The NAB Rural Commodities Index fell 5.6% m/m in December and a further 5.7% in January. Prices are now 14.7% below year-ago levels, as the long covid-Ukraine war boom subsides.

Lower cattle and to a lesser extent grain prices are key drivers of recent weakness in the Rural Commodities Index. Wheat dropped off significantly in late 2022 while cattle’s fall continues seemingly unabated. With these two commodities combined constituting nearly 40% of the index, the only way was south.

Looking ahead, we see moderately lower grain prices and further price risks in livestock. Cattle in particular faces parallel challenges of higher turnoff, processor constraints and challenging global conditions. Further volatility awaits this year.

As the third La Nina in a row tails off, BoM and to a slightly lesser degree international models, now indicate that an El Nino could develop this winter. However, two key caveats apply: firstly, La Nina continues and its breakup is likely to be followed by neutral conditions well into autumn; and secondly, late summer-autumn is generally a low reliability forecast period. That said, the BoM’s latest outlook points to a dry autumn for southern Australia.

The global economic outlook remains murky, although much recent data have surprised on the upside. However inflationary pressures remain stubbornly persistent. We now see a much more hawkish RBA and forecast 25bp hikes at each of the next three meetings, to peak at 4.1% in May this year.

For further details, see the NAB Rural Commodities Wrap Feb 23