NAB report: strong dollar a risk to farmers as index dips

A strong dollar presents a big risk to local farm prices, according to NAB’s latest rural commodities report.

 

Australian agricultural prices look set to trend marginally higher in Australian dollar terms this year despite challenging international conditions, but the stronger dollar presents a big risk to local prices, according to a report.

NAB’s latest rural commodities wrap for April, to be released today, says Australian agricultural commodity prices have taken a hit since February, with the US5c rise in the dollar against the US dollar since January putting further pressure on local ­prices in an already subdued global environment.

While the NAB Rural Commodities Index rose slightly in January, it subsequently fell 1.1 per cent in February and 1.2 per cent in March. In US dollar terms, the index was up 3.4 per cent in March.

“The lower Australian dollar has been a big factor in supporting prices locally,” said NAB agribusiness economist Phin Ziebell.

“Since the start of the year, that appreciation is starting to cut into local prices for globally traded commodities like grains. And for dairy the dollar is also supporting the sector. Without that support, prices are going to have to follow more global developments.”

He said another important factor would be the weather, after El Nino made conditions difficult in parts of Australia last year.

The latest rainfall outlook points to below-average rainfall in April before wetter conditions in May. “Everybody is going to be looking at the winter. We have had a very patchy season in the past year. It has been a tough season in Victoria and NSW,” Mr ­Ziebell said. “The big story in the next month is when the wheat and barley goes into the ground, will there be the rains to support the crops especially in the east?”

The report notes that global wheat prices continue to trend lower in response to strong global wheat supply and for 2016 there will be no significant upside for wheat prices in US dollar terms.

Falling US export prices and the higher Australian dollar have also put pressure on cattle prices, which have soared to record levels in the past two years.

NAB expects that while domestic saleyard prices will stay high this year, reflecting domestic restocker demand, export prices are likely to remain under pressure given growing US beef supply and the increasing competitiveness from South America. “The outlook beyond 2016 presents increasing downside risks to prices,” the report says.

But Mr Ziebell said the strength of the US beef export market over the past two years was a reminder about the importance of export diversity and that more traditional markets were still core for Australian producers, despite the hype about China.

“Having some diversity in your destinations for your exports is a good thing,” he said. “For example much of the run-up in cattle prices in the past two years is because of the US hamburger beef market.”

The NAB report sees little upside for global dairy prices, with moderately higher Chinese import demand but continued strength in global supply.

“Weather was a challenge in many dairy regions in 2015 (especially Victoria, parts of South Australia and Tasmania). Producers are looking to a decent autumn break this year, but this is yet to arrive and is not expected until very late autumn,” it says.