HORIZONS

by Professor Ross Kingwell, AEGIC Chief EconomistApplications of artificial intelligence (AI) are helping reduce grain shipping costs and emissions. What! Another story about AI! Is it about...

Key characteristics of Australian wheat varieties have significantly improved. New varieties offer higher yields, greater grain density and more flour yield.

Globally, agriculture is tarnished by a judgement that it is a principal cause of global biodiversity loss. Growing populations and heightened per capita wealth create a growing demand for food and feed grains. To satisfy that growing demand large swathes of biodiverse landscapes continue to be replaced by summer and winter crops. 

Many consumers, even in countries where education and information services are readily available, are more uncertain about what foods deliver sustainability than foods that bolster health.

The challenge to frontier pioneers in the TV programs of my youth was: “Head west!” resulting in thousands of hopefuls trekking westwards in search of fortune. Australia’s west in recent years has certainly offered up its grain treasures, with consecutive bumper harvests in 2021 and 2022. This has fuelled farmland prices to remarkable heights (see Rural Bank 2022); despite the background challenge of a drying, warming climate (Figure 1).

Nightly portrayed on television screens across Australia is the destructive damage inflicted by Russian aggression in Ukraine. Russia specifically targets essential infrastructure and housing to create fear and weaken resolve among Ukrainians. As at February 2023 analysts in the Kyiv School of Economics estimate conservatively that the cost of replacing the damaged infrastructure in Ukraine is currently USD144 billion. Half of Ukraine’s energy system is destroyed and 7 million hectares (or 22%) of Ukraine’s arable land is under Russian occupation.

Australia’s rural media often mentions the climatic phase that Australian agriculture is experiencing. In recent years that phase was persistent La Niña conditions. However, the Bureau of Meteorology, as at early May 2022, points to an emerging change in those seasonal conditions.

In late January 2023, China’s National Bureau of Statistics officially reported that China’s population declined in 2022 by 850,000 to 1.41 billion. There were 10.41 million deaths in 2022 but only 9.56 million births. The birth rate in China has been steadily falling over several decades (Chart 1), even despite the scrapping of its one-child policy.

Our export grain industries are exposed to concentration risk, where a single policy decision could affect the whole trade. In 2017, India purchased about 1.1 million tonnes of Australian chickpea, or 62% of Australia’s chickpea exports in that year. Only a few years later in 2022, India purchased just 0.2% (or 932 tonnes) of Australia’s chickpea exports. The huge reduction was due to India imposing in 2018 a tariff of 66% that effectively closed the market to Australian and other exporters (Figure 1). The policy change by India’s government had an immediate effect on the global chickpea trade which had left itself open to concentration risk.

We may think we have it tough in Australia, coping with floods, damage to roads and having problems with grain logistics. But spare a thought for Ukrainian grain producers who have experienced theft of their stored grain, missile damage to their port, road and rail systems and for some, an inability to return to their fields due to unexploded ordinances, shell holes and proximity of the conflict. For many farmers their logistics costs have doubled or trebled in 2022/23 compared to pre-war cost (Figure 1).

You go to buy some beef and are confronted by rows of meat cuts with adjectives — hormone-free, grass-fed, organic, grain-fed, extra-lean, etc. When it comes to grain-fed versus grass-fed beef, are there any key differences in the nutritional qualities of the meat? Do any of the differences greatly matter? First worth highlighting is that both grain-finished and grass-fed beef are highly concentrated sources of beneficial nutrients. Each type of beef is loaded with vitamins B12, B3, and B6; highly bioavailable iron, selenium, and zinc. Each type of beef also contains high quality protein and various lesser-known nutrients, such as creatine and carnosine important for muscle and brain functioning.

In AEGIC blog #82 late last year I shared farm performance metrics for grain dominant farm businesses in Western Australia (WA) that revealed their remarkable achievements. It was a cause for celebration. The WA grains industry has recorded consecutive record grain harvests, 24.0 mmt in season 2021 and 26.1 mmt in season 2022! (GIWA estimate).

When AEGIC investigated and then reported in August 2022 on the opportunities to improve Australia’s exports of containerised grain and fodder; shipping rates for containers were still stubbornly high.

Some of the findings from this year’s report are worth highlighting as they reveal the phenomenal performance of many grain farm businesses in the last couple of years.

Most people have used or relied upon “Google Earth” at some stage. Not only does it help people find their way, it also reveals how a landscape is used. One interesting application of “Google Earth” compares land use along countries’ mutual borders1.

At their zenith before 2022, Russia and Ukraine supplied around 30% of the world’s wheat exports and were globally important suppliers of barley. Additionally Ukraine was a major source of sunflower oil. Yet since Russia invaded Ukraine in February 2022, large swathes of Ukraine’s croplands have become battlefields and its grain export infrastructure has been extensively damaged. The Statistics Service of Ukraine estimates that around 40% of Ukraine’s cropland may not be planted this year and, due to the expense and difficulty of obtaining crop inputs, wheat production may be halved.

How we use grains is influenced by several factors: tradition, culture, location, income, religion, technology, attitudes, and the relative prices of the various grains. Across the globe, as individuals’ incomes increase, more calories and a greater diversity of foods are invariably consumed. Often as wealth and incomes increase, more dairy products and meats are purchased; and increasingly these foods are underpinned by grain-feeding the animals that are the primary source of those foods.

Australia, the ‘Great Southern Land’, is one of the few southern hemisphere sources of large exportable surpluses of grain. Most exportable grain surpluses are in the northern hemisphere. Hence, whenever North America, Europe or the Black Sea region experience drought or disruption to their grain supplies, buyers then look further afield, including southern hemisphere sources like Australia, to secure their supplies.

Seeing it’s the AFL 2022 finals, I’d like to start with a quote from former Footscray, West Coast and Collingwood coach, Mick Malthouse. He famously quoted a Confucian saying, “The ox is slow but the earth is patient.” The key meaning was that for a football team, change does happen, it just takes time, so you need some patience. How does this relate to grain prices?

The AFL 2022 finals are underway and morning coffees are likely to be full of dissection of the weekend triumphs or woes. Amid the conversations, you may very occasionally hear the word “gut-running”, referring to the players with remarkable athletic endurance.

Much media attention focuses on political and economic tensions between China and many other regional and western nations. In the case of Australian agriculture, attention is often focused on the trade restrictions imposed by China on a range of Australian export goods like wine, barley and lobsters. Yet China remains an important provider of many manufactured goods used in Australia, including Australian agriculture. As Figure 1 shows, there are many goods imported by Australia for which China is either the main supplier, or one of the main suppliers. In brackets after the description of each import item is the share of imports of that item that come from China.

Farmers with long memories tell their grandchildren that there was a time in Australia when wheat prices were so low that Australian wheat production had to be restricted to help drive up prices. At the instigation of the Australian wheat industry, in 1969 restrictions were placed on the quantities of wheat that could be delivered to the Australian Wheat Board. Each wheat grower was given a quota to reduce the build-up of excessive carryover stocks after the record 1968–69 Australian wheat harvest that coincided with increased world wheat stocks that suppressed global wheat prices.

Opportunities for Aussie grains are on the rise in South East and North Asia as consumers increasingly look at not just price, but sustainability and health benefits, when choosing grain-based foods.
Labelling on products can provide a consumer with information that helps the consumer to buy the product, or not. Recent research by AEGIC scrutinised the labelling claims on grain products in South East and northern Asian markets. We investigated the type of claims made on these products, the food sectors they are used in, and the prevalence of claims on new food products. And, we looked ahead at leading markets to get an indicator on the direction in which labelling could go.

Since the mid-2000s the bulk freight capacity of international shipping has grown strongly (Figure 1), on the back of a huge ship-building program in the period 2006 to 2012 (Figure 2).  However, in very recent years new construction of bulk ships as a proportion of the trading fleet has been very low (Figure 2), despite the volume of grain traded globally continuing to grow as has demand for other main bulk commodities (iron ore and coal).

It could be that many Australian grain farmers are soon to have another fine season; underpinned by the separate or combined forces of high grain prices and favourable yields. What’s the evidence to support that statement? Firstly, when Russia, the world’s largest wheat exporter, invaded Ukraine, the world’s fourth largest wheat exporter; it caused a cascade of problems that inevitably will support high wheat prices for months. Ukrainian access to its key southern ports from which it cost-effectively exports its wheat is no longer possible. Moreover, the size of the Ukrainian winter wheat crop harvest this year will be markedly less, as field operations that would normally support usual yields are no longer feasible. Ukraine’s main farm group is forecasting 18.2mmt of Ukrainian wheat production in 2022-23, a 15mmt drop from the 2021-22 crop year.

Some recently released market research from Mintel confirms there are sound growth prospects for the consumption of biscuits, cookies and crackers in Asia. As shown in Figure 1, Australia and New Zealand consumers already individually consume on average over 6 kilograms of biscuits, cookies and crackers each year. By contrast, consumers in many Asian countries individually consume far less; but the prospects for consumption growth over the next five years make those markets attractive to suppliers of the ingredients (e.g. wheat flour) for those products.

There is a famous Monty Python sketch that touches on “What have the Romans ever done for us?” where one character repetitiously asks that question; only to eventually receive a long list of things provided by the Romans — sanitation, medicine, education, wine, public order, irrigation, roads, a fresh water system, public health, and peace.