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Economic growth underpins world agriculture prices

16 November 2007

DESPITE an aggressive appreciation of the Australian dollar dampening world prices during October, the weighted average world price of agricultural commodities remained 17.9% higher than levels this time last year, according to the latest Westpac-NFF Commodity Index.

While growth in biofuels is largely credited as the key driver behind recent rises in world prices for agricultural produce, just as significant are the changing demand patterns stemming from economic growth in developing countries.

"This trend has been particularly prevalent in South-East Asia and China, where economic growth during 2006 averaged an impressive 5.8% and 11.1% respectively,” National Farmers’ Federation (NFF) Vice-President Charles Burke said.

"These strong growth rates are expected to continue at least in the short-to-medium term, leading to a significant increase of disposable incomes across the region.

"Demand is now emerging for a greater diversity of food types in these regions with increasing consumption of animal protein and horticulture, signaling a move away from the traditional cereal based diets.

"Another consequence is a reduction in agricultural land area devoted to grain production, as soil degradation increases due to rapid urbanization in these developing countries. The rising demand for meat and dairy products is, in turn, putting pressure on fodder grain stocks, just as the cropping land is being lost."

Justin Smirk, Westpac senior economist, said strong commodity prices were a longer-run structural trend driving higher demand for Australian grain crops.

"While the current growth in demand for biofuel is being driven more by government policy rather that economic fundamentals, the rising incomes in the developing world are a long-run trend.

"So while there is the potential for the former Soviet Union states, and South America, to step up to the plate and increase grain production, we are looking at a much stronger growth in the demand for grains than we have experienced for a number of decades." Mr Smirk said.

Compared with September 2007 levels, global prices in October increased for Barley (1.6%) and Wool (4.0%). Canola (-0.5%), Wheat (-5.8%), Beef (-4.2%), Cotton (-1.8%), Sugar (-3.8%) and Dairy (-7.5%) all experienced a decrease in price from previous month levels, largely due to the strengthening Australian dollar. The overall weighted index decreased by 3.6% in Australian dollar terms during October, yet remains 17.9% above year ago levels.

[ENDS]

The Westpac-NFF Commodity Index is weighted according to the value of Australian agricultural exports and includes only rural commodities – unlike other price indices that are overshadowed by oil, mineral and energy prices. It provides daily movements based on prices of Australia’s eight key farm exports – wheat, barley, beef, wool, cotton, sugar, dairy and canola – in both $US and $A.

Media Enquiries: NFF: Emma Keogh on (02) 6273 3855 or 0408 448 250
Westpac: Sean Glover on (02) 8254 8408

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