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The future of wheat growing

27 Oct, 2011 02:00 AM
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Wheat growing: John Nicoletti at his crop in the Central Wheatbelt around Merredin which is due to be harvested at the end of this month. PHOT: Merredin-Wheatbelt Mercury
Wheat growing: John Nicoletti at his crop in the Central Wheatbelt around Merredin which is due to be harvested at the end of this month. PHOT: Merredin-Wheatbelt Mercury

WA’S biggest private grain grower John Nicoletti, who is based in Merredin, said wheat growing technology and innovation had peaked for his farm business and is only capable of wielding minimal influence on its future viability.

Speaking to Rural Press about the future of wheat growing for Australian farmers, Mr Nicoletti said genetically modified (GM) wheat research might bring some future benefits in the years ahead.

But any new varieties, possibly with frost tolerance or drought resistance, are at least seven to 10 years away from commercialisation.

Mr Nicoletti’s biggest concern is the ongoing volatility of wheat prices which have hit some high points in recent seasons.

But at current levels of about $260/tonne, he believed there was insufficient profit in wheat growing, to support his business long-term, in the face of escalating input costs and labour challenges.

He said wheat prices need to stay at about $300/tonne to keep his business going strong and prevent him slashing next year’s plantings by up to 50 per cent.

This year, Mr Nicoletti planted more than 83,000 hectares at his three locations, in the northern Wheatbelt at Mullewa, in the Central Wheatbelt around Merredin and south at Esperance.

That’s a crop roughly 80 square kilometres larger than the Pacific Ocean country of Tonga.

His business is deliberately structured to spread seasonal risks of drought and other factors, by growing crops at various geographical locations, which are capable of capturing different rainfall patterns in any given year.

Over 33 years, he’s steadily built his business based on these sound risk management principles and the advantages of adopting greater economies of scale.

But times are becoming more complicated and challenging due to the compound effects of several recent droughts and ongoing price volatility.

Mr Nicoletti endured one of his toughest seasons last year with his 74,000/ha program ravaged by WA’s worst drought in 20 years.

His wheat and barley crops in Esperance performed extremely well averaging about 2.5/tonnes per hectare while canola returned about 1.3/t and his lupins 1.6/t.

But at Mullewa near Geraldton in the north, he only returned about 0.9/t per hectare while on the 40,000/ha he owns and leases in the Central Wheatbelt, his returns were well below average.

Across his various properties, Mr Nicoletti aims for a budgeted average of 1.5 to 1.6/t and last year banked on producing about 110,000 tonnes but only returned a third of that estimate.

At the end of the season he told Rural Press that if it wasn’t for the high grain prices at harvest, “I think there would have been a for sale sign up here”.

Between seasons he has fought an ongoing battle with the banks and emerged this year fighting stronger than ever, with another big crop sitting in the ground.

After a couple of bad years, he thought 2011 would be “the bonanza year” and boosted his plantings by about 3000/ha at Geraldton and his two other key locations.

Mr Nicoletti said he faced a mixed bag this year but the prospect of making decent returns definitely appeared brighter than 2010, with more grain on the way at harvest time.

In Geraldton, he’s having an outstanding season and one that’s capable of eclipsing recent record returns.

WA’s bulk grain handler CBH is reporting the state’s growers are on track to deliver their second biggest harvest since the bumper year of 2003-04 when they delivered 14.7 million tonnes.

For Mr Nicoletti’s Central Wheatbelt crops, the rain ran out of puff around Bullfinch during the critical stages of the growing season but there was more moisture in the ground than the past few seasons, to keep them alive.

Those crops are looking less promising than he’d like and he’s expecting a return of about 0.8/t per hectare that’s “a fraction below average”.

Other crops around Marvel Loch are looking at a likely 1.2/t return which is on budget for his Central Wheatbelt paddocks.

In Esperance, another rain burst would see his crops return 2.5/t but if not, he won’t be overly concerned if the average return hits 2/t.

But current grain prices dominate his view on the future of wheat growing, more than anything else.

A few months ago wheat was offering more than $300/tonne but Mr Nicoletti was reluctant to hedge a large volume of his crop that early in the growing season, given catastrophes with forward selling in recent years.

He started locking in some grain prices early, but said it was unwise to commit his entire expected production volume in April and May when the crop first went in the ground.

He said it would have been a “gutsy effort” to forward sell the entire crop but cast his mind back to 2007 when many growers were caught with little or no grain to fill forward contracts at record high prices.

“That cost everyone an awful lot of money and we don’t want to go back down that path again,” he said.

“In 2008 we had a reasonable season but prices dropped to $200 a tonne.

“Everyone said the price would stay there but then eight months later it hit $300 and nobody saw that coming - none of the traders or any of the commentators - they all thought wheat would stay where it was at $200 a tonne.”

Perplexed by ambiguous market signals, Mr Nicoletti said recent world supply and demand estimates were contradicting current wheat prices, especially with corn supplies at record lows.

He said the recent price drop was being driven more by global financial markets than actual supply and demand factors for world wheat and grain stocks.

“Stocks are higher than they have been in the past but the current wheat price is not reflecting that, like it has in the past,” he said.

“We’re getting around $260 to $265 a tonne for APW but five months ago the price was nearly $100 more than that.

“Futures are still driving the market while farmers in Argentina and Australia are copping it in the neck.

“We’ve been copping it in the neck for the last couple of years but prices of $300 plus would get us out of the manure.

“Farmers are cautious to do any forward selling, but we would like wheat to have stayed around the $300 mark and can’t understand why it’s gone this low.

“There’s not enough grain in the world for the price to be where it is today and corn stock levels are at the lowest level ever.

“But Russia could start exporting wheat again and prices will drop even further.”

Mr Nicoletti said he had no choice but to grow wheat and accept price volatility, at least for the time being.

“We’ll continue to grow wheat but under duress,” he said.

“If there’s no improvement with grain prices by February or March I won’t be growing 80,000/ha of crop next season.

“There’ll be about a 50 per cent reduction and we may even surrender some leases.

“I know what my fixed costs are and I can’t continue to take all the risk when the bank takes on no risk.

“I haven’t worked 33 years to get where I am today, to now be at the mercy of grain prices.

“If world grain stocks are not at an all time high, why isn’t the price better?

“I don’t think there’s that much grain out there so maybe a few porkies are being told somewhere along the line.

“Everyone that I talk to around the world is telling me there’s no good grain around the place.

“Wheat prices and wheat futures have to do a massive turnaround and be at least $300 a tonne to keep this cockie going round again next year.”

Mr Nicoletti said he didn’t employ an agronomist because they didn’t add value to his business and he already employs farm managers with those skills.

He would prefer to have a good grain trader and said it was something he may consider in future.

“It’s an idea but that costs money as well and after two bad years we can’t really afford it because our finances have been stretched to the limit,” he said.

In the past year, Mr Nicoletti has been forced to cut his full-time staff numbers from 46 to about 35 to help absorb the impacts of consecutive droughts.

He said there was a two tier wage system in WA that was also concerning in light of the future of wheat growing - the farming wage and the mining wage.

He said it was very hard to compete with the mega-wages offered by mining companies with young workers able to collect $80,000 a year working on the mines, straight out of school.

He said farming can’t pay the same kind of money because the profits “are just not there”.

“We are lucky to have some darn good staff at the moment but she’s a very tough industry to be in at the moment,” he said.

“Small family farms are kicking goals but it’s hard for big operations like mine to get the people.

“The mining boom is good to see and it’s great for the country but it’s not so good for me.”

As for technology and innovation and its impact on wheat growing, Mr Nicoletti had little to say.

“I don’t want to be negative but we can’t get any more efficient than we are,” he said.

“We are at the limit now, unless GM is going to improve our profitability somehow.

“But I don’t want to say too much on that just yet because there’s still a lot of work to be done.

“No matter what, if we plant crops, not just wheat, we need to guarantee a return.

“I’m happy with the deregulated system but we need some kind of insurance system for a hedge that can carry the risk, if it doesn’t come off.”

Date: Newest first | Oldest first

READER COMMENTS

Bonnie
29/10/2011 5:40:05 AM, on Farm Weekly

John referring to your last sentence, you had this it was called a national pool !!!!!!!
Jock Munro
31/10/2011 4:49:15 PM, on Farm Weekly

Bonnie, Five pages of Nicoletti discourse on how risky and unprofitable wheat growing is and then he informs us that he is in favour of deregulation. Is he not aware that the National Pool manager had an obligation to maximise grower returns and it achieved this by hedging,by maximising quality,by managing logistics including sea freight and by leveraging all players in the supply chain. Wonders never cease! If he thinks that things are tough now then he has a real shock coming when this saga plays out.
Ted OBrien
3/11/2011 7:01:40 AM, on Farm Weekly

How much of a problem was price fluctuation for John Nicoletti when we had the AWB and the single desk? The problem which made it necessary to create the Wheat Board in the first place, i.e. security of supply, are looming again.
dunart
4/11/2011 3:47:15 PM, on Farm Weekly

headlines grabber what more can be said about the article the industry had stability, he opposed it. now he complains and instability! back to the first line

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cont.... And guess what? you bet it, they were predicting a 70-80% of above median rainfall. How
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Yes, coops are worth another look. Thinks about Rabobank, Danish Crown, Flora Holland, Land
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Who is foolish? The only people that are foolish are all the media reports we get about how we