Balancing the outlook for agriculture

While everyone involved in agriculture is well accustomed to the cycles of the industry, it has been a long time since the year began with so many positives. But tragically some of those “positives” are the result of the tragedy unfolding in Ukraine with the Russian invasion.

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Looking beyond that geopolitical catastrophe, despite all the complexities from many aspects of farming, nothing is as important as the season itself. And in almost every farming region of Australia, the level of rainfall, combined with the summer temperatures over the past few months, have been excellent.

“As agricultural producers and supply chain operators look ahead to see what the year may hold, it will be important to view the glass as being both half empty and half full.”

This particularly includes livestock or dairy producers making the most of some of the best late summer pasture in years to keep stock in top condition and save on supplementary feeding costs, as well as grain producers, fresh from a record harvest, preparing to sow into areas of excellent soil moisture.

At the same time, while prices for agri commodities may start to level after some of the extraordinary peaks of 2021, they remain historically very high across the board. Whether it is cattle, sheep, dairy products or grains and oilseeds, most agri commodity prices are continuing to be boosted.

Grains in particular though will be impacted by war. Analysts estimate Ukraine is the world’s fourth-largest exporter of both corn and wheat. It is also the world’s largest exporter of sunflower seed oil. Russia and Ukraine supply nearly a third of all global wheat exports.

The war will compound challenges faced by Australia’s main global competitors, increasing global demand as economies continue their pandemic recoveries and a heightened push to procure exports based on the global geopolitical uncertainties – all topped off by the high production volumes Australian producers have largely continued to enjoy in the last two years since the drought.

Glass half…

As agricultural producers and supply chain operators look ahead to see what the year may hold, it will be important to view the glass (of good local milk or perhaps Chardonnay) as being both half empty and half full.

The half empty glass reminds all those in agribusiness that while a great season may be a time to enjoy the fruits of your hard work (and to take a break at some point!) it is not a period for complacency. At some point, the season will inevitably turn, commodity prices will come down from their highs and interest rates will eventually rise again. For these and other possible eventualities, agribusinesses across Australia need to continue to plan their strategies accordingly.

Crucially, it is just as important to remember that the glass is also half full. Taking the time to research and implement a change to any operation can bring a wide range of benefits – not just economic and agronomic but also by increasing the enjoyment and mental stimulation of running the business.

This could take a vast array of forms – whether increasing farm plantations for stock benefits and income diversity, exploring new crop varieties, or implementing new developments in agtech, genetics or sustainability management. This potential to grasp new opportunities at the right time extends right down the agri supply chain as companies right from the farm-gate to the consumer’s table look for new efficiencies, new markets and new technologies.

The importance of developing a number of these changes has been a reaction to the ongoing pandemic-related supply chain interruptions but there is every reason why these developments could have long terms benefits for many businesses.

Gains in grain

Australian grain farmers know all too well, contrary to what some people may think, there’s never really a “downtime” of year. Certainly, the sowing and particularly harvest periods are intensively busy but the rest of the year involves either monitoring the crop in the ground and providing the inputs needed to maximise its potential, maintaining and upgrading all the plant and equipment needed to run an efficient operation and all the other aspects of the modern farm.

That said, the period around February, when the harvest is effectively finished across the country, at least provides the industry with some kind of a breather to reflect on the harvest just passed and evaluate the factors likely to impact the year ahead. This could include both the choice of crops to be sown as well as the variables which may impact grain prices.

This year of course, with the Ukraine catastrophe and other geopolitical tensions, planning is more complex but still a necessity.

Despite some concerns toward the end of the season, the 2021/22 Australian grain crop is estimated to have hit new record levels. In particular, the wheat crop reached another record, while Australia’s barley reached its third-highest level despite earlier concerns on the impact of Chinese tariffs on barley farmers’ planting intentions.

For wheat, while the record harvest of 34 million tonnes was up around 0.7 million tonnes (2 per cent) on the previous year, it was a massive rise of around 135 per cent on the drought impacted crop of 2019/20. The record volume was particularly boosted by optimal growing conditions in Western Australia which normally accounts for around 40 per cent of the national wheat crop.

While there had been concern late in 2021 around the possible impact of weather conditions on the crop in some regions, it ultimately had a minor bearing on the overall harvest volume. If anything, the main impact of the heavy rainfall in November 2021 on cropping regions in New South Wales and Northern Victoria was on the quality of the crop. The rain caused some of the grains to sprout resulting in a reasonable volume of grain being downgraded to feed wheat in these regions.

The sharp increase in the proportion of feed wheat as part of the overall harvest had a notable impact on wheat prices. Ordinarily, the price gap between feed wheat and milling wheat is around $A20 to $A40 per tonne. However, given the major volume of feed wheat, this gap grew to around $A110 to $A150 per tonne. Notably, milling wheat prices rose sharply from their pre-harvest levels while feed wheat prices declined from those levels, although remained relatively high based on strong global demand.

In line with the record wheat harvest, Australia is also likely to see record wheat export levels of around 25.5 million tonnes, up around 7 per cent on the previous year. This will be driven not just by the record crop but by ongoing strong global grain import demand.

While Indonesia would ordinarily be Australia’s largest wheat export market, the 2021/22 export season has seen exports to China reach around 0.93 million tonnes, over double those to Indonesia in the same period. While the bulk of exports continues to be Asian markets, exports to African markets continue to grow strongly.

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While not at the same heights as the wheat crop, the Australian barley harvest of 13 million tonnes in 2021/22 is still estimated to have been the third largest ever, not far behind the record crop of 13.5 million tonnes in 2016/17.

The imposition by China of prohibitive tariffs in 2020 has not had a major impact on barley plantings. If anything, the shift of some barley acreage towards canola was driven by high oilseed prices at the time.

Just as the weather had impacted the wheat crop in different regions, the quality of barley in some regions of New South Wales, as well as northern Victoria, was also downgraded as a result of heavy rainfall. That said, given that most barley from these areas is feed quality, the impact on price and exports was minimal.

Overall volumes of barley export rose by around 2 per cent to 8.5 million tonnes. With the Chinese tariffs meaning barley exports to that country have fallen to zero, the largest market is now Saudi Arabia which accounts for around 36 per cent of all exports. Other major barley markets include Japan, Thailand and Vietnam.

Domestically, strong feedlot utilisation has continued to drive domestic barley demand with this trend likely to continue on the back of the continuing growth of the domestic cattle herd.

Looking ahead, Australian grain producers will be factoring in the outlook for fertiliser and chemical prices into their planting strategies, particularly given the ongoing uncertainty around global supply chain disruptions and Chinese export bans. One impact may be a slight shift by some producers to more legume crops while other producers may accept reduced fertiliser usage may lead to lower yields than over the past two years.

The situation in Ukraine of course will deliver tremendous volatility for several commodities and supply chains at least for the foreseeable future.

For agribusinesses who are doing well at the start of 2022, the benefits are only partially due to the impact of good weather and favourable global factors and more to do with all the hard work the industry has experienced in tougher years leading up to this point.

For that, farmers and agribusinesses should justly be proud. The need to make the most of these good times will be the next iteration of that hard work.

Mark Bennett is Head of Aus Agribusiness and Michael Whitehead is Director for Client Insights at ANZ

Click here to read the full February ANZ Agri InFocus report

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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