Opportunities and risks for Australian agriculture amid global volatility

Ongoing inflationary pressures, a weaker global economic outlook and the prospect of a wet winter across many production regions of Australia is causing volatility for the agricultural sector.

That’s according to NAB’s May Rural Commodities Wrap, which reports that despite the current conditions, the bank’s Rural Commodities Index is on track for a 2 per cent rise in May, taking it to another record high.

NAB senior agribusiness economist Phin Ziebell said Australian agriculture was facing a number of opportunities and risks as a result of current global conditions.

“La Nina is kicking on longer than expected and a negative Indian Ocean Dipole is likely to bring above average rainfall for much of the country this winter, with the notable exception of WA’s Wheatbelt and South West Tasmania,” Mr Ziebell said.

“This presents an upside for the 2022-23 Australian winter crop but increases risks to global grain production.

“While Australian farmers will likely benefit from these circumstances, global food security risks are an increasing challenge.”

Mr Ziebell said global grain prices continued to skyrocket, driven by a “confluence” of challenges.

“Russia’s invasion of Ukraine, drought in Germany and France, drought across parts of Africa, a ban on Indian wheat exports and very mixed conditions in the Americas have all conspired to push prices higher,” he said.

International grain stocks are “unevenly distributed”, with about half of the world’s wheat stocks in China — limiting the ability to draw down 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 present a major challenge to global agricultural profitability, although good seasonal conditions and high commodity prices continued to provide a buffer for farmers in Australia.

“Overall, our fertiliser index was up another 12.5 per cent in April, over double its level from just one year ago,” he said.

“While USD denominated diammonium phosphate and urea have dropped somewhat in recent weeks, we do not expect much downside this year.

“The World Bank reports that global fertiliser affordability is at historically low levels, which were last seen in the 1970s and only surpassed during the global financial crisis period between 2007 to 2009.”

In addition, oil prices continued to exhibit “high volatility” as markets weigh the ongoing Russia-Ukraine crisis and lower investment against lockdowns in China and signs of slowing global growth.

“With the Australian dollar now lower, fuel prices have rebounded,” Mr Ziebell said.

“Our feed grain price index is now rising fairly rapidly, following high global grain prices and a lower AUD. The index was up 7.8 per cent in April and another 8.9 per cent in May (to date).”

With ongoing inflationary pressures making central banks including the US Federal Reserve more hawkish, the USD is rising.

“Combined with ongoing COVID-19 lockdowns in China, this presents higher volatility risks for the AUD,” Mr Ziebell said.

“The AUD dipped below US 70 cents earlier this month and we see the currency at around US 72 cents by the end 2022.”