The National Australia Bank (NAB) in its latest Rural Commodities Outlook  wrap  issued on 22 December 2011 has reported that apart from the weakening global economy, there is also a very strong production response hitting world agricultural commodity markets.

Australian rural production  is on track for  massive winter crops in 2012 because of good rains adding to downward pressure on prices.  At  the same time, sugar and cotton production growth in Australia have also been part of the general response to  high prices seen earlier in 2011. In contrast, livestock prices are holding up reasonably well, as the structural lags between prices and production are generally longer than for broad-acre crops. Australian livestock production hasbeen rebuilding since the 2010 ending of a long climatic drought.

World volatility and falling prices

The NAB Report says market volatility will continue to set the tone for commodity prices entering 2012. Markets will remain focussed on European sovereign debt issues, although attention has also been shifting towards emerging economies as scepticism grows over their capacity to weather the global headwinds.

This will pose considerable risk for agricultural commodities, where any sign of weakness in the emerging economies will have considerable impacts on demand. This has already been evident in some commodities, where upward revisions to forecasts of stocks levels have come at the same time as weakening demand. With prices already responding to improved production prospects, the NAB Report says any weakness in the emerging economies is likely to expose prices to considerable downside risk.

Strong production levels in Australia

While global prices for agricultural commodities are weaker, conditions within the Australian farm sector remain very strong overall. According to recent ABARES forecasts, the volume of Australian farm production in 2011-12 is forecast to increase 4 per cent, while export earnings from farm commodities are expected to rise to $34.5 billion in 2011-12, up from $32.4 billion in 2010-11. Record winter and summer crops are expected, with good pasture conditions and ample feed boosting livestock production. However, some risk is posed by recent heavy rainfall across southern Queensland and New South Wales, which has frustrated some harvesting and raising concerns around crop quality.

Falling Feed Grain Prices

The NAB notes that feed grain prices pulled back sharply for a second consecutive month in November 2011, with the NAB Weighted Feed Grains Price falling 4.1 per cent on October levels.

Driving the monthly movement were falls across the board,with prices of sorghum (down 9.1 per cent) and barley (down 6.4 per cent) feeling the brunt of the price falls. Price falls for maize (down 2.3 per cent), feed wheat (down 2.2 per cent) and triticale (down 0.9 per cent) were modest while oats prices remained unchanged. At $217.40/t, the NAB Weighted Feed Grains Price now sits at its lowest level since June 2010, prior to the run up in global grains prices. With a massive winter crop being harvested, huge carryover stocks of feed grains from last season and the supply squeeze in the global coarse grains being eased, prices for feed grains are likely to continue to fall. This is likely to be exacerbated by recent rainfall frustrating the east coast harvest and potentially adding to already abundant stocks of feed grains.

Australian Economic Growth Outlook

The NAB Report points out the latest set of national accounts data confirmed that the recovery from the floods earlier this year continued into the September quarter, with GDP rising by 1 per cent to be 2 per cent higher in year average terms. The strength in September quarter GDP largely reflected a sharp increase in business investment and another solid rise in consumption, while net exports and stocks subtracted from growth in the quarter.

Surprisingly, says the NAB Report, given recent softness in approvals and starts,dwelling investment  in Australia strengthened a little in the quarter. The outlook for business investment remains very strong – largely due to investment in the resources sector – which should continue to support growth over the next year or so.  GDP forecasts through 2012 and 2013 have been revised up to 4.5 per cent and 3.3 per cent, respectively. These upward revisions reflect stronger consumption and business investment.

Share