Below trend growth to continue
The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month. Agricultural commodities hit record levels in 2011, to ease in 2012 on massive production response. But considerable risk remains based on weather and Euro-zone debt crisis. Prices for agricultural commodities managed to pick up significantly in 2011, […]
The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month.
Agricultural commodities hit record levels in 2011, to ease in 2012 on massive production response. But considerable risk remains based on weather and Euro-zone debt crisis.
Prices for agricultural commodities managed to pick up significantly in 2011, with the NAB Rural Commodities Price Index (in AUD) hitting record levels and averaging 19 per cent higher than 2010. Reflecting this, global food security again became a pressing issue as a sharp supply squeeze across almost every agricultural commodity through early 2011 saw the UN FAO Food Price Index hit its highest level in history. Since then, we have seen a fairly large supply response emerge. But as is often said about agricultural commodities, they took the elevator up and are now taking the stairs back down. Reflecting this, the NAB Rural Commodity Price Index (in AUD) peaked at around 37 per cent higher than its decade long average in March. As of December, the index was still 22 per cent above its decade long average, while we anticipate that it is likely to hit more average levels by early-to-mid 2013. In other words, it took around 10 months for the index to break through the average and hit a new record, while it appears likely that based off current production and macroeconomic projections, it will take around two years to revert back to more ‘normal’ levels.
Price response to 2011 supply shocks
Source: NAB Economics
Looking to 2012, this is largely how we expect the agricultural commodity story to play out. A massive production response to high prices in early-mid 2011 is well underway. Reflecting this, record acreage for a number of broad-acre crops were planted while record production figures for 2011-12 are materialising. Nonetheless, the production response has also had to contend with rising demand, consumption growth for a number of commodities has been exceptional. On balance, this leaves a number of balance sheets for commodities likely to remain fairly tight through 2012 despite record production estimates. At the same time, risk is ever present on the weather front. Already, this is the second consecutive year in which we have had a La Niña event. Although the current event appears considerably weaker than last year’s, it still is causing concern surrounding crop conditions in South America. Similarly, the northern hemisphere winter crop is in its dormancy phase meaning that a lot of unknowns persist for grains markets, while livestock herds and flocks have been vulnerable in some parts.
With some of these concerns evident and still historically low stocks levels, we do expect prices to remain volatile through 2012. In addition, a number of factors on the macroeconomic front are likely to exert themselves from time to time. A recession in the Euro-zone is pencilled in by most analysts (NAB included) and a poor run of macroeconomic data releases from Europe should add some price volatility. Similarly, conditions in the United Kingdom have been deteriorating, thereby increasing the chances of recession there, while economic growth in China has slowed. The big risk from the macroeconomic front is if conditions in Europe spill over to the rest of the world, particularly the big developing economies, which have generally provided support for commodities on the demand front.
Another key outside market, oil, has provided considerable support to prices. Oil prices have been buoyed by the supply impact of the Arab Spring, outages in the North Sea, pipeline disruptions in Nigeria as well as fairly low stocks of middle distillates. This has seen prices push past 100 US$/bbl while we expect prices for most benchmarks to average around that level through 2012, buoyed by the latest geopolitical support thrown up by the Iranian sanctions, as well as still low European stocks and expensive energy across Europe. This is likely to maintain positive ethanol margins through the year.
For the Australian farm sector, the story for most commodities is likely to be weaker prices than 2011, with global prices eroded somewhat by a strengthening AUD in the near term. Nonetheless, prices are expected to remain high by historical standards, while incomes are likely to be supported by fairly low input costs relative to competitors, strong water allocations, near full dam storage levels and ample feed and fodder availability. As such, rising production should offset falling prices and see a gain in overall farm GDP.
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