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Low Aussie dollar and high domestic demand are good news for agriculture

By Rodney Woods

Having seen its best month on record in February, the NAB Rural Commodities Index climbed a further 5.8 per cent in March as seasonal conditions, a low Australian dollar and domestic demand combined to create favourable conditions for the agriculture sector.

NAB Agribusiness economist Phin Ziebell said the low Australian dollar was a major positive for Australian agriculture, boosting local prices despite slightly higher input prices.

“The RBA has now cut the cash rate to 0.25 per cent, and unconventional monetary policy is being used to keep the three-year government bond yield at around 0.25 per cent,” Mr Ziebell said.

“The COVID-19 crisis means considerable uncertainty remains for the global economic outlook, but NAB forecasts point to an AUD (Australian dollar) around the USD (US dollar) 63 cent mark by the end of 2020.”

On top of the low AUD, the report outlines two major positives for agriculture amidst the COVID-19 pandemic: seasonal conditions and the seasonal outlook have vastly improved, and domestic demand for staples like meat and flour is high.

“After a 2019 best forgotten, 2020 is shaping up very well,” Mr Ziebell said.

“Root zone moisture is well above average in southern Queensland, most of NSW and Victoria and Tasmania, and the three-month outlook points to well above average rainfall across most of the country.

“Demand for staples is high, and while most hoarding is likely to be transient, there is a move from some grain exporters to secure more domestic supplies.”

In terms of livestock, the competing forces of strong restocker interest and challenging global market fundamentals will place pressure on beef and lamb prices in coming months.

“Australia’s high value, premium product could become harder to attain for global consumers with restaurants closing and many consumers facing unemployment,” Mr Ziebell said.

“On balance though, we expect to see domestic restocker demand pull prices away from global fundamentals.

“Wool prices have dropped significantly, which is a trend we expect to continue due to likely lower demand fundamentals for the remainder of 2020.”

Grain continues to trade above international benchmarks, although the gap is closing due to higher global prices and the lower AUD.

“Two months ago, we would have expected prices to fall back in line with global fundamentals,” Mr Ziebell said.

“It now looks like the opposite has happened with global fundamentals supporting local prices amidst consumer stockpiling and the spectre of export restrictions in some markets.

“The combination of a good season and good prices is the holy grail for grain growers and comes as welcome relief after two very tough seasons for most of eastern Australia.”

COVID-19 means demand for fibres like cotton is likely to be low and prices have started to fall as a result.

“We don’t expect the downward trend to be reversed while the current global economic turmoil continues,” Mr Ziebell said.

“Fruit and vegetable prices are climbing, up 9.9 and 20.8 per cent respectively.

“However, horticulture faces some of the biggest risks from coronavirus of any agriculture sector.

“Labour availability is likely to be a key issue, with many backpackers repatriating and COVID-19 outbreaks in packing sheds a major risk.”