Key points:

• Q4 2016 saw a sustained drop in the price of many agricultural commodities, with the NAB Rural Commodities Index down 1.1% in October, 4.5% in November and 1.1% in December. January 2017 brought an upturn  however, the NAB Rural Commodities Index was up 1.4% in AUD terms for the month. The recovery was driven foremost by a stellar jump in lamb prices (up 17.1%), but higher prices for sugar (up 7.5%) and beef (up 1.5%) also contributed to the increase.
• This year, we have expanded the index to include separate state level indices. Queensland has been the strongest performer since late 2015, reflecting the state’s outsized share of Australia’s cattle industry and the extraordinary run of saleyard cattle prices. Grain-heavy Western Australia outperformed other states from 2012 to 2015 but poor grain prices saw it sink to its lowest level since 2012 by the end of 2016. In January 2017, the national index stood at an index value of 133.6 (January 2010 = 100), New South Wales at 144.3 (+1.6%), Victoria at 135.7 (+1.9%), Queensland at 153.9 (+1.6%), Western Australia at 121.7 (+1.0%), South Australia at 123.6 (+1.6%) and Tasmania at 143.7 (+1.2%).
• The outlook for prices the coming year is highly dependent on the course of the Australian dollar. This week, we revised up our AUD forecasts for the first half of 2017, although we still expect the AUD to fall to 70 US cents at the end of 2017, providing some upside towards the end of the year. We expect cattle prices to fall further in 2017. While we have already seen some price contraction in saleyard prices, restocker interest could slow rapidly if dry conditions persist as major export markets show a generally subdued pricing outlook. Our forecasts point to the EYCI falling to 500 AUc/kg in the September quarter 2017. This is an approximately 30% contraction from peak.
• The outlook for production is somewhat mixed. While winter crops had a generally spectacular season, with a record 35 million tonnes of wheat harvested, the drier outlook for the coming year is likely to see downward pressure in the 2017-18 season. Major proteins all show lower production for 2016-17, with beef, lamb and mutton and dairy all falling. While lower beef and sheepmeat production reflects the need to rebuild herds and flocks following a previous period of elevated slaughter, we see low prices being the primary driver for lower milk production. Without further upside in farmgate prices, it is likely that production in the dairy sector will continue to lag.

For further details, please see the attached report

• NAB Rural Commodities Wrap: February 2017 (PDF, 2MB)