Rural Commodities Wrap – May 2012

The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during […]


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

  • Global agricultural commodity prices come under pressure as European concerns sees heightened financial market volatility
  • Australian poultry industry on firm footing, buoyed by rising productivity and solid growth in per capita consumption
  • Decline in domestic pig meat production reversing as adjustment to import competition largely over as sector switches to fresh meat production

Recent elections in France and Greece plus renewed concerns surrounding Spain’s fiscal position have triggered renewed uncertainty about the fate of the Euro-zone, sparking sizeable bouts of investor risk aversion. As a result, we have generally seen a flight to quality, with investors selling off risk assets in favour of perceived safe havens such as US treasuries. This has generally coincided with price declines for almost all commodities in recent weeks. At the same time, concerns over the slowing growth momentum in China and the rest of Asia have emerged. Some silver lining was provided by growth in the German economy, which helped keep Europe out of a technical recession while the US economy continues to grow at a moderate pace.

Broadly speaking, market concerns over Europe and China have generally dominated movements of commodity prices in recent weeks, with even the 50 basis point cut to China’s reserve requirement providing little relief. While the VIX Index suggests that market volatility is still quite muted relative to recent episodes, political, economic and banking uncertainties in Europe are set to be an ongoing issue for some time, suggesting that we are likely to be entering an extended period of higher volatility. Over the longer horizon, we are still expecting a soft landing for the Chinese economy and a strengthening in the US economic recovery, which should provide some support to global markets. Nonetheless, risks are very much skewed to the downside for the time being.

For agricultural commodities, investor risk aversion appears to be hitting a number of markets just at a time when strong production estimates are slowly being realised. This has generally seen a withdrawal of non-commercial traders from a number of markets. Prices of commodities not traded in futures markets have also come under pressure as reports of buyer caution are emerging in an increasingly uncertain macro environment. Over the near term, markets are likely to remain extremely cautious as long as uncertainty surrounding the Greece situation persists and questions surrounding Spain’s fiscal sustainability remain unanswered.

For further analysis download the full report.