Australia Agriculture to the Rescue!
The month of May was a tough one for portfolio managers in Australia. The S&P 200/ASX fell >2.5% from April highs. The banking industry was mentioned as a potential reason for the sell off. Moody recently downgraded the major Australian banks’ credit ratings from Aa2 to Aa3 due to the mortgage risk they have (over 60% of loans are in residential property). Check out this Bloomberg article for more info:
Another reason for the sell off could have been the lower exports of iron ore over the past year. Cyclone Debbie disrupted production and it had a ripple affect on the economy over the past few months. The storm damaged rails when it hit the northeast shore in early April.
The bright side of the past year has been the agriculture sector. The Australian Bureau of Statistics stated that the sector grew 27% in 2016. This is expected to continue, with wheat, canola, sugar and especially cotton leading the way. Now, however, below normal rainfall may threaten crop production, and thus the Australian economy.
Drought Potential
There is talk of drought moving forward for Australia, most notably in the cotton regions in the east. The past 30 days have been slightly dry, (10-50mm below normal). Wheat needs to be planted soon, and requires adequate moisture to do so. Cotton farmers need not worry for a few months. Global wheat production has risen 5 straight years. Australia will need more rainfall to help this trend continue.
Rainfall will become even more important later, from August through December. The major concern is the potential for El Niño conditions during this period. Warmer waters in the equatorial Pacific create greater descent over the Australian continent.
In addition to the El Niño impacts, the Indian Ocean can also affect Australian rainfall patterns. When the Indian Ocean Dipole is in a positive phase (current state), the western Indian sea surface temperature anomalies are warmer than those in the east. This set up usually leads to below normal rainfall over Australia. The questions moving forward are: Will a moderate El Niño form and will +IOD conditions persist?
