La Nina and the grain market
Editorial written by Andrew Whitelaw, Manager, Commodity Market Insights Thomas Elder Markets for the Summer 2020/2021 Seasons Magazine.
The Bureau of Meteorology (BOM) recently declared that the world is now in a state of La Nina or ‘the little girl’. This is good news for Australia’s grain production and bad news for other parts of the world. But what does it mean for grain prices?
A La Nina event can make South Australia, Victoria, NSW, and Queensland wetter, whilst the west tends to be less gifted.
This is excellent news for Australia in general as ‘rain makes grain’. From 1980 to the present, there have been 16 La Nina events. In the eastern states, 11 corresponded with production above the 10-year average. The arrival of La Nina adds support to farmers who have struggled through successive droughts in the eastern half of the country.
The story is not quite as favourable for farmers in the great state of WA. During the last 16 events, only eight seasons showed higher than average production.
Conversely, there have been years when the west suffered during La Nina. During the La Nina year of 2010, for example, production fell 40 per cent compared to the decade average. Generally, the effect over the long term is that WA is hit or miss when it comes to La Nina, whilst the east coast is wet. However, the grain market does not operate in a domestic bubble. Our prices are typically more influenced by events overseas, from political interventions to weather events in the northern hemisphere.
La nina not wetter everywhere
Whilst we understand the effect of La Nina on Australian grain production, what about the other major growing areas of the world?
The United States is one of the world’s largest grain producers, growing large quantities of corn and wheat. When La Nina strikes, there is a tendency for large tracts of the US to experience drier-than-average conditions.
The US wheat yield in La Nina years hasn’t been drastically impacted compared to the decade average. On average, the yield in a La Nina year has been down up (1.22 per cent); however, the range has been wide from -13pc fall to +12pc.
Impact on grain prices
The wheat price in Australia is not only influenced by overseas wheat prices but other allied commodities, such as corn. The use of biotechnology has seen corn yields in the US rise from an average of 4.5 metric tonnes a hectare in the 1960s to 10mt/ha during the past decade. The corn yields during La Nina years have been more impacted than wheat. Overall yields have declined by 3pc in the US against the decade average.
The range has also been significant, from -24pc to +11.5pc against the decade average. This is important, as corn is the world’s most highly produced crop and the US grows just over 30pc of global production.
The world has become reliant on a good US corn crop and the yields that it produces. If a major drop in yield is experienced, we will see a significant rise in Australian grain prices as a flow-on effect.
All in all, rainfall in Australia is driven by a range of factors. History has shown that the east coast tends to get wetter and results in productivity gains. The west coast is more complicated and is equally likely to benefit as lose due to La Nina. There is a good chance that anything grown will be sold at a much higher price due to the impact of lower production in other parts of the world.
The perfect scenario for Australian farmers is good local production and poor overseas crops. This would lead to the happy duo of volume and price.
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