Tuesday 7th Jul, 2020

What the drought means for bulk handling

With drought impacting farmers in eastern Australia, ABHR speaks to Grains Analyst Cheryl Kalisch Gordon about the potential flow-on effects for the bulk handling industry.

With drought impacting farmers in eastern Australia, ABHR speaks to Grains Analyst Cheryl Kalisch Gordon about the potential flow-on effects for the bulk handling industry.

Since Federation, Australia has endured through three major, prolonged, widespread droughts: the Federation Drought, the drought during WWII and the Millennium Drought.

Smaller, more localised droughts are much more common, but can still seriously impact the national agricultural industry.

The Bureau of Meteorology (BoM) reports severe rainfall deficiencies in south-east Queensland and New South Wales throughout 2019 and has seen water storage levels continue to fall in March. Total water storage in the Northern Murray Darling Basin is almost down to eight per cent, lower than during the Millennium Drought.

BoM adds that some towns have had to switch to emergency water supplies and many farmers are going another season without crops.

Cheryl Kalisch Gordon, Senior Analyst – Grains and Oilseeds at Rabobank, explains this drought is hitting farmers hard.

“On the east coast, many farmers are heading into a possible third year of below average, or no crop being produced, leading to significantly lower supply across NSW and Queensland,” she says.

“NSW’s winter crop production was down 60 per cent year-on-year, which is on top of the previous year being down 50 per cent as well. This is starkly different when looking at the winter crop production of Western Australia for 2018-19, which saw a 20 per cent year-on-year increase.

“There’s a tale of two extremes at the moment. Our national outlook would be worse if it wasn’t for WA as it hides the gravity of the drought across the east coast,” Dr Kalisch Gordon says.

Low rainfall has also reduced pasture production meaning farmers have needed to provide animals with supplementary feed grain to ensure their livestock remain healthy.

This elevated demand for grain, along with tighter supplies, has caused the prices of feed grain to rise significantly. Farmers have been incentivised by the higher livestock prices to continue feeding their animals compared with other drought periods where they may have offloaded them. Rabobank anticipates prices for grains to stay elevated and at a higher-than-average basis over global prices for the remainder of 2019. Higher costs of grain and the drought has led to higher prices for lamb and beef at the supermarket.

Dr Kalisch Gordon says while the west coast typically exports around 90 per cent of its wheat to global markets, the elevated demand from the east coast has made the most recent harvest the most valuable on record.

“This has been an ongoing occurrence for the past 10 months, and we expect it to continue to at least September this year,” she says.

“However, as bulk shipments of grain head east, it has put pressure on Australia’s competitive position in global markets. For example, Argentina, which has a greater exportable agricultural surplus than we do this year, delivered a million tonnes of wheat to Indonesia in Q1 2019, a market that Australia typically dominates.”

International impacts

South East Asia is one of Australia’s largest wheat markets, and Indonesia is Australia’s 13th largest trading partner according to the Department of Foreign Affairs and Trade. In 2017, DFAT found Australia’s northern neighbour was the country’s largest market for wheat, buying $1.4 billion worth.

The two countries entered into the Indonesia-Australia Comprehensive Economic Partnership Agreement in March to build new trade opportunities and allow Australian grain growers to export feed grains into Indonesia without tariffs.

Simon Birmingham, Minister for Trade, said with a population of 270 million and high levels of economic growth, Indonesia is on track to become one of the world’s largest economies.

However, Oscar Tjakra, South-East Asian grains analyst at Rabobank, says the region is firmly in the sights of Russian, Ukrainian and Kazakhstani wheat exporters who have ramped up exports.

“The Black Sea region poses the biggest threat to Australia’s market share in South-East Asia, with Australia’s share of South-East Asian wheat imports falling from 50 per cent in 2011 to around 40 per cent in recent years,” he says, “and this year it could drop to 30 to 35 per cent, with drought-reduced volumes.

“The drought in eastern Australia is driving a big price gap between Australian wheat and its competitors,” Mr Tjakra explains.

He adds the Australian industry is at a crossroads as to whether it increases its quality by increasing yield or maintains its value proposition as a high-quality producer.

Managing the supply chain

One potential way to reduce the cost of production is increase efficiencies for moving, storing and handling grain in bulk.

The Department of Agriculture and Water Resources says investment into new and innovative technology is critical for ongoing growth and improvement in the productivity, profitability, competitiveness and sustainability of Australia’s agricultural industry.

Dr Kalisch Gordon says the bulk handling and agriculture industries are embracing new ways of approaching global markets, with new investments into export pathways in the last 10 years since deregulation.

“There has been an increase in the usage of containers and direct delivery from truck to ship, along with new investment in port infrastructure outside of the traditional bulk handling networks,” she explains.

“This is in addition to increasing investment for on-farm storage infrastructure. We estimate that by 2025, there will be at least 20 million tonnes of permanent storage for grain in Australia, which would be 40 to 45 per cent of winter and summer grain production. 

“Farmers are looking to have risk management in place, usually in the form of additional storage. A severe drought like the one being experienced further encourages this kind of investment,” Dr Kalisch Gordon explains.

BoM does not expect the drought to break soon, reporting in its 2018 State of the Climate decreases in rainfall across southern Australia, projecting more time in drought.

However, this drought has shown there is the capacity to turn around supply chains between Australia’s geographically distant growing regions, Dr Kalisch Gordon says.

“This is an important development, as it means similar movements can be made, probably more efficiently in the case of similar future droughts,” she says.

“It shows we have a robust infrastructure network that is able to support bulk handling from west to east as well as offshore to international markets.”