RURAL Bank's Australian Agriculture Outlook 2023 report delivers a mixed outlook for farmers heading into the first half of 2023, with global economic challenges and continuing high production costs cited as the main dampeners.

Following recent bumper seasons, the industry navigated a challenging period through the latter half of 2022 with a third consecutive La Niña event bringing damaging rainfall and flooding on the east coast, impacting producers across a range of agricultural sectors.

The new report analyses the performance of six industries – cattle, cropping, dairy, horticulture, sheep and wool – and anticipates improving seasonal conditions, which combined with high commodity prices, will assist producers to offset potential quality issues, particularly across the cropping and horticultural sectors.

Andrew Smith, Rural Bank head of agribusiness development, said four major factors will impact Australian agriculture in the first half of 2023, with seasonal conditions, production costs, trade conditions and global economic headwinds all featuring prominently in the findings.

"We expect trade conditions to continue improving in 2023 with the UK Free Trade Agreement anticipated to take effect in 2023 and the Australia–India Economic Cooperation and Trade Agreement (IA–ECTA) coming into force this month," he said.

"Sheepmeat, almond, wool, lentil, and wine producers are set to see the greatest benefits from improved access to the Indian market.

"We see farm input costs persisting as a key issue in 2023 across every sector.

"Tight global fertiliser supply combined with high fuel and labour costs will weigh on grower margins, however, a generally weaker Australian dollar in comparison to the first half of 2022 should lift the overall competitiveness of our agricultural exports.

"Near perfect seasonal conditions in Western Australia and South Australia has growers on track to produce a record winter cereal crop.

"Harvest is advancing well with minimal delays at this stage and canola yields are at record levels with very good oil content.

"High production costs are expected to remain an ongoing challenge for producers with input costs and the cost of labour forecast to remain elevated while visitors on working holiday visas remain well below pre–pandemic levels.

"Geopolitical uncertainty is supporting global grain prices and Russia's ongoing invasion of Ukraine is expected to continue driving volatility across grain and oilseed markets as uncertainty regarding exports from two of the world's largest grain producers continues.

"Trade relations with China could potentially move in a more positive direction following recent high–level talks, but punitive tariffs with China remain in place and any thawing in trade relations is expected to be slow.

"Supply chain disruptions are also improving at a domestic and global level and a return to more typical weather conditions is forecast, which should see cropping and horticultural production remain above average."

VICTORIA'S OUTLOOK:

• Low irrigation costs and improving growing conditions will drive strong fruit and nut production more generally in the first half of 2023 across the state, though vegetable producers are expecting some short–term supply shortfalls following a challenging spring and summer planting period that was heavily impacted by flooding and rainfall events.

• Almond production is also looking strong throughout the Sunraysia region following a relatively successful pollination period with low irrigation costs further aiding growers in the region.

• Table grape production is forecast to increase this season amidst ongoing maturation of vine plantings and low irrigation costs.

Ongoing seasonal labour shortages are expected to continue impacting producers throughout picking.

Stone fruit production throughout the state has been impacted by extreme weather events throughout October and November.

Apple and pear production has also been impacted by flooding across Victoria's key production regions including the Shepparton and Goulburn Valley with supplies to remain constrained into early 2023 as a result.

• Victorian milk production is forecast to remain below average through the first half of 2023.

A continued downwards trend in production is exacerbated by loss of production through flooding, and the effects on the supply chain will continue to hamper any growth.

Tight production will see prices remain at near record levels with the 2022/23 farmgate price around $9.30/Kg MS.

• Victoria also suffered crop losses through its central and northern regions from this season's flood events.

At a state level this will be offset by high yields in the Mallee and Wimmera regions.

Harvest will extend into the new year, and it will be some time before the overall quality of the crop is known.

• Lamb producers will head into 2023 with confidence as a rebuilt flock and wet conditions fuel a period of high production.

Although prices will continue to soften under the weight of supply and some weaker consumer demand both domestically and abroad, they will remain high from a longer–term perspective.

Lamb's broadening range of export markets and weaker competition should drive long–term confidence in the industry.

• Victoria's cattle prices are likely to see a marginal fall in the first half of 2023 due to pressure from rising supply.

The favourable rainfall outlook in cattle regions of the state means re–stocker demand is likely to remain firm as herd rebuilding continues due to strong pasture availability.

• Australian wool prices will continue to come under pressure as demand eases.

Finer types are still higher than their five–year average after two strong years.

The southern market is underperforming against the northern and western markets particularly with medium and finer wool types with quality affected by recent weather events.

Crossbred wool is unlikely to cover shearing costs in all markets.

• Wool production in Victoria is down four percent year–on–year in terms of progressive gross weight.

This can be directly attributed to extreme weather events.

This may indicate a rush of supply when shearing is able to recommence.

Strong seasonal conditions and restocking are forecast to increase the national wool clip by five percent in 2023.

Victoria is the single largest wool producing state contributing 30 percent to the national clip.

Cattle:

Australian cattle prices are likely to see a marginal fall in the first half of 2023 due to downward pressure from increased supply.

A favourable rainfall outlook in most cattle regions means re–stocker demand is likely to remain firm as herd rebuilding continues and good pasture availability prevails.

This increased cattle herd will also drive a higher slaughter rate.

As a result, beef production is expected to rise by five per cent during the first half of 2023.

The forecast rise in supply should lead to more competitive pricing encouraging domestic beef consumption, though inflationary pressures are likely to weigh on consumer spending across higher end beef products.

China is also likely to continue to prefer purchasing from South American markets with a ban on several abattoirs and Australian processers, increasing competition for Australian beef producers.

As United States production declines throughout the year, opportunities for Australian beef exports will see more opportunity to expand trade with reliable partners such as Japan and South Korea, likely leading to an increase in export volume. Brazil's beef production levels are forecast to increase by around one per cent as strong global demand, particularly from China, encourages a rise in supply.

Consumer preference for more sustainably produced beef from countries like Australia is expected to further support export opportunities.

Cropping:

All states are set to produce above average yields.

Demand for Australian grain will stay strong into 2023 with above average production, strong export demand and high global prices to providing a continued positive outlook for cropping.

Australian winter crop production is forecast to be the equal second highest on record however, quality has been impacted by excessive rain on the east coast.

With harvest delayed, growers' top priority remains getting this season's crop off in a safe and timely fashion.

Global consumption is forecast to outpace production, so strong export demand and tightening global supplies are expected to keep Australian grain prices at historically high levels, giving growers confidence to put in a full cropping program heading into next season.

Wheat production will surpass 30 million tonnes for the third consecutive year, which is unprecedented.

While the current estimate of 36 million tonnes is six per cent below last year's record crop, it remains 43 per cent above longer–term averages.

Favourable seeding conditions and high prices saw growers increase area planted to canola by 11 per cent this season and in Western Australia, the area planted to canola actually surpassed that of barley for the first time.

This season is likely to see Australian export market share to the Indian subcontinent, Asia and Middle East decline as these markets return to purchasing canola supplies from Canada.

Offsetting this is strong export demand from traditional European Union biofuel customers.

Demand from Europe for green fuels could be further enhanced with proposed changes to biofuel mandates in the European Union next year.

Dairy:

The number of farmers choosing to leave the industry combined with the impacts of flooding will see lower total milk supply in 2023.

This should see high prices sustained in the coming season, but elevated cost of inputs will keep margins for dairy farmers slim.

Australian milk production should decrease, and global supply will increase marginally but remain constrained. Domestic demand will remain relatively flat while a smaller domestic pool with high input costs will see close to record farmgate prices maintained.

The trend of smaller producers exiting the industry or diversifying farming operations into beef and sheep will persist, but is set to be tempered by larger farmers expanding operations or increasing herd sizes.

Horticulture:

Horticultural producers will generally see margins squeezed further over the next six months with high packaging, fuel, freight, fertiliser, and labour costs expected to remain a factor well into 2023.

Fruit and vegetable prices are forecast to remain well above average across most varieties, though strong production will see prices ease from recent highs as the year progresses.

Improved export market access will hold horticultural exports in good stead.

Vegetable producers are expecting some short–term supply shortfalls following a challenging spring and summer planting period that was heavily impacted by flooding and rainfall events.

Potatoes, one of Australia's most valuable vegetable crops, have been negatively impacted by flooding and heavy rainfall on the east coast.

Potato crops throughout Tasmania have seen the largest impact with growers throughout Victoria and New South Wales also affected.

This will see lower production volumes into autumn which, when paired with ongoing supply chain challenges, will elevate potato prices.

A wetter than average summer combined with low irrigation costs will drive strong fruit production volumes in the first half of 2023, though recent damaging weather events throughout Victoria will keep volumes of certain seasonal varieties constrained, with quality also expected to be an issue into early 2023.

Fruit prices are widely forecast to ease from recent highs, though they will remain above long–term averages with high input costs and a tight labour market continuing to squeeze grower margins.

Table grape production is forecast to significantly increase this season, with exports to Vietnam expected to continue to grow, while the industry is also anticipating a rebound in export volumes to China despite the restrictive 'COVID Zero' policy which remains in place.

Growth in almond export demand is anticipated due to strong demand from China, complemented by the ongoing diversification of export markets.

Sheep:

Australian lamb supply is set to be higher than a year ago but lower than the surge of supply seen in late–2022.

Softer consumer demand due to inflation could be mitigated by improved access to the UK and India.

Lower prices are on the horizon but there is still plenty of optimism in the outlook for sheep producers heading into 2023 as a rebuilt flock and wet conditions fuel a period of high production.

Although prices will continue to soften under the weight of supply and some weaker consumer demand, they will remain high from a longer–term perspective.

Lamb's broadening demand base and weaker competitive dynamics should drive long–term confidence in the industry.

Demand for lamb will likely soften in both domestic and export markets as economic conditions take their toll on consumer spending.

While the US is showing greater signs of softening demand due to inflation, the longer–term growth trend to the US remains strong.

Further export growth is tipped to South Korea which has risen to be the third most valuable market for lamb thanks to a doubling in export value across the last two years.

Wool:

Australian wool producers are forecast to see increased wool supply and discounted prices into 2023 as the national flock increases, with volumes forecast to continue increasing for a third consecutive year.

Demand will ease due to falling consumer sentiment at both a domestic and global level resulting in downward pressure on prices.

Increased stock numbers and wet weather will continue to put pressure on shearing operations which are already being affected by a labour–supply shortage.

The re–opening of Australia's border with New Zealand in early 2022 has not eased the shearer shortage which will be an ongoing challenge for the industry.

Fine wool prices are being challenged by discounts not seen for over 18 months however, fine, and medium wool prices remain above their five–year average, which may indicate scope for further pull–back in the face of reduced demand.