Grain prices rise on fear of dry season

By Sofia Omstedt

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.

• Sofia Omstedt is industry analyst with Dairy Australia.