Agribusiness Outlook 2016

Australia

Food & Agribusiness Research and Advisory February 2016

Foreword

Rabobank Australia is very pleased to share the insights from our Food & Agribusiness Research and Advisory division’s Australian Agribusiness Outlook 2016.

Australian producers had a mixed year in 2015, as reflected in successive Rabobank Rural Confidence Surveys. Weather conditions were particularly unfavourable in areas of Queensland and also in Victoria, where a hot and dry spring curtailed the potential of winter grains crops. At the same time, record livestock prices were a bright spot for Australian red meat producers.

As we enter 2016, global stocks of many agricultural commodities are high or at record levels and—combined with a strong US dollar and weak oil prices—agri commodity prices are at subdued levels. Fortunately, the depreciation of the Australian dollar has shielded producers here from some of these impacts. In our outlook for the year ahead, currency movements are just one of five key ‘swing factors’ that we highlight as having the potential to significantly impact the broader outlook for the Australian agricultural sector as we move further into 2016.

This Outlook report published by our dedicated team of analysts highlights that the year ahead will present its share of both opportunities and challenges for Australia’s food and agricultural producers. As the leading global food and agribusiness bank, our commitment to knowledge sharing is just one example of how Rabobank is working to help our clients to feed the world and sustainably achieve their goals and aspirations. We hope you find it to be useful in supporting your own decision-making in the near future, and wish you a successful year ahead in 2016.

With kind regards,

Thos Gieskes

Swing Factors

The further depreciation anticipated in the Australian dollar versus the US dollar over the coming year is by and large seen as a tail wind for Australian agriculture in 2016. At the same time, the quantum of this shift and relative movements in the currencies of key global competitors will be critical to the outlook. Central bank policies, as well as geopolitical and economic turbulence, have acted to significantly devalue the currencies of many of Australia’s major global competitors over the past year, impacting global competitiveness, and encouraging production in some geographies despite high global stocks and falling USD prices.

With El Niño forecast to dissipate as we head into Q2 2016, the high likelihood of neutral or La Niña conditions developing bodes well for Australian agricultural production in 2016. However, the sting in El Niño’s tail remains a factor, given ongoing moisture deficits in parts of Australia, and the potential to impact crop development and more broadly influence global agricultural production and prices.

Currency movers and shakers

So long El Niño

Rabobank has identified five key swing factors that we believe will shape the outlook for Australian agriculture in 2016

China will remain centre stage throughout 2016, with developments there having major consequences for the demand for Australian agricultural exports. Both China’s government policy and economic development enters a pivotal stage in 2016 as it looks to implement its 13th 5-year plan and continue to steer its economy towards a more consumer-based growth model. While the economy is expected to maintain sufficient momentum in the near term, challenges are mounting, and the majority of risks to the outlook are presently weighted to the downside.

All-in-all, lower oil prices are expected to weigh on agricultural commodity and food prices in 2016 in the current low wage growth environment. The relationship between oil prices and commodity prices is well established, with oil-derived products and transport logistics representing major inputs in the farm production system. With oil prices anticipated to come under sustained pressure in 2016, associated pressures on agricultural commodity prices are likely to remain in effect. While lower oil prices have the potential to support global consumer spending, slowing global wage growth threatens to limit this impact over the coming year.

If the global financial crisis has taught us one thing, it’s the inherently de-stabilising impact of high levels of leverage and extreme volatility in financial markets, and the associated risk of contagion to commodity markets and disruption to the real economy. The heightened volatility witnessed thus far in 2016 again reminds us of this risk, and the need for food and agricultural producers to prepare themselves for a bumpy ride and any potential feed-through to the real economy.

China will remain centre stage throughout 2016, with developments there having major consequences for the demand for Australian agricultural exports. Both China’s government policy and economic development enters a pivotal stage in 2016 as it looks to implement its 13th 5-year plan and continue to steer its economy towards a more consumer-based growth model. While the economy is expected to maintain sufficient momentum in the near term, challenges are mounting, and the majority of risks to the outlook are presently weighted to the downside.

All-in-all, lower oil prices are expected to weigh on agricultural commodity and food prices in 2016 in the current low wage growth environment. The relationship between oil prices and commodity prices is well established, with oil-derived products and transport logistics representing major inputs in the farm production system. With oil prices anticipated to come under sustained pressure in 2016, associated pressures on agricultural commodity prices are likely to remain in effect. While lower oil prices have the potential to support global consumer spending, slowing global wage growth threatens to limit this impact over the coming year.

If the global financial crisis has taught us one thing, it’s the inherently de-stabilising impact of high levels of leverage and extreme volatility in financial markets, and the associated risk of contagion to commodity markets and disruption to the real economy. The heightened volatility witnessed thus far in 2016 again reminds us of this risk, and the need for food and agricultural producers to prepare themselves for a bumpy ride and any potential feed-through to the real economy.

The China factor

Negative energy

Financial market volatility

12-Month Australian Farmgate Price Outlook Sector 2016 price trend Key takeaway

Wheat Wheat prices will likely remain range bound, given large global stocks, coupled with sluggish demand growth.

G&O Large South American corn and soybean crops add to historically large world inventories, limiting price upside.

Dairy A weaker dollar and an anticipated uplift in dairy commodity markets provides some hope of an increase in Australian farmgate milk prices in 2016/17.

Beef Tight supplies and restocker demand in the domestic market will balance the drop in export beef prices to the US seen in late 2015.

Sheepmeat Stabilising production, a strong domestic market and a diverse range of export markets will support domestic sheep prices through 2016.

Sugar A forecast swing to a global production deficit in 2015/16 of nearly 5mt looks to provide support to ICE#11 prices through 2016.

Cotton Cotton price outlook for 2016 shows some improvement in the ICE#2, edging towards an average of US 68c/lb in Q4, on the basis of tightening fundamentals.

WoolWool exporters globally are facing some headwinds through 2016. A falling currency and tightening supply will be critical factors in protecting returns to Australian wool growers.

Wine Tightening stocks of some commercial white and premium red wine varieties should support a rise in the industry-average wine grape price.

Much of Australia again enters the year hot and dry. 2015 was Australia’s fifth warmest year on record and national rainfall was below average. Spring 2013, 2014, and 2015 were Australia’s three warmest springs on record.

Relief might be on the way. The strong 2015 El Niño event has passed its peak. The decline in indicative sea surface temperatures since late last year points to a further moderation, of which the timing and extent remains less clear.

Most models predict El Niño conditions to last into Q2 2016 when more neutral conditions will take effect. At that point, a transition to La Niña event becomes a real possibility.

Seasonal Outlook

What to Watch • Australian food and agriculture producers can expect more favourable seasonal conditions to emerge in 2016 as El Niño dissipates, but

what follows in 2H 2016 remains a key swing factor.

• History shows significant La Niña events tend to be linked to increased levels of volatility on agricultural markets. Outside of Australia, a La Niña event can cause dry and warm temperature in the US and impact the corn and soybean crops, but can benefit South American crops.

Highest on Record

Rainfall Decile Ranges

Very Much Above Average10

Above Average8-9

Average4-7

Below Average2-3

Very Much Below Average1

Lowest on Record

Australian rainfall deciles — CY2015

Source: BOM, Rabobank, 2016

Wheat

Wheat prices will likely remain range bound, given large global stocks, coupled with sluggish demand growth. Rabobank forecasts CBOT wheat prices to remain largely neutral, and mainly above the USD 5/bushel level.

Domestically, Australian wheat prices have weathered the storm seen at a global level, and have remained comparatively high through the Australian 2015/16 harvest.

Australian wheat prices have been assisted by a weakening Australian dollar and strong domestic demand. This being said, we anticipate that the basis between Australian and global wheat prices will ease slightly as we move through 2016. With global wheat prices currently suppressed, Australian wheat prices will need to remain in touch with global prices to maintain competitiveness.

Globally, 2015 produced another record wheat crop, the third in a row. Combined with a record soybean harvest, and a large corn harvest, the global grains and oilseeds complex is well supplied.

Despite the likelihood that prices will be capped to the upside, we do not foresee significant downside risk at a global level. Reduced winter wheat plantings in the US and Ukraine mean that there is a likelihood that production growth in 2016/17 may be limited.

Market Outlook

What to Watch • Spring weather in the northern hemisphere. The Northern Hemisphere winter crop went

into winter dormancy on the back of dry conditions during sowing, particularly in the Ukraine. This being said, the northern hemisphere crop is made in the spring, not the winter.

• Indian import demand. Poor weather in India looks set to negatively impact domestic wheat production, leading to an increased likelihood of the need for imports in 2016.

Global Wheat Stocks at Record Highs

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50,000

100,000

150,000

200,000

250,000

thou

sand

tonn

es

Ending stocks Stocks-to-use ratio

Global wheat stocks have reached record highs, while the stocks-to-use ratio sits at a comfortable 32%, the highest level since 2002. This is likely to keep wheat prices range bound throughout 2016.

Source: USDA, Rabobank, 2016

Global wheat stocks

Grains & Oilseeds

Global feed grain stocks remain at record high levels, capping any significant upside potential for global feed grain markets in 2016. The combined global stocks-to-use ratio for wheat, corn and soybeans is expected to be above 25%, the highest level since the 2001/02 season.

Softer Chinese demand for Australian sorghum and barley is expected to continue to be one of the main drivers behind lower average prices for feed grains throughout 2016. We expect feed grain prices to trade between AUD 200-240 across SA and WA for much of the year. With prices between AUD 220 and AUD 260 expected on the east coast.

A continuation of historically high demand for feed grain from the domestic cattle market (~850,000 cattle on feed) along with our expectation of a depreciation of the Australian dollar vs the US dollar (to 0.64) will help shield local AUD denominated prices from significant falls.

Global rapeseed/canola ending stocks are expected to decline by 29% YOY helping to support prices. A 10% YOY reduction in Australian canola production in 2015/16 to 3.05 million tonnes is likely to cause domestic stocks to fall to their lowest level since the 2012/13 season.

What to Watch • Prices for feed quality grains are expected to come under pressure as the season

progresses. Global corn and soybean stocks levels and Chinese demand for Australian feed grains will be crucial to price direction.

• Edible oils stocks (soy, palm and rapeseed) remain plentiful, although palm production in South-East Asia has been impacted by El Niño. A prolonged El Niño could lead to further production cuts and higher edible oil prices.

Market Outlook

Large G&O Stocks Continue to Pressure Prices

5%

10%

15%

20%

25%

30%

35%

0

100

200

300

400

500

600

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16(f)

2016/17(f)

mill

ion

tonn

es

Corn Soybean Wheat Stocks-to-use ratio, combined

Global wheat, corn and soybean ending stocks—large stocks continue to pressure prices

Source: USDA, Rabobank, 2016

Global grains and oilseeds prices are expected to remain range bound throughout 2016, as large South American corn and soybean crops add to historically large world inventories.

Dairy

Indications point to profitability continuing in 2016 for most dairy producers. Farmgate margins have been helped by lower operating costs, as fuel, fertiliser and interest rates remain below historical levels. As always, supplementary feed costs this year will be the critical factor and will hinge on pasture growth and the subsequent size of the supplementary feed gap.

Despite no step-ups in farmgate milk prices for export-oriented milk suppliers in the current season, dairy producers have largely avoided the severe global market downturn. Any improvement in farmgate prices for 2016/17 will hinge on a recovery in global commodity markets.

Dairy producers will be looking for better seasonal conditions in 2016. Rainfall last year across most dairying regions was below average, an impact of the strong El Niño. Dry conditions were compounded by very warm temperatures.

Australian milk flows are up 0.8% season-to-date. However, earlier than normal feed gaps are likely to see slower growth over the closing months of the season.

The Australian dairy consumer market remains mixed across the country. Weaker economic settings in 2016 are likely to impact dairy demand and consumer spending patterns.

Across the drinking milk regions, better local farmgate pricing dynamics are paying dividends. Excluding Queensland, where producers remain under pressure, milk flows in WA, NSW and SA have all increased recently.

What to Watch • Stock levels are high on both the buy and sell side of the market. Some of the stockpile sits in

intervention stores in Europe and markets will be watching how the drawdown is managed.

• Two major issues continue to complicate global markets and will be monitored intensely in 2016. EU milk production on the supply side and Chinese import volumes on the demand side.

Market Outlook

Global Dairy Prices to Remain Subdued forMuch of 2016

1,500

2,500

3,500

4,500

5,500

Jan 2012

Jul 2

012

Jan 2013

Jul 2

013

Jan 2014

Jul 2

014

Jan 2015

Jul 2

015

Jan 2016

USD

/ton

ne F

OB

Butter SMP WMP Cheese

With the world producing more milk than the market could consume, the need to clear dairy product kept global commodity prices low in 2015. These low prices combined with modest consumption growth will see stocks gradually erode and, once the brakes go on production in 1H 2016, we expect prices for Whole Milk Powder to improve to around USD 3,200 by the end of 2016.

Source: USDA, Rabobank, 2016

Global dairy prices

Beef

Rabobank expects cattle prices to remain firm for 2016, as tight supplies and restocker activity in the domestic market balance the drop in US prices experienced in late 2015.

As cattle supplies tighten, following years of liquidation, the question for 2016 will be: How many cattle are left in Australia and who is going to pay for them?

Live cattle prices are expected to remain firm given the competition for supply. On the demand side however, Indonesian wholesale beef prices are already high, suggesting their capacity to drive prices higher is limited. Despite a strong 2015, the Vietnamese market is not expected to grow to the same extent in 2016.

Australian slaughter, production and exports are all expected to drop between 15% and 20% on 2015 levels following three years of strong liquidation, although improved growing conditions should lead to an increase in average slaughter weights.

2015 saw feedlots operating with a record number of cattle on feed. Currency movements and implementation of trade agreements to key markets will determine if these high numbers and demand can be maintained given higher domestic cattle prices.

Currency will play a major role in 2016. A lower Australian dollar not only supports exports to the US when their prices have dropped but also increases competitiveness into other key markets such as Korea and Japan.

What to Watch • Brazil accessing the US market. In 2015 the U.S. Department of Agriculture’s Animal and

Plant Health Inspection Service concluded that it would be safe to import fresh (chilled or frozen) beef from 14 Brazilian states. While imports are yet to be given the green light, a growing production base and depreciating Brazilian real means increased competition for Australian manufacturing beef into the US. It will also give Brazil the opportunity to intensify negotiations and grow trade with other countries.

Market Outlook

250

300

350

400

450

500

550

600

650

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 2016 5-yr monthly avg.

AU

c/kg

cw

tBeef Prices to Remain at Record Levels

After testing AUc 600/kg cwt a couple of times in 2015, the EYCI finally broke through in early January 2016. Given various market pressures it is expected to hover between AUc 500/kg and AUc 600/kg for 2016.

Source: MLA, Rabobank, 2016

Eastern Young Cattle Indicator (EYCI)

Sheepmeat

With stabilising production, a domestic market that will benefit from higher retail beef prices and a diversity of export markets, domestic sheep prices are expected to remain strong through 2016.

For the majority of 2015, the ESTLI remained above the 5-year average and it is expected to follow a similar trend in 2016. With no major disruptions on the horizon, the Australian sheepmeat industry is expected to have another solid year in 2016.

Lamb slaughter in 2015 is expected to be only marginally higher than the 2014 level of 22.2 million, while sheep slaughter dropped in 2015. With sheep inventory levels stabilising around the mid 70 millions and a lower number of sheep slaughtered, lamb production for 2016 is expected to be similar to 2015.

The diversity of export markets and size of the domestic market has enabled the industry to overcome some of the slowdown in demand experienced in China and the European markets.

What to Watch • Decline in oil prices. Lower oil prices have the potential to slow the economies of key export

markets such as the Middle East, which may result in a drop in demand.

• New Zealand production. So far an additional 280,000 (increase of 6%) lambs have been processed in the 2015/16 season compared to 2014/15. With expectations of around 1.5 million fewer lambs on the ground this year, it is likely that there will be a significant reduction in availability once the peak slaughter period concludes.

Market Outlook

tonn

es s

wt

-10,000

-5,000

0

5,000

10,000

15,000

20,000

2011 2012 2013 2014 2015

Middle East US China EU Other

Middle East: a Growing Market

Change in export volumes for selected destinationsSource: DAFF, Rabobank, 2016

The US and the Middle East have been strong export markets for Australian lamb, with exports growing YOY. In addition, the US is also the most valuable market. They have supported the overall growth in exports, and covered the decrease in exports to China. Changes in these markets are likely to have a large impact on lamb exports.

Sugar

Fundamentally the outlook for sugar is looking brighter, with a forecast swing to a deficit in 2015/16 of nearly 5 mt, which would be the first in six seasons. While risks in the market remain, the outlook looks to see prices to Australian growers supported through 2016.

While some volatility returned to the sugar market in late 2015, the active ICE#11 price finished the year almost where it started at USc15.24/lb. Having hit lows of USc 10.39/lb in August, this recovery was significant. This saw the Australian dollar price equivalent lift from the Q3 average of AUD344/t to AUD 449/t in Q4. Greater volatility in the market is to be expected in 2016 as production tightens.

Currency played a significant role in offsetting the fall in the ICE#11 for Australian producers in 2015, and will likely continue to buffer the global price in 2016 with further depreciation of the AUD/USD expected.

As the world’s largest producer and exporter, it is however the BRL/USD cross that is pivotal for the global sugar price and with the forecast continued depreciation of the real to 4.50 over 12 months, gains to ICE#11 will likely be modest.

Locally the Australian sugar industry will continue to digest the recently enacted Queensland Government legislation on sugar marketing. CSA negotiations for the 2017 season will need to take into account the new laws around grower choice and pre-contract arbitration.

What to Watch • One of the key drivers in the recovery of the sugar price in late 2015 was the response of

funds to the growing consensus of the 2015/16 global sugar deficit. Funds built up a record net long position and how they manage this position through 2016 will have a strong influence on prices.

Market Outlook

140

150

160

170

180

190

-25

-15

-5

5

15

25

mill

ion

tonn

es (r

aw v

alue

)

mill

ion

tonn

es (r

aw v

alue

)

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

Surplus/deficit (RHS) Production (LHS) Consumption (LHS)

Global Sugar Supply-and-Demand Balance is Expected to Tighten

Source: FO Licht, Rabobank, 2016

Global sugar supply/demand balance is projected to tighten to a 4.7 million tonne deficit through 2015/16, drawing down record-large stocks.

Sugar supply balance

Cotton

On the basis of tightening fundamentals, the outlook for cotton prices in 2016 points towards some improvement in the ICE#2, edging towards an average of US 68c/lb in Q4. Risks remain for cotton however with soft demand and uncertainty around government support policies limiting the pace of stock erosion.

Given the cap that the high stockpile is placing on prices, currency will likely have the largest impact on prices for Australian growers through 2016. Rabobank has forecast further weakening of the AUD. Taking into account this depreciation, a forecast trading range of USc 65-70c/lb, and above average Australian basis with another small harvest, local prices should stay upward of the AUD500/bale mark.

Global production is set to contract 10 percent YOY in 2015/16, which would see a deficit of 6 million bales, the first since 2009/10. While this is certainly a key driver of any potential improvement in global prices, the more than 100m bales of ending stocks will likely overhang the market for some time yet.

Australian production for 2016 remains limited by water availability and based on planted area has the potential to reach 2.35 million bales. While this below average volume should support Australian basis, the slow moving 2014/15 crop and ultimate mill demand will both impact this. China has been the largest market for Australian cotton for a decade and their retreat from the market requires merchants to find new homes willing to pay a premium.

What to Watch • The biggest conjecture in the market remains around when China will look to start selling

off their stockpile in a big way (auctions have commenced already and have been slow). Whether they sell at market or at a discount, the volume has the potential to significantly dampen global prices.

Market Outlook

0%

20%

40%

60%

80%

100%

120%

0

20,000

40,000

60,000

80,000

100,000

120,000

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15e

2015/16f

thou

sand

480

lb b

ales

Stocks to consumptionChina World stocks outside of China

Cotton Stocks Set to Contract in 2015/16

Although record stocks remain an overhang on the market, stocks outside of China have begun to tighten, leaving the market susceptible to production shocks. Beyond stocks, weak synthetic fibre prices and fragile world economic growth threaten consumption growth.

Source: USDA, Rabobank, 2016

Global cotton stocks

Wool

Wool exporters globally are facing some headwinds through 2016. A falling currency and tightening supply will be critical factors in buffering these challenges to protect returns to Australian wool growers.

As the Australian EMI closed out 2015 20% higher than it had opened the year, expectations turn once again to whether these stronger prices can be sustained. Current prices across all indicators are above long-term averages, some significantly. The spread reaches from 0.5% above average for 16.5 micron, to more than double the 20 year average for merino cardings, which now sit at record highs.

Variation in performance between different wool types will be expected to continue in 2016 as both demand and supply factors weigh in. While the volume of fine wool production is expected to decline marginally, supply remains historically high and the restrained premiums for finer types will be set to continue. This is also underpinned by the relative strength of the broader types.

The official wool production forecast for 2015/16 is for a 7% reduction YOY to 322 mkg from the final 2014/15 estimate. With on farm stocks largely cleared during the price spike in mid-2015, it is likely that there will be a reduction in the amount of wool available for sale. Already reflecting this tighter supply picture are first hand bale offers at auction and weight of wool—tested down 9% and 6% season to date respectively.

What to Watch • Strong demand pushed crossbred and merino cardings prices to record levels in June, both

in AUD and in USD terms. Much of the demand for this type in 2015 was credited to the woolen, processed, double-face outerwear fabric. Northern hemisphere winter orders will start coming in through Autumn and will give an indication of how successful the product was on the shelves and how sustainable prices for those types will be.

Market Outlook

700

800

900

1000

1100

1200

1300

1400

1500

1600

Jul 2010 Jul 2011 Jul 2012 Jul 2013 Jul 2014 Jul 2015

AUD USD AUD 5-yr avg. USD 5-yr avg.

AU

c/kg

Weaker Dollar a Key Factor in Supporting Australian Wool Prices

Source: Bloomberg, Rabobank, 2016

The benchmark Australian EMI averaged AUc 1,191/kg in 2015—4% higher than the 2014 average. While this improvement is positive for local growers, it perhaps does not truly reflect ongoing demand signals as the role of the falling Australian dollar has been significant. The EMI in USD terms averaged USc 895c/kg—5% below 2014 and 17.6% below the 5-year average.

Australian Eastern Market Indicator

Wine

Leading into the harvest, wine company inventories are generally balanced but with stocks of some white commercial wines and red premium wines becoming tight. This should support a rise in the industry-average wine grape price in 2016.

Australian wine sales experienced a more positive year in 2015, aided by the lower Australian dollar and the strong rebound in demand in the Chinese market. At home and abroad, the general market trend for Australian wines continues to favour red wines, at higher price points and lighter wine styles.

Thus far, the 2015-16 growing season looks promising for good yields and quality production, with some notable exceptions, such as the Hunter Valley region. In the absence of any major global supply pressure emanating from 2015, demand-side considerations come to the fore in 2016, suggesting that market conditions in the US and China will play a leading role. While low wage growth and financial market volatility present significant downside risks to global consumption, these two markets fortunately carry strong momentum into 2016.

What to Watch • The continued lack of traction for Australian wines in the US continues to be a major challenge,

making future developments in the greater China wine market all the more consequential. The coming year will increasingly test how resilient wine demand is in China in response to the marked economic slowdown and any future devaluations in the Chinese yuan.

Market Outlook

France

Australia

Italy

Chile Spain

US South Africa

Other

0

10

20

30

40

50

60

-20% 0% 20% 40% 60% 80%

Aver

age

impo

rt p

rice

(CN

Y/l)

Annual volume growth

Australian Wine Looking to Consolidate Strong Gains in China

Source: China Customs c/o OEMV, Rabobank, 2016

Australian wines more than held their own in the Chinese market in 2015. Australian wines enjoy an enviable position in the market, generating strong growth at high average price points in 2015. That said, growth is becoming quite polarised, with strongest growth in bottled wine volumes occurring for wines priced below AUD 2.50 per litre and above AUD 50 per litre.

Note: Size of bubbles represent relative import volume.

Change in China still, bottled wine imports by country of origin, 2015

Fertiliser

Benchmark urea prices begin at their lowest levels in more than 5 years. An inventory build up and further capacity expansions should outweigh any expected improvement in demand and keep a lid on price rises this year.

Weak fundamentals kept some pressure on global phosphate prices through 2015. However, major producers have been managing output to avoid excess supply from depressing prices. Demand in key import markets will resume this year and will likely provide support to prices.

Major potash producers have reduced production rates in reaction to the market signals. However, prices are likely to remain range-bound at current levels for 2016.

What to Watch • With most global benchmark fertiliser prices likely to remain subdued through 2016 (in

USD terms) and global freight rates very weak, the biggest upside risk to local prices will be currency and local demand dynamics.

Market Outlook

150

200

250

300

350

400

450

500

550

Jan 2014

Mar 2014

May 2014

Jul 2

014

Sep 2014

Nov 2014

Jan 2015

Mar 2015

May 2015

Jul 2

015

Sep 2015

Nov 2015

Jan 2016

Urea DAP

USD

/ton

neGlobal Fertiliser Prices Under Pressure

Source: Bloomberg, Rabobank, 2016

Fertiliser prices, particularly urea prices, eased significantly in USD terms throughout 2015. The depreciation in the Australian dollar has meant that the full effect of the fall in price has not been passed on to the Australian producer.

Global fertiliser prices

FX

Pressure on the Australian dollar is expected to be sustained as we move further into 2016. As the US Federal Reserve mulls over the case for further rate hikes, the clear and present danger attached to the slowdown in China’s economy and the downturn in the commodity cycle will leave interest rate cuts on the RBA’s agenda, unimpeded by a benign outlook for wage and consumer price inflation.

Against this backdrop, forecasts indicate AUD/USD steadily easing towards 0.64 on a 12-month view. A key question remains whether this will be enough to sure-up the global competitiveness of Australia’s agricultural exports, with many (especially emerging market) competitors having already experienced significant currency devaluations over recent months.

Looking more broadly across the currency spectrum, China’s inclusion as a global ‘reserve’ currency in late 2015 marked a milestone in their global economic ambitions, but their ability to fashion an orderly transition to a more market-based and stable currency regime remains in question. The prospect of a significant devaluation appears on the horizon, which won’t bode well for already weak commodity prices.

What to Watch • Another broad-based appreciation in the US dollar is anticipated in 2016, but the timing

and extent of this is far from clear owing to uncertainty surrounding US monetary policy. In addition to the direction of Australian interest rates and the terms of trade, the future trajectory of US interest rates will be a large determinant of movements in the value of the Australian dollar in 2016.

Market Outlook

0

1

2

3

4

5

6

Jan 04

Jan 06

Jan 08

Jan 10

Jan 12

Jan 14

Jan 16

Jan 18

Fed.

fund

s ra

te (%

)

Fed. funds futures FOMC forecast Dec 15Fed. funds rate

Uncertainty Surrounding US Monetary Policy Settings

Source: Bloomberg, Rabobank, 2016

As has been the case for some time, financial markets see less immediate upside in US interest rates than the US Federal Reserve, cautioned by mounting questions over global and US economic growth.

Historical and forecast US interest rates

Oil & Freight

While oil markets are volatile in nature, there appears to be limited upside potential to oil prices in the first half of 2016.

The dramatic crash in oil prices has become even more stunning as we enter the new year.

Experts put the collapse down to jitters about the health of the Chinese economy, defiant US production growth, and breakdown of OPEC cohesion.

This all bodes well for consumers, with prices at the bowser expected to remain low at least in the first half of the year. This being said, low oil prices are often associated with lower commodity prices, agricultural commodities included.

The cost of freight remains very cheap. As a lead indicator, the Baltic Dry Index remains cemented to its lowest levels in three decades. With world merchandise trade weighed down, it is difficult to see things improving quickly in 2016.

What to Watch • As always, political tensions in the Middle East have a bearing on global markets.

• There are some expectations that oil markets will begin to stabilise before staging a recovery in 2016, driven by a rebalancing of the market.

Market Outlook

0

20

40

60

80

100

120

140

160

0

10000

20000

30000

40000

50000

60000

70000

Oct 2004

Oct 2005

Oct 2006

Oct 2007

Oct 2008

Oct 2009

Oct 2010

Oct 2011

Oct 2012

Oct 2013

Oct 2014

Oct 2015

PriceStocks

thou

sand

bar

rels

USD

/bar

rel

Large Oil Stocks Weigh on Price

Source: Bloomberg, Rabobank, 2016

Oil stocks - Cushing, Oklahoma

Rabobank Australia Nearest branch call 1300 30 30 33 www.rabobank.com.au

Food & Agribusiness Research and AdvisoryTim Hunt General Manager, Food & Agribusiness Research & Advisory, Australia & New Zealand Tim.Hunt@Rabobank.com

Graydon Chong Senior Analyst - Grains & Oilseeds +61 2 8115 4091 Graydon.Chong@rabobank.com

Georgia Twomey Commodity Analyst +61 2 8115 2446 Georgia.Twomey@rabobank.com

Maddie Armstrong Business Co-ordinator +61 2 8115 4157 Maddie.Armstrong@rabobank.com

Michael Harvey Senior Analyst - Dairy & Farm Inputs +61 3 9940 8407 Michael.Harvey@rabobank.com

Matthew Costello Analyst - Animal Proteins +61 2 8115 2233 Matthew.Costello@rabobank.com

Ben Larkin Agricultural Analyst +61 2 8115 2741 Ben.Larkin@rabobank.com

Angus Gidley-Baird Senior Analyst - Animal Proteins + 61 2 8115 4058 Angus.Gidley-Baird@rabobank.com

Emma Higgins Research Analyst +64 3 961 2908 Emma.Higgins@rabobank.com

Marc Soccio Senior Analyst – Wine, Horticulture & Rural Economics +61 3 9940 8437 Marc.Soccio@rabobank.com

This document is issued by a Rabobank Group member. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by any Rabobank Group member to enter into a transaction. This information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any financial or strategic decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. No Rabobank Group member accepts any liability whatsoever for any direct, indirect, consequential or other loss or damage howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of a Rabobank Group member. By accepting this document you agree to be bound by the foregoing restrictions. All copyright is reserved ©