Despite extreme weather conditions and a high dollar, the outlook is positive for the Australian grains market in 2011, according to a recently-released report by agribusiness bank Rabobank.
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After intense flooding across the eastern states and near-drought conditions in the west, 2010 has seen grain quality and quantity downgrades, however prices have been a saving grace, the report says.
Author of the report Australian Grains Outlook – Cold November Rain, Rabobank senior analyst Wayne Gordon said as 2010 draws to a close, most would concur the year could not have turned out more differently than initial expectations.
“In addition to Australia’s wet harvest in the east and drought conditions in Western Australia, we’ve had weather shocks in Russia, Western Europe and Canada, as well as poor conditions in the United States winter wheat areas impacting on prices,” Mr Gordon said.
“Next year, we expect macroeconomic and weather events will still dominate market sentiment, with each driving the market at some stage, much the same as in 2010”.
While the outlook is positive, it is not without risks.
“There will be high price volatility, as macroeconomic factors and fundamentals take turns at driving market sentiment, but current expectations are for crop balances to be tight for much of 2011, particularly for corn and cotton. Less spring wheat will be planted in the US and the strong demand for feed grain are all positives for Australian producers,” the report says.
In addition, Mr Gordon expects sharp gyrations in prices, particularly in the more sensitive corn and soybean markets, as the ‘battle for acres’ gets underway in the US.
According to the Rabobank report, the uncertainty around the persistence of the La Niña event makes it difficult to predict planting conditions for the 2011 Australian winter crop, however the latest forecast from the BOM (Bureau of Meteorology) suggests above-medium rainfall will persist into March which is positive news for growers.
Mr Gordon said he favourable new-season outlook, combined with stored moisture from the wet spring, suggests a good start to the eastern winter cropping season and a slight increase in area sown to grain, particularly wheat and malting barley.
“Similar areas of canola are anticipated, with a ‘battle for acres’ of our own brewing between cotton and winter grain production in northern NSW and Queensland,” he said.
In contrast to the east, Western Australia, aside from a few brighter spots, witnessed the driest winter conditions on record across the wheat belt.
“Looking to 2011, the good news for WA is that the BOM’s improving outlook for rainfall provides some optimism that production may shift back toward average levels in 2011/12 which, assuming average yields, wheat production should reach 8.1 million tones,” Mr Gordon said.
The Rabobank report predicts the Australian dollar will remain elevated for some time, posing problems for grain exporters.
“The strong dollar will be problematic for exporters in the second half of 2011, particularly if corn supplies increase substantially and global wheat quality improves in Northern Hemisphere harvests,” it says.
With such extreme volatility in crop prices expected to continue, price-side events remain difficult to predict for the whole of 2011, according to Mr Gordon.
He nominates three key swing factors that are likely to determine global crop prices over the coming year – crop areas, weather, and policy developments such as export bans in Russia and China’s policy attempts to combat food inflation.
“If these swing factors play out as we expect, a definite bullish picture can be proposed for crop prices in 2011,” he said.
The report also highlights that margins will again be a strong focus for growers as stronger crop prices will lead to higher chemical and fertiliser prices in 2011.
“This means relative crop margins will again need to be watched carefully,” Mr Gordon said.
The Rabobank report warns grain-handling infrastructure will be the limiting factor for Australian grain exports in the near-term, with Mr Gordon expecting Australian grain exports to remain at similar levels going into 2011.
“The rain-delayed harvest is only adding to what was already a difficult logistical exercise due to the unbalanced split between Australia’s east and west,” he said.
“The question is how hard will these infrastructure bottlenecks bite?”
