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Queensland wearing its import parity cap…

by Peter McMeekin, origination manager, Nidera Australia, 19 September 2017

AS DRY weather continues to reduce the size of the northern New South Wales and southern Queensland cereal crops, domestic demand in that part of the world remains buoyant. This has pushed the local feed grain values higher and higher in recent months and extended the drawing arc for feed grains as far south as Victoria.

Nidera Australia, Peter McMeekin

The Queensland feedgrain market is predominantly made up of beef, poultry and pork producers spread around Brisbane and across the Darling Downs. Most growers who regularly supply grain into these consumers will be facing significantly reduced production compared to last season. This has many thinking that values will continue to rally due to lack of supply.

The reality is, domestic winter crop production in the eastern states of Australia will be more than enough to satisfy domestic demand along the entire eastern seaboard. That is before the record carry-in of more than 11 million tonnes (Mt), itself more than enough to satisfy domestic feed grain demand, is added to the equation.

However, it is the location of the required grain relative to the key demand points and the propensity of the grower to sell that will present the biggest challenges for the domestic feedgrain sector over the ensuing 12 months.

We know that carry-in stocks in Western Australia and South Australia are relatively low after a huge export program this year. We also know that much of last year’ record Queensland harvest has already been consumed or exported. Therefore, most of the aforementioned carry-in must reside in Victoria and NSW.

The pace of exports over the past 12 months has cleared a majority of stocks from the bulk-handling system in those states. This means the grower is still holding a significant proportion of last year’s production in a variety of on-farm storage systems, from aerated silos to sheds or even silo bags.

Values in the northern feedgrain markets relative to the Victorian and South Australian markets have rallied significantly over the past few months. This is basically a reflection of the cost of freighting grain from the south, where supply is abundant, to the north, where demand is high but supply is scarce.

The values are now at or very close to import parity. This is the value of a unit of product shipped from a foreign country (read state of Australia), valued at a geographic location of interest in the importing country (read Brisbane).

If the spread between values in Victoria and Brisbane exceed the cost of shipping from South Australia (the cheapest origin) plus redelivery to Brisbane consumers, then the market will be encouraged to take the cheaper shipping alternative.

At this point, the price of grain in Brisbane and across the Darling Downs becomes a function of prices in South Australia. If South Australian values increase or decrease then prices in the north will move accordingly. This effectively places a cap on the value of grain in Brisbane and the Darling Downs.

The interesting question here is: Should the long holder of old-crop grain in NSW, or to a lesser degree, Victoria, allow that to happen at this point in the season? If a significant proportion of the carry-in is being held on-farm east of the alternate origin (South Australia), and new crop harvest about to commence, then “no” is definitely the answer.

With the Brisbane and the Darling Downs markets at or near import parity, sellers should not expect future values to outperform the southern markets. Growers still holding old-crop grain on farm, or in the system, should be looking to sell into this rally to maximise returns in a poor production year. In fact, the constant stream of trucks carrying grain from the south to the north has been giving that very signal for some weeks now.

Source: Nidera Australia Pty Ltd, a member of the COFCO International Group.

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