While Russia's invasion of Ukraine early this year sent farm commodity prices spiking, the war has actually smoke screened more fundamental market issues, like global grain production shortages.
For various reasons the world has not been producing big enough crops to satisfy increasing demand, despite the fact Australia could potentially harvest its third consecutive record, or near record, winter crop later this year.
"Russia invading Ukraine has been one important and highly visible influence on the swings in prices early this year, but other factors are actually more important," said Commonwealth Bank of Australia's agri-commodity specialist, Tobin Gorey.
"The world needs to catch up with production output - we have not had a huge global crop for a while," he said.
"And every time there has been some claw back to better yields, demand has been greater than before.
"Inventories have been tight and falling behind, particularly since 2020."
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By way of example, Mr Gorey pointed to a 55 per cent rise in the S&P GSCI (Standard and Poor's Goldman Sachs Commodity Index) Agriculture and Livestock Index between August 2020 and early February this year - before Moscow's forces invaded its Black Sea region neighbour.
The outbreak of war on February 20 triggered immediate market uncertainty about how agricultural trade would cope with loss of grain exports from Ukraine and Russia, driving the global index up a further 15pc by May.
However, by early September it had retreated to just 2pc above pre-invasion levels.
Chicago wheat futures contracts for December traded to a peak of $664 a tonne in mid May, but were back to $442/t a month ago.
"Clearly much of the agri-commodity price rally was already in place prior to any widespread worries about Russia in Ukraine - something else has been going on," Mr Gorey said.
The trade now accepted Russia was likely to be exporting its normal grain quantities to the world and Ukraine would export what it could, however, wheat markets began rising again in September.
Stocks are low
"Inventories have struggled to regain comfortable levels since 2020, partly because of unseasonable (northern hemisphere) weather, but even when forecasts were as good as they could be these markets were not on a path to resolve supply tightness," he said.
Technically, low global inventories should be particularly exciting news for Australia given the availability of a potential bumper 2022-23 harvest.
However, the local trade was still struggling to export the previous grain crop fast enough because the nation's logistical capacity had been pushed beyond its limits and subsequently could not take full advantage of peak export market opportunities quickly enough.
Mr Gorey said although global price rewards were "pretty good" for Australian farmers, he tipped export returns would continue to be undermined by unusually weakened basis prices in 2023, while rising crop input costs also gnawed into profits, too.
An increase in the container grain trade or more bulk ships loading in deep water ports may allow some basis recovery.
Other conflicting market influences were at play, too.
Profits under pressure
Although high commodity prices and tight global inventories would also normally encourage greater worldwide crop planting and yield productivity efforts, this seemed less likely at the moment.
A combination of high energy costs, and, indirectly, high fertiliser production costs, plus central bank pressures on interest rates and currency exchange rates, could dilute farm profitability and discourage extra investment in production.
Current prices are not yet close to flowing through one-for-one into profitability
- Tobin Gorey, CBA
"Season 2022 has seen no expansion in expected harvest area and expected yields across the world," Mr Gorey said.
"A tentative conclusion is that current prices are not yet close to flowing through one-for-one into profitability.
"Chances are, expected profitability is higher, but perhaps not enough to trigger a lot of investment."
However, the world still needed food, particularly big consumers such as China and Asia in general.
Despite China being "in the midst of a festering property bust" and economic slowdowns caused by COVID-19 lockdowns, its consumption and import needs were expected to keep pressure on global prices.
Beijing was considered unlikely to risk unsettling public sentiment, particularly its urban population which had increasingly westernised food habits and expectations of beef, sheepmeat, oilseed and grain products sourced around the globe, particularly from South America and the North American grainbelt.
India, normally a grain importer, had temporarily taken advantage of high export prices early this year, but then partially banned wheat exports because it, too, had to ensure its own domestic needs were met.
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Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
