High-cost crunch for Aussie grain

25 Jun, 2015 02:00 AM
The global trade is proving hard work

THE world is supposed to be hungrier and more willing than ever to pay good money for Australian food exports, but for graingrowers the whacky market trends of recent years tend to be delivering few of the price rewards their industry has been led to anticipate.

Despite a fast-rising global population and improving living standards in Asia, average global wheat values are flat or falling.

Part of the reason is world grain stocks have actually been building or holding firmly ahead of global consumption needs for the past seven years.

Another critical factor has been an unprecedented slip in global shipping rates bringing new low-cost competition into Australia's traditional export market regions.

Millers in nearby Indonesia now substitutes Australian wheat with imports from as far away as eastern Europe's Black Sea region and Canada.

"In the past 18 months we've witnessed bigger changes in global grain flow than I've seen in 35 years in this game," said GrainCorp managing director Mark Palmquist, the former US trader and global grain business specialist who took the helm at Australia's biggest agribusiness late last year.

This year's Chicago Board of Trade (CBOT) spot wheat futures prices are currently around US500 cents a bushel ($US183 a tonne) after trending well below optimistic December-January highs of US650c/bu ($US240/t), despite bursts of recent busy buying activity.

While international economic signals indicate exciting export prospects do exist for Australian grain, and in some cases rewards are trickling through, including recent strong prices for sorghum to China, the global trade is proving hard work.

Blocks to recovery

Australian exporters' frustrations are being compounded by competition from domestic livestock markets for drought-depleted stocks of east coast grain.

Australia still has abundant export possibilities according to Mr Palmquist, but cheap oil and a surplus of cheap international sea freight capacity have brought more intense grain trade competition right into Australia's export backyard.

The high cost of getting grain out of Australia via our ageing bulk storage sites and an inefficient rail transport network was also chewing into graingrowers' returns.

Mr Palmquist estimated about a third of the value of a tonne of grain was consumed by the costs associated with getting the crop into the global supply chain.

In the US that same cost factor was "substantially cheaper" - about 15-20 per cent.

Meanwhile, the worldwide steel price slump had helped spur on orders for big capacity new generation ocean freighters from South Korean and Chinese shipyards, and these ships operated at up to 8pc more efficiently than existing vessels at sea.

At the same time, older freighters were now running more cheaply than a few years ago thanks to low oil prices, and fewer ageing bulk carriers were being withdrawn from service because cheap values made them less attractive as scrap metal.

On the grain production front, Russia, Ukraine and the Black Sea region had become increasingly influential suppliers to global markets in the past decade, notably to the Middle East and into Asia.

In what would have seemed a laughable situation a decade ago, Mr Palmquist noted some large Indonesian mills just 3000 kilometres from West Australian grain ports now used cheap freight to help fill up to 20pc of their needs with blends of low-cost, low protein Russian wheat and high protein spring wheat shipped from Canada and the US about 15,000km away.

While they may still want Australian quality wheat, overseas buyers were increasingly tempted to shop around for cheaper grain to blend with it.

"It's amazing how so many deflationary forces in the energy, steel and commodity markets have come together at the same time to create these new market conditions," Mr Palmquist said.

Although Australia's depreciating dollar had definitely helped improve our grain export competitiveness in the past two years, many other key grain export nations - notably Canada, Argentina, and Brazil - had benefited from lower currencies, too.

Market analyst Malcolm Bartholemaeus at Avantagri said the restrained prices for Australian export wheat were also a consequence of a five-year surplus in global stocks.

Although export values were typically about $50/t better than early last decade, price growth had been restrained since the 2007-08 global grain shortage (when Australian values peaked at $400/t) because the world had responded by growing much more grain.

Mr Bartholemaeus said world wheat stocks grew an average 840,000t annually in the past five years, although those surpluses may be about to fade to zero this year if current seasonal conditions persisted.

While Australian growers ideally needed export values above a local cash price of $270/t (delivered port) to stay profitable, in Australian dollar terms CBOT average prices at harvest since the peak in 2008 had only crept close to a rewarding $300/t in 2010 and 2012, and lows had been around $220 and $240 in 2009, 2011 and 2014.

Decline odds firming

Deteriorating crop yield conditions in much of Europe and Canada could be about to turn the tide for world wheat prices, with Mr Bartholemaeus noting the odds are firming for a significant decline in world stocks and a price revival.

"It's still a closely watched thing, but there has been improving support for the wheat market in recent weeks," he said.

Yield expectations were drying off in Canada and Western Europe, parts of the US were still too wet and 2015-16 export prospects from the increasingly influential Black Sea region remained uncertain.

"Every major move in the world wheat market since 2007 has been triggered by what's happened in Russia and the Black Sea - if they get dry conditions world prices are up, if they harvesting big crops they swamp the market and it's down again," he said.

"The Black Sea can be quite unreliable as a production area.

"Conditions can quickly turn windy and dry or they get freeze damage, and like Australia they tend to average a crook season every five years or so."

Exportable shortages were further complicated if Russian taxes and other restrictions kicked in.

Mr Bartholemaeus said current estimates suggested global wheat stocks (with the exception of a 2-million-tonne surplus in the US and 6m tonnes in China) would fall by about 10m tonnes in 2015-16 to total about 108m - the lowest since 2012-13, when the market last kicked.

"Given China doesn't export its crop, and like Australia, production from Europe and Canada could be pretty tight, the US might be the last man standing in the global trade, which means we look like moving towards a US price rally."

Andrew Marshall

Andrew Marshall

is the national agribusiness writer for Fairfax Agricultural Media
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Jock Munro
25/06/2015 4:43:05 AM

The day Rudd Labor and Nelson's Liberals abolished Australia's single desk national pooling export wheat arrangement was one of the blackest in our Nation's history. We were able to address all of the problems that Andrew Marshall has documented. Deregulation has transformed the wheat industry into a merchant free for all. Unfortunately, industry commentators seem unwilling to acknowledge the ramifications of the treacherous removal of the single desk or that it even existed for over sixty years.
25/06/2015 6:43:23 AM

But Munro will ventilate that the answer is a return to the iconic- single desk selling and a new utopia.
25/06/2015 9:30:52 AM

Jock, what exactly are you hoping to achieve by sitting on Rural press websites clicking refresh, waiting for a wheat-related story and then posting a moan about the abolition of the single desk? By my estimation you have now posted about a thousand of these almost identical messages, irrespective of how tenuously related the story is to the single desk. Do you think you have changed anyone's mind? Do you think that Barnaby Joyce is taking his policy guidance from the comments section of Stock & Land? Take a break, go outside and get some sunshine. You have my permission to let go.
Jack Munro
25/06/2015 9:35:55 AM

treacherous 'tr?t?(?)r?s/ adjective 1.guilty of or involving betrayal or deception. Certainly sounds like your beloved Single Desk to me Jock - You personally may be the biggest victim of all of their deception. They were criminals - not alleged criminals. In your eyes they get more glorious by the day. As for their unceremonious and justified removal being the blackest day in our nation's history? I think even you would retract that sentiment on reflection Jock.
25/06/2015 11:17:00 AM

Jock, take your blinkers off & read the Story properly...Several key fundamentals in the price of International shipping, have Changed forever the way Wheat is being traded globally. Something even your beloved price equalisation scheme (If it was still about) would have had no control over......We live in a rapidly changing World, either accept & embrace Change or get left behind in It's wake.........just my 2 cents..
Jock Munro
25/06/2015 11:34:48 AM

No Hayseed-world marketing is behaving as you would expect and we are now at a complete disadvantage. As for shipping; we had a premium chartering business through AWB Ltd. I don't think that you could call our single desk a price equalisation scheme-growers were well and truly rewarded for producing a quality product. The merchants that now control the industry are the price equalisers! Perhaps you should remove the blinkers or are you an employee of a powerful merchant?
25/06/2015 12:36:00 PM

Jock Monro, baying at the moon. Everyone hates me. Big bad merchants, nasty government, I am the only one marching in step. You are whiner and a whinger.
25/06/2015 12:38:49 PM

Jock, give it up, the single desk is gone and won't be coming back.
25/06/2015 12:47:37 PM

Carnamah couldn't agree more. A poll do you agree or disagree with removal of single desk think probably would be 55/45 do you want it reinstated would be a resounding no possibly 10 for 90% against. Free speech jock can say what he wants but like you never a solution offered.
25/06/2015 1:35:17 PM

For goodness sake Jock, did you read the article? It is the low price of oil that has seen grain flows change and other exporters can land wheat in Indonesia at a competitive price. Are you saying that AWB could control the global price of oil in the 'good old days'? As for the 'premium', chartering business, when are you going to admit that it was a cost centre levied against AWB International in a non-competitive arrangement? Transparency? Value to the National Pool?
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