Domestic or International Influences – Which to Watch?
Chris Coore, Agfarm Advantage Manager
April 12th 2018
It’s that time of year again. Grain markets are approaching the most volatile time of the season. Australian sowing is just around the corner and the northern hemisphere weather risk period is fast approaching. So, which one will be the main driver of price and which one should we keep a closer eye on? This article will discuss why prices continue to rise around the world and what the biggest drivers of Australian wheat and barley prices are.
At the moment, both North and South America are experiencing adverse dry weather which is dramatically reducing production for the coming year. The reason this is creating so much panic around the world is the largest agricultural futures market sits in Chicago and its prices, to a large extent, rely on the crop production of these regions (specifically soybean, corn and wheat). When North and South American crop production is impacted, global supply is also impacted, so price typically rallies and the whole world watches and reacts. Therefore, a price rise in Chicago agricultural futures will typically create a rally for grain and oilseed prices around the world.
In the Black Sea region, both Russia and Ukraine are experiencing fantastic growing conditions for wheat. Russia and Ukraine have been expanding their agricultural output over the last five years with better technology and crop management which has led to these nations becoming a major competitor into our traditional exports homes of Asia. Typically, Russia and Ukraine harvest their crops in June but due to their wetter than average conditions, this harvest is expected to be slightly delayed allowing Australia to have a longer export window this year, keeping demand on our shores.
This is all simple supply and demand, right? Well, unfortunately international influences aren’t always that simple.
To add fuel to fire this year, there is a political war being played out between the US and Chinese governments over tariffs being place on certain products and commodities from each country. It started with the US placing tariffs on certain Chinese produced goods like solar panels, and ended with the Chinese Government placing a 25% tariff on US commodities such as pork and corn. This has created a huge wave of volatility in markets, impacting the equities and commodities exchanges. Now the world is calling for it all to stop so we don’t experience any unnecessary consequences, and some experts warn that if left unresolved, this trade war could lead to the next Global Financial Crisis.
Last year, parts of Western Australia and most parts of Victoria produced good crops but unfortunately South Australia, NSW and QLD saw adverse growing conditions. The 20 year average wheat production in Australia is 22.28MT and as the chart below illustrates, Australia has very volatile growing seasons. Last year with the unfavorable growing conditions, wheat production was 20.5MMT which was below the 20 year average. This put a floor on wheat and barley prices at harvest time and caused a gradual rally in prices since harvest which has rewarded growers who deferred their wheat and barley sales.
Unfortunately, since then Australia has been through a period of dry and hot weather and with sowing creeping up quickly, this is likely to have a negative impact on acres planted. This has recently seen traders, exporters and consumers all jump to the buy side of the market, especially for the East Coast, which is pushing up values dramatically for both current crop and new crop. Australian grain markets are now trading in what is known as a ‘weather market’, so every day it doesn’t rain, prices will likely go up and the moment it does rain, prices will likely go down.
What is outlook and what should we focus on?
The catch in broadacre farming and commodity marketing is the influencers tend to lie out of our hands. We never know 100% what the government or the weather will do day-to-day, so coming to a ‘definitive conclusion’ of what will happen to grain prices is nearly impossible. Domestically, with grain markets trading into a ‘weather market’ it is easy to focus solely at home because if we don’t see an autumn break soon we could see large spikes in values as buyers’ scramble to get cover. But, it is important you don’t overlook what is happening globally and to watch for any developments in the US weather and the political struggle between China and the US.
So, to answer the initial question of, ‘which influencer should we watch?’ the answer is both. We live in a global economy therefore we can no longer only worry about what is happening in our own backyard but need to pay attention to what is happening around the world. Any influencer, be it the size of the Black Sea crop, the weather taking a turn for the worse in North America, a drop of rain in outback Australia or Governments decreasing or increasing tariffs, could turn commodity prices on their head.
To print or download this Agfarm World Market Update, click here.