Grain prices rise on fear of dry sea­son

Dairy News Australia - - MARKETS - SOFIA OMSTEDT • Sofia Omstedt is in­dus­try an­a­lyst with Dairy Australia.

EAR­LIER IN the sea­son in­put costs looked to be the bright spot for the Aus­tralian dairy in­dus­try. Fol­low­ing a record hay and wheat har­vest, com­bined with global record break­ing grain yields, low wa­ter prices, sub­dued fer­tiliser prices and un­usu­ally high cull cow prices, in­put costs were set to re­main favourable dur­ing the se­cond half of the year. A few months later, fol­low­ing a re­mark­ably dry start to win­ter, the out­look ap­pears less rosy. Win­ter brought well be­low aver­age rain­fall in most re­gions, with some ex­pe­ri­enc­ing the dri­est win­ter ever. Key agri­cul­tural ar­eas in West­ern Australia are yet to re­ceive suf­fi­cient rain and drought con­cerns led to price jumps, es­pe­cially in the grain mar­ket. The ques­tion is whether th­ese jumps are tem­po­rary mar­ket over­re­ac­tions to the threat of drought, or if higher in­put prices are here to stay. For four con­sec­u­tive years global wheat pro­duc­tion broke pre­vi­ous yield records. Global wheat pro­duc­tion is es­ti­mated to con­tract 11 mil­lion tonnes this year, to 743.2 mil­lion tonnes ac­cord­ing to the lat­est USDA World Agri­cul­tural Sup­ply and De­mand Re­port. De­spite this re­duc­tion, wheat pro­duc­tion is pro­jected to be the se­cond largest on record. In 2016–17 global wheat con­sump­tion de­creased re­sult­ing in larger-than-ex­pected stock­piles on the mar­ket. Com­bined with record pro­duc­tion, this de­pressed prices sig­nif­i­cantly dur­ing the year, both on the global mar­ket and in Australia. Since early 2016 wheat prices in Australia con­sis­tently dropped and be­tween July 2016 and May 2017 prices were well be­low the long run aver­age, rang­ing from 10 per cent to 30 per cent be­low the five year aver­age. Due to wheat over­sup­ply many grow­ers planted less this year, with China, the United States, the EU and Australia all pro­ject­ing smaller crops. To­tal win­ter crop in Australia is ex­pected to fall 33 per cent in 2017–18 ac­cord­ing to the ABARES June crop re­port. This is a 33 per cent fall on a yearly ba­sis, how­ever yields are still ex­pected to be big­ger than the pre­vi­ous three years. De­spite the large stock­piles of wheat avail­able on the global mar­ket and years of record pro­duc­tion, the wheat mar­ket ral­lied in July. The price rally can be at­trib­uted to un­favourable and dry con­di­tions in Australia, Canada, parts of Europe and very hot weather in the north­ern plains area in the United States. The global wheat price surge af­fected the Aus­tralian mar­ket, and com­bined with do­mes­tic drought con­cerns caus­ing grow­ers to hold onto grain, prices rose close to $70/tonne in a month. To­wards the end of win­ter, rain­fall be­gan to al­le­vi­ate drought con­cerns and of­fered some price re­lief, es­pe­cially in south­ern re­gions of Australia. Mar­ket ex­perts sug­gest wheat prices are strongly cor­re­lated to weather con­di­tions and the re­cent price spikes do not reflect the un­der­ly­ing sup­ply sit­u­a­tion. More rain­fall is likely to en­tice grow­ers to in­crease sell­ing which should see prices ease fur­ther. As wheat sup­ply is not likely to be­come an is­sue any time soon, prices will likely con­tinue to be driven pri­mar­ily by weather and rain­fall fore­casts. In the hay mar­ket, cold weather and frosts stunt pas­ture growth in south­ern re­gions and prospects for this sea­son’s har­vest de­te­ri­o­rated dur­ing win­ter. De­spite cur­rent over­sup­ply of hay, some pre­dict that a poor har­vest this sea­son would be enough to cre­ate un­der­sup­ply for next sea­son and drive prices up. Sup­ply is in­creas­ingly scarce in north­ern Australia and as prod­uct is be­ing sourced from other re­gions, freight costs form an in­creas­ing per­cent­age of over­all cost. Prices re­main well back from pre­vi­ous year but qual­ity is in­fe­rior and many farm­ers are opt­ing for more ex­pen­sive, high qual­ity feed to en­sure an­i­mal health and main­tain pro­duc­tion. Dry con­di­tions dur­ing win­ter added pres­sure to the out­look for the next sea­son, how­ever late win­ter rain­fall eased con­cerns some­what. Good rain­fall dur­ing spring will be key. Wa­ter prices in­creased dur­ing win­ter as un­usu­ally high evap­o­ra­tion rates led to much lower than ex­pected in­flows to the ma­jor stor­ages. Fol­low­ing rain­fall in Au­gust, stream lev­els in­creased, but are still well be­low nor­mal lev­els and with­out sig­nif­i­cant in­flows dur­ing spring the out­look is dry for the wa­ter sea­son. De­spite the sharp price rises in July, wa­ter trad­ing in­creased sig­nif­i­cantly com­pared to pre­vi­ous months, demon­strat­ing the ef­fects of a dry win­ter. The BOM fore­casts spring rain­fall be­low aver­age, and weather go­ing for­ward looks to be the key cat­a­lyst for in­put prices. Both the ENSO and In­dian Ocean Dipole out­looks are ex­pected to re­main neu­tral for the re­main­der of the year, restor­ing some con­fi­dence for a fu­ture down­pour, how­ever high pres­sure sys­tems south of Australia con­tinue to re­duce low pres­sure sys­tems and cloud cover. It is still too early to say what the out­look for the se­cond half of the year and in­put prices will be. With a de­cent amount of rain it is likely in­put prices will not stray too far from rea­son­able lev­els, es­pe­cially in the hay and grain mar­kets as cur­rent in­di­ca­tions sug­gest de­cent sup­ply for the rest of the year. How­ever only time, and rain, can tell.

The ques­tion is whether th­ese jumps are tem­po­rary mar­ket over­re­ac­tions to the threat of drought, or if higher in­put prices are here to stay.

Global wheat pro­duc­tion is es­ti­mated to con­tract 11 mil­lion tonnes this year, to 743.2 mil­lion tonnes, but is still pro­jected to be the se­cond largest on record.

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