Agribusinesses forecast better conditions as cost pressures mount
Mid-market agribusinesses are looking forward to better conditions despite cost pressures, according to the latest Commonwealth Bank Future Business Index.
What is the Future Business Index (FBI)?
The FBI is an analysis of the views of financial decision makers in companies with a turnover of $10m – $100m, measuring their outlook on business conditions, investment plans, business challenges, projected revenue and how prepared they are to navigate conditions for the six months ahead.
What did the FBI tell us about mid-market agribusinesses?
39% of agribusinesses said they expected business conditions to improve over the next six months, up from 35% three months earlier, while another 36% predicted conditions would remain steady. Read the full report for a wide-ranging snapshot of Australia’s midsized businesses.
However, while firms across the sector said domestic and international growth would help create better conditions in 2014, that positive outlook was tempered by concerns over staff shortages and cost increases. Meanwhile, only 35% believe that growth will deliver immediate gains in revenue, the lowest proportion of any industry surveyed.
Cost pressures rise
The June quarter Index reveals that many agribusinesses are likely to be impacted by rising costs over the next six months, with 45% predicting that operating costs will increase, while 58% say salaries and wages are likely to rise. In part, these rising wage costs reflect the intensifying competition for experienced staff across the rural and agribusiness sector. Thirty-five per cent of agribusinesses now anticipate that skill shortages will affect them negatively in the near future.
Nonetheless, many firms continue to invest in increasing their capacity to respond to future demand. While 53% still see cost management as their main priority, 47% are now focused on growth, up 10 percentage points since the March quarter. As a result, 40% plan to increase capital expenditure over the next six months, the highest proportion of any sector.
That confirms the findings of our recent Agri Insights report, which showed that producers intend to invest in infrastructure, plant and equipment to help drive higher volumes as demand picks up.
Currency hedging on the rise
The June quarter Index also underlines the sensitivity of the agribusiness sector to seasonal impacts and fluctuating commodity prices and exchange rates. The lower dollar since mid-2013 has been a key positive for the industry, with many anticipating further falls. Forty per cent of mid-market agribusinesses say exchange rates will have a positive impact on their business over the next six months, more than in any other industry.
Yet few are taking anything for granted. Nineteen per cent plan to use currency hedging this year, up from 9% just three months ago. Among those planning to hedge, one in two will hedge more than 60% of their overall currency risks. That reflects the enormous potential impact of a higher dollar on exporters with rising costs and tight margins; 58% of those who use hedging say an exchange rate over 90 US cents could make their business uncompetitive.
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