts of climate change become more evident. In developing a strategy for adapting to climate change, one key challenge is dealing with uncertainty. Signifi cant uncertainty relates to the nature and extent of regional climate change impacts, impacts across agricultural industries, and impacts over time. The challenge for governments and agricultural industry stakeholders is to deal with these uncertainties through further research and the development of policies and farm management approaches that are fl exible enough to deal effectively with a range of potential climate change outcomes. references Adams, R.M., Hurd, B.H., and Reilly, J. 1999, Agriculture and Climate Change: A Review of the Impacts on US Agricultural Resources, Pew Center on Global Climate Change, Arlington. Beare, S. and Heaney, A. 2002, Climate Change and Water Resources in the Murray Darling Basin, Australia: Impacts and Possible Adaptation, ABARE, Canberra. Bindi, M. and Howden, M. 2004, Challenges and opportunities for cropping systems in a changing climate, Proceedings from the 4th International Crop Science Conference, 26 September–1 October, Brisbane. Brooks, N. and Adger, W.N. 2005, ‘Assessing and enhancing adaptive capacity’, in Lim, B., Spanger-Siegfried, E., Burton, I., Malone, E.L. and Huq, S. (eds), Adaptation Policy Frameworks for Climate Change, Cambridge University Press, New York, pp.165– 82. ——, —— and Kelly, P.M. 2005, ‘The determinants of vulnerability and adaptive capacity at the national level and the implications for adaptation’, Global Environmental Change, vol. 15, pp.151–63. Ellis, F. 2000, Rural Livelihoods and Diversity in Developing Countries, Oxford University Press, England. Fankhauser, S., Smith, J.B. and Tol, R.S.J. 1999, ‘Weathering climate change: some simple rules to guide adaptation decisions’, Ecological Economics, vol. 30, pp. 67–78.

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Howden, M., Ash, A., Barlow, S., Booth, T., Charles, S., Cechet, B., Crimp, S., Gifford, R., Hennessy, K., Jones, R., Kirschbaum, M., McKeon, G., Meinke, H., Park, S., Sutherst, B., Webb, L. and Whetton, P. 2006, An Overview of the Adaptive Capacity of the Austra- lian Agricultural Sector to Climate Change – Options, Costs and Benefi ts, CSIRO, Canberra. IPCC´´ (Intergovernmental Panel on Climate Change) 2001, Third Assessment Report – Climate Change, Cambridge University Press, England (www.ipcc.ch). —— 2007, Climate Change 2007: The Physical Science Basis, Summary for Policy Makers, Cambridge University Press, England (www.ipcc.ch). Kokic, P., Davidson, A. and Boero Rodrigez, V. 2006, ‘Australia’s grain industry: factors infl uencing productivity growth’, Australian Commodities, vol. 13, no. 4, pp. 705–12. Kurukulasuriya, P. and Rosenthal, S. (2003). Climate Change and Agriculture: A Review of Impacts and Adaptations, World Bank Climate Change Series Paper no. 91, Paper prepared and published for the Rural Development Group and Environment Depart- ment of the World Bank. Littleboy, M. and McKeon, G.M. 1997, ‘Subroutine GRASP: grass production model – documentation of the Marcoola version of subroutine GRASP’, Appendix 2 in Evalu- ating the Risks of Pasture and Land Degradation in Native Pasture in Queensland, Final Project Report for Rural Industries and Research Development Corporation project DAQ124A, Canberra. Nakicenovic, N., Alcamo, J., Davis, G., de Vries, B., Fenhann, J., Gaffi n, S., Gregory, K., Grübler, A., Jung, T.Y., Kram, J., La Rovere, E.L., Michaelis, L., Mori, S., Morita, T., Pepper, H., Pitcher, H., Price, L., Raihi, K., Roehrl,A., Rogner, H.H., Sanskovski, A., Schlesinger, M., Shukla, P., Smith, S.Swart, R.,van Rooijen,S., Victor, N. and Dado, Z. 2000, IPCC Special Report on Emissions Scenarios, Cambridge University Press, England. Natural Resource Management Ministerial Council 2004, National Biodiversity and Climate Change Action Plan 2004–2007, Department of the Environment and Heri- tage, Canberra (www.environment.gov.au/biodiversity/publications/nbccap/). Nelson, R., Kokic, P., Elliston, L. and King, J. 2005, ‘Structural adjustment: a vulnerability index for Australian broadacre agriculture’, Australian Commodities, vol. 12, no. 1, pp. 171–9. Nelson, R., Webb, T. and Byron, I. 2006, Prioritising Social and Economic Information for Natural Resource Management Policy, ABARE/BRS Report to the National Land and Water Resources Audit, Canberra. Steffen W.L. and Candadell, P. 2005, Carbon Dioxide Fertilisation and Climate Change Policy, A report prepared for the Australian Greenhouse Offi ce, Canberra. Stern, N. 2006, The Economics of Climate Change: The Stern Review, Cambridge Univer- sity Press, Massachusetts (www.hm-treasury.gov.uk/Independent_Reviews/stern_ review_economics_climate_change/sternreview_index.cfm). Tubiello, F.N. 2005, ‘Climate variability and agriculture: perspectives on current and future challenges’, Impact of Climate Change, Variability and Weather Fluctuations on Crops and their Produce Markets, B Knight (ed.), Impact Reports, Cambridge. Whetton, P.H., McInnes, K.L., Jones, R.N., Hennessy, K.J., Suppiah, R., Page, C.M., Barthols, J. and Durack, P.J. 2005, Australian Climate Change Projections for Impact Assessment and Policy Application: A Review, CSIRO, Melbourne.

178 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performancetrade reform

> colinlisa elliston mues > > +61+61 22 62726272 20402091 >> [email protected]@abare.gov.au farm ﬁ nancial performance Australian farm income, debt and investment, 2004-05 to 2006-07

> peter martin, colin mues, paul phillips, walter shafron, thuy van mellor, phil kokic, rohan nelson and rhonda treadwell

» Severe drought across southern and central Australia is projected to reduce farm incomes in 2006-07 to their lowest level in over thirty years. » Farm cash incomes for grain farms in New South Wales, South Australia and Victoria are estimated to have fallen the most, and the dairy industry has also been particularly affected. » Most Australian farms entered 2006-07 with relatively high farm equity. However, a large increase in the proportion of farms recording negative farm cash incomes in 2006-07 is likely to result in signifi cant increases in farm debt. » Continued strong prices for major commodities, particularly grains and beef, together with high levels of farm investment in recent years, remain positive factors supporting farm income recovery and farm values after 2006-07. » While fi nancial performance is obviously important to farmers’ ability to manage the impact of the current drought, human social and biophysical factors are also important contributors to the resilience of farm businesses. farm income falls sharply Data from ABARE’s Australian agricultural and grazing industries survey and Australian dairy industry survey are used in this analysis to gain insights into the performance of Australian farms principally over the period since 2004-05, including projected farm fi nancial performance in 2006-07. The fi nancial performance of Australian farms improved in 2004-05 and 2005-06, following a sharp fall in the fi nancial performance of Australian farms in 2002-03 that resulted from the onset of drought. Improved seasonal conditions in parts of Australia in 2004-05 and during the spring of 2005-06 underpinned an increase in farm incomes. However, the return of severe drought across most of southern Australia in 2006 has led to a signifi cant reduction in farm production and incomes in 2006-07. In January 2007 around 60 per cent of Australian broadacre farmers reported the existence of drought conditions (map 1). This is similar to the proportion of producers who reported drought in October 2002. Over the fi ve years to 2005-06, when seasonal conditions were mixed but generally below average, prices for livestock and grains remained relatively high, assisting farmers to manage cash fl ow when production had fallen. In particular, high beef cattle prices

australian commodities > vol. 14 no. 1 > march quarter 2007 179 farm performance

seasonal conditions were crucial in supporting farm incomes, as more 1 Australian farms carry beef cattle than engage in any other farming enterprise. January 2007 Notwithstanding the mix of seasonal conditions in the fi ve years to 2005-06, demand for rural land was strong which resulted in rising farm capital values. This served to offset the impact of recent increases in farm debt on farm equity levels. At the end of June 2006 the average equity ratio for Australian broadacre farms was 90 per cent, which is relatively high in historical terms. However, with farm debt projected to increase in 2006-07 and diminished prospects for further increases in land drought values, farmers will be more reliant on farm income below average and debt management to maintain farm equity in average above average the medium term. no data October 2005 fi nancial performance of Australian farms Each year ABARE interviews a large number of producers from the broadacre and dairy sectors of Australian agriculture as part of its annual broadacre and dairy surveys. The information collected provides a basis for analysing the current fi nancial position of farmers in these industries and expected changes in the short term. Information for the preceding fi nancial year is collected between July and October, usually by face to face interview. Esti- mates are also collected by telephone for the current fi nancial year, usually in October and November. However, in October and November 2006 there was more than usual uncertainty about production outcomes over the remainder of the fi nancial year. Many producers were waiting to see how seasonal conditions unfolded over summer before making critical summer crop and livestock selling decisions. Conse- quently, ABARE recontacted farmers in January 2007 to update production and fi nancial estimates for the current fi nancial year. farm receipts Overall, average total cash receipts for broadacre farms are projected to fall by nearly 20 per cent in 2006-07, with the bulk of this reduction being driven by reduced crop receipts (table 1). There were severe rainfall defi ciencies over most winter cropping regions of Australia during 2006, particularly in late winter and spring. The effect of low rainfall over this period was also exacerbated by record high temperatures. Refl ecting the extreme conditions, winter grains production in 2006-07 was around 60 per cent lower than the previous year, making it the lowest winter crop production in over ten years. Winter crop production is reported to have been sharply reduced in all areas except Western Australia, northern New South Wales and central Queensland where seasonal conditions were relatively more favourable. In addition, prospects for 2006-07 summer crops remain

180 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance below average, despite some rains in early 2007. Extremely dry conditions in northern New South Wales and southern Queensland during the early planting period in late 2006 are expected to limit potential summer crop production. The reduction in crop production will be partially offset by higher crop prices. Prices received by farmers for all major grains and oilseeds are forecast to be 20–30 per cent higher in 2006-07 compared with 2005-06 because of reduced world grain production and stocks, coupled with increased domestic feedgrain demand for livestock feeding. Crop receipts will also be supported by payments from the large 2005-06 crop that will be received in the 2006-07 fi nancial year. Despite these factors, average crop receipts are projected to fall by nearly 40 per cent for broadacre farms in 2006-07. Farm receipts from sheep and lamb sales are also projected to fall in 2006-07. Lower saleyard prices for sheep and lambs, refl ecting an increase in the number of stock sold and the sale of unfi nished stock are projected to more than offset the effect on revenue of an increase in the number of sheep sold, particularly in South Australia and Victoria. The latest survey data indicate that wool production per farm will fall by around 9 per cent in 2006-07, primarily through a reduction in the number of sheep shorn. However, the impact of reduced wool production on farm receipts is projected to be partially offset by the recent recovery in the wool market and sale of some wool from on-farm stocks. With low pasture availability and high feed prices, producers in southern Australia intend to increase the number of beef cattle sold and reduce herd numbers. Higher yardings, together with the sale of less fi nished stock, are forecast to result in average prices received for beef cattle being lower than in the previous year despite continued strength in the Australian beef market. Receipts from beef cattle sales are projected to

ﬁ nancial performance – all broadacre industries 1 average per farm

2004-05 2005-06 p 2006-07 s total cash receipts $ 381 695 359 000 (6) 288 900 total cash costs $ 308 911 277 710 (5) 262 300 farm cash income $ 72 785 81 290 (11) 26 600 farms with negative farm cash income % 28 23 (8) 44 farm business profi t $ 3 693 8 620 (96) –59 800 farms with negative farm business profi t % 61 58 (3) 77 profi t at full equity – excl. capital appreciation $ 32 351 41 540 (21) –22 200 – incl. capital appreciation $ 225 373 233 070 (15) na farm capital at 30 June a $ 3 131 247 3 426 030 (4) na net capital additions $ 47 191 28 400 (78) na farm debt at 30 June b $ 322 640 357 380 (6) 412 700 equity at 30 June b c $ 2 691 881 3 054 370 (5) na equity ratio b d % 89 90 (1) na harvest loans at 30 June e $ 10 740 11 730 (13) na farm liquid assets at 30 June b $ 121 965 134 840 (15) na farm management deposits (FMDs) at 30 June b $ 26 990 21 180 (9) na share of farms with FMDs at 30 June b % 24 19 (7) na rate of return f – excl. capital appreciation % 1.1 1.3 (19) –0.6 – incl. capital appreciation % 7.8 7.3 (13) na off–farm income of owner manager and spouse b $ 27 588 31 200 (6) na a Excludes leased plant and equipment. b Average per responding farm. c Farm capital minus farm debt. d Equit y ex pres s ed as a p ercentage of farm capital. e Harvest loans are not included in farm debt. f Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available. australian commodities > vol. 14 no. 1 > march quarter 2007 181 farm performance

fall for producers in southern Australia, with lower saleyard prices more than offsetting the increase in the number of beef cattle sold. In contrast, beef producers in northern Australia are enjoying average or above average seasonal conditions. These producers are attempting to increase herd numbers, which serves to subdue beef receipts in the short term, although incomes are likely to improve in the medium term once turnoff increases. Milk production will be reduced in 2006-07 as a consequence of drought across most dairying regions. Drought and lower availability of irrigation water have resulted in reduced pasture growth and have driven fodder costs higher. This has led many dairy farms to dry off cows early and reduce herd numbers in anticipation of continued drought conditions. As a consequence, average milk production per farm is forecast to fall by around 10 per cent in 2006-07. Early in 2006-07, world prices for dairy products were lower than the previous year although they have recently exhibited some signs of recovery. Average Australian farmgate milk prices are forecast to fall slightly in 2006-07 although this is not uniform across all states. Overall, milk receipts are forecast to fall sharply in 2006-07, mainly as a result of the drop in production. farm costs Average cash costs for broadacre farms fell by around 8 per cent in 2005-06 (table 1), largely owing to a signiﬁ cant reduction in livestock purchases that more than offset the higher costs associated with the production, harvest and sale of the large winter crop, and higher interest payments. The latter was mainly the result of an increase in average farm debt as expenditure on capital items continued at historically high levels. In contrast, cash costs for dairy farmers rose by around 20 per cent, mainly from higher labour costs, fodder cost and interest payments.

major ﬁ nancial performance indicators farm cash income = total cash receipts – total cash costs Total revenues received Payments made by the farm business for by the farm business materials and services and for permanent during the ﬁ nancial year and casual hired labour (excluding owner manager, partner and family labour)

farm business proﬁ t = farm cash income + changes in – depreciation – imputed trading stock labour costs

profi t at full equity = farm business profi t + rent + interest and – depreciation (Return produced by all fi nance lease on leased items the resources used in the payments farm business)

rate of return = proﬁ t at full equity total opening capital x 100 (Return to all capital used)

off-farm income = wages off-farm + other business income + investment + social (Owner manager welfare and spouse only) payments

182 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance

In 2006-07, total farm cash costs for broadacre farms are projected to fall by a further 5 per cent as farmers trim costs in the face of reduced income. Signifi cant reductions are expected in the cost of livestock purchases, repairs and maintenance and crop harvesting and marketing costs. However, these reductions are largely offset by higher fodder costs and increased interest payments associated with the expected increase in average farm debt. Another factor that will constrain the extent to which broadacre farmers can reduce costs in 2006-07 is the expected cost of planting the 2007 winter crops. Broadacre producers currently indicate that given a return to more normal seasonal conditions in autumn 2007 they intend to plant an expanded area to winter crops this year and most of the planting costs for this crop will be incurred in this fi nancial year. The expected increase in cash costs on Australian dairy farms in 2006-07 is almost entirely the result of higher fodder costs. Very dry seasonal conditions have signifi cantly reduced pasture availability in most dairying regions and in order to secure fodder supplies producers have had to pay signifi cantly higher prices than in previous years. Fodder costs aside, other cash costs for dairy farms are projected to fall slightly as producers attempt to mitigate the effect of lower receipts and high fodder costs on their fi nancial performance. farm cash income and farm business profi t In 2003-04 and 2004-05, farm cash income for the broadacre industries as a group improved steadily as production on these farms recovered from the 2002-03 drought. High livestock and crop prices over this period also helped the recovery. In 2005-06, crop production improved signifi cantly and expenditure on livestock purchases and feed fell, resulting in a further modest increase in farm cash income (fi gure A). In historical terms farm fi nancial performance in 2006-07 is projected to be one of the poorest on record. A very large reduction in total cash receipts per farm, coupled with a relatively small reduction in total cash costs, is projected to result in a fall in farm cash income for broadacre industries of nearly two-thirds. Farm cash income for broadacre farms is projected to fall from an average of around $81 000 per farm in 2005-06 to less than $27 000 in 2006-07 — the largest year on year fall in farm cash income recorded in the 29 years during which the current series of ABARE surveys have been conducted (fi gure A). Farm cash income is a measure of the cash funds available 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 all broadacre industries short term measure of farm performance because it A takes no account of depreciation or changes in farm farm cash income inventories. A longer term measure of profi tability that 100 takes account of capital depreciation and changes in 80 inventories of livestock, fodder, grain and wool is farm 60 business profi t. 40 Average business profi t for farms in the broadacre industries is expected to fall in 2006-07 by an even 20 2006-07 larger amount than the reduction in farm cash income $’000 (table 1, fi gure A). This refl ects a projected rundown –20 in inventories of livestock and grains on many farms, particularly those in cropping regions of southern –40 farm business profit Australia. Reduced livestock numbers will subdue –60 farms’ ability to generate cash fl ow beyond 2006-07. 1978 1985 1992 1999 2006 However, an exception to this pattern is in the northern -79 -86 -93 -2000 -07 australian commodities > vol. 14 no. 1 > march quarter 2007 183 farm performance

regions of Australia where many proper- estimated value of agricultural operations ties are taking advantage of improved ABARE’s annual broadacre and dairy industry surveys only seasonal conditions by beginning to include farms above a minimum size threshold to exclude rebuild cattle numbers. In Queensland, for noncommercial businesses. This size threshold is based example, the reduction in average income on the estimated value of agricultural operations (EVAO) for broadacre farms refl ects a mixture of as calculated by the Australian Bureau of Statistics. factors, such as reduced crop receipts, ABARE has periodically changed the EVAO cutoff fewer livestock sales as producers begin over the life of the two surveys. For the 2005-06 collection, ABARE raised the EVAO cutoff from $22 500 to to build up cattle herd numbers, and $40 000. Estimates for 2004-05 have also been made lower beef cattle prices. However, farm using the same cutoff in real terms. Prior to this change, the business profi t is not expected to fall by as last time the EVAO cutoff was changed was for the collec- much as farm cash income due to a build tion of data for 1991-92 when it was lifted from $20 000 up in livestock inventories. to $22 500. It was kept at that level in nominal terms until the most recent collection. rates of return broadacre industries Rates of return to total farm capital including capital appreciation have been relatively wheat and other crops industry high in 2003-04, 2004-05 and 2005- The wheat and other crops industry represents the more 06 (table 1). Strong demand for rural specialised producers of cereal grains, coarse grains, land in the past three years has resulted pulses and oilseeds. in sharply increased land values in many mixed livestock–crops industry farming regions, raising the total capital The mixed livestock–crops industry covers farms engaged value of farms. Rising farm capital values in the production of sheep and/or beef cattle in conjunc- in recent years have resulted in historically tion with substantial activity in broadacre crops such as high rates of return including capital appre- wheat, coarse grains, oilseeds and pulses. ciation, but have reduced rates of return sheep industry excluding capital appreciation. Rates The sheep industry represents the more specialised of return excluding capital appreciation producers of sheep and wool. However, the number have also been subdued in many areas of properties classifi ed to the industry, along with the by poor farm business profi ts resulting from industry’s contribution to wool production, has declined below average seasonal conditions. With substantially since the early 1990s as producers diversi- very low farm business profi t projected for fi ed enterprises. Currently, sheep industry farms account 2006-07, rates of return excluding capital for only around a third of Australia’s wool production. The majority of both wool and sheep meat production occurs appreciation are expected to also be on mixed enterprise farms, particularly on mixed livestock– among the lowest on record. crops industry farms.

sheep–beef industry performance, by state The sheep–beef industry covers properties engaged in The producer rating of seasonal condi- running sheep and beef cattle. As for the sheep and beef industries, this industry also contains a large number of tions in January 2007 (map 1) is mirrored small farms. in the projected ﬁ nancial performance of broadacre farms across Australian states beef industry (table 2). Average farm cash income is The beef industry covers properties engaged mainly in projected to be very close to zero in New running beef cattle and accounts for around 60 per cent South Wales and Victoria in 2006-07, of Australia’s beef production. The beef industry contains and positive but much lower than in the a large number of small farms. previous year in Queensland, Tasmania and South Australia. These poor results

184 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance

ﬁ nancial performance, by state – all broadacre industries 2 average per farm

New South Wales Victoria 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 303 190 323 804 (11) 227 010 436 320 265 930 (10) 187 145 total cash costs $ 230 790 247 805 (9) 222 556 374 471 203 394 (11) 187 124 farm cash income $ 72 400 75 999 (23) 4 454 61 849 62 536 (12) 21 farms with negative farm cash income % 30 22 (15) 55 26 18 (20) 45 farm business profi t $ 3 114 11 176 (119) –85 648 3 369 4 277 (143) –73 287 farms with negative farm business profi t % 65 62 (5) 83 56 53 (9) 84 profi t at full equity – excl. capital appreciation $ 28 645 37 616 (38) –56 848 24 157 29 586 (21) –42 265 – incl. capital appreciation $ 170 210 147 812 (38) na 225 026 115 002 (20) na farm capital at 30 June a $ 2 809 653 2 922 354 (10) na 2 601 239 2 765 766 (5) na net capital additions $ 39 366 26 970 (180) na 39 048 24 062 (103) na farm debt at 30 June b $ 279 799 289 887 (9) 328 468 198 296 226 496 (9) 293 006 equity at 30 June b c $ 2 438 418 2 620 848 (11) na 2 374 246 2 526 443 (6) na equity ratio b d % 89.7 90.0 (1) na 92.3 91.8 (1) na harvest loans at 30 June e $ 3 312 3 135 (29) na 2 557 4 479 (36) na farm liquid assets at 30 June b $ 110 597 163 422 (34) na 118 471 74 285 (14) na farm management deposits (FMDs) at 30 June b $ 16 441 15 490 (19) na 23 731 20 320 (21) na share of farms with FMDs at 30 June b % 19 17 (16) na 25 22 (16) na rate of return f – excl. capital appreciation % 1.1 1.4 (31) –1.9 1.0 1.1 (21) –1.5 – incl. capital appreciation % 6.5 5.3 (29) na 9.5 4.3 (20) na off-farm income of owner manager and spouse b $ 28 425 33 465 (19) na 28 233 30 719 (21) na Queensland Western Australia 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 355 521 400 941 (27) 324 254 541 212 526 863 (6) 566 009 total cash costs $ 301 121 299 414 (22) 303 153 430 061 434 452 (7) 442 549 farm cash income $ 54 400 101 527 (47) 21 101 111 151 92 411 (16) 123 460 farms with negative farm cash income % 32 27 (12) 42 25 28 (21) 28 farm business profi t $ –2 925 1 312 (3640) –50 279 26 285 3 099 (520) –298 farms with negative farm business profi t % 66 63 (7) 71 51 55 (12) 60 profi t at full equity – excl. capital appreciation $ 31 587 43 182 (119) 1 161 74 475 57 978 (26) 59 701 – incl. capital appreciation $ 293 688 393 249 (41) na 351 820 550 989 (27) na farm capital at 30 June a $ 3 867 884 4 363 102 (16) na 3 819 184 4 615 653 (8) na net capital additions $ 94 811 5 747 (1064) na 27 244 32 791 (109) na farm debt at 30 June b $ 440 595 500 486 (17) 606 978 516 144 616 797 (12) 682 339 equity at 30 June b c $ 3 214 019 3 844 665 (17) na 3 132 769 3 972 338 (8) na equity ratio b d % 87.9 88.5 (2) na 85.9 86.6 (2) na harvest loans at 30 June e $ 1 901 1 085 (67) na 61 034 64 769 (15) na farm liquid assets at 30 June b $ 102 303 93 573 (18) na 183 076 215 471 (16) na farm management deposits (FMDs) at 30 June b $ 32 953 21 615 (17) na 37 368 27 584 (22) na share of farms with FMDs at 30 June b % 23 18 (15) na 31 19 (20) na rate of return f – excl. capital appreciation % 0.9 1.1 (105) 0.0 2.1 1.4 (26) 1.3 – incl. capital appreciation % 8.3 9.8 (28) na 10.0 13.5 (26) na off-farm income of owner manager and spouse b $ 31 503 28 601 (19) na 29 026 29 830 (21) na

australian commodities > vol. 14 no. 1 > march quarter 2007 185 farm performance

ﬁ nancial performance, by state – all broadacre industries 2 average per farm

South Australia Tasmania 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s total cash receipts $ 352 151 372 365 (10) 295 013 326 999 282 864 (14) 190 793 total cash costs $ 270 983 292 084 (11) 252 869 238 292 209 849 (11) 164 628 farm cash income $ 81 169 80 281 (13) 42 145 88 707 73 015 (25) 26 166 farms with negative farm cash income % 24 21 (22) 36 11 23 (29) 40 farm business profi t $ –15 102 13 584 (77) –50 851 14 878 24 653 (22) –44 234 farms with negative farm business profi t % 62 53 (10) 74 51 48 (24) 82 profi t at full equity – excl. capital appreciation $ 8 334 42 713 (23) – 19 069 33 722 48 742 (19) –24 264 – incl. capital appreciation $ 122 174 103 019 (27) na 357 521 157 393 (27) na farm capital at 1 July a $ 3 024 063 3 217 247 (6) na 3 024 380 3 237 904 (12) na net capital additions $ 39 036 77 873 (85) na 10 342 –27 396 (96) na farm debt at 30 June b $ 291 926 309 364 (11) 328 354 216 771 276 334 (27) 332 046 equity at 30 June b c $ 2 647 239 2 900 361 (6) na 2 629 361 2 958 026 (13) na equity ratio b d % 90.1 90.4 (1) na 92.4 91.5 (1) na harvest loans at 30 June e $ 7 802 10 883 (25) na 0 0 (0) na farm liquid assets at 30 June b $ 119 842 142 318 (11) na 201 771 133 430 (38) na farm management deposits (FMDs) at 30 June b $ 42 841 30 697 (18) na 28 219 21 267 (56) na share of farms with FMDs at 30 June b % 35 24 (17) na 24 18 (43) na rate of return f – excl. capital appreciation % 0.3 1.4 (21) –0.6 1.2 1.6 (15) –0.8 – incl. capital appreciation % 4.2 3.4 (26) na 13.2 5.0 (25) na off-farm income of owner manager and spouse b $ 17 800 30 951 (19) na 34 338 32 648 (21) na Northern Territory Australia 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 1 427 516 1 479 737 (10) 1 234 701 381 873 358 998 (10) 288 905 total cash costs $ 1 541 574 1 004 533 (11) 1 179 154 309 256 277 712 (11) 262 271 farm cash income $ –114 058 475 204 (13) 55 547 72 616 81 286 (13) 26 634 farms with negative farm cash income % 42 36 (22) 46 28 23 (22) 44 farm business profi t $ 165 470 405 446 (77) 271 894 3 487 8 621 (77) –59 787 farms with negative farm business profi t % 44 45 (10) 34 61 58 (10) 77 profi t at full equity – excl. capital appreciation $ 213 384 473 065 (23) 344 384 32 119 41 538 (23) –22 228 – incl. capital appreciation $ 769 578 1 338 705 (27) na 226 603 233 068 (27) na farm capital at 30 June a $ 11 072 026 12 160 092 (6) na 3 134 689 3 426 025 (6) na net capital additions $ 33 391 – 29 502 (85) na 47 001 28 396 (85) na farm debt at 30 June b $ 560 037 560 883 (11) 732 801 321 997 357 382 (11) 412 685 equity at 30 June b c $ 7 477 625 11 572 709 (6) na 2 696 590 3 054 371 (6) na equity ratio b d % 93 95 (1) na 89 90 (1) na harvest loans at 30 June e $ 0 0 (25) na 10 706 11 728 (25) na farm liquid assets at 30 June b $ 185 635 145 991 (11) na 122 194 134 837 (11) na farm management deposits (FMDs) at 30 June b $ 18 039 28 082 (18) na 26 901 21 178 (18) na share of farms with FMDs at 30 June b % 15 13 (17) na 24 19 (17) na rate of return f – excl. capital appreciation % 2.1 4.2 (21) 2.9 1.1 1.3 (21) –0.6 – incl. capital appreciation % 7.6 11.9 (26) n a 7.8 7. 3 (26) na off-farm income of owner manager and spouse b $ 14 924 27 059 (19) na 14 924 31 199 (21) 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 Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

186 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance

ﬁ nancial performance, by state – dairy industry 3 average per farm

New South Wales Victoria 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s total cash receipts $ 342 307 473 920 (4) 422 000 358 028 399 860 (5) 349 500 total cash costs $ 282 650 403 900 (6) 419 700 267 719 307 980 (6) 340 600 farm cash income $ 59 658 70 020 (22) 2 300 90 308 91 880 (12) 8 800 farms with negative farm cash income % 13 20 (28) 48 3 13 (32) 54 farm business profi t $ 729 –140 (11078) –103 000 29 306 25 170 (41) –86 100 farms with negative farm business profi t % 62 61 (9) 75 36 47 (18) 84 profi t at full equity – excl. capital appreciation $ 23 872 38 100 (40) – 67 900 65 134 67 710 (17) –43 000 – incl. capital appreciation $ 231 888 106 720 (78) na 146 691 111 340 (77) na farm capital at 30 June a $ 2 905 215 3 758 600 (11) na 2 105 608 2 495 830 (5) na net capital additions $ 40 826 45 130 (57) na 32 070 47 320 (41) na farm debt at 30 June b $ 232 960 384 000 (15) 427 300 346 271 430 910 (12) 478 700 equity at 30 June b c $ 2 719 719 3 359 420 (12) na 1 699 122 2 057 710 (6) na equity ratio b d % 92 90 (2) na 83 83 (2) na farm liquid assets at 30 June b $ 72 659 122 530 (17) na 91 351 71 780 (23) na farm management deposits (FMDs) at 30 June b $ 13 621 18 350 (38) na 9 535 10 530 (28) na share of farms with FMDs at 30 June b % 11 14 (33) na 20 14 (31) na annual payment from DSAP and SDAS f $ 22 986 21 377 (33) na 11 266 12 393 (31) na rate of return g – excl. capital appreciation % 0.9 1.0 (43) –1.8 3.3 2.8 (17) –1. 7 – incl. capital appreciation % 8.8 2.9 (83) na 7.4 4.7 (80) na off-farm income of owner–manager and spouse b $ 18 118 25 350 (38) na 24 660 22 100 (28) na Queensland Western Australia 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 255 154 335 630 (5) 342 600 432 692 521 610 (5) 492 300 total cash costs $ 195 358 267 520 (7) 296 000 360 040 407 900 (6) 397 200 farm cash income $ 59 797 68 110 (20) 46 600 72 652 113 710 (13) 95 100 farms with negative farm cash income % 12 18 (53) 21 11 12 (43) 25 farm business profi t $ –2 880 15 850 (86) –55 500 1 532 51 550 (31) 5 800 farms with negative farm business profi t % 54 37 (30) 80 58 25 (43) 46 profi t at full equity – excl. capital appreciation $ 15 500 40 760 (32) –20 700 42 626 103 830 (15) 64 100 – incl. capital appreciation $ 233 188 156 370 (47) na 306 633 1 474 420 (18) na farm capital at 30 June a $ 2 206 962 2 643 650 (9) na 3 859 782 6 504 780 (7) na net capital additions $ 3 191 41 340 (72) na –29 752 59 250 (35) na farm debt at 30 June b $ 231 739 370 620 (18) 344 000 478 006 593 410 (10) 688 200 equity at 30 June b c $ 2 004 486 2 261 430 (11) na 3 348 700 5 900 490 (8) na equity ratio b d % 90 86 (4) na 88 91 (1) na farm liquid assets at 30 June b $ 54 648 71 830 (30) na 47 602 129 340 (39) na farm management deposits (FMDs) at 30 June b $ 11 710 11 780 (62) na 14 242 24 650 (65) na share of farms with FMDs at 30 June b % 12 12 (52) na 11 14 (55) na annual payment from DSAP and SDAS f $ 22 880 24 253 (52) na 32 721 31 412 (55) na rate of return g – excl. capital appreciation % 0.8 1.7 (30) –0.7 1.2 2.1 (16) 1.0 – incl. capital appreciation % 11.8 6.4 (46) na 8.5 29.1 (23) na off-farm income of owner-manager and spouse b $ 23 945 23 770 (38) na 14 218 13 730 (28) na

australian commodities > vol. 14 no. 1 > march quarter 2007 187 farm performance

ﬁ nancial performance, by state – dairy industry 3 average per farm

South Australia Tasmania 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 471 003 558 960 (6) 580 200 402 119 451 000 (3) 450 700 total cash costs $ 385 181 505 390 (5) 574 400 343 413 360 090 (4) 372 800 farm cash income $ 85 822 53 570 (47) 5 700 58 706 90 910 (9) 77 900 farms with negative farm cash income % 5 23 (54) 33 15 16 (21) 12 farm business profi t $ 19 482 –22 730 (151) –120 000 17 425 12 260 (39) –4 900 farms with negative farm business profi t % 38 50 (23) 55 48 62 (12) 52 profi t at full equity – excl. capital appreciation $ 54 555 28 510 (112) –67 800 69 597 60 990 (13) 47 200 – incl. capital appreciation $ 154 431 115 640 (33) na 374 413 644 340 (35) na farm capital at 1 July a $ 2 494 506 2 848 180 (6) na 2 478 489 3 300 130 (4) na net capital additions $ 84 368 61 750 (32) na 28 527 54 900 (28) na farm debt at 30 June b $ 360 153 571 020 (12) 679 600 548 791 563 070 (8) 752 900 equity at 30 June b c $ 2 141 793 2 270 520 (8) na 1 908 934 2 731 080 (4) na equity ratio b d % 86 80 (3) na 78 83 (1) na farm liquid assets at 30 June b $ 66 397 108 620 (50) na 20 213 28 930 (15) na farm management deposits (FMDs) at 30 June b $ 8 327 7 380 (58) na 3 670 9 740 (20) na share of farms with FMDs at 30 June b % 22 14 (59) na 12 11 (22) na annual payment from DSAP and SDAS f $ 21 116 20 483 (59) na 13 664 14 074 (22) na rate of return g – excl. capital appreciation % 2.4 1.1 (109) –2.1 3.3 2.3 (13) 1.5 – incl. capital appreciation % 6.7 4.3 (32) na 17.9 24.4 (36) na off-farm income of owner–manager and spouse b $ 6 751 12 320 (38) na 8 199 12 410 (28) na

Australia 2004–05 2005–06 p 2006–07 s

total cash receipts $ 355 390 416 270 (6) 377 800 total cash costs $ 275 002 330 240 (5) 360 000 farm cash income $ 80 388 86 030 (47) 17 800 farms with negative farm cash income % 6 15 (54) 46 farm business profi t $ 19 967 19 260 (151) –79 500 farms with negative farm business profi t % 43 48 (23) 78 profi t at full equity – excl. capital appreciation $ 53 213 60 750 (112) –36 700 – incl. capital appreciation $ 185 222 185 220 (33) na farm capital at 30 June a $ 2 321 718 2 830 280 (6) na net capital additions $ 30 693 47 990 (32) na farm debt at 30 June b $ 334 588 439 020 (12) 491 000 equity at 30 June b c $ 1 961 237 2 382 740 (8) na equity ratio b d % 85 84 (3) na farm liquid assets at 30 June b $ 77 517 78 470 (50) na farm management deposits (FMDs) at 30 June b $ 10 125 11 740 (58) na

share of farms with FMDs at 30 June b % 17 14 (59) na annual payment from DSAP and SDAS f $ 15 634 15 321 (59) na rate of return g – excl. capital appreciation % 2.5 2.3 (109) –1.3 – incl. capital appreciation % 8.6 7.0 (32) na off-farm income of owner–manager and spouse b $ 21 656 21 360 (38) 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. p Preliminary estimates. s Provisional estimates. na Not available. 188 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance refl ect the combined impact of widespread farm cash income crop failures that have drastically reduced total B crop receipts and lower prices for beef cattle grains and sheep. Farm cash income is also projected to be wheat and other crops sharply lower in the Northern Territory, primarily refl ecting increases in transfers onto Northern 150 Territory properties compared with the previous year, while transfers off and sales remained relatively unchanged. 100 Average incomes in Western Australia are projected to increase in 2006-07 to just over $120 000 per farm. Western Australian winter 50 crop production in 2006 was less affected by mixed livestock–crops below average seasonal conditions, although 2006-07 this was not uniform across the state. Grain $’000 producers in the northern parts of the cropping 1978 1985 1992 1999 2006 zone were particularly affected by the dry -79 -86 -93 -2000 -07 season and are expected to record poorer farm sheep performance than their counterparts elsewhere in the state. sheep However, at the state level, carryover 100 payments from the previous year’s winter crop 80 helped maintain crop receipts. The major factor behind the rise in farm cash income was a lift sheep–beef 60 in receipts from cattle sales. However, higher cattle sales led to a reduction in herd numbers 40 which, in turn, is refl ected in the drop in farm business profi t. 20 The average farm cash income for dairy 2006-07 farmers in Victoria, New South Wales and South $’000 Australia is projected to fall considerably in 1978 1985 1992 1999 2006 2006-07, with receipts barely suffi cient to cover -79 -86 -93 -2000 -07 cash costs (table 3). The higher cost of fodder, caused by reduced pasture availability and beef much higher fodder prices, was a major factor affecting the fi nancial performance of farms in 100 these states. This was further compounded by lower milk production and sales. 80 performance, by industry 60

Summary information on fi nancial performance 40 in Australian broadacre and dairy industries is given in table 4 and fi gures B and C, while 20 detailed estimates are provided in table 5. For 2006-07 the purposes of survey design, analysis and data $’000 presentation ABARE uses the Australian and 1978 1985 1992 1999 2006 New Zealand Standard Industrial Classifi ca- -79 -86 -93 -2000 -07 australian commodities > vol. 14 no. 1 > march quarter 2007 189 farm performance

tion of industry type or ANZSIC. Many Australian broadacre farms are mixed enterprises combining grain growing, sheep or beef cattle. The following discussion of grains, sheep, beef and dairy farms uses information for broadacre ANZSIC industry types substantially involved in the production of these commodities. grain farms Farm cash income for grain producers in the wheat and other crops and mixed livestock– crops industry increased modestly in 2005-06 to where it could be considered to be among the better income years in the past three decades. Substantial increases in grain production bolstered receipts even though grain prices were slightly lower. Receipts on mixed livestock–crops farms were also boosted by higher receipts from beef cattle and lambs. Farm costs rose because of the higher costs associated with the production, harvest and marketing of the large 2005 winter crop. Farm expenditures on fuel, fertiliser, and grain handling were all higher. Average interest payments also rose as many grain farms increased borrowings to ﬁ nance new investments in plant and machinery.

fi nancial performance of broadacre farms, by industry 4 average per farm farm cash income farm business profi t 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s $ $ $ $ $ $ wheat and other crops 115 860 140 560 7 100 22 710 54 980 –112 300 mixed livestock–crops 66 750 74 490 25 200 –7 700 –200 –62 500 beef industry 72 740 82 100 41 900 20 490 8 400 –40 500 – farms with less than 300 beef cattle 29 943 21 518 12 192 –38 046 –34 439 –45 896 – farms with more than 300 beef cattle 92 437 115 194 57 784 47 551 31 756 –37 535 sheep 29 370 39 390 27 800 –26 570 –17 340 –50 100 – farms with less than 3000 sheep 9 917 24 615 15 248 –46 536 –23 420 –53 684 – farms with more than 3000 sheep 63 771 62 726 47 531 9 448 –7 737 –44 339 sheep–beef 72 070 63 240 23 400 1 370 –6 830 –29 400 all broadacre industries 72 790 81 290 26 600 3 690 8 620 –59 800 dairy 17 840 86 030 17 800 19 970 19 260 –79 500 rate of return – excluding rate of return – including capital appreciation a capital appreciation a 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p % % % % % wheat and other crops 2.2 3.2 –1.4 8.0 5.5 mixed livestock–crops 0.8 1.0 –0.9 7.0 5.4 beef industry 1.3 1.0 –0.2 9.7 10.8 – farms with less than 300 beef cattle –2.2 –1.4 –1.9 10.5 10.9 – farms with more than 300 beef cattle 1.9 1.5 0.2 9.6 10.8 sheep –0.3 0.4 –1.0 6.8 4.8 – farms with less than 3000 sheep –2.2 –0.4 –2.1 7.4 4.2 – farms with more than 3000 sheep 1.2 0.9 –0.2 6.4 5.2 sheep–beef 0.7 0.5 0.0 5.1 7.6 all broadacre industries 1.1 1.3 –0.6 7.8 7.3 dairy 2.5 2.3 –1.3 8.6 7.0 a Defi ned as profi t at full equity, including or excluding capital appreciation, as a percentage of total opening capital. Profi t at full equity is defi ned as farm business profi t plus rent, interest and lease payments less depreciation on leased items. p Preliminary. s Provisional estimate.

190 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance

ﬁ nancial performance, by industry 5 average per farm

wheat and other crop industry mixed livestock–crops industry 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 492 513 576 937 (8) 399 586 323 515 334 322 (7) 258 409 total cash costs $ 376 657 436 373 (7) 392 486 256 761 259 832 (6) 233 229 farm cash income $ 115 856 140 563 (15) 7 100 66 754 74 490 (16) 25 180 farms with negative farm cash income % 27 19 (16) 52 25 18 (14) 54 farm business profi t $ 22 707 54 979 (31) –112 349 –7 696 –201 (124) –62 454 farms with negative farm business profi t % 59 41 (11) 77 60 61 (6) 77 profi t at full equity – excl. capital appreciation $ 67 093 108 429 (17) –50 191 21 726 30 208 (44) –26 562 – incl. capital appreciation $ 243 069 185 854 (14) na 180 459 156 080 (16) na farm capital at 30 June a $ 3 300 532 3 561 133 (6) na 2 767 794 3 041 243 (6) na net capital additions $ 73 870 89 376 (24) na 36 404 24 374 (57) na farm debt at 30 June b $ 491 716 575 208 (9) 666 060 333 271 350 924 (12) 402 858 equity at 30 June b c $ 2 634 236 2 960 258 (6) na 2 394 395 2 673 530 (6) na equity ratio b d % 84 84 (1) na 88 88 (1) na harvest loans at 30 June e $ 41 168 44 904 (15) na 8 334 12 453 (24) na farm liquid assets at 30 June b $ 167 859 172 125 (11) na 106 397 111 528 (10) na farm management deposits (FMDs) at 30 June b $ 46 665 39 206 (15) na 21 887 20 807 (14) na share of farms with FMDs at 30 June b % 30 25 (13) na 24 21 (13) na rate of return f – excl. capital appreciation % 2.2 3.2 (14) –1.4 0.8 1.0 (42) –0.9 – incl. capital appreciation % 8.0 5.5 (11) na 7.0 5.4 (14) na off–farm income of owner–manager and spouse b $ 23 892 28 030 (11) na 27 307 32 555 (13) na sheep industry beef industry 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s

total cash receipts $ 200 769 228 016 (7) 194 442 500 255 347 428 (40) 322 394 total cash costs $ 171 396 188 627 (7) 166 673 427 513 265 323 (41) 280 542 farm cash income $ 29 373 39 390 (19) 27 769 72 741 82 104 (39) 41 852 farms with negative farm cash income % 37 29 (17) 30 25 27 (15) 39 farm business profi t $ –26 565 –17 340 (47) –50 059 20 486 8 401 (139) –40 457 farms with negative farm business profi t % 72 63 (8) 78 57 61 (8) 74 profi t at full equity – excl. capital appreciation $ –6 804 8 962 (79) – 25 722 44 660 37 511 (65) –6 572 – incl. capital appreciation $ 155 233 121 667 (19) na 324 742 390 902 (14) na farm capital at 30 June a $ 2 417 288 2 633 441 (6) na 3 687 655 3 994 994 (5) na net capital additions $ –3 715 –12 830 (353) na 59 523 30 997 (131) na farm debt at 30 June b $ 200 743 259 224 (15) 257 029 285 711 308 059 (12) 369 775 equity at 30 June b c $ 2 138 887 2 367 642 (5) na 3 245 099 3 675 218 (5) na equity ratio b d % 91 90 (1) na 92 92 (1) na harvest loans at 30 June e $ 594 819 (69) na 102 262 (85) na farm liquid assets at 30 June b $ 96 517 101 764 (15) na 124 293 159 968 (12) na farm management deposits (FMDs) at 30 June b $ 20 083 14 556 (19) na 24 148 15 930 (16) na share of farms with FMDs at 30 June b % 25 17 (17) na 21 16 (15) na rate of return f – excl. capital appreciation % –0.3 0.4 (79) –1.0 1.3 1.0 (62) –0.2 – incl. capital appreciation % 6.8 4.8 (21) na 9.7 10.8 (13) na off–farm income of owner–manager and spouse b $ 28 661 29 963 (15) na 29 877 34 384 (35) na

australian commodities > vol. 14 no. 1 > march quarter 2007 191 farm performance

The effect on fi nancial performance of the widespread crop failures in 2006-07 has been concentrated on grain farms, particularly cropping specialists. Farm cash income is expected to drop sharply for grain producers, with reductions in crop receipts the major cause. Two factors served to limit the reduction in receipts. First, grain prices have risen sharply from the previous year, providing a healthy return for what little grain was harvested. Second, there were substantial payments for the previous year’s large crop that were received in 2006-07. The reduction in farm receipts is projected to be amplifi ed on mixed livestock–crops farms by lower lamb and beef prices, and by the sale of less than fi nished stock due to drought conditions. With average cash costs only projected to be around 10 per cent lower than in the previous year, the average farm cash income for both wheat and other crops and mixed livestock–crops industry farms are projected to fall to the lowest level in the past three decades (fi gure B). Farm business profi ts are also projected to be drastically reduced. The reduction in profi t is projected to be greater than the reduction in farm cash income mostly because of a reduction in on-farm inventories of grain and livestock. Just over 50 per cent of grains farms are projected to record negative farm cash incomes in 2006-07 and average farm debt is expected to increase by around 15 per cent. Almost all of the increase in debt in 2006-07 is expected to be for working capital. On the positive side, one of the major reasons for the low farm cash income is the relatively high level of farm expenditure anticipated for the planting of the forthcoming 2007

ﬁ nancial performance, by industry 5 average per farm

sheep–beef industry dairy industry 2004-05 2005-06 p 2006-07 s 2004-05 2005-06 p 2006-07 s total cash receipts $ 301 038 289 527 (32) 245 265 355 390 416 268 (3) 377 798 total cash costs $ 228 969 226 286 (26) 221 896 275 002 330 236 (4) 359 957 farm cash income $ 72 069 63 241 (61) 23 369 80 388 86 032 (9) 17 840 farms with negative farm cash income % 26 21 (22) 47 6 15 (21) 46 farm business profi t $ 1 369 –6 825 (384) –29 368 19 967 19 259 (39) –79 476 farms with negative farm business profi t % 56 64 (8) 79 43 48 (12) 78 profi t at full equity – excl. capital appreciation $ 22 174 17 183 (154) 1 545 53 213 60 748 (13) –36 695 – incl. capital appreciation $ 167 743 281 876 (55) na 185 222 185 221 (35) na farm capital at 30 June a $ 3 478 213 3 957 508 (23) na 2 321 718 2 830 275 (4) na net capital additions $ 72 327 –3 790 (3757) na 30 693 47 990 (28) na farm debt at 30 June b $ 247 768 285 620 (14) 369 539 334 588 439 016 (8) 491 014 equity at 30 June b c $ 3 070 306 3 663 476 (25) na 1 961 237 2 382 744 (4) na equity ratio b d % 93 93 (2) na 85 84 (1) na harvest loans at 30 June e $ 97 0 (0) na 0 0 (0) na farm liquid assets at 30 June b $ 106 251 116 923 (18) na 77 517 78 467 (15) na farm management deposits (FMDs) at 30 June b $ 19 273 15 237 (43) na 10 125 11 739 (20) na share of farms with FMDs at 30 June b % 22 19 (14) na 17 14 (22) na rate of return f – excl. capital appreciation % 0.7 0.5 (140) 0.0 2.5 2.3 (13) –1.3 – incl. capital appreciation % 5.1 7.6 (42) na 8.6 7.0 (36) na off–farm income of owner–manager and spouse b $ 28 729 27 936 (13) na 22 903 19 345 (16) 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 Rate of return to farm capital at 1 July. p Preliminary estimates. s Provisional estimates. na Not available.

192 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance winter crop. Projected total cash costs for 2006-07 include a large part of the anticipated cost of planting the next crop and producers have indicated that they intend to signifi cantly expand winter crop area in 2007 if autumn rainfall is favourable. Further, the high level of new investment on grain farms in recent years in new plant and machinery should assist grain farm to increase output and productivity when seasonal conditions improve. sheep farms In 2005-06, sheep industry farm cash incomes increased by 20 per cent on the back of higher receipts from crops and, to a lesser extent, lambs and sheep. This result was achieved despite a reduction in wool production and wool prices. Farm cash income for sheep–beef industry farms in 2005-06 was slightly lower than the previous year as higher beef receipts offset reductions in income from sales of sheep, lambs, wool and crops. However, farm cash income above $60 000 is historically high when compared with incomes since the beginning of the 1990s. In 2006-07, farm cash income is projected to fall sharply for sheep–beef industry farms as prices for wool, sheep, lambs and beef cattle are all forecast to weaken. Fodder costs for these farms are also expected to rise signifi cantly. For sheep–beef industry farms, particularly in northern New South Wales and larger pastoral properties in Queensland and Western Australia, average turnoff of sheep and cattle is expected to be lower in 2006-07. This will also act to reduce farm receipts from the previous year’s level but lead to a lesser reduction in farm business profi t as livestock numbers increase slightly after several years of high turnoff. The fall in average farm cash income on sheep industry farms in 2006-07 is projected to be smaller than for the sheep–beef industry. Turnoff of sheep is expected to be up as producers reduce stock numbers in the light of reduced pasture availability. However, with lower sheep and lamb prices and the poorer average condition of stock, sheep receipts are nonetheless expected to fall. Receipts from wool are expected to be slightly down on the previous year with higher prices only partly offsetting lower production. A substantial increase in the average expenditure on fodder is projected to limit the extent to which sheep producers reduce cash costs. beef farms Average beef cattle turnoff fell slightly on beef industry farms in 2005-06, although the reduction in turnoff was more marked in pastoral Queensland where herds were being rebuilt. The reduction in cattle turnoff on beef industry farms was a major factor that reduced their total cash receipts in 2005-06 along with lower average crop receipts. However, total farm cash costs also fell signifi cantly in 2005-06 because of a large reduction in purchases of store and breeding stock and reduced fodder expenditure. This more than offset the reduction in receipts and farm cash incomes rose slightly to average $82 000 per farm. In real terms, this was similar to the other historical highs observed in 1979-80 and more recently in 2001-02 (fi gure B). Farm business profi t was also above average in 2005-06. In 2006-07, net sales of beef cattle are expected to rise in all states other than Queensland and the Northern Territory. This mostly refl ects the extremely dry conditions in southern Australia that have restricted pasture availability. However, in northern Australia, seasonal conditions are relatively much better and producers are intending to continue herd rebuilding by limiting the number of cattle sold. Overall, beef cattle sales by beef industry specialists are projected to be slightly higher in 2006-07 than in the previous

australian commodities > vol. 14 no. 1 > march quarter 2007 193 farm performance

year, although slightly lower prices are expected to lead to lower beef cattle receipts. While receipts are projected to be around 10 per cent lower in 2006-07, farm cash costs are projected to rise slightly above the previous year’s level. Cattle purchases are expected to fall further as producers either endeavour to rebuild herds through natural increase or limit purchases to manage the reduced feed availability depending on their local seasonal conditions. However, the lower cost of livestock purchases is expected to be almost entirely offset by higher fodder costs. Lower receipts and unchanged cash costs are projected to result in average farm cash incomes in the beef industry roughly halving to just above $40 000 per farm in 2006-07. dairy industry The Australian dairy industry has undergone a number of large production and market related shocks in recent years. These include severe drought, low allocations of irrigation water in the Goulburn and Murray Valley production regions and highly volatile world market returns between 2001 and 2003. These shocks have had a major infl uence on farm production and fi nancial performance in the four years to 2005-06. Average farm cash incomes in the dairy industry recovered in both 2003-04 and 2004-05 from the low recorded in the drought affected year of 2002-03. In 2004-05 in particular, higher production and higher prices contributed to a marked improvement in the average fi nancial performance of Australian dairy farms. The same factors further boosted average farm cash income in 2005-06. The higher production was particularly notable in that it was achieved despite a deterioration of seasonal conditions in the second half of the year. The strong increase in receipts was more than suffi cient to offset the higher cost of fertiliser, fodder and interest payments in 2005-06 and average farm cash income rose to around $86 000 per farm, which over the past three decades was second only in real terms to the record incomes in 2001-02 (fi gure C). In 2006-07, many dairying regions have been signifi cantly affected by drought and signifi cantly lower availability of irrigation water. This has resulted in reduced pasture production and has dairy industry driven fodder costs higher. Dairy farm expenditure on C fodder is projected to average more than $130 000 per farm in 2006-07, which is around 25 per cent farm cash income 90 higher in real terms than in 2002-03 when drought conditions were also severe. Anticipation of continued 60 drought conditions has led many dairy farms to dry off cows early and reduce herd numbers to contain 30 farm costs. Reductions in average milk production of around 10 2006-07 $’000 per cent in combination with slightly lower milk prices are projected to result in a sharp decline in dairy farm farm business profit –30 receipts in 2006-07. With lower farm receipts and higher cash costs, farm cash incomes are projected to –60 fall markedly to below $18 000 per farm. The reduc- 1978 1985 1992 1999 2006 tion in dairy herd numbers and the rundown in on- -79 -86 -93 -2000 -07 farm stocks of fodder and grain are projected to lead to farm business profi t falling by even more than farm cash income.

194 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance recent trends in farm business debt proportion of broadacre farms D expanding fi nancing farm expansion and capital investment From the mid-1990s up to 2001-02 there was a 8 steady increase in the proportion of farms acquiring land and expanding the scale of their farm opera- 6 tion (fi gure D). Increasing the scale of operation is an important means of boosting farm productivity as the more effi cient methods of farming often need 4 to be adopted on a large scale in order to capture their advantages. The rising proportion of farms 2 purchasing additional land was accompanied by a steady increase in average farm debt until the end % of the 1990s, although two years of above average 1977 1984 1991 1998 2005 incomes in 2000-01 and 2001-02 served to temper -78 -85 -92 -99 -06 this increase. While the proportion of farms acquiring land has investment in plant, machinery, fallen from 2002-03 onwards, the average value E vehicles and improvements of net additions of plant, machinery, vehicles and average per farm improvements has remained relatively high (fi gure E) 30 and average farm debt has continued to rise. Instead 25 of seeking to expand farm income by increasing the physical size of their properties in the face of high 20 land prices, many producers have switched to the strategy of investing in new plant, equipment and 15 farm improvements in order to improve the productivity of their farms. Where this investment has been 10 well targeted, increases in farm productivity can be 5 expected over the coming years, strengthening future 2006-07 farm fi nancial performance. Although there was an $’000 increase in working capital debt as farms dealt with 1990 1993 1996 1999 2002 2005 the drought of 2002-03, the great majority of the -91 -94 -97 -2000 -03 -06 F farm debt

farm business debt other debt 300 Farm business debt estimates have been provided land purchases exclusive of debt that is underwritten, including harvest working capital loan and dairy structural adjustment advances. Inclusion of harvest loans in estimates of farm busi- 200 ness debt can result in falls in farm debt for grain producing farms in drought years as crop production is reduced, masking the increases in working capital 100 debt that often occurs at these times. Conversely, debt increases in years of high crop production when cash ﬂ ow is also high. Harvest loans and dairy struc- 2006-07 $’000 tural adjustment payments are reported separately in the tables. 1989 1993 1997 2001 2005 -90 -94 -98 -02 -06 australian commodities > vol. 14 no. 1 > march quarter 2007 195 farm performance

land prices for broadacre farms increase in farm debt in recent years has been used G to fund new farm investment (fi gure F). Although average farm debt has increased pastoral steadily in real terms since the mid-1990s, broad- 400 acre farmers have been able to maintain their equity in the farm business at close to 90 per cent due to a 300 strong rise in land values driven by steadily increasing demand for agricultural land (fi gure G). Rising land high 200 rainfall values in recent years have not only supported equity levels, but have also led to very high average rates of return to total farm capital including capital 100 wheat–sheep appreciation in most farming regions (map 2). This has been especially noticeable since 2002-03 index when the increases in land values in the southern 1977 1984 1991 1998 2005 high rainfall and wheat–sheep zones have been -78 -85 -92 -99 -06 substantial. impact of drought in 2006-07 With a large projected increase in the proportion average annual rates of return of farm businesses recording negative farm cash 2 including capital appreciation income in 2006-07, many farms may need to 2002-03 to 2005-06 increase borrowing for working capital, particularly average those where reserves of liquid assets are low. It would be expected that there will be far less debt- fi nanced investment in land and nonland capital as most farmers will be looking to defer these types of investments until incomes improve. There are also some early signs that farms are choosing to meet their short term funding needs by accessing their accumulated portfolio of liquid assets including ‘farm management deposits’. In the September over 10 per cent quarter of 2006 the net withdrawal from farm 6.5–10 per cent management deposit accounts was more than 4–6.5 per cent 0–4 per cent $500 million (fi gure H). under 0 per cent Although average farm debt for broadacre farms no data is projected to increase by 16 per cent to more than 1997-98 to 2001-02 $410 000 per farm, average equity ratios are average expected to remain relatively high provided land values at least remain steady. Assuming land values remain unchanged during 2006-07, on the basis of projected increases in farm debt the average farm equity ratio for broadacre farms would fall by two percentage points to 88 per cent by 30 June 2007. Naturally there is considerable variation around this average as individual farm businesses are at different stages of farm development, requiring them to carry very different levels of debt, and each will adopt their own strategy to fi nance farm expansion and capital investment. For example, while the average

196 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance equity ratio among broadacre farms was around 90 farm management deposits and per cent at the end of 2005-06, around 7.4 per cent H number of account holders of broadacre farms were estimated to have an equity number of FMD ratio of less than 70 per cent. However, low equity accounts 2500 ratios are not necessarily an indication of an unviable 40 000 farm. A low equity ratio can be manageable if that 2000 farm generates enough income to service debt and 30 000 meet other fi nancial obligations. 1500 In order to better understand the impact of the 20 000 2006-07 drought on debt servicing capacity, a clas- value of FMDs held 1000 sifi cation based on the combination of equity and 10 000 cash fl ow has been developed. Farms are separated 500 into one of four groups according to whether their equity ratio is above or below 70 per cent, and their 0 quarterly, ended September 2006 $m farm cash income is positive or negative. The results Dec Dec Dec Dec Dec Dec Dec are presented in fi gure I. Estimates for 2006-07 use 2000 2002 2004 2006 expected farm debt at 30 June 2007 as provided by farm operators in interviews in January 2007 and an assumption that total capital value at 30 June 2007 remains unchanged from 30 June 2006. Figure I shows that the average equity position of Australian broadacre farms as they entered the drought was good. In the period 2003-04 to 2005-06, the proportion of farms with equity ratios above 70 per cent (the sum of the two bottom bars) rose to its highest level in the past three decades. However, the deleterious effect of drought on farm incomes in 2006-07 is also clear. The proportion of farms with negative cash income increased from 21 per cent in 2005-06 to 42 per cent in 2006-07. This is a much larger increase in the size of this group of farms compared with the previous drought in 2002-03, when the proportion of broadacre farms with negative farm cash income increased from 17 per cent to 33 per cent. Within the group of farms with negative income, it is those farms with the lowest level of equity that may distribution of farms, by equity ratio I and farm cash income – broadacre have the greatest diffi culty obtaining additional credit and dairy farms in the future. The proportion of farms with negative low equity - negative income farm cash incomes and equity of less than 70 per low equity - positive income cent is projected to more than double, rising to 6.5 high equity - negative income per cent by the end of 2006-07. The last time that this high equity - positive income many farms had negative income and very low equity levels was in the early 1990s. While fi nancial factors such as debt servicing 80 ability are obviously important to a farm’s ability to manage the impact of the current drought, there is 60 an array of other fi nancial and nonfi nancial factors that are also important. These are considered in more 40 detail in the following section.

20 adaptive capacity of broadacre farms

While ﬁ nancial factors such as debt servicing ability % are obviously important to a farm’s ability to manage 1978 1985 1992 1999 2006 the impact of the current drought, there is an array of -79 -86 -93 -2000 -07 australian commodities > vol. 14 no. 1 > march quarter 2007 197 farm performance

adaptive capacity of Australian other fi nancial and nonfi nancial factors that are also 3 farm households reliant on important. Nelson et al. (2005) used the rural liveli- broadacre agriculture hood framework of Ellis (2000) to create a simple and low cost indicator of the vulnerability of Australian farm households dependent on broadacre agriculture. ABARE and CSIRO are currently improving this analysis for the National Land and Water Resources Audit, and preliminary results are shown in map 3. The analysis presented in map 3 differs from that of Nelson et al. (2005) in that it focuses on adaptive capacity rather than the broader concept of vulnerability (see the box section below). An advantage of focusing on the adaptive capacity of farm households is that it can be positively infl uenced by policy. low (0–33 per cent The adaptive capacity of farm households can be or lowest 1 in 3) high (33–100 per cent enhanced through policies that increase the diversity or highest 2 in 3) of assets and activities available to form livelihood no data strategies (Ellis 2000). Policies of this kind include investment in production, transport and marketing infrastructure, education and training, regional development, and policies that affect the cost and availability of rural credit (Anderson 2003).

adaptive capacity of broadacre farm households The adaptive capacity of Australian farm households to external drivers of change, such as climate and declining terms of trade, depends partly on the diversity of assets and activities that they can draw on to form livelihood strategies (Ellis 2000). Adaptive capacity contributes to the more dynamic concept of resilience, defi ned as the ability of farm households to recover their livelihoods following stress or shocks (Ellis 2000; Walker and Salt 2006). Greater diversity enables substitution between activities and assets to adapt to external change, particularly if income sources less affected by any particular driver of change are available. Assets and activities are defi ned broadly within rural livelihoods analysis to refl ect the important contributions that human, social and natural capital make to productivity along with the commonly recognised physical and fi nancial assets. Most of the data for this analysis are drawn from data provided by Australian farmers through ABARE broadacre surveys. For this analysis: » a human capital index was created from operator and spouse education levels, combined with a measure of self assessed health status (ABS 2006) » social capital is refl ected in partnerships within the farm business, combined with internet use and membership of Landcare as measures of external social capital » natural capital uses the pasture growth index from the AussieGrass model (Carter et al. 2000) as a measure of biophysical productivity; in addition, data on threats to biophysical productivity arising from weeds and salinity have been incorporated using data from the National Land and Water Resources Audit » physical capital is measured using information on plant and machinery, on-farm struc- tures and livestock » fi nancial capital is represented using average farm incomes, diversity of on- and off- farm incomes sources, and business fi nance. Estimates for each of the components are presented in the maps on the opposite page.

198 australian commodities > vol. 14 no. 1 > march quarter 2007 farm performance

components of the adaptive capacity index

human social

natural physical

financial

low (0–33 per cent or lowest 1 in 3) high (33–100 per cent or highest 2 in 3) no data

australian commodities > vol. 14 no. 1 > march quarter 2007 199 farm performance

Concentrations of broadacre farm households with relatively low adaptive capacity are highlighted by the orange areas of map 3. The factors contributing to low values of the adaptive capacity index vary across agricultural regions. For the extensive (mainly sheep) grazing regions of central eastern South Australia, and far western New South Wales, low adaptive capacity results from the intrinsically low levels of physical and natural capital combined with low levels of social capital. In the opportunistic cropping areas in central New South Wales, low levels of fi nancial capital are the result of farms being too small to cope with declining terms of trade. In some areas, the incursion of woody weeds and constraints on land clearing contribute to diminishing natural capital inland of the eastern Australian grain belt. In addition, there are pockets of low human and social capital as in other cropping areas of New South Wales. Low adaptive capacity in south east Queensland is caused by low ratings on all forms of capital. Structural adjustment pressures caused largely by small farm size are refl ected in low measures of fi nancial and physical capital. The low natural capital index for this region refl ects a latent and largely as yet unexpressed salinity hazard that is the only potential threat to the otherwise high levels of natural capital. Farm size also reduces the adaptive capacity in many regions of Victoria. Overall adaptive capacity is low in south western Victoria where low physical capital coincides with low natural and social capital. It is also worth drawing attention to the reasons why some regions return relatively high values for the adaptive capacity index in the face of obvious pressures. For example, salinity is a signifi cant threat to the natural capital of agricultural industries in Western Australia. However, this is compensated by high levels of biophysical productivity and more manageable weed issues than some of the agricultural regions of eastern Australia. In addition, relatively high levels of human, social, physical and fi nancial capital contribute to high adaptive capacity. Similarly, low human capital and a lack of income diversity in the cattle grazing regions of northern Queensland is offset in terms of overall adaptive capacity by more adequate levels of social, physical and natural capital.

references ABS (Australian Bureau of Statistics) 2006, National Health Survey 2004-05: Summary of Results, cat. no. 4364, Canberra. Anderson, J.R. 2003, ‘Risk in rural development: challenges for managers and policy makers’, Agricultural Systems, vol. 75 pp. 161–97. Carter, J.O., Hall, W.B., Brook, K.D., Mc Keon, G.M., Day, K.A. and Paull, C.J. 2000, ‘Aussie GRASS: Australian grassland and rangeland assessment by spatial simulation’, in Hammer, G.L., Nicholls, N. and Mitchell, C. (eds), Applications of Seasonal Climate Forecasting in Agricultural and Natural Ecosystems – The Australian Experience, Atmo- spheric and Oceanographic Sciences Library, vol 21, Kluwer Academic Publishers, Dordrecht. Ellis, F. 2000, Rural Livelihoods and Diversity in Developing Countries, Oxford University Press, England. Nelson, R., Kokic, P., Elliston, L. and King, J. 2005, Structural adjustment: a vulnerability index for Australian broadacre agriculture’, Australian Commodities, vol.12, no. 1, pp. 171–9. Walker, B. and Salt, D. 2006, Resilience Thinking – Sustaining Ecosystems and People in a Changing World, Island Press, Washington DC.

200 australian commodities > vol. 14 no. 1 > march quarter 2007 water use

> peterlisa elliston gooday > +61> +61 2 6272 2 6272 2091 2138 > [email protected]> [email protected] groundwater management issues affecting the efﬁ cient allocation of groundwater

> tim goesch, simon hone and peter gooday

» Groundwater has become increasingly scarce across much of Australia, with some reserves being substantially depleted. This has raised concerns over the effi ciency and equity of current management arrangements. » Groundwater systems tend to be complex and diffi cult to observe. As a result, sustainable groundwater yield estimates are often highly uncertain. Adding to the diffi culty in managing these systems is the poor monitoring of extractions, with only 20–40 per cent of users metered. » A cap and trade system may be suitable for some groundwater systems, with the cap providing the certainty needed to protect the integrity of the groundwater resource, and trade providing the mechanism for allocating consumptive water to its highest value uses. » Where there is a high degree of uncertainty about what can be sustainably extracted from groundwater systems, it may be prudent for policy makers to be conservative in allocating access to groundwater, and to formalise a set of management actions specifying restrictions on extractions in the event that stocks fall below predetermined thresholds. background Most groundwater extracted in Australia is used by rural enterprises. While data on use, by activity, are dated, in 1996-97 it was estimated that 51 per cent of groundwater was used for irrigation, with a further 17 per cent being extracted for stock watering and other rural uses. The remaining 32 per cent was used to supply cities, towns and industry. Up to four million Australians used some groundwater for domestic water supplies (CSIRO 2001). Access to groundwater for irrigation is rationed through a system of entitlements. Groundwater entitlements are issued by state and territory governments, and are typically separate from land and other property rights. In general, they specify the volume of groundwater that irrigators are entitled to extract in a given year, although other conditions may be attached (Natural Resource Management Standing Committee 2002). For example, some entitlements may specify maximum daily pumping rates, while others may specify additional volumes that can be extracted during droughts. There are currently around 145 000 groundwater entitlements in Australia, with a combined volume of 7000 gigalitres (ABS 2006). australian commodities > vol. 14 no. 1 > march quarter 2007 201 water use

Total groundwater use by the Australian agricultural sector was estimated to be 2800 gigalitres in 2004-05, equivalent to 40 per cent of total entitlements. Groundwater use in agriculture was highest in New South Wales (1030 gigalitres), Queensland (670 gigalitres) and South Australia (470 gigalitres). Groundwater accounted for 23 per cent of total water use in agriculture nationally and 82 per cent in the Northern Territory. Major groundwater irrigation districts include the Border Rivers (New South Wales), Namoi (New South Wales), Murrumbidgee (New South Wales), Lower Limestone Coast (South Australia), Goldfi elds (Western Australia), Balonne–Condamine (Queensland) and Shepparton (Victoria) districts (ABS 2006) — see map 1 for the locations of the major groundwater areas in New South Wales and Victoria. Groundwater is particularly attractive to surface water irrigators who can also access groundwater during periods of drought. Groundwater systems typically have a signifi cant stock component, and are infl uenced less by short term climatic variability than surface water systems. As a result, groundwater systems tend to form a buffer against reduced surface water availability, with extractions increasing during droughts. Earth Tech Engi-

location of licensed bores in New South Wales and Victoria

licensed bores major rivers Murray Darling Basin boundary towns

source: Ife and Skelt, 2004

202 australian commodities > vol. 14 no. 1 > march quarter 2007 water use neering (2003) estimated that groundwater extractions from the Lower Murrumbidgee Valley increased by around 50 per cent over the two years to 2002-03 because of the drought. There is evidence that extractions in some groundwater systems are not sustainable. Map 2 illustrates the extent of groundwater extractions relative to sustainable yield across Australia. Overuse is indicated where extractions exceed the volume of groundwater that can be sustainably extracted (identifi ed by the dark orange regions in map 2). Sustain- ability is assessed by comparing extractions with sustainable yield, which can be defi ned in a number of ways. Some states narrowly defi ne sustainable yield as rainfall recharge. This defi nition does not factor in any discharge to groundwater dependent ecosystems. Other states use more sophisticated defi nitions. The National Groundwater Committee defi nes sustainable yield as an extraction regime (measured over a specifi ed planning timeframe) that allows acceptable levels of stress and protects dependent economic, social and environmental values (National Water Commission 2006). This defi nition explicitly recognises the existence of tradeoffs between competing uses. Map 2 indicates that overuse occurred in some groundwater units located within the Murray Darling Basin. While extractions (1250 gigalitres) were estimated to be lower than sustainable yield (2450 gigalitres) for the Murray Darling Basin as a whole in 2000-

map 2 level of groundwater extractions relative to sustainable yield July 2004–June 2005 groundwater management units source: National Water Commission

extraction greater than sustainable yield (>100%) high level of extraction (70–100%) moderate level of extraction (30–69%) low level of extraction (0–29%) unknown volumes or no data provided

australian commodities > vol. 14 no. 1 > march quarter 2007 203 water use

01 (Earth Tech Engineering 2003), around 15 per cent of groundwater management units located in the Basin were overused. For example, groundwater extractions at Katunga in northern Victoria were almost three times sustainable yield for that region (Ife and Skelt 2004). While the volume of groundwater estimated to have been extracted from the basin was lower than sustainable yield in 2000-01, the volume of water specifi ed in entitlements for consumptive use was signifi cantly higher than sustainable yield (3250 gigalitres compared with 2450 gigalitres). Increasing demand for irrigation water, combined with restrictions on access to surface water, may lead to the activation of entitlements that are currently unused or partially used in groundwater systems located in the Murray Darling Basin. This activation may be accelerated by irrigators substituting groundwater for surface water in the event that less surface water is available in the future. In a recent study by Sinclair Knight Merz (2003) it was assumed that future groundwater extractions would increase by 1–5 per cent a year. If future groundwater extractions increase by 3 per cent a year, sustainable groundwater yield for the Murray Darling Basin (2450 gigalitres) is likely to be reached by around 2025. Concerns over ineffective management of groundwater have increased in recent years. Most recently, a group of groundwater professionals prepared a position paper on national groundwater reform (Evans et al. 2006). Their paper highlighted the need to identify sustainable yield in groundwater systems, and to return use in overallocated systems to sustainable levels. In January this year the Australian Government announced its intention to address overallocation in the Murray Darling Basin. As part of this process, the CSIRO has been commissioned to derive sustainable box 1 what is groundwater? yield estimates for surface and groundwater systems for catchments in the Murray Darling Groundwater is contained in geological strata called aquifers. Specifi cally, it is contained in the Basin by the end of the year (Commonwealth of pore spaces separating material comprising the Australia 2007). aquifer. Aquifers can be composed of a wide range of materials, including sand, gravel, limestone and fractured granite. The more permeable key differences between groundwater the aquifer (the greater its hydraulic conductivity), and surface water the more easily groundwater will fl ow through it. Groundwater generally moves relatively slowly Managing groundwater is, in many respects, through an aquifer, except in the case of fractures. more challenging than managing surface water How long water is retained in an aquifer will (see box 1 for a description of groundwater). This depend on the distance between the locations is largely because aquifers are diffi cult to observe, of recharge and discharge, and the speed with making it diffi cult to identify key biophysical rela- which it moves. Groundwater is usually extracted through wells. tionships. For example, it is likely to be much How much can be extracted will depend on how more diffi cult to accurately identify groundwater much water is in the aquifer initially, how much recharge than infl ows into surface water systems, new water enters (recharges) the system and how or to identify the impact of different extraction much water is discharged through avenues other regimes on groundwater dependent ecosystems than extraction. If discharge exceeds recharge, than the impact of surface water extractions on groundwater levels will drop. Extracting ground- surface water dependent ecosystems. Where water through wells will cause groundwater levels to drop. Extracting more groundwater than is sustainable groundwater yield estimates are recharged is referred to as groundwater mining available, they are often assumed to be only (Peralta 1995). within 25 per cent of their true value (Evans et al. 2003).

204 australian commodities > vol. 14 no. 1 > march quarter 2007 water use

Groundwater use is also poorly monitored relative to surface water use. This reduces the information available to policy makers to determine and enforce more sustainable groundwater extraction regimes. According to the National Water Commission (2006), large scale metering of bores has only commenced in the past fi ve to ten years. Moreover, not all bores are metered in metered areas. Overall, the commission estimates that only 20–40 per cent of major users are currently metered. Groundwater systems also comprise a much larger stock component than surface water systems, which have to rely on dams or weirs to store water. This means that groundwater systems tend to be infl uenced less by short term climatic variability than surface water systems. Consequently, groundwater use tends to increase in drought years, when surface water availability declines. As stated in the previous section, groundwater extractions in the lower Murrumbidgee Valley increased by around 50 per cent over the two years to 2002-03 because of the drought. While this groundwater system provided irrigators with a signifi cant buffer against reduced surface water availability, this increase in use led to a 10–20 metre drop in hydraulic head in most parts of the deeper aquifer (Earth Tech Engineering 2003). goal of groundwater management effi ciency The goal of natural resource management is to maximise the net social benefi ts from resource use over time. For groundwater, these benefi ts include any private and external benefi ts derived from groundwater use less any private and external costs. Externalities include any costs or benefi ts imposed on or accruing to third parties through the activities of another party. In the absence of externalities, the net benefi ts from groundwater use will be maximised at the point where the net marginal private benefi ts derived from groundwater use are equalised across all potential users. For instance, if the benefi t from using one more megalitre of water in enterprise A (say $150) exceeds the cost from using one less megalitre in enterprise B (say $100), there would be a net private gain equivalent to $50 less transaction costs in transferring water from enterprise B to A. externalities As is the case for many natural resources, there are external costs associated with groundwater use. Excessive groundwater use can impose signifi cant costs on third parties, including other water users and the environment. For example, excessive use of water could lead to land subsidence, loss of habitat or ecological diversity, and reduced dilution and assimilation of contaminants (National Academy of Sciences 1997). Excessive use in coastal aquifers has also led to sea water intrusion in Queensland, while salinity recycling is a problem in parts of South Australia (Natural Resource Standing Committee 2002). For other water users, in the absence of some form of regulation or informal agreement, individual groundwater users will have little incentive to consider the increased pumping costs imposed on other users as a result of their pumping activities, or the costs associated with reduced stock available for future use (Hafi and Cao 2002; Provencher and Burt 1993). They will also have little incentive to consider the impact of their pumping activities on other users where aquifers or surface water systems are linked. For example, in the Murray Darling Basin the Condamine, Lower Gwydir, Upper Namoi, Lower Macquarie,

australian commodities > vol. 14 no. 1 > march quarter 2007 205 water use

Upper Lachlan, Murrumbidgee and upland Victoria groundwater management units exhibit medium to high stream aquifer connectivity. Earth Tech Engineering (2003) estimate that around 45 per cent of the additional groundwater that could be ‘sustainably’ extracted from the Murray Darling Basin each year is located within connected water systems. If groundwater extractions increased by 550 gigalitres a year in connected water systems within the Murray Darling Basin, these additional extractions could ultimately lead to a 330 gigalitre a year reduction in surface water availability across the basin (based on an estimated leakage coefﬁ cient of 0.6), adversely affecting downstream surface water users and the environment.

managing groundwater use In the absence of price signals that refl ect the external costs of groundwater use, irrigators will have few incentives to constrain consumption to socially optimal levels. As a result, governments may need to intervene to ensure that at least some of these costs are accounted for by groundwater users. This raises the question of what form of intervention is appropriate. For example, it may be possible to achieve a regulatory solution by restricting access to water, or a market based solution by either taxing water use to reduce consumption or imposing a cap on extractions and allowing trade in consumptive allocations. The instrument that policy makers ultimately select should depend on its relative effi ciency and effectiveness in achieving the desired goal. It is unlikely that price or quantity based instruments will be effi cient and effective in achieving the desired allocation of groundwater if used in isolation. While quantitative restrictions may be highly effective in reducing use, they are likely to be ineffi cient in allocating groundwater for consumptive use. In contrast, price instruments such as taxes may be relatively ineffective in reducing consumptive use. The reason for this is that the demand for water for consumptive use tends to be relatively unresponsive to price movements. Hence, there will be no guarantee on the level of water to be extracted using price instruments. It is also likely to be impractical to set an effi cient tax where there are signifi cant movements in demand for and supply of groundwater caused by climatic variability. A more practical option for allocating groundwater relies on using price and quantity instruments in tandem. It involves restricting access to water for consumptive use, allocating property rights to the consumptive pool, and allowing trade between consumptive users. The aim of capping extractions is to balance the environmental needs of water dependent ecosystems and the consumptive needs of current and future users. The cap provides a high degree of certainty about availability for environmental use, whereas trade provides a mechanism for allocating consumptive water to its highest value uses. This cap and trade model is consistent with that being used in surface water systems in Australia. Making the cap and trade model operational will involve identifying a cap on extractions, and allocating water identifi ed under this cap to consumptive users. Despite the information requirements for a cap and trade option being signifi cantly lower than for a regulatory solution (where data would need to be available on the costs and benefi ts of water use by individual users), these requirements may still be substantial. Ideally, the overall cap on extractions would be set to equalise the marginal benefi ts between consumptive and environmental use, and between current and future use. The cap on extractions would also vary to refl ect changes in biophysical and economic variables, such as reduced recharge or increased returns to irrigated activities. As alluded to earlier, it may be diffi cult and expensive to identify the net marginal values for consump-

206 australian commodities > vol. 14 no. 1 > march quarter 2007 water use tive and environmental uses needed to identify an effi cient cap for groundwater. Adding to this diffi culty and expense is the fact that many groundwater systems are diffi cult to observe, and are often unalike. This lack of similarity increases information costs since data acquired for a particular aquifer may not be applicable elsewhere. dealing with uncertainty While knowledge of groundwater systems has increased in recent years, the reality is that many of these systems remain poorly understood. Where uncertainty is high about what can be sustainably extracted from these systems, it would be prudent for policy makers to be conservative in allocating access to groundwater. It may also be prudent for groundwater managers to formalise a set of management actions that would be activated in the event of groundwater stocks falling below some predetermined thresholds. This would be particularly the case where there was a risk that extractions could lead to severe and irreversible damage to groundwater dependent ecosystems or compromise future availability for high value activities such as irrigated tree and vine crops. Such an approach would involve clearly stating the management actions necessary to achieve defi ned environmental and economic objectives. It would also contain a process for monitoring and assessing the environmental status of a groundwater system and the economic gains from extracting groundwater for productive use. It would also be necessary to defi ne a set of rules to control the level of extractions based on these environmental and economic assessments of the groundwater system. This type of approach could provide the community with a reasonable level of confi - dence that groundwater resources were being managed for long term environmental and economic sustainability, and the irrigation industry with a more certain operating environment. One of the main benefi ts of this type of approach is that a predetermined set of operating rules would be in place to cope with unexpected changes in the state of an aquifer. To implement this type of strategy, it would be necessary to specify the relevant ‘reference’ points needed to guide management decisions. For example, ‘target’ reference points would be needed that specifi ed the desired status of stocks and desired extractions. ‘Limit’ reference points that identify points beyond which the risk to the aquifer and related ecosystems is regarded as unacceptably high would also be required. A set of operational rules would then be required to regulate extractions, so that stocks remained at target levels. These rules would also specify the action to be taken if the limit reference point was breached. It is important to recognise that there are varying amounts of information available on groundwater systems, and that full quantitative assessments for all aquifers would not be possible. Rather, a risk management approach would be required, whereby extraction levels would be reduced as uncertainty around sustainable yield estimates increased. For aquifers where suffi cient information were available, identifying the relevant reference points would involve the construction of groundwater simulation models capable of testing the impact of various extraction and recharge scenarios. These models could also be used to evaluate various management controls, and provide the basis for modifying these management controls. The uncertainty and variability surrounding sustainable yield estimates need to be understood and incorporated into any decisions on granting access to groundwater systems. Over time more data may become available that could reduce the level of uncertainty about sustainable yield estimates. australian commodities > vol. 14 no. 1 > march quarter 2007 207 water use

While collecting more information on sustainable yield would tend to improve decisions on granting access to groundwater systems, the benefi ts of acquiring additional information would need to be compared with the costs. The research agenda on sustainable yield should be driven by the information needs of groundwater managers. Research on sustainable yield should be targeted in the fi rst instance at groundwater systems where extractions are leading to signifi cant environmental damage or seriously compromising future availability for high value consumptive activities. IAH Australia (2004) suggests a system for prioritising the level of effort applied to the assessment process based on the level of risk of the resource being overallocated. Under this approach, priority would be given to research into aquifers that have a high level of allocation relative to yield and for which sustainable yield estimates are highly uncertain. trade Making the trade component of a cap and trade system operational would involve allocating rights (referred to as entitlements) to the consumptive pool of water identifi ed under the cap. While the manner in which these rights would be allocated have wealth implications for individual users, the method of allocation should not reduce the capacity of this option to effi ciently distribute groundwater to those who value it most. Groundwater entitlements would need to be clearly specifi ed and transferable if the benefi ts from consumptive use are to be maximised. For instance, the level of security should be suffi cient to provide irrigators with the information they need to make effi cient investments. Well specifi ed rights would be of little value, however, if they were not enforced. For this to occur, groundwater use would need to be monitored. According to the National Water Commission (2006) only 20–40 per cent of major groundwater users are currently metered. To ensure compliance, a system of penalties would need to be introduced, with these penalties exceeding the benefi ts of noncompliance. The extent to which trade increased the benefi ts from groundwater use for any given level of restriction on resource access would depend on the variability in marginal returns between users. The benefi ts may be substantial where there is signifi cant variability in marginal returns between users. Conversely, the gains may be minimal where there is little variability in marginal returns from groundwater use. The gains from trade in groundwater may be relatively small compared with those from trade in surface water because of the discrete nature of many groundwater systems. The discontinuous nature of many groundwater systems (in contrast to many surface water systems) means that irrigators within these systems are often engaged in similar activities. This is an important consideration when considering the introduction of trade, since the transaction costs in some instances may outweigh any additional benefi ts from being able to transfer groundwater to other users. Other factors that need to be taken into consideration when trading groundwater include the localised effects of drawdown on neighbouring irrigators. These impacts could include both quantity and quality effects. For example, excessive drawdown by one irri- gator could reduce availability to other irrigators within the vicinity in the short term, or increase salinity levels. The impact of extractions on groundwater dependent ecosystems could also vary with the proximity of irrigators to these ecosystems. Finally, if trade were to be introduced, it would be important to resolve any overallocation prior to its introduction. If trade was introduced before overallocation issues were resolved, unused and partially used entitlements could be activated, increasing the complexity and cost of reducing overallocation.

208 australian commodities > vol. 14 no. 1 > march quarter 2007 water use benefi ts of more fl exible management The aim of restricting access to groundwater is to increase the sustainability and effi ciency of resource use. It may be possible to minimise the costs of restricting access to groundwater (and hence increase the net benefi ts from groundwater use) by adopting more fl exible management rules. For example, it may be possible to introduce more fl exible annual extraction rules. Given the hydrogeological characteristics of some groundwater systems, there may be scope to increase returns to irrigators by providing them with the fl exibility to extract more water in dry years and less in wet years, while limiting aggregate use to long term sustainable yield. ABARE (Goesch, Qureshi and Hafi 2003) recently estimated the benefi ts of allowing irrigators located in the McLaren Vale Prescribed Wells Area in South Australia the fl exibility to access a total of 5.5 megalitres per hectare over a fi ve year period compared with a situation where extractions were restricted to a maximum of 1.1 megalitres per hectare a year. To protect the aquifer from any major deviations at the extraction point, an additional constraint, restricting extractions to a maximum of 1.5 megalitres per hectare in any given year, was also imposed. While ABARE’s research indicated that the benefi ts from more fl exible annual extraction rules were relatively modest for irrigators located in McLaren Vale, it is likely that the benefi ts from being able to access additional water in drier years would be greater the more restrictive the allocation regime, the more variable the rainfall pattern and the more valuable the irrigated farming activity. The benefi ts of more fl exible annual extraction rules would therefore be likely to increase if rainfall were to become lower and more variable in the future. complexity of shared water Shared water comprises that component of water that either feeds into a stream or river from an aquifer (the ‘gaining’ stream), or conversely, discharges from a river or stream into an aquifer (the ‘losing’ stream). Connectivity can be complex, with a single river in some instances both gaining and losing water, depending on location. It may also be the case that any amount of groundwater pumping in a connected system will deplete stream fl ow, and that the rate of depletion will vary with the rate of pumping and distance from the river. Policy makers have a number of options for addressing the ‘double allocation’ of shared water in connected systems, and reallocating this water. Where they have a good understanding of the groundwater system, and groundwater–surface water connectivity, the preferred option may be to allocate property rights to shared water and allow trade in these rights once the overallocation issue has been resolved (Goesch and Hafi 2006). The success of this management regime would, however, be highly dependent on being able to monitor groundwater irrigators’ use of shared water, and enforcing any restrictions on access to this water. These monitoring and enforcement costs could be considerable, and would need to be factored into any benefi t–cost analysis of altering existing arrangements. Similar to the case where groundwater-only systems are poorly understood, policy makers should be conservative in allocating access to shared water in systems where connectivity is poorly understood. It may also be preferable to delay the introduction of trade until the interactions between surface water and groundwater are better understood, to avoid any unwanted third party impacts.

australian commodities > vol. 14 no. 1 > march quarter 2007 209 water use

conclusion Groundwater is an important input to irrigated agriculture in Australia, accounting for nearly a quarter of agricultural water use. While it is not possible to accurately determine the extent of groundwater use in Australia, there are a number of groundwater units that are overused or approaching overuse. There is also the issue of overallocation of groundwater entitlements, with the volume of water attached to entitlements in the Murray Darling Basin exceeding sustainable yield. Increasing demand for irrigation water combined with restrictions on access to surface water may lead to the activation of groundwater licences that are currently unused or partially used. If groundwater extractions were to increase by 3 per cent a year, sustainable groundwater yield for the Murray Darling Basin is likely to be reached by around 2025. Excessive groundwater use can impose signifi cant costs on third parties, including other consumptive users and the environment. It is unlikely that price or quantity based instruments would be both effi cient and effective in achieving any desired reduction in groundwater use if used in isolation. It may, however, be possible to combine the use of price and quantity instruments to achieve a reduction in groundwater use. For example, it may be possible to introduce a cap and trade system whereby the cap provided the certainty needed to protect the integrity of the groundwater resource, with trade providing the mechanism for allocating consumptive water to its highest value uses. This cap and trade model is consistent with that being used in surface water systems in Australia. If trade were to be introduced, however, it would be important to resolve any overallocation before its introduction. If trade were introduced prior to resolving overallocation, unused and partially used entitlements may be activated, increasing the complexity and cost of reducing overallocation. Ideally, any cap on extractions would need to be set to equalise the marginal benefi ts between consumptive and environmental use, and between current and future use. It would also vary to refl ect changes in biophysical and economic variables such as reduced recharge or increased returns to irrigated activities. While more information on sustainable yield would tend to improve decision making on the level at which to set the cap, the benefi ts of acquiring additional information would need to be compared with the costs. Research on sustainable yield should be targeted in the fi rst instance at groundwater systems where extractions are leading to signifi cant environmental damage or seriously compromising future availability for high value consumptive activities. While knowledge of groundwater systems has increased in recent years, the reality is that many of these systems remain poorly understood. Where there is a high level of uncertainty about what can be sustainably extracted from these systems, it would be prudent for policy makers to be conservative in allocating access to groundwater. It may also be prudent for groundwater managers to formalise a set of management actions that would be activated in the event that groundwater stocks fell below some predetermined thresholds. These management controls would specify restrictions on extractions in the event that target or limit thresholds were exceeded. This type of transparency on management controls should not only help protect the resource, but also help users such as irrigators to make more informed investment decisions.

210 australian commodities > vol. 14 no. 1 > march quarter 2007 water use references ABS (Australian Bureau of Statistics) 2006, Water Account Australia: 2004-05, Canberra. Commonwealth of Australia 2007, A National Plan for Water Security, Canberra (www. pm.gov.au/docs/national_plan_water_security.pdf). CSIRO (Commonwealth Scientifi c and Industrial Research Organisation) 2001, Australia: State of the Environment 2001, Canberra. Earth Tech Engineering Pty Ltd 2003, Review of Selected Factors that May Change Future Flow Patterns in the River Murray System, Murray Darling Basin Commission, Canberra. Evans, R., Evans, R., Jolly, P., Barnett, S., Hatton., T, Merrick, N. and Simmons, C. 2006, National Groundwater Reform, Sydney, November (www.ncgm.uts.edu.au/media/ National_GW_Reform.pdf) Evans, R., Richardson, S., Hillier, J, Bonte, Dyson, P., Ross, J and Middlemis, H. 2003, Water- mark: Sustainable Groundwater Use within Irrigation Regions, Final report prepared for the Murray Darling Basin Commission, Canberra, August Goesch, T., Qureshi, M. and Hafi , A. 2003, Ground Water Allocation: Policies to Maxi- mise Viticultural Benefi ts, ABARE, Canberra. Goesch, T. and Hafi , A. 2006, Conjunctive Water Management: Economic Issues and Policy Options, ABARE, Canberra. Hafi , A. and Cao, L. 2002, Optimal extraction of water from a groundwater system with two linked aquifers’, ABARE paper presented at the 46th Annual Conference of the Australian Agricultural and Resource Economics Society, Canberra, 12-15 February. IAH Australia 2004, Guiding Principles for Sustainable Groundwater Management, Background Paper, Kent Town, May. Ife, D. and Skelt, K. 2004, Murray-Darling Basin Groundwater Status: 1990-2000, Murray-Darling Basin Commission, Canberra. National Academy of Sciences 1997, Valuing Groundwater: Economic Concepts and Approaches, National Academy Press, Washington DC. Natural Resource Standing Committee 2002, Case Examples of Managing Overallo- cated Groundwater Systems, Canberra. Natural Resource Management Standing Committee 2002, Groundwater Trading, Commonwealth of Australia, Canberra. National Water Commission 2006, Australian Water Resources: 2005, Canberra. Peralta, R. 1995, Assuring a Long Term Groundwater Supply: Issues, Goals and Tools, Utah State University Extension Paper, Logan. Provencher, B. and Burt, O. 1993, ‘Externalities associated with the common property exploitation of groundwater’, Journal of Environmental Economics and Management, vol. 24, pp. 139–58. Sinclair Knight Merz 2003, Projections of Groundwater Extraction Rates and Implications for Future Demand and Competition for Surface Water, Murray Darling Basin Commis- sion, Canberra.

australian commodities > vol. 14 no. 1 > march quarter 2007 211 biofuels

> graham love > +61 2 6272 2055 > [email protected]

outlook for biofuels in Australia the challenges ahead

> graham love and clara cuevas-cubria

» Australia’s relatively small and gradually expanding biofuels industry offers a potential market for agricultural feedstocks, such as grains or molasses, for ethanol production, or tallow or oilseeds for biodiesel production. » However, as feedstocks represent around 60–70 per cent of the cost of producing biofuels, the recent rise in feedstock prices, combined with the moderation in world oil prices, may put downward pressure on biofuels producer returns. » Notwithstanding this, the relative movements of forecast world oil prices and forecast local feedstock prices in 2006-07 are expected to be more favourable for biofuels producers than in many years since 1995-96.

current biofuels production in Australia Biofuels currently comprise only a small proportion of Australia’s liquid fuel supply. In 2005-06, Australia produced and consumed 57 million litres of biofuels, consisting of 41 million litres of fuel ethanol and 16 million litres of biodiesel. This compares with petrol consumption of 19 050 million litres and diesel consumption of 15 880 million litres in 2005-06. However, biofuels production and sales are rising, with more ethanol blended fuel reported to have been sold in the ﬁ rst four months of 2006-07 than in 2005-06 as a whole. Production capacity for biodiesel was boosted by the commissioning of several large new facilities in 2006. Ethanol production capacity is expected to expand in 2007 and 2008 with several large projects under way in both eastern and western Australia.

production processes

fuel ethanol Ethanol can be produced industrially or from the fermentation of biomass feedstocks. The latter are typically obtained from agricultural sources, including waste starch, molasses, corn (maize), sorghum and low quality wheat. The next generation of technology could allow cellulosic material, such as crop waste, wood waste and grasses, to be economically used as feedstocks. The energy content of fuel ethanol is typically 68 per cent of the energy content of a litre of petrol, regardless of the feedstock used. Fuel ethanol is produced in two forms, hydrous (or hydrated) and anhydrous. Hydrous ethanol typically has a purity of about 95 per cent and has been used in Brazil since the late 1970s as a fuel in motor vehicles with modiﬁ ed engines. A second stage process is

212 australian commodities > vol. 14 no. 1 > march quarter 2007 biofuels used to produce high purity anhydrous ethanol for use in petrol blends. The 95 per cent pure product is dehydrated using azeotropic processes or a molecular sieve to remove the water, resulting in 99 per cent pure ethanol. Anhydrous ethanol is typically blended with petrol for use in unmodifi ed engines. Since 1 July 2003 the maximum permissible limit on the ethanol component in petrol in Australia has been 10 per cent — this blend is known as E10 (Australian Government 2005). biodiesel Biodiesel is usually produced from a reaction of vegetable oil or animal fat with an alcohol such as ethanol or methanol in the presence of a catalyst to yield mono-alkyl esters and glycerine in a process known as transesterifi cation. Depending on the feedstocks and processes employed, byproducts can include glycerine, fatty acids, fertiliser and oilseed meal. Potential feedstocks for biodiesel include vegetable oils, animal fats, such as tallow, and used cooking oils and fats. The energy content of biodiesel varies between 88 per cent and 99 per cent that of diesel, depending on the feedstock and esterifi cation process used. Subject to engine manufacturers’ advice, biodiesel can be used as a direct replacement for diesel or in a blend such as B5 (5 per cent biodiesel and 95 per cent diesel) or B20 (20 per cent biodiesel and 80 per cent diesel) (Australian Government 2005). Biodiesel can be made in virtually any scale of plant. Many farmers or groups of farmers are considering setting up small scale production facilities for biodiesel production to produce fuel for their own farm operations (Potter and McCaffery 2006). In southern Australia, oilseeds, such as canola or mustard, are being investigated as feedstocks for biodiesel production. Researchers who have investigated both the technical and economic aspects of small scale biodiesel production have concluded that any local or regional investment in biodiesel needs to occur with a thorough knowledge of the costs and the risks associated with variable feedstock and fi nal product prices. economics of production An analysis of the economics of biofuels production (Short and Riwoe 2005) found that the three main factors infl uencing the rates of return obtainable by biofuels producers were: » world oil prices » costs of production, especially feedstock costs, and » government support. oil prices Ethanol and biodiesel blended fuels are sold mainly into the transport fuels market in competition with traditional fuels, such as petrol and diesel. Consequently, the price that biofuels producers are able to obtain for their product will depend on the domestic prices of petrol and diesel, prices that are related in turn to the world oil price and the Australian exchange rate. The world oil price used in ABARE’s analysis is the average price for West Texas Intermediate (WTI). WTI is a lighter grade crude oil similar to Tapis (east Malay- sian), the particular crude oil used by Australian refi ners as a price indicator. World oil prices rose in 2004-05 and 2005-06, with the WTI price rising from an average of US$44 a barrel in the third quarter 2004 to US$70 a barrel in the second quarter 2006. After remaining at this level in the third quarter 2006, the price of WTI fell to average US$60 a barrel in the fourth quarter of 2006, and is forecast to average lower australian commodities > vol. 14 no. 1 > march quarter 2007 213 biofuels

West Texas Intermediate (WTI) in the ﬁ rst and second quarters of 2007. Consequently, the 1 price nominal price price for WTI is forecast to average lower in 2006-07 than in 2005-06. Since the value of the Australian dollar WTI price 2004-05 2005-06 2006-07 a has averaged around US75 cents since the fourth quarter US$ a barrel 48.77 64.22 61.02 of 2004, Australian dollar denominated oil prices have A$ a barrel 65.03 85.63 79.76 followed a similar pattern (table 1). a Average of actual prices for July 2006 – February 2007 and ABARE forecasts for March–June 2007. The most For biofuels producers, the easing of world oil prices recent calendar year forecasts for the WTI are in this issue of Australian Commodities. in 2006-07 and corresponding reductions in Australian denominated import prices for petrol and diesel mean that producers are likely to have to reduce the asking price of their product to remain competitive against petrol and diesel. cost of production The cost of producing biofuels includes both capital costs and operating costs. Feedstock costs represent a large proportion of the latter, typically 60–70 per cent. Fuel ethanol producers located in the grain belt use grains such as sorghum and wheat as feedstocks, while producers located in coastal north east Australia use molasses, derived from sugar cane. Biodiesel producers use a variety of fats and oils as feedstocks including used cooking oil, tallow and oilseeds, depending on availability and seasonal conditions. Byproducts from the production process can potentially yield a stream of revenue in the form of distillers’ grains (when ethanol is produced from grain) or glycerine (when biodiesel is produced). In 2006-07, the domestic prices of many feedstocks, particularly grains and oilseeds, are forecast to average unit gross values of production higher than in 2005-06 because of a combination of 2 of feedstocks in Australia higher world prices and drought induced lower domestic supplies (tables 2, 3). 2004-05 2005-06 2006-07 For biofuels producers, higher prices for agricultural A$/t A$/t A$/t feedstocks in 2006-07 are likely to increase costs of Wheat 197 228 269 f production and reduce rates of return on invested capital. Sorghum 134 175 264 f Sugar cane a 26 27 32 f Consequently, 2006-07 will be a challenging year for Canola seed 326 372 546 f Australian biofuels producers. Tallow b 542 447 486 c World oil prices are expected to average lower in a The price of the sugar based feedstock used for ethanol 2006-07 than in 2005-06. However, they are still fore- production, C molasses, is likely to move with cane prices. b Unit export value for inedible mixed beef and mutton tallow, cast to remain relatively high in historical terms. Other in drums. c Average for July–November 2006. f ABARE forecast. things being equal, it may be argued that the more feed- Source: ABARE, Australian Commodities, March quarter 2007. stock purchasable with a barrel of oil, the more market conditions favour biofuels producers, whose products production of feedstocks in compete against traditional petroleum fuels derived from 3 Australia crude oil. In ﬁ gure A, the estimated quantities of different biofuels feedstocks that can be purchased by the price of one 2004-05 2005-06 2006-07 barrel of oil are presented. This is estimated by converting Mt Mt Mt the West Texas Intermediate price of oil to Australian Wheat 21.9 25.1 9.8 dollars and then dividing it by the unit gross values of Sorghum 2.0 2.0 1.0 production for the commodities shown for each year. Sugar cane 37.8 38.2 36.0 Canola seed 1.5 1.4 0.5 These estimates provide a broad indication of the favour- ability of biofuels production. Because the quantity of Sources: ABARE, Australian Commodities, March quarter 2007; Australian Crop Report, February 2007. biofuel obtainable from a particular feedstock can differ

214 australian commodities > vol. 14 no. 1 > march quarter 2007 biofuels between different feedstock types, fi gure A should not quantities of feedstock purchasable be taken as a comparison of the commercial viability A with the price of one barrel of oil of using different feedstocks. Between 1995-96 and 1998-99, the annual oil 3.0 600 price (WTI) was relatively low, in the range US$14–22 a barrel (US$18–29 in real terms – 2006-07 dollars) 2.5 500 sugar cane sorghum — equivalent at that time to A$23–29 a barrel (A$29– 2.0 left axis 400 37 in real terms). Prices for the agricultural commodities, including grains, were relatively high over that 1.5 300 period, although easing. Overall, these price move- wheat ments were relatively unattractive for biofuels produc- 1.0 200 tion in that period. However, in 1999-2000, oil prices 0.5 canola 100 rose appreciably and feedstock prices continued to ease, making biofuels production relatively more tonnes kg attractive in the years 1999-2000 and 2000-01 (the 1997 2000 2003 2006 fi r s t p e a k i n fi g u r e A ) . -98 -01 -04 -07 The price of sugar cane is used in the calculation as a proxy for In 2001-02, domestic feedstock prices rose. Even the price of C molasses, the cane based product that historically though oil prices remained high, the relative attractive- has been used in Australia for ethanol production. ness of biofuels production appears to have declined (see the trough in fi gure A). More recently, in 2004-05, the world oil price moved even higher and feedstock prices eased, increasing the attractiveness of biofuels production once more. While not as favourable as in 2004-05 and 2005-06 (when oil prices were at recent peaks and feedstock prices lower) the relative movements of forecast world oil prices and forecast local feedstock prices in 2006-07 are still expected to be more favourable for biofuels producers than in many of the years since 1995-96. government support biofuels excise rates in Australia a In addition to world oil prices and domestic feedstock prices, the other main infl uence 4 on biofuels producer returns is the level of ethanol biodiesel support received from the government. In excise effective relief excise effective relief 2001, the Australian Government set an nominal nominal real nominal nominal real objective that biofuels would contribute at 2004-05 2004-05 least 350 million litres to the total fuel supply c/L c/L c/L c/L c/L c/L by 2010. 2005-06 0 38.1 37.1 0 38.1 37.1 Production of both fuel ethanol and 2006-07 0 38.1 36.2 0 38.1 36.2 biodiesel is encouraged through the payment 2007-08 0 38.1 35.3 0 38.1 35.3 of production grants (subsidies) of 38.143 2008-09 0 38.1 34.5 0 38.1 34.5 2009-10 0 38.1 33.6 0 38.1 33.6 cents a litre on biofuels. The production 2010-11 0 38.1 32.8 0 38.1 32.8 grants ensure the effective rate of excise for 2011-12 2.5 23.4 19.7 3.8 32.1 25.6 biofuels will be zero until 1 July 2011, when 2012-13 5.0 20.9 17.1 7.6 28.3 21.9 fuel excise will begin to be applied. The 2013-14 7.5 18.4 14.7 11.4 24.5 18.3 effective rates of excise will increase annu- 2014-15 10.0 15.9 12.4 15.3 20.6 14.8 2015-16 12.5 13.4 10.2 19.1 16.8 11.6 ally until fi nal rates of 12.5 cents a litre for a The Short and Riwoe (2005) analysis was in 2004-05 terms. From 2011-12, excise for ethanol and 19.1 cents a litre for biodiesel biofuels will be applied on an energy content rather than volume basis. Since ethanol has an energy content of 0.68 relative to petrol, Short and Riwoe (2005) assumed that the are reached on 1 July 2015. In energy relevant nominal excise baseline for ethanol would fall to 25.9 cents a litre in 2011-12. The energy content of biodiesel was assumed to be 94 per cent that of petrol, resulting in a nominal excise baseline of 35.8 cents a litre from 2011-12. Source: Short and Riwoe (2005, tables 9–10, pp. 15–16) australian commodities > vol. 14 no. 1 > march quarter 2007 215 biofuels

content terms, these ﬁ nal rates of excise represent a 50 per cent discount on the rates levied on petrol and diesel (ATO 2006). The full refund of excise through the production grant will allow producers to operate successfully at a higher cost of production than if excise had not been refunded. However, because production grants are paid in nominal terms on a per litre basis, the amount of support they deliver would effectively fall through time in real terms, even before the scheduled reduction in support from 1 July 2011 (table 4). Government support has also been provided to some biofuels producers through the $37.6 million Biofuels Capital Grants Program. Seven companies received these grants, provided at a rate of 16 cents a litre for new or expanded projects producing a minimum of 5 million litres of biofuels a year (DITR 2006b). Over the lifetime of the plant, however, the amount of support delivered by the program is estimated to be in the order of 1 cent a litre of production. In December 2005, after considering the recommendations of the 2005 Biofuels Task- force (Australian Government 2005), the government announced a Biofuels Action Plan. Under this plan, company action plans are submitted to the Australian Government by petroleum product reﬁ ners and marketers. Collective company plans for biofuels production and sales currently exceed the 350 million litres target. In August 2006, the government announced a new $17.2 million Ethanol Distribution Program aimed at assisting service station operators to upgrade their equipment and increase their sales of ethanol blended fuel. The program recognises the need for action at the retail level to complement that at the production level (DITR 2006a). The Renewable Energy Development Initiative (REDI) is a $100 million grants program supporting renewable energy innovation and related early stage commercialisation. Under this initiative, a number of biofuels projects have been awarded grants, including projects for algal feedstock diesel production, technology for converting plant waste into ethanol, and high yielding sugar cane feedstock technology (Bioenergy Australia 2007).

current and planned capacity During 2005-06 there was increased interest in biofuels, fuelled by a sharp increase in oil prices and relatively low feedstock prices. Several new biofuels production facilities were planned to come on line in 2006 and 2007; however, some of these have been postponed, as the effects of drought and the downward trend in oil prices became apparent. Notwithstanding the challenge posed by the current easing in oil prices and high cost of many feedstocks, biofuels producers will have assessed their long term prospects over a range of possible oil and feedstock price scenarios. Based on an assessment undertaken in February 2007, the current and planned capacity of biofuels plants is shown in tables 5 and 6. ethanol There are currently three ethanol production facilities in Australia — the Manildra facility in New South Wales and the CSR and Rocky Point distilleries in Queensland (table 5). The largest of these is the 100 million litres a year Manildra facility, followed by CSR distilleries in Sarina, which expanded their capacity to 32 million litres a year in August 2006. Several large new ethanol production facilities are planned or are currently under construction (table 5). Under an agreement with BP, the annual production capacity of Primary Energy’s new ethanol plant in Kwinana, Western Australia, could be doubled from

216 australian commodities > vol. 14 no. 1 > march quarter 2007 biofuels

80 to 160 million litres. Commencement of construction of a 120 million litres a year plant at Gunnedah is scheduled for 2007, while recently a 160 million litres a year plant has been proposed for Brisbane. With construction of its Swan Hill ethanol project expected to be complete in 2007, Australian Ethanol is currently evaluating sites for similar facilities, all of which would use grain as a feedstock. Current concerns for prospective fuel ethanol producers include the rising cost of feedstocks, and securing a regular supply of feedstocks as well as contracts for the supply of biofuels for blending. Some earlier proposed fuel ethanol projects may have been halted or postponed because of these concerns. Regularity of feedstock supply may remain a concern for ethanol producers, particularly grain based producers, as grain based production capacity increases. If all the grain based facilities in table 5 were to come on stream from the planned startup dates and to operate at full capacity, ethanol producers could be seeking as much as 2.5 million tonnes of grain (sorghum or wheat) a year by 2011-12. It is doubtful whether all of this could be supplied as sorghum, traditionally the lowest priced of the coarse grains, production of which averaged 2 million tonnes a year from 2003-04 to 2005-06, of which an average of 1.7 million tonnes a year were consumed by existing domestic users. In most years, wheat would be available even if sorghum were not. Wheat production is higher than sorghum (averaging 24.4 million tonnes a year over the same period) and

5 ethanol production capacity in Australia a feedstock use at company/location capacity startup date feedstocks full capacity b ML/yr kt/yr Manildra Group 100 existing waste wheat starch, na Nowra, New South Wales some low grade grain CSR Distilleries 32 expanded in molasses 128 Sarina, north Queensland August 2006 Rocky Point Sugar Mill 20–25 c March 2008 molasses, 80–100 Woongoolba (Brisbane), Queensland expansion sorghum

Primary Energy 120 2009 d coarse grains, 300 Gunnedah, New South Wales (mostly sorghum) wheat Primary Energy 160 2009 d grain 400 Pinkenba (Brisbane), Queensland Australian Ethanol 100 early 2008 wheat, corn, barley 245 Swan Hill, Victoria Dalby Bioreﬁ nery 80 mid-2008 sorghum 200 Dalby, Queensland Primary Energy 160 planned 2008 wheat 400 Kwinana (Perth), Western Australia Australian Ethanol 200 2010 e wheat 490 Coleambally (Riverina), New South Wales Australian Ethanol, 200 2010 e wheat 490 Lake Grace, Western Australia a Based on a review of the projects listed in Australian Government (2005), and recent announcements. Not all proposed projects may be included. b ABARE estimate. c Currently 5 million litres. d Based on plans to start construction early 2008. e Based on feasibility studies currently under way.

australian commodities > vol. 14 no. 1 > march quarter 2007 217 biofuels

with domestic consumption averaging 5.3 million tonnes a year, the exportable surplus of wheat is higher. Nonetheless, large falls in wheat production can occur in drought years – wheat production fell to only 10.1 million tonnes in 2002-03 from 24.3 million tonnes the year before, and to 9.8 million tonnes in 2006-07, down from 25.1 million tonnes the year before. The appearance of a new group of domestic grain buyers requiring at least 2.5 million tonnes of grain would also represent a potential increase in total domestic sorghum and wheat use of the order of 35 per cent over average domestic use in the period 2003-04 to 2005-06. biodiesel Four new biodiesel facilities were commissioned in 2006 (table 6). The annual production capacities of the two located near Brisbane are 160 million litres and 30 million litres respectively, while those of the new facilities located at Adelaide and Bunbury (Western Australia) are both 45 million litres. A large 140 million litre a year facility at Darwin has been completed and is expected to begin producing at full capacity early in 2007. Over 6 potential biodiesel production capacity in Australia a feedstock use at location capacity startup date feedstocks full capacity b ML/yr kt/y Biodiesel Industries Australia 15–20 existing tallow, used 14–18 Rutherford (Hunter Valley), New South Wales cooking oil, canola oil Australian Renewable Fuels 45 March 2006 canola oil, tallow, 41 Largs Bay (Adelaide), South Australia used cooking oil Eco-Tech Biodiesel 30 February 2006 tallow, used 28 Narangba (Brisbane), Queensland cooking oil Australian Biodiesel Group 160 July 2006 tallow, soy bean oil 147 Narangba (Brisbane), Queensland Australian Renewable Fuels 45 July 2006 canola oil, tallow, 41 Picton (Bunbury), Western Australia used cooking oil Natural Fuels Australia 138 February 2007 palm oil, 130 Darwin, Northern Territory soybean oil South Australian Farmers Fuel 15 2008 canola oil, tallow, 14 Adelaide, South Australia used cooking oil Biodiesel Producers Australia 60 mid-2007 tallow, used cooking oil, 55 Albury, New South Wales vegetable oils Axiom Energy 150 mid-2007 used cooking oil, 135 Geelong, Victoria tallow, palm oil Riverina Biofuels 40 2007 tallow 36 Deniliquin, New South Wales Energetix Biodiesel 100 c mid-2007 tallow, canola oil, 90 Melbourne, Victoria expansion used cooking oil Future Fuels 30+ existing canola oil na Moama, New South Wales BP Australia 110 2007 tallow 100 Bulwer, Queensland d a Based on a review of the projects listed in Australian Government (2005), and recent announcements. Not all proposed projects may be included. b ABARE estimate. c Currently 12 Ml/yr. d Biofuel production facility to use tallow hydrogenation technology developed by BP.

218 australian commodities > vol. 14 no. 1 > march quarter 2007 biofuels the next year an expansion is planned for the Energetix Biodiesel facility and several other producers plan to open new facilities (table 6). Although current biodiesel production capacity is larger than ethanol production capacity and there are more projects expected to come on line in the short term, biodiesel producers are also experiencing diffi culties in securing customers for their product. The Australian Biodiesel Group’s Berkeley Vale refi nery in New South Wales, for example, was mothballed in December 2006, leaving their Narangba facility in Queensland to meet demand requirements. In addition, many of the plants currently operational are operating signifi cantly below full production capacity and expect to continue doing so over the next year. The relative fl exibility of biodiesel plants to use a variety of vegetable oils and animal fats makes it more diffi cult to calculate the likely increase in demand for particular vegetable oils or animal fats if all the new facilities shown in table 6 were to come on stream from the planned startup dates and were to operate at full capacity. The potential total feedstock (tallow, used cooking oil and oilseeds) requirements in table 6 exceed 800 000 tonnes. Industry estimates put the annual availability of used cooking oil at around 50 000 tonnes a year, while annual production of tallow in Australia averages around 500 000 tonnes, of which around 350 000 to 400 000 tonnes is exported. On these fi gures, local used cooking oil and tallow alone would be unable to provide all feedstock requirements if all the new facilities shown in table 6 were to come on stream from the planned startup dates and operate at full capacity. Unlike grain-based ethanol producers, however, biodiesel producers are generally located at or near ports, and would have the option of supplementing local supplies of vegetable oils and animal fats with imported oils such as palm oil or imported tallow if required. issues Based on output from the new production capacity established in 2006 and further new capacity expected to be added from now until 2010, Australia’s output of biofuels is expected to increase over the next few years. The growth of the biofuels industry has raised many issues, including the rationale for government support, its effectiveness and cost, resource allocation effects, environmental benefi ts, the effect on domestic markets for agricultural feedstocks, security of supply for feedstocks, and the potential effect on Australian producers of agricultural feedstocks. The current system of government support for biofuels can be expected to result in economic costs to the community and its value to producers will decline over time (Short and Riwoe 2005). Because production grants are paid on a nominal per litre basis, in real terms, the amount of support they deliver will effectively fall over time, even before the scheduled reduction in support from 1 July 2011. On the fi gures shown in table 4, the real per litre support provided by refunding fuel excise for fuel ethanol could fall to 27 per cent of its 2005-06 level by 2015-16, while the real support provided for biodiesel could fall to 31 per cent of its 2005-06 level. Other things being equal, in the long term, this decline in support could reduce the effectiveness of the production grants in encouraging greater production of biofuels. Furthermore, while the real level of support per litre will decline through time, the fi nancial and economic cost of delivering this support could rise appreciably in the future as total biofuels production rises.

australian commodities > vol. 14 no. 1 > march quarter 2007 219 biofuels

The planned reduction in government support, particularly if combined with a further easing in world oil prices, may encourage biofuels producers to seek ways of reducing production costs, particularly feedstock costs. However, there may be limited scope to reduce feedstock costs, as the prices for the feedstocks currently used by biofuels producers are inﬂ uenced by competition from other human or livestock users, and available supplies. In the longer term, if biofuels production were to increase signiﬁ cantly, domestic feedstock prices could rise because of the additional demand for feedstocks from biofuels producers. The payment of production grants for biofuels effectively represents an implicit tax on other consumers of these feedstocks. Some of the potential problems caused by the competition for feedstocks between biofuels producers and other consumers may be reduced when biofuels are able to be commercially produced from alternative, nonfood sources such as cellulosic raw material. Research and development of this technology is being undertaken in a number of countries.

references ABARE, Australian Commodities, vol 14, no. 1, March quarter 2007. ATO (Australian Taxation Ofﬁ ce) 2006, Alternative Fuels Fact Sheet, Canberra (www. ato.gov.au). Australian Government 2005, Report of the Biofuels Taskforce to the Prime Minister, Department of the Prime Minister and Cabinet, Canberra, August. Bioeneregy Australia 2007, ‘Renewable energy development initiative’, Bioenergy Newsletter, Sydney, January (www.bioenergyaustralia.org/newletter/news29/ Newsletter29_Jan07.pdf). DITR (Australian Government Department of Industry, Tourism and Resources) 2006a, Help for Service Stations to Increase Ethanol Sales, Canberra, August (www.industry. gov.au). —— 2006b, Government Biofuels Initiatives, Canberra, December. Potter, T. and McCaffery, D. 2006, Biodiesel in Australia – Small Scale Production, GRDC Grains Research Update for Irrigation Croppers, CSIRO Land and Water Division, Grifﬁ th, New South Wales. Short, C. and Riwoe, D. 2005, Biofuels: An Assessment of their Viability, ABARE Report to the Biofuels Taskforce, Canberra, July.

220 australian commodities > vol. 14 no. 1 > march quarter 2007 australian food industry

> lisa elliston >> +61 22 6272 2091 > [email protected] australian food industry performance and competitiveness

> christopher short, courtney chester, peter berry and lisa elliston

» The Australian food industry is an important component of the Australian economy, accounting for around 20 per cent of manufacturing sector output. » Growth of the Australian food sector has been strongly export oriented, with exports growing at around 2 per cent a year. » A key trend in world food markets is increasing globalisation, driven by large multinational food manufacturers and supermarket chains with the ability to source their input requirements from many different countries. Greater globalisation and the increased competition it brings are major issues for the Australian food industry. » Australia’s continued international competitiveness in food products requires ongoing improvements to multifactor productivity and investment in research and development. food manufacturing in Australia Since the late 1970s the value of output from Australia’s manufacturing sector as a whole has declined as a proportion of gross domestic product (GDP). Within the sector, food manufacturing accounts for about 20 per cent of output, and remains one of Australia’s largest manufacturing industries (ﬁ gure A). Growth in the value of output from the food industry averaged around 2.0 per cent a year over the past ten years, slightly higher than the 1.9 per cent fig A industry value added, Australian a year average for the manufacturing sector as a manufacturing industry in 2005-06 dollars whole. other manufacturing Geographically, the distribution of food manufac- 80 machinery and equipment turing in Australia closely resembles the distribution of population, with the bulk of the industry located metal products 60 nonmetallic mineral products petroleum, coal, chemical, etc For more information, see Short, C., Chester, C. 40 printing, publishing, and Berry, P. 2006, Australian Food Industry: recorded media wood, paper products Performance and Competitiveness, ABARE Research 20 Report 06.23 Prepared for the Australian Govern- textile, clothing, footwear ment Department of Agriculture, Fisheries and Forestry, Canberra, December — available on $b food, beverage, tobacco www.abareconomics.com 1995-96 2004-05 australian commodities > vol. 14 no. 1 > march quarter 2007 221 food industry

figB state shares in Australian food, along the east coast, predominantly in Victoria and beverage and tobacco New South Wales (fi gure B). Between 1998-99 manufacturing , 2002-03 and 2002-03, most of the growth in the industry was concentrated in New South Wales. Tasmania 3% Within food manufacturing, the most solid growth Western Australia 6% over the past fi ve years has been in wine, beer and South Australia New South 10% Wales 35% malt, and soft drinks, cordial and syrup (fi gure C). Although not the largest food category overall, between 1997-98 and 2003-04 the value of wine Queensland 17% production almost doubled, to $1.7 billion (in 2005- 06 dollars). The other beverage categories and meat also had large absolute increases in value added, of Victoria 29% about $300 million (in 2005-06 dollars) each. Meat products were the largest single product category in terms of value added, worth $3.4 billion (in 2005-06 dollars) in 2003-04.

fig C Australian food, beverage and domestic consumption tobacco industry value added, In Australia, consumer expenditure on food is rela- by subsector tively insensitive to changes in income, with expen- wine diture changing by smaller proportions than the beer and malt changes in household income. Not surprisingly, total 15 soft drink, cordial and syrup household expenditure on food and nonalcoholic other food beverages increased by only about 3 per cent in real 10 bakery products terms between 1988-89 and 2003-04, equivalent flour mill and cereal food to an average growth rate of 0.2 per cent a year. oil and fat Consumption expenditure increased most signifi cantly 5 fruit and vegetable processing for poultry, seafood and fresh fruit and vegetables, dairy products and shifted away from meat, eggs, grains and sugar. 2005-06 The overall trend in expenditures suggests that, since $b meat products 1948-49, consumers may have been including higher 1997-98 2003-04 proportions of high value foodstuffs such as seafood in their diets. food exports Between 1995-96 and 2004-05, total food exports (that is, minimally, substantially and elabourately transformed food products) increased by $4 billion to $24 billion (in 2005- 06 dollars), at an average growth rate of around 2 per cent a year. Meat products have been the main export category, although there have also been large increases in wine and dairy exports. Despite Queensland being only the third largest producer of manufactured food products in Australia, the state had the largest exports, with shipments valued at more than $5 billion (in 2005-06 dollars) in the substantially and elabourately transformed categories in 2004-05. The main export commodities from Queensland were meat ($3 billion) and sugar ($1 billion). In 2004, Asia was the biggest market for Australian food exports (US$7.0 billion— fi gure D). The composition of exports differed signifi cantly between regions — for example, while the European export market was worth only about US$1.5 billion in 2004, it was the largest export market for Australian wines.

222 australian commodities > vol. 14 no. 1 > march quarter 2007 food industry fig D Australian food exports, by destination region, 2004

other food and beverages 80 wine seafood 60 grains, pulses and oilseeds fruit, vegetables 40 and nuts flour and bakery products 20 dairy % meat Americas Asia Europe Pacific US$2.6b US$7.0b US$1.5b US$0.8b employment and productivity in the food industry High labour and multifactor productivity growth in food manufacturing has contributed to output growth in the sector, enabling employment to remain relatively unchanged over the past twenty years. On a year to year basis, employment levels fl uctuate, refl ecting fl uctu- ating incomes in the food industry. These fl uctuations are associated with primary product supplies being affected by major climatic events, such as droughts, fl ooding and severe storms, or through impacts on the value of sales caused by exchange rate movements or sudden shifts in consumption patterns. research and development expenditure Research and development (R&D) are closely linked with the location of production centres, which is refl ected in the distribution of R&D expenditure between states. Most of the $50 million (in 2005-06 dollars) increase in food, beverage and manufacturing research and development expenditure between 1997-98 and 2003-04 occurred in Victoria, and close to 70 per cent of total R&D expenditure was in New South Wales and Victoria. R&D expenditure tended to be undertaken by fi rms with 200 or more employees, and mostly (88 per cent) covered labour costs and other current expenditure (not including capital). market concentration The global food industry is dominated by large, multinational fi rms, and the Australian market refl ects that trend. In 2003, about 75 per cent of industry revenues in Australia were generated by fi fty fi rms, more than half of which were foreign owned or publicly listed companies. However, the market shares of the largest fi fty fi rms varied widely in individual food categories — from 95 per cent for milk and cream processing to 7 per cent for seafood. Almost half of the largest fi fty fi rms were foreign owned companies. These fi rms generated about 45 per cent of domestic revenue in the fi ve years to 2002. There were about nine fi rms in each of publicly listed companies, cooperatives and privately owned companies, which generated 30 per cent, 14 per cent and 10 per cent respectively of domestic revenue.

australian commodities > vol. 14 no. 1 > march quarter 2007 223 food industry

table 1 global food sales, 2002 supply chain 2002 US dollars In 2001-02, inputs (in value terms) into food manufac- retail food turing comprised raw agricultural products (32 per cent), stores service total major services (26 per cent), labour (17 per cent), food US$b US$b US$b products (13 per cent) and other industrial inputs (12 fresh food 531 382 913 per cent). Output from the industry was consumed by processed products 1 762 1 420 3 182 households (43 per cent), exported (22 per cent), used packaged food 1 148 828 1 976 as inputs by other industries (33 per cent) or through beverages 614 592 1 206 changes in inventories (2 per cent). – alcoholic drinks 316 422 729 – hot drinks 53 12 65 The meat products industry, including beef and dairy – soft drinks 245 167 412 cattle, sheep meat, poultry and pigs, was the largest total food 2 293 1 803 4 096 industry examined. In 2001-02, the industry had a total supply value of around $15 billion (in 2001-02 dollar Source : Regmi and Gehlhar (2005b). values). Agricultural goods were the main input (57 per cent), followed by major services and labour. Within the major services inputs, transport and storage, wholesale trade and business services were the main services provided. Of the buyers of meat products, industries consumed the largest proportion of output (37 per cent), followed by exports (32 per cent) and household consumption (25 per cent). global food trends Food sales worldwide in 2002 are estimated to have been worth more than US$4 trillion (in 2002 dollars), with processed products (packaged foods and beverages) making up more than 70 per cent of this amount (table 1). Packaged foods alone were worth approximately US$1.9 trillion (in 2002 dollars). A key trend in food consumption is that the rate of growth of consumption per person, albeit from a low base, is higher for low and middle income countries. As incomes rise, the rate of growth in food consumption per person tends to decline (fi gure E). The composition of food consumed also changes as incomes increase, with changes to the proportion of different foods in consumer diets (fi gure F). Consumption of fi sh, dairy and meat products all increase as incomes

figE food budget as a share of figF food groups as a share of household expenditure food budget other food fruit and other food 40 vegetables 80 fruit and oils and fats vegetables 30 dairy 60 oils and fats fish dairy meats 20 40 fish cereals meats 10 20 cereals

% % low middle high low middle high income income income income income income Expenditure in 2002 by income group (based on per person gross national income in US dollars): low income: ≤US$760; middle income: US$761–9360; high income: ≥ US$9361 (World Bank 2000).

224 australian commodities > vol. 14 no. 1 > march quarter 2007 food industry rise, while there are declines in the proportions of cereals, oils and fats, and fruits and vegetables. The responsiveness of household consumption to income changes also varies with level of income, with signifi cant differences in both the magnitude and range of income responsiveness for different food categories. Per person consumption of food in high income countries tends to have relatively low responsiveness to income changes and narrow ranges of responsiveness between different categories, whereas the inverse holds for developing countries. changing consumer preferences Refl ecting the difference in income growth rates between high and low income countries, the opportunities for the food industry to expand volumes sold within domestic food markets tend to decline as incomes increase. In high income countries, which also tend to have low or declining population growth, fi rms tend to increase their market share through product differentiation. The types of foods likely to be developed include products that can be sold on the basis of specifi c sensory appeal (colour and fl avour enhancement), desired nutritional content, relevant health benefi ts, food safety, origin of production and processing practices or greater convenience. industry location and trade The global food processing industry is dominated by a relatively small number of fi rms. These fi rms operate food processing facilities across countries and are responsible for most of the investment in such operations. Despite a relatively high concentration in ownership of branded products and production facilities, the existence and location of food processing industries is strongly infl uenced by the costs of manufacturing and distribution within a region or country. The various economic forces at work in the market for inputs (raw materials, labour and capital investment) mean there is no reason to expect that countries that have a comparative advantage in producing agricultural goods used as raw inputs to food manufacturing will be advantaged in producing manufactured foods for export to other countries. The economic characteristics of food manufacturing have a signifi cant role in determining where processing plants are located internationally. Access to investment funds and new technologies are two of the most important inputs to the production of elabourately transformed foods as most manufacturing processes are capital intensive. The location of manufactured food production is not necessarily dependent on the availability of the natural resource endowments required to produce raw material inputs. This is because raw product inputs such as refi ned sugars, starches and grains are relatively nonperishable and easily transportable without loss of nutritional value or quality. Another factor affecting food trade is the cost of the trading activities. Trade related costs include such things as transport charges, cost of coordinating deliveries for managing supply chains with multiple inputs from a variety of regions, and communication and trans- actions costs (such as cost of meeting legal and regulatory requirements). Together, these factors can result in a decline in trade, the further the fi nal market is from the country where the goods are produced. In this regard, Australia performs well compared with other trading nations given Australia’s distance from its major trading partners. International trade in food products is highly regionalised — with most trade occurring intraregionally. That is, exports and imports of food products occur predominantly within

australian commodities > vol. 14 no. 1 > march quarter 2007 225 food industry

Asia, within the European Union and within the North American Free Trade Area rather than across regions. These trade fl ow patterns provide an indication that the desire to locate processing facilities close to fi nal markets exerts a strong infl uence on the location of food processing industries across countries. Australia’s export performance Comparative advantage is a fundamental economic driver in determining the long run export performance of an industry. By engaging in trade, countries that specialise in producing goods in which they are relatively effi cient will maximise their economic benefi ts. For Australia, the composition of food exports is such that 95 per cent of the value of exports occurs in the bulk, and minimally or substantially transformed product categories. Only a small percentage of Australia’s food exports are represented by elabourately transformed products such as confectionery products. Analysis of the rate of growth of food exports relative to the growth in world trade on a product line basis indicates that over 75 per cent of the value of total food exports is in products in which the Australian share of export markets is increasing. In addition, 35 per cent of total exports are occurring in products for which the rate of annual growth in trade exceeds that of the growth in world trade for food products in total. That is, 35 per cent of Australian food product exports are being shipped to growing world markets and are increasing their share of world trade at the same time. Conversely, only a small share — 6 per cent — of exported product lines are in markets for which both trade is declining and Australia is losing market share.

226 australian commodities > vol. 14 no. 1 > march quarter 2007 austral aia n co mmod ities

statistical tables GDP, imports

contribution to GDP, Australia in 2005-06 dollars

1995-96 2005-06 $827.3b $922.4b agriculture, forestry and fishing 3% agriculture, forestry and fishing 3% mining 6% mining 5% manufacturing 13% manufacturing 10% building and construction 7% building and construction 5%

services 73% services 75%

share of Australian imports, by source in 2005-06 dollars

1995-96 2005-06 total $99.4b $167.6b United States United States 14% other 38% 23% other 43% Japan 10%

Japan 14% China 14% China 5% Germany 5% New Zealand 5% Germany 6% New Zealand 3% Singapore 3% United Kingdom 6% Singapore 6% United Kingdom 4% agriculture $4.7b $7.2b China 3% China 5% other 14% other 22% ASEAN 16% ASEAN 15% United States other Asia 5% other Asia 7% 11% United States 13%

European New Zealand 19% European Union 25 31% New Zealand 16% Union 25 23% minerals and energy $8.5b $30.0b Indonesia 11% Indonesia 9% Malaysia 2% other 20% Malaysia 9% Singapore 7% other 39% Vietnam 3% New Zealand 2% other Asia Middle East 6% Singapore 24% 8%

Middle East 21% New Zealand 7% other Asia18% Vietnam 12%

228 australian commodities > vol. 14 no. 1 > march quarter 2007 export markets markets for Australian exports in 2005-06 dollars 1995-96 2005-06

total $97.1b $152.3b Japan 22% Japan 20% Other 38% Other 31% China 5% China 12%

Korea, Rep. of 9% Korea, Rep. of 8% European Union 25 12% European Union 25 11 % United States 6% United States 6% India 2% New Zealand 7% India 5% New Zealand 6%

agriculture $25.9b $27.7b China 9% China 11 % Other 19% Other 15%

United States 5% Japan 20% United States 11 % Japan 18%

Middle East 8% Middle East 8%

European Union 25 10% European Union 25 9% ASEAN 15% ASEAN 17% Other Asia 14% Other Asia 13%

energy $16.3b $39.4b

Other 22% Other 16% Japan 41% Japan 40% European Union 25 8% European Union 25 10%

Other Asia 8% Other Asia 11 % India 5% India 6% Korea, Rep. of 11 % Chinese Taipei 7% Korea, Rep. of 9% Chinese Taipei 5%

minerals $28.5b $52.8b China 4% Thailand 4% China 21% Other 27% India 1% Other 19%

Japan 19% Thailand 4% European Union 25 11 % India 8% European Union 25 7% Other Asia 12% Korea, Rep. of 17% Japan 17% Other Asia 22% Korea, Rep. of 8%

manufacturing $23.4b $28.8b China 5% China 8% Other 21% Japan 10% Other 25% Korea, Rep. of 5% Korea, Rep. of 4%

United States 16% New Zealand 23% New Zealand 22% United States 18% European Union 25 21% European Union 25 22% australian commodities > vol. 14 no. 1 > march quarter 2007 229 agriculture

principal markets for Australian agricultural exports

wheat barley

Iraq Kuwait 2005-06 2005-06 Malaysia Korea, Rep. of 1995-96 1995-96 United Arab Korea, Rep. of Emirates Japan Japan Egypt China Indonesia Saudi Arabia kt 500 1000 1500 20002500 3000 kt 500 10001500 2000

sugar wine

Canada Sweden New Zealand 2005-06 Chinese Taipei 2005-06 1995-96 Indonesia 1995-96 Germany Japan Canada Malaysia United States Korea, Rep. of United Kingdom kt 200 400 600 8001000 1200 ML 50 100 150 200 250

wool beef and veal Malaysia Canada

Chinese Taipei 2005-06 Chinese Taipei 2005-06 Czech 1995-96 1995-96 Republic Korea, Rep.of India United States Italy China Japan

kt50 100 150 200 250 300 kt 100 200 300 400

sheep meat cheese China Indonesia 2005-06 2005-06 South Africa Netherlands 1995-96 1995-96 European Korea, Rep. of Union 25 Japan United States Saudi Arabia Saudi Arabia

United States Japan

kt 1020 30 40 50 kt 20 40 60 80

230 australian commodities > vol. 14 no. 1 > march quarter 2007 minerals and energy

principal markets for Australian mineral and energy exports

thermal coal metallurgical coal Japan Japan Korea, Rep of India 2005-06 2005-06 Chinese Korea, Rep of Taipei 1995-96 1995-96 China Netherlands Malaysia Chinese Taipei India Brazil A$m 1000 2000 3000 4000 A$m 1000 2000 3000 4000 5000 6000

oil and gas gold

Japan India Singapore United Kingdom

Korea, Rep.of Thailand 2005-06 2005-06 New Zealand Japan 1995-96 1995-96 Indonesia Singapore China Korea, Rep.of A$m 1000 2000 3000 4000 5000 6000 A$m 500 1000 1500 2000 2500 3000

iron ore aluminium China Japan

Japan Korea, Rep of Korea, Rep of Thailand Chinese Chinese Taipei Taipei 2005-06 2005-06 United 1995-96 1995-96 Kingdom Malaysia France Hong Kong A$m 2000 4000 6000 A$m 250 500750 1000 1250 1500

copper iron and steel

Japan Korea, Rep of China United States India China Chinese Taipei New Zealand 2005-06 2005-06 Thailand 1995-96 Japan 1995-96 Korea, Rep of Hong Kong A$m200 400 600 8001000 1200 A$m 50100 150 200 250300 350 australian commodities > vol. 14 no. 1 > march quarter 2007 231 prices

indexes of prices received by farmers 1 Australia

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops sector Grains Winter crops Barley 130.8 159.9 105.9 100.1 121.2 178.7 140.0 Canola 99.7 100.9 104.4 84.5 96.4 141.7 113.4 Lupins 127.7 149.0 120.4 105.2 105.7 158.5 126.8 Oats 128.2 160.3 101.1 98.1 142.6 221.4 167.8 Wheat 132.3 134.4 109.1 99.6 115.4 136.2 117.8 Summer crops Sorghum 102.2 120.9 93.8 79.4 105.1 314.5 169.9 Total grains a 123.7 134.0 105.2 95.7 112.8 153.0 124.3 Cotton 92.7 100.1 88.2 87.0 85.0 76.9 83.1 Sugar 88.5 83.2 76.3 84.1 90.6 112.1 104.5 Hay 104.2 155.0 125.0 128.0 147.8 177.4 182.7 Fruit 117.8 108.9 123.9 114.3 187.7 225.2 232.0 Vegetables 104.3 123.8 124.6 122.2 141.2 169.4 174.5 Total crops sector 113.6 118.7 106.3 99.3 116.6 142.2 129.3 Livestock sector Livestock for slaughter Cattle 167.7 145.0 160.4 177.2 178.6 164.1 181.6 Lambs b 167.2 176.7 190.1 184.3 183.8 157.6 182.2 Sheep 204.7 185.4 230.3 195.4 202.0 156.0 238.2 Live sheep for export 156.1 179.3 178.0 164.1 176.1 179.7 179.7 Pigs 123.6 109.7 109.4 117.8 112.6 128.5 133.3 Poultry 93.0 98.5 97.7 91.9 93.1 95.1 98.8 Total 151.5 139.1 149.2 157.4 158.2 148.7 163.6 Livestock products Wool 113.9 153.2 116.5 107.4 98.4 211.0 205.3 Milk 110.5 90.7 93.4 105.7 110.9 107.2 131.7 Eggs 82.8 92.4 89.2 85.4 91.2 100.4 103.4 Total 109.0 114.0 101.6 104.6 104.7 145.1 156.4 Store and breeding stock 145.3 125.8 144.0 159.5 163.2 147.9 166.4 Total livestock sector 133.4 128.1 129.3 135.4 135.9 144.9 158.2 Total prices received 122.5 122.6 116.5 115.2 125.2 140.3 141.2

a Total for the group includes commodities not separately listed. b Lamb saleyard indicator weight 18–20 kilograms. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. Indexes for most individual commodities are based on annual gross unit value of production. 2 Prices used in these calculations exclude GST. Source: ABARE.

232 australian commodities > vol. 14 no. 1 > march quarter 2007 prices

indexes of prices paid by farmers, and terms of trade 2 Australia

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f

Farmers’ terms of trade a 108.6 101.0 94.7 90.7 94.7 100.9 100.9 Materials and services Seed, fodder and livestock Fodder and feedstuffs 105.5 167.5 148.3 140.4 140.4 172.1 154.6 Seed, seedlings and plants 112.9 118.3 104.9 97.6 92.7 110.7 101.7 Store and breeding stock 145.3 125.8 144.0 159.5 163.2 147.9 166.4 Total 116.5 150.3 142.0 140.5 141.0 158.2 151.1 Chemicals 105.6 108.0 110.0 111.9 114.6 117.3 119.5 Electricity 100.4 100.5 100.0 101.3 103.5 105.7 107.2 Fertiliser 104.3 106.9 102.8 114.4 118.2 120.5 119.3 Fuel and lubricants 128.3 127.0 144.3 167.2 208.7 203.5 197.3 Total 113.1 126.0 125.2 129.6 135.5 143.0 140.9 Labor 113.3 117.9 121.6 125.7 129.7 133.7 137.1 Marketing 112.4 115.9 118.7 121.5 125.4 129.3 132.6 Overheads Insurance 118.6 124.5 128.8 131.9 135.1 139.4 143.8 Interest paid 104.2 110.7 118.1 123.7 130.6 145.0 150.1 Rates and taxes 115.5 119.1 121.9 124.8 128.8 132.8 136.1 Other overheads 111.9 115.4 118.1 121.0 124.8 128.7 131.9 Total 109.9 115.2 120.6 125.1 130.6 140.6 145.1 Capital items 115.2 118.3 121.3 124.4 128.4 132.5 136.0 Total prices paid 112.9 121.5 123.0 127.1 132.2 139.1 140.0 Excluding capital items 112.4 121.8 123.1 127.3 132.6 139.8 140.4 Excluding capital and overheads 113.0 123.3 123.7 127.8 133.1 139.5 139.0 Excluding seed, fodder and store and breeding stock 112.1 115.6 119.2 124.4 130.5 135.1 137.8

a Ratio of index of prices received by farmers and index of prices paid by farmers. s ABARE estimate. f ABARE forecast. Note: 1 ABARE revised the method for calculating these indexes in October 1999. The indexes for commodity groups are calculated on a chained weight basis using Fisher's ideal index with a reference year of 1997-98 = 100. 2 Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 233 costs and returns

farm costs and returns 3 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f

Costs Materials and services Chemicals $m 1 550 1 649 1 691 1 749 1 655 1 760 Fertiliser $m 1 820 1 827 1 851 1 725 1 805 1 830 Fuel and lubricants $m 1 520 1 702 1 907 2 146 2 052 2 083 Marketing $m 2 433 3 567 3 433 3 636 2 510 3 574 Repairs and maintenance $m 2 392 2 453 2 493 2 602 2 468 2 610 Seed and fodder $m 4 874 4 317 4 267 3 860 5 413 4 350 Other $m 3 329 3 378 3 473 3 685 3 607 3 805 Total $m 17 918 18 893 19 116 19 403 19 511 20 011 Labor $m 3 226 3 420 3 410 3 521 3 450 3 554 Overheads Interest paid $m 2 295 2 614 2 888 3 249 3 848 3 848 Rent and third party insurance $m 412 422 432 446 448 459 Total $m 5 933 6 456 6 730 7 215 7 746 7 861 Total cash costs $m 23 851 25 349 25 846 26 618 27 257 27 872 Depreciation a $m 3 915 4 017 4 122 4 255 4 290 4 376 Total farm costs $m 27 766 29 367 29 968 30 874 31 547 32 248 Returns Gross value of farm production $m 31 513 35 871 34 996 37 900 33 753 40 084 Gross farm cash income b $m 33 563 36 493 36 191 37 450 33 303 39 634 Net returns and production Net value of farm production c $m 3 746 6 505 5 028 7 026 2 206 7 836 Real net value of farm production d $m 4 181 7 093 5 352 7 247 2 206 7 645 Net farm cash income e $m 9 712 11 144 10 345 10 831 6 046 11 762 Real net farm cash income d $m 10 839 12 151 11 011 11 172 6 046 11 475 Gross value added g $m 18 423 24 737 24 652 25 755 20 449 25 006

a Based on estimated movements in capital expenditure and prices of capital inputs. b Gross value of farm production less increase in farmers’ assets held by marketing organisations. c Gross value of farm production less total farm costs. d In 2006-07 Australian dollars. e Gross farm cash income less total cash costs. g Chain volume measures at basic prices. Reference year is 2004-05. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

unit export returns 4 Australia

Annual indexes a 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 f Farm 117.8 115.9 105.1 106.1 105.8 107.2 109.9 Energy minerals 140.8 135.2 120.2 166.1 225.0 208.6 204.8 Metals and other minerals 110.3 106.0 105.0 125.1 160.9 200.6 199.5 Total mineral resources 122.3 117.4 111.0 141.0 185.7 204.5 202.5 Total commodities 121.3 117.3 109.5 130.1 160.2 173.7 172.9

2005-06 2006-07 2007-08

Quarterly indexes b June Sep. Dec. Mar. p June s Sep. f Dec. f Mar. f June f Farm 107.8 102.8 104.6 110.6 112.2 114.1 108.2 109.4 109.4 Energy minerals 239.9 236.9 216.3 220.6 211.0 219.8 221.5 222.5 205.0 Metals and other minerals 198.2 215.0 218.4 218.0 217.6 217.3 215.2 216.1 215.6 Total mineral resources 215.3 224.9 218.7 220.1 216.2 219.5 218.8 219.8 212.9 Total commodities 176.8 182.1 178.5 181.2 178.9 181.7 179.5 180.5 175.7

a In Australian dollars. Base: 1989-90 = 100. b In Australian dollars. Base: 1994-95 = 100. p Preliminary. s ABARE estimate. f ABARE forecast. Source: ABARE.

234 australian commodities > vol. 14 no. 1 > march quarter 2007 exports

contribution to exports by sector Balance of payments basis 5 Australia

proportion of proportion of exports merchandise exports of goods and services

2005-06 Rural a Other merchandise 20% 17% Mineral resources 46% Other Services merchandise 21% 21% Mineral resources 59% Rural a 16% 2004-05 Rural a Other merchandise 24% 17% Mineral resources 41% Other Services merchandise 24% 23% Mineral resources 54% Rural a 18%

2003-04 Rural a Other merchandise 26% 18% Mineral resources 36% Other merchandise Services 25% 26% Mineral resources 49% Rural a 20%

2002-03 Rural a Other merchandise 26% 19% Mineral resources 38% Other Services merchandise 24% 25% Mineral resources 49% Rural a 20%

2001-02 Rural a Other merchandise 28% 19% Mineral resources 37% Other merchandise Services 24% 23% Mineral resources 47% Rural a 22% a Includes farm, forest and fisheries products. Source: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 235 exports

annual exports summary Balance of payments basis 6 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m At current prices Rural Cereal grains and products 4 487 5 093 5 159 4 852 4 509 5 258 Sugar and honey 1 363 1 123 1 292 1 850 1 400 1 080 Meat and meat preparations 5 655 5 758 6 937 6 709 6 893 6 758 Wool and sheepskins 3 545 2 778 2 838 2 544 2 829 2 810 Other rural a 14 809 14 072 14 124 14 576 14 064 14 059 Total 29 859 28 824 30 350 30 531 29 695 29 966 Mineral resources Coal, coke and briquettes 11 987 11 002 17 236 24 354 22 500 23 488 Other mineral fuels 11 049 8 777 11 151 13 251 15 363 15 751 Metalliferous ores and other minerals bs 15 312 15 327 20 512 29 376 36 537 40 343 Gold 7 648 7 031 6 472 9 116 9 679 11 681 Other metals cs 10 967 11 346 13 139 14 732 22 370 24 122 Total s 56 963 53 483 68 510 90 829 106 448 115 384 Total commodities sector s 86 822 82 307 98 860 121 360 136 142 145 349 Other merchandise s 28 981 27 152 29 007 33 023 na na Total merchandise s 115 803 109 459 127 867 154 383 na na Services 35 987 37 746 39 695 41 949 na na Total goods and services 151 790 147 205 167 562 196 332 na na Chain volume measures d Rural Cereal grains and products 3 520 4 774 5 159 4 877 4 075 4 863 Sugar and honey 1 231 1 231 1 292 1 327 1 181 1 220 Meat and meat preparations 6 509 6 238 6 937 6 773 7 226 7 059 Wool and sheepskins 2 456 2 494 2 839 2 696 2 660 2 974 Other rural a 14 204 14 324 14 124 15 013 14 398 16 427 Total 27 920 29 061 30 351 30 686 29 540 32 543 Mineral resources Coal, coke and briquettes 15 446 16 282 17 236 17 144 17 748 18 856 Other mineral fuels 12 719 11 023 11 151 10 707 13 261 13 826 Metalliferous ores and other minerals bs 18 225 18 798 20 513 21 164 23 827 25 993 Gold 7 490 7 198 6 473 7 033 6 870 8 061 Other metals cs 14 371 14 145 13 139 13 083 13 598 15 567 Total s 68 251 67 446 68 512 69 131 75 305 82 302 Total commodities sector s 96 171 96 507 98 863 99 817 104 844 114 845 Other merchandise s 26 492 27 648 29 004 30 946 na na Total merchandise s 122 663 124 155 127 867 130 763 na na Services 37 785 38 886 39 695 40 534 na na Total goods and services 159 183 162 583 167 562 171 299 na na

a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2004-05. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

236 australian commodities > vol. 14 no. 1 > march quarter 2007 exports

quarterly exports summary Balance of payments basis 7 Australia

2005-06 2006-07 2007-08

June Sep. Dec. Mar. p June s Sep. f Dec. f Mar. f June f

$m $m $m $m $m $m $m $m $m At current prices Rural Cereal grains and products 1 286 1 442 1 018 1 125 924 893 1 363 1 527 1 476 Sugar and honey 589 470 326 337 267 264 285 295 236 Meat and meat preparations 1 773 1 805 1 970 1 399 1 719 1 712 1 740 1 509 1 798 Wool and sheepskins 666 612 716 724 778 641 749 685 736 Other rural a 3 701 3 797 3 752 3 139 3 376 3 717 3 421 3 193 3 728 Total 8 015 8 126 7 781 6 724 7 063 7 226 7 558 7 208 7 974 Mineral resources Coal, coke and briquettes 6 022 5 831 5 486 5 773 5 410 5 877 5 937 6 240 5 434 Other mineral fuels 3 128 4 241 3 942 3 581 3 598 4 107 3 858 3 931 3 855 Metalliferous ores and other minerals bs 8 731 8 689 9 289 8 931 9 627 9 880 10 002 9 894 10 567 Gold 3 310 2 549 2 468 2 431 2 230 2 704 2 771 3 009 3 197 Other metals cs 4 412 5 102 5 578 5 906 5 785 5 591 5 937 6 243 6 351 Total s 25 603 26 412 26 763 26 623 26 650 28 159 28 504 29 317 29 404 Total commodities sector s 33 618 34 538 34 544 33 347 33 714 35 385 36 062 36 524 37 378 Other merchandise s 8 677 8 610 na na na na na na na Total merchandise s 42 295 43 148 na na na na na na na Services 10 487 11 194 na na na na na na na Total goods and services 52 782 54 342 na na na na na na na Chain volume measures d Rural Cereal grains and products 1 262 1 419 921 927 808 799 1 236 1 426 1 402 Sugar and honey 341 384 309 279 209 353 336 304 227 Meat and meat preparations 1 804 1 863 2 040 1 545 1 778 1 750 1 846 1 583 1 881 Wool and sheepskins 700 633 670 613 743 743 743 743 743 Other rural a 3 876 3 876 3 759 3 952 2 811 3 506 4 153 3 991 4 776 Total 7 983 8 175 7 700 7 315 6 350 7 152 8 314 8 047 9 030 Mineral resources Coal, coke and briquettes 4 423 4 497 4 381 4 411 4 458 4 681 4 638 4 762 4 775 Other mineral fuels 2 410 3 240 3 527 3 237 3 258 3 518 3 330 3 514 3 463 Metalliferous ores and other minerals bs 5 372 5 355 6 164 6 012 6 296 6 358 6 499 6 347 6 789 Gold 2 192 1 718 1 727 1 788 1 636 1 894 1 927 2 049 2 190 Other metals cs 3 255 3 142 3 413 3 483 3 561 3 581 3 845 4 025 4 115 Total s 17 652 17 952 19 213 18 931 19 209 20 033 20 239 20 698 21 332 Total commodities sector s 25 635 26 127 26 912 26 246 25 559 27 185 28 553 28 745 30 362 Other merchandise s 8 194 8 342 na na na na na na na Total merchandise s 33 829 34 469 na na na na na na na Services 10 003 10 578 na na na na na na na Total goods and services 43 832 45 047 na na na na na na na

a Includes other farm, forest and fisheries products. Includes exports of wine and of paper and paperboard, which are not included in this balance of payments item by the ABS. b Includes diamonds, which are not included in this balance of payments item by the ABS. c Includes ABARE estimates for steel and nickel which were confidentialised by the ABS. d For a description of chain volume measures, see ABS, Introduction of chain volume measures, in the Australian National Accounts, cat. no. 5248.0, Canberra. Reference year is 2004-05. p Preliminary. s ABARE estimate. f ABARE forecast. na Not available. Sources: ABS, Balance of Payments, Australia, cat. no. 5302.0, Canberra; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 237 sectors

industry gross value added a 8 Australia

Unit 2001-02 2002-03 2003-04 2004-05 2005-06 Agriculture, forestry and fishing Agriculture $m 24 790 18 423 24 737 24 652 25 755 Forestry and fishing $m 2 437 2 430 2 604 2 502 2 387 Total $m 27 193 20 807 27 340 27 153 28 142 Mining Mining (excludes services to mining) $m 42 304 41 861 40 460 41 784 40 866 Services to mining $m 3 702 3 949 3 715 4 369 4 173 Total $m 45 735 45 596 43 949 46 152 45 038 Manufacturing Food, beverage and tobacco $m 19 346 19 540 19 483 19 689 19 581 Textile, clothing, footwear and leather $m 3 956 3 644 3 371 2 744 2 566 Wood and paper products $m 6 853 6 987 6 976 7 030 6 748 Printing, publishing and recorded media $m 10 661 10 923 11 251 10 967 10 717 Petroleum, coal, chemical, etc. $m 12 574 13 290 12 708 12 713 12 216 Non–metallic mineral products $m 3 943 4 281 4 430 4 651 5 193 Metal products $m 16 838 17 440 17 501 17 037 16 866 Machinery and equipment $m 15 431 16 523 17 364 17 466 18 409 Other manufacturing $m 3 945 4 154 4 424 4 068 3 691 Total $m 93 132 96 528 97 422 96 366 95 989 Building and construction $m 43 776 50 974 54 353 56 941 62 277 Electricity, gas and water supply $m 19 690 19 867 20 000 20 146 20 471 Taxes less subsidies on products $m 67 599 71 268 73 705 75 947 77 042 Statistical discrepancy $m 0 0 – 1 0 – 317 Gross domestic product $m 813 542 839 186 873 197 896 569 922 386

a Chain volume measures, reference year is 2004-05. Source: ABS, National Income, Expenditure and Product, cat. no. 5206.0, Canberra.

238 australian commodities > vol. 14 no. 1 > march quarter 2007 production, employment

volume of production indexes 9 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Farm Grains and oilseeds 59.3 138.6 113.2 133.1 51.9 124.4 Total crops 83.4 123.0 116.8 116.3 73.8 104.6 Livestock slaughterings 109.8 104.4 109.3 108.6 112.1 109.8 Total livestock 104.2 99.6 103.1 102.1 100.7 98.7 Total farm sector 93.6 111.9 110.7 109.9 87.0 102.1 Forestry a Broadleaved 119.4 119.3 128.1 123.9 137.2 147.5 Coniferous 126.3 131.8 129.0 130.8 134.9 135.6 Total forestry 123.1 125.8 128.8 127.5 136.1 141.3 Mine b Energy minerals 115.0 111.0 113.4 111.5 120.9 126.8 Metals and other minerals 115.8 115.9 124.0 124.5 131.7 152.0 Total minerals 115.5 113.5 118.8 118.1 126.3 140.4

a Volume of roundwood equivalent removed from forests. b Uranium is included with energy. s ABARE estimate. f ABARE forecast. Note: ABARE revised the method for calculating 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.

employment a 10 Australia

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 p ’000 ’000 ’000 ’000 ’000 ’000 Agriculture, forestry and fishing Agriculture 373 386 326 320 312 305 Forestry and logging 13 13 10 12 12 11 Commercial fishing 19 18 17 16 14 12 Total (including services) 435 444 377 374 363 355 Mining Coal 18 20 21 21 23 28 Oil and gas extraction 6 4 4 6 7 9 Metal ore 30 34 35 38 35 43 Other mining (including services) 24 23 26 27 29 34 Total 79 81 86 92 93 115 Manufacturing Food, beverages and tobacco 179 182 183 171 196 182 Textiles, clothing, footwear and leather 84 74 73 65 55 56 Wood and paper product 70 70 74 78 71 72 Printing, publishing and recorded media 118 105 115 110 109 106 Petroleum, coal and chemical product 107 107 112 100 91 88 Non–metallic mineral product 42 43 47 44 36 38 Metal product 175 155 164 157 139 162 Other manufacturing 319 324 323 309 294 297 Total 1 113 1 077 1 091 1 033 991 1 001 Other industries 7 389 7 532 7 769 7 933 8 089 8 388 Total 9 016 9 134 9 323 9 431 9 536 9 858

a Average employment over four quarters. p Preliminary. Source: ABS, The Labour Force, Australia, cat. no. 6291.0, Canberra. australian commodities > vol. 14 no. 1 > march quarter 2007 239 business, banks

business income 11 Australia

2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m Farm Net value of farm production 11 127 3 746 6 505 5 028 7 026 Company profits in selected industries a Mining 14 895 15 092 12 133 17 599 36 013 Manufacturing Food, beverages and tobacco 4 819 3 778 5 998 na na Textiles, clothing and footwear 438 515 758 na na Wood and paper products 1 313 1 739 1 704 na na Printing, publishing and recorded media 2 006 2 627 2 799 na na Petroleum, coal and chemical product 2 011 2 789 2 567 na na Non–metallic mineral product 996 1 380 1 529 na na Metal product 3 923 4 595 4 344 na na Machinery and equipment 2 471 2 944 3 440 na na Other manufacturing 698 703 976 na na Total 18 675 21 070 24 115 23 537 23 060 Other industries (including services) 27 964 40 487 47 604 57 605 54 495 Total (including services) 61 534 76 649 83 852 98 741 113 568

a Company profits before income tax. na Not available. Sources: ABS, National Income and Expenditure and Product, cat. no. 5206.0, Canberra; ABS, Company Profits, Australia, cat. no. 5651.0, Canberra; ABS, Business Indicators, cat. no. 5676.0, Canberra; ABS, Australian Industry , cat. no. 8155.0, Canberra; ABARE.

all banks lending to business a 12 Australia

2004-05 2005-06 2006-07 Sep. Dec. Mar June Sep. Dec Mar June Sep. $b $b $b $b $b $b $b $b $b Agriculture, fishing and forestry 35.1 35.7 36.9 39.3 39.8 39.3 41.4 43.5 44.1 Mining 5.4 6.0 5.7 5.7 5.9 6.1 6.7 6.8 10.9 Manufacturing 30.7 30.5 31.1 31.3 32.4 35.1 36.4 37.1 37.6 Construction 17.4 18.1 19.4 19.4 19.9 20.8 21.6 21.3 22.9 Wholesale, retail trade, transport and storage 49.7 51.9 53.7 54.9 56.3 59.5 61.5 64.2 66.5 Finance and insurance 48.3 49.6 48.7 49.6 51.8 54.9 55.7 62.5 72.6 Other 158.5 162.9 166.1 173.9 181.3 191.0 200.4 204.1 208.5 Total 345.1 354.7 361.6 374.1 387.4 406.7 423.6 439.5 463.1

a Includes variable and fixed interest rate loans outstanding plus bank bills outstanding. Source: Reserve Bank of Australia, Bank Lending to Business - Selected Statistics, Bulletin Statistical Table D8.

240 australian commodities > vol. 14 no. 1 > march quarter 2007 farm debt

rural ﬁ nance a 13 Australia

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m $m Rural debt All banks a 25 174 26 829 28 957 34 115 39 261 43 546 Other government agencies b 701 711 739 751 820 891 Pastoral and other finance companies 2 639 2 691 1 628 3 379 3 112 3 352 Large finance institutional debt 28 514 30 231 31 324 38 246 43 193 47 789 Other farm debt cs 1 920 1 967 2 017 2 067 na na Total rural debt 30 434 32 198 33 341 40 313 na na Deposits Farm management deposits 1 033 2 074 2 480 2 619 2 792 2 797

a Derived from all banks lending to agriculture, fishing and forestry. b Includes the government agency business of state banks and advances made under War Service Land Settlement. Prior to 1996 includes loans from the Queensland Industry Development Corporation. From 1996 these loans are included in bank lending. c Includes loans from life insurance companies, lease agreements and indebtedness to hire purchase companies, trade creditors, private lenders and small financial institutions. s ABARE estimate. na Not available. Sources: Department of Agriculture, Fisheries and Forestry; Reserve Bank of Australia, Estimated Rural Debt to Specified Lenders, Bulletin Statistical Table D9; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 241 capital expenditure

capital expenditure of private enterprises 14 Australia

2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m At current prices Gross fixed capital formation a All sectors 168 831 193 788 211 722 228 646 254 912 New capital expenditure Mining b 7 250 8 766 9 282 10 253 18 608 Manufacturing Food, beverages and tobacco 2 205 2 614 2 274 2 418 2 472 Textiles, clothing, footwear and leather 213 230 200 268 187 Wood and paper products 593 709 912 711 802 Printing, publishing and recorded media 687 553 538 558 867 Petroleum, coal and chemical product 1 284 1 608 2 090 2 423 2 473 Non–metallic mineral products 554 965 590 711 837 Metal products 1 541 2 158 2 689 3 390 4 804 Machinery and equipment 1 854 2 180 1 877 1 875 2 503 Other manufacturing 251 367 257 328 483 Total 9 181 11 385 11 423 12 681 15 428 Total surveyed industries 44 380 50 815 51 247 57 554 72 642

Chain volume measures c Gross fixed capital formation a All sectors 175 108 199 857 216 272 228 646 249 348 New capital expenditure Mining 7 588 9 122 9 668 10 253 17 815 Manufacturing 8 202 10 581 11 367 12 682 15 315 Other selected industries 23 937 27 425 29 682 34 620 39 257 Total surveyed industries 39 720 47 065 50 668 57 554 72 405

a Estimates taken from ABS national accounts, which include taxation based statistics. b Includes industries covered by Division B (for example, the metallic and nonmetallic minerals, coal, oil and gas, construction materials and other nonmetallic minerals industries) as defined in the 1993 edition of the Australian New Zealand Standard Industrial Classification (ANZSIC). c Reference year is 2004-05. Sources: Australian Bureau of Statistics; ABARE.

242 australian commodities > vol. 14 no. 1 > march quarter 2007 mineral exploration

private mineral exploration expenditure 15 Australia

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 $m $m $m $m $m $m At current prices Energy Petroleum Onshore 176.9 164.6 191.3 230.5 270.1 355.8 Offshore 847.9 718.1 803.8 713.6 774.6 906.1 Total 1 024.8 882.7 995.1 944.1 1 044.7 1 261.9 Coal 41.2 50.4 77.8 81.5 126.8 166.4 Uranium 8.4 8.7 6.9 10.6 20.7 56.1 Total 1 074.4 941.8 1 079.8 1 036.2 1 192.2 1 484.4

Metals and other minerals a Gold 370.1 331.3 378.4 397.1 391.7 399.6 Iron ore 23.4 25.2 44.5 63.7 137.9 161.3 Base metals, silver and cobalt b 165.3 132.9 142.4 151.9 261.3 356.7 Mineral sands 23.6 33.2 27.3 23.8 27.6 29.2 Diamonds 31.8 35.4 29.9 25.9 23.7 22.6 Other 19.5 23.6 25.6 32.2 38.7 48.8 Total metals and other minerals a 633.7 581.6 648.1 694.6 880.9 1 018.2 Total expenditure 1 708.4 1 522.8 1 727.9 1 730.8 2 073.1 2 502.6

a Uranium is included with energy. b Base metals include copper, lead, nickel and zinc. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 243 world prices

annual world indicator prices of selected commodities 16 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Wheat a US$/t 160 160 154 176 210 193 Corn b US$/t 107 115 97 104 151 168 Rice c US$/t 199 220 278 301 325 313 Soybeans d US$/t 245 321 275 261 295 307 Cotton e USc/lb 55.4 68.3 52.4 56.0 58.8 61.1 Sugar g USc/lb 8.0 7.9 10.5 15.8 11.5 9.5 Livestock products Beef h USc/kg 202 243 286 277 284 290 Wool i Ac/kg 786 758 767 713 835 830 Butter j US$/t 1 186 1 621 2 208 1 998 1 915 2 000 Cheese j US$/t 1 775 2 358 2 856 2 792 2 850 2 950 Skim milk powder j US$/t 1 587 1 862 2 210 2 175 2 700 2 850 Energy Crude oil Dubai US$/bbl 25.90 29.35 40.72 58.30 57.86 53.33 West Texas intermediate US$/bbl 29.92 33.76 48.77 64.22 61.02 56.38 Brent US$/bbl 27.82 31.42 46.23 62.44 60.54 55.84 World trade weighted average k US$/bbl 26.26 29.33 41.18 57.25 56.30 51.79 Coal l Thermal US$/t 25.86 29.45 47.14 49.34 50.29 51.48

Uranium (U3O8) m US$/lb 10.22 14.90 22.20 36.79 72.42 103.75

Minerals and metals n Aluminium US$/t 1 361 1 568 1 807 2 244 2 575 2 123 Copper US$/t 1 595 2 267 3 151 5 062 6 517 5 300 Gold o US$/oz 334 389 422 527 640 680 Iron ore (negotiated) q USc/dltu 28.28 30.83 36.57 62.72 74.63 81.73 Lead US$/t 445 700 964 1 061 1 488 1 173 Manganese (negotiated) r US$/mtu 1.97 2.12 2.45 3.98 3.00 2.70 Nickel US$/t 7 666 12 264 14 957 15 488 34 694 35 313 Silver t USc/oz 461 579 695 928 1 284 1 022 Tin US$/t 4 371 6 627 8 491 7 403 10 069 9 100 Zinc US$/t 775 962 1 171 2 118 3 661 3 484

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok (August–July basis). d US cif Rotterdam (October–September basis). e Cotlook 'A' index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports (October-September basis). h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. Official sales prices or estimated contract terms for major internationally traded crude oils. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q Australian hematite fines to Japan (fob) for Japanese fiscal year commencing 1 April. r Japanese fiscal year commencing 1 April. t London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Reuters Ltd; Ux Consulting Company; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

244 australian commodities > vol. 14 no. 1 > march quarter 2007 world prices

quarterly world indicator prices of selected commodities 17 Australia

2005-06 2006-07 2007-08 Unit June Sep Dec Mar p June s Sep f Dec f Mar f June f Crops Wheat a US$/t 198 207 217 210 210 187 198 194 193 Corn b US$/t 110 117 156 165 166 160 165 172 175 Rice c US$/t 314 319 307 326 341 306 295 323 331 Soybeans d US$/t 264 264 290 304 297 297 297 311 309 Cotton e USc/lb 55.3 58.1 57.9 58.9 60.3 60.8 60.5 61.1 61.8 Sugar g USc/lb 17.5 14.3 13.8 14.0 13.5 13.0 16.1 15.9 15.8 Livestock products Beef h USc/kg 269 282 285 285 290 298 293 288 283 Wool i Ac/kg 724 746 720 700 675 668 668 668 668 Butter j US$/t 1 808 1 683 1 858 2 058 2 060 2 025 2 010 1 965 2 000 Cheese j US$/t 2 683 2 600 2 792 2 992 3 017 3 025 2 975 2 850 2 950 Skim milk powder j US$/t 2 075 2 125 2 675 3 092 2 908 2 950 2 875 2 725 2 850 Energy Crude oil Dubai US$/bbl 65.35 66.40 57.63 54.03 53.39 54.89 54.75 51.98 51.72 West Texas intermediate US$/bbl 70.41 70.42 59.96 57.20 56.50 58.00 57.00 55.50 55.00 Brent US$/bbl 69.53 69.62 59.68 56.80 56.07 57.43 57.26 54.49 54.18 World trade weighted average k US$/bbl 63.87 65.70 54.99 52.50 52.00 53.40 53.00 50.50 50.25 Coal l Thermal US$/t 48.96 49.35 49.88 49.68 52.25 52.31 52.36 52.42 48.84

Uranium (U3O8) m US$/lb 43.33 50.00 65.00 82.67 92.00 98.00 104.00 105.00 108.00

Minerals and metals n Aluminium US$/t 2 652 2 482 2 718 2 700 2 400 2 200 2 100 2 100 2 090 Copper US$/t 7 251 7 670 7 098 5 700 5 600 5 500 5 400 5 200 5 100 Gold o US$/oz 629 622 614 660 665 675 680 685 681 Lead US$/t 1 100 1 186 1 629 1 646 1 492 1 315 1 117 1 160 1 100 Nickel US$/t 19 925 29 141 33 134 39 000 37 500 35 000 35 500 35 500 35 250 Silver q USc/oz 1 229 1 170 1 262 1 345 1 359 1 198 1 030 925 933 Tin US$/t 8 529 8 653 10 335 11 053 10 233 9 600 9 300 8 900 8 600 Zinc US$/t 3 292 3 363 4 207 3 550 3 525 3 500 3 475 3 460 3 500

a US hard red winter wheat, fob Gulf. b US no. 2 yellow corn, delivered US Gulf. c Prices previously reported by the Thailand Board of Trade are no longer available. From September 1998 the price quoted is the USDA sourced nominal quote for Thai white rice, 100 per cent, Grade B, fob, Bangkok. d US cif Rotterdam. e Cotlook ’A’ index. g Average of monthly averages of New York no.11 spot price; basis: fob Caribbean ports. h US cif price. i Australian Wool Exchange eastern market indicator. j Average of traded prices (excluding subsidised sales). k World trade weighted average price compiled by the US Department of Energy. l Average export unit value, fob Australia. m Average of weekly restricted spot prices over the period, published by Ux Consulting. n Average LME spot price unless otherwise stated. o London gold fix, London Bullion Market Association. q London silver fix, London Bullion Market Association. Prior to March 2001, Handy and Harman, commercial bar price used. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Meat and Livestock Australia; Australian Wool Exchange; Cotlook Ltd; Food and Agriculture Organisation; General Agreement on Tariffs and Trade; International Energy Agency; International Wheat Council; ISTA Mielke and Co.; Reuters Ltd; London Bullion Market Association; The London Metal Exchange Ltd; New York Board of Trade; Ux Consulting Co.; Platts Oilgram; US Department of Agriculture; US Department of Energy; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 245 unit values

gross unit values or prices of farm products a 18 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops b Grains and oilseeds Winter crops Barley $/t 255 169 159 193 288 222 Canola $/t 446 403 326 372 546 437 Field peas $/t 344 232 235 202 283 275 Lupins $/t 292 236 206 207 310 248 Oats $/t 219 138 134 193 303 229 Triticale $/t 258 153 152 203 294 220 Wheat $/t 266 216 197 228 269 233 Summer crops Maize $/t 233 223 194 289 322 316 Rice $/t 348 325 297 362 424 409 Sorghum $/t 205 159 134 175 264 238 Soybeans c $/t 384 365 283 289 361 289 Sunflowerseed c $/t 400 349 341 409 430 344 Industrial crops Cotton lint d c/kg 222 225 167 179 181 193 Sugar cane (cut for crushing) $/t 28 23 26 27 32 32 Wine grapes $/t 810 787 715 616 650 690 Livestock for slaughter Beef e c/kg 256 290 320 322 299 330 – yearling e c/kg 289 327 359 367 330 345 – ox e c/kg 284 307 331 332 326 310 – cow e c/kg 227 262 289 288 249 270 Lamb eg c/kg 367 377 352 340 324 370 Mutton e c/kg 167 199 166 172 145 170 Pig e c/kg 244 221 243 232 265 275 Poultry h c/kg 385 387 396 368 360 368 Livestock products Wool i c/kg 786 758 767 713 835 830 Milk j c/L 27.1 27.9 31.5 33.1 32.6 34.7

a Average gross unit value across all grades in principal markets, unless otherwise indicated. Includes the cost of containers, commission and other expenses incurred in getting the commodities to their principal markets. These expenses are significant. b Average unit gross value relates to returns received from crops harvested in that year, regardless of when sales take place, unless otherwise indicated. c Price paid by crusher. d Australian base price for sales in the financial year indicated. e Average saleyard price (dressed weight). g Lamb saleyard weight indicator 18–20 kg. h Retail, frozen. i Australian Wool Exchange eastern market indicator. j Weighted average farmgate price. s ABARE estimate. f ABARE forecast. Note: Prices used in these calculation exclude GST. Sources: Australian Bureau of Statistics; ABARE.

246 australian commodities > vol. 14 no. 1 > march quarter 2007 world 19 world production, consumption, stocks and trade for selected commodities a

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Farm Grains Wheat Production Mt 566 556 629 618 589 625 Consumption Mt 600 588 616 622 607 621 Closing stocks Mt 165 125 138 135 116 121 Exports b Mt 107 103 110 107 106 112 Coarse grains Production Mt 874 916 1 014 974 962 1 020 Consumption Mt 901 943 975 986 1 008 1 039 Closing stocks Mt 167 140 178 167 118 99 Exports b Mt 104 104 102 104 106 107 Rice Production c Mt 378 392 400 416 415 420 Consumption c Mt 405 410 406 412 418 420 Closing stocks c Mt 107 85 78 81 78 77 Exports bd Mt 28 27 29 28 28 29 Oilseeds and vegetable oils Oilseeds Production Mt 330 335 381 390 395 388 Consumption Mt 325 336 367 382 393 401 Closing stocks Mt 48 44 56 62 63 50 Exports Mt 70 67 75 77 83 86 Vegetable oils Production Mt 96 102 111 118 124 112 Consumption Mt 96 101 108 116 122 130 Closing stocks Mt 8 8 10 10 10 10 Exports Mt 36 38 42 46 48 51 Vegetable protein meals Production Mt 185 190 206 215 224 217 Consumption Mt 186 189 204 215 224 233 Closing stocks Mt 7 6 7 6 5 4 Exports Mt 54 59 60 66 68 68 Industrial crops Cotton Production Mt 19 21 26 25 25 25 Consumption Mt 21 21 24 25 26 27 Closing stocks Mt 10 9 12 12 11 9 Exports Mt 7 7 8 10 9 9 Sugar Production Mt 148 143 144 150 160 162 Consumption Mt 141 145 148 151 153 156 Closing stocks Mt 66 65 61 61 67 73 Exports Mt 44 45 46 47 45 46 Continued

australian commodities > vol. 14 no. 1 > march quarter 2007 247 world 19 world production, consumption, stocks and trade for selected commodities a continued

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Livestock products Meat deg Production Mt 210 218 226 232 238 na Consumption Mt 207 214 221 227 233 na Closing stocks Mt 12.6 16.6 17.9 22.1 26.8 na Exports b Mt 18.2 19.2 21.0 20.5 21.0 na Wool h Production kt 1 227 1 221 1 228 1 230 1 263 1 273 Consumption di kt 1 256 1 214 1 237 1 196 1 262 1 274 Closing stocks j kt 124 164 163 165 166 166 Exports k kt 567 533 578 567 599 606 Butter dg Production kt 6 612 6 626 6 741 7 036 7 420 7 650 Consumption kt 6 206 6 251 6 352 6 698 7 099 7 325 Closing stocks kt 423 342 312 290 261 230 Exports kt 865 905 793 742 729 735 Skim milk powder gl Production d kt 3 658 3 303 3 299 3 282 3 313 3 390 Consumption d kt 3 442 3 390 3 321 2 943 2 939 3 000 Closing stocks d kt 949 563 365 291 277 200 Exports kt 1 172 1 165 1 012 1 052 1 054 1 060

Energy d Crude oil Production World m mbd 79.7 83.0 84.5 85.3 85.8 87.7 OPEC n mbd 30.7 32.8 34.2 34.4 33.9 36.5 Consumption m mbd 79.3 82.4 83.6 84.5 85.9 89.5 Closing stocks OECD o days 52.0 52.0 51.0 53.0 na na Coal d Production Hard coal q Mt 4 133 4 533 4 970 5 375 5 775 6 150 Brown coal Mt 903 893 905 888 871 922 Exports Metallurgical coal Mt 185 197 207 209 220 227 Thermal coal Mt 535 573 578 611 636 652

Uranium (U3O8) d Production rs kt 41.7 46.4 49.3 47.2 55.1 61.3 Consumption kt 77.8 78.5 78.8 77.2 80.3 79.5 Metals d Bauxite production kt 158 315 167 595 176 403 191 288 200 108 210 360 Alumina production kt 52 591 54 872 56 157 67 900 70 850 72 758 Aluminium Production kt 28 000 29 922 32 022 33 669 36 492 38 851 Consumption kt 27 605 29 962 31 703 33 785 36 136 38 240 Closing stocks t kt 3 672 3 033 3 010 2 894 3 250 3 861 Exports kt 16 852 18 091 16 975 15 465 16 125 16 872 Continued

248 australian commodities > vol. 14 no. 1 > march quarter 2007 world 19 world production, consumption, stocks and trade for selected commodities a continued

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Iron and steel d Production Iron ore u Mt 1 074 1 184 1 316 1 465 1 613 1 707 Pig iron Mt 670 724 785 870 935 994 Crude steel Mt 970 1 068 1 140 1 239 1 314 1 382 Iron ore trade Mt 582 669 744 780 842 908 Gold d Mine production t 2 590 2 470 2 519 2 463 2 531 2 626 Supply t 4 150 3 847 4 036 3 843 3 851 3 776 Fabrication consumption v t 2 990 3 163 3 280 2 910 3 047 3 292 Base metals d Copper Production w kt 15 184 15 819 16 637 17 431 18 492 19 496 Consumption kt 15 305 16 213 16 738 17 360 18 276 19 272 Closing stocks kt 1 212 518 547 618 834 1 059 Lead Production w kt 6 762 6 954 7 579 8 019 8 359 8 674 Consumption kt 6 848 7 283 7 750 8 021 8 316 8 666 Closing stocks kt 407 299 313 300 375 393 Nickel Production w kt 1 192 1 252 1 293 1 349 1 433 1 526 Consumption kt 1 219 1 246 1 243 1 388 1 463 1 530 Closing stocks kt 99 98 112 81 50 45 Tin Production w kt 276 345 377 367 390 420 Consumption kt 302 336 349 383 400 415 Closing stocks kt 38 28 38 23 13 18 Zinc Production w kt 9 874 10 353 10 229 10 657 11 296 11 805 Consumption kt 9 843 10 646 10 628 11 068 11 356 11 810 Closing stocks kt 1 158 1 039 808 495 436 431 Mineral sands d Production Ilmenite x kt 10 179 10 392 10 944 10 412 10 807 11 245 Titaniferous slag kt 1 995 2 082 2 274 2 160 2 170 2 190 Rutile concentrate kt 391 378 411 462 651 744 Zircon concentrate kt 1 137 1 168 1 192 1 208 1 420 1 636

a Some figures are not based on precise or complete analyses. b Includes intra–EU trade. c Milled equivalent. d On a calendar year basis, e.g. 1991-92 = 1992. e Beef and veal, mutton, lamb, goat, pig and poultry meat. g Selected countries. h Clean equivalent. i Virgin wool at the spinning stage in 65 countries. j Held by marketing bodies and on-farm in five major exporting countries. k Five major exporting countries. l Nonfat dry milk. m Includes crude oil, marine bunkers, refinery fuel, nonconventional oil and natural gas liquids. 1 million litres a year equals about 17.2 barrels a day. n Includes OPEC natural gas liquids. o Industry stocks in OECD countries at the start of the financial year. q Includes anthracite and bituminous coal, and for the United States, Australia and New Zealand, sub-bituminous coal. r World production data has been revised to exclude reprocessed uranium. t LME and producer stocks. u China's iron ore production adjusted to world average. v Includes jewellery consumption. w Primary refined metal. x Excludes some small producers and large tonnages produced from ilmenite–magnetite ore in the Commonwealth of Independent States. s ABARE estimate. f ABARE forecast. na Not available. Sources: Australian Bureau of Statistics; Meat and Livestock Australia; Commodities Research Unit; Commonwealth Secretariat; Consolidated Gold Fields; Department of Agriculture, Fisheries and Forestry Australia; Economic Commission for Europe; Fearnleys; Food and Agriculture Organisation; Gold Fields Mineral Services; International Atomic Energy Agency; International Energy Agency; International Iron and Steel Institute; International Lead–Zinc Study Group; International Nickel Study Group; International Sugar Organization; International Wheat Council; ISTA Mielke and Co.; Metallgesellschaft A.G.; Ministry of Agriculture, Forestry and Fisheries (Japan); New Zealand Dairy Board; New Zealand Wool Board; UNCTAD Trust Fund on Iron Ore; United Nations; Uruguayan Association of Wool Exporters; US Department of Agriculture; World Bureau of Metal Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 249 australia

commodity production 20 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Grains and oilseeds Winter crops Barley kt 3 865 10 382 7 740 9 869 3 722 8 870 Canola kt 871 1 703 1 542 1 441 513 1 271 Chickpeas kt 136 178 116 123 239 264 Field peas kt 178 487 289 478 149 423 Lupins kt 726 1 180 937 1 079 174 526 Oats kt 957 2 018 1 282 1 416 633 1 368 Triticale kt 327 826 611 676 300 659 Wheat kt 10 132 26 132 21 905 25 090 9 819 24 980 Summer crops Cottonseed s kt 546 494 912 844 354 540 Maize kt 310 395 418 380 259 385 Rice kt 438 553 339 1 048 106 464 Sorghum kt 1 465 2 009 2 011 2 019 996 1 862 Soybeans kt 18 74 54 55 37 56 Sunflowerseed kt 25 58 62 95 33 54 Other oilseeds a kt 63 72 70 83 76 70 Total grains and oilseeds kt 20 056 46 560 38 289 44 695 17 409 41 790 Industrial crops Cotton lint kt 387 349 645 597 250 335 Sugar cane (cut for crushing) kt 36 995 36 993 37 822 38 169 36 000 38 622 Sugar (tonnes actual) kt 5 461 4 994 5 196 5 108 4 650 5 100 Wine grapes kt 1 411 1 895 1 938 1 850 1 322 1 513 Livestock slaughterings Number slaughtered Cattle and calves ’000 9 228 8 779 8 853 8 401 8 863 8 600 Cattle exported live b ’000 973 581 574 549 600 660 Sheep ’000 13 657 10 421 11 443 11 830 13 000 10 000 Lambs ’000 16 870 16 562 17 331 18 666 19 000 18 800 Sheep exported live b ’000 5 843 3 843 3 233 4 248 3 800 3 700 Pigs ’000 5 742 5 591 5 342 5 370 5 200 5 300 Meat produced Beef and veal c kt 2 073 2 033 2 162 2 077 2 175 2 111 Lamb c kt 329 341 354 382 390 387 Mutton c kt 268 220 237 244 252 200 Pig meat kt 420 406 389 389 374 381 Poultry meat c kt 726 732 792 817 842 847 Total kt 3 816 3 732 3 934 3 909 4 032 3 926 Continued

250 australian commodities > vol. 14 no. 1 > march quarter 2007 australia

commodity production continued 20 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Livestock products Wool d kt 551 509 520 509 472 465 Milk e ML 10 326 10 075 10 125 10 092 9 050 8 815 Butter g kt 164 149 147 146 130 122 Cheese kt 379 384 388 373 360 350 Casein kt 13 14 13 13 11 10 Skim milk powder h kt 203 184 191 212 190 180 Wholemilk powder kt 198 187 189 158 150 145 Buttermilk powder kt 17 17 17 16 16 16 Forestry Roundwood '000 m3 26 032 26 621 27 207 26 980 28 778 29 898 Fisheries i Tuna j kt 13.4 14.7 11.3 12.7 13.4 13.0 Other fish k kt 151.7 165.3 172.9 147.1 143.2 145.2 Prawns kt 26.4 27.6 23.7 23.0 22.6 21.8 Rock lobster kt 17.1 19.7 17.9 15.5 14.7 14.9 Abalone kt 5.2 5.8 6.0 5.5 5.2 5.2 Scallops kt 10.7 9.3 15.4 8.7 13.9 12.8 Oysters kt 10.7 13.9 11.7 13.2 13.3 13.6 Other molluscs kt 9.9 11.0 11.6 8.6 10.4 10.2 Other crustaceans kt 8.7 8.7 7.9 6.7 7.3 7.2 Energy Coal Black, salable Mt 274.9 286.0 304.9 305.8 330.3 345.2 Black, raw Mt 348.9 360.4 393.4 398.5 426.0 446.6 Brown Mt 68.8 70.0 70.6 71.2 71.9 72.4 Petroleum Crude oil and condensate ML 35 142 30 719 27 311 24 320 27 988 29 190 Petroleum products l ML 46 723 43 486 44 555 40 679 41 334 39 711 Natural gas m Gm3 36.8 37.0 41.3 42.2 45.2 50.1 LPG (naturally occurring) ML 4 681 4 639 4 628 4 722 4 997 5 180

Uranium (U3O8) t 9 172 9 569 10 964 9 974 10 357 11 534

Metalliferous minerals and metals n Aluminium Bauxite Mt 54.5 56.3 57.6 60.9 65.2 66.5 Alumina kt 16 413 16 690 17 161 17 826 18 955 20 530 Aluminium (ingot metal) kt 1 855 1 877 1 890 1 912 1 936 1 937 Copper Mine production o kt 883 811 899 931 939 1 144 Refined, primary kt 537 458 479 461 460 615 Gold Mine production o t 277.8 266.7 265.6 250.2 255.3 288.7 Continued

australian commodities > vol. 14 no. 1 > march quarter 2007 251 australia

commodity production continued 20 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Metalliferous minerals and metals (continued) Iron and steel Ore and concentrate q Mt 199.1 222.8 251.9 263.8 299.7 324.1 Iron and steel Mt 9.4 9.4 7.4 7.9 8.0 8.5 Lead Mine production o kt 695 677 682 761 643 829 Refined r kt 267 247 234 234 203 255 Bullion kt 181 143 153 141 120 160 Manganese Ore, metallurgical grade kt 2 472 3 094 3 563 4 081 4 794 4 614 Metal content of ores and concentrates kt 1 186 1 169 1 710 1 959 2 301 2 215 Nickel Mine production o kt 183 185 192 183 202 238 Refined, class I s kt 117 112 116 104 115 131 Refined, class II u kt 13 12 10 7 9 12 Total ore processed v kt 230 234 229 221 247 286 Silver Mine production o t 1 892 2 056 2 303 2 218 1 538 1 912 Refined t 672 619 722 655 651 678 Tin Mine production o t 6 328 1 512 2 055 1 805 2 267 3 300 Refined t 708 553 445 736 353 250 Titanium Ilmenite concentrate kt 2 069 1 910 1 993 2 184 2 539 3 006 Leucoxene concentrate kt 43 53 68 79 167 219 Rutile concentrate kt 208 154 174 184 309 507 Synthetic rutile s kt 673 696 751 712 750 760 Titanium dioxide pigment s kt 189 196 204 208 214 220 Zinc Mine production o kt 1 529 1 355 1 352 1 380 1 383 1 676 Refined kt 570 502 464 446 495 500 Zircon concentrate kt 458 448 432 442 566 862 Other minerals Diamonds ’000 ct 32 006 24 310 32 471 25 354 30 825 21 150 Salt kt 10 438 10 618 12 254 11 763 11 320 11 920

a Linseed and safflowerseed. b Excludes animals exported for breeding purposes. c In carcass weight and includes carcass equivalent of canned meats. d Greasy equivalent of shorn wool (includes crutching), dead and fellmongered wool and wool exported on skins. e Includes the wholemilk equivalent of farm cream intake. g Includes the butter equivalent of butteroil, butter concentrate, ghee and dry butterfat. h Includes mixed skim and buttermilk powder. i Liveweight. j Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. k Includes an estimated value of aquaculture but excludes inland commercial fisheries. l Includes production from petrochemical plants. m Includes ethane, methane and noncommercial natural gas. n Uranium is included with energy. o Primary production, metal content. q Excludes iron oxide not intended for metal extraction. r Includes lead content of lead alloys from primary sources. t Products with a nickel content of 99 per cent or more. Includes electrolytic nickel, pellets, briquettes and powder. u Products with a nickel content of less than 99 per cent. Includes ferronickel, nickel oxides and oxide sinter. v Includes imported ore for further processing. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; Australian Dairy Corporation; Consolidated Gold Fields; Coal Services Pty Limited; International Nickel Study Group; Queensland Government, Department of Natural Resources and Mines; Raw Cotton Marketing Advisory Committee; ABARE.

252 australian commodities > vol. 14 no. 1 > march quarter 2007 value of production

gross value of farm and ﬁ sheries production 21 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Crops Grains and oilseeds Winter crops Barley 984 1 750 1 233 1 905 1 071 1 973 Canola 389 686 503 536 280 555 Chickpeas 65 58 36 57 143 134 Field peas 61 113 68 97 42 116 Lupins 212 278 193 223 54 130 Oats 210 279 172 273 191 314 Triticale 84 126 93 137 88 145 Wheat 2 692 5 636 4 317 5 727 2 645 5 821 Summer crops Maize 72 88 81 110 83 122 Rice 153 180 101 379 45 190 Sorghum 300 319 270 353 263 444 Soybeans 7 27 15 16 14 16 Sunflowerseed 10 20 21 39 14 18 Other oilseeds a 30 44 36 47 50 35 Total grains and oilseeds 5 440 9 837 7 364 10 161 5 236 10 299 Industrial crops Cotton lint and cotton seed b 844 671 1 222 1 105 419 607 Sugar cane (cut for crushing) 1 019 854 980 1 037 1 168 1 249 Wine grapes 1 143 1 491 1 385 1 138 859 1 043 Total industrial crops 3 006 3 016 3 587 3 280 2 446 2 899 Horticulture Table and dried grapes 192 166 220 250 230 235 Fruit and nuts (excl grapes) 2 216 2 184 2 547 2 650 2 570 2 700 Vegetables 2 126 2 356 2 134 2 390 2 535 2 660 Other horticulture 1 074 1 018 1 014 1 055 960 1 075 Total horticulture 5 608 5 723 5 914 6 345 6 295 6 670 Other crops nei c 1 374 1 802 1 321 1 445 1 860 1 445 Total crops 14 355 19 360 17 172 20 176 14 877 20 238 Continued

australian commodities > vol. 14 no. 1 > march quarter 2007 253 value of production

gross value of farm and ﬁ sheries production continued 21 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Livestock slaughterings Cattle and calves d 5 845 6 341 7 455 7 218 6 947 7 462 Cattle exported live e 567 318 374 358 412 422 Sheep g 468 454 416 442 352 428 Lambs gh 1 161 1 318 1 326 1 425 1 246 1 433 Sheep exported live 408 266 207 291 266 273 Pigs 911 879 906 867 952 1 005 Poultry 1 281 1 281 1 304 1 363 1 367 1 418

Total livestock slaughterings k 10 676 10 896 12 030 12 007 11 587 12 486 Livestock products Wool i 3 318 2 397 2 196 1 970 3 951 3 914 Milk j 2 795 2 809 3 194 3 340 2 950 3 061 Eggs 294 336 328 340 338 340 Honey and beeswax 75 74 77 66 50 44 Total livestock products 6 482 5 615 5 794 5 716 7 289 7 360 Total farm 31 513 35 871 34 996 37 900 33 753 40 084 Forestry products Roundwood 1 483 1 569 1 639 1 681 1 791 1 900 Fisheries products l Tuna m 317 280 172 175 190 191 Other fin fish n 585 571 553 603 587 605 Prawns 367 360 309 302 297 319 Rock lobster 461 406 417 461 509 521 Abalone 216 198 233 226 205 218 Scallops 34 25 47 25 40 39 Oysters 62 77 74 84 86 90 Pearls 124 122 122 122 140 128 Other molluscs o 64 73 70 63 61 62 Other crustaceans 73 75 70 58 62 62 Total fish q 2 322 2 201 2 092 2 138 2 196 2 256

a Linseed, safflowerseed and peanuts. b Value delivered to gin. c Mainly fodder crops. d Includes dairy cattle slaughtered. e Excludes animals exported for breeding purposes. g Excludes skin values. h Lamb saleyard indicator weight 18–20 kilograms. i Shorn, dead and fellmongered wool and wool exported on skins. j Milk intake by factories and valued at farmgate. k Total livestock slaughterings includes livestock disposals. l Value to fishermen of product landed in Australia. m Tuna captured under joint venture or bilateral agreements or transhipped at sea is included. n Includes an estimated value of aquaculture. o Includes Northern Territory aquaculture production. q Also includes fish and aquaculture values not elsewhere included. s ABARE estimate. f ABARE forecast. Note: The gross value of production is the value placed on recorded production at the wholesale prices realised in the market place. The point of measurement can vary between commodities. Generally the market place is the metropolitan market in each state and territory. However, where commodities are consumed locally or where they become raw material for a secondary industry, these points are presumed to be the market place. Note: Prices used in these calculations exclude GST. Sources: Australian Bureau of Statistics; ABARE.

254 australian commodities > vol. 14 no. 1 > march quarter 2007 areas, stock

crop areas and livestock numbers 22 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crop areas Grains and oilseeds Winter crops Barley ’000 ha 3 864 4 477 4 645 4 739 3 990 4 668 Canola ’000 ha 1 298 1 211 1 377 962 944 1 001 Chickpeas ’000 ha 201 152 113 105 259 240 Field peas ’000 ha 380 354 413 280 342 352 Lupins ’000 ha 1 025 851 845 754 500 540 Oats ’000 ha 911 1 089 894 859 794 866 Triticale ’000 ha 408 445 389 347 328 335 Wheat ’000 ha 11 170 13 067 13 399 12 980 11 138 13 000 Summer crops Maize ’000 ha 50 70 72 76 50 70 Rice ’000 ha 46 66 51 105 12 55 Sorghum ’000 ha 667 734 755 889 427 739 Soybeans ’000 ha 10 33 26 24 14 25 Sunflowerseed ’000 ha 40 46 46 79 34 54 Other oilseeds a ’000 ha 44 51 55 54 43 47 Total grains and oilseeds ’000 ha 20 777 23 201 23 808 22 983 19 412 22 567 Industrial crops Cotton ’000 ha 224 198 321 336 143 190 Sugar cane b ’000 ha 448 448 434 415 420 430 Winegrapes ’000 ha 140 146 153 149 155 157

Livestock numbers c Cattle Beef million 23.62 24.41 24.73 25.51 24.80 25.30 Dairy million 3.05 3.06 3.06 3.05 2.93 2.87 milking herd d million 2.05 2.04 2.08 2.05 1.94 1.90 Total million 26.66 27.47 27.78 28.56 27.74 28.18 Sheep million 99.3 101.3 101.1 100.1 94.0 93.7 Pigs million 2.66 2.55 2.54 2.47 2.45 2.46

a Linseed and safflowerseed. b Cut for crushing. c At 30 June. d Cows in milk and dry. s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 255 yields

average farm yields 23 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Crops Grains and oilseeds Winter crops Barley t/ha 1.00 2.32 1.67 2.08 0.93 1.90 Canola t/ha 0.67 1.41 1.12 1.50 0.54 1.27 Chickpeas t/ha 0.68 1.17 1.02 1.17 0.92 1.10 Field peas t/ha 0.47 1.38 0.70 1.71 0.43 1.20 Lupins t/ha 0.71 1.39 1.11 1.43 0.35 0.97 Oats t/ha 1.05 1.85 1.43 1.65 0.80 1.58 Triticale t/ha 0.80 1.86 1.57 1.95 0.91 1.97 Wheat t/ha 0.91 2.00 1.63 1.93 0.88 1.92 Summer crops Maize t/ha 6.20 5.64 5.81 5.03 5.18 5.50 Rice t/ha 9.52 8.38 6.60 9.98 8.80 8.43 Sorghum t/ha 2.20 2.74 2.66 2.27 2.33 2.52 Soybeans t/ha 1.77 2.21 2.07 2.33 2.74 2.26 Sunflowerseed t/ha 0.62 1.26 1.35 1.20 0.99 0.99 Industrial crops Cotton (lint) t/ha 1.72 1.76 2.01 1.78 1.75 1.77 Sugar cane (for crushing) t/ha 83 83 87 92 86 90 Winegrapes t/ha 10.08 12.98 12.67 12.42 8.53 9.64 Livestock Wool a kg/sheep 4.25 4.51 4.57 4.43 4.16 4.35 Wholemilk L/cow 5 037 4 943 4 877 4 923 4 665 4 641

a Shorn (including lambs). s ABARE estimate. f ABARE forecast. Sources: Australian Bureau of Statistics; ABARE.

256 australian commodities > vol. 14 no. 1 > march quarter 2007 export volumes

volume of commodity exports 24 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Farm Grains and oilseeds Winter crops Barley a kt 3 462 5 308 6 499 5 315 3 149 4 605 Canola kt 612 1 049 1 019 884 317 733 Chickpeas kt 89 164 151 211 242 184 Lupins kt 208 646 419 469 144 221 Oats (unprepared) kt 177 172 165 190 118 166 Peas b kt 108 209 116 156 211 226 Wheat c kt 10 845 15 073 15 779 15 168 12 680 15 663 Summer crops Cottonseed kt 259 167 214 204 164 178 Rice kt 591 234 271 259 479 64 Sorghum kt 70 289 513 173 54 48 Other oilseeds d kt 16 19 28 18 21 33 Total grains and oilseeds kt 16 436 23 329 25 175 23 049 17 578 22 122 Industrial crops Raw cotton e kt 596 459 410 650 482 279 Sugar kt 4 167 4 060 4 153 3 896 3 650 3 970 Wine ML 508 584 661 736 806 794 Meat and live animals for slaughter Beef and veal gh kt 902 860 948 892 952 925 Live cattle i ’000 973 581 574 549 600 660 Lamb g kt 102 119 128 146 144 159 Live sheep i ’000 5 843 3 843 3 233 4 248 3 800 3 700 Mutton g kt 162 129 144 148 167 118 Pig meat g kt 63 51 43 43 42 41 Poultry meat g kt 23 20 20 22 22 22 Wool Greasy js kt 307 321 373 372 347 342 Semiprocessed kt (gr.eq.) 169 127 114 91 90 90 Skins kt (gr.eq.) 28 27 29 35 35 40

Total js kt (gr.eq.) 505 475 515 498 472 472 Dairy products Butter k kt 111 83 69 82 64 57 Cheese kt 208 212 227 202 183 168 Casein kt 21 18 13 8 6 5 Skim milk powder kt 181 155 141 181 160 141 Wholemilk powder kt 142 117 105 110 87 73 Continued

australian commodities > vol. 14 no. 1 > march quarter 2007 257 export volumes

volume of commodity exports continued 24 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f Forest products Woodchips kt 5 437 5 264 5 598 5 363 5 803 6 135 Fisheries products Tuna l kt 12.6 12.8 10.9 11.7 12.1 11.9 Other fish kt 17.4 13.2 15.0 11.6 11.2 11.4 Prawns m Headless kt 0.6 0.3 0.4 0.1 0.1 0.2 Whole kt 8.7 8.9 9.6 8.4 7.2 7.1 Rock lobster Tails kt 1.7 2.1 1.8 1.6 1.5 1.7 Whole kt 9.5 10.9 10.2 9.9 9.3 9.5 Abalone Fresh, chilled or frozen kt 1.7 2.1 2.0 2.1 2.2 2.2 Prepared or preserved kt 2.5 2.8 2.0 1.5 1.7 1.5 Scallops n kt 1.2 1.5 1.2 1.5 1.8 1.9 Mineral resources Energy Crude oil o ML 20 950 17 526 15 731 13 026 15 589 16 675 LPG ML 3 194 2 916 2 844 2 800 3 063 3 150 LNG qs Mt 7.826 7.914 10.589 12.495 15.200 15.400 Bunker fuel r ML 2 238 2 216 2 207 2 163 2 159 2 160 Petroleum products ML 3 140 2 474 1 847 2 082 2 067 2 125 Metallurgical coal Mt 107.8 111.7 124.9 120.5 126.6 135.6 Thermal coal Mt 99.9 106.7 106.4 110.8 114.6 121.1

Uranium (U3O8) t 9 593 9 099 11 249 10 253 10 376 11 534 Continued

258 australian commodities > vol. 14 no. 1 > march quarter 2007 export volumes

volume of commodity exports continued 24 Australia

Unit 2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f

Mineral resources (continued) Metalliferous minerals and metals t Aluminium Alumina kt 13 168 13 572 14 073 14 499 15 507 16 753 Aluminium (ingot metal) kt 1 551 1 546 1 512 1 617 1 651 1 649 Copper Ore and concentrate kt 1 193 1 286 1 326 1 635 1 621 1 762 Refined kt 359 301 322 314 293 428 Gold v t 282 315 309 315 335 379 Iron and steel Iron ore and pellets Mt 181.5 194.8 228.5 239.4 274.8 296.7 Iron and steel w kt 3 589 3 818 2 338 2 428 2 668 3 041 Lead Ores and concentrates kt 366 417 417 502 445 544 Refined kt 269 231 243 244 218 255 Bullion kt 150 113 164 140 136 160 Manganese Ore s kt 2 014 2 603 3 128 3 215 3 815 3 030 Nickel vs kt 209 214 218 202 224 262 Titanium Ilmenite concentrate x kt 1 020 783 633 722 1 321 1 724 Leucoxene concentrate kt 41 125 93 86 130 219 Rutile concentrate kt 195 146 158 169 310 479 Synthetic rutile s kt 456 470 517 472 504 543 Titanium dioxide pigment kt 147 165 175 177 176 187 Refined silver t 511 415 517 482 453 485 Tin v t 5 963 143 1 529 1 556 1 704 2 500 Zinc Ores and concentrates kt 1 913 1 844 1 953 1 821 1 887 2 372 Refined kt 486 396 397 388 396 420 Zircon concentrate y kt 445 443 428 438 560 853 Other minerals Diamonds ’000 ct 32 274 24 326 32 471 25 354 30 826 21 150 Salt kt 10 172 10 285 12 128 10 776 11 060 11 682

a Includes the grain equivalent of malt. b Includes field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g In shipped weight. Fresh, chilled or frozen. h Includes meat loaf. i Excludes breeding stock. j ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. k Includes ghee, dry butterfat, butter concentrate and butteroil, dairy spreads, all expressed as butter. l Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. m Excludes volume of other prawn products. n Includes crumbed scallops. o Includes condensate and other refinery feedstock. q 1 million tonnes of LNG equals about 1.31 billion cubic metres of gas. r International ships and aircraft stores. t Uranium is included with energy. u Exports of bauxite are confidential. v Quantities refer to total metallic content of all ores, concentrates, intermediate products and refined metal. w Includes all steel items in ABS, Australian Harmonized Export Commodity Classification , ch. 72, ’Iron and steel’, excluding ferrous waste and scrap and ferroalloys. x Excludes leucoxene and synthetic rutile. y Data from 1991-92 refer to standard grade zircon only. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; Australian Mining Industry Council; Department of Foreign Affairs and Trade; Department of Agriculture, Fisheries and Forestry; International Nickel Study Group; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 259 export values

value of commodity exports (fob) 25 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Farm Grains and oilseeds Winter crops Barley a 954 1 239 1 274 1 108 808 1 157 Canola 289 453 397 331 150 307 Chickpeas 52 71 65 106 179 145 Lupins 57 148 89 99 33 52 Oats 66 66 36 47 36 51 Peas b 43 56 33 43 67 87 Wheat c 3 109 3 475 3 488 3 296 3 118 3 778 Summer crops Cottonseed 82 62 55 53 44 43 Rice 371 145 173 172 344 46 Sorghum 17 61 96 33 14 12 Other oilseeds d 21 25 33 20 25 30 Total grains and oilseeds 5 062 5 800 5 739 5 308 4 819 5 710 Industrial crops Raw cotton e 1 153 982 770 1 137 815 499 Sugar 1 220 982 1 098 1 508 1 060 930 Wine 2 386 2 494 2 750 2 799 2 910 2 950 Total 4 759 4 458 4 618 5 445 4 784 4 379 Other crops 3 420 3 096 3 186 3 214 3 066 3 096 Total crops 13 241 13 354 13 542 13 967 12 669 13 185 Meat and live animals for slaughter Beef and veal 3 756 3 793 4 584 4 272 4 332 4 645 Live cattle g 567 318 374 358 412 422 Lamb 554 636 700 782 783 872 Live sheep g 408 266 207 291 266 273 Mutton 346 174 418 431 369 295 Pig meat 256 181 150 140 140 156 Poultry meat 22 20 20 21 23 21 Total 5 910 5 388 6 452 6 295 6 325 6 685 Wool Greasy h 2 266 1 850 1 994 1 868 2 104 2 053 Semiprocessed 991 632 505 389 396 448 Skins 288 296 339 287 329 308 Total h 3 545 2 778 2 838 2 544 2 829 2 810 Dairy products Butter 224 182 188 224 156 152 Cheese 800 738 875 835 593 664 Casein 128 122 116 89 86 50 Skim milk powder 406 386 420 529 534 538 Wholemilk powder 380 321 324 334 304 269 Other dairy products 555 540 564 559 478 488 Total 2 493 2 290 2 488 2 570 2 151 2 160 Other livestock exports 1 977 2 224 2 329 2 279 2 348 2 371 Total livestock exports 13 924 12 680 14 108 13 688 13 653 14 026 Total farm exports 27 164 26 035 27 650 27 654 26 322 27 211 Continued

260 australian commodities > vol. 14 no. 1 > march quarter 2007 export values

value of commodity exports (fob) continued 25 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Forest products Woodchips 808 794 858 839 911 959 Other forest products 1 253 1 207 1 230 1 269 1 265 1 270 Fisheries products Tuna i 321 273 166 179 196 189 Other fish 164 137 139 115 109 121 Prawns j Headless 12 5 7 3 3 3 Whole 193 151 153 129 112 109 Rock lobster Tails 113 103 101 97 94 100 Whole 344 318 330 387 438 445 Abalone Fresh, chilled or frozen 109 117 124 132 139 139 Prepared or preserved 107 120 139 114 112 110 Scallops k 29 35 33 39 43 48 Pearls 332 310 291 290 342 313 Other fisheries products 121 81 61 62 81 71 Total 1 844 1 652 1 542 1 547 1 669 1 648

Total rural exports l Derived as sum of above 31 069 29 689 31 280 31 310 30 168 31 088 On balance of payments basis m 29 859 28 824 30 350 30 531 29 695 29 966 Mineral resources Energy Crude oil n 6 402 5 055 6 330 6 638 7 766 7 870 LPG 855 647 804 1 002 1 047 1 029 LNG 2 607 2 174 3 199 4 416 5 393 5 567 Bunker fuel o 775 696 951 1 322 1 206 1 111 Other petroleum products 1 198 918 844 1 195 1 229 1 285 Metallurgical coal 7 448 6 510 10 758 17 003 15 027 14 986 Thermal coal 4 448 4 372 6 336 7 206 7 311 8 362 Uranium (U3O8) 427 364 475 546 726 972 Total Derived as sum of above 24 161 20 737 29 696 39 328 39 705 41 182 On balance of payments basis (excl. bunker fuel) 23 036 19 779 28 387 37 605 37 862 39 239 Metalliferous minerals and metals Aluminium Bauxite s 159 125 123 127 186 185 Alumina 3 660 3 781 4 383 5 262 6 398 5 949 Aluminium (ingot metal) 3 696 3 441 3 726 4 788 5 498 4 697 Copper p Ore and concentrate 1 048 1 242 1 750 3 492 3 943 3 633 Refined 956 924 1 332 2 161 2 453 3 044 Continued

australian commodities > vol. 14 no. 1 > march quarter 2007 261 export values

value of commodity exports (fob) continued 25 Australia

2002-03 2003-04 2004-05 2005-06 2006-07 s 2007-08 f $m $m $m $m $m $m Mineral resources (continued) Metalliferous minerals and metals (continued) Gold p 5 133 5 510 5 523 7 089 9 202 11 124 Iron and steel Iron ore and pellets 5 342 5 277 8 120 12 854 16 955 20 021 Iron and steel 1 855 2 004 2 031 1 674 1 756 1 834 Lead p Ores and concentrates 289 387 490 711 758 851 Refined 203 199 305 350 408 404 Bullion 165 142 246 235 305 297 Manganese Ore s 312 371 473 424 461 451 Titanium Ilmenite concentrate q 135 82 63 76 146 187 Leucoxene concentrate 16 33 25 25 45 67 Rutile concentrate 149 94 114 138 257 395 Synthetic rutile s 293 253 306 321 351 378 Titanium dioxide pigment 428 399 422 441 440 475 Nickel s 2 347 3 116 3 731 3 515 8 406 10 215 Refined silver 136 118 161 197 238 214 Tin p 38 1 8 12 19 23 Zinc p Ores and concentrates 670 677 852 1 542 2 470 3 097 Refined 757 557 614 998 1 808 1 964 Zircon concentrate r 282 260 319 398 506 764 Total 28 071 28 993 35 118 46 830 63 009 70 269 Other minerals Diamonds s 789 484 658 526 651 461 Salt 233 186 226 229 243 257 Other 4 485 3 779 3 763 5 239 4 045 4 326 Total mineral resources exports 57 738 54 179 69 461 92 152 107 653 116 495 Total commodity exports Derived as sum of above 88 807 83 868 100 741 123 461 137 821 147 583 On balance of payments t 86 822 82 307 98 860 121 360 136 142 145 349

a Includes the grain equivalent of malt. b Field peas and cowpeas. c Includes the wheat equivalent of flour. d Includes soybeans, linseed, sunflowerseed, safflowerseed and peanuts. Excludes meals and oils. e Excludes cotton waste and linters. g Excludes breeding stock. h On a balance of payments basis. ABS recorded trade data adjusted for changes in stock levels held overseas by Wool International. i Exports of tuna landed in Australia. Tuna captured under joint venture or bilateral agreements or transhipped at sea is not included. j Other prawn products included in other fisheries products. k Includes crumbed scallops. l Sum of farm, forest and fisheries products. m The value of exports derived as the sum of published detailed items differs from the balance of payments aggregates shown in table 6 for two main reasons: the ABS makes special adjustments to some recorded trade data for balance of payments purposes; and ABARE derives its own estimates, (using non-ABS sources), for several items as footnoted. For more detail on a balance of payments basis, see table 7. n Includes condensate and other refinery feedstock. o International ships and aircraft stores. p Value of metals contained in host mine and smelter products are not available separately and are included in the value of the mineral product or metal in which they are exported. q Excludes leucoxene and synthetic rutile; data from 1991-92 refer to bulk ilmenite only. r Data refers to standard grade zircon only. t As derived in table 6. s ABARE estimate. f ABARE forecast. Sources: ABS, International Trade, Australia, cat. no. 5465.0, Canberra; ABARE.

262 australian commodities > vol. 14 no. 1 > march quarter 2007 import value

value of imports and exports of selected commodites 26 Australia

2001-02 2002-03 2003-04 2004-05 2005-06 s $m $m $m $m $m Vegetable oilseeds and products a Imports 399 401 382 352 341 Exports 784 443 603 551 470 Dairy products Imports Cheese 166 168 158 187 227 Other dairy products 84 92 101 124 122 Total 250 260 259 311 349 Exports Cheese 1 033 800 738 875 835 Other dairy products 2 245 1 693 1 552 1 613 1 734 Total 3 278 2 493 2 290 2 488 2 570 Edible fisheries products Imports Shellfish b 352 360 360 412 426 Fin fish 537 591 545 547 602 Total 889 950 905 959 1 028 Exports Shellfish b 1 160 1 000 909 932 943 Fin fish c 502 485 410 304 295 Total 1 662 1 485 1 319 1 236 1 237 Forest products Imports Sawnwood 443 505 502 492 419 Wood based panels 170 206 193 219 231 Pulp and paper products 2 611 2 784 2 719 2 809 2 841 Other d 529 591 585 587 528 Total 3 752 4 086 3 998 4 107 4 020 Exports Woodchips 712 808 794 858 839 Pulp and paper products 841 834 820 839 854 Other e 431 418 388 392 415 Total 1 984 2 060 2 002 2 089 2 108 Petroleum Imports Crude oil g 7 458 8 610 6 594 9 995 12 820 Petroleum products h 1 625 2 050 3 595 5 123 8 761 Total 9 083 10 661 10 190 15 118 21 581 Exports Crude oil g 6 390 6 402 5 055 6 330 6 638 LPG i 721 855 647 804 1 002 LNG 2 613 2 607 2 174 3 199 4 416 Bunker fuel j 760 775 696 951 1 322 Other petroleum products 1 234 1 198 918 844 1 195 Total 11 719 11 838 9 490 12 126 14 573

a Includes peanuts, oilseeds, vegetable oils and vegetable protein meals. b Includes all crustaceans and molluscs including canned. c Excludes tuna transhipped at sea or captured under joint venture or bilateral agreements. d Includes roundwood, other processed wood and minor forest products. e Includes roundwood, sawnwood, sleepers, processed wood and minor forest products. g Includes condensate and other refinery feedstock. h Includes LPG. i Naturally occurring and refinery byproduct gas. j International ships and aircraft stores. s ABARE estimate. Sources: Australian Bureau of Statistics; Department of Agriculture, Fisheries and Forestry; ABARE.

australian commodities > vol. 14 no. 1 > march quarter 2007 263 abare management contacts

Executive director Phillip Glyde [email protected] 6272 2100 Deputy executive director Karen Schneider [email protected] 6272 2033

Chief economist (acting) Don Gunasekera [email protected] 6272 2040 Chief commodity analyst Terry Sheales [email protected] 6272 2054 Macroeconomic analyst Jammie Penm [email protected] 6272 2030 Commodity outlook and regional conferences Vince O’Donnell [email protected] 6272 2255 Agriculture Branch manager (acting) Lisa Elliston [email protected] 6272 2091 Agriculture and biosecurity (acting) Ben Buetre [email protected] 6272 2404 Crops, livestock and food industries John Hogan [email protected] 6272 2056

Energy and minerals Branch manager Paul Ross [email protected] 6272 2349 Energy projections and analysis Graham Love [email protected] 6272 2055 Resource markets and infrastructure Andrew Dickson [email protected] 6272 2173 International energy and mineral analysis Leanna Tedesco [email protected] 6272 2295 Farm surveys and analysis Branch manager Rhonda Treadwell [email protected] 6272 2043 Regional farm data analysis and collection Colin Mues [email protected] 6272 2027 Data management Geoff Armitage [email protected] 6272 2367 International Branch manager (acting) Helal Ahammad [email protected] 6272 2146 International economic analysis Alistair Davey [email protected] 6272 2170 Climate change and trade modelling Helal Ahammad [email protected] 6272 2146 Natural resource management Branch manager Peter Gooday [email protected] 6272 2138 Fisheries (acting) David Galeano [email protected] 6272 2094 Land and forests Thilak Mallawaarachchi [email protected] 6272 2011 Water Tim Goesch [email protected] 6272 2009

Corporate management Corporate manager Annette Blyton [email protected] 6272 2222 Conferences Yvonne Kingsley [email protected] 6272 2265 Media coordinator Maree Finnegan mﬁ [email protected] 6272 2260 Publishing and marketing Andrew Wright [email protected] 6272 2290 Publications enquiries Denise Flamia dﬂ [email protected] 6272 2211 Recruitment Peter Cahill [email protected] 6272 2022

264 australian commodities > vol. 14 no. 1 > march quarter 2007