Trends. Westpac Regional Economic Report Contents

Overview 3

Macro overview Grains 4 Australian economic recovery on track 6 Australian interest rate outlook 8 Australian dollar outlook 10

Commodity outlooks Beef and dairy 12 Grains and oilseeds 14 Sugar and cotton 16 Sheep and wool 18

Summary forecast tables Australia – financial 20 Australia – economic 21 Commodity prices 22 World growth forecasts 23

The Westpac Regional Economic Report is a quarterly publication

Editors: Neil Burgess Senior Commodities Analyst, Agribusiness Commercial & Agribusiness Level 2, 275 Kent Street, Sydney, NSW 2000 Telephone: (61 2) 8253 7912 email: [email protected]

Lydia Harvey Graduate Commercial & Agribusiness Commercial & Agribusiness

This issue was finalised on 20 August 2010

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Overview

What an interesting few months it has been. Improved climatic conditions continue over the eastern states providing a continued boost to cropping and livestock production. Unfortunately, Western Australia has failed to experience the soaking rains that many others in agriculture have benefited from. Whilst some rain events have taken place, it has been well below what is required and concerns remain over the potential of the WA wheat crop.

Prices in the grains markets had been subdued due to adequate global supply, however, poor weather in Europe and the former Soviet Union (FSU) together with wheat export bans from Russia have caused prices to gain momentum. This has flowed through to other grains as they ride on the coat-tails of wheat.

Not only have we seen movement in the commodity prices, but also movement in the corporate grains environment. On August 14th The proposed merger between AWB and Graincorp was challenged by an offer for the takeover of AWB from the Calgary based Agrium. The grains industry in Australia is a particularly interesting place to be at this moment in time.

Livestock production has benefitted greatly from the improved conditions resulting in better pasture and animal condition. Prices for cattle, sheep and lambs remain robust and well above seasonal averages, with lambs reaching the almost mythical price of $200.

Meat exports remain under pressure due to the strong Australian dollar and subdued demand in some overseas markets.

In this quarter’s edition, the feature is on the wheat market and its recent activity.

Australian wheat growers have experienced some tough conditions with respect to weather and price. From the highs of the 2008 season, wheat prices have headed south as global supplies grew well ahead of consumption. The arrival of the GFC pushed prices lower as ample global supplies were readily available. From there, whilst remaining in a fairly narrow price band there has been more pressure to head down than up.

On the domestic front, after prolonged periods of poor conditions, welcome rains have given the Eastern grain growers a significant boost. Improved conditions have moisture profiles ideal during the planting season, and continued rain through the growing season has provided ideal conditions. However, in Western Australia, conditions remain tough as rain events have been few and far between and the season rests on a knife edge.

Furthermore, extreme weather conditions in Europe and Former Soviet Union (FSU), a wet start to the Canadian plantings and a Russian wheat export ban to the end of the year and within the space of a month, the wheat price was trading at almost 100% higher.

However, for the Australian wheat grower, such volatility within the market can bring forth opportunity.

Westpac commodity price index Farm output

index index $bn, qtr $bn, qtr 240 240 8 8 Sources: Bloomberg, MLA, Westpac Economics

7 Farm GDP (lhs) 7 190 AUD index USD index 190

6 6 140 140 5 5

90 90 4 4

Sources: ABS, Westpac Economics An index of global agricultural commodity prices 40 40 3 3 Feb-85 Feb-90 Feb-95 Feb-00 Feb-05 Feb-10 Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10

3 Volume Three 2010 Regional Economic Report

Grains

Wheat: volatility equals opportunity. Nothing new. After a prolonged period of meandering prices on the back of large surpluses worldwide, suddenly, wheat prices have climbed out of the doldrums and onto the rollercoaster and what a ride it has been so far.

Prices have remained subdued for a considerable time due to readily available supplies of wheat, with no news on the horizon to shake the market. The weather in Australia then improved, rain had arrived and the planting season was off to a great start, in most places. Eastern states were experiencing some of the best starts to the planting season for a number of years; however, Western Australia was still experiencing overly dry conditions.

Weather concerns. On a global scene, the US summer crop experienced favourable conditions. Early June saw wheat contracts touch a low of US425.5¢ per bushel. Then, from a pricing perspective, the situation started to improve. Canada was experiencing an overly wet start to the growing season and concerns for yield reductions came into play. Weather in Europe was at the extreme with floods in some parts and hot dry conditions in others, again with yield reduction implications. Prices started to rise on the back of uncertainty.

Prices double. With news coming out of the former Soviet Union (FSU) that extreme drought conditions were affecting wheat crops and expected yields, the impetus for price elevation was delivered. The FSU announced that an export ban on wheat shipments was to be made effective from August 15th. As the market grappled with the announcement, the potential scenario of ‘force majeure’ on sales contracts and the implications of the reduced availability of FSU wheat was realised. Wheat prices climbed significantly higher, reaching a high of US841¢ per bushel, almost double from the two months previous.

Since the export ban announcement and the subsequent spike in prices, the markets have absorbed further information and a market correction has been seen. As a result wheat prices have retraced some 20% of their value from the high on 6th of August. However, prices remain at elevated levels when compared with recent historical prices.

Stocks still robust. Market estimates are that over 15 million tonnes of wheat has been removed from production, the bulk of this from the FSU (13 million tonnes). Offsetting this reduction on the production side is an estimated fall in consumption of just over 2 million tonnes. Despite this fall, the estimated global wheat production of just over 645 million tonnes is still the third largest on record and results in the global estimate for the closing wheat stocks for August at approximately 174.7 million tonnes. As August progresses and harvests in the FSU and Europe are completed, a much clearer picture of the true volumes will become available.

While there are still some lingering doubts about the Canadian crop, few concerns are evident for the US crop at this stage, as production estimates have been increased again; however, there is still time for nature to have the last laugh.

Despite production uncertainty from some regions, overall, estimated crop production will still mean that global wheat stocks still remain robust.

East–wide devide. From an Australian perspective, wheat production is distinctly divided between east and west. The eastern states have received significant rainfall prior to planting and during the growing season. This has resulted in a very positive start and outlook to the season. Western Australia on the other hand has missed many of the significant rain events. While recent rains have helped the developing wheat crop, significantly more rain is required to see the crop through to harvest.

So, what does this market volatility mean for Australian wheat growers?

Opportunities presented. With volatility comes opportunity. Wheat prices have languished around the AUD200/ tonne level for a significant period of time, however, recent events have seen prices improve significantly. As a result, now is the time for farmers to review their production estimates and their risk mitigation strategies and to start asking themselves the difficult questions. With price improvements, there may well be opportunities to lock in improved wheat prices for a percentage of their estimated crop.

4 Regional Economic Report Volume Three 2010

Grains

Strategy required. While it is acknowledged that production and marketing strategies will be different for each individual producer, reviewing and revising strategies enables farmers to stay one step ahead of the volatility game.

Prediction is difficult. The next step is to try and project forward into the next growing season, to consider the production potential and the effects on global supplies. This of course is a very difficult task to predict accurately as there are so many variables. However, there are a number of issues to consider. While the FSU has experienced drought conditions for a large part of their 2010 growing season, information is circulating that rain events have started to occur. While this is too late to add any value to this years harvest, it does have the potential to improve soil moisture profiles ready for the following year’s season. The poor wet weather experienced in Europe has the potential to move east into the FSU wheat belt and deliver added moisture to soil profiles. Take into consideration the US and Canadian production environments and the picture gets very complicated. While there is considerable time to pass before planting decisions are made, it does provide the market with some food for thought.

Price driven planting. Another issue to consider is that if planting conditions are suitable, will the higher prices experienced recently; turn out to be a sufficient catalyst for increased plantings on a global basis. After the last historical price spike, global plantings increased. However, for this price spike, the volume position of global supply is considerably better. Will an increase in global plantings have the effect of adding to the global supply at a far greater rate than consumption? Fortunately, there is some time to pass before planting decisions have to be made, but ensuring there is sufficient wheat for all domestic uses without undue price increases is a high priority for governments within the FSU.

Global wheat supply drives down prices Global Wheat Production and Exports

US¢/bu % US$/t Million/t 40 350 800 stocks to use (rhs) Sources: ABARE, Westpac Economics Global Exports (rhs) Sources: ABARE, Westpac Economics 1000 price (lhs) 300 Global Production (rhs) 700 35 CBOT price (lhs) 600 250 800 30 500 200 25 400 600 150 300 20 100 400 200 15 50 100 200 10 0 0 1983-84 1988-89 1993-94 1998-99 2003-04 2008-09 1999-00 2001-02 2003-04 2005-06 2007-08 2009/10(f)

5 Volume Three 2010 Regional Economic Report

Australian economic recovery on track

The economic outlook for In the previous Regional Economic Report we described the outlook for the Australian Australia is positive ... economy as upbeat. We remain of that view, although the global recovery remains uneven and uncertainties persist. Our central case forecast for world growth in 2011 is a healthy 4.0% but it’s critical to keep a watching brief on imbalances in the US and Europe, which may yet trigger a downside surprise to global conditions.

... growth is expected to be The Australian economy expanded by a solid but unspectacular 2.7% over the year to March a little above trend in 2010 2010. Still, that’s a marked improvement from a year ago, when growth was a tepid 0.7%. Our and 2011 .... forecast is for GDP growth to strengthen to 3.5% through 2010 and to repeat that through 2011. That’s a touch above trend, which is judged to be around 3¼%.

... but global uncertainties To date, public sector demand has played a major supporting role. Notable is the Federal persist and remain a Government’s building program, with $14.7bn for schools and $6.6bn for public housing. downside risk. Public investment, which represented just 5% of the economy in mid-2009, has spiked, rising 43% in the year to March. In dollar terms, public investment in aggregate over the last three quarters was $10bn over and above the annualised level of last June quarter. To place that in perspective, domestic demand increased by 4.4% over the last year of which 2.8ppts was contributed by overall public spending. From here, public investment is set to decline as stimulus related projects are completed.

Housing construction and Most importantly, a transition to a self-sustaining recovery is underway, with a rotation mining investment to take towards private sector demand. A strong burst of housing construction and an upswing in the running. mining sector infrastructure projects will be key drivers during 2010 and into 2011. New private residential construction is set to jump. Starts rebounded by 27% over the second half of 2009 but work done has fallen by 4% over the three quarters to 2010Q1. It's time for an overdue upswing. As for private infrastructure investment, construction of the $43bn Gorgon project has recently commenced. We’re forecasting total private sector infrastructure investment to rise by 30% over the year ahead, adding 1ppt to GDP growth. All up, we expect total business investment to add more than 2ppts to growth over the year, a sharp turnaround from a 0.4ppt subtraction over the prior four quarters.

Rates on hold – for now. On the interest rate front, the Reserve Bank has held rates steady for the three months to August. We now expect the RBA to remain on the sidelines for the remainder of 2010, before the interest rate tightening cycle resumes during 2011. In major news on the domestic economy, underlying inflation surprised on the low side in the June quarter. That saw annual underlying inflation decline to be back within the 2%–to–3% target band for the first time since September 2007.

The housing sector is responding to earlier interest rate rises. The RBA smartly normalised rates, hiking six times over the eight months from last October to May, taking the cash rate from a low of 3.00% to 4.50%. Established house prices have shown little growth over the past few months after a year of strong gains. Housing loan approvals are well off their highs, pointing to a moderation in the housing construction upswing during 2011.

Cautious consumers may Consumers have generally remained cautious in their spending during 2009 and so far in loosen the purse strings. 2010. Real retail sales increased by 1.3% only over the year to June, with retailers forced to discount heavily. That’s not even keeping pace with population growth, which is currently 2.0%. The good news is that the consumer mood took a marked turn for the better over July and August as interest rates were held steady and as global share markets staged a fight back. The Westpac–MI Consumer Sentiment Index rebounded from just 102 in June to 119 in August. Moreover, the sub-index “time to buy major household items” strengthened to its highest level since 2007.

Business, a loss of While the consumer mood has improved, business confidence had yet to rebound as at July. confidence, but terms of A lack of business confidence is a concern and poses a downside risk to the non-resource trade surge a major boost. investment outlook. However, we expect this to prove temporary and for business to take their lead from consumers, particularly if household spending begins to strengthen. Moreover, while the US and Europe continue to struggle in the wake of the North Atlantic banking crisis, Australia is benefitting from China’s strong demand for commodities. The terms of trade is likely to jump by around 20% this year on a rebound in iron ore and coal prices. This, Commodity Boom Mark II, is both a plus (boosting national incomes) and a challenge (with inflation pressures likely to re-emerge in 2011 – and hence, in time, placing upward pressure on interest rates and the Australian dollar). 6 Regional Economic Report Volume Three 2010

Australian economic recovery on track

Chart 1. Chart 2.

Australian economic conditions Terms of trade: moves higher

% ann % ann index index 10 14 140 140 forecasts to Sources: ABS; Westpac Economics domestic demand GDP public demand * 12 end 2012 8 private demand 10 120 120 terms of trade, goods & services 6 +8% 8 Last 3 qtrs 100 100 4 6 4 2 80 80 2 0 0 60 +49% 60 above avg -2 * smoothed -2 Sources: ABS, Westpac Economics -4 -4 40 40 Mar-90 Mar-98 Mar-06 Mar-90 Mar-98 Mar-06 Mar-60 Mar-70 Mar-80 Mar-90 Mar-00 Mar-10

Chart 3. Chart 4.

Business & Consumer confidence diverge Housing finance: the shifting mix

net bal. net bal. AUDbn/mth Value of housing finance AUDbn/mth 140 40 12 12 Sources: Westpac MI, NAB, Westpac Economics Latest: Sources: ABS, Westpac Economics 130 Business, July month 30 upgraders, ex-refinancing Consumer, Aug month 10 10 -10% 120 20 investor finance 8 FHBs 8 110 10 100 0 6 +29% 6 90 -10 4 -59% 4 80 Consumer (lhs) Business (rhs) -20 2 2 70 Qtrly -30 60 -40 0 0 Sep-90 Sep-94 Sep-98 Sep-02 Sep-06 Sep-10 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10

Chart 5. Chart 6.

Dwelling investment vs approvals & starts Infrastructure boosted by Gorgon

ann% ann% $bn Private sector $bn 80 60 80 80 Approvals to March: +51% Sources: ABS, Westpac Economics 60 Starts to 2009 Q4: +13.7% New dwelling inv f’cast Jun-11: +19% 40 Work pipeline: +137% in 2009Q4 40 60 * Note: commencements 2qtr avg, 60 20 ex Pluto $11bn 2007Q3 & 20 ex Gorgon $42bn 2009Q4 0 0 40 40 commencements * -20 -20 monthly approvals (lhs)* pipeline of work outstanding -40 20 20 starts (real $, rhs)* -40 -60 Sources: ABS, new dwelling invesment (rhs) Westpac Economics *lagged six months -80 -60 0 0 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts. 7 Volume Three 2010 Regional Economic Report

Australian interest rate outlook

Meek Q2 inflation ... We were staggered to see the print for the underlying June quarter consumer price index at just 0.5%. Our forecast had been 0.9% and most market estimates were around that level. We expect the Reserve Bank was equally surprised since the Governor’s recent statements were preparing the market for a high number. Much to the Bank’s (and presumably) the Government’s relief that number allowed it to maintain its forecast that underlying inflation would print 2.75% for 2010 and remain at that level in 2011. A read of 0.9% would have pushed the read on inflation in the first half of the year up to 1.7% and it would not have been credible, given that the economy is growing around a trend pace, to expect that the pace would slow to 1% in the second half without further policy tightening.

However, with an actual outcome of 0.5%, the Bank was able to hold rates steady on August 3.

... kept the RBA on hold in Rates now appear to be on hold for the remainder of 2010 although if there is a move it will August. be up rather than down in response to a return to a very high inflation print in the September quarter and a faster than expected tightening of the labour market. We saw some evidence that softer demand partly explained the low inflation read in the June quarter. This was related to goods and services discounting including a record fall in the cost of domestic holidays. That trend is probably sufficient to contain the September quarter read to a level (0.6% to 0.8%) that will be sufficiently low to allow the Bank to stick with its inflation forecasts. However the gradual tightening of the labour market and the boost to demand from six months of unchanged and relatively low rates are likely to set the scene for a resumption of the tightening cycle in 2011. Note that the unemployment rate is set to fall further while it currently sits only 0.1% above the 5% which is the Bank’s assessment of “full” employment.

Hikes should resume in We expect a further 75bps of rate hikes in 2011. That will see rates nearing their cycle peak. 2011 ... That series of hikes is likely to push household debt servicing ratios back to around the levels which prevailed in early 2008. Housing and consumer demand are likely to slow sufficiently for the market to expect that rates will be near their peak for this cycle.

The Statement on Monetary Policy, which the Reserve Bank released on August 6, appears to support our view that rates will start to rise again in 2011.

... as above trend growth ... As we expected, the Bank, unlike in most previous Statements, did not change its growth and inflation forecasts. It maintained its view that growth in 2011 and 2012 would be well above trend at 3¾% to 4% and that inflation would be heading to 3% from the second half of 2011. There appeared to be an undeniable flavour of a Bank that expects to eventually have to raise rates further. This came out in a number of instances. Firstly, there was a quite intentional change in the wording of the key final paragraph of the Introduction section. In the Governor’s Statement after the Tuesday Board meeting, the cash rate was described as “appropriate”. In Friday’s Statement on Monetary Policy, it was described as “appropriate at this stage” – an apparent intention to allay any market assumptions that it is complacent.

The detailed analysis emphasised the Bank’s concern with the limited spare capacity in the economy: “the economy is likely to be pushing up against supply-side constraints over time”.

... pushes the economy The Bank maintained its above-trend growth forecasts for 2011 and 2012 and reflects that up ... in the inflation forecasts. The low point in inflation will be reached in 2010 and 2011, before pushing up to 3% (the top of the target band) in the first half of 2012, which is forecast to be another year of above-trend growth. From a base of 3% inflation and significantly above-trend growth, the only reasonable conclusion is that inflation is expected to exceed 3% in 2013. Therefore, the Bank is indicating that the balance of risks lies clearly to the upside of the target range. Our interpretation of this is that the Bank broadly agrees with our view that it will be necessary to resume the tightening cycle early in 2011.

... against supply As the data unfolds through the reminder of the year most attention will be on inflation; constraints. labour market; wages and commodity prices. The Bank expects a gradual firming of the labour market; moderate increases in wages and commodity prices holding near current levels. We broadly agree but expect that with rates now on hold upside risks prevail.

8 Regional Economic Report Volume Three 2010

Australian interest rate outlook

Chart 1. Chart 2.

RBA removes stimulus RBA cash & 3yr swaps

% % % % 12 12 9 9 Sources: RBA, Westpac Economics 3 yr swaps 8 -0.57bps 8 10 Cash forecast 10 Cash rate 3yr swap since end April to end 2011 7 7 8 8 6 6 6 5.25% 6 5 5 4 4 RBA cash rate 4.50% 4 4 2 mortgage rate, variable 2 weekly average mortgage rate, 3yr fixed 3 3 Sources: RBA, Factset, Westpac Economics updated 19 Aug 0 0 2 2 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Aug-01 Aug-03 Jul-05 Jul-07 Jul-09

Chart 3. Chart 4.

CPI core inflation returns to the band Credit: early stages of an upswing

%yr %yr 3 mth % chg, annl’sd 3 mth % chg, annl’sd 5 5 32 32 Sources: RBA, Westpac Economics Core inflation: within the 2%-3% target band 24 24 4 for the first time since Sep-07 4 core inflation 16 16

3 3 8 8

0 0 2 2 -8 Total housing business -8 Sources: ABS, RBA, Westpac Economics 1 1 -16 -16 Jun-94 Jun-98 Jun-02 Jun-06 Jun-10 Jun-90 Jun-94 Jun-98 Jun-02 Jun-06 Jun-10

Chart 5. Chart 6.

Australian labour gap vs wages growth Labour market tightens on jobs burst

WPI %yr gap ppts % 6mth %chg, annls’d 5.0 30 12 f/c to end-2012 Sources: ABS, Westpac Economics Sources: ABS, Westpac Economics 11 6 4.5 20 10 4 9 4.0 10 8 2 3.5 0 7 0 6 3.0 -10 5 -2 Labour gap ppts - adv 2 qtrs (rhs) 4 unemployment rate (lhs) 2.5 -20 -4 Wage Price Index %yr (lhs) 3 employment * (rhs) * smoothed 2.0 -30 2 -6 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13 May-89 May-94 May-99 May-04 May-09

Australian dollar outlook

The currency had a good Over July and into August the AUD has essentially seen one way traffic rising from around month ... 87.5¢ to 91.5¢ which is around the high point for the period.

Recall that as recently as mid June the AUD had touched 81¢ and there were plenty of calls for AUD to go below 80¢. We have retained the fairly boring but reasonably reliable view that AUD will remain in the 88¢ to 92¢ range over the remainder of the year.

... despite a pause by the As noted overleaf we have revised down our profile for Australian interest rates over the RBA. course of 2010. With the June quarter CPI printing (in underlying terms) 0.5% compared to our “bold” forecast of 0.9% (market forecasts edged up over the course of the month to be around that level on the day of the release) we now expect that the RBA will be on hold for the rest of the year. However aggregate capacity is still tight and the RBA expects growth to accelerate in 2011. With inflation bottoming out at 2¾% in 2010 rates are likely to be rising through 2011. By the time of the release of the CPI markets were still only priced for about a 30% probability of an August rate hike (amazingly complacent from our perspective) so we did not get much of a headwind for AUD when the low number guaranteed that rates would remain on hold.

The relentless strength of AUD in July has mainly been driven by USD weakness and a return of the risk trade.

US dollar weakness ... The key to the concerns with the USD is that markets expect the US Federal Reserve to resume some form of quantitative easing – probably a more mild form by reinvesting the cash from maturing securities rather than outright new purchases. Despite the Fed’s “silence” markets seem convinced even though US mortgage and bond rates are already near their lowest levels since the depths of the crisis. This trade looks more like a “sell on rumour”; ”buy on fact” strategy indicating that further USD weakness may be limited even if the Fed does announce some new purchase program. Of course if the program goes beyond reinvesting maturing securities then there is likely to be a further downleg for the USD.

... and increased interest in The return of the risk trade seems to have mainly stemmed from the boost to confidence growth assets ... from the stress tests of the European banks, although the potential liquidity implications of an easing in Fed policy is also relevant. When AUD was languishing in the low 80¢ area we predicted that as with the US stress tests the results of the European process would also be positive for markets – not because all was suddenly well with the system but rather because new information would be available – 100 pages of detail identifying holdings of various securities including sovereign debt has been a welcome development for markets.

... post the European However short term risks still abound. The much anticipated swing from government stress tests ... sector/inventory cycle to private spending in the US is not eventuating. Our long standing scepticism with the so called V shaped recovery in the US has proven to be well based. Equally importantly the data is confirming that China is going through a cyclical slowdown. Confidence indicators continue to fall; the Leading Index is still pointing down; and while spot iron ore prices (which at one point had fallen by nearly 40% from the peaks in April) have staged a recent rally, reports of excessive stock levels of iron ore are not encouraging for the immediate future.

... drove the gains. In China the private sector has a confidence in the government to ease restrictions on banks and implement new infrastructure policies particularly around public housing to reboot the construction cycle. Broadly China’s use of steel is around 65% in construction and most of the rest is in durables, particularly automobiles. The hugely successful policies to boost automobile and other durable goods in 2009 are also likely to be revisited over the course of the next year. However in the near term China’s momentum is likely to continue to slow and that should contain any further upward momentum in the AUD.

Medium term promise Medium term, however, prospects for the AUD remain strong. With AUD rates rising remains. through 2011; our bold call for the Fed to be on hold till September next year now looking conservative; China’s growth momentum picking up from the current 8% to closer to 10%; and the recent local move to trade surpluses being the norm rather than the aberration of previous cycles; means that customers must be scoping plans around an AUD above 90¢ rather than in the 80’s or 70’s that had been mooted as recently as last month.

10 Regional Economic Report Volume Three 2010

Australian dollar outlook

Chart 1. Chart 2.

AUD/USD & AUD/JPY AUD/EUR & AUD/NZD

USD JPY NZD EUR 1.05 110 1.40 0.75 Sources: Factset, Westpac Economics. Sources: Factset, Westpac Economics.

0.95 100 AUD/EUR (rhs) 1.30 AUD/NZD (lhs) 0.85 90 0.65

0.75 80 1.20

0.65 USD/JPY (rhs) 70 0.55 1.10 0.55 AUD/USD (lhs) 60

0.45 50 1.00 0.45 Jan-07 Dec-07 Dec-08 Nov-09 Jan-07 Dec-07 Dec-08 Nov-09

Chart 3. Chart 4.

The Australian dollar: actual versus fitted Australian dollar & US equities: volatility

USD USD vol vol 1.10 1.10 100 50 Source: Bloomberg, RBA, Westpac Fair value band 90 45 1.00 1.00 US equity volatility (lhs) AUD/USD actual and forecast 80 40 0.90 0.90 70 AUD/USD volatility (rhs) 35 60 0.80 0.80 30 50 25 0.70 0.70 40 20 0.60 0.60 30 20 15 0.50 0.50 10 10 Sources: RBA, Westpac Economics 0.40 0.40 0 5 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-07 Jul-07 Feb-08 Aug-08 Mar-09 Sep-09 Apr-10

Chart 5. Chart 6.

The Australian dollar & 2yr swap spreads Current account and components: annual

USD %pa % GDP % GDP 1.00 6 2 2 ToT base case scenario: –0.4%yr 2011 & +1.9%yr 2012 AUD/USD (lhs) 5 1 1 0.90 AU-US 2yr swap spread (rhs) 0 0 4 -1 -1 0.80 3 -2 -2 -3 -3 0.70 2 -4 -4 1 0.60 -5 -5 0 -6 f/c to -6 0.50 -7 end- -7 -1 trade balance net income position 2012 Sources: Bloomberg, Westpac -8 current account -8 0.40 -2 -9 Sources: ABS, Westpac Economics -9 Feb 90 Feb 93 Feb 96 Feb 99 Feb 02 Feb 05 Feb 08 Mar-83 Mar-87 Mar-91 Mar-95 Mar-99 Mar-03 Mar-07 Mar-11

Beef and dairy

Beef: steady as she goes Favourable conditions The continued rain along the eastern states has maintained the focus in the domestic cattle continue. scene. Re-stockers in particular looking to take advantage of the improved conditions, as pasture quality and condition have been maintained. These favourable conditions are also expected to follow through into spring, giving confidence to those producers looking to purchase increased numbers of cattle.

Tight supplies. The tighter supplies of animals at the saleyards have seen increased competition from lot- feeders, re-stockers and the abattoirs, which have underpinned prices. The Eastern Young Cattle (EYCI) continues to rise and closed at 367.5¢/kg on 20th August, well above the 321.0¢/kg of the same time last year. Strong buyer interest in light young cattle has been seen, pushing the EYCI to a four year high of 369.25¢/kg.

Feed–lot pressures. On the feedlot, conditions remain tough. Export demand for lot-fed cattle remains sluggish and the robust Australian dollar is not helping their cause. The cost of acquiring suitable cattle has also increased as competition remains from other quarters of the industry. One positive has been that the price of feed grains has been attractive as surplus grains have been readily available at very competitive prices. However, production costs are expected to rise, with recent improvements in both wheat and feed grain prices.

Reduced live exports. One other industry issue of note is the announcement from Indonesia to reduce the volume of live cattle being imported from Australia for the 2010 calendar year. This quota has now been set at 452,000 head, which is some 316,000 less that for the 2009 calendar year. Despite this, Indonesia has made it clear that Australian breeder cattle and feeder cattle will play an important role in Indonesia reaching its strategic self sustainability goals.

Dairy: the grass is looking greener. Production improvement. With improved conditions over the winter months, dairy producers are looking forward to a strong start to spring. Improved moisture levels and replenished water supplies have provided significant optimism to the industry. Indeed, the industry is expecting an increase in production of between 1–2%.

Price increase. On the back of an improved outlook, the opening price announcement for milk from many of the southern processors of 35¢/litre is a significant improvement on the opening prices from the previous year.

Export volumes remain Australian dairy exports remain relatively robust in volume terms, with exports for the period robust. Jul 09 – Jun 10 totalling 746,449 tonnes. Overall, this represents a small drop of 2.3% from the corresponding period the year before. In value terms, exports for the period Jul 09–Jun 10 were AUD 2.396 billion, representing a fall of 17.9% from the corresponding period in the previous year.

Prices softer. For the three months (Jun–Aug 2010) prices from globalDairyTrade reflected the increased seasonal supply and eased accordingly. Many international buyers had stepped away from the market, either due to the holiday season in the northern hemisphere or to await further economic indicators.

The following weighted average prices (USD/MT/FAS) have been recorded for the months of June, July and August:

Anhydrous milk fat (AMF): US5,325, US4,620 and US4,302 respectively. Whole milk powder (WMP): US3,880, US3,344 and US3,080 respectively. Skim milk powder (SMP): US3,462, US3,067 and US2,770 respectively.

Positive outlook. Continuing to look forward, in the short term, global dairy prices are expected to be supported by improving demand particularly from Asia, India and some of the Middle Eastern countries.

12 Regional Economic Report Volume Three 2010

Beef and dairy

Chart 1. Chart 2.

Average beef export prices index Beef prices

index index index, AUD AUD¢/kg 200 200 225 4.5 Sources: Bloomberg, MLA, Factset, Westpac Economics AUD index USD index 200 4.0 160 160 175 3.5

120 120 150 3.0

80 80 125 2.5 100 Export prices * 2.0 40 40 Eastern Young Cattle Indicator (rhs) Sources: MLA, Westpac Economics 75 1.5 * average 0 0 50 1.0 Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Chart 3. Chart 4.

Eastern Young Cattle Indicator Global dairy prices

¢/kg US$/t US$/t 390 6500 6500

370 5500 5500 skim milk powder butter 350 4500 whole milk powder cheese 4500 330 3 year 3500 3500 310 average 2500 2500 290

270 1500 1500 Source: MLA, Westpac Economics Sources: USDA, Westpac Economics 250 500 500 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

Chart 5. Chart 6.

Global powdered skim milk prices Australian Milk Production

USD/t USD/t Million litres 6000 6000 1200 Sources: USDA-FAS, Westpac Economics Oceania 1000 5000 5000 Western Europe 800 4000 4000 600 3000 3000 Year 08/09 400 Year 09/10

2000 2000 200 Source: Dairy Australia, Westpac Economics 1000 1000 0 Mar-05 Mar-06 Mar-07 Feb-08 Feb-09 Mar-10 Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun

Grains and oilseeds

Wheat: volatility reigns Market volatility. From the beginning of June, the wheat price continued on its lacklustre trip with no real news providing incentive to step away from its entrenched position. However, deteriorating weather conditions in the FSU and Europe have lead to market volatility. CBOT Wheat traded at a low of US 425.5¢/bushel on 9th of June, but as the picture of reduced yield started to become a reality, market activity increased. On 6th August CBOT wheat hit a high of US841¢/bushel on the back of the FSU announcing their export wheat ban. While the ban announcement caused speculative activity, the market soon absorbed the information and prices eased, with wheat retracing some of the rapid gains.

Improved conditions. For Australia, the good rains have continued over the eastern states and provided a real boost to the confidence as crop conditions remain positive. However, focus remains on the weather conditions, not just for the health of the crop, but also for the effects on the potential locust plague that is lurking beneath the soil.

Western Australia still dry. Western Australia continues to experience dry conditions. While some rain has arrived, it has been less than is necessary. All eyes are fixed as to the continued effects on the wheat crop and the resulting yields. The next few weeks through August will provide a clearer picture.

Oilseeds: looking brighter. Favourable conditions. Soybean harvest commenced across the country this quarter, with the NSW soy harvest experiencing dry conditions for the first time in many years. Across the country, yields were higher than expected, with production estimates at 63,950 t in total. Continued favourable growing conditions across QLD, coupled with weakening sugar prices have driven yield increases. In addition to high yields, NSW crop seed size was larger than usual, a result of late rains in March. Protein levels averaged well above 40% for coastal crops, and inland irrigation crops also performed well above predictions. Similarly QLD soybean yields and grain quality was impressive, considering wet weather and pest problems.

Prices positive. Canola crops across much of NSW, VIC and SA experienced ideal conditions this quarter, with many crops advancing well relative to sowing times. The arrival of cooler winter weather has reduced the impact of early locust activity. With canola prices positive relative to other grains, canola production is forecast to rise to 2mt in 2010–11.

Yields above average. Improved conditions continued across the country, including much needed substantial rains across the WA canola belt in July, lifting national canola crop estimates up to 1.6million hectares, one of the largest canola crops on record. NSW conditions remained the best for years, with sub soil moisture levels supporting estimated yields of 1.6t/Ha, well above the average over the past decade of 1.36t/Ha.

Oilseeds production Over the past three months COBT Soybeans hit a high of US1,059¢/bushel, and a low of predicted to rise. US930.50¢/ bushel. The CBOT price for soybeans closed at US 1,044.50¢/bushel on the 11/08/2010. CBOT corn has fluctuated between a high of US 405c bushel and a low of US 325¢/ bushel over the past three months. The CBOT price for corn closed at US396.25¢/ bushel on 12/08/2010. ICE Canola averaged at CAD417.18mt over the same period, with prices varying during the period by 26%. The world oilseed indicator price is forecast to average 13% lower in 2010–11, at US$352/t. This is due to an expected increase in both world production and stocks. World oilseed production is projected to rise by 429mt in 2010– 11, sunflower and cottonseed production offsetting lower soybean and canola production.

Yields under pressure. The US is the world’s largest oilseed producing country, with production forecast to fall slightly to 90mt in 2010–11, due to reduced winter plantings. Both Canada and Europe are experiencing problems with canola production, with very wet conditions driving lower yields. ‘Oilworld’ forecasts a 4% decrease in canola stocks, mainly due to Canada’s production concerns.

Strong demand expected. Global meal demand increased by 5%, driven predominantly by demand from China, which accounts for 44%. The USDA reported growing global soybean stocks, a result of high global yields, necessary to support strong demand from China and India in coming months. Overall, world supplies of major oilseeds are up on last year by 4–5%, providing some level of insurance from supply driven price shocks.

14 Regional Economic Report Volume Three 2010

Grains and oilseeds

Chart 1. Chart 2.

Wheat prices Wheat prices – Rapid surge

US$/t AU$/t AU$/tonne US$/tonne 450 450 350 300 Sources: Factset, Bloomberg Westpac Economics, 400 400 CBOT wheat futures, US$ (lhs) 300 CBOT Wheat - AU$ (lhs) 350 350 250 CBOT wheat futures, AU$ (rhs) CBOT Wheat - US$ (rhs) 300 300 250 250 250 200 200 200 200 150 150 150 150 Source: Westpac Economics, Reuters 100 100 50 50 100 100 Jan-89 Jan-94 Jan-99 Jan-04 Jan-09 3/05/10 17/05/10 1/06/10 15/06/10 29/06/10 14/07/10 28/07/10 11/08/10

Chart 3. Chart 4.

World corn and barley prices World canola & soybean prices

US$/t US$/bl CAD$/t USc/bu 8 170 270 Sources: Factset, Westpac Economics 850 Sources: Factset, Westpac Economics 7 150 750 230 canola (lhs) soybean (rhs) barley (lhs) corn (rhs) 6 130 650 5 190 1100 550 4 900 150 3 450 700 2 350 110 1 250 500 70 0 150 300 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Feb-74 Feb-79 Feb-84 Feb-89 Feb-94 Feb-99 Feb-04 Feb-09

Sugar and cotton

Sugar: not quite as sweet. Production increases Australian sugar production is expected to increase by 2% in 2010–11, to 4.6mt, with higher expected. production levels expected to offset lower sugar yields. The sugar content of the cane has been lower due to recent high rainfalls across much of Australia’s sugar producing areas. The indicative price outcome for 2010–11 Australian production was between $420 – $480/t in June, a decrease on last years’ seasonal pool outcome.

Large crop forecasts. Over the past three months, the ICE sugar spot price hit a high of US19.57¢/lb, and a low of US13.67¢/lb, a price variation of 43.16%. Prices averaged US17.98¢/lb throughout July and finished on US18.26¢/lb on 11/08/2010. World sugar prices are forecast to fall in 2010–11, by 4¢/lb to average US18¢/lb, reflecting expected record sugar production, outstripping projected demand. The world sugar price indicator hit a low in May, of 18.07¢/lb, before recovering in June. Large sugar crop forecasts in both Brazil and India will place continued pressure downwards on prices in 2010–11. Ethanol prices will determine how much Brazilian sugar cane is allocated to ethanol, as opposed to sugar production. Recent ethanol production has been encouraged by large cane production, and lower sugar prices.

Global production World sugar production is forecast to increase by 13.8mt in 2010–11, to 173.8mt, in response improves. to high sugar prices. Globally, production is forecast to increase for all sugar producers with the exception of EU producers. EU sugar beet production is expected to fall by 7%, on previous record production levels of 2009–10. Despite this decrease, production is expected to exceed the EU guaranteed price quota by as much as 1.47mt.

Brazilian production is expected to reach record highs of 45.1mt in 2010–11. Similarly, Indian production is also expected to recover to 25mt over the same period. World consumption of sugar is expected to increase, yet remain below the ten year average increase of 2.7% due to relatively high prices.

Cotton: some positives ahead. Cotton production Australian cotton production in 2009–10 is estimated at 389,000t, an increase of 60,000t increases. on the previous year. Cotton quality remains high, with over 90% reaching industry grade standards or above. High cotton prices relative to grain prices have increased forecast plantings by 56% in 2010–11. Of this increase, the majority will be dryland over irrigation, due to water concerns. As dryland yields are lower than irrigation cotton, the increase in plantings is expected to result in an increase in production of 33%.

Stable performance. In the period 3/05/2010 to 11/08/10, cotton spot prices reached a high of US 84.72¢/lb and a low of US 84.72¢/lb, a relatively stable price performance. It is estimated that 90% of Australian cotton from 2009–10 has been priced, with 22% of 2010–11 production forward sold.

Consumption improves. Global consumption continues to recover from the GFC induced drop of 10.6% in 2008-09, expected to increase by 2.8% in 2010–11. We expect competition in the form of synthetic substitutes will constrain global cotton demand. Prices for the main synthetic substitute, polyester, have been increasing since mid 2009, however at a slow rate, due to the recovery in oil prices.

Falling stocks. A continued strong AUD performance continues to offset strong cotton futures prices, supported by a weaker USD. The world cotton price indicator is forecast to average US82.5¢/ lb in 2010–11, a 6% increase on 2009–10 (ABARE 2010). The increase is driven by falling stocks relative to demand, despite forecast global production of 25mt in 2010–11, an increase of 2.6mt on the year before. The majority of this boost in production is expected to come from the US, where favourable cotton prices compared to grains will boost cotton plantings by an estimated 15% to yield a projected 3.64mt.

Weather affecting crops. Recent flood damage in Pakistan, has caused supply concerns, and impacted on delivery of cotton, placing pressure on cotton futures prices. Conversely, Monsoon rains in India have boosted yields by 20 to 25% in some growing areas. India currently accounts for 20% of world production, with yields significantly improved since the adoption of GM cotton varieties in 2003–4. World cotton stocks remain tight, with continued strong demand from China, prompting the China State Reserve to auction off 600,000t of cotton, to the domestic market.

16 Regional Economic Report Volume Three 2010

Sugar and cotton

Chart 1. Chart 2.

Sugar prices improve Global sugar market tightens

US¢/lb US$/bl Mt Mt 80 150 180 180 Sources: Factset, Westpac Economics Sources: ABARE, Westpac Economics

120 150 stocks production consumption 150 60 spot sugar (lhs) 120 ABARE 120 spot crude oil (rhs) 90 est. & f'cst 40 90 90 60 60 60 20 30 30 30

0 0 0 0 Dec-83 Dec-89 Dec-95 Dec-01 Dec-07 1974 1979 1984 1989 1994 1999 2004 2009

Chart 3. Chart 4.

World sugar prices & stocks Cotton prices

Us¢/lb Mt US¢/lb AU¢/lb 35 90 160 160 Sources: Bloomberg, Westpac Economics closing stocks (rhs) ABARE est, 80 140 140 30 f'csts AU¢ period avg world price (lhs) 70 120 120 25 60 100 100 20 50 80 80 15 40 60 60 10 30 40 40 5 20 20 US¢ (lhs) AU¢ (rhs) 20 Sources: ABARE, Westpac Economics 0 10 0 0 1972-73 1980-81 1988-89 1996-97 2004-05 Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

Chart 5. Chart 6.

Production of cotton textiles Cotton prices: expected to rebound

index index US¢/lb % 200 1000 110 65 stocks to consumption ratio (rhs) Sources: ABARE, Westpac Economics 900 100 cotton price (lhs) 180 India (lhs) China (rhs) ABARE forecast (lhs) 55 800 90 160 45 700 80 140 600 70 35 120 500 60 25 100 400 50 15 80 300 40 Sources: Factset, Westpac Economics 60 200 30 5 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

Sheep and wool

Sheep and wool: still looking attractive Meat still attractive. While total flock numbers still remain an area of some concern, expectations are that flock size will increase over time. The initial focus for many sheep producers continues to be on meat production as opposed to wool production. Current prices for sheep & lamb meat remain highly attractive as demand remains robust. As such it is expected that in the short to medium term, flocks will contain a higher proportion of lambs and a lower proportion of wethers. As time progresses, the expected gradual lift in wool prices will encourage greater numbers of wethers to be maintained in the flock.

Markets quiet. Certainly the months of June and July have been very quiet on the wool market front as Europe enters its traditional holiday period. Wool sales have re-commenced and the effects of the Australian dollar volatility against the US dollar have been evident throughout the initial sales period. The Eastern Market Indicator (EMI) reacted to the strength of the Australian dollar and eased, initially, however, recovering as the Australian dollar weakened against the US dollar. The EMI is currently at 873¢/kg, well above the corresponding period last year of 803¢/kg.

China demand still sound. The decline in global consumption of wool appears to have stabilised at around 1.2 million tonnes down from the high of 1.9 million tonnes in 1987. From the Australian wool perspective, thank goodness for Chinese market demand as this has continued to grow strongly and now accounts for over 70% of Australia’s wool exports. It is expected that Chinese demand will continue to lift over the medium term. Improved incomes, coupled with a greater preference for natural fibres over synthetic, will continue to drive demand for Australian wool.

Lamb and mutton: star performance continues Tight supplies. Confidence in the lamb market remains strong due to continued improved seasonal conditions. The tightness in supply continues as farmers take advantage of the ample pasture available to finish lambs. In addition, the ability of producers to get lambs to market has been affected.

Record prices. While continued rains keep pastures green, it has in some cases meant that due to wet conditions, farmers have been unable to access their stock and get them to suitable transport. This means that lamb numbers at the sale yards have been reduced, and aided price support. This tightness in supply has seen the Eastern Trade Lamb Indicator hit a high of 562¢/kg (cwt), closing on 20th August at 558¢/kg. Heavy lambs also finished well, closing on the same date at 548¢/kg.

Catch 22. With such firm prices in the market, all eyes remain on supply and whether the record prices currently seen will encourage an increased effort on the part of producers to push lambs from paddock to the sale yards. However, in an almost ‘Catch 22’ scenario, the increased throughput of lambs may drive prices lower too quickly. It is expected that many producers will then consider holding lambs and continue to fatten to chase the higher premium for export weights.

New season lambs. Prices in the very near term are expected to remain underpinned by the tight supplies as appetite from re-stockers and abattoirs remains upbeat. However, prices are still expected to come under pressure as competition for stock eases and a greater supply of animals becomes available. Expect that with the flush of new season lambs towards the end of August there will be sufficient impetus for prices to ease as the supply/demand imbalance is adjusted.

Mutton prices strong. Mutton continues to perform well above expectations. Despite a small correction in price, as the market took a breather, prices have bounced again. The Eastern States Indicator ended on 20th August with prices at 4324¢ kg, momentum still keeping mutton prices on a considerable high.

Processors are still eager to acquire stock to fill export orders, as such the tightness in supply is underpinning prices at the saleyard. This tightness in supply is expected to continue in the short term.

18 Regional Economic Report Volume Three 2010

Sheep and wool

Chart 1. Chart 2.

Lamb prices elevated Australia’s dwindling flock

AUDkg '000,000 mn mn 600 200 200 lamb slaughters (rhs) 2.0 Sources: ABARE, Westpac Economics 175 175 500 lamb market price (lhs) 1.8 150 150 400 125 125 forecast 1.6 300 100 100 75 75 200 1.4 50 50 100 1.2 25 25 Sources: ABS, MLA, Westpac Economics 0 1.0 0 0 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 1986 1991 1996 2001 2006 2011

Chart 3. Chart 4.

Wool prices above trend Wool stocks remain supportive of prices

A¢/kg A¢/kg A¢/kg kt 800 1800 1600 1000 Sources: ABARE, Westpac Economics 600 1600 stocks (rhs) A¢/kg avg price 1400 400 1400 eastern market indicator (lhs) 800 200 1200 1200 ABARE 600 000 1000 forecasts 1000 800 800 400 600 600 800 400 400 200 600 200 Sources: Bloomberg, Westpac Economics 200 0 0 400 0 Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08 1980 1985 1990 1995 2000 2005 2010

Financial forecasts – Australia

Interest rate forecasts Latest (20 Aug) Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Cash 4.50 4.50 4.50 4.75 5.00 5.00 Market implied* na 4.50 4.56 4.59 4.65 4.67 90 Day Bill 4.72 4.75 4.75 5.00 5.25 5.50 3 Year Swap 4.86 5.10 5.20 5.40 5.50 6.00 3 Year Bond 4.42 5.00 5.30 5.30 5.50 5.70 10 Year Bond 4.91 5.20 5.30 5.30 5.30 5.50 10 Year Spread to US (bps) 234 200 190 180 170 170 * Market implied rate is the anticipated target rate in the OIS market. Sources: Bloomberg, Westpac Strategy.

Currency forecasts Latest (20 Aug) Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 AUD vs AUD index* 100 96.3 97.3 99.4 101.4 100.0 USD 0.8940 0.88 0.90 0.92 0.90 0.88 USD forward^ na 0.91 0.90 0.89 0.88 0.86 JPY 76.50 77 82 86 87 88 EUR 0.7030 0.67 0.68 0.68 0.69 0.70 NZD 1.2650 1.26 1.25 1.23 1.20 1.19 CAD 0.9360 0.91 0.91 0.91 0.91 0.91

GBP 0.5750 0.57 0.58 0.57 0.58 0.57 CHF 0.9240 0.91 0.94 0.96 0.99 1.03 DKK 5.2390 5.00 5.05 5.10 5.15 5.20 SEK 6.6310 6.31 6.37 6.40 6.49 6.63 NOK 5.5740 5.31 5.32 5.34 5.35 5.58 ZAR 6.5410 6.64 6.66 6.67 6.66 6.64

SGD 1.2120 1.19 1.21 1.23 1.19 1.15 HKD 6.9160 6.84 6.98 7.13 6.98 6.82 PHP 40.40 39.60 39.77 40.38 39.23 38.10 THB 28.20 28.16 28.51 28.84 27.74 26.66 MYR 2.8040 2.73 2.78 2.83 2.75 2.68 CNY 6.0700 5.94 6.06 6.18 6.01 5.85 IDR 8040 7876 7983 8087 7839 7594 TWD 28.50 27.81 28.30 28.79 27.94 27.10 KRW 1058 1021 1036 1050 1014 978 INR 41.70 40.48 40.95 41.41 39.78 38.20

*Nominal trade weighted index, with latest data compiling the base. Weights from Reserve Bank of Australia. A reading above (below) 100 indicates a rise (fall) in the AUD. ^Approximate market forward price for AUD/USD, not a forecast. Sources: Bloomberg, Westpac Economics.

Economic forecasts – Australia

Activity* 2009 2010 2011 Calendar years % change Q3 Q4 Q1 Q2 Q3f Q4f Q1f 2008 2009 2010f 2011f Private consumption 0.3 0.9 0.6 0.7 0.8 1.0 1.0 1.9 1.6 3.0 3.5 Dwelling investment 7.7 1.3 –1.0 5.9 5.8 3.4 1.8 2.6 –4.6 10.8 9.5 Business investment* –3.0 4.2 –3.3 3.9 3.3 2.8 2.8 12.5 –1.2 3.5 11.5 Private demand * 0.1 1.6 –0.4 1.7 1.7 1.6 1.4 3.7 0.6 3.6 5.6 Public demand * 3.0 4.1 4.0 –0.3 –0.5 –0.7 –0.4 6.3 3.7 8.5 –1.3 Final demand 0.7 2.1 0.6 1.2 1.2 1.1 1.0 4.3 1.3 4.6 4.0 Stock contribution 0.7 0.2 0.2 –0.3 0.2 0.0 0.0 –0.4 –0.5 0.6 0.1 GNE 1.4 2.3 0.8 0.9 1.4 1.1 1.0 4.0 0.7 5.2 4.1 Exports –1.7 2.0 –0.5 5.0 0.0 1.5 2.0 3.1 1.4 5.0 7.5 Imports 4.2 8.1 1.8 3.0 2.7 2.4 2.2 11.3 –7.8 15.0 9.5 Net exports contribution –1.2 –1.3 –0.5 0.3 –0.6 –0.2 –0.1 –1.7 2.0 –2.1 –0.6 GDP (1) 0.3 1.1 0.5 1.2 0.8 0.9 1.0 2.3 1.3 3.3 3.5 annual chg 0.9 2.8 2.7 3.1 3.7 3.5 4.0 – – – –

Other macroeconomic variables 2009 2010 2011 Calendar years % change Q3 Q4 Q1 Q2 Q3f Q4f Q1f 2008 2009 2010f 2011f Employment (1) 0.2 0.8 0.9 0.7 0.5 0.8 0.8 2.2 0.3 2.6 2.8 annual chg –0.1 0.6 1.8 2.7 3.0 3.0 2.9 –––– Unemployment rate % (1) 5.8 5.6 5.3 5.2 5.1 4.9 4.8 4.3 5.6 5.1 4.8 Wages (WPI) (sa) (2) 0.7 0.6 0.9 1.0 0.9 0.8 1.1 –––– annual chg 3.6 2.9 3.0 3.2 3.4 3.6 3.8 4.3 2.9 3.6 4.2 CPI Headline (2) 1.0 0.5 0.9 0.6 1.2 0.4 1.0 –––– annual chg 1.3 2.1 2.9 3.1 3.3 3.2 3.3 3.7 2.1 3.2 3.2 CPI average RBA core 0.8 0.6 0.8 0.5 0.7 0.6 0.8 –––– annual chg 3.5 3.2 3.0 2.7 2.6 2.7 2.6 4.3 3.2 2.7 3.1 Current account AUDbn –13.8 –18.5 –16.6 –7.7 –7.5 –8.1 –7.4 –54.4 –51.4 –40.0 –30.5 % of GDP –4.4 –5.8 –5.1 –2.3 –2.2 –2.3 –2.1 –4.4 –4.1 –2.9 –2.1 Terms of trade annual chg (1) –16.2 –11.5 0.3 23.6 23.5 23.4 18.1 14.3 –8.5 17.4 6.1 Calendar year changes are (1) period average for GDP, employment and unemployment, terms of trade (2) through the year for inflation and wages. * GDP & component forecasts are reviewed following the release of quarterly national accounts. ** Business investment and government spending adjusted to exclude the effect of private sector purchases of public sector assets.

Macroeconomic variables – recent history 2009 2010 Monthly data Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Employment ’000 30.5 33.6 38.3 62.0 –12.0 30.1 35.8 22.8 45.9 – – Unemployment rate % 5.8 5.6 5.5 5.2 5.3 5.3 5.3 5.1 5.1 – – Westpac-MI Consumer Sentiment 121.4 118.3 113.8 120.1 117.0 117.3 116.1 108.0 101.9 113.1 119.2 Retail Trade %mth 0.4 1.2 –0.6 0.9 –1.3 0.8 0.6 0.2 0.2 – – Dwelling approvals %mth –0.3 9.0 4.1 –2.3 –2.9 13.8 –11.0 –6.4 –3.3 – – Private sector Credit %ann 1.3 0.9 1.5 1.4 1.7 2.1 2.2 2.7 2.8 – – Trade balance AUDbn –1.84 –1.48 –1.86 –0.64 –1.10 –1.55 1.26 1.83 3.54 – –

Commodity price forecasts

annual averages latest*** Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 all commodities index# 294 312 315 314 314 316 323 324 bulk commodities index# 446 500 505 510 515 519 533 533 iron ore (USD/t)* 112 146 146 146 146 146 146 146 coal (USD/t)* 128 123 125 128 130 133 140 140 WCFI**# 255 256 258 254 251 251 254 258 crude oil (USD/bbl) NYMEX 76 76 76 76 76 76 78 80 gold (USD/oz) 1,226 1,200 1,200 1,200 1,200 1,200 1,200 1,200 base metals index# 206 198 206 206 206 206 210 213 copper (USD/t) 7,287 7,100 7,300 7,300 7,300 7,300 7,427 7,552 aluminium (USD/t) 2,098 2,000 2,100 2,100 2,121 2,121 2,154 2,188 nickel (USD/t) 21,664 20,050 21,000 21,000 21,000 21,000 21,365 21,726 zinc (USD/t) 2,080 2,000 2,100 2,100 2,100 2,100 2,133 2,165 lead (USD/t) 2,090 2,080 2,120 2,120 2,120 2,120 2,161 2,201 rural commodities index# 129 139 136 128 122 121 123 124 wool AU¢/kg 936 955 970 985 1,000 1,015 1,030 1,015 wheat US¢/bu 699 820 800 720 650 630 620 620 sugar US¢/lb 19 18 15 13 13 15 16 16 cotton US¢/lb 85 80 78 79 80 81 75 75 levels % change annual 2008 2009 2010f 2011f 2008 2009 2010f 2011f all commodities index# 285 225 280 325 34.1 –21.0 24.3 16.2 bulk commodities index# 416 334 431 543 85.6 –19.7 28.8 26.1 iron ore (USD/t)* 81 65 119 159 58.9 –19.1 81.3 33.6 coal (USD/t)* 142 114 112 133 105.2 –20.0 –1.5 18.2 ave coking price (USD/t) 190 149 129 153 126.7 –21.9 –13.4 18.4 ave thermal price (USD/t) 92 83 93 113 78.0 –8.8 10.8 21.6 iron ore lump contracts (US¢ dltu) 202 120 280 314 96.5 –40.5 133.3 12.0 iron ore fines contracts (US¢ dltu) 145 97 239 268 79.9 –33.0 146.4 12.0 coal coking contracts (US$/t) 305 129 180 200 215.7 –57.7 39.5 11.1 coal thermal contracts (US$/t) 125 70 95 99 124.6 –44.0 35.7 4.2 WCFI**# 263 201 243 252 1.8 –23.6 20.5 4.1 crude oil (USD/bbl) NYMEX 100 63 74 77 37.5 –36.6 16.2 4.1 gold (USD/oz) 879 973 1,113 1,200 25.0 10.7 14.4 7.9 base metals index# 210 154 196 207 –24.1 –26.7 27.3 5.5 copper (USD/t) 6,912 5,171 7,013 7,332 –3.0 –25.2 35.6 4.6 aluminium (USD/t) 2,597 1,687 2,013 2,124 –2.1 –35.0 19.3 5.5 nickel (USD/t) 21,224 14,690 19,138 21,091 –41.9 –30.8 30.3 10.2 zinc (USD/t) 1,896 1,673 2,081 2,108 –41.9 –11.8 24.4 1.3 lead (USD/t) 2,095 1,726 2,069 2,130 –18.7 –17.6 19.9 3.0 rural commodities index# 128 103 124 124 13.9 –19.5 19.8 0.1 # Chain weighted index: weights are Australian export shares. * Average Australian export prices fob – Source ABS 5432.0 Merchandise Trade Exports. ** WCFI – Westpac commodities futures index. *** Weekly averages except for bulks. Sources for all tables: Westpac Economics, Bloomberg, ABS.

Commodity futures contracts Future contracts latest*** 3rd 6th 9th 12th 18th 24th crude oil (USD/bbl) NYMEX 81 86 87 87 88 88 88 gold (USD/oz) COMEX 1,184 1,129 1,133 1,141 1,153 1,254 na aluminium (USD/t) LME 2,177 2,344 2,373 2,400 2,425 2,472 2,514 copper (USD/t) LME 7,384 7,886 7,903 7,910 7,902 7,865 7,808 nickel (USD/t) LME 21,450 25,001 25,022 24,994 24,845 24,521 24,201 zinc (USD/t) LME 2,055 2,402 2,425 2,442 2,449 2,445 2,431 lead (USD/t) LME 2,151 2,211 2,228 2,235 2,235 2,222 2,201

World growth forecasts

Economic growth forecasts# Real GDP %ann 2005 2006 2007 2008 2009 2010f 2011f

World 4.5 5.1 5.2 3.0 –0.6 4.3 4.0

United States 3.1 2.7 1.9 0.0 –2.6 2.6 2.5 Japan 1.9 2.0 2.4 –1.5 –5.8 3.5 1.1 Euro zone 1.7 3.0 2.8 0.6 –4.1 0.8 1.2

Group of 3 2.4 2.7 2.4 0.3 –2.9 2.1 1.8

United Kingdom 2.2 2.9 2.6 0.5 –4.9 1.1 1.0 Canada 3.0 2.9 2.5 0.4 –2.6 2.8 3.0 Australia 3.2 2.6 4.8 2.3 1.3 3.3 3.5 New Zealand 3.2 1.0 2.8 –0.2 –1.6 2.9 4.4

OECD total 2.7 2.7 2.6 0.3 –3.1 1.2 2.3

China 11.3 12.7 14.2 9.6 9.1 10.3 9.1 Korea 4.0 5.2 5.1 2.3 0.2 6.0 4.2 Taiwan 4.7 5.4 6.0 0.7 –1.9 6.0 3.8 Hong Kong 7.1 7.0 6.4 2.1 –2.7 5.8 5.6 Singapore 7.6 8.7 8.2 1.4 –2.0 13.0 3.0 Indonesia 5.7 5.5 6.3 6.0 4.5 6.0 5.2 Thailand 4.6 5.1 4.9 2.5 –2.3 5.0 4.0 Malaysia 5.3 5.8 6.2 4.6 –1.7 6.0 4.0 Philippines 5.0 5.3 7.1 3.8 0.9 4.5 3.3 Vietnam 8.4 8.2 8.5 6.2 5.3 8.0 8.3

East Asia 8.7 9.8 10.9 7.1 5.9 8.8 7.5 East Asia ex China 5.2 5.8 6.0 3.2 0.4 6.2 4.5 NIEs* 4.8 5.8 5.8 1.8 –0.9 6.7 4.1

India 9.2 9.8 9.4 7.3 5.7 8.0 9.1 Russia 6.4 7.7 8.1 5.6 –7.9 4.0 3.3 Brazil 3.2 4.0 6.1 5.1 –0.2 5.5 4.1 South Africa 5.3 5.6 5.5 3.7 –1.8 2.6 3.6 Mexico 3.2 4.9 3.3 1.5 –6.5 4.2 3.5 Argentina 9.2 8.5 8.7 6.8 0.9 3.5 3.0 Chile 5.6 4.6 4.6 3.7 –1.5 4.7 5.4 CIS^ 6.7 8.5 8.6 5.5 –6.6 4.0 3.6 Middle East 5.4 5.7 5.6 5.1 2.4 4.5 4.8 C & E Europe 5.9 6.5 5.5 3.0 –3.7 2.8 2.8 Africa 6.3 6.5 6.9 5.5 2.1 4.7 5.9

Emerging ex–East Asia 6.0 6.8 6.8 5.0 –0.7 4.9 5.0

Other countries 5.1 5.2 4.1 4.1 2.0 3.9 4.1

World 4.5 5.1 5.2 3.0 –0.6 4.3 4.0 #Regional and global groupings are weighted using PPP exchange rates updated to reflect ICP 2005 benchmark revisions. Adding ½ppt to the global headline approximates growth under the prior weighting system * “NIEs” signifies “Newly Industrialised Economies” as defined by the IMF, viz; Republic of Korea, Hong Kong SAR, Taiwan Province of China, and Singapore. ^ CIS is the Commonwealth of Independent States, including Mongolia. Sources: IMF, Westpac Economics.

24 Notes

25 Notes

26 Corporate directory

Westpac Economics Westpac Commercial and Agribusiness Banking

Sydney Sydney Ben Marini Level 2, 275 Kent Street Level 29, Westpac Place State General Manager, Commercial and Sydney NSW 2000 275 Kent Street Agribusiness, Regional Banking WA Telephone (61-2) 8254 8372 Sydney NSW 2000 Telephone (61-8) 9426 2831 Facsimile (61-2) 8254 6934 Telephone (61-2) 9220 1083 Facsimile (61-2) 8253 0955 Steve Hannan Bill Evans State General Manger, Commercial and Global Head of Economics Graham Jennings Agribusiness, Regional Banking NSW Chief Executive, Commercial and Telephone (61-2) 6580 3926 Andrew Hanlan Agribusiness, Regional Banking Senior Economist Telephone (61-2) 8254 1083 Richard Hockney State General Manager, SA/NT - Regional, Matthew Hassan Rick Aylett Westpac Retail & Business Banking Senior Economist State General Manager, Commercial and Telephone (61-8) 8230 2225 Agribusiness, Regional Banking VIC Huw McKay Telephone (61) 427 249 059 Sally Kirkright Senior International Economist State General Manager, TAS - Regional, Rodney Kelly Westpac Retail & Business Banking Justin Smirk State General Manager, Commercial and Telephone (61-3) 6230 4360 Senior Economist Agribusiness, Regional Banking QLD (on secondment to St.George Bank) Telephone (61-7) 4688 6063

Anthony Thompson Senior Economist

Elliot Clarke Economist

This issue was finalised on 20 August 2010 Publication enquiries, Neil Burgess, Senior Commodity Analyst, Agribusiness Telephone: (61 2) 8253 7912 RER001 (09/10)