If there's one area of the Australian economy that looks a clear winner from the recently announced Australia-China Free Trade Agreement (FTA) it's agriculture. China already buys more agricultural produce from Australia than any other market, with the trade worth an estimated $9 billion to the agricultural sector in 2013.
The deal also hands Australian farmers a competitive advantage over trade rivals in the United States, Canada and the European Union. Currently only Chile and the dairy-focused Kiwi economy enjoy FTAs with China, agreed in 2006 and 2008 respectively.
Tariffs on the chopping board
China's shift from an export-driven economy to one of domestic consumption is ongoing and supported by a fast-growing middle class happy to spend on a wider range of dietary staples. Indeed, the Australian Bureau of Resource Economics and Sciences predicts 43 per cent of the demand for agricultural products will come from China by 2050.
Consequently some of the most significant concessions agreed by the Chinese government are to give agriculture exporters tariff-free access to the Chinese market. For example, tariffs on dairy products, which are currently up to 20 per cent, will be removed within 4 to 11 years. Notably, international dairy demand remains strong and China is the world's leading importer of dairy products.
While the Chinese middle-class demand dairy there's a cashed-up urban elite with altogether more sophisticated tastes. Rock lobster, abalone, fine wines and cheese are all on their menu, with China's political elite unsurprisingly agreeable to tearing down the barriers to easier importation.
Tariffs on gourmet seafoods will be removed over the next four years having been previously up to 15 per cent, while Australian wine will see the removal of tariffs of 14 to 20 per cent over the next four years. These cost savings could potentially be passed on to make Australian wine available at more competitive prices compared to its European rivals.
The real cash cows
However, it's the dairy sector where now looks a really good time to be an investor, with companies like Fonterra Australia (ASX:FSF) already declaring the deal a "game changer" to "support the future profitability of the entire Australian dairy supply chain". The deal is commercial gold and the confidence boost should flow through to further investment encouraged by the knowledge that exporting to the world's largest dairy market just got more cost effective. Moreover, Fonterra already has significant experience operating in China which it can use to harness the FTA tailwind.
Cheese is another western dietary staple that is seeing growing demand in China and the FTA cost savings will benefit businesses like Bega Cheese (ASX:BGA) and Warrnambool Cheese and Butter (ASX:WCB). Bega's executive chairman, Barry Irvine, has described the deal as "a key moment in the development and success of the Australian dairy industry".
The Asian Luxeplosion
The phenomenal demand increase for luxury goods in China is also well documented, with designer clothes, cars, wine and seafood exporters all long-term beneficiaries. Indeed, while many have talked about Australia's potential to act as the food bowl of Asia, wine maker Treasury Wine Estates (ASX:TWE) has potential to act as the punch bowl of Asia.
Treasury's stable of premium wine brands includes Lindeman's, Wolf Blass, Rosemount Estate and the high-margin money-spinner Penfold's. Due to its sheer size the Chinese market has long been regarded as the ultimate prize for Australian wine exporters, however, they've struggled to break the locals' love for French labels.
Although cost savings of up to 20 per cent within four years are a big bonus, Treasury's key challenge remains changing consumer fashions and a mentality that always equates price to quality. That's not a problem likely to be encountered by Tasmania-based seafood producers, with Chinese President Xi Jinping reportedly dining on Tasmanian abalone during this week's visit to The Apple Isle.
