NAB Rural Commodities Wrap: May 2022

Since last month’s wrap, we have seen three key changes, namely more rain forecast, ongoing inflationary pressures making central banks more hawkish and a materially weaker global economic outlook.

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La Nina is kicking on longer than expected and a negative Indian Ocean Dipole (IOD) is likely to bring above average rainfall for much of the country this winter, with the notable exception of the WA wheatbelt and south-west Tasmania. This presents an upside for the 2022-23 Australian winter crop, but increases risks to global grain production. While Australian farmers will likely benefit from these circumstances, global food security risks are an increasing challenge.

Inflationary pressures continue to mount, with the RBA joining other central banks in raising interest rates. The Fed’s hawkishness combined with a flight to safety is boosting the USD. Combined with ongoing Covid lockdowns in China, this presents higher volatility risks for the AUD. The AUD dipped below 70 US cents earlier this month and we see the currency at around 72 US cents by end 2022. 

In addition to lockdowns in China, a broad range of global economic risks have emerged in recent times, including the war in Ukraine and energy shocks. With central banks increasingly hawkish in the face of rising inflation, there is a risk of a policy mistake as central banks may need to push rates above “neutral” levels if high inflation persists. With several shocks hitting the global economy at once, the risk of a recession in a major economy is rising.

The NAB Rural Commodities Index fell 0.8% in April, its first drop since March 2021. Partial data puts the index on track for a 2.0% gain in May, taking the index to another record high.

For further details, see the Rural commodities wrap May 2022