High prices for grains may be around for a tad longer.

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?

Well, grain prices are influenced not only by current levels of exportable production surpluses but also by the level of grain inventories (see chart 1). It can take time to re-build inventories if they have been run-down. Over the last 6 years global grain inventories have gradually been run down, generating upward pressure on grain prices. Re-building those stocks will not happen immediately (i.e. the ox is slow!). In the meantime, grain prices are likely to stay high, especially given the likelihood that prices of grain production inputs will remain high and that general inflationary pressures are emerging in many grain exporting nations.

Chart 1: Global stocks of grain (mmt)

Higher prices of cropping inputs raise farmers’ costs of grain production. This encourages many farmers to seek higher prices for their grain just to maintain their profits. The higher prices for inputs also forces farmers to limit their use of expensive inputs and this can limit yield upside. Hence, despite the high prices for grains farmers may be constrained in their ability and willingness to produce more grain by increasing their use of inputs. This behaviour limits grain production and maintains upward pressure on grain prices.

Also, noting that grain production is often based on rainfall or snow melt, the supply of grain depends on growing conditions, not just the grain price. Hence, even in the midst of high grain prices, regions of the world that are usually sources of exportable surpluses can experience drought or severe weather that robs them of the ability to increase their production. In addition, as is observed in Ukraine and Russia, conflict can jeopardise a country’s ability to produce or export its grain, despite the attractiveness of grain prices. Then there are political decisions such as the imposition of export taxes that restrict the flow of grain onto export markets and prolong the period of high prices in international markets.

The implication is that grain prices are likely to stay higher than many may have once thought. The bull run seems destined to last a tad longer. These high prices for grains in many international markets observed in recent years however do not seamlessly translate into similarly very high prices at the farmgate in Australia. Current logistics constraints within Australia, combined with high levels of grain inventories in Australia, weaken local farm-gate prices. Hence, although Australian farmgate prices will remain attractive they will not be as high as some farmers would imagine, based on prices posted in some international markets. Nonetheless for Australian grain farmers facing yet another favourable production year in season 2022, it means that the prices they receive for their grain in 2022/23 will likely remain attractive, with high prices perhaps continuing into 2023/24.