In good news for Australian farmers, agricultural prices are expected to remain historically high for the time being, but 2012 will also see price volatility for many commodities.

National Australia Bank (NAB) Agribusiness expects agricultural prices to ease in 2012, but will not revert to historically average levels until early to mid-2013, according to the NAB January Rural Commodities Wrap.

Khan Horne, NAB Agribusiness General Manager, said the NAB Rural Commodities Price Index hit record levels in 2011 and averaged 17 per cent higher than the decade long average.

"It took around 10 months for the Index to break through the average and reach the record highs in 2011, but based on current production and macroeconomic projections, it will take around two years to return to more ‘normal' levels," said Mr Horne.

"A massive supply response is certainly underway globally, but rising demand and consumption are expected to leave stocks for some commodities tight throughout 2012," he said.

The outlook for 2012 also incorporates elements of risk including weather conditions both in Australia and other exporting nations, and the weakening economic outlook in Europe.

"The main risk on the macroeconomic front is if conditions in Europe spill over to the rest of the world and impact demand, particularly the big developing economies which have generally provided demand-side support for Australian commodities," said Mr Horne.

For the Australian farm sector, the story for most commodities is likely to be weaker prices in 2012 than in 2011, eroded somewhat by a strengthening AUD in the near term.

"Nonetheless, prices are expected to remain high by historical standards, while incomes are likely to be supported by fairly low input costs relative to competitors, strong water allocations, near full dam storage levels and ample feed and fodder availability.

"As such, rising production should offset falling prices and see a gain in farm GDP overall," said Mr Horne.

The report examined the 2012 outlook for a number of key commodities:

• Grain prices are expected to weaken on rising stocks, but the downside may be limited by the influence of outside markets.
• Cotton prices are expected to fall but be supported by ongoing Chinese buying.
• For wool, demand conditions are weakening but Chinese retail sales and tight global supply will provide some support to prices.
• The Eastern Young Cattle Indicator is expected to ease; it will be supported by contracting global beef supplies making our exports more competitive but limited by the rising production outlook in Australia.
• Lamb prices are anticipated to continue to weaken compared to 2011 but to continue to be supported by strong export demand.
• Prices for sugar are expected to be weaker than in 2011, weighed down by strong production responses, particularly in Thailand and India.
• Dairy prices are expected to ease with solid production levels in Oceania hitting the global market, but prices are likely to be supported by ongoing Chinese milk powder demand.

The Commodities Wrap is available from NAB Agribusiness Bankers or via the website at www.nab.com.au/agrireports.

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