Commodity Price Concerns Take Edge Off Australian Farmer Confidence

Media Release

June 7, 2010

Commodity price concerns take edge off Australian farmer confidence

Results at a glance:

* Australian rural confidence has had a small decline this quarter, although remains in positive territory and above last year's levels.

* Favourable seasonal conditions across the major eastern agricultural regions have helped to maintain optimism despite a general fall in commodity prices
* Confidence improved in NSW, Victoria and Tasmania and remains highest among dairy operators in these states.

Australian rural confidence has moderated slightly this quarter, after surging early in the year, as worries about global commodity prices weigh on the nation's farmers.

The latest quarterly Rabobank Rural Confidence Survey has shown deteriorating prices in some commodities have stifled rural sentiment, although favourable seasonal conditions are fuelling farmer optimism in the eastern states.

However, despite moderating, the rural confidence index remains in positive territory, with more farmers still expecting conditions to improve over the next 12 months than those expecting conditions to deteriorate.

The latest survey completed last month found 29 per cent of farmers expected conditions to improve in the coming year, down from 30 per cent in the previous quarter. The number of farmers expecting conditions to worsen increased to 23 per cent, up from 19 per cent last survey.

A comprehensive monitor of outlook and sentiment in Australian rural industries, the Rabobank Rural Confidence Survey questions approximately 1200 farmers across a wide range of commodities and geographical areas throughout Australia on a quarterly basis.

Rabobank general manager Rural Australia Peter Knoblanche said overall the survey had seen rural confidence plateau, with many farmers weighing up the opposing impacts of positive and negative market conditions.

"Favourable autumn rainfall across eastern Australia has topped up sub-soil moisture profiles and resulted in the best winter crop planting conditions in nearly a decade in many regions," he said.

"Other things being equal, we would have expected very buoyant confidence results in the survey this quarter, but unfortunately grain prices are depressed and the recent
locust plague across southern New South Wales, Victoria and parts of South Australia has caused some crop damage. Fortunately most growers delayed planting until the plague subsided however vigilance will be needed in spring when eggs hatch."

After contending with a strong currency in past months, agricultural exporters should receive welcome relief from the recent depreciation in the Australian dollar, Mr Knoblanche said.

"The strong Australian dollar had been a frustration for exporters for some time. The depreciation, which came after the survey was in field, will result in higher realised prices for most exporters and will help to counter balance the impact of lower prices for producers of commodities such as grain and sugar," he said.

"Despite the mediating influence of the lower dollar, the subdued wheat price remains a concern and we are seeing a number of farmers looking to plant alternatives as a result. The strong cotton price, upwards of $450 a bale, coupled with high rainfall in the north of New South Wales and southern Queensland, may see producers moving back to growing cotton."

The latest Rabobank Rural Confidence Survey showed, not surprisingly, that an expectation of favourable seasonal conditions was the main driver behind increased farmer confidence this quarter. Of those primary producers who expected conditions to improve over the next 12 months, 62 per cent nominated seasonal conditions as a major contributing factor, up from 41 per cent last quarter.

Mr Knoblanche said that despite favourable seasonal conditions in much of the country, producers in several key regions particularly the south west corner of Western Australia and parts of South Australia had been anxiously awaiting a late break to the season at the time of the survey. "Fortunately conditions have improved since with some good rains in late May," he said.

"It's certainly the case that most producers now are off to a very good start, however, as always, further rains through the season will be needed to ensure good yields."

Of those primary producers surveyed who expected conditions to worsen, commodity prices were cited as the major concern, nominated by 56 per cent of producers primarily grain and mixed farm operators impacted by lower grain prices. The strong Australian dollar (at the time of the survey) and rising input costs were also top of mind, cited by 21 per cent and 27 per cent of producers respectively.

While grain prices have benefitted from the recent volatility in the Australian dollar, Rabobank's Food & Agribusiness Research and Advisory unit says, by long-term averages, grain prices remain subdued due to a build up in global stocks which are expected to cap any significant price gains. Wheat has the most burdensome fundamentals picture, while the price outlook for canola and pulses is more positive. Cotton remains the most buoyant robust pricing and improving water availability suggest an optimistic outlook for the sector.

Mr Knoblanche said the impact of rising input prices was most likely to be felt by those producers with low stocks of chemicals. The depreciating dollar, coupled with low supplier inventories and the reliance on imports, is expected to result in higher
prices over the remainder of the year. "Fertiliser stocks however are at higher levels and it is felt that there will be less pressure on prices in this market," he said.

Farm business performance, income and investment

In terms of farmers' own operations, the Rabobank survey found 39 per cent of respondents expected to see improved performance in their business over the next 12 months, compared to 36 per cent last quarter. This was significantly higher than farmers' expectations of the overall agricultural economy.

Mr Knoblanche said the variance between these two measures indicated an underlying confidence, with farmers feeling more positive about their own situation than that of the agricultural economy as a whole.

Farmers' income expectations also increased. Overall, 34 per cent of respondents expected to have higher incomes over the next 12 months, compared with 32 per cent with that expectation in the previous survey. The number of producers expecting lower gross farm incomes remained unchanged at 16 per cent.

The improvement in income expectations comes after a mixed quarter for gross farm incomes. A total of 37 per cent of Australian producers reported higher gross farm incomes in the first three months of 2010 compared to the same period the previous year, with 28 per cent reporting lower incomes.

Consistent with farmers' improved confidence in their own operations and increased income expectations, their investment intentions also improved. A total of 90 per cent intended to maintain or increase the level of investment in their business, up from 88 per cent last quarter. Sugar and dairy producers continue to be the most likely to increase their investment, while grain producers were found to be the least likely, with 15 per cent of grain growers surveyed looking to decrease their total level of business investment.

States

The Rabobank survey found rural confidence was strongest in the south eastern states, with Victoria, New South Wales and Tasmania all recording improved results this quarter.

Mr Knoblanche said the situation was similar in all three states, with sentiment driven by solid autumn rainfall and a positive start to the winter season.

"The season would be considered above average in most regions with a good soil profile now established for most of the winter cropping areas. Conditions are ideal for grazing and stock prices are likely to remain buoyant going into the winter period," he said.

Confidence remains highest in Victoria.

"Had it not been for the locust plague and grain prices we may have seen sentiment hit record highs in the state," Mr Knoblanche said. "Increased water allocations in northern Victoria have eased pressure on irrigators who had endured several tight
years. Dairy producers, in particular, are well placed as increasing milk prices should result in strong returns for the sector."

Declining confidence in Queensland was driven by falling sentiment amongst the state's sugar producers. This follows a consistent fall in sugar prices over the past three to six months.

Mr Knoblanche said conditions had been less favourable in South Australia and Western Australia than in the east, with both states impacted by low wheat prices and a late start to the season in some regions.

Sectors

Farmer sentiment is strongest, not surprisingly, within sectors enjoying both favourable weather conditions and firm or improving commodity prices. Confidence among livestock (sheep and beef) producers has improved slightly, although dairy remains the most buoyant sector.

High confidence and improving investment intentions among dairy producers reflect favourable conditions in south east Australia at present, Mr Knoblanche said.

"Dairy producers have received firm signals from processors that opening prices for the 2010/11 season are likely to be improved. This coupled with irrigation water availability, widespread rain and softening feed prices has helped to maintain sentiment at a three-year high," he said.

Sentiment among beef producers remains positive despite some uncertainty in the live trade export market.

"There remains some trepidation as import permits to Indonesia have been put on hold. This has impacted sentiment in the north of Queensland, however fortunately the season further south has been sufficient to hold prices for restocker cattle at quite high levels," Mr Knoblanche said.

The price for wheat and other grains has driven sentiment into negative territory for the grains sector, with both confidence and investment intentions falling.

For sugar, Mr Knoblanche said, prices were well down on the levels seen six months ago, although they remained above historic averages.

"The sugar price has been impacted by a series of demand and supply side shocks over the last four to five months which has seen the price fall from a 29-year peak in February, of over 30c a pound US, to just under 14c in May, before recovering to just over 15c in the final week of May," he said.

The most robust study of its type in Australia, the Rabobank Rural Confidence Survey has been conducted since 2000 by an independent research organisation interviewing an average of 1200 farmers throughout the country each quarter. The next results are scheduled for release in September 2010.

ends

To arrange an interview with Rabobank general manager Rural Australia Peter Knoblanche, or for more information on Rabobank's Rural Confidence Survey, please contact:

Denise Shaw
Public Relations Manager
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Email:[email protected]

Jess Martin
Public Relations
Rabobank Australia & New Zealand
Phone: 02 8115 4861
Email:[email protected]



SOURCE: Rabobank