The Economy: Winter/Summer Crops Boost/Biz Confidence, Conditions Improve

Upbeat news yesterday from the economy with business conditions and confidence improving and good weather conditions in the past month or so helping rural areas and boosting the size of the 2011-12 wheat crop to an all time high.

As well, the mix of the summer crop has been sharply increased.

But the recent rain and flooding in parts of NSW and Queensland will have a negative impact on crop size and quality.

The Australian Bureau of Agricultural and Resource Economics and Sciences said in its first crop report for 2012 yesterday that it now saw the current wheat harvest reaching a record 29.5 million tonnes.

The group said wheat production would rise 4.2% from its December estimate and 5.7% from the previous record of 27.9 million tonnes in the crop year ended March 31, 2011.

The boost will come from a huge rise in the size of the wheat crop in WA.

After domestic demand of 6 million tonnes a year is met, the balance of local production is available for export, usually making Australia one of the largest suppliers to the world wheat trade.

(Australia is the world's 4th biggest wheat exporter.)

ABARES forecast exports in the marketing year that began October 1 at a record 22.3 million tonnes, up 3.2% from a December estimate and a 20% rise from actual exports of 18.6 million tonnes in 2010-11.

Domestic carryover stocks will rise, and for growers, it means downward pressure on prices and returns, unless there's a drought elsewhere in a major producing country which cuts global stocks.

The US on Monday raised its estimate for the 2012 wheat plantings and crop, pushing prices lower.

The lift in the summer crop production comes hard on the heels of record winter crop production levels, thanks in large part to the sizeable lift in output in Western Australia, it said.

Winter crop production for 2011-12 is estimated to have risen 7% to 45.4 million tonnes, with more than half of that accounted for by the record wheat harvest.

"A significant recovery in production in Western Australia is a major reason for the estimated record production nationally for winter crops," ABARES executive director Mr Paul Morris said in yesterday's report.

"In particular, Western Australian wheat production is estimated to have more than doubled from the 2010-11 season" he said after the big drought the year before.

While production in the eastern states is estimated to be smaller than the record crop last year, it is still estimated to be one of the largest on record.

Of the major winter crops in 2011-12, wheat production is estimated to reach a record 29.5 million tonnes, ABARES said, up from 27.9 million tonnes in 2010-11.

Barley output is tipped to be up 5% to an estimated 8.6 million tonnes, with canola production estimated to have risen by 16% to a record 2.8 million tonnes.

But the recent floods in NSW and Queensland will cut quality and yields, although the damage is not expected to be as dramatic as pictures of the floods would indicate.

ABARES said it will take some time for the extent of the full impact of the flood damage to be clarified.

"There is likely to be downgrading in crop quality and crop losses for these producers, however until the flood water recedes, the full extent of crop damage will be unclear," Mr Morris said.

"Due to flooding generally affecting low-lying areas that comprise a small proportion of the total crop area, the effects of the flooding on total crop production are expected to be small.

"Yields outside the areas not inundated with flood water are expected to be above average and summer crop production is forecast to be the highest on record."

In NSW, the second-largest wheat-growing state after WA, winter crop production is estimated to have fallen by 26% versus the previous harvest to just over 7.9 million tonnes.

Rainfall in November and early December delayed the harvest and resulted in some crop losses due to flooding in the north, according to ABARES.

The WA harvest is tipped to be up 135% at around 11.7 million tonnes.

ABARES also forecast an 18% increase in the size of the total summer harvest.

The large rise in summer crop production will be underpinned by yields for cotton and grain sorghum with cotton production forecast to rise 20% to around 1.1 million tonnes and grain sorghum by 13% to around 2.3 million tonnes. Rice production is forecast to increase by 27% to 923,000 tonnes.

Meanwhile the National Australia Bank said yesterday that business conditions improved a little last month in the wake of the interest rates cuts late last year from the Reserve Bank.

The NAB Business Survey for January showed that business conditions moved into positive territory, posting a rise of two index points to plus two points in January.

Business confidence rose one point to plus four points and is now the highest for around 8 months.

The NAB said that while business confidence was relatively firm in January, employment was still a problem.

"Labour market conditions remain soft and the overall outlook for near-term activity remains moderate," the NAB said in a statement accompanying yesterday's survey.

(The January jobs data will be released tomorrow. the February consumer sentiment survey is due out today.)

The bank said business conditions strengthened a little in January with some sectors struggling to make gains.

"Profitability deteriorated in the month, while employment and trading conditions were unchanged," the NAB said.

"Conditions deteriorated sharply in SA and Tasmania, but strengthened modestly in Victoria and Queensland and NSW.

"In levels terms, conditions in the mainland states were strongest in WA (+5), while they were broadly similar across the other states (ranging between -1 and +1 index points).

"In trend terms, WA was the strongest mainland state.

"Labour and purchase costs growth softened for a second consecutive month in January.

"Product prices fell slightly in the month, while retail prices fell by more, recording the weakest outcome in six months," the NAB said.

The bank said it had changed its cash rate forecast after the RBA kept it on hold at its February meeting.

The NAB said there may just be room for one further RBA cut towards the middle of 2012, most probably in May.

"Thereafter, we see the cash rate unchanged until mid-2013 when rates will be under upward pressure from wages and a strengthening labour market," the NAB added.