Continued inflationary pressures, a weaker global economic outlook and the prospect of a wet winter in many of Australia’s producing regions are causing volatility for the agricultural sector.
That’s according to NAB’s Rural Commodities Wrap for May, which reports that despite current conditions, the bank’s Rural Commodities Index is on track for a 2% rise in May, taking it to a new all-time high. .
Phin Ziebell, senior agribusiness economist at NAB, said Australian agriculture faced a number of opportunities and risks due to current global conditions.
“La Nina is lasting longer than expected and a negative Indian Ocean Dipole will likely bring above average rainfall to much of the country this winter, with the notable exceptions of the WA Wheatbelt and southwestern Tasmania,” Ziebell said.
“This presents an advantage for Australia‘s 2022-23 winter crop, but increases risks for global grain production.
“While Australian farmers are likely to benefit from these circumstances, global food security risks pose a growing challenge.”
Mr Ziebell said world grain prices continued to soar, driven by a “confluence” of challenges.
“Russia’s invasion of Ukraine, drought in Germany and France, drought in parts of Africa, ban on Indian wheat exports and very mixed conditions in the Americas have all contributed to driving up prices,” he said.
International grain stocks are “unevenly distributed”, with about half of global wheat stocks in China, limiting the ability to tap into supplies to meet demand.
“The world needs grain and Australia will be a key source of it in the coming year,” Mr Ziebell said.
Mr Ziebell said rising input prices also posed a major challenge to global agricultural profitability, although good seasonal conditions and high commodity prices continued to provide a buffer for Australian farmers.
“Overall, our fertilizer index was up another 12.5% in April, more than double its level just a year ago,” he said.
“While USD-denominated Diammonium Phosphate and Urea have been down somewhat in recent weeks, we don’t expect much downside this year.
“The World Bank reports that global fertilizer accessibility is at historically low levels, which were last observed in the 1970s and only exceeded during the period of global financial crisis between 2007 and 2009. “
In addition, oil prices continued to show “high volatility” as markets weigh on the ongoing Russia-Ukraine crisis and falling investment amid lockdowns in China and signs of slowing global growth.
“With the Australian dollar falling, fuel prices have rebounded,” Mr Ziebell said.
“Our feed grain price index is now rising quite rapidly, following high world grain prices and the decline in the AUD. The index rose 7.8% in April and a further 8.9% in May (nowadays).
With continued inflationary pressures making central banks, including the US Federal Reserve, more hawkish, the USD is on the rise.
“Combined with the ongoing COVID-19 lockdowns in China, this presents higher volatility risks for the AUD,” Ziebell said.
“The AUD fell below 70 cents US at the start of the month and we see the currency at around 72 cents US by the end of 2022.”