Alistair Davidson, ABARES: Grains and oilseeds outcomes, outlook and opportunities
ALISTAIR DAVIDSON: I'm very pleased to have the opportunity to present ABARES outlook for grains and oilseeds. Before I start, I'd like to thank members of our team-- Amelia, Charlie, Chris, James, Matt, Tom, and Sarah, the ABARES crop analysts and researchers whose work underpins what I'm about to present.
This year was extraordinary. Australia produced record crops of barley, wheat, and canola. We were not alone. Globally, record-breaking cereal production this year followed several bumper years and added to mounting stocks. We have not witnessed such high trade volumes. And fierce competition pushed prices down to lows in real terms that we haven't seen since the mid-2000s.
I'm going to divide my talk into three parts. I'll review this year's performance of the Australian grains and oilseeds industry, identify issues affecting price formation on world markets, and then present ABARES' price forecast and predictions over the next five years. So let's have a look at 2016-'17.
Outstanding seasonal conditions this year largely explain Australia's record crop production. This map shows rainfall in the wheat-sheep zone over the entire winter growing season, from May to October. The colours compare 2016 with history. Dark blue signifies that 2016 was within the top 10% of rainfall records over the past 117 years.
As you can see, the eastern states were much wetter than usual. Although Western Australia's rainfall was below average, it was timely, and mild conditions kept evaporation low. The Bureau of Meteorology advised us that rainfall over Australia's entire wheat-sheep zone from May to October was the highest on record.
Outstanding seasonal conditions delivered exceptional yields in most regions. There were some exceptions. Waterlogging in low-lying areas of New South Wales and Victoria, and severe frost in parts of Western Australia significantly damaged some crops. Not withstanding, total winter crop production at 58.9 million tonnes was a record around 30% above the previous record in 2011-'12.
ABARES estimates national wheat production to be 35.1 million tonnes, 17% above its 2011-'12 record. We also estimate record production of barley.
Generally speaking, high-yielding cereal crops tend to have a lower protein content, and we're definitely seeing five volumes of lower-grade wheat and feed barley this year. However, protein levels in parts of the eastern states have been surprisingly good, and some growers achieved high grades of wheat and malting barley.
For canola, it's been a terrific year. ABARES estimates production to equal the 2012-'13 record, but on a smaller area. It's generally been very high-quality, as the long maturing process and mild conditions favoured high oil content.
We also estimate a record pulse crop. Large areas went into chickpeas and lentils because of favourable expected returns at the time of planting. Despite concerns of waterlogging and disease pressure, the pulse crop yielded extremely well.
So let's look at the summer crops which are growing at the moment. Summer crops this year had a mixed start. At planting time in late 2016, plentiful supplies of irrigation water were available to growers in Queensland and New South Wales. This enabled large increases in areas planted to irrigated cotton and rice-- well above average for both.
Dry land crops, however, had a less-favorable start, with low soil moisture in parts of Queensland. While dry land cotton and sorghum plantings were both affected, late plantings of sorghum were curbed by further reductions in soil moisture over January and February. Additionally, higher expected returns from cotton pushed sorghum plantings to a 24-year low.
The average price of cotton has been strengthening over the past nine months due to a rundown in global stocks. In contrast, sorghum prices continue to face downward pressure because of the large availability of feed substitutes.
We expect the hot, dry conditions to adversely affect yields for dry land cotton and sorghum. The Bureau of Meteorology's latest three-month seasonal outlook is for more of the same. As such, ABARES is forecasting summer crop production to be just above the 10-year average at 4.2 million tonnes-- up just over 400,000 tonnes on last year.
Looking at the year as a whole, at the farm gate, exceptional yields offset low prices, especially for wheat and barley. We're forecasting grain farm incomes to rise in 2016-'17, and average around $398,000 a farm. If realised, average farm cash income will be the highest in the past 20 years in real terms-- that is, after we've adjusted for the effects of inflation. As Australia exports around 3/4 of its grains and oilseeds production, world markets largely dictate prices received at the farm gate, and in turn, planting decisions.
Before I present ABARES' outlook for the Australian grains and oilseeds industry, I want to touch on the medium-term outlook on world markets. We're predicting growth in global demand for grains and oilseeds over the next five years, similar to what we've witnessed historically. The two big drivers are population growth and income growth, particularly in developing countries in Asia, the Middle East, and North Africa.
As diets change, we expect further increases in the consumption of feed grains used for intensive livestock production and of wheat for food. In the case of oilseeds, and for the same reasons, we're predicting rising demand over the medium term with increased use for food and livestock offsetting slower growth in biodiesel use. Two large consumers of biodiesel, the European Union and the United States, are using a lower proportion of oil from oilseeds in favor of alternatives-- predominantly, recycled oils, animal fats, and palm oil.
In contrast to global demand, the outlook for global supply is a more dynamic story. ABARES is predicting continued growth in global grains and oilseeds production over the medium term, driven largely by changes in government policy and yield gains. In Argentina, we expect the recent elimination of export taxes and other export restrictions to stimulate production. And the Brazilian government's minimum price guarantee is seeing large areas planted to second-crop corn.
There's no doubt that improving yields in major-producing countries, Australia included, will be a key driver. We expect to see the greatest gains in the Black Sea region-- that is, Ukraine, Russian, and across to Kazakhstan, and in South America, namely Argentina and Brazil.
As a prime example, this slide shows growth of wheat yields for Argentina, Russia, and Australia over the past three decades or so. While it's clear that growth in these competitor countries is stronger, what's less obvious is that the trend growth is also less volatile. And, of course, production growth is translating into substantial trade growth. In the case of Russia, for example, the Australian Export Grains Innovation Centre estimated that grain exports from Russia-- predominantly wheat, barley, and corn-- are likely to increase 60% in a little over a decade or so from now.
World markets are now larger and far more competitive than in the past, and this is putting prices under pressure. Prices for grains continue to slide from a peak a few years ago. In 2012-'13, prices spiked in response to a fall in supplies of wheat, corn, and soybeans. Poor seasonal conditions had curbed production in the northern hemisphere at a time when global stocks were low. The opposite is true.
For the past few years, growth in grain production has exceeded consumption, swelling stocks and dampening prices. Because of this, we predict world prices to remain relatively low in real terms over the next five years.
Of course, it's important to remember that ABARES' medium-term projections assume average seasonal conditions globally. While we know that adverse conditions will occur at some point again, there is uncertainty about where, when, and how severe. As such, a major drought could change our outlook, although any upward pressure on prices will be tempered by large global stocks.
So what does this mean for Australian producers? In the immediate future, ABARES forecasts domestic production of grains and oilseeds to fall in 2017-'18. It's difficult to see next year being a repeat of this outstanding year, and as such, we forecast yields to return to average. We're also expecting a shift away from cereals in favour of canola.
In the medium term, we project yield gains to underpin modest production growth. While a relatively low Australian dollar will assist the competitiveness of our exports, in light of our global outlook, Australian growers face some challenges in the medium term.
To recap, we predict growth in global supply to outplace demand and maintain downward pressure on prices. And in conjunction with intense global competition and large stocks, prices aren't expected to recover in the medium term.
But it's important to keep the outlook in perspective. This graph of the world wheat indicator price shows that prices have been trending down in real terms for a long time. In this sense, the medium-term outlook is somewhat of a familiar landscape.
Questions inevitably arise as to how growers should deal with this challenge. With little control over prices, they typically pursue productivity growth as their main strategy for maintaining profitability and international competitiveness.
And we can see the results of this in the red line, which represents the productivity of specialist grain growers. We started measuring productivity at the industry level in the late 1970s. It's a measure of how well they convert inputs to outputs, and it tends to improve over time as they adopt new technologies and management practises. Similarly, we see growers overcoming the challenges ahead while continuing to improve productivity is their main means of maintaining profitability Thank you.
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