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Australian Rural Commodities Wrap

29 July 2014

Australian Rural Commodities Wrap - July 2014Australian Rural Commodities Wrap - July 2014

Rural Commodities Wrap published by National Australia Bank


  • Rural commodity prices were lower overall in June. Beef prices were stable, while lamb prices increased and wool saw a subdued end to 2014-15. Led by declines in wheat and dairy prices, the NAB Rural Commodities Index continued to fall after its April peak.

  • The global economy shows mixed signs and moderate growth continues after falling in early 2014. US growth is likely to pick up after a harsh winter but the recovery in Europe appears to be stalling. Trend slowing in China continues while growth in other East Asian economies remains sluggish.

  • Domestic conditions are subdued overall as consumers continue to react to the 2014- 15 federal budget. Domestic indicators continue to point to unemployment growth and a lack of certainty that declining mining investment will be replaced quickly.

  • We expect that the AUD will fall to 85 US cents by the December quarter 2014, while official interest rates will remain on hold until late next year.

  • The prospect of El Niño continues to weigh on the minds of producers, especially wheat growers in eastern states. This month’s Rural Commodities Wrap focuses on the progress of the 2014-15 Australian wheat crop, which has started well in most areas except northern New South Wales and southern and western Queensland. These growers will be counting on strong rains in winter and early spring to counter low subsoil moisture levels.

Global economy:

  • Moderate global growth continues after slowing in early 2014. This has resulted in slightly lower growth forecasts in 2014 which are projected to return nearer to trend in the out years. Advanced economies paint a mixed picture. While US GDP growth went backwards in the first quarter after a harsh winter, unemployment is falling steadily. Euro-zone growth has been dented by poor performance in France and Italy but the UK appears largely on track. Japan has coped with April’s tax increases better than some feared. This mixed picture is likewise reflected in emerging economies. Trend slowing in China continues, while other East Asian economies, and India and Latin America remain sluggish.

Domestic Economy:

  • Overall, a mixed picture of the Australian economy has emerged. While business confidence is still largely unaffected by the budget, NAB’s quarterly Australian Consumer Anxiety Index has spiked and is now at the highest level since the survey began in early 2013. Domestic indicators continue to point to unemployment growth and there is no certainty that declining mining investment will be replaced quickly. Retail looks softer and the property market seems near a plateau with June house price increases potentially partly seasonal. The extent of fiscal consolidation remains uncertain and could be a slow burn on activity with concerned consumers.

Interest Rate:

  • The RBA kept the cash rate at 2.5% in July, largely in line with expectations. With the RBA expecting growth for the coming year to be slightly below trend and the impact of restructuring associated with the end of the mining investment boom still uncertain, the cash rate is unlikely to increase for the rest of the year. A higher cash rate would also place upward pressure on the AUD which the RBA appears keen to avoid. Conversely, the RBA may be reluctant to lower the cash rate for fear of a renewed boom in house prices. These cross-currents are likely to see the cash rate on hold well into next year.

The Australian Dollar

  • The AUD remains range bound, failing to hold breaks. While the AUD has tried to break its range, more so to the upside than the downside in the last few weeks, it has failed to do so and remains stubbornly in the 93.5-0.94.5 US cents range.

  • RBA Governor Glenn Stevens recently commented that “most measurements would say (the AUD) is overvalued, and not by just a few cents” and that “investors are underestimating the likelihood of a significant fall in the Australian dollar at some point”. This shows that while AUD does remain supported by the general “carry,” low volatility environment, it is not gaining any further impetus on low levels of volatility.

  • Our June quarter 2014 Post-farmgate Agribusiness Survey shows that postfarmgate agribusinesses expect the AUD to average 90.5 US cents over the next six months, slightly lower than the average business estimate of 91.5 US cents. These expectations are well above NAB’s forecasts of AUD performance, which project the AUD to fall to 85 US cents by the December quarter of 2014.

Domestic Agricultural Outlook

Production Outlook:

  • In 2013-14, winter crops were unaffected by drought conditions and delivered a strong result, with the exception of parts of New South Wales and Queensland. The 2014-15 season has progressed well in most States, although growers in northern New South Wales and Queensland continue to be challenged by unreliable rainfall and a lack of subsoil moisture. ABARES expects that winter crop production will fall 12% in 2014-15, but it is possible that this estimate is conservative for Western Australia, South Australia and Victoria, where wheat has enjoyed a strong start to the season. The possibility of an El Niño event is a downside risk should it emerge before November.

  • Red meat production and exports continue to proceed at a rapid pace in June following a strong performance in previous months on high slaughter rates. It is likely that supplies will tighten in the second half of this year.

Climate Conditions Update:

  • The Bureau of Meteorology (BoM) now forecasts a a drier than normal winter for northern Queensland, most of Victoria, south eastern South Australia and southern New South Wales, but Tasmania and central Australia are forecast to see above average rainfall.

  • A transition towards an El Niño event may currently be underway. The BoM forecasts that El Niño remains likely to materialise in spring, it is increasingly unlikely to be a strong event. Nonetheless, El Niño could place producers in the eastern states in a more difficult position coming into summer.

  • Northern New South Wales and southern and western Queensland remain under pressure from significant rainfall deficiencies. While autumn brought some welcome rains , growers will be heartened to see more optimistic BoM forecasts for rainfall from August to October, which now predict closer to average rainfall from August to October.

Rural Commodities Index:

  • The NAB Rural Commodities Index continued to fall in June after its April peak as dairy and wheat prices edged lower. Overall, the Index declined 2.5% (AUD) and 2.6% (USD). Beef prices were stable, falling 0.7% (AUD) while lamb rebounded 2.9% (AUD), erasing falls in May. Dairy continued to fall for a fourth straight month, with global prices falling 3.9% (USD) in June. Wheat prices fell 8.9% (USD) on the back of plentiful global supply, while barley posted similar falls. Wool fell 1.6% (AUD) in a lacklustre finish for the financial year while cotton was slightly up. Sugar was down 1.6% (USD).

NAB Farm Input Prices:

  • Global Diammonium Phosphate prices rose to USD 478/tonne in June and urea prices have rebounded to USD 308/tonne. Meanwhile natural gas prices were stable having retreated from their historic high in February to around USD 4.6/mmBtu, unchanged since April. Overall, the AUD fertiliser index was up 5% in May, rebounding from falls in March, April and May. Underlying fuel prices also edged higher, influenced in part by recent sectarian strife in Iraq. However, crude prices have since fallen on account of minimal Iraqi supply disruptions thus far.

NAB Weighted Feed Grain Prices:

  • Domestic feed grain prices dipped due to falling barley, oats, sorghum, maize feed wheat and triticale prices. This has coincided with a strong autumn break in the south east from good autumn rainfall and above average autumn temperatures, which has seen pastures rebound. While the fattening and slaughtering of cattle and sheep in recent months has continued into June, falling global wheat, corn and soybean prices due to plentiful global supply are likely to mitigate many domestic pressures. Poor spring rainfall prospects if an El Niño weather pattern settles in will likely weigh on the mind of farmers and may lead to higher domestic feed grain demand approaching spring and summer, especially in areas which have received sporadic rainfall in the late autumn and early winter.

Agricultural Sectors


  • Average cattle prices eased very slightly (-0.7%) to AUc 334/kg carcase weight, but are still 7% above the same period last year as decent rainfall in autumn and early winter across central and southern parts of Australia helped to boost restockers’ confidence, although the prospect of El Niño in the spring remains a risk for the sector.
  • In the meantime, cattle slaughter rates were lower in June overall, but up on May in New South Wales and Victoria, offset by lower slaughter rates in Queensland in particular.

  • Australian exports of beef and veal were down somewhat in June from their May record, with 103,257 tonnes exported. Nonetheless, exports are almost 18% higher than this time last year. Meat and Livestock Australia forecasts that the US will be Australia’s largest beef export market in 2014, surpassing Japan for the first time since 2003.


  • Lamb prices rebounded in June to erase their May falls in what continues to be a strong year for the sector. Heavy lamb prices are up 2.9% in AUD terms to 600 AUc/kg carcase weight. Exports fell 4% in June but are still 15% higher than last year.
  • Slaughter rates fell in June from elevated levels earlier in 2014. The sustained long period of high slaughter in 2013 and 2014 combined with poor weather conditions during the joining season have resulted in fewer breeding ewes and lower conception rates in 2014, which foreshadows a significantly tighter supply of stocks available for slaughter in 2015.


  • Wool prices gave up their May gains in June, with the Eastern Market Indicator falling 1.3% to 1031 AUc/kg. June 2014 prices are virtually unchanged from the same time last year.
  • Overall, the mood among farmers was subdued at the end of 2013-14, with superfine wool in particular performing disappointingly. If prices continue to disappoint, it is possible that Australian wool supply will further decline as substitution to lamb or beef becomes more enticing.

  • The Australian wool market has been gripped by soft demand conditions since February, partly reflecting the lack of available credit for Chinese manufacturers as Chinese authorities clamped down on lending and raised required capital to loan ratios for a number of banks. However, recent reports suggest that the Chinese central bank is now boosting supply and pushing banks to extend loans. With around three quarters of Australian wool destined for China, farmers will be hoping for improved Chinese economic conditions in 2014-15.


  • Global dairy prices continued to fall for their fourth straight month in June, with BNZ’s global weighted index down 3.9% to US$5187/tonne. Despite international headwinds, domestic opening prices for this season are similar to last year. Lion is opening with $6.35/kg milk solids, followed by Murray Goulburn with $6, Warrnambool Cheese and Butter with $5.86 and Fonterra with $5.80.
  • In Australia, above-average rainfall in the southern parts of the country during the autumn months, combined with above average temperatures in May, has given dairy farmers a good break going into winter. However, if El Niño materialises in the spring, producers will likely need to increase supplementary feeding, increasing costs and hurting margins.


  • Global sugar prices fell 1.7% in June, continuing the subdued pace that began with falling prices in late 2012 and early 2013. The US Department of Agriculture recently cut Mexican and US production estimates, which, combined with drought conditions in Brazil and persistently low prices for producers, could see the supply overhang dissipate and cause shortages.
  • In Australia, uncertainty continues over the future of Queensland Sugar Limited’s (QSL) single desk for sugar exports precipitated by the decision of Wilmar, Tully and MSF to leave the scheme from 2017. The ABC reports that Isis Sugar Mill, Bundaberg Sugar and Mackay Sugar have renewed their contracts with QSL for the the 2017 season. QSL now controls around 600,000 tons of sugar for 2017, a considerable reduction.


  • Cotton prices inched up 0.9% to 91 USc/pound in June, before falling steadily at the end of the month and into July. Prices are lower than the same time last year on account of higher global production and lower consumption from China as textile production shifts towards polyester.
  • The US Department of Agriculture has sharply revised up its forecast of US cotton production for 2014-15 its July 2014 World Agricultural Supply and Demand Estimates. The report projects that world cotton stocks for 2014-15 will amount to 105.7 million bales, with 2014-15 production increasing by 500,000 bales.

July 2014

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