What is the outlook for commodity prices?

Australia hit record agricultural production this financial year at $85.3 billion. A combination of events led to these bumper conditions. The first was particularly good weather in Australia and poorer weather elsewhere. The second was the war in Ukraine resulting in lower levels of exports from both Russia and Ukraine. The third was an economy in growth mode with elevated levels of demand across a range of commodities. And the final driver were the lingering effects of the pandemic, resulting in lower levels of production in places like Brazil and China.

We are however at the start of a new cycle. Weather patterns will be different this year to last. Inflation is starting to hit household budgets, limiting how much people can spend. Interest rates are on the rise and the outlook for economic growth is becoming more constrained. How will this impact the outlook for Australian agricultural production? It is generally agreed that although the next 12 months will be positive, it is unlikely to be better than what was achieved last financial year.

In their latest report, the Australian Bureau of Agricultural and Resource Economics (ABARE) and Sciences has forecast that favourable weather conditions will continue. What will draw back the value of our agricultural production will be two factors - less of what we produce being demanded, and prices pulling back.

A lot of what Australian farms produce was in high demand last year because of two factors. Very strong economic growth meant that people wanted more commodities, particularly expensive commodities such as beef. The second is that we had great weather but elsewhere didn’t, leading to a lot more production for us but less elsewhere. While our weather is expected to stay favourable in Australia, it is also expected to improve elsewhere. Slower economic growth is hitting people’s budgets meaning less demand for some of our more expensive commodities

While we are going to be impacted by lower demand, pricing is also going to get softer. According to the Food and Agriculture Organisation of the United Nations (FAO), world food commodity prices declined for the fifth consecutive month in August and this occurred across most groups. The biggest decline was in wheat - improved production of wheat in the US and Russia has led to a 5 per cent decline in prices.

Should we be negative about the outlook? The answer is no. ABARE has forecast that the value of production will decline to $82 billion next financial year. While this is a 4 per cent decline on last year, it is still 12 per cent higher than in 2021, the second highest value of production we ever recorded. Good times remain this year and while it won’t be as good as last year, it will be better than any other year we have had.