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Strong global supply creates challenges for Aussie growers

21 March 2018

Large grain production globally is expected to impact demand for Australian grain.

The latest data from the United States Department of Agriculture (USDA) has confirmed earlier predictions that global grain production for 2017/18 is heading towards its second-highest level ever, behind last year’s record production.

While Australia has experienced a below average crop, many other regions have had increases in production. Russia is likely to have a record exportable surplus while North Africa, India and Europe, which traditionally import Australian grain, have produced larger domestic crops for their own consumption which will potentially reduce imports.

Coupled with low freight rates, these factors are likely to have an impact on demand for Australian grain in 2018.

Low rainfall threatened the 2017/18 Australian winter crop, but yields held up surprisingly well and quality was also better than expected in most regions.

Total Australian production is expected to reach more than 37.5 million tonnes in 2017/18, according to the USDA.

This is a testament to the recent progress made in plant breeding to develop new varieties better suited to Australian conditions. It is also a credit to Australia’s growers, who have adopted more drought-resistant farming practices such as no-till, which have enhanced grain yields, particularly in low rainfall years.

Global wheat supplies are forecast to reach a record 758mmt in 2017/18, up from last year’s 750mmt. Consumption has increased slightly to 744mmt but stocks are up 13 per cent to 266mmt – creating a significant imbalance.

India and China hold more than half of these stocks, however even when their numbers are omitted, the rest of the world still has 132mmt in storage which needs to be drawn down before we are likely to see high prices.

Russia’s 17 per cent growth in wheat production to an expected record of 85mmt, coupled with an 8 per cent increase in wheat exports to 36mmt, is another challenge for Australia. With freight rates at historically low levels and a favourable exchange rate, Russian exports are expected to be competitive with Australian wheat into South East Asia.

Aussie wheat is heading for a below-average total of 21.5mmt, according to the USDA, with drought in New South Wales and Queensland hampering the 2017/18 season while yields in most parts of Western Australia, South Australia and Victoria held up surprisingly well.

In addition, a recent rally of the Australian dollar after Christmas hasn’t helped prices for local growers. At the time of writing, the Aussie dollar was at 0.779 USD, up nearly 3c from harvest levels of 0.749 USD. With much of the wheat trade based on US dollars, Australian growers generally need the Aussie dollar to be lower to obtain better returns.

Global barley production is forecast to decrease by 3 per cent from last year to 142mmt in 2017/18, triggered mainly by reduced crops in Australia, Canada and the US.

Once again the Russian season has been strong, with Russian barley production increasing by 15 per cent from last year’s total to 20mmt. Their barley exports are also expected to increase to 5.2mmt, mainly driven by demand in the Middle East.

This means the Australian barley trade will concentrate more on the key markets of China and Japan with an expected 5.8mmt in exports coming from Australia’s 8mmt crop.

Already in the first quarter of 2017/18, more than 76 per cent of Australia’s barley exports have headed to China, of the 93 per cent being shipped to Asia. Only a small percentage has been shipped to the Middle East, which is a significant shift from last year.

Asia provides an important market for both malting and feed barley from Australia and despite our reduced production this year, quality held up well and the amount of barley which met malting grade was above average.

Global barley stocks are tight and are forecast to reduce to 17.9mmt – a significant drop from previous levels over the past decade which have been between 20-30mmt.

Corn production and stocks are also heading downwards from their recent record highs which is a positive for feed grains.

Major importer China has made large inroads into its corn stocks, with 2017/18 stocks expected to be down 21 per cent to 79.5mmt. China’s own production is down and consumption is up which, despite a large corn crop in the US, has brought the global stocks-to-use ratio down slightly to 19 per cent.

As one of only a few countries which grows sustainable canola that can access the environmentally-friendly European energy markets, the outlook for Australian canola relies heavily on EU and Ukraine conditions.

Aussie growers have seen a drop in canola prices lately which has been caused by an 8 per cent increase in Europe’s own canola production to 22.1mmt, meaning their demand for imports has reduced.

In addition, Ukraine’s 2017/18 canola production is expected to rise to 2.2mmt – which is nearly double their 2016/17 total. Australia’s canola production has held up surprisingly well and is expected to end up not far off the 2016/17 production of 4.1mmt.

So far this season canola exports from Australia have been solely to the EU, but given the above conditions, traders will have to start looking to other markets in Asia and the Middle East for the remainder of the year.

Global oilseed production is also very strong, with soybean production in particular expected to be at near-record levels of 346mmt following large crops in the US and South America.