Rural Commodities Wrap – July 2012

The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month

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The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month.

  • Commodity markets improving as ‘risk on’ sentiment returns, but sentiment still somewhat tentative
  • Grains and oilseeds prices continue to lift on US drought and Black Sea conditions, providing boost to Australian farm incomes and offsetting weaker Australian rainfall outlook
  • Cotton prices to remain subdued through 2012-13 on global stocks build-up, to impact Australian acreage with 2012-13 cotton crop of 4.3 million bales forecast

Global confidence continues to be eroded by the uncertainty surrounding the outlook for the Euro-zone. This, in conjunction with financial market volatility, is starting to have a sizeable impact on economic activity, with the latest business surveys showing a softening in trading conditions in the big advanced economies. The lagged effects of tighter domestic economic policy and spill-over from the decline in European import demand have also slowed the pace of emerging economy growth. Over the past month, progress was made regarding a Spanish banking bailout, however, this did little to prevent Spanish 10-year bond yields hit record levels, thereby dragging Italian bond yields up with them.

Global markets received some respite when the ECB’s Mario Draghi stated that “the ECB is ready to do whatever it takes to preserve the Euro… and believe me, it will be enough.” He also provided some calm for markets regarding peripheral sovereign debt yields, saying that “they come within our mandate” and “we have to cope with the financial fragmentation and address these issues.” This basically had the effect of raising expectations that the ECB will step in to lower yields, for Spain and Italy in particular. This generally saw a resumption of ‘risk-on’ playing out in financial markets, with the VIX Index pulling back and most commodity prices lifting in response.

Looking ahead, a heightened degree of uncertainty persists in financial and commodity markets. Recent sentiment coming from the ECB is very encouraging, although markets will need to see details to back up Draghi’s comments. At the same time, recent US economic data has been disappointing and markets are eagerly awaiting any announcement of further quantitative easing. Similarly, the recent slowing in growth in emerging market economies – most notably China – is likely to continue to have markets on edge for a little longer. In all, this implies that macroeconomic support for the overall commodities complex is not likely to be there. This is likely to affect commodities markets not currently facing a supply squeeze.

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