The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month.

• Agricultural commodities weakening on Euro sovereign debt crisis, rising production prospects
• Wool prices hit by weakening demand prospects, but still relatively high
• Australian wool production to rise 3.1 per cent in 2011-12 but exports to remain flat on de-stocking in 2010-11

Prices across the broad commodities complex have fluctuated sharply over the past month and are generally lower than levels seen a month ago. Escalating concerns over European sovereign debt and a more uncertain global economic outlook have overshadowed slightly more positive economic data out of the United States. Market volatility has been rising following a reprieve over the first half of November. Co-ordinated central bank action and prospects for a new European compact may have helped to restore a degree of calm in financial markets, by way of providing renewed hope for the resolution of sovereign debt problems. However, significant political hurdles remain along with continuing financial instability and fears of a European credit crunch.

As the global growth outlook has become increasingly uncertain, a broad range of commodity prices has generally declined over the past month, although there is considerable variation within the commodities complex. Commodities perceived to have safe haven properties, such as gold, should continue to benefit from market fragility and the prevailing riskoff attitude. In contrast, commodities reliant on industrial production and global trade, such as bulk commodities and base metals, are likely to continue to come under pressure, although the scale of recent falls may provide some upside risk. Oil prices are being pressured by competing drivers, although worries around the global economy appear to be winning out. Nonetheless, geo-political tensions surrounding Iran and a still tight stocks situation in Europe have provided some support to prices.

Agricultural commodities have not been immune from the selloffs, with prices for almost everything grown having weakened since mid November. While a weakening global economy is having an impact, there is also a very strong production response hitting agricultural commodity markets. Australia is on track for a massive winter crop while sugar and cotton production has generally responded to high prices seen earlier in the year. In contrast, livestock prices have held up reasonably well, as the structural lags between prices and production are generally longer than for broad-acre crops.

 For further analysis download the full report.

• Rural Commodities Wrap December 2011