More than a grain of hope as winter crops begin harvest

The wheat and crop forecast looks strong across much of the country after late rains in the south-east. Beef prices are buoyant. And even those sectors where concerns over COVID-19 were lingering – namely sheep and wool – are showing good recoveries or, at least, signs of life.

"As the winter crop harvest gets underway across the country, all indications are there for a strong wheat harvest across Australia’s grain-growing areas.”

This time of year can be anxious for grain growers depending on location; they hang on one more finishing rain, no late frost, no rain interrupting harvest. But on most objective measures, our major commodities are looking good.

There are however, mixed messages from the producers themselves. Total outstanding loans to industry have increased 9 per cent on this time last year. This debt total of $A80 billion likely combines factors of strong investment demand and high land prices - but also reflects droughts inhibiting the ability to pay down debts through seasonal cycles. (A longer discussion for another time, but the positive side of this for most farmer borrowers is we are experiencing the lowest interest rates in a lifetime.)

Despite the good seasonal conditions driving improved confidence in many areas, farmer confidence is otherwise influenced by some areas doing less well and an overall backdrop of COVID-19 uncertainty.

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Global grains

As the winter crop harvest gets underway across the country, all indications are there for a strong wheat harvest across Australia’s grain-growing areas. When combined with the recent increase in global grains prices off the back of trade demand, the outlook is very positive for grain growers.

Some concerns still exist about the possibility of untimely rainfall in New South Wales however to date that has not happened. Similarly, strong outlooks for barley and canola harvests are also adding to the optimism. However, strong increases in the global price of grains have not filtered through to domestic prices as yet.

Global grains prices have jumped strongly since August on the back of the July United States Department of Agriculture (USDA) forecast of lower than anticipated production and consumption.

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Export prices have increased strongly for all countries but was strongest for wheat from the United States, which was driven primarily by strong export demand from China. Exports prices across all major wheat producers increased strongly, even in Canada and Australia where very strong crops are anticipated.

As a result of the strong production year forecast for 2020/21, competition is expected to be strong between producers, particularly for high-quality wheat out of Canada which has ramped up its export markets in recent years through new Free Trade Agreements.

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The most recent USDA forecast for global wheat production saw a slight increase in global production for 2020/21 with larger forecast crops in Australia, Canada and the EU, offset by a slight increase in consumption of feed wheat.

Despite this, USDA forecasts for 2020/21 see ending stocks of wheat increasing by 0.8 per cent and a record global stocks-to-use ratio of almost 43 per cent. While such a high stocks-to-use ratio appears to be a strong indicator that global prices will decline into the future, it must be remembered the vast majority of stocks are being held by China who account for over 51 per cent of global stocks and in the past three years have accounted for 96 per cent of the increase in global stocks.

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Those strong global wheat prices have not translated to domestic prices, however, as both milling wheat (APW, Port Adelaide) and feed wheat (ASW, Port Adelaide) remain around 5 per cent below levels seen in 2019 and 2018.

Despite this, Australian grains producers are looking at a strong year, based on production levels. The latest crop report from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) reveals a strong harvest ahead, with wheat production forecast to increase by 91 per cent to 28.9 million tonnes, barley production by 25 per cent to 11.2 million tonnes and canola production by 47 per cent to 3.4 million tonnes.

Record levels

Similarly, global coarse grain production is expected to reach new record levels, increasing almost 6 per cent in the last year, most of which comes through the increase in corn production in the United States and Brazil. A record global corn harvest, combined with relatively stable global barley crop, would normally see some downward pressure on overall coarse grain prices. This year, however, this is yet to eventuate, with strong bidding for corn in the US based on concerns over the impact of recent storms and weather on the corn harvest also supporting global barley prices.

Australian concerns over the impact of increased tariffs on Australian barley exports to China do not seem to have eventuated, as global trade flows shift to accommodate the almost immediate cessation of Australian barley exports to China. In its stead, the Saudi Arabian market appears to be opening up to Australian exports, as Black Sea exports are diverted to China.

Global oilseed prices have seen the strongest rises in recent weeks, as demand from China and slower processing in Argentina put pressure on supply. However, those increasing global prices, similarly to wheat prices, have not translated to large increases in the domestic price which, while not going sky high, still sit at stronger levels than either wheat or barley at just 1 per cent below the levels seen at the same time last year. In the medium term, ABARES is forecasting a solid drop in canola prices, which does not seem to be materialising as yet.

Mark Bennett is Head of Australian Agribusiness and Madeleine Swan is Associate Director, Agri Research Australia at ANZ

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