AUSTRALIA'S grain pricing and its supply chain have been in the headlines this year with farmers concerned that pricing is below world parity.
Farmonline's national grains reporter Gregor Heard caught up with Pat O'Shannassy, the chief executive of Grain Trade Australia, the peak body for Australia's grain traders, to discuss the factors in play in the local grains industry at present.
GH: Pat, there has been a lot of talk about the grains industry supply chain and how it has coped with this year's harvest, can you give some background as to what is happening?
PO: Australia has just produced a record crop of 62.4 million tonnes for the 2021/22 season, which is 5 per cent above the previous record from 2016/17 and has followed another large crop of 58.6m tonnes in 2020/21.
As a guide, the 10-year average Australian crop production is 45.8m tonnes, which is 27pc below the total production for the 2021-22 season.
This flows through to exports, which are forecast to be a record 43.3m tonnes for the current 2021/22 season, 6.1pc above the previous export record of 40.8m tonnes, also set in 2016/17.
Last year was also a big export year with 39m tonnes exported.
GH: What does this mean for grain exporters in terms of getting grain from where it is harvested and onto international customers?
PO: What we can see is that it has been an exceptional season of production and means the grain supply chain is working hard to move and export significantly more grain than ever before.
There is no historical precedence for this volume moving through the Australian grain supply chain.
GH: What influence does this massive volume going through the supply chain have on price?
PO The pressure on the supply chain is important to recognise in analysing local grain prices against international indicator prices.
Even with high Australian grain stocks, and despite record monthly grain shipments, the supply chain does not have the excess capacity to move more grain into the current market.
GH: So where do cash prices across Australia's major crops currently sit?
PO: Profarmer Australia data shows Australian wheat cash bids across various port zones are currently around decile 8 or 9 levels, which is very high by historic standards, effectively at price levels usually seen during low production years, rather than big production years.
GH: That is good news, but why can't the industry fully capture the value of current international grain prices in full?
PO: The supply chain has been working at unprecedented capacity since the harvest in 2020/21 moving the last two large crops to domestic and export markets.
This is combined with additional constraints including COVID 19, transport shortages, labour shortages, floods, container supply issues, high sea freight and fuel prices.
GH: Does the current shortage of shipping capacity indicate we should invest in more export facilities.
PO: We should not forget that a significant amount of this supply chain capacity is idle or underutilised during droughts and lower production years, meaning supply chain operators and investors have been required to consider an appropriate balance in capacity utilisation.
GH: The headline grain price numbers have been very good at many times globally but how much volume can the trade sell at those higher levels?
PO: The carryover stock position prior to the large 2021/2022 crop combined with the strong global demand for Australian grain and, large volumes of pre-harvest and harvest selling of the crop by producers, has meant export sales have been locked-in and current and forward shipping capacity is heavily committed.
GH: Have we been able to get an opportunity to benefit from the run-up in values since the start of the Ukraine war?
PO: Effectively, prior to the Ukraine conflict grain producers had already sold significant portions of their grain.
It is notable the Australian bulk grain shipping levels are well ahead of the previous record for the first six months of the shipping year, therefore, there is limited or marginal capacity available for additional sales to capture current global market values resulting from the conflict in Ukraine.
GH: What are the opportunities for grain that has not been sold as yet?
PO: Any unshipped 2021/2022 crop will need to be stored, incurring financial cost and storage carry charges until capacity becomes available in the next export year.
The market will factor the cost of carrying grain into prices.
GH: Why is there a difference in the local wheat Price compared to global futures markets? What is all the noise about the Australian basis being low and what does it all mean?
PO: 'Basis' is defined as the difference in value between the local cash price and a relevant futures contract.
The Australian grain industry historically has a focus on US (CME) wheat futures to monitor basis and to hedge Australian wheat.
There has been some unease in the market that Australian grain prices have not fully reflected the rally in US wheat futures market in response to the Ukraine conflict.
While US futures markets are a visible barometer of wheat prices, at times they are not reflective of Australia's, or indeed the world's cash markets.
We need to ask some key questions such as
a) Is the US wheat futures market reflective of what the consumer will or needs to pay for grain?
b) Can sales be made and actually executed at the US wheat futures price?
GH: What was the reason for the disconnect between US futures and Australian cash prices.
PO: The rally and extreme volatility in US futures markets induced by a combination of already tight global exporter wheat ending stocks, and the Ukraine conflict, can be viewed as a "liquidity squeeze" that was not fully reflected in local cash markets (and other global markets).
This liquidity squeeze, occurred as futures market participants including hedgers with short (i.e. sold) futures positions, sought to exit the market (ie trying to buy US futures) are unable to exit their positions smoothly due to lower liquidity as a consequence of the higher volatility and risk triggered by the conflict in Ukraine.
At times of extreme volatility in a futures market the underlying supply and demand factors of the physical markets, lose priority or relevance to the survival need for some participants in the futures market to manage and exit their positions, therefore the US futures prices, for periods of time, are not as relevant to global physical markets and do not fully reflect them.
GH: How does local supply and demand pressure impact basis.
PO: Basis and local cash prices are by definition about local supply and demand factors.
As already mentioned, Australia has large supplies from two large crops, and supply chain capacity constraints in delivering the crop to market.
Given these local factors, and the firmer US futures market, it makes intuitive sense for the local cash basis to be lower than in years of smaller Australian crop supply.
GH: Can we measure up how prices are faring in comparison to other years of high production.
PO: As this is the largest crop on record, there is no historical precedence for meaningful analogous comparisons.
However, competition for Australian growers' grain from both exporters and domestic consumers is strong, with multiple buyers.
However buyers must work and manage financial and operational exposure, in a high risk, volatile and uncertain environment within the capacity constraints of a practically fully utilised supply chain.
GH: What lies ahead for the grain markets in the short to medium term?
PO: Looking ahead, highly volatile markets are likely to continue given the significance of Ukraine and Russia in global supplies and exports in grains and oilseeds.
This will be heightened knowing while war rages in Ukraine, this is the planting season in those regions, meaning significant risks to global new crop supplies due to the war and its impact on planting (labour, land, fuel, fertiliser, and finance) and logistics (storage, delivery, shipping, trade finance).
However, the ability for Australian grain producers to fully compensate the potential Black Sea shortfall may be limited.
Australian acreage is at record levels, and high livestock returns are reducing incentive to switch to cropping.
Other major exporting nations also have obstacles, the US may be able to increase wheat acres, but this is likely to be at the cost of other crops, South America is dry suggesting lower yields, while Canada with a serious drought last year, may be able produce more this year.
European acreage is relatively stable, and may require policy adjustments to increase acres.
Argentina, and also India could emerge as key exporters.
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