Mecardo Market jitters could benefit Australian growers

A couple of weeks ago we took a look at feed grain prices, showing how strong world corn supplies were depressing global feed values, and hence feed grain prices here in Australia. With murmurs of a potential La Nina, it will be US corn and soybean crops that suffer, here we look at how this might create the next big price rally.

The Bureau of Meteorology has copped a lot of heat in recent times over forecasts of hotter, dryer conditions in 2023 when for many areas of Australia, mild and wetter conditions prevailed. Regardless, the BOM is still the place to find climate forecasts.

The most recent (‘Climate Driver Update) released last week (read here) shows the average of international model forecasts are currently sitting at Neutral for June. We can see that the dial is swinging back from El Nino toward neutral over the coming four months.

A neutral average forecast suggests that some models are pointing towards La Nina, and others remaining in the El Nino range, so it would seem climate forecasts are showing no real consistency at the moment.

While La Nina historically produces big crops here, across the Pacific it has the opposite impact. Figure 1 shows global grain production over the last 18 years. When La Nina was in action in 2022-23 we can see that global grain production dropped away from a record high. The record high was set in a La Nina year though, so like El Nino, the impact is not consistent or assured.

Argentina, Brazil, and the US account for 43% of world corn production outside of China. Figure 1 shows corn is the world’s largest grain crop, and as such impacts prices of all grain commodities.

Figure 2 shows corn and wheat futures contracts with two major corn rallies associated with La Nina years. From July 2010 to January 2011 corn prices close to doubled on the back of production declines. We saw a similar rally in August 2020. Even though global corn production remained steady in the end, ever-increasing consumption saw corn prices more than double.

What does it mean?

While there is little evidence to suggest a La Nina is coming this year, we can see why markets get jittery at even the mention. Speculators certainly don’t want to be caught short in a La Nina market, while Australian growers, in general, will welcome a boost in world prices, and an associated bumper crop.