COMMODITY UPDATE
Market Observations: September

Late August delivered some timely rain for Victorian farmers. While some areas still seek a more fuller soil moisture profile, on the whole the Victorian crop is on track to be relatively prosperous. Forecasts are supportive at this stage for a decent Spring break which is one factor dictating where market prices are as we enter September.

As Victorian farmers gain more confidence in the new crop prospects, the growing need to clear storage systems and make preparations for the pending crop becomes more prevalent. Opportunities to sell into the domestic market still exist in the months prior to harvest via feed millers, feedlots and farmer to farmer transactions. Demand still exists in the Flour milling sector while the need for pulses has dropped off somewhat primarily due to the high premiums consumers are needing to pay. Those feeding sheep have been able to tap into what has been a prosperous Maize season. More growers have added Maize to their rotational repertoire and those feeding sheep have made up somewhat for the unbalanced demand from normal channels.

Cereal market prices over August crept back overall not only due to favourable conditions locally, but a softening on international futures due to a large Northern hemisphere crop, a strengthening Australian dollar versus the U.S and minimal export activity. This however is also coupled with good prospects overall for crops on the East coast of Australia and what appears to be a decent crop on the way in W.A.

Naturally, at the start of the year prior to the Australian growing season commencing, forecasts for the Australian crop usually starts at a readjusted average even prior to planting. International crop forecasts are better known as Winter crops enter their Spring faze so we start to get an understanding of what international prices will look like by futures markets. The other main factor in determining local price as mentioned is the value of the Australian dollar. Traded in high volumes daily it would be natural to assume accurate predictions could be made as to future values. However, the volatility and disproportionate values compared to what analysts suggest proves the uncertainty in what is a key factor when determining commodity prices.

The Australian agricultural sector, particularly grain growers, is intricately linked to global markets and currency fluctuations. The relationship between the AUD and the USD is of particular importance, as it can significantly impact the profitability and competitiveness of Australian grain exports. Back in 2023, analysts predicted a softening of the AUD in 2024 against the USD which raised both challenges and opportunities for Australian grain growers.  However, it’s important to note that the relationship between currency fluctuations and farm gate returns is complex. While a softening AUD can enhance returns when selling grains, other factors such as production costs and local market dynamics must also be considered. Growers are all too aware of the rising costs of fertilisers, machinery and fuel when the AUD is in decline. The correlation between the rise in grain prices and the rise in input costs when the AUD falls is rarely a one for one move. Conversely, this is also the case when the AUD rallies (which is what we are seeing now, opposite to what analysts predicted). Since these inputs are often priced against foreign currencies, a weaker AUD implies that farmers need to expend more of their own currency to acquire the same quantity of inputs.

A simple paradox of the effects of a weakened AUD for example might be as follows:

1. The AUD is low, making Australian grain cost competitive/attractive to international buyers, triggering exports which in turn activates domestic freight companies for the movement of grain to the port.
2. The low AUD increases the cost of goods and services often linked to foreign currencies such as the USD. These goods would include fuel for domestic freight providers.
3. Cost competitive grain moving to the ports becomes less competitive now due to an increase in logistics costs because of a weaker AUD. Shipping costs are also geared to the USD from Australia.
4. This can drive the price of grains down domestically in order to keep export competitiveness and/or a rationalization of freight costs is required. 

The softening of the Australian Dollar against the United States Dollar has multifaceted implications for Australian grain growers. While it can boost export competitiveness and potentially increase farm gate returns, it also introduces an element of uncertainty into the industry. By adopting prudent risk management strategies, staying informed about market trends, and embracing technological advancements, grain growers can navigate the currency landscape with greater confidence.

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Author

Justin Fay
Commodity Manager