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2022 Australia – A year of challenges and opportunities

07 March 20227 min reading

Australia is on track to produce another large crop, but farmers in the country face a cost-price squeeze due to an increased cost of production. The invasion of Ukraine by Russia could further complicate and inflate the cost of many of these inputs. 

Manager
Thomas Elder Markets
Melbourne


I have lived in Australia for twelve years, and each of those has been quite different! The one word that best sums up agriculture in this continent is variable! During my time here, the country has had its share of floods, frosts, droughts, fires and mice plagues. 

The last four years really stand out as memorable; we had two years of severe drought, followed by two consecutive years of record wheat production. These past two seasons have allowed Australian farmers to recoup the losses of the bad years and brought Australian wheat back onto the global market.

Chart 1 below displays wheat production in Australia since 2010, along with our first projections for the 2022 crop. Our current estimates for the wheat crop are 30mmt +/- 2.5mmt, which might seem like a big variation; there are two months to planting and nine months until harvest.

Whilst it is still very early in the Australian grain growing season, and as mentioned previously, we can face a large number of climatic issues between now and harvest. The agronomic conditions are extremely inviting. The summer rains have resulted in very solid soil moisture profiles through large parts of the eastern states. 


Provided Australia doesn't face any disasters this would place the Australian well above average and ensure a bountiful surplus to meet the world's market. 

It isn't all rosy at the moment. Farmers are facing strong agronomic conditions but are also facing some of the most expensive input costs in recent years. 

The diesel market in Australia very closely follows the crude oil market due to diesel being a refined derivative product of crude oil. If the crude oil price rises, then diesel will rise (and vice versa).


The crude oil market has risen in recent months due to increased demand. This rise was exacerbated in 2022 due to geopolitical concerns. Namely, the risk premiums that are being added to the market as tensions remain between Russia/Ukraine and UAE/Yemen. These are two regions that contribute large volumes of oil and gas to the global economy

This has led to fuel prices hitting the highest price since 2008. As grain growers start to make purchase decisions in the months approaching seeding, prices are likely to be at high levels compared to recent seasons. 


Producing grain requires large diesel volumes and is one of the top five costs facing farmers in Australia. 

The highest single cost that grain farmers face is fertiliser. The second half of 2021 saw large increases in the price of fertiliser around the world. The price of fertilisers have risen to the highest nominal price on record. When accounting for inflation prices have not exceeded the highs of the early 1970's. 

The rise in fertiliser pricing levels is directly attributable to the increase in the cost of energy. The production of fertiliser is highly energy-intensive, and as energy increases in cost, so does the price of fertiliser. 

This relationship can be viewed in Chart 3, which displays the average monthly price of both Netherlands gas and Middle eastern Urea. 


The higher cost of energy led to higher fertiliser prices around the world, leading to further secondary effects. The largest of these was the ban on the export of fertiliser from China between October 2021 and June 2022. 

The purpose of the ban was to ensure to limit the capacity of domestic fertiliser manufacturers to access the global market, thereby reducing prices and ensuring supply for Chinese farmers. China is a major global manufacturer and exporter of fertiliser, and a ban on exports has had ramifications on available supply. 

On a monthly average, we have imported approximately 14% of our urea from China. However, we have had months where the volume has been as high as 83% and as low as 1%. Australia has a much bigger reliance on China for our supply of MAP/DAP. On a monthly average, we import 65% of our MAP from China. On a number of periods, Chinese volume has represented >70% for extended periods.

The likelihood of substantially lower fertiliser prices before the start of the Australian seeding window is highly unlikely. Whilst fertiliser prices have considerably fallen overseas during the first two months of 2022, it is likely that Australian prices will lag overseas markets. 


In a similar fashion to fertiliser, the major chemicals used by Australian grain growers are produced in highly energy-intensive processes. The commonly used herbicide Glyphosate is one of these chemicals. The price of this chemical has a strong relationship with the price of energy. 

Chart 5 displays the cost of US natural gas and glyphosate as an index rebased to August 2006. At present, glyphosate is yet to achieve the high prices of 2008.  There are currently concerns that a force majeure event is being enacted by Bayer, one of the world's largest glyphosate producers, is being enacted due to supplier faults. The information is not conclusive but could reduce volumes of glyphosate available on the global market over the next two to three months.


The final input that grain growers face which has increased but is harder to quantify, is labour. Australian farmers regularly use backpacker labour; these are young people who come to the country on holiday but are able to work to fund their travels. These backpackers are in short supply. 

Covid has severely constrained movements of people; Australians haven't been able to get to WA, never mind arrive from the rest of the world. Travel restrictions have caused a sharp drop in the number of applications for backpacker visas. Chart 6 shows the granted backpacker visas, based on which year the visa has been applied for. This is important later on.

The average number of visas was around 205,000 per year during the last decade. In the 2020 financial year, it was 31200, and up until December 2021, it was 17500. A huge fall, but not surprising considering no one could get through our border.

The next thing that I think is important is the lack of second-year visas applications. In a typical year, just under 20% of applicants would be on a second-year visa. The second-year visa holders are not going to be there, as there were less than 2000 first year visas last year. In addition to attracting new backpackers, the gap in second-year backpackers will have to be filled.

The reliance will be on new applicants and third-year vias. Only 8% of the average number of backpacker visas have been granted roughly halfway through the year. The shortage is not going away anytime soon.

So, all in all, Australia is on track to produce another large crop, but farmers in the country face a cost-price squeeze due to an increased cost of production. The invasion of Ukraine by Russia could further complicate and inflate the cost of many of these inputs. 

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