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
The NAB Rural Commodities Wrap focuses on some of the key economic activity that occurred in the Agribusiness sector during the month.
• Agricultural commodities hold up in face of highest volatility in equity markets since 2008-09
• Wheat prices to weaken over medium term, solid production gains to be partially offset by tight corn market
• Australian 2011-12 wheat crop revised up to 25.05 million tonnes on late September rainfall
There has been an exceptional level of volatility in global equity markets over the past few weeks. Equity prices across the big developed economies managed to pull back to well below their early July levels. The Australian equity market has also sold off with shares trending down but also showing remarkable volatility. This has been reflected in the VIX index, which, in recent weeks, has been back at levels not seen since the global financial crisis of 2008-09. The turmoil in global financial markets has clearly flowed through to commodity markets, although these generally remain high by historical standards. The CRB USD index fell by around 10 per cent in the last month, while the Economist measure is also well off its peak. Similarly, energy commodities have been hit with oil prices down by around 10 US$/bbl since peaking in July.
Despite recent volatility in financial markets, and the onset of a risk-off attitude, agricultural commodities have held up reasonably well. The NAB Rural Commodity Index was up in September in both AUD and USD terms, while prices for livestock have surged. Grains prices, although down on a couple months ago, have managed to find decent support driven by tight corn fundamentals. Livestock prices continue to be supported by historically tight supply. Prices for cotton have traded within a fairly narrow band over recent weeks while sugar has been buoyed by concerns surrounding Thai and Indian production. On the other hand, wool has continued to weaken following its recent spike and dairy is responding to the Oceanic spring flush.
Looking at the fundamentals driving agricultural commodities, prices are expected to ease back although a sharp correction is not on the cards. A sharp correction would require a global recession and this appears unlikely at this stage, with our central forecast pointing to trend growth in 2012. Importantly, it is the outlook in the emerging economies which help to support demand for agricultural commodities. Developing economy growth, although slowing, still points to rising protein consumption and its associated impacts on the commodities complex. Similarly, any weakness in the big developed economies is likely to see consumers trade down which will have more marginal effects.
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