This article is sponsored by Agfarm.
Wheat and barley prices are showing price volatility at levels not seen to this extent for three years, both domestically and internationally.
The 2016/17 harvest saw 10 year lows in grain prices, while the month of June and into July saw a rally of up to 30 per cent.
Arguably, the cause of this rally can be put down to three interconnecting factors; global weather, global supply and global demand.
Why do these factors have such a dramatic impact on global grain prices and what does it mean for Australian domestic and international demand?
First, let’s look at the current global weather. Producers in the Black Sea and Europe have experienced a drier and warmer than usual season.
France is at approximately 75pc of their annual rainfall for the season, Italy at approximately 77pc and Spain at 66pc.
Since the Australian planting window opened, the majority of the cropping belt has experienced below average rainfall resulting in unfavourable growing conditions, less planted acres and yield penalties.
These global growing conditions have caused expected decreases in global wheat and barley production for the first time in five years.
When there is a decrease in global production the demand for grain needs to be rationed, therefore typically, prices rise.
Those who really need the grain will pay a premium to secure it, and those who can hold off for now, will.
This causes global price rallies to occur.
The same scenario occurs in domestic grain markets.
When Australian production decreases, demand needs to be rationed and local millers and feed producers usually pay a premium to have their needs filled before grain is exported away from Australian shores.
Naturally, this also works in reverse as seen in Australia’s record 2016/17 season where there was so much grain it didn’t need to be rationed, it needed to be moved.
The increased supply of grain, pushed prices to lows not seen in 10 years.
The ‘cheap’ grain attracted new international demand, which absorbed the sharp increase in production and resulted in a year of record exports from Australia, gradually pushing prices higher throughout the year as supply decreased.
The record pace and quantity of grain shipped from Australia has caused 2016/17 ending stocks to be less than originally thought, 8.5 million tonnes for wheat and 800 thousand tonnes for barley, contributing to the 30pc kick in grain prices.
The wheat and barley forecast for the 2017/18 season is 21.5mt and 7.7mt respectively, placing total supply at 30mt and 8.5mt.
Australia has a strong inelastic demand base from both domestic consumption and key export homes. This inelastic demand needs to be filled prior to supplementary demand, therefore is priced more competitively to ensure Australia achieves their fill.
This year, Australia’s forecast domestic demand for wheat is approximately 8.4mt and 3.5mt for barley, leaving an exportable surplus of 16mt and 3.5mt.
To put the year on year change into perspective, Australia has already exported close to 16mt of wheat and 6mt of barley, and it’s only half way through the year.
With the expected pull back in grain production both globally and domestically, more buyers have come to market to secure their demand needs, pushing prices so high, Australia is no longer competitive into elastic export markets, and as a result, will only export to key inelastic homes.
As it stands today (July 2017) on relative prices, Australia will export somewhere between 12-14mt of wheat, which is at the low end of what Australia should be exporting for the coming season.
So what does it all mean for Australia?
The recent run up in wheat and barley prices has rationed enough demand to offset the expected decrease in production and ensure all inelastic domestic and export demand can be filled for the coming season.
Unfortunately for the Australian grain grower there is a double edged sword.
All factors remaining constant, prices should remain firm for the short term, at least until good rain is received and new crop production prospects become a little brighter.
Until that time, the waiting and watching game continues, to see if the 2017/18 season will turn out as predicted, or take a significant turn.
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This article is sponsored by Agfarm.