While the NAB Rural Commodities Index was down 1.2% m/m in February, almost all of the downside was driven by falling cattle prices, with other commodities mostly stable or even recording gains.

Cattle prices constitute around a quarter of our index, so volatility here will have an outsize impact. Grains –another big part of the index and a key driver of price weakness late last year –have stabilised. Cattle continues to face parallel challenges of higher turnoff, processor constraints and challenging global conditions, with EYCI closing out last week just below 670c/kg. This points to more volatility ahead for the index, even if most commodities are relatively stable.

The third La Nina in a row is now over, replaced swiftly by the threat of an El Nino event. The BoM is now on El Nino watch, indicating a roughly 50% chance of an event developing this year. While autumn is a tricky time to forecast, the three-month outlook points to very dry conditions heading into winter. An El Nino, if it develops, increases the chances of a hot, dry spring-summer across eastern and northern Australia.

The global outlook has become much more complicated recently, as central banks find themselves caught between competing forces, namely persistently high inflation (despite steep policy rate increases in much of the world in 2022) and banking sector instability in both the United States and Europe.

The Australian economy looks to have remained resilient in Q4, with real retail sales declining only modestly, business conditions remaining well above average and the labour market remaining strong. But we see growth slowing sharply from here as consumer consumer spending comes under pressure from both higher rates and inflation.

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