Australia-A Bankers veiw of commodity prices and farming.

AUSTRALIA-A BANKERS VEIW ON THE RECESSION AND IMPACT ON FARM COMMODITIES.

Weak international demand for key Australian exportcommodities suggests a price decline for many could have quite a distance torun, according to a regional report issued Friday by Westpac Banking Corp.

Commodity prices generally started to plunge in the second half of 2008 in

response to softening demand and as a massive deleveraging of commodity markets

unfolded, it said.

Encouragingly, prices of a number of rural commodities have stabilized, or

even rebounded a little from an oversold position in November, but the weak

demand environment suggests this will prove to be a temporary rebound,

according to the bank.

"A recovery in commodity prices will emerge, but not just yet in our view,"

Westpac senior economist Andrew Hanlan said in a statement. "If, as we expect,

international demand remains weaker for longer, then expectations of a recovery

in markets will be met with disappointment in the early stages."

A positive in this cycle for Australian commodity exporters is that prices,

coming from record highs, in many cases are still above historic averages, with

a sharp fall in the value of the Australian dollar helping cushion the fall, he

said.

Westpac Bank is also of the view that a "weaker for longer" scenario is on

the cards for the Australian currency, pushing its low point into 2010 with a

target of US$0.55 in the first half of 2010, compared with a previous forecast

of US$0.70 by mid 2010.

As for supply conditions, tightness in some rural commodity markets, such as

sugar and lamb, is mitigating the impact of the global recession, but others,

such as cotton and wool, are more demand-sensitive and have been hit hard by

the global downturn, he said.

The backdrop to demand for commodities and the Australian economy, including

the regions and the farm sector, is the severe deterioration in the world

economy late in 2008, which has sparked downward revisions in growth forecasts,

he said.

The International Monetary Fund in July was forecasting world growth at 3.9%

in 2009, but the IMF now expects growth at just 0.5% while Westpac expects "no

growth at all," he said.

"Against the backdrop of what will be the weakest performance for the world

economy in at least sixty years, the Australian economy will experience a

significant negative shock," he said.

Westpac forecasts the Australian economy will contract by 0.7% in 2009, a

more downbeat view than the latest consensus forecast of 0.3% growth, he said.

The IMF expects a recovery to emerge later this year and for growth to

improve to 3.0% in 2010, a pace that is still below trend, he said.

"We see the risks to the downside. This global recession was triggered by a

banking crisis and will require significant balance sheet repair by the banks,

households and corporates. By its very nature, balance sheet repair takes time.

We would expect the recovery in the OECD region to be particularly muted in

2010," he said.

This scenario plays out in Westpac’s forecast for commodity prices, which in

broad terms are expected to bottom in the second quarter of 2010, when an

Australian dollar commodity price index is forecast to hit 171 compared with

its latest 260 and first quarter of 2009 estimate at 245.

Westpac expects prices of iron ore, coal and copper to bottom in the 2010

second quarter; oil, nickel and zinc to bottom in the 2010 first quarter; and

wheat, cotton and other commodities to bottom in the fourth quarter of 2009.