Bumper crop despite floods; Construction slumps

ABARE Crop Report; Performance of Construction

• The Government’s commodity forecaster has lifted its crop forecasts. ABARES has lifted its forecast for the 2010/11 winter crop by 6.2 per cent. Despite dry conditions in the west and floods in the east, ABARES tips a record wheat crop with production up 22 per cent on a year ago.
• Construction is contracting, joining the services and manufacturing sectors. All the key sectors in the economy are estimated to be going backwards at present. The Performance of Construction index fell by 1.8 points to 42.2 in November, below the 50 reading that separates expansion from contraction.

What does it all mean?

• Despite the over-abundance of rain in recent weeks, the Government’s chief commodity forecaster still believes that Australia will produce a record wheat crop this year. Unfortunately quality will be downgraded, affecting returns to farmers, but in a macro perspective the bumper crop is positive for rural Australia. The key issue for many farmers over the next few weeks, however, is for conditions to become dry enough to get the crop off.
• As always, conditions are far from uniform. Grain producers in the east are benefiting from the rain, but in the west the lack of rain means that the harvest could be half that of a year ago.
• Certainly the outlook for the summer crop is decidedly positive with cotton and rice farmers to be amongst the key beneficiaries of the big wet.
• Overall there will be more money in the rural economy over the coming year, courtesy of the breaking of the drought. Drought in the west and floods in the east mean that not all will share the gains. But in aggregate, income levels will be higher, boosting the outlook for retail, manufacturing and services businesses in regional centres.
• The construction sector is facing challenging conditions and all areas of government are seemingly showing no interest in addressing fundamental issues. Planning, zoning, regulation and costs are all key issues for builders and construction companies at present and serving as road blocks to higher activity levels. The Performance of Construction sector has only produced a handful of positive readings over the past two years and conditions are getting worse, not better.

What do the figures show?

ABARES Crop Report:

• The Australian Government’s commodity forecaster, ABARES, has lifted its forecast for 2010/11 winter crop production by 6.2 per cent to 43.1 million tonnes (Mt). The crop is now seen 21.7 per cent higher than 2009/10. Downgrades were applied to Queensland and Western Australian production and upgrades to other states.
• ABARES has also lifted its forecast for summer crop production by 21.6 per cent to 4.6Mt. Production of the summer crop in 2010/11 is expected to be the highest in nine years. Cotton production is tipped to soar by 130 per cent with rice production almost four times higher than the previous year at 802Kt.
• ABARES expects that wheat production will hit a record high of 26.8Mt in 2010/11, up 22.4 per cent on the previous year. Barley production is estimated to rise by 24.1 per cent to 9.8 million tonnes and canola production is estimated at 2.0 million tonnes, 6.6 per cent higher than last year.
• Exports of coarse grains in 2010/11 are tipped to rise by 23 per cent to 6.5Mt with wheat exports tipped to rise 8.5 per cent to 16Mt.

Performance of Construction index:

• The Performance of Construction index fell by 1.8 points to 42.2 in November. Any reading below 50 indicates that the sector is going backwards.
• All key sectors had activity readings below 50 with apartments at the lowest levels in 16 months. Only engineering improved in November but the reading of 39.4 was still well below the 50 line.
• Profitability is under significant pressure with selling prices sliding 11.7 points to 43.4 and input prices down only 0.9 points to 75.4.

What is the importance of the economic data?

• ABARE releases its Crop Report four times a year. The report contains the latest estimates of crop conditions, yields as well as expected exports. The information is useful in gauging the health of the rural sector.
• The Performance of Construction index is released monthly and provides a guide to operating conditions across the sector including residential, commercial and engineering construction.

What are the implications for interest rates and investors?

• The Reserve Bank has plenty to digest at present – droughts, floods, a mining boom and the conservative mindset of consumers and businesses. Now is certainly the time for interest rate stability.
• Our CBA equity analysts indicate that main beneficiary of the excess rainfall is Ridley Corporation (RIC), “which will now have an abundant supply of feed quality grain for milling yet global grain prices remain strong so RIC’s milling margins do not appear under pressure”. Ridley Corp is the preferred stock of CBA Equity Research in the Food & Agribusiness sector.
• Of other stocks in the sector the analysts note:
  • “GrainCorp (GNC) now appears likely to have FY11 grain receivals around the lower end of guidance (10- 13Mt).
  • PrimeAg (PAG) may be affected by flooding in the Emerald region but has good conditions for its cotton crop.
  • Goodman Fielder (GFF) has started buying its milling wheat (for flour milling by Allied Mills) for the second half of 2011 and the 2012 financial year and will face materially higher input costs as the spread between milling wheat and feed quality wheat widens.”