Rural Commodities Wrap – March 2013

Global and domestic financial markets have continued to improve as confidence in the global economic outlook firms. Strong underlying fundamentals of the US economy and signs of recovery in China have encouraged a more bullish market outlook. Commodity markets are less buoyant.

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  • Global and domestic financial markets have continued to improve as confidence in the global economic outlook firms. Strong underlying fundamentals of the US economy and signs of recovery in China have encouraged a more bullish market outlook. Commodity markets are less buoyant.
  • Despite this optimism, global economic activity in the closing months of 2012 remained subdued with very little momentum in industrial output or trade.
  • Australia expected to be the second largest raw cotton exporter in 2012-13, supported by record crop (in 2011-12) and low prices.

Global financial markets are on a rallying streak which appears to be unstoppable at present. Share prices are up by more than 10% from their mid-November lows in the major developed economies with the figure for the Australian market closer to 20%. Other financial indicators are also showing much better conditions with the Vix index of market volatility back down at levels last seen in mid-2007 and a big fall in the Swiss franc, a safe haven currency.

This “risk on” mood in the markets owes more to their greater confidence in the economic outlook than to current economic conditions, which are still quite soft. Central bank action in the Euro-zone, US and Japan has boosted market hopes of sustained growth by removing tail risks like a Euro-zone break-up or premature US interest rate rises. The real side of the economy is weaker, however, with global trade and industrial output volumes registering little growth in the last few months of 2012. Similarly, commodity markets have not shown much of a trend over the same period with the Economist and CRB USD indices still being around their early November levels.

The conditions in emerging economies are showing some tentative signs of recovery, although significant variations persist across countries and sectors.China’s economic growth accelerated in the last quarter of 2012 to 7.9% yoy from 7.4% in the September quarter. However, the strength in the quarter partly reflects the pull-forward effects of the Lunar New Year, and therefore should be interpreted with a degree of caution in the projection of China’s growth trajectory. Other BRIC members such as India and Brazil have yet to experience a similar traction in economic expansion, with fiscal consolidation and high levels of private debt weighing on activity.

More encouraging was the recent data emerging from the US, which showed that underlying fundamentals of consumption, business and housing investment spending growth have strengthened, despite a marginal fall in Q4 GDP due to the inherent volatility in the data.

The run of data over summer confirmed the softness of the Australian economy in late 2012 and leading indicators suggest the first half of 2013 is likely to be a difficult period for many firms and households. We reviewed our GDP forecasts and, as indicated at the time, we see 2013 growth at around 2% with unemployment rising to around 5.75% by late 2013. Despite the cash rate being held constant at 3.0% by the RBA in its February and March meetings, we continue to believe that the RBA will need to cut rates by 75 points in 2013, but have marginally delayed the timing. Three cuts of 25 bps each are now pencilled in for May, June and November.

Agricultural commodity markets, although mixed, were slightly skewed to the upside in January. Hot and dry weather conditions for the most part of the month and flooding brought about by the ex-tropical cyclone Oswald affecting parts of Queensland and New South Wales had adversely impacted the supply of most crops and livestock. In terms of price trends, grains prices are expected to strengthen from record low global stocks and dry conditions limiting supply domestically. Livestock prices at sale yards rose marginally as heavy rains in north-eastern Australia have limited throughput; however increased slaughterings have kept export prices in check. Global dairy prices continued to edge higher from soft supply conditions while wool prices benefited from a strong demand in China. For the softs, excess surplus is weighing on sugar prices but cotton ticked higher from speculative demand. This month, cotton is our commodity in focus.

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