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“Watch the Aussie dollar” says US grains expert

Australian grain growers have been told to “watch their dollar carefully”, as currency movements are set to have the biggest bearing on Australian grain prices next season and beyond, according to US grains expert Dan Basse, who is in Australia as part of Rabobank’s Visiting Experts Program.

Travelling around the country on a week-long tour, Mr Basse has met with farmers from Queensland’s Darling Downs to the Western Australian wheatbelt – as part of Rabobank’s commitment to bring international industry leaders to Australia to share knowledge and expertise with the bank’s clients.

Mr Basse, who has been forecasting US and world agricultural price trends for more than three decades, says – in a “world awash with grain” that offers little upside to global grain prices – Australian prices will be largely dictated by the value of the Australian dollar.

“Over the past three years we have seen the Australian dollar fall by around 24 per cent against the US dollar, and it has been this currency shift that has helped underpin Australian grain grower revenues and incomes,” he says.

And the Australian dollar is expected to depreciate further over the next couple of years, he says, as the US dollar looks set to remain in a bullish phase as the United States raises interest rates and lowers the corporate tax rate.

Mr Basse says this will help underpin Australian grain prices in a global grains market that is set to remain oversupplied in the short to more medium term.

“There are no longer ‘levers that can be pulled’ to return balance to the global grains market, which remains burdened by record wheat, corn and soybean stocks,” he says.

“In years gone by, we saw low grain prices and low profitability essentially correct itself by the EU and US reducing acreage. However changes to US farm income support and EU Cap reforms ensure this is no longer the case.”

The Black Sea and South America have also “changed the global grains landscape”, he says, with Russia, once the largest importer of wheat, now establishing itself as the world’s largest exporter.

“Most of the growth in global grain supply is coming out of the Ukraine, Russia, Brazil and Argentina,” he says, “with increases in cultivated area and yield improvements driving substantial increases in production.”

In Russia, for example, Mr Basse says there are a further 30 million acres that could be turned into crop production.

“If the Russian ruble stays weak and the economic incentives to increase production remain, Russia’s potential is huge,” he says. “They also have huge agronomic potential, with their yields lagging those in the US by some 40 per cent.”

In contrast, wheat production in the US is falling, Mr Basse says, with US wheat seedings at their second-lowest level since 1900.

“Low returns are seeing US wheat producers lose an average $100 per acre (net) on their wheat crop, which has seen wheat relegated to a second-tier crop and not the principle grain it once was,” he says.

However this is doing little to change the oversupply in global grain markets, he says, as US farmers substitute wheat with corn and soybeans.

On the demand side, Mr Basse says world wheat trade remains flat with the 1.8 per cent annual increase in global grain demand met by the trend increase in world crop yields, without cultivating additional acres.

With global grain demand previously driven by biofuel demand and the livestock sector, he says future grain demand growth will need to come from new biofuel policy direction or expanding world livestock herds.

Mr Basse says increased demand from expanding world livestock herds might come from India or Africa, as China was currently self-sufficient in grain.

“Back in 2014/15, China imported one out of every five million tonnes of grain that were traded in the world,” he says. “But now, there is a real possibility that China could become a net exporter of corn by 2018/19.”

In a global grains sector facing so many headwinds, Mr Basse says a supply-shock will only have a short-term effect on the market.

“Historically, every seven to 14 years we have seen a significant weather event drive a rally in world grains markets, however the crop woes of the EU over the last two years or last spring’s damage to South America’s crops haven’t eased the supply pressure,” he says.

That said, Mr Basse says the world is facing a short-term shortage of high protein wheat due to flooding in France and Germany, which has been positive for Australian growers.

“Millers are in search of higher quality wheat, and this has boded well for Australia’s exports of prime wheat, however this shortage is expected to be alleviated when the northern hemisphere crop comes back online in June,” he says.

Mr Basse warns the global grains landscape could also be increasingly affected by geopolitical tensions.

“There are many ‘black swans’ out there that we need to be aware of and watch to see how they play out,” he says.

“For example, there are heightened political tensions in Turkey, the world’s largest wheat miller, and there will also be effects from the recent votes of Brexit and Trump.”

Mr Basse founded AgResource Company in 1987, with his firm’s research sought after around the world by farmers, processors, wheat millers, food companies and trading companies.