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Heavy Rains and Chinese protein shortage underpin Australian Agri credit

Heavy rains this week throughout NSW have confirmed what many already knew – the drought in many parts of the state is over.

  • This most recent deluge follows the Australian east coast’s wettest summer since 2011/12. As the La Niña cycle nears its end, its influence over March rainfall is apparent as shown in Chart 1.
  • The timing of the rain is largely positive for farmers. The 2020 cereal crops have been harvested and the 2021 crops not yet planted. This rainfall represents an early autumn break in south-eastern cropping regions by boosting soil moisture which will allow for early winter crop sowing.
  • The filling of on-farm water storages and storages in the Murray-Darling Basin will increase the productive capacity of irrigated industries in New South Wales and Victoria.
  • The continued improvement in seasonal conditions has put downward pressure on temporary water prices. According to the Bureau of Meteorology, the average surface water allocation price across the Southern Murray-Darling Basin in March 2021 fell to $100 per megalitre (chart 2). This compares to the average of $620 per megalitre recorded in early March 2020. Lower water prices will translate directly into higher on farm margins and the credit outlook for the coming 18 months
  • When the improved production outlook is combined with surging Chinese import demand for protein and grains, that feed their domestic protein, our downside risk to Australia farm credit is further reduced
  • The African Swine Fever that has plagued the Chinese hog heard over the last 2 years has led to beef and pork imports of 3-4 times historical levels (Figure 3 & 4).
  • Whilst Australia is experiencing geopolitical tension with China that may limit direct imports of our agricultural product, the overall global supply demand equation has tightened significantly. These tighter markets for broadacre crops and livestock underpins the revenue line for many of our prospective borrowers.


Figure 1: Australian Rainfall Analysis

Figure 2: 2020/21 Murray-Darling Basin Allocation Trade History, Bureau of Meteorology 

Figure 3: Chinese Pork Imports being maintained at 3-4 times historical levels

Figure 4: Chinese Beef Imports being maintained at 3 -4 times historical levels

Merricks Capital Agriculture Investment Portfolio and Investment Pipeline

There has been no adverse impact to our current investment portfolio due to recent flooding. Our underlying assets have benefited from the rain and are well positioned to take advantage of greater allocations and lower temporary prices.
From an investment pipeline perspective, the rains are welcomed as we are currently reviewing a number of investment opportunities that will benefit from the following factors:

  • Increased soil moisture profile ahead of the 2021 cropping season
  • Greater allocations and full water storages
  • Lower temporary water prices

Our credit approach differs materially from traditional banks. We take a forward-looking approach while banks continue to assess credit on a historical financial basis. In reference to aast cost farms, this will be on financial statements that were materially adversely impacted by drought caused by El Nino.
We see significant opportunity to provide credit to agriculture, which continues to enjoy favourable weather conditions and commodity prices and where bank credit has been restricted in recent years.