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Australian Rural Commodities Wrap

02 September 2014

Australian Rural Commodities Wrap - August 2014Australian Rural Commodities Wrap - August 2014

Rural Commodities Wrap published by National Australia Bank

Economic Update

Global economy:

  • We have trimmed our global forecasts to take account of the impact of default in Argentina on Latin American growth and unexpectedly soft Japanese exports and post-tax consumption which led us to significantly lower our Japanese forecast. Elsewhere, solid growth numbers are coming from the UK and US but the Eurozone presents downside risks (with soft recent business surveys and second quarter GDP in Italy and Belgium) to growth and a clear threat of deflation. The emerging economies now drive around 70% of global output growth but present a mixed picture. China’s growth remains robust, India’s has disappointed but could be about to pick up and East Asian economies are likely to remain subdued pending faster world trade. Overall, world growth in 2015 to rise to 3.6% (nearer trend) from a mixed and disappointing 3.1% in 2014.

Domestic Economy:

  • Weak retail trade and net exports point to soft GDP growth in the second quarter. Employment continues to drift and the jump in unemployment rate appears to be a quirk from ABS measurement changes (which probably added 0.2 points to unemployment). Partial indicators are generally better: business conditions jumped to four year high in July, while, business confidence, orders and capacity utilisation are all looking better. But headwinds remain, especially a high AUD, declining mining investment and fiscal restraint. Australian forecasts are revised down in 2014-15 (3.1% from 3.3%) and up in 2015-16 (3.2% from 3.0%). We forecast the official unemployment rate to peak at 6½% by end 2014 (was 6¼%) and only slowly improve (6.2% by end 2015). The cash rate is likely to remain on hold until late 2015 but there is a risk of a cut(s) if unemployment rises above the current forecasts.

Interest Rates:

  • We still expect no change in the cash rate until the end of 2015. Labour demand remains tepid but there are encouraging signs from forward indicators, including our own survey. However, the potential near term weakness in GDP represents a clear risk that the cash rate may need to be cut if conditions worsen again. A pain point for the RBA would be unemployment at 6¾%.

For more information on recent global and domestic economic trends, see our August Global & Australian Forecasts and World on Two Pages reports.

Exchange Rates

  • The AUD has remained in a relatively narrow range between 93 and 95 US cents for much of 2014, reflecting a relatively low volatility environment. However, the USD has made an attempted break higher across the board of late. If volatility slips lower again, the AUD is likely to move into the lower 94 to 92 US cents range; a rise in volatility would see a more sustained move toward NAB’s 90 US cents end third quarter target.

  • The ratcheting up of geopolitical tensions has seen JPY, CHF and to a lesser extent USD display some traditional safe-have characteristics. How volatility behaves will be key; ultimately higher volatility and a return to focus on (good) US data are required for stronger and sustained USD advances.

Domestic Agricultural Outlook

Climate Conditions Update

  • July rainfall was below average over much of southern and western Queensland, northern and Western New South Wales as well as the Gascoyne and parts of the wheatbelt in Western Australia. Above average falls were recorded in the Kimberley, around Darwin, Cape York, coastal South Australia and parts of Victoria. Parts of eastern Australia have endured unusually frequent and severe frosts over the winter. It is likely that these frosts will have some impact on winter crop yields.

  • The Bureau of Meteorology (BoM) forecasts that rain from September to November is likely to be below average in central and parts of northern Victori, western Queensland and much of southern and central New South Wales.. Above average rainfall is forecast for parts of central Australia and Tasmania.

  • BoM has downgraded the likelihood of El Niño developing in 2014 to 50%. While this is still double the normal likelihood of an El Niño event occurring, BoM expects it is unlikely to be a long lasting event.

Production Outlook

  • The production outlook for winter grains remains strong. Wheat yields are likely to benefit from the recent El Niño risk downgrade, although Victorian and southern New South Wales producers could be chasing rain in the event of a dry spring.

  • The outlook for protein will be influenced by spring rainfall. If conditions return to normal in northern New South Wales and Queensland, it is likely that cattle slaughter will contract and producers will look to rebuild herds. Dairy had a strong autumn and winter break, but below average spring rainfall in Victoria and eastern South Australia remains a risk.

  • Fibre production may come under pressure over the coming months, with cotton production at risk from lower water availability and both wool and cotton producers concerned about lacklustre prices and uncertain Chinese demand.

Domestic Agricultural Outlook

NAB Rural Commodities Index

  • The NAB Rural Commodities Index fell for the third straight month in July, led by lower wheat, lamb, cotton and dairy prices. An improved supply outlook in the United States, driven by improved weather, has put downward pressure on international grain prices.

  • Overall, the index gave up 2.9% in both AUD and USD terms.

NAB Farm Input Prices

  • Global Diammonium Phosphate prices increased to USD 511/tonne in July while urea was steady at USD 308/tonne. Meanwhile natural gas prices fell to US$4/MMBtu, down from US$4.6/MMBtu in June. Overall, the AUD fertiliser index was down just 0.1% in June.

  • Petrol prices were essentially steady in July, falling 0.1AUc/litre for the month.

NAB Weighted Feed Grain Prices

  • Weighted feed grain prices fell 4.7% in July, brought down by lower wheat, barley, oats and triticale prices. Sorghum prices increased while maize was steady.

  • If south eastern Australia receives a drier than average spring, poor pasture growth may put upward pressure on feed grain prices.

Agricultural Sectors


  • Global wheat prices continued to fall in July before staging something of a recovery in early August as rains delayed harvest in France and Germany (demoting much of the crop to stock feed quality) and tensions increased in the Ukraine. Prices have since eased somewhat on account of welcome August rains in New South Wales and Western Australian wheat regions as well as a downgrade in the likelihood of El Niño occurring, although some south eastern areas have experienced unusually frequent frosts.

  • The United States Department of Agriculture’s (USDA) World Agricultural Supply and Demand Estimates report for August sees the 2014-15 world wheat supply forecast raised 10.9 million tons to a record 716.1 million tons based on increased forecast production in the United States, China and the Black Sea region.


  • Heavy lamb prices fell 8.1% in AUD terms in July to 551AUc/kg carcase weight. Prices are nonetheless 6.4% higher than the same time in 2013.

  • Lamb slaughter was down 4.3% in the eastern States, led by a sharp fall in South Australia. Slaughter was 7.8% higher in Queensland, 7.9% higher in New South Wales and 12.7% higher in Victoria. Slaughter rates have been elevated over the past year by drought conditions in New South Wales and Queensland, which have seen high turnoff and limited restocker interest. However, Meat and Livestock Australia projects that producers will increasingly look to rebuild their flocks over the coming year. This is likely to lead to lower production and higher prices.


  • Wool prices fell slightly in July, with the benchmark Eastern Market Indicator falling 0.5% to average 1024 AUc/kg for the month, although the annual three week recess saw lower trading volumes.

  • China is far and away the largest customer of Australian wool. In 2012-13, over three quarters of Australian wool exports were sent to China. Partial indicators in China point to a stabilisation in the economy, after the slowing trend across late 2013 and early 2014. However, similar growth in the third quarter could be difficult to achieve, pointing to continued mixed performance in the wool industry.


  • Global dairy prices continued to fall in July and were down 4.5% for the month. Prices have been falling for much of 2014 and are now 19.3% lower than their February peak. Prices have since shown some signs of stabilisation in August, although risks continue to be weighted on the downside.

  • Russia’s announcement in August 2014 that it would ban most food imports from the United States, European Union, Canada, Australia and Norway has caused some concern in the Australian dairy industry. Australian dairy exports to Russia have been growing strongly in recent years. While Australian dairy exports to Russia were worth around AU$29 million in 2012-13, recent reports from Murray Goulburn suggest that the exports could be approaching $100 million in 2014. While this represents a small portion of Australia’s AU$2.2 billion dairy export industry, there is a risk that international prices will fall further as European Union producers look to find alternative buyers.

For more information on the Russian sanctions, see our Special Report: Impact of the Russian Food Embargo on Australian Agriculture


  • Global sugar prices held steady in July, averaging 17 USc/lb for the month. Sugar futures have since fallen below 16 USc/lb in August reflecting ample global supply and large stockpiles. There are concerns however that Brazil’s harvest, although starting well, may ultimately fall short due to drought damage.


  • Global cotton prices tumbled in July. Cotlook ‘A’ index prices were 7.8% lower in July at 84 USc/lb. Cotton futures have tumbled further, ending the month at 62 USc/lb and remaining stable to mid August. The considerable drop in prices is a result of changes to Chinese stockpile arrangements and good rains in Texas cotton regions.

  • Australian cotton production is forecast to fall. Cotton Australia projects that Australian production could fall up to 50% in 2014-15 due to drought conditions causing constrained water availability. Poor international prices may see further trepidation on the part of local producers and lead to changed production plans.

September 2014

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