Export Monitor February 2015

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New agribusiness opportunities abound in India

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Strong economic and population growth, combined with rapid rates of urbanisation are driving India’s increased demand for food products — which is expected to more than double between 2009 and 2050. This will offer significant new opportunities for Australia’s agribusiness exporters, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), particularly for exporters of vegetables, fruit, dairy products and wheat. 

India is tipped to become the world’s most populous country by 2028. The World Bank also expects India to leapfrog China to become the fastest growing major economy as early as 2017. One of the few bright spots in the global economic outlook — India is benefiting from a reformist government, cheaper oil and accommodative monetary policies. Together with rapid urbanisation, (1) these forces will drive increased and more diversified food consumption. Higher average incomes in urban areas allow these consumers to purchase a greater variety of higher value foods, including dairy, oils and pulses (Chart 1).

Under current policy settings, ABARES expects consumption of vegetables to rise by 183%, fruit by 246%, and dairy by 137% from 2009 to 2050 (in 2009 US dollars). Together these products account for 77% of the total increase in food consumption by 2050 (a large proportion of the Indian population are vegetarian).

But India’s increased domestic food production will be insufficient to satisfy higher demand, necessitating greater imports for many commodities. Growth in food imports will predominantly be driven by fruit and vegetables, which are projected to reach US$47b and US$58b respectively by 2050. Dairy products at US$13b and wheat at US$15b also expected to rise significantly (Chart 2).

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India is often cited as a source of untapped potential for Australian exporters. Australia exported agricultural goods worth $614m to India last financial year — comprising just 1% of Australia’s total agricultural exports (China accounted for over 20%). In fact, Australia’s agricultural exports to India are worth less than half that sent to New Zealand, despite the latter having a population 280 times smaller. Nonetheless, Export Finance Australia’s recent Exporter Sentiment Survey suggests opportunities in India are dawning on exporters — a record 11% of SMEs surveyed nominated the sub-continent as their most important overseas market. 

Australia’s comparative advantage in horticulture production means it is well placed to meet rapid growth in Indian demand. Despite this, strong competition from India’s domestic production and other exporting countries will necessitate an ongoing focus on productivity enhancing measures.

China rebalancing to dent mining exports but foster diversification

Over the past decade Australia’s stellar export performance has been dominated by resources. But robust gains in export volumes will prove insufficient to offset rapid falls in commodity prices — Australia’s earnings from resources exports are forecast to fall 10% this financial year. The diminishing role of investment in China’s economy will keep the pressure on Australia’s mining sector. Diversification of our export base will become increasingly critical to capitalise on the Chinese market.

The Reserve Bank expects the recent terms of trade decline to flatten out in 2015 — with commodity prices 40% lower than their mid-2011 peak (but still some 45% higher than the historical average). While large sunk investments in capacity has begun to translate into higher production and export volumes, lower commodity prices mean Australia’s earnings from mineral and energy commodity exports are forecast to decline by 10% to $176b this financial year (Chart 3). For instance, Australia is expected to earn 18% less from its exports of iron ore and coal (which comprise 60% of total commodity exports), despite volumes being 10% higher than last financial year (Chart 4). The notable exception is LNG export earnings, which will begin to increase following the commissioning of new LNG facilities on the east coast.

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The Bureau of Resources and Energy Economics suggests substantial increases in supply are the primary factor driving commodity price declines. But softer Chinese demand isn’t helping — 60% of Australia’s resources exports were destined for China last financial year.

China’s economic slowdown is not the villain hindering Australian resources exports. Expanding by 7.4% last year, China recorded its slowest pace of growth in nearly a quarter of a century. The slowdown is expected to continue — the IMF forecasts GDP to expand by 6.8% this year. But China’s increased economic size means that last year’s growth yielded an extra 4.8 trillion yuan in GDP, almost exactly the same as in 2007, when growth ran to 14.2%. Despite the slowdown, China’s economic output was US$10.3t last year — a five‑fold increase from a decade ago.

Of greater importance is the diminishing role of investment in the commodity-intensive property and infrastructure sectors of the Chinese economy. In the wake of the global financial crisis, China unleashed a mammoth fiscal stimulus program which provided a boon to Australian raw material exports. But as Chinese authorities aim to restructure the economy towards a more sustainable and consumption driven model of growth, the investment-to-GDP ratio is likely to decline as less emphasis is placed on public infrastructure spending. Persistent oversupply in the property market — China’s unsold houses surged 26% in 2014 — is also expected to stymie growth in the property sector. JPMorgan is forecasting growth in real estate investment across China to halve to 5-6% in 2015 — already well down on the 20% growth in 2013. Lower spending in these commodity intensive sectors will see China’s raw material imports continue to grow in 2015, but at slower rates.

As China shifts from investment to consumption, diversification and expansion of Australia’s export sectors including agriculture, services, tourism and education will increasingly be required to capitalise on China’s economic rise. RBA analysis finds that Chinese investment now absorbs more than twice as much Australian value-added output as Chinese household consumption. But the RBA also confirms that a rise in demand by Chinese households for food products and services could provide some offset from lower demand growth for Australia's mineral resources.

Lower AUD boosts export performance but not sentiment

AUD depreciation provides a welcome boost to Australia’s export competitiveness and performance, but China’s slowing economy and multiple threats to the global growth outlook have stifled a bounce in exporter sentiment.  

After a period of stubborn elevation, the AUD has begun to fall — it is now down 11% since peaking in mid‑2014 against the currencies of our major trading partners (2). Despite the recent depreciation, the RBA maintains that the AUD ‘remains above most estimates of its fundamental value’ when considering the significant declines in key commodity prices.

Combined with record low interest rates, a weaker AUD will continue to support export activity in the non-resources sectors crucial to diversifying Australia’s mining-dependent economy. Non-resource exports increased 5% over the second half of last year (Chart 5), fuelled in particular by strong growth in the rural sector (Chart 6). For instance, the weaker AUD has been credited with aiding Australia’s wine exports — which rose for the first time in seven years in 2014. Australia’s Grape and Wine Authority suggests currency depreciation will provide further stimulus this year.

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But a more competitive currency coupled with a stronger and more diversified export performance in the second half of last year has not been enough to buoy the spirits of exporters. The ACCI’s Business Expectations Survey released earlier this month found that expected export sales fell for the third consecutive quarter in December — the index now sits at a neutral level for the quarter ahead. Moreover, expected export deliveries reported in the ACCI-Westpac Survey of Industrial Trends were only mildly positive (+1) in the December quarter, in contrast to an average reading of +12 during the eight years from 2000 to 2007.

The latest Deloitte Quarterly CFO Survey found that slowing Chinese growth severely dented the confidence of the Australian CFOs in the back half of 2014. Ongoing European turmoil was also found to be contributing negatively to CFO optimism. But if the global economy strengthens in 2015 as widely predicted, we expect exporter sentiment to gain some momentum.

Improving world trade growth will continue to underperform

World trade growth is expected to accelerate this year, but remain well below the recent pre-crisis average (Chart 7). This is a radical change in trend after 30 years of unprecedented expansion. IMF analysis suggests the slowdown is a symptom of structural changes in the patterns of international production — and that the phenomenon will therefore persist. Rising trade protectionism is also to blame, highlighting the importance of free trade agreements both secured and sought.

The IMF’s latest World Economic Outlook predicts world trade volumes will expand by 3.8% this year. This represents both a modest acceleration from 2014 (3.1%) and a return to the historical relationship where trade growth outstrips GDP growth.

But world trade growth continues to underperform relative to the historical average. The global trade slowdown is partly a cyclical phenomenon — driven in particular by economic hardship afflicting the euro area (the EU accounts for roughly a third of total world trade volumes). But recent IMF analysis finds that structural rather than short term factors are mostly to blame. Specifically, the slowdown is a symptom of changing patterns of international production — where supply-chain trade in the two largest trading economies, the US and China, has exhausted its strong momentum. Thus, unlike the global trade collapse in 2009, the 2012-13 trade slowdown is likely to persist in coming years. Some relief may be provided in the longer term by increasing international division of labour in regions that have not yet made the most of global supply chains — including south Asia, Africa and South America. 

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Also contributing to slower world trade growth, albeit to a lesser extent, is a modest rise in trade protectionism following the financial crisis. A recent WTO report on G-20 Trade Measures finds that since 2008 the stock of restrictive trade measures introduced by G-20 economies (accounting for 76% of global trade) continues to rise despite a pledge to roll back any new protectionist measures.The total number of restrictive measures still in place now stands at 962 a three-fold increase over the four year period (Chart 8).

This protectionist trend highlights the importance of free trade agreements secured last year with Australia’s three largest export markets — China, Korea and Japan. It also provides new motivation to pursue several others — namely with India, the Gulf Cooperation Council and Trans-Pacific Partnership. 

Cassandra Winzenried, Senior Economist
cwinzenried@exportfinance.gov.au

The views expressed in Export Monitor are Export Finance Australia’s. They do not represent the views of the Australian Government. The information in this report is published for general information only and does not comprise advice or a recommendation of any kind.  While Export Finance Australia endeavours to ensure this information is accurate and current at the time of publication, Export Finance Australia makes no representation or warranty as to its reliability, accuracy or completeness.  To the maximum extent permitted by law, Export Finance Australia will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this report.  

Photo credit: © Ahmad Masood / REUTERS / Picture Media

(1) Urban incomes are around double those of rural areas. The share of India’s population living in urban areas increased from 26% in 1990 to 31% in 2010, and is expected to reach 52% by 2050.

(2) While the depreciation has been more dramatic against the USD (17%), the AUD has proved more resilient against the euro and the yen as both the ECB and Bank of Japan increased unconventional monetary stimulus.