Has Australian food and agriculture passed ‘peak China’ exposure? Rabobank tips market diversification

August 19, 2020

SYDNEY - Australian exports of food and agricultural products to China rose 8% in value terms in the 2019/20 season, reaching the highest level in the history of the China-Australia trading relationship. But that could well prove to be the peak of Australian agriculture's exposure to China, agribusiness specialist Rabobank said in commentary released today.

 Data released in August showed the biggest gains in Australian agricultural exports to China in 2019/20 were registered by beef and sheep-meat as Chinese buyers looked to fill a hole left by African swine fever, which has more than halved the Chinese sow herd and created a shortage of animal protein in China's local market.

 Shipments of Australian dairy, wine, grain, oilseeds and fruit to China in 2019-2020 all saw year-on-year gains as Australia continued to ride a wave of opportunity generated by rising incomes in China, Rabobank said.

The 2015 China-Australia FTA, increasingly-sophisticated e-commerce supply chains and the value consumers placed on Australia's food quality and provenance all contributed, the bank said.

 However, while there was a surge in shipments to China, the total value of Australia's food and agri (F&A) exports "basically stood still in 2019/20" - with shipments down by just under two per cent.

 As a result, China's share of Australian F&A exports rose to 32% for the 2019/20 period - up from 29% in the prior year to reach the highest level in the history of the China-Australia trading relationship, Rabobank said.

 But the recent trajectory of Australian agriculture's increasing exposure to China was not inexorable, the bank warned, adding that 2019/20 could well prove to be the peak of Australian agriculture's exposure to China.

 Rabobank's head of Food & Agribusiness Research, Tim Hunt, said "extracting one in three of our export dollars from one market" brought considerable concentration risk for the Australian food and agricultural sector.

 "We haven't been this exposed to one market since the 1950s, when we were still joined at the hip to the UK," he said. "And that was a very different political relationship."

 Hunt said that in a year in which political relations with China soured, the share of almost all of Australia's agri exports destined for China rose. But trade was now starting to suffer.

 "This shouldn't come as a complete surprise," he said. "China has often found reasons to reduce purchase of agri products from countries when tensions arise. And its most senior diplomat in Australia warned over two years ago that if political relations continued to deteriorate, trade could suffer.

 "Almost eight months into 2020, this is exactly what we are seeing."

 "Australia has five F&A exports to China that can be worth over a billion dollars in any given year," he said.

"In 2020, China so far has impeded or threatened to impede three of these - via the removal of accreditation to supply some beef product lines from certain abattoirs, the imposition of an anti-dumping duty of barley, and now a threat to impose anti-dumping duties on wine."

 In its commentary, Rabobank said 2019/20 may prove to be the peak of Australian agriculture's exposure to China for several reasons.

Firstly, the likely rebound of wheat production this season would see a huge boost to shipments of a product that was typically sold to markets outside China.

Secondly, China's antidumping duty on barley would likely see most barley exports directed elsewhere for at least the next 12 months.

Meanwhile, with some rebound in the Chinese pig herd under way, the share of Australia's beef and sheep-meat destined for China may also have peaked

"As we push into the longer term, regions like South-East Asia are also expected to play an increasing role in the textile milling industry. This will see the share of Australian cotton sent to China drop off over the medium term."

Huntesaid the size of the Auustralia-China trade flow would be heavily influenced by the politics between the countries and the strategy of buyers and sellers. "The extent of exposure to China and the risks this is bringing may see many industries look to diversify markets in coming years," he said.

 "The Chinese market is hard to replicate in size, growth and value. But there are growth opportunities in other markets that Australian exporters can tap into in coming years, especially if progress is made in improving market access."

 Hunt said Australia's F&A industry had been flexible and adept enough to navigate shifts in its customer base over many decades. "This may prove to be the start of the next phase in that journey," he added.