RURAL COMMODITIES WRAP APRIL 2019

Author Phin Ziebell, Senior Economist – Agribusiness Photo | Mai Thai

KEY POINTS

Source: NAB Group Economics, ABARES, Meat and Livestock Australia, Australian Pork, Ausmarket Consultants, Australian Bureau of Statistics, Bloomberg and Profarmer. 2

CONTENTS 3 | Seasonal conditions 4 | Regional prices 5 | Farm inputs 6 | Livestock 7 | Winter crops 8 | Summer crops, sugar 9 | Rainfall data

CONTACTS Phin Ziebell Agribusiness Economist +61 (0) 475 940 662

Alan Oster Group Chief Economist +61 3 8634 2927

Dean Pearson Head of Economics +61 3 8634 2331

We are now a quarter of the way through 2019, and beyond frankly troubling reflections about the rapid passage of time, winter planting is now almost here and many in southern Australia are really chasing rain. Up north, the situation is more mixed, with parts of Queensland seeing useful rain but the top end still very dry.

Dry conditions saw cattle prices fall to lows not seen since late 2014 last month, although good rainfall in Queensland and northern New South Wales saw the market rebound (although prices have tailed off a little recently). A good break in the south would likely see further upside, although there are real risks in the market should dry conditions continue. Producers would find another year feeding a major challenge. Lamb has fared much better, reflecting strong demand overseas and wool continues to perform well.

The coming season is at the forefront of grain growers’ and customers’ minds alike. While eastern states grain has eased from very high levels at the end of year, (wheat has fallen from the mid-$400s range to the mid to high $300s), prices remain well above global benchmarks. If tough seasonal conditions persist, prices are likely to remain elevated.

Global Dairy Trade auction results continue to perform, although high input costs – especially in northern Victoria – continue to cause major issues for the sector. Meanwhile, low irrigation water availability will likely limit cotton plantings once again.

Overall, the NAB Rural Commodities Index fell 2.7% in March, largely reflecting lower cattle, grain and fruit prices.

NAB RURAL COMMODITIES INDEX Index and m/m % change

MONTHLY COMMODITY PRICE CHANGES

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

20

40

60

80

100

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2010 2012 2014 2016 2018

Rural Commodities Indexm/m change (RHS)

Jan. Feb. Mar.

Wheat ▼ 2.1% ▼ 5.9% ▼ 6.0%

Beef ▼ 7.2% ▼ 4.9% ▼ 6.6%

Dairy ▲ 10.2% ▲ 7.8% ▲ 6.2%

Lamb --- 0.0% ▼ 2.3% ▼ 0.1%

Wool ▲ 2.6% ▲ 3.7% ▲ 0.4%

Sugar ▲ 1.4% ▲ 2.2% ▼ 2.8%

Cotton ▼ 3.4% ▼ 1.4% ▲ 4.2%

SEASONAL CONDITIONS

Source: Bureau of Meteorology and NAB Group Economics

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It is now half way through autumn and while March is traditionally dry in southern regions, the lack of rainfall there is being keenly felt indeed. Queensland and parts of New South Wales have fared better however, although there is still a lot of catching up to do following a very tough summer.

Ultimately though, the traditional start of planting is less than two weeks away, so more rain is sorely needed – and soon.

The latest outlook from the Bureau of Meteorology points to a wetter than average end to autumn and start to winter in most of the west and South Australia, but drier than average conditions across Queensland and northern New South Wales.

However, in most parts of Australia the outlook tends to be less than 65% consistent with actual rainfall. The Darling Downs, parts of the WA wheatbelt, coastal South Australia, West Gippsland and western Victoria all have less than 50% consistency.

Ultimately, rainfall is very hard to predict. The risk is that a late break will cause heightened concern around winter crop yields.

RAINFALL – MARCH Deciles

BOM RAINFALL OUTLOOK May to July 2019

BOM EL NINO ENSO TRACKER NINO34 sea surface tracker

RAINFALL OUTLOOK ACCURACY Past accuracy for outlook period

REGIONAL PRICES

Source: NAB Group Economics, Bureau of Meteorology, ABARES, Meat and Livestock Australia, Australian Pork, Ausmarket Consultants, Australian Bureau of Statistics, Bloomberg and Profarmer.

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We also produce the NAB Rural Commodities Index on a state-by-state basis.

Only Tasmania recorded a higher state-level Rural Commodities Index in March, up 0.6%. Victoria fell modestly, down 0.8%. South Australia fell 2.4%, while New South Wales was down 3.0%, Western Australia 3.6% and Queensland 3.9%.

Our regional agricultural price indicators show that March was negative across the country, with the exception of dairy country in Tasmania and Victoria. Lower cattle prices drove the decline across Queensland and the Northern Territory, although this has been reversed in April. Grain prices are lower too, although from a high base.

RURAL COMMODITIES INDEX BY STATE Index value

MONTH ON MONTH February – March 2019

YEAR ON YEAR March 2018 – March 2019

- > 5% - 4-5% - 3-4% - 2-3% - 1-2% - 0-1% no data + 0-1% + 1-2% + 2-3% + 3-4% + 4-5% + > 5%

- > 20% - 15-20% - 10-15% - 5-10% - 0-5% no data + 0-5% + 5-10% + 10-15% + 15-20% + > 20%

80

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

National NSW VIC QLD WA SA TAS

FARM INPUTS

Source: Bloomberg, Profarmer and NAB Group Economics

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NAB FERTILISER INDEX AUD index

NATIONAL AVERAGE FUEL PRICES AUc/litre

Farm input prices have reinforced trends seen over the last few months, with grain coming off, fertiliser stabilising at lower levels and fuel back on the rise.

Oil prices continue to rise, with Brent reaching US$70/bbl for the first time since November last year. Geopolitical dramas in Libya and Algeria, the wheels continuing to fall off in Venezuela, as well as OPEC-Russia output cuts continue to affect sentiment.

Our outlook for the oil market is for only limited further upside for prices this year. While geopolitical risks could push prices higher, as could a favourable result on US-China trade negotiations, US supply remains strong and global growth concerns are mounting.

The NAB Fertiliser index was essentially flat in March, up 0.5% m/m. It is now only 3.8% higher than the same time last year. However, with oil prices having risen, it is likely that there will be an upward trend this year.

Domestic feed prices dropped another 3.9% in March. On a year on year basis, prices are up 23.9%. We are sceptical whether cash prices delivered on farm will fall a great deal further until there are signs of a good autumn break.

NAB WEIGHTED FEED GRAIN PRICE INDEX AUD/t

GEELONG-BRISBANE PRICE SPREAD AUD/t

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2010 2012 2014 2016 2018100

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2010 2012 2014 2016 2018

petroldiesel

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2010 2012 2014 2016 2018

LIVESTOCK

Source: NAB Group Economics, ABARES, Meat and Livestock Australia, Australian Pork, Ausmarket Consultants, Australian Bureau of Statistics, Bloomberg and Profarmer.

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CATTLE AUc/kg

LAMB National Trade Lamb Indicator, AUc/kg

Cattle prices dropped to the lowest level since late 2014 last month. EYCI dropped to 385c/kg on 8 March but subsequently returned to above 500c recently, before dropping to around 480c currently.

If there is more rain, there is likely to be elevated restocker demand and upside for the EYCI, but with the dry autumn continuing in much of the southern Australia this is looking less likely in the short term. On balance, we see EYCI in 400s range in 2019, recovering to around 500c by Q1 2020.

Lamb prices have been fairly stable of late, while the longer term trend is of upward prices since late 2012. Returns for the industry remain very strong. This has been further supported by a hot wool market. Interestingly, this year, previously booming super fine wool, has pulled back, while prices above 20 micron have gained ground. An emerging risk for the industry is the slowdown in global growth, which could see lower consumer demand for high quality woollen garments.

Global Dairy Trade auctions continue to look good – every auction result has been positive in USD terms since December 2018. While there have been step-ups at farmgate level, input costs are a major challenge, particularly in irrigated areas like northern Victoria.

DAIRY $/t, AUD/kgms (farmgate)

WOOL Southern region, by micron, AUc/kg

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2010 2012 2014 2016 2018

EYCI US live cattle future

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17 19 21 2325 28 30

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AUD Index (LHS)USD index (LHS)MG/Saputo milk price (RHS)Fonterra Australia milk price (RHS)

WHEAT AUD/t

WINTER CROPS

Source: NAB Group Economics, ABARES, Meat and Livestock Australia, Australian Pork, Ausmarket Consultants, Australian Bureau of Statistics, Bloomberg and Profarmer.

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ANZAC day, the traditional start of winter planting, is now less than two weeks away. Overall, it is still very dry, particularly in south-eastern Australia. While there are opportunities for dry sowing and late planting, many producers would no doubt like to see more rain at this point in the season. Unless things turn around from here, an “average” season (in which Australia would produce around 24 million tonnes of wheat) is increasingly unlikely.

Drought notwithstanding, eastern states grain prices have come off a good deal from peak, with wheat dropping from a peak in the mid-400s range to mid-300s now. This is welcome news for graziers but there is still very substantial compared to global benchmarks. Our forecasts are in the mid-high 300s range for east coast wheat over winter, although if drought continues graziers may be forced to destock rather than buy feed, providing a cap on demand.

January 2020 ASX wheat futures are in the $330/t range, suggesting that new season crop will still be in demand. However, the predictive powers of futures markets is fairly limited.

PULSES AUD/t

COARSE GRAINS AUD/t

CANOLA AUD/t, Newcastle

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500

2010 2012 2014 2016 2018

ASX east Aust futureAUD denominated CBOT

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2010 2012 2014 2016 2018

Chick peas Field peas Lupins

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2010 2012 2014 2016 2018

barley (feed)barley (malting, Geelong)sorghum (Newcastle)oats (feed, Albany)

SUMMER CROPS, SUGAR AND HORTICULTURE

Source: NAB Group Economics, ABARES, Meat and Livestock Australia, Australian Pork, Ausmarket Consultants, Australian Bureau of Statistics, Bloomberg and Profarmer.

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Storage volumes for major public storages in the Murray Darling Basin remain at generally depressed levels, with little inflow of late. Private storages in the basin are also likely to be fairly low. Allocations for the coming season are likely to remain low in many areas, suggesting that Australia will face a second year of lower cotton production.

Cotton prices have come up a little recently, with AUD denominated Cotlook A back to $600/bale.

Fruit and vegetables were very strong in February but fruit was off a little in March while vegetables remained strong. Fruit dropped 5.4% while vegetables were up 2.7%.

Monthly moves in horticultural prices often reflect seasonal supply patterns more than anything else and this is likely to have been partly the case in February and March, although extreme weather may have been a factor.

COTTON AUD/bale

SORGHUM AND RICE AUD/t

SUGAR AUD/t

FRUIT AND VEGETABLES Index

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2010 2012 2014 2016 2018

Fruit

Vegetables

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2010 2012 2014 2016 2018

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2010 2012 2014 2016 20180

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2010 2012 2014 2016 2018

sorghum (Newcastle)

rice (US rough)

MONTHLY AVERAGE RAINFALL IN WINTER CROPPING REGIONS (MM)

Source: Bureau of Meteorology and NAB Group Economics

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Long run average 1900-01 to 2013-14 El Nino years 2019 YTD 2018

NEW SOUTH WALES VICTORIA

QUEENSLAND

WESTERN AUSTRALIA

SOUTH AUSTRALIA

TASMANIA

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Photo | Mai Thai