The outlook for soft commodities

Major reduction

Commodity outlooks are mixed. The national grain harvest is likely to see a major reduction from last year, although this will be a return to average, or just below average, following a record crop.

"As with every year, the impact of spring and summer rains – or the lack of them – will shape the outlook. “ - Mark Bennett

Australian wheat production levels are forecast to be well down on 2016’s record harvest, although harvests are expected to differ greatly between regions, based on winter rainfall.

Overall harvest is forecast for 22.5 million tonnes but with greater downside risk. However, a reduction in global production and a fall in global stocks once – China is excluded – should maintain higher prices than last year.

The domestic cattle herd continues its rebuild, although the impact of dry weather may slow this trend. For sheep producers, the industry remains strong with continuing high beef prices driving increasing wool and sheep meat prices.

Global beef production is expected to continue to increase at a faster pace than consumption, which should see a continuation of the downward pressure on global prices.

Domestic cattle prices remain partly reliant on rainfall in Northern Australia and subsequent restocker activity, which would remain flat if dry weather continues.

Volatility

The dairy sector’s fortunes remain mixed, not just due to well-publicised corporate events, but because of volatile global prices.

Volatility and uncertainty remain central to Australian dairy producers, not only because of doubt over the future direction of Australia’s largest processor, Murray-Goulburn, but also due to mixed global prices across dairy commodities.

Butter and cheese prices continue to improve, while skim milk powder (SMP) remains at very low levels. Whole milk powder (WMP) has improved significantly since mid-last year, however has remained relatively flat since January this year.

Sheep meat and wool are continuing to defy predictions of a price fall as the National Trade Lamb Indicator continues to increase even though the main supply of lamb has started to enter the market.

Markets are being driven by relatively tight supply and early processor demand in meat. However, as pressure starts to mount on prices of competing commodities, including beef, it remains unclear how much longer these levels can be sustained.

In wool, the market correction in the past few weeks has been felt more across the fine and broader micron categories and resulted in high pass-in rates – perhaps indicating that a peak price-point has been met.

Global factors are also impacting the sugar sector as it feels the weight of a global surplus. Finally, weather is top of mind for the cotton industry; dry conditions are affecting domestic producers and US hurricanes have the potential to impact price.

Mark Bennett is Head of Australian Agribusiness at ANZ