01 December 2011
The exceptional degree of volatility on global financial markets has continued over the past couple weeks. The VIX Index remains at levels consistent with the global financial crisis while equities in the big developed economies are down by around five per cent since the start of the month. Not surprisingly, the Australian dollar (A$) has also pulled back in recent weeks as investors have sold off risk assets in favour of US dollar (US$) and treasuries. The A$/US$ has now fallen US$0.97.
These forecasts represent year-on-year average changes in A$ price and production between 2010-11 and 2011-12 financial years
Sovereign debt problems in Greece, Italy and Spain remain firmly in markets' sights, while French developments are increasingly grabbing attention. With bond yields in Italy and Spain hovering near the seven per cent level, the main event is whether the European Central Bank will become a lender of last resort, an outcome strongly opposed by Germany. This is leading to increasing scepticism about the ability of EU leaders to fix this mess and will continue to weigh on equity markets for some time. Added to that, weak economic data is contributing to the gloom surrounding Europe. Industrial production fell two per cent in September, while September quarter GDP came in at just 0.2 per cent. This meagre growth rate was propped up mainly by Germany and France, with growth rates of 0.5 per cent and 0.4 per cent, respectively. Elsewhere, the Italian and Spanish economies have stagnated, and have austerity packages in the pipeline that will further restrain activity. Greece and Portugal have contracted as expected, and the Netherlands also experienced a fall in activity.
It has not been all doom and gloom, however, with some promising economic data across the Atlantic. Evidence is mounting that the US economy is growing modestly, with good outcomes for retail sales, industrial production, manufacturing surveys, jobless claims, consumer confidence and the housing sector. It appears that the US recession scare that spooked markets in August and September has passed for now. However, markets are likely to remain jittery about the wrangling over deficit reduction and prospects of further public sector cuts in the face of a weakening global economy.
Commodity prices have pulled back quite sharply, given their perception by investors as risky assets. As such, we have seen funds pull out of net long position in large numbers over recent weeks. This has seen some fairly sharp declines in prices for base metals while iron ore and coal prices have also weakened in recent weeks. Crude oil prices have also declined in the past week, despite geo-political ructions and near-term supply constraints. Against that back-drop, agricultural commodity prices have come under considerable pressure. Market concerns about weakening demand prospects, investor risk aversion and an appreciating US$ has seen US$-denominated prices for key agricultural commodities fall by between seven and 12 per cent since the start of the month.
For the Australian farm sector, recent falls in agricultural commodity prices should not yet be cause for concern. The A$ has played its traditional role in buffering exporters from the worst, with A$-denominated prices holding up pretty well. Similarly, export performance remains robust. Meat exports over recent weeks have strengthened. Seasonal conditions remain strong with a record winter crop on the cards and an equally strong summer crop around the corner. Importantly, the weakness in the global economy stems from the big developed economies, whose protein consumption tends to be less susceptible to income shifts while growth in the emerging economies remains conducive to rising per-capita protein consumption. For the time being, the Australian agricultural sector remains on the right side of the multi-speed economy.
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