Australian grains remain competitive in crisis

In the period of COVID-19, all industries – grain, other agriculture sectors and beyond – have been tested in ways like never before.

"The biggest driver facing the grains industry right now is the relatively good growing season for all of the major grain producing countries.”

Through the second half of 2020 and into 2021, the Australian grains industry will face a number of new challenges. The task for the industry will be to evaluate the impact of COVID-19 so far this year – both domestically and globally - as well as the influence these factors are likely to have in the future.

Importantly, the industry needs to prepare and devise strategies for the convergence of major global factors which will continue impacting the sector.

By its nature, grains production is a resilient industry. In comparison with other globally traded agriculture commodities, grains is arguably the most competitive sector with the top 12 exporters making up 80 per cent of world trade.

Because of this mix of exporters, major import markets have the ability to switch suppliers reasonably easily. As a result, the Australian grain industry has become accustomed to remaining continually focused on maintaining relationships while keeping aware of new markets.

The Australian grains industry must continue to develop new innovations, both in terms of the grains themselves and the supply chain processes in a bid to continually meet the evolving demands of global consumers and feed markets.

The biggest driver facing the grains industry right now is the relatively good growing season for all of the major grain producing countries - what should be a positive development for grain farmers around the world. As a result, the outlook is for a record global crop overall, with a number of grain producing countries forecasting record production level.

While some of the major producers and exporters are forecast to see slight falls from last year, most notably those from Europe, the forecast combination of high grain production and stocks points to minimal signs of strong price rises in the months to come.

Australia forecasting a record harvest

Australia’s grains industry is cautiously optimistic that 2020/21 will see the best wheat crop in half a decade. While forecasts vary, the current projection is a wheat harvest of 26 million tonnes in 2020/21, which would be up 71 per cent on last year’s drought-hit low of 15.2 million tonnes.

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This forecast remains a cautious one, as while most grain-growing regions of Australia experienced a good start to the season, a number saw little or no rain throughout June. With four or five months until harvest, these regions will need to see a return of good moisture to see crops reach potential.

On the back of production outlooks, grain exports are also forecast to see a major turnaround from last year, jumping 90 per cent to 17.5 million tonnes. This would see wheat exports accounting for around 67 per cent of Australia’s total production, in line with the average proportion of the last decade.

On its own, a strong recovery in production is definitely good news for the sector. That said, swings of these proportions in both production and exports also come with impacts which need to be factored into industry planning.

To put it in proportion, a 42 per cent increase in national wheat production would be the second largest increase in 24 years. For exports, not only would a 90 per cent rise on the previous year also be the second largest in almost a quarter of a century, it would also be the fourth largest year-on-year rise in at least the last 50 years.

A lot of growers would have seen their wheat production levels fall for around six of the past seven years so a rise of this volume will require a number of important strategic operational decisions. Many growers will need to evaluate what proportion of grain may be stored on farms, rather than sent to grain receival sites, and ensure they have adequate storage facilities should this eventuate - whether in silos, bunkers or other options.

Operationally, with prices for cattle and sheep continuing to remain at strong levels, a number of grain producers will also be evaluating the balance of stock versus crop acreage in mixed farming operations.

Among a number of other considerations, these operations will be balancing in the level of feed grain stored on-farm and how this will tie in with budgeting forecasts on possibly either buying feed or selling grain. 

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For grain traders and receival site operators, the build up to this year’s harvest will similarly need to focus on ensuring logistical capabilities and storage capacity are prepared for the scale of crop which could eventuate. In the record wheat crop of 2016/17, some industry stakeholders were caught unprepared by the scale of the crop leading to logistical challenges along the supply chain.

In comparison, the forecast year-on-year crop increase in 2020/21 will be greater than that year, in both volume and percentage increase.

In terms of the Australian wheat stocks-to-use ratio - an indicator of the end stocks compared with the total usage, one which is regarded as having reasonable impact on price - current forecasts have Australian wheat heading for 20 per cent, which is consistent with the average figure for the past decade. On this outlook, Australian wheat prices would seem unlikely to be headed for strong upward pressure.

Similarly, the forecast percentage rise in wheat export volumes is also the fourth highest in half a century. To put it in perspective, the major rise in Australia wheat exports in 2016/17, which presented some challenges to the Australian wheat export supply chain at the time, was up 40 per cent on the previous year, while the current forecast for the 2020/21 export rise is up 90 per cent on the previous year.

It will be important for the industry to ensure any potential issues such as port access and capacity or possible COVID-19-related bureaucratic issues at the receiver end are planned for in advance.

For companies utilising containerised grain, any issues arising out of the reduced availability of containers due to COVID-19 related shipping interruptions will also need to be factored into planning.

Michael Whitehead is Director and Viveka Manikonda is Senior Associate of Client Insights at ANZ

Click here to read the full grains report.