NAB Rural Commodities Wrap: July 2020

Food service spending under pressure amid new restrictions.

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Overview

Agricultural commodities have continued their mixed performance of late. While cattle prices remain near all-time highs, the last couple of months has seen a broad decline across grains, lamb under pressure (albeit from high levels), ongoing weakness in fibres and challenges for dairy (although July results have been better). While the NAB Rural Commodities Index remains 8.3% above year-ago levels, it fell 3.7% in June and is 7.4% below its March 2020 record high.

Australia is part of a global supply chain for many commodities, which means many prices are determined or influenced by international trends and benchmarks. Nonetheless, the strong progress of the season in Australia has caused an outsized impact on domestic prices for two key reasons: firstly livestock prices have been boosted by rain-induced restocker demand; and secondly, because grain prices are returning towards global benchmarks as shortages abate with the strong prospect of a good season. These trends are pulling our index in opposite directions, with livestock largely responsible for the rally this year. If livestock prices head south (and there are already some signs of this with lamb), there is further downside risk for the rural commodities index.

Victoria is now in the midst of a coronavirus second wave, with several hundred cases being diagnosed each day. Stage three restrictions are in force for Melbourne and Mitchell Shire, which have closed pubs and restricted restaurants to takeaway. The virus has already changed dining habits in Australia and the recent outbreak in Melbourne is likely to see this continue, with more online supermarket ordering, delivery of takeaway food and a delayed return to pubs. Whether this changes demand for certain food types in the long run remains to be seen though.

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