I. Sector landscape and outlook
Food producing activities, such as agriculture, farming, fishing and poultry etc., being an essential service, have continued to operate in the COVID-19 induced lockdowns. Since economies are re-opening now, the lagged demand for food materials from the dine-in segment will likely revive gradually. Food commodities’ inputs to dine-in places have seen severe disruptions across the globe due to the Great Lockdown, and there remains uncertainty and thus opportunity on the return to full capacity utilisation in the dine-in sector, including restaurants, hotels, clubs, cafes.

Figure 1: Australian agriculture land

Source:Australian Bureau of Agricultural and Resource Economics
 
Food and Agriculture Organisation of the United Nations (FAO) notes that COVID-19 impacts were felt across food sectors idiosyncratically, but agriculture commodity markets have proved to be resilient, according to FAO’s Food Outlook.

FAO expects a stable demand and supply situation for the 2020/21 season, suggesting an increase of 2.6% over the previous year. Meat forecast is down by 1.7% in 2020 due to animal diseases, droughts, and COVID-19. Meat prices in the international markets have fallen due to COVID-19, drop in global import demand, unsold meat, and logistics issues.

It said that seafood markets are facing stress, especially in the perishable species that are consumed in the restaurants. Producers have also lowered stocking targets. FAO said salmon and shrimp production would likely take a hit.

FAO asserts that the world is better placed than 2007-08 global food price crash backed by higher inventory levels and broad-based trade. And, countries are experienced and prepared to deal with global crises.



An economic expansion elevates the demand for goods and service, including agriculture commodities. Since the global economy is set to witness a recession, it is possible that some impact would be felt in the agriculture sector as well.
COVID-19 has played havoc across sectors, let us look at how it has impacted the Australian agriculture sector. 

How is the Australian agriculture sector faring amid COVID-19?
Australian Bureau of Agricultural and Resource Economics (ABARES) noted that COVID-19 -driven impacts were limited to China initially, but the virus spread across the globe and has been impacting global markets by and large.

Majority of the Australian agriculture sector is facing price movement due to lower demand after a long time as supply-side shocks have moved prices over the recent years due to droughts, cyclones etc. ABARES noted that economic activity would not impact demand for essential food products as seen during the global financial crisis.

Figure 4: Agrifood trade during the Global Financial Crisis

Source: IMF, ABARES
 
Australian agriculture is not immune to the global economic downturn. Consumers are likely to refrain from discretionary spending, including dining out at high-end restaurants and cafés where high-quality produce is sourced.

Lower income and unemployment will likely induce consumers to look for value offering products. And, the foodservice industry is opening-up gradually, which would also mean a revival of demand from the dine-in segment.

Producers are likely to divert goods within sales channels, which may induce producers to compromise on margins in pursuit of better sales. Agriculture commodities that are factors of production in manufacturing business could face stress, including wool and cotton (non-perishable).

ABARES Analysis: Impact on Agriculture commodities trade during COVID-19 
Although agriculture exports were largely stable during the early part of 2020, there was a notable impact on seafood and meat exports. Grains were impacted due to drought, and domestic production is expected to remain resilient, depending on seasonal conditions.

Wool prices and demand have been trending lower and domestic production was impacted by drought. Horticulture exports have performed strongly during the period with consistent demand from China, exports values of products were also higher during the March quarter.

Oilseeds have peak season between January to April. January and February exports values were lower due to drought but increased substantially in March. Pulses exports were also largely impacted due to drought.

The agriculture sector is also dependent on the import of machinery, fertilisers, products of oil and gas, chemicals. Although ABARES expect impacts on production and harvest this season, the import of key agriculture inputs between January and March was stable.

Australia’s beef position
In 2019, Australia was among the top three beef exporting nations, after the US in the second position. According to Meat and Livestock Australia (MLA), most of Australia’s beef production was exported, Australia had a share of 4% in global beef production and 16% share in global beef trade.

Australia generated $10.8 billion through beef exports in 2019. It has gained beef access worldwide due to trade reform and high animal health. Australia has Free Trade Agreements (FTAs) with the US, China, Japan, Indonesia and Korea.

As per MLA, Australian beef exports were stable in May at 99k tonnes swt. Cattle supplies have added impact to export numbers, and despite COVID-19 challenges exports were down just 3% on year-to-May basis over 2019.

It was said that US beef production was returning to normal after lost production in May. However, there is an uncertainty on the pick-up in exports from India and Brazil due to COVID-19. 

In May 2020, China imposed a ban on import of beef from four meat processing plants from Australia on certification grounds.

Time to gauge through government actions to alleviate the impact caused by the lockdown. 

Federal Government has taken measures to alleviate supply chain and logistics disruptions
According to the Australian Bureau of Statistics (ABS), the latest trade data suggest that majority of the trade flows have remained unscathed despite the pandemic. But live animal exports were lower due to lower demand from Vietnam and Indonesia. Exports of seafood were impacted largely due peak season for some species in February.

Government has launched International Freight Assistance Measure to improve the delivery of fisheries and agriculture exports into key markets. Some agriculture produce requires large labour flows to support the production, and international as well as domestic travel restrictions intensified scarcity of labour. Government has extended visa for agriculture workers, and workers are allowed to travel within regions. It also moved to ensure the availability of Australian Government Accredited Veterinarians for live exporters.

Australian Government is also moving to facilitate smooth trade with the trading partners and is working to provide assurances to the trading partners for the quality of goods that would remove the need of on-site audits by the importing nation upon arrival of the shipment.

Let us now look at how the industry is poised.

Agriculture forecast and recovery
Agricultural outlook would be driven by a recovery in drought, and COVID-19 will continue to pose risks, according to Agriculture Commodities report by ABARES. Better seasonal conditions would drive farm production values to $61 billion in 2020-21.

A rebound in grain production is expected, and the forecast is 15% higher to $31.8 billion. A weaker economic outlook and resilience in agriculture produce would drive the prices lower for major commodities.

Figure 5: Major Agriculture Forecasts (A$, millions)

Source: ABARES
 
After recovery from drought, ABARES expects farm exports to fall by $2.7 billion to $44.1 billion in 2020-21. Value of livestock is also expected to be lower by 10% as restocking starts as after three years of drought-like conditions have begun to improve.

It expects meat and livestock exports to be lower by $3.5 billion and grain exports would be higher by around $2.3 billion.

For the winter crop production, ABARES June 2020 crop report is suggesting a 53% increase in crop production for 2020-21. In South Australia, New South Wales and Victor, agriculture yields are expected to be better than average.

Winter crop plantation forecast for 2020-21 is 5% above the average of the last ten years at 22.5 million hectares. The wheat plantation has a forecast of 13 million hectares, up by 27%. Barley plantation forecast is increased by 8% to 4.4 million hectares.

ABARES expects wheat production to be 26.7 million tonnes, up by 76%. Barley production would reach 10.6 million tonnes, an increase of 17%, and an increase of 40% to 3.2 million tonnes is expected in canola production.

Chickpeas production is expected to increase by 135% to 661k tonnes and oats production is forecasted to be 1.6 million tonnes, up by 81%. Weather outlook for June to August suggest above average rainfall in QLD and NSW, and around average rainfall in most of the other regions.

Risks

(a) Agriculture outlook largely depends on weather outlook, which makes it very volatile. Natural calamities could impact the demand and supply dynamics of the agricultural commodities and prices.

(b) Australian agriculture produce is majorly exported, and the sector is largely dependent trade, which also supports employment.

(c) Growing tensions with the large trading partners pose risks to the agriculture exports of Australia.

(d) In light of pandemic, many countries have introduced export prohibitions. Additional developments in the geopolitical and trade could hurt the agriculture sector.

With the Australian Government firm on its commitments to curb the spread of COVID-19 and lifting of lockdown, slowly the economy is limping back to normalcy. Many restaurants are also opening their doors to customers, albeit at a lower occupancy rate. This should augur well for the food and meat sector and help the players to see some uptick in their order book. 
 
II. Investment Theme and Stock under Discussion (CGC, TGR, UMG and ING)
After gauging through the industry dynamics, let us take a detailed look at the companies operating in this sector, in terms of their performance and outlook. We have assessed the companies’ stocks based on Discounted Cash Flow (DCF) method.