Australia’s almond sector is well placed to remain competitive with arch rival California in global export markets, despite some local headwinds, according to new industry research.
In its report, Australian Almonds: Still in the Game, agribusiness banking specialist Rabobank says – at a time when both the Australian and US almond industries are poised for considerable growth – its research indicates Australian almond plantations are likely to remain competitive into the medium-term, but warns there are downside risks to the outlook, particularly around the cost and availability of water.
Report author, Rabobank senior wine and horticulture analyst Hayden Higgins says with significant production coming online in California to pose a risk to global almond prices, it was important to determine whether the Australian almond industry could remain competitive, on a cost basis, with the US.
“Our analysis indicates – under a number of scenarios – that an Australian almond orchard planted in 2019 is likely to remain cost competitive with a Californian almond orchard planted at the same time,” he says.
“Given the dominance of the US – with California accounting for 80 per cent of global almond production compared to Australia’s eight to nine per cent – this cost competitiveness analysis is important to ensuring any new production coming on board is profitable.”
Cost competitiveness
Modelling three different scenarios for both Australia and California to take into account the variance in water markets, the report found an almond orchard planted this year in Australia would be cost competitive with an orchard established at the same time in California, when both reach full production.
“We ran modelling on an orchard that has 100 per cent of its water available from permanent water entitlements, one that sources all its water via temporary allocations and an orchard that has an equal spilt of both permanent entitlement and temporary water allocations,” Mr Higgins says.
Under all three scenarios using Rabobank’s base case assumptions, he says, the Australian almond orchards were able to achieve cost competitiveness with their Californian counterparts providing the Australian dollar exchange rate remains below USD 0.75. For those with permanent water entitlements, at full allocation, the exchange rate could rise to USD 0.97 before competitiveness is eroded.
“The price of temporary allocation water poses the biggest risk to Australia’s cost competiveness and has the biggest influence on the modelling,” he says, “and this would be exacerbated by any material rise in the AUD/USD exchange rate.”
Global outlook
Almond production in both the US and Australia is forecast to rise in the vicinity of 43 to 44 per cent over the next five years to a combined total of 1.62 million tonnes by 2023-24, Mr Higgins says.
“The largest volume growth will well and truly come out of the US,” he says, “with planted area forecast to increase to 650,000 hectares to produce around 1.5 million tonnes of almonds.”
In Australia, Mr Higgins says Rabobank projects the planted area to reach 53,300 hectares over the five year period, producing some 149,000 tonnes.
“While this takes into account some additional developments here in Australia, we expect the rate of land converted to almonds will be slower than what we have seen over the last two or three years,” he says.
Mr Higgins says uncertainty around water availability and prices, combined with current restrictions in place in Victoria related to the issuing of new water licences, are key factors expected to contribute to a slowdown in “greenfield” almond orchard developments.
On the demand side, a combination of taste, convenience, nutritional factors and rising middle-class incomes are supportive of future demand growth, he says.
“While global demand should broadly keep pace with supply growth, we expect that in order for the global market to absorb this increased supply, prices will moderate from their current levels over the next five years,” he says.
“But given the dominance of the US, we will continue to see volatility in the market, with any production disruptions exerting upside pressure on prices.” A situation currently being seen, he says, with the US almond crop expected to be down substantially from earlier season forecasts.
For Australia
The report says while Australian almond orchards are likely to remain profitable into the medium term, there are some downside risks to the outlook that are “outside of the control of the Australian sector”.
“The key risk facing local growers is the future water availability in the Lower Murray, especially during peak demand periods,” he says. “Not only in terms of physical deliverability restraints but in light of changeable future weather patterns, where it is reasonable to assume there will be more volatility in recharging the system.”
Mr Higgins says this has the potential to flow into the cost of temporary water allocation prices, which have the greatest influence on cost of production, as rising future demand is expected from the increased permanent crop plantings that have occurred recently in the Lower Murray.
Other risks, he says, include the US regaining improved access to the Chinese market and US production increasing faster than currently forecast.
“The US-China trade war has created a significant demand opportunity for Australia to fill,” he says, “with China accounting for around 57 per cent of our almond exports in the year-to-date (to September), up from 12 per cent in the same period last year.”
Mr Higgins says the risk lies in the US seeking to refill that gap, should a truce be agreed upon, which will see some of the increased Australian almond export volumes to China re-directed to other markets where the US has been building market share in the interim.
Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of approximately 8.4 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 93 branches throughout Australia and New Zealand.
Media contacts:
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Email: denise.shaw@rabobank.com
Skye Ward
Media Relations Manager
Rabobank Australia & New Zealand
Phone: 02 4855 1111 or 0418 216 103
Email: skye.ward@rabobank.com