by Professor Ross Kingwell – AEGIC Chief Economist.
Although a return to business-as-usual conditions in Australia’s grains industry is possible towards 2030, the industry should also consider the possibility that spatial structural change in Australian grain production is underway . Australia’s east coast population is growing whilst its crop production remains affected by variable seasons, causing feed grain production to become increasingly important.
East coast grain flows to port are likely to be more frequently redirected towards domestic feed grain users. By contrast, in Western Australia (WA) and South Australia (SA), traditional grain flows to port for export will continue. The destination of grain exported from WA and SA, however, will depend increasingly on east coast seasonal conditions. Low production and low stocks of grain in eastern Australia will often trigger flows of grain out of WA and SA to the east coast, rather than international destinations.
AEGIC and Rabobank have independently conducted assessments of strategic trends in Australia’s grains industry and come to similar conclusions that towards 2030, feed grain demand and supply will increase in prominence in Australia.
Market conditions in 2018 and 2019 provide a glimpse of the structural implications likely to unfold over the next decade. How quickly those implications become reality will mostly depend on the seasonal conditions over the next decade, especially in eastern Australia.
What will actually unfold is difficult to predict as there is rarely uniformity in spatial demand and supply of grain, especially in eastern Australia. For example, Victoria can have a favourable season whilst northern NSW and southern Qld can be in drought, or vice versa. Yet freight differentials can mean that it is cheaper to bring in shipments of WA grain into Qld than truck surplus grain from Victoria.
The flow of grain is not just a product of consumption and production differences in adjacent regions. Reductions in logistics costs can occur which increase the size of grain catchments. For example, freight costs towards 2030 in eastern Australia are likely to be affected by the construction of an inland rail line in eastern Australia, due for completion around 2025. The north-south flow of east coast grain by rail and road could become increasingly important relative to upcountry to port flows.
Two different but feasible scenarios for eastern Australia are outlined below. Scenario 1 would see the possibility that east coast grain production strongly rebounds and once again be a source of grain exports. Under this scenario, importing grain from elsewhere in Australia would be a rare event. However, a counter-view, as illustrated in Scenario 2, would see adverse seasonal conditions continuing with sufficient frequency that the growing east coast demand for food and feed grains would not always be met by east coast grain production in that year. As has occurred in recent seasons, eastern Australia, with some regularity, could be required to import grain from other less populous grain-growing regions located elsewhere in Australia.
Scenario 1 – Strong rebound in Eastern and Southern Coast grain production
Scenario 2 – Weak rebound in Eastern and Southern coast grain production
Scenario 1 suggests a return to a business-as-usual set of conditions. By contrast, Scenario 2 has several important ramifications for Australia’s grains industry ― glimpses of which we’ve seen in 2018 and 2019.
Towards 2030, if east coast grain production continues to be constrained by occasional dryness, whilst population growth continues to fuel demand for grain-based products (eggs, dairy, poultry, pork, feed-lot beef, etc) then the increasing prominence of feed grains will narrow the premiums for food grains. This is a view also held by Rabobank grain analysts.
As seasonal volatility will continue to influence crop production in Australia towards 2030, farmers and grain users are likely to react by:
(i) investing in more grain storage; especially whilst interest rates are low, making the cost of carrying grain affordable.
(ii) focusing more on domestic market opportunities – especially in eastern Australia.
(iii) focusing more on feed grain production in eastern Australia.
(iv) opportunistically selling grain from Western Australia and South Australia to end-users in eastern Australia during periods of low production on the east coast. However, this will adversely affect Australia’s international reputation as a reliable grain supplier.
(v) looking more closely at grain supply security when investing in export-focussed grain processing/animal protein industries – with access to export parity grain rather than exposure to import parity on the east coast.
If Scenario two characterises the next decade, then the traditional flow of grain from farm to port for export will be observed less frequently in eastern Australia. By contrast, due to its small domestic market and more reliable climate for grain production, Western Australia and South Australia are likely to increase their grain exports. These altered grain flows will affect the returns from owning infrastructure (trains, port terminals, port storage) required for grain export. Some of the export grain from these states, in some years, may find its way onto east coast markets.