NAB Rural Commodities Wrap: August 2020

Appreciating AUD takes gloss off positive seasonal outlook.

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Overview

Last month we flagged two key risks for Australian agriculture: seasonal conditions and the trajectory of the AUD. The good news is that while a month ago we were getting nervous about the state of the season, August provided generally better rain, although Western Australian yields will remain sensitive to individual rainfall events.

The Bureau of Meteorology moved to a La Nina alert on 18 August, indicating a roughly 70% chance of La Nina forming in coming months. This is generally associated with above average spring rainfall in the eastern states, which is reflected in the latest three month outlook, showing a very high chance of above average rainfall almost everywhere except Western Australia.

The bad news is that AUD appreciation continues. While much of the appreciation is down to persistent USD weakness, China’s demand for Australian resources for its industrial and infrastructure led recovery will put further upward pressure on the AUD. Our forecasts point to a weak USD seeing an AUD at 80 US cents by mid-2022. This will be a headwind for Australian agricultural commodity prices.

Recent price movements have seen some divergence. Should the winter crop perform, much of the current domestic basis will dissipate and we see domestic wheat in the $300/t range at the end of 2020. But there maybe some upside pressure across the grains complex if Chinese flooding leads to higher Chinese demand. Meanwhile, young cattle prices are at eye-watering levels, with EYCI hitting another record and closing on $8/kg. This reflects substantial pent-up restocker demand and expectations of a big spring in Queensland. But global demand fundamentals aren’t so rosy and –as always –we are a little nervous. Similar global concerns have pushed lamb substantially lower, even ahead of traditional spring flush. Overall, the NAB Rural Commodities Index fell 0.7% in July and a further 3.7% in August.

For further details, see the NAB Rural Commodities Wrap August 2020