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Australian Rural Commodities Wrap

19 July 2013

NAB Australian Rural Commodities Wrap - July 2013NAB Australian Rural Commodities Wrap - July 2013

Global equity markets have come under downward pressure, but the latest data on activity is slightly more positive. Business sentiment about current conditions has picked up in advanced economies and growth in global industrial output is faster.
Rural Commodities Wrap published by National Australia Bank

There was previously a disconnect between sluggish global growth and the big rise in equity values, rationalised by a flood of central bank liquidity boosting investor appetite for higher yielding assets and risk. Recently this has reversed with G7 equity markets falling at a time when there are some brighter signs for their growth outlook. This reflects the fear that there will be less central bank liquidity injected to support asset values as the economic situation improves. The withdrawal of central bank stimulus from global economic activity should be a long and gradual affair – the US Federal Reserve’s likely timetable would not see an end to quantitative easing (QE) until next year with no rate rises until 2015 and the Japanese central bank has ramped up its stimulus.

Less buoyant equity markets would be in line with the generally weak trend evident in global commodity markets through the last year, the latter being far more in accordance with the sub-trend pace of global economic growth that has led to only sluggish growth in commodity demand. Nonetheless, the latest data on activity is slightly more positive. Business sentiment about current conditions has picked up in advanced economies and growth in global industrial output is faster.

Across the advanced economies, the US remains one of the best performing with moderate expansion continuing, but partial data suggest that growth could have slowed in the June quarter. There are also signs of improved conditions in the previously weak Japanese and UK economies. The performance of the Japanese economy is attracting particularly close attention as investors assess the impact of “Abenomics” – the combination of monetary and fiscal easing plus reform intended to end deflation and boost growth.

The three big emerging market economies of China, India and Brazil are still driving most of the 3% global growth forecast for 2013 but they too have experienced a slowdown. There is clear evidence of a major slowdown in Chinese exports but domestic market oriented measures of demand such as fixed investment or retail sales still show solid growth.

The Australian economy appeared to weaken further in June in the face of the combined effects of softness in Chinese growth and minerals commodity prices, volatility in financial markets and weaker domestic partials, including our own survey. The latest NAB survey reported the weakest reading for business conditions for more than four years. We have left GDP growth unchanged at 2.3% in 2013 and 2.8% in 2014 but with greater downside risk to the outlook. Unemployment rate is still expected to exceed 6% by the end of this year. Domestic weaknesses, softness in China and financial volatility have encouraged us to bring our next expected rate cut forward to the next meeting on 6 August (previously November). We expect the bias to easing to continue beyond August.

In June, the prices of livestock have jumped significantly, with the short seasonal supply and the much awaited rains keeping price and confidence buoyant. Wool prices firmed moderately on a tight supply and some renewed interests from major buyers. Wheat prices retreated after recording a sharp rise last month but remain elevated. Excess global surplus continues to plague sugar prices while cotton prices stayed largely unchanged. Meanwhile, dairy prices continued to ease from their record highs in April. This month, wine is our commodity in focus.

Currency Movements

The AUD’s relentless move lower from May was halted over the past few weeks, as it ranged from 0.8999 to 0.9345 against the USD. The underlying picture, if anything, has worsened, but the prior universal negativity brought about a brief reprieve before the slide resumed last Friday. The information flow over the past few weeks has supported the softer AUD outlook. Concerns regarding China’s economic growth have increased. The market is expecting the State- sanctioned 7.5% q/q, but the risks are fractionally to the downside. Meanwhile, as Chinese interest rates remain elevated and the currency modestly strengthens, the prospects for further economic rebalancing increase. While this is long term positive for China, it remains an AUD negative. The International Monetary Market (IMM) positioning data highlights the extent to which the AUD is out of favour. As at 2 July, ‘speculative’ traders held a record short AUD against the USD, at -70.5k contracts. This equated to a third of all reported IMM speculative USD longs; a huge proportion considering that in the spot market, the AUD accounts for only 7.6% of all currency trades. Given such extreme positioning, it is perhaps not surprising the AUD saw a recovery in the past week. Data released for 9 July showed a small reduction in shorts and continued reduction in extreme positioning is likely to allow for AUD to trade lower over time. While we continue to monitor the downside risks to the AUD, there have been no further revisions to NAB’s exchange rate forecasts since the last wrap. NAB is forecasting the USD/AUD rate to fall to 0.88 by the end of 2013, 0.85 by mid-2014 and 0.83 by the end of 2014.

NAB Rural Commodity Index

In June, sharp rallies in domestic livestock products and a further notable depreciation in the AUD saw a 6.7% rise in the NAB Rural Commodity Index in AUD terms in the month, but when converted into USD terms, turns into a marginal decline of 0.2%. Leading the rise of the AUD index in the month were marked lifts in beef (+7%), wool (+4%) and lamb (+19%), aided by a combination of factors: the arrival of the much awaited rains boosting farmers’ confidence and a seasonally tight supply during winter months. After a sizeable reversal of dairy prices last month, the easing has slowed to just 2% this month while sugar continued its relentless fall (-3%). Wheat undid some of the price gains from last month as the global market continues to seek direction between a tight old crop market and a bumper new crop in 2013-14. Cotton and barley prices were largely unchanged in the month. Looking ahead, livestock prices which are expected to rise further will provide some support to the rural commodity index but this will be rationalised by an exceptional year of grains and oilseeds harvests.

NAB Farm Input Indices

A weakening AUD is serving to more than offset the benefits of falling fertiliser input prices. Over the past month, global Diammonium Phosphate prices have fallen further to USD 472/tonne while urea prices have dipped to USD 315/tonne. Natural gas is also softer at USD 3.8/million Btu. Despite the falls in global prices, the overall NAB Fertiliser Index actually rose by 3% in the month from a 6.5% fall in the currency. The previously expected acceleration in fertiliser usage intensity associated with spring planting programs in the Northern Hemisphere did not eventuate from the delayed arrival of warmer conditions and now the most ideal application window has passed. Meanwhile, supply side remains loose with a high urea inventory and the imminent uptick in Chinese fertiliser exports in the current quarter from the lowering of export taxes. So far, the spikes in global oil indices due to the escalated tensions in the Middle East and a weaker AUD have not translated into higher domestic petrol prices, presumably due to the generous margins maintained by oil companies to start with, but we expect the effects of higher oil prices to flow through to the index in the coming months.

NAB Weighted Feed Grains Price

Feed grain prices have retreated marginally by 0.5% but remain elevated by recent historical comparisons. Similar to the situation in the global grains market, current prices are supported by a restricted inventory of old crops feed wheat, oats and sorghum while the new winter crops, which have been recently sowed and expected to yield a significantly higher output this year, will serve to dampen feed prices in the medium term.

Key Commodity Prices

July 2013

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