13/04/2022 - 10:34

High input prices squeeze margins

13/04/2022 - 10:34

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The shifting geopolitical landscape is presenting new challenges for WA agribusinesses.

High input prices squeeze margins
Steve Kelly says global events are causing uncertainty among farmers. Photo: David Henry

A RECORD harvest, record prices and high global demand for grain would normally be great news for Western Australian grain growers.

These, however, are not normal times, with several factors combining to create an environment of rising costs for farm inputs and a resultant decrease in margins.

Growers in WA produced more than 24 million tonnes of grain in 2021-22, a figure 30 per cent higher than the previous record output.

According to the Grain Industry Association of Western Australia, the strong result was due to a combination of factors that rarely occur over an area the size of the state’s grain belt.

A large area sown, good subsoil moisture, an early start to planting, warm growing conditions, higher than-average fertiliser use and mild conditions during grain fill contributed to the record season.

The harvest coincided with high grain prices, further exacerbated by the uncertainty caused by Russia’s invasion of Ukraine. Both countries are large exporters of wheat and barley.

In 2020, Russia exported about 20 per cent of the world’s wheat, while Ukraine was responsible for about 9 per cent.

Since the invasion in late February, Ukraine has not been able to export its products after Russia blocked its ports.

While many Western countries placed sanctions on Russia for the invasion, agricultural products have so far been exempted.

Russia banned wheat exports to its ex-Soviet neighbours but is still selling the product to other countries, although logistics and insurance issues have slowed trade.

According to the International Grains Council, barley prices have increased by 66 per cent in the year to March 31 and wheat prices 60 per cent in the same timeframe.

Ukraine and Russia export to countries in the Middle East and Africa, raising food security issues for people living in those areas.

CBH Group chief executive Ben Macnamara said the demand created by the conflict was substantial, and WA could only go a small way towards filling it.

In 2020, according to the Observatory of Economic Complexity, Australia was responsible for about 5 per cent of the world’s wheat exports.

Mr Macnamara said most of CBH’s grain had already been sold, with 8mt already shipped, but its extra capacity could be reallocated.

“We are seeking to add additional capacity but as you can see, we are not going to be able to fill the whole gap that has been created by Ukraine not being able to access its port and sanctions imposed on Russia,” Mr Macnamara told Business News.

“Nearly 80 per cent of wheat demand for the Middle East and Africa is coming out of the Black Sea, so they are seeking to replace that grain from other markets.

“Australia will be one of those, but they will be looking further afield to countries like India.”

The Russian invasion of Ukraine has caused prices for a range of commodities to rise.

According to the World Bank, the price of fertiliser inputs increased by 20.7 per cent in March.

Prices were high before the conflict in Ukraine because of supply chain issues caused by the COVID-19 pandemic but have reached greater heights due to sanctions placed on Russia and Belarus (which has assisted the invasion), two of the world’s biggest exporters of fertiliser.

World oil prices have also risen because of sanctions against Russia.

However, some temporary relief was granted in the federal budget, when the fuel excise was halved for six months, saving consumers 22.1 cents per litre.

Mr Macnamara said rising grain prices and high input prices had resulted in tight margins for growers.

“With all commodity prices going up, input prices are going up just as much as grain prices … so you are seeing them almost offsetting one another,” Mr Macnamara said.

“Then you’ve got the uncertainty of the duration of the conflict.” Demand could increase further, with China recently acknowledging the winter wheat crop could be its worst in history.

In the US, growers have been affected by drought conditions threatening their winter harvest.

Rabobank WA regional manager Steve Kelly said while the industry was in a relatively strong spot, uncertainty and volatility were two key concerns for grain growers due to pricing changes.

“While we have got elevated grain prices, there is margin pressure and it means farmers going into a higher-risk, higher-reward farming system,” Mr Kelly told Business News.

Rabobank’s recent Rural Confidence Survey found labour shortages and global geopolitics were factors contributing to a decline in optimism among WA growers about the sector’s prospects for the next 12 months.

On the other hand, the survey also found farmers had maintained a strong appetite for investing, due to a record harvest and high cattle prices strengthening balance sheets in recent months.

“We have seen a lot of farmers reduce debt, combined with rapidly increasing property values,” Mr Kelly said.

“We have got increased assets and reduced liabilities, so balance sheet growth, equity growth, has never been as good [as] over the past 12 months.”

Farmers are using their positive financial position to expand their operations and purchase new machinery.

Rabobank’s survey found about 88 per cent of farmers were intending to increase or maintain investments in their farm enterprises.

About 77 per cent were planning to upgrade new plant and machinery in the coming year, despite extended delivery timeframes, and 14 per cent were considering buying new land.

Mr Kelly said demand was making land a hot commodity driving prices about 40 to 60 per cent higher over the last 12 months.

“Most farm sales have been sold through tender across WA and quite often we have had three, four or five farmers going for the same farm,” he said.

While early estimates suggested the 2022-23 harvest would not reach record levels, Mr Kelly said rain had provided good soil moisture and the area planted by grain growers would be like last year’s crop.

But he said the size of the crop would depend on fertiliser use. CBH’s Mr Macnamara said the industry was expecting 20mt crops to become the norm over the next decade.

CBH Group is upgrading its supply chain to deal with the expected larger crops, including increasing shipping capacity in the first half of the year and constructing improved rail loading facilities.

New markets

The Russia-Ukraine conflict began when the state’s agricultural exporters were recovering from tariffs implemented by its major trading partner.

In 2020, China imposed various official and unofficial tariffs and bans on commodities including barley, beef, lobster, cotton and timber.

Later that year, China suspended barley imports from WA’s CBH Group specifically, claiming customs found weeds in a shipment.

Mr Macnamara said the group had been able to establish new markets in Mexico and had re-established its long-term trading relationship with Saudi Arabia.

CBH was named WA Exporter of the Year by the Export Council of Australia for its ability to obtain new markets for its barley.

Another exporter to have ridden out the initial damage caused by trade tensions with China is the state’s western rock lobster industry.

Data from the Western Rock Lobster Council shows the value of exports to China plummeted from $22 million in October 2020 to about $107,000 a month later.

However, the sector rapidly built supply relationships in other countries and exported $27 million worth of product to other markets in January 2022.

The Geraldton Fishermen's Co-operative is responsible for about 50 per cent of Australia’s total rock lobster exports.

Chief executive Matt Rutter said the cooperative had been working with Austrade and foreign offices overseas to complete market research to develop new trade relationships.

He said there were always buyers for the product, but it came down to getting the right price.

“One of the challenges we have got is to find the highest paying market,” Mr Rutter said.

“We are constantly looking for those markets that are willing to pay a bit more and can take products that are cheaper to produce so more money can go back to our fishers’ hands.”

He said it had been difficult to find high prices over the past two years, with COVID lockdowns meaning people had been skipping the celebratory events that normally involved the consumption of lobster.

As a result, Mr Rutter said revenue had dropped by more than 50 per cent from pre-COVID-19 levels.

He said he was hoping international markets would free up and the cooperative would be able to make up lost gains.

Recently, the co-operative was the recipient of a $1.9 million grant from the federal government to further grow its international exports through value-adding products.

The grant, part of the Agricultural Trade and Market Access Cooperation program, will be used to expand the cooperative’s North Fremantle facility to produce a greater volume and range of value-added frozen goods.

The investment will fund machinery to split cooked lobster and utilise automated flow wrappers and automatic weighing sales.

Geraldton Fishermen's Co-operative estimated the expansion would increase its customer base by 20 per cent.

“Europe is a traditional buyer of the frozen product, but we are finding now that a number of the other old markets – Taiwan, Japan – have always been big buyers of frozen product as well, but all markets take it in varying quantities,” Mr Rutter said.

 

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