You know the drought is getting serious when politicians start turning up on farms, making announcements. This drought is different from what the East Coast normally experiences, and markets are not behaving in a normal fashion.
When we talk about drought in Australia, it is usually regarding vast areas of inland New South Wales and Queensland, where crop failure and lack of pasture growth have predictable impacts on markets.
Crop failure sees grain prices move from export parity to import parity. Import parity is the cost of grain in international markets, plus the cost of freight to Australia. How high local prices go depends on international prices and freight costs.
This drought is affecting historically high-rainfall zones, which are predominantly used for high-stocking-rate livestock enterprises, with some mixed cropping
Figure 1 shows wheat domestic and export use. Despite the dry conditions in the south, a good growing season in NSW saw plenty of grain produced, with much more expected to be exported than used domestically. ABARES is actually expecting grain wheat stocks to increase this year.
While there have been some localised increases in grain prices as it has to be freighted in from further away, the market hasn’t had the crazy increases we have seen in the hay market. Figure 2 shows ASX Wheat futures have been tracking sideways at a premium to US futures, but not what you would call a drought premium.
Figure 3 shows the price of barley in Geelong, which has rallied around $40 since harvest on the back of local demand. Milling wheat and feed barley are around the same price in the south, as sheep producers prefer barley, and local supplies run low.
Import parity for feed grain would be somewhere in the $400-500/t range, so livestock and dairy producers can be at least thankful that NSW had a good cropping season last year.
Looking forward, crop forecasts remain relatively solid thanks to a reasonable start in the north. There is still time in the south to produce good crops, although rainfall will have to be in season this year, and a kind spring will be required.
What does it mean?
Grain markets are yet to get nervous about dry weather causing price rallies, as we are still on track for another exportable surplus. If it dries out in NSW over winter and spring, and expected grain yields start to drop, the market will start building in a premium.
Key Points
- This drought is hitting high-rainfall livestock areas, not the usual cropping regions.
- Grain prices are stable due to good northern NSW yields, no drought premium like we’ve seen previously
- Local prices up slightly from freight, southern crop outlook depends on spring rain.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: MLA, Bloomberg, ABARES, Mecardo
