December 23, 2010

 

Positive outlook for Australia's grain market

 

 

Despite extreme weather conditions and a strong currency, the outlook is positive for Australia's grains market in 2011, according to a Rabobank report.

 

After intense flooding across the eastern states and near-drought conditions in the west, 2010 has seen grain quality and quantity downgrades, however prices have been a saving grace.

 

Author of the report Australian Grains Outlook - Cold November Rain, Rabobank senior analyst Wayne Gordon said as 2010 draws to a close, most would concur the year could not have turned out more differently than initial expectations.

 

"In addition to Australia's wet harvest in the east and drought conditions in Western Australia, we've had weather shocks in Russia, Western Europe and Canada, as well as poor conditions in the US winter wheat areas impacting on prices," Gordon said.

 

"Next year, we expect macroeconomic and weather events will still dominate market sentiment, with each driving the market at some stage, much the same as in 2010".
 

While the outlook is positive, it is not without risks.

 

"There will be high price volatility, as macroeconomic factors and fundamentals take turns at driving market sentiment, but current expectations are for crop balances to be tight for much of 2011, particularly for corn and cotton. Less spring wheat will be planted in the US and the strong demand for feed grain are all positives for Australian producers," the report says.

 

In addition, Gordon expects sharp gyrations in prices, particularly in the more sensitive corn and soy markets, as the 'battle for acres' gets underway in the US.

 

The Rabobank report predicts the Australian dollar will remain elevated for some time, posing problems for grain exporters.

 

"The strong dollar will be problematic for exporters in the second half of 2011, particularly if corn supplies increase substantially and global wheat quality improves in Northern Hemisphere harvests," it says.

 

With such extreme volatility in crop prices expected to continue, price-side events remain difficult to predict for the whole of 2011, according to Gordon.

 

He nominates three key swing factors that are likely to determine global crop prices over the coming year - crop areas, weather, and policy developments such as export bans in Russia and China's policy attempts to combat food inflation.

 

"If these swing factors play out as we expect, a definite bullish picture can be proposed for crop prices in 2011," he said.