australian commodities december quarter 07.4 GPO Box 1563 Canberra 2601 telephone +61 2 6272 2000 abareconomics.com ABARE is a professionally independent government economic research agency editor andrew wright ABARE project 1163 © Commonwealth of Australia 2007 Selected passages, tables and diagrams may be reproduced provided due acknowledgment is made ISSN 1321- 7844 abare australia’s premier commodity forecasting conference 4–5 march 2008 National Convention Centre Canberra ‘be the early bird and save’ outlook / secure your registration for Outlook 2008 today to qualify for the early bird discount, payment and the registration form must be received by abare before 18 january 2008. f: +61 2 6230 5278 or e: [email protected] abareconomics.com/outlook contents economic overview 585 drought in australia – its impact on broadacre and dairy farms incomes 595 commodity outlook crops wheat 599 coarse grains 603 oilseeds 607 cotton 610 sugar 613 livestock wool 617 sheep meat 619 beef and veal 621 dairy 623 energy oil and gas 627 thermal coal 632 metals steel and steel making raw materials 637 gold 643 aluminium and alumina 646 nickel 650 copper 652 zinc 655 articles climate change – impacts on Australian agriculture 657 don gunasekera, yeon kim, catherine tulloh and melanie ford india’s economic prospects – and implications for australia’s commodity exports 677 marina kim and jammie penm farm management deposits – use and interaction with exceptional circumstances assistance 691 caroline levantis and peter martin minerals and energy – major development projects – october 2007 listing 699 alan copeland and commodity analysts, energy and minerals branch statisical tables 715 abare management 752 australian commodities > vol. 14 no. 4 > december quarter 2007 583 abareconomics.com our new address abare has moved to 7 london circuit canberra abare provides high quality economic policy analysis and forecasts to enhance the competitiveness of Australia’s agricultural, fi shing, forestry, energy and minerals industries. abare is proud to contribute to signifi cant items on the Australian and international policy agendas: > multilateral trade negotiations and more open agricultural markets > greenhouse gas emissions and climate change response policies > water policy reform > salinity management > international energy developments > minerals exploration and policies > issues in regional Australia > Australian farm performance > fi sheries bioeconomic model > forestry economic overviewcontents > jammiecontact penm > +61 > +61 2 6272 2 6272 ???? 2030 > [email protected]> [email protected] economic overview increased downside risks to world economic outlook marina kim and jammie penm » Although the global economy has sustained strong growth in recent quarters, volatility in fi nancial markets has led to an increase in the downside risks to the world economic outlook. » In preparing this set of commodity forecasts, world economic growth is assumed to be 4.6 per cent in 2008, compared with an estimated 4.8 per cent in 2007 and 5.4 per cent in 2006. » Economic growth in Australia is assumed to strengthen to 4.25 per cent in 2007- 08 from 3.2 per cent in 2006-07. world economic outlook fi nancial market volatility yet to affect economic growth Despite a signifi cant increase in fi nancial market volatility, global economic expansion has been strong. This has been supported mainly by robust economic performance in the emerging market economies. In particular, China’s economy expanded year on year by 11.5 per cent in the September quarter, following growth of 11.9 per cent in the June quarter. In India, economic growth continues at an annual world economic growth rate of around 9 per cent (For a more detailed discus- sion, see the article on India’s economic prospects). The pace of economic expansion in other emerging 5 market economies also remains strong. These econo- mies include Singapore, the Philippines and Indo- 4 nesia, as well as the Russian Federation, the Ukraine and eastern Europe. 3 Strong growth in the emerging market econo- mies has counterbalanced moderating growth in 2 some OECD countries. In the United States, weaker housing activity has adversely affected overall 1 economic growth, while economic growth in the euro area and Japan has slowed after strong expansion % in early 2007. 1988 1992 19962000 2004 2008 australian commodities > vol. 14 no. 4 > december quarter 2007 585 economic overview increase in crude oil prices in local currency terms approximated by the price of West Texas Intermediate oil per barrel average Jan-Oct change late Nov change country currency of 2006 2007 from 2006 2007 from 2006 % % OECD United States US$ 66.1 68.1 3.1 98.2 48.6 Japan ¥ 7 662.7 8 086.6 5.5 10 629.8 38.7 Western Europe € 52.4 50.2 –4.1 65.9 25.8 United Kingdom £ 35.8 34.1 –4.6 47.5 32.7 Australia A$ 87.9 82.3 –6.4 112.7 28.3 Asia China yuan 526.7 521.0 –1.1 728.0 38.2 India rupee 2 992.7 2 842.1 –5.0 3 867.3 29.2 Malaysia ringgit 243.6 236.3 –3.0 332.8 36.6 Indonesia rupiah 608 266.2 621 105.3 2.1 923 698.1 51.9 emerging infl ationary pressures in developing countries Despite the recent substantial increase in crude oil prices, headline infl ation remains largely contained in the major OECD economies. In contrast, infl ationary pressures are emerging in a number of developing countries, including China and India, mainly refl ecting strong growth in domestic demand and a marked rise in food prices. The increase in food prices has stemmed from the use of food crops, such as corn and oilseeds, for biofuel production in a number of major world economies and adverse seasonal conditions and supply disruptions in a number of producing countries. Mean- while, oil prices have rebounded to new highs, owing to stronger growth in demand in the face of lower production by the Organisation of Petroleum Exporting Countries (OPEC), a smaller than expected rise in non-OPEC output, and continuing geopolitical concerns in key oil producing regions. In response to increased infl ationary pressures, monetary authorities in a number of emerging market economies have tightened mone- regional economic growth tary policy and increased interest rates. In China, for example, interest rates were raised in mid-September for the fi fth time since the beginning of 2007. Simi- 2006 larly, the Reserve Bank of India increased its bench- 8 2007 mark interest rate in June 2007, the fi fth over the past 2008 18 months. 6 world economic growth to slow marginally in 2008 4 Despite the modest increase in infl ationary pressures in some emerging market economies and continued 2 fi nancial market volatility, global economic growth is expected to remain relatively strong in the short term. % In preparing this set of commodity forecasts, world OECD non-OECD Latin Russia, world economic growth is assumed to be 4.6 per cent in Asia America Ukraine, 2008, compared with an estimated 4.8 per cent in eastern Europe 2007 and 5.4 per cent in 2006. 586 australian commodities > vol. 14 no. 4 > december quarter 2007 economic overview there are signifi cant downside risks to the outlook While world economic growth is assumed to remain strong in the short term, there are considerable downside risks surrounding the short term outlook for the global economy. One signifi cant downside risk to the current world economic outlook is associated with recent weakening in global credit market conditions. There has been an increase in global credit market risks as a result of tightening in lending conditions stemming from the problems in the subprime mortgage market in the United States. global credit market volatility has increased Initially, rising delinquencies in US subprime mortgages led to a rise in interest rates on borrowings backed with such loans in the United States. More recently, rising uncertainty about the magnitude of losses and the exposure of fi nancial institutions in both the United States and other countries has signifi cantly added to market concerns. As a result, market interest rates have risen and share market valuations of companies with exposure to the subprime mortgage market have declined markedly in the United States, Japan and the euro area. The volatility has also spilled over to emerging markets, with borrowing costs rising, share market valuations falling, and capital fl ows to emerging markets being scaled back. In response to increased market disruptions, monetary authorities in a number of coun- tries, including the US Federal Reserve and the European Central Bank, have provided signifi cant capital injections to money markets and/or lowered their benchmark interest rates. Despite the monetary interventions, signifi cant uncertainty remains as to the full extent of the effects on general economic activity, especially on consumer spending and business (in particular residential) investment in major world economies. US economic growth to moderate In the face of credit tightening and volatile fi nancial market conditions, the short term outlook for US world stock markets economic growth has been downgraded. Economic growth in the United States is now assumed to be stock market index around 2.0 per cent in 2008, a reduction of 0.6 52 week late percentage points from the assumption used in high a Nov. 2007 change ABARE’s previous outlook. Economic growth in the % United States is estimated to average around 1.9 per OECD cent in 2007. This compares with growth of 2.9 per United States 14 165 12 937 –8.7 cent in 2006. Japan 18 300 14 995 –18.1 Euro area 4 558 4 235 –7.1 Ongoing diffi culties in the mortgage market are Australia 6 852 6 405 –6.5 expected to extend the decline in residential (housing) east Asia investment in the United States, while higher energy China 6 396 5 415 –15.3 prices, sluggish job growth, and weaker house prices Korea, Rep.