Global pain hurts at home

Source: Profarmer and Dairy Australia

In a volatile global trade environment, political pressure often leads to hasty and expedient policy decisions, especially when trying to support domestic food security against rising prices.

One such measure is the implementation of export restrictions.

Export restrictions are typically put in place in an attempt to insulate domestic commodity prices against world prices, through protecting domestic supply.

While sounding good in theory, this policy measure was shown to have a far-reaching negative impact throughout the 2007-08 global food crisis.

This is because successive decisions to implement export restrictions by multiple countries exacerbated the increases in world prices and market volatility instead, due to reduced global supply.

One form in which trade intervention has shown up in 2022, in response to domestic food security challenges, is through the restriction of wheat exports.

India, Russia, Kazakhstan and Egypt have all implemented such policies.

Due to their collective influence on the global wheat market, this has had significant implications for global supply, and has therefore flowed through to affect the price of wheat here in Australia.

In the past 12 months, local wheat prices have increased across all monitored regions by an average of around 50 per cent.

In addition to this, the supply and production of fertiliser around the world is currently being impacted by high natural gas prices across Europe, current export restrictions in China and the ongoing conflict in Ukraine.

The combined influence of these factors continues to place upward pressure on world fertiliser prices, due again to restricted supply.

Alongside general COVID-19 related supply chain disruptions, this accounts for the sharp increase in fertiliser prices seen in Australia over the past 12 months.

In comparison to June 2021, the global benchmark prices for urea and diammonium phosphate (DAP) have increased by 76 per cent and 30 per cent, respectively.

For those reliant on robust world trade, incidences of snap decision making and short-term hysteria across commodity markets can induce a snowball effect.

This is reflected through increasingly volatile markets, where prices become vulnerable to unpredictable supply and demand dynamics.

Such conditions create a difficult environment for farmers to navigate and hasty decisions around input use change can add to this volatility rather than protect from it.

For farmers here in Australia, this could be seen through a continuation of elevated grain and fertiliser prices over several seasons and an increased vulnerability to inevitable shifts in farm gate milk price.

With the upcoming Australian grain harvest as an example, if major exporters remain out of play, farmers looking to secure feed on the domestic market may find themselves competing against high international demand that would have previously been met elsewhere.

If this scenario persists, the prolonging of inflated feed costs has the potential to undermine margins, even in a high milk price year, and could have implications for the relative viability of different farm systems over time.

While there is a clear objective around the implementation of export restrictions, in the current trade environment, they are actually more likely to cause an exacerbation of grain and fertiliser price volatility.

The increased unpredictability of input markets presents a challenge for both short and long-term farm management.

Nonetheless, understanding the influence of market pressures, and more importantly, not making the same sort of hasty mistakes, can aid in successfully navigating through this uncertain time.