Australian agriculture looks set for a positive 2011 with agri-commodity prices expected to stay at elevated levels, but the sector must be prepared to manage a number of challenges, including increasing price volatility, according to a new industry report.

In its keynote annual Australian Agriculture in Focus report, leading food and agri-finance specialist Rabobank said the outlook for Australian agriculture is generally optimistic, however several challenges will need to be effectively managed in order to turn “positive signs into a profitable year”. Chief among these are: increasing volatility in agri-commodity markets, a high Australian currency and the need to engage with developing economies.

Rabobank’s general manager Food & Agribusiness Research and Advisory Justin Sherrard said a mix of higher prices across most agricultural commodities and ongoing volatility is set to characterise the year ahead in the global food and agribusiness sector.

“Last year saw a strengthening of global demand for agricultural commodities, along with frequent supply shocks, and subsequent tightening of the balance between supply and demand,” Mr Sherrard said.

“This year looks, on balance, a year of robust support to agri-commodity prices at elevated levels. However, there is the prospect of greater volatility, along with unexpected shocks, as the extensive flooding in Queensland and Victoria at the start of the year should remind us.”

Volatility in agri-commodity markets is set to increase in 2011, due to the current tight state of global markets, along with heightened activity of investment funds and potential trade restrictions, according to the report.

“Tightness in global markets, coupled with low stocks, leaves little scope to absorb supply-side shocks, like the recent drought in Russia which caused prices to jump markedly,” Mr Sherrard said.

“Investment funds have also flowed back into agri-commodity markets, mainly in response to the bullish fundamentals. In addition, there is the potential for trade restrictions, such as export bans and import limits and tariffs, being put in place by developing countries to promote domestic food production and ensure food is affordable locally.”