Last week in Singapore was “Global Grain Asia 2012”, many of Australia’s big end of town of the grain industry were also there. And in similar conferences that are held all over the globe, the take home message is always the same. That being, the next 5 to 15 years looks bullish for agricultural commodities. Some key themes from the conference are…
Demand for grain is strong. Indonesia is our largest customer and new flourmills keep going in each year. Only about 6-7 years ago there were 3-4 mills; now there are 15 with others under construction and some talking of 20+ by 2015. The shift to meat proteins as incomes rise in developing economies means it is hard for governments to shut off that demand. Take for instance China that has averaged 8 - 10% GDP growth over the last decade, and with the country having 55% of worlds pigs grain demand will continue to be a driver. The countries goal of being self-sufficient in corn is face becoming a thing of the past. This years imports are going to be in excess of 5mmt, and this has the ability to climb north of 20mmt by 2020.
Black Sea exporters (Russia, Ukraine, etc) are getting their logistics act together, including containers. Just as Australia has experienced steady wheat exports at over 2mmt for 4-5 years, there is a steady stream of grain in containers out of Black Sea into Asia as well. But there could also be renewed competition from traditional foes, with the Panama Canal able to manage traffic of 14,500 containers per day from 2014, compared to 4,700 today – means much greater competition from US Gulf than we have now.
US ethanol industry has hit the “blending wall” for inclusion in fuel, so very little further growth predicted for corn demand for US ethanol industry. In 2001 only 7% (18mmt) of U.S. corn went for ethanol. By 2011, the ethanol share was 40% (127mmt) out of total U.S. production of 316 mmt! And with the US blenders credit now up in smoke, will demand level out at current levels.
Political interference, largely unknown nor expected in Australia for grain exports, is likely to remain a factor in some exporting countries when either local food security/prices, or a requirement to raise tax revenue, becomes a local priority. Examples include Argentina (tax revenue), Russia and China (local food prices and/or security). Governments in many of these countries are very loath to risk domestic stability when it comes to food for the people.
Continued strong demand growth does not mean year-on-year growth in grain prices! There will be continued volatility on a seasonal basis, but the trend is upwards. Take for example the old APW average was $185 from 1996 – 2006, since that period prices have averaged closer to $270. 2012/13 is presenting as a “down year” at this stage – average weather till Sept 12 will see lots of grain supply and lots of stock with down price pressure – so don’t be fooled by what looks like a poor year price-wise, especially with the dollar nudging 1.05. However as we learnt from recently from South America, things can quickly turn pear shaped and if the weather turns sour somewhere and we can quickly correct the surplus.
Australian wheat is the cheapest wheat available to our Asian customers at the moment and they are buying it up. Australia entered 2011/12 (at 1 Oct 2011) with a carry in of over 8mmt. We have just harvested a record 29mmt and will carry out more than 9mmt at 30 Sep 2012. With APW 2012/13 prices at $233, (basis in relation to US Dec futures has averaged -$22 over the last couple of months) is there any reward for holding grain any longer when we can sell it today at $203 port. Considering that it’ll cost $30 to carry it till the end of the year.