Pandemic could deliver rare 'plus' for grain growers

COVID-19 cloud may have silver lining for Australian grain growers

Industry Insights
Australian Export Grains Innovation Centre chief economist, Professor Ross Kingwell, says the devalued Australian dollar gave grain growers an opportunity to lock in favourable prices early in 2020. PHOTO Nicole Baxter

Australian Export Grains Innovation Centre chief economist, Professor Ross Kingwell, says the devalued Australian dollar gave grain growers an opportunity to lock in favourable prices early in 2020. PHOTO Nicole Baxter

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Devalued Australian dollar strengthens grain prices heading into 2020 season.

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The tragedy of the COVID-19 virus that has swept across the globe since the beginning of the year could deliver at least one ray of hope - an economic boost for Australian wheat growers.

Softening international wheat prices very early this year, resulting from supply chain uncertainties and an anticipated large Russian winter wheat harvest, have now been largely cushioned by a significant depreciation in the Australian dollar against the United States dollar and a lift in international wheat prices triggered by wheat export restrictions in some countries.

Currency shifts

Australian Export Grains Innovation Centre (AEGIC) chief economist Professor Ross Kingwell says the impact of the virus on the Australian economy stemming from the lockdown of the Chinese economy and its global consequences had devalued the Australian dollar about 20 per cent between January and March.

Professor Kingwell says Australia is particularly vulnerable to any downturn in the Chinese economy and there had been a diminished demand by China for some goods and services produced or offered by Australia.

"For example, tourism and education are hugely important economic sectors in Australia and because both of these have taken major hits, among others, the value of the dollar has not been sustained," he says.

"The devalued dollar has provided grain growers the opportunity to lock in some very favourable wheat prices for part of their 2020 harvest.

"As the world commences its economic and social recovery, combined with the harvest of the northern hemisphere's grain crop in July and August, grain prices are less likely to be as attractive during our end-of-year harvest period as they have been during the early months of 2020.

"So, many farm consultants have recommended growers lock in prices for at least some of their crop."

The devalued dollar has provided grain growers the opportunity to lock in some very favourable wheat prices for part of their 2020 harvest. - AEGIC chief economist Professor Ross Kingwell

Collapsing oil prices

Also, global oil prices collapsed as a result of crude oil supply continuing to be maintained by Russia and Organisation of Petroleum Exporting Countries, despite a reduction in demand.

In mid-April, however, oil exporters finally agreed to lessen their supply to cause a modest lift in oil prices.

This situation has had a twofold effect on the grains industry.

"Lower oil prices are forcing corn previously used in ethanol production to flow on to the feed market, putting pressure on feed grain prices which, in turn, impacts on wheat prices," Professor Kingwell says.

But given crude oil prices underpin fuel costs, the flipside of these lower prices means grain growers are seeing financial benefits from lower fuel costs.

"Across a farm, depending on its enterprise mix, between $20 to $40 per hectare is often spent on fuel," he says.

"In addition, cartage of grain from the farm to a receival point can cost a further $10 to $15 per tonne, so the large reductions in fuel prices seen in 2020, due to the widespread response to the virus and its impact on fuel demand, has helped lower the costs of production."

Lower oil prices are forcing corn previously used in ethanol production to flow on to the feed market, putting pressure on feed grain prices which, in turn, impacts on wheat prices. - AEGIC chief economist Professor Ross Kingwell

Professor Kingwell says the economic impact of the virus is also flowing on to the cost of farm borrowings.

"Most grain farmers run large overdrafts to fund their cropping programs, yet the cost of short-term borrowings in 2020 is very low, helping protect farmers' profit margins," he says.

Higher input costs

Some crop inputs, such as machinery supplied by American manufacturers, will become more expensive due to the depreciation of the Australian dollar against the US dollar.

"However, in season 2020, many farmers are unlikely to be undertaking large purchases of machinery, especially farmers in eastern Australia who are recovering from years of drought," Professor Kingwell says.

The net benefit from increases in both grain prices and cropping inputs means that most grain growers in Australia are set up to capitalise on season 2020. - AEGIC chief economist Professor Ross Kingwell

While the price of inputs such as chemicals, fertiliser and machinery will almost certainly rise as a result of the devaluation of the Australian dollar, this is unlikely to have a major impact on the coming growing season, with prices for most inputs already locked away.

"The net benefit from increases in both grain prices and cropping inputs means that most grain growers in Australia are set up to capitalise on season 2020, provided favourable rains and temperatures continue throughout the growing season," he says.

Traditionally, Australian agriculture has struggled to attract both full-time and seasonal labour, but current economic conditions could present opportunities for Australian growers, particularly as they head into a busy seasonal period.

"Given the downturn in the domestic economy and the high rates of unemployment and underemployment, farmers should now have access to a much larger local labour force than ever before.

"While international backpackers will be in short supply given the travel restrictions, locally available labour should increasingly be available to fill this gap."

See also:

More information: Ross Kingwell, ross.kingwell@aegic.org.au

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