Agricultural commodity prices crashing

24 Sep, 2014 06:00 AM
The weakness in agricultural commodities is another weight on the economy, and it has similar roots

THE mining commodity price squeeze was making headlines again on Tuesday as iron ore fell to a five year low and BHP Billiton announced that 700 Bowen Basin coal mining workers would go, but the miners are not alone in feeling the pressure.

The price of wheat, Australia's sixth biggest export, has fallen by about 31 per cent since May, and is at a four-year low. The price of corn, a key industrial food and drink-making raw material, has fallen by 28pc since mid August, and is also at four-year lows. The price of sugar has fallen by 25pc since mid-year, and soybean prices have fallen by 39pc.

Agricultural commodity price declines don't feed into Australia's economy as heavily as our biggest mineral exports. We exported $6.1 billion worth of wheat last year and $69.5 billion worth or iron ore, for example. The 41pc iron ore price slide from last year's average of $135 a tonne to $US79.80 a tonne on Tuesday and an average of $US105 a tonne this year cuts export income by about $US15 billion, more than twice last year's wheat export receipts.

The weakness in agricultural commodities is another weight on the economy, though, and it has similar roots.

Economic growth and rising living standards in Asia in particular create a long-term demand growth scenario for agricultural producers that is similar to mining commodities, but all commodities are affected by changes in supply and demand, and agricultural production can be volatile: the weather is crucial but also anyone's guess.

Farmers can also respond more quickly than miners to price moves by changing what they grow, and the price weakness in key agricultural commodities follows a rapid supply-side response to booming prices in 2013.

Growing conditions have been favourable in Australia and overseas, and the wheat price weakness is tied to booming US and European summer production, for example. Strong US production has driven corn and soybean prices down, and sugar's price strength is linked to strong South American production despite dry conditions.

Prices are not down to disastrous levels, but the price shifts and the forces behind them are impacting on producers and the companies that supply them.

Nufarm strategy pays off

The 7.4pc rise in underlying earnings before interest and tax to $200.6 million that Australia's Nufarm group reported on Tuesday included, for example, a 51pc, $21.5 million slide in earnings on the sale of crop protection chemicals in North America caused by depressed demand during an usually cold US winter season, and a 76pc, $31 million rise in crop-protection earnings in South America, including Brazil.

The group has taken the recent crop price weakness into account by issuing more downbeat guidance for high single-digit earnings growth in South America in 2014-15. It knows that if prices stay down, plantings and demand for its products in that market will fall (US production is subsidised, and less price-sensitive).

Nufarm's attempts to protect the business as far as possible from seasonal side-swipes appears to be getting traction, though, and investors rewarded the group by pushing its shares up by 12.2pc, or 49c, to $4.52 on Tuesday.

Nufarm's shares have been in the doghouse since 2010, when booming Chinese production effectively commoditised its biggest weed-killing product, glyphosate. Its shares were trading above $17 in 2008, and were still above $10 when 2010 began. They bottomed at $3.25 in July of that year, and have averaged $4.72 since then.

It is beginning to show that it is controlling its inventories more tightly, however, and after building up its business in South America and Brazil in particular, it has a better geographic spread, and a better hedge against bad weather, which is impossible to avoid but also impossible to predict.

The group generates 94pc of its sales from crop-protection products including weed-killers, and glyphosate is still a key product, accounting for just over 30pc of revenue. Nufarm lost the distribution rights to one of the best-known glyphosate brands, Monsanto's RoundUp last year but continues to sell the chemical under other brand names.

In 2014, North America and Europe accounted for 21pc and 22pc respectively of crop-protection sales. Australia and New Zealand accounted for 24pc of crop-protection sales. South America accounted for 27pc, establishing itself as another southern hemisphere sales centre after two years of solid growth.

Nufarm is also developing new higher-margin lines, including a seed technology business that boosted earnings before interest and tax (EBIT) from $32.4 million to $37.2 million in 2014 and generated an EBIT margin of 37.2c in the dollar of sales.

Chief executive Doug Rathbone says Nufarm is still on a restructuring journey. A rationalisation of Australian production capacity that is absolutely essential, for example, is not yet complete. But, based on Tuesday's trade, there are at least some investors who believe now that Rathbone and Nufarm are going to get the restructuring job done.

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24/09/2014 6:33:57 AM

We have been dumbed down to be low cost commodity producers.....for the life of me I cant understand the Australian psyche with this. The price of the end commodity hasnt come on Australia lets get a bit of get up and go into things and stop selling just commodity
24/09/2014 6:40:26 AM

theres something big going down globally. not only are the agriculturals coming down, it is all commodities. major deflationary card being played by the worlds central bank stooges for their globalist masters. this is the bit where the elite come in and pick out the bits they want for cents in the dollar. it would seem likely that another 'debt crisis' is about to be unleashed on a farm near you ... unfortunately! australian housing is set to crash big time
24/09/2014 8:02:00 AM

so what will it be consolidated? will we see continued deflation, or a sudden turnaround to hyperinflation?
24/09/2014 8:23:12 AM

First deflation, then highly possibly hyperinflation or ... war .... or both. Problem is too many people in the world and printed money creating an illusion the back paddock can carry them.
24/09/2014 9:41:05 AM

I think war is here. what will wheat be worth in a hyperinflated economy and will people have money to pay for it?
24/09/2014 1:22:58 PM

You could have $1000 wheat in Egypt and $5 wheat in Australia if war breaks out and global trade breaks down.
24/09/2014 2:05:43 PM

The decline in commodity prices makes a huge impact on farmers bottom lines because it hits the whole crop (gross return) not just the profit margin, which is very narrow ar it is, thus taking away any profit. I bet no worker would take a cut of 20% on their before tax wage every year without wingeing.
Jock Munro
24/09/2014 2:50:43 PM

We wheat growers will suffer further with the loss of our national pool-experts are saying that we are $40.00 per tonne worse off so far this year with out the hedging program that we once had through AWB Ltd. The premiums that we were paid are also drying up as we have become just another player rather than the premium supplier that we once were. Rudd and the Liberals have a lot to answer for.
Western QLD
24/09/2014 5:45:14 PM

One minute we are all going to starve and the next minute we have a mass over supply. Marketing failure again. Story of all Australian agricultural products. Global population growth just a myth. Under no circumstances would any producer double production as you would only get half price for your product. What we do is produce less and get more price. Lets get smart and not produce food for the rest of the world for nothing.
NSW Farmer
24/09/2014 9:42:37 PM

damn straight jock! until we get another income equalisation scheme running in this country, NSW will continue to fall behind the rest of australia & a debt bomb is in view. it is not fair the premiums head to WA & SA.we are all in this together. you are a good voice for the battler out there
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