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RURAL BUSINESS MARKET FORECAST
Photos: Kondinin Group
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Ag markets look refreshingly buoyant
Brendan White EXECUTIVE GENERAL MANAGER REGIONAL AND AGRIBUSINESS BANKING COMMONWEALTH BANK
At a glance Markets are experiencing a period of growth, and the dilemma facing growers is whether to lock in price now, or risk being able to take advantage of possible future rises.
While not yet at the stratospheric levels of early 2008, agricultural commodities have been performing remarkably strongly during recent months. And while that doesn’t mean the recent market jitters are at an end, Commonwealth Bank analysts believe, on balance, prices are likely to remain healthy well into next year.
The high Australia dollar is trimming some of the cream from the favourable market conditions. Australian grain will benefit from the misfortunes of some of its overseas competitors. Cotton growers are likely to benefit from a worldwide supply shortage. The dissipated domestic sheep flock and strong global demand acontinue to drive wool prices.
Rural Price Index (1997 = 100)
FIGURE 1 Australian dollar impact on markets CBA Index: Rural (AUS) 250 CBA Index: Rural (USD) 200 150 100 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan10 Jan 11
The current strong markets pose an interesting problem for Australian farmers. While it’s tempting to lock in contracts at today’s robust prices, there could be a further upside to come — so if growers lock in a price now, there is some chance they could miss out on future gains. Yet the fragile state of the global economic recovery also suggests that it could be wise to put a floor under prices now while the going is good. Then there’s the buoyant Aussie dollar to consider. As Figure 1 details, our resurgent dollar has already trimmed some of the benefits of rising international prices for Australian producers. While the Commonwealth Bank Rural Commodity Price Index has jumped by almost 140 points in US dollar terms since early 2009, it’s up by less than 40 points after exchange rates are taken into account. On the rebound Fortunately, it is possible to manage risks like these, while still allowing the flexibility to take advantage of any market movements in your favour — more on that in a moment. But first, let’s look a little deeper into the forces driving some key commodity markets during the past few months.
16 Farming Ahead October 2010 No. 225 www.farmingahead.com.au
A brighter outlook for wheat The global grain landscape has changed dramatically during the past few months. Between May– September, global wheat production forecasts for 2010– 2011 were slashed from 672 million tonnes to 643 million tonnes, significantly below global consumption requirements of 661 million tonnes. A ravaging drought culminated in the world’s most significant low-price exporter, Russia, introducing a wheat export ban from August. Since August, prices have fallen back somewhat, but they still remain at levels, which would have seemed impossible just a short time ago. The question is, how long can the gains persist? And can we expect even higher prices anytime soon? The answer largely depends on the Black Sea winter crop. The same drought that stripped tonnes from the current wheat crop has threatened sowings for the upcoming winter season, although the most recent weather reports suggest the drought is easing, with forecasts of adequate sowing rain.
RURAL BUSINESS MARKET FORECAST
prospects are good, with expanding Asian demand and the increasing use of cane stocks for ethanol production likely to keep markets healthy.
But the outlook is far from certain. Not only could there be more production downgrades, it also appears harvest rain may threaten the quality of some northern hemisphere crops. There is even market talk that Russia may now import significant quantities of grain. So, while Australian wheat prices may come under some downward pressure, the outlook for local wheat is now much stronger than it was three months ago.
Tight supplies boost coarse grains It is a similar story with other grains. Corn and barley rallied strongly during July, undoing earlier losses, after big production downgrades in Europe and Canada. The same drought that devastated Black Sea wheat saw production of barley and corn slashed in Russia and Kazakhstan, while elsewhere in Europe barley production was hit by, of all things, too much rain. Excessive rain was also the problem in Canada, where the spring barley crop suffered badly. All of this has been enough to overshadow forecasts of a huge US corn crop, especially with coarse grains increasingly being substituted for wheat as stock feed. As a result, Australian Stock Exchange (ASX) feed barley futures surged 70% during July and August. Looking ahead, lower reserves should continue to boost prices going into 2011, with US corn stockpiles expected to fall to their lowest levels since 1995/1996. But locally, prices could be affected somewhat after December by excellent east coast production prospects — so watch this space!
Cotton supplies at 16-year lows Among agricultural commodities, cotton prices are perhaps the most sensitive to global economic conditions. So it is not surprising the fragile global economy has continued to impact cotton, with the international apparel market still struggling. But concerns for the global economic outlook are being outweighed by extremely tight cotton supplies, resulting in extremely strong raw cotton prices. During 2009–2010 world cotton production fell 15% below consumption requirements driving a sharp reduction in global stocks. In the US, the world’s most important exporter, stocks plummeted to three million bales from 10 million bales two years before. The higher prices have encouraged increased plantings. The US Department of Agriculture has forecast that global cotton output will rebound by 16% this year. But despite the larger crop, there is still expected to be a global production deficit, with global stocks falling to their tightest levels since 1994–1995, when prices averaged 88 cents and peaked near 120 cents. Sugar under pressure It’s been a rollercoaster ride for sugar producers this year, with raw sugar prices first surging to 30-year highs above 30 US cents a pound, then collapsing to 13 cents, before finally rallying to around 20 cents. Current sugar prices are double the average during the past 10 years. As with cotton, it’s all about a global supply squeeze — although, unlike cotton, sugar has continued to benefit from high global demand, especially in Asia. Now, however, that squeeze may be coming to an end. The upcoming Indian cane crush is expected to see production of at least 25 million tonnes, with some estimates as high as 28 million tonnes. That would be enough to allow for significant Indian exports next season, a big turnaround after two years in which India has been the world’s most important importer. As a result, the Commonwealth Bank predicts that prices will come under downward pressure as the supply squeeze dissipates. Nonetheless, longer-term
Golden fleece keeps its lustre Wool has been drifting sideways this year, with prices remaining fairly strong, but markets are lacking any clear direction. Overall, three key themes continue to drive the global scene: a declining sheep flock, constraining the premium wool supply; an uncertain global fibre market, with economic weakness sapping the strength of clothing markets; and fluctuating demand from Chinese buyers. Positives for Australian producers include the tight global cotton supply and strong lamb and mutton prices. Nonetheless we expect prices to continue their gradual downward drift. See page 86–87 for Meat and Livestock Australia’s sheep meat and beef market forecasts. Managing the risks So what are Australian agribusinesses to make of all this? How can you take advantage of today’s price strength and guard against possible future falls? One traditional solution is to use commodity swaps to hedge a fixed price, getting rid of most (but not all) of your commodity price risk. A commodity swap gives you the security of a fixed price without the need to enter into a physically delivered forward contract. An alternative is to use commodity Put options, giving you the right to sell a commodity at a predefined price, but not the obligation in the event that the market moves higher. Options allow you to establish a floor price without locking yourself in. Then there are more complex, structured solutions, combining several options or swaps. The right structure can offer price protection, the potential for profit, or a combination of both. Perhaps the best solution of all is to talk to an agribusiness specialist. They can assist in creating a solution and help you manage risk as markets develop. Because the only thing we can truly say with certainty is that the future remains unpredictable. CONTACT AgriLine 1300 245 463 (1300 AGLINE) www.commbank.com.au/business/ agribusiness.
Farming Ahead October 2010 No. 225 www.farmingahead.com.au
While not yet at the stratospheric levels of early 2008, agricultural commodities have been performing remarkably strongly during recent mon...