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It seems like the good times are coming to an end.
We had two years of terrible drought, followed by three years of excellent production across most of Australia.
It was only a matter of time, but it seems the times of high production are turning. ABARES is due to release an update in September; it will be for falling production.
Let’s be straight: First of all, this isn’t the drought of 2018 and 2019; it’s nowhere near that severe.
An area of major concern is Southern Queensland and Northern NSW, this is an area quickly drying off, but where a huge chunk of the country’s domestic demand is located.
The first chart below shows that the domestic premiums are being paid in these markets.
The second chart shows the spread between Brisbane and Geelong/Kwinana since 2015.
We can see that the wheat price in Brisbane rose to a stratospheric high during the last drought. This is caused by domestic consumers paying up to ensure that they gain access to grain.
We have to remember that domestic consumers are largely inelastic in their demand; they need to feed animals. That is unless they start destocking.
There can be an element of fear of missing out (or FOMO for the millennials reading), and this can drive markets higher as concerns are of lack of access.
Again, I don’t see the situation at present as being analogous to the 2018/19 drought, but the concerns in the marketplace are driving Northern NSW and Southern QLD grain to strong premiums.
This article originally appeared on Episode3. Republished with permission.
