“The large production, in combination with high prices driven by poor events overseas, has led to a golden period where farmers can recoup the losses from previous droughts. While many other nations will be struggling to fulfill the export market requirements, Australia is back in action for a second year. Whilst many of our markets are existing ones, such as many parts of South East Asia, we will have the capacity to reach further afield.”
Thomas Elder Markets
While key wheat exporters in Northern Hemisphere, including Canada, the United States and Russia, have been hit by adverse weather and drought, Australia is expecting a second consecutive bumper harvest after two years of drought. Shrinking global wheat production is expected to see robust export demand for Australian wheat. And rising wheat prices put a smile on the face of Australian farmers. “The large production, in combination with high prices driven by poor events overseas, has led to a golden period where farmers can recoup the losses from previous droughts,” said Thomas Elder Markets senior ag economist Andrew Whitelaw.
In an exclusive interview with Miller Magazine, Mr. Whitelaw said Australia will be well-positioned to participate in the market. “The Russian export regulations are another benefit to the Australian industry,” adds experienced commodity market analyst.
Responding to our questions, Andrew Whitelaw provides valuable insight into the Australian grain industry and world wheat markets.
First of all, could you please share the 2021/22 wheat output and exports forecast with us?
Forecasting the Australian crop is always a difficult process, the climate in this continent likes to throw as many barriers in the way right up until harvest. We have largely got through most of the growing season with good rainfall and hampered only by a few bouts of frost in Western Australia.
The coming issue facing the crop is a wetter than normal harvest period for the eastern states, which could potentially have an impact on the availability of milling quality grades. Based on nothing going wrong (mice, frost, hail, storms or fire!) our forecast for production is for approximately 32.2 to 32.8mmt, with circa 22-23mmt available for export.
While top wheat exporters Russia, United States, and Canada expect lower output, Australia will harvest a bumper wheat crop. Do you think this situation would give Australia an opportunity to expand into new markets?
Absolutely. Australia has suffered through a series of droughts in recent years. The 2018 – 2019 droughts resulted in extremely poor production, with much of the impact being felt in the eastern states. Western Australia, the largest export state, had eastern states livestock producers as their largest customer during this period, as exports turned to transhipments. At the height of the drought, Australia produced 14.4mmt, versus a ten-year average of 24.5mmt, and a far cry from bumper production in 2020 of 33.3mmt, and projections of >32mmt in 2021.
The large production, in combination with high prices driven by poor events overseas, has led to a golden period where farmers can recoup the losses from previous droughts. While many other nations will be struggling to fulfill the export market requirements, Australia is back in action for a second year. Whilst many of our markets are existing ones, such as many parts of South East Asia, we will have the capacity to reach further afield.
Will Australia be able to supply the market? Does Australia have the export infrastructure to meet demand? What are the major challenges for the Australian grain industry?
Australia has shown the capability of exporting large quantities. The current season has seen 17.2mmt exported between January and July, ahead of the previous export record year of 2017. In 2021, Australia will be well-positioned to participate in the market. (Chart 1, Chart 2,)
The major challenges are labour. On the supply chain side, we have had staff poached from the grain industry to work in the resources sector (iron ore/coal), such as site staff and train drivers. The wages on offer are substantial and have attracted a high number of workers.
Conversely, in the farming sector, Australia was previously reliant on overseas workers to conducted harvest. These were generally backpackers from North America and Europe from farming backgrounds.
The outbreak of COVID and strict lockdown rules in Australia has resulted in no access to backpackers for this season. To combat this, there have been a number of creative solutions, from recruiting ex-soldiers to employing laid-off commercial pilots. The crop will be harvested, but as discussed previously, the impact of a wet harvest will be exacerbated by the lack of labour.
Global wheat prices climbed to their highest since 2013. Do you expect prices to go higher? Which factors will drive the markets?
The big drivers are the moment are negative events overseas impacting the major producers, from Russia to Canada. Luckily Australia has been distanced from overseas issues and has had a season of dreams (so far).
Currently, Australian pricing is trading at a discount to overseas futures (Chicago), where typically, our pricing levels would be at a premium. This is a result of both a lower premium here and higher prices overseas.
The high prices are a godsend for our producers, but there is a lack of quality premiums for protein, which would typically be associated with a wetter year. If a wet harvest eventuates, we expect the potential for higher protein premiums to emerge.
After the pandemic, the demand for grain has increased in the world. Do you think this demand will remain strong?
Demand is demand. Typically demand increases in a relatively linear fashion, between 1-2% dependent upon the country. My view is that demand will continue to settle in the long term at these more average levels, with years of aberration.
I do question how much of the demand is true demand or a function of issues with localized supply.
Do you think the worldwide shipping container shortage will continue next year?
The container shortage is a real issue and one which we are facing in Australia. The access to available empty containers is constraining a number of agricultural exports, but especially meat, wool and pulses.
I expect it will take some time for global supply chains to get back to the level of efficiency we previously were blessed with in pre-Covid times. I would expect that we will be looking at a disrupted supply chain until at least the second quarter of 2022.
What are the impacts of the pandemic on the Australian grain industry? How will COVID-19 have a lasting impact on the agriculture industry?
Whilst Australian cities have suffered under the world's longest lockdowns, the impact on the grain industry will be minimal. The supply chain has had some slight hiccups, but our benefit as a continent at the end of the world has allowed us to remain largely locked from the worst issues of COVID-19.
The biggest impact has been the continual shut down of events that the industry uses to socialize; as we know, the grain industry is a social industry, and zoom just doesn't cut it!
Russia has increased its wheat exports to Southeast Asia in recent years, threatening the dominance of Australia. However, Russia's projected wheat exports for 21/22 are at the lowest level in five years due to a small crop and slow export pace. Do Russian export regulations give Australia an advantage in the market?
The Russian export regulations are another benefit to the Australian industry. The government interventions in the form of export taxes should, in theory, reduce Russian exporters' competitiveness.
This was intended to reduce the cost of grains for Russian consumers. In reality, government interventions like this will only result in farmers planting fewer acres as their local prices decline, and therefore in the longer-term increase price as Russia drops down the rankings with lower surpluses.
Similar action in the export beef industry in Argentina resulted in fewer cattle being produced as farmers were disincentivized. The export tax improves the competitiveness of Australian wheat, and that is only a good thing for our industry.