With record global inventories of wheat following consecutive years of bumper global harvests, wheat prices are now under pressure, potentially curtailing the planting area for the next season or two as farmers consider other more potentially profitable options.
Australian wheat farmers will be considering Australia’s key differentiators in the global market; high product quality, low exchange rate and the safety and reliability of our economy.
Importantly, the Australian wheat market is supported by both strong domestic and export demand. Strong feed demand from the poultry, pork, sheep and beef markets, means Australian wheat farmers are not completely reliant on export markets, setting our market apart from many other grain exporting countries.
Human food and animal feed consumption set to rise in SE Asia
The largest consumption growth area for wheat is food, with increased world trade primarily driven by increasing consumer demand from Asia and Africa. According to the International Grains Council, China is expected to continue wheat stock accumulation, with forecast stocks at the end of 2020/21 equivalent to 43% of the global total, the biggest share since the late 1990s, although China’s inventories are relatively inaccessible to the global grains economy.
It is important to note that China’s imports are likely to remain small and continue to mainly supplement local supply, and for India, purchases are forecast to edge upward, but stay fairly low overall. In comparison, Australia will benefit more from higher exports to Indonesia, South Korea, the Philippines, Thailand and Vietnam for both human food and animal feed. Indonesia is expected to substantially increase wheat imports as a substitute for more expensive corn in feeding livestock. If other importing countries follow, this may put pressure on global inventories which should give Australian wheat farmers food for thought.
With total consumption forecast to outstrip production over the next five years, a decline in global wheat inventory is likely, as is a steady recovery in price.
Innovate to increase production and efficiency
The federal Government strongly supports innovation and growth, so Australian farmers should be making the most of the opportunities to innovate, increasing production and production efficiency.
Over the medium-term, prices for all cereals are projected to show modest nominal increases, with more significant gains in other coarse grains, which is mostly a result of the high demand for animal feed in China and limited production expansion possibilities in the main production regions.
Farmers and marketers will be watching weather forecasts closely as the northern hemisphere commences their 2016 harvest and sowing periods for the 2017 crop. Any adverse weather events at harvest or sowing will have a positive effect on global prices.
Value-adding coarse grains, particularly for food and feed use, will be important for profit margins as the cost of production for grains in developed economies such as Australia are expected to rise.
Capital investment required in Australia’s grain supply chain
Good quality Australian arable farmland has been in demand in recent years from Australian private, corporate and foreign investment. Investors in arable farmland are generally seeking a long-term sustainable yields, non-correlated asset diversification and long-term capital appreciation of land.
Whilst arable farmland is popular, downstream infrastructure and ports have attracted more institutional and international capital due to the efficient rate of returns from deploying large amounts of capital into infrastructure type assets. Infrastructure assets fit well with a larger number of investors’ existing portfolio allocations, requiring less adjustment to investment strategies. The majority of Australia’s grain market gateways are foreign owned or controlled, and as a result is well capitalised and connected to international market opportunities.
Given the aforementioned market dynamics, forward thinking investors are seeking alternate pathways to invest capital throughout the Australian grain supply chain.
AMC specialises in identifying non-traditional investment opportunities in Australia including:
- Alternative forms of finance
To achieve productivity potential, farmers require access to capital aligned to the underlying fundamentals of the farm business. For example, CommStream Capital provides upfront capital to farmers in exchange for the physical delivery of a small, set tonnage of commodity, over a contracted term, typically 5 to 10 years.
- Grains infrastructure
Efficient, well managed storage, grain value-adding and logistics infrastructure will have significant advantages over the older up-country infrastructure that typifies the industry. Farmers are moving away from large, expensive corporate operators in favour of more efficient and convenient supply chain solutions. For example, many corporate operators have moved infrastructure away from major growing areas resulting in increasing freight and logistics costs for farmers.
- Supply chain investment partnerships with farmers
Much of the downstream grain supply chain has no farmer ownership resulting in a lack of supply certainty for corporate owners. New investors and owners of supply chain assets will prosper by partnering with high performing farmers, securing commodity supply through mutually beneficial investments. Farmers will benefit from extended ownership through the supply chain. For example, investors partnering with farmers to invest in and sure up supply for grain storage, value-adding and logistics infrastructure.
- Improved on-farm storage capabilities
Significant investment has already been made in on-farm storage, and the trend of farmers storing or value-adding more grain on-farm is set to continue.
- Productivity improvements
Farmers and investors will invest widely in more efficient and effective farm inputs, management and land development. This investment will drive increased and more efficient farm output. CommStream Capital’s funding is designed to assist farmers in making on-farm productivity investments.
- Technology and innovation
More than just “AgTech” investing, capital investment is required to better understand and utilise the new wave of available data for production, management and marketing purposes.
Through AMC’s joint venture with leading Australian private equity and alternative asset manager, M.H. Carnegie & Co., we seek to make strategic investments in the agricultural supply chain. We seek to co-invest with like-minded investors and supply chain partners. To find out more please call Charlie Blomfield on +61293971412 or email email@example.com.
- International Grains Council, 2015. “Five-year global supply and demand projections.”
- OECD-FAO Agricultural Outlook 2016-2015