For mixed farmers, the question of whether to sell grain, or feed it to animals, is not straightforward. The principle of a natural hedge underpins some of the thinking, so let’s look into that.
If the summer season is particularly brutal, and animals are put on feed en masse then, theoretically, the demand for grain will increase and lift prices. If the grain is sitting in a silo on farm, then the cost of feeding is not more expensive than the price that it could have been sold for at harvest, and presumably lower than having to buy it in subsequently. (We will ignore nutritional comparisons in this article).
Underlying this theory is the assumption that local demand (feed) will become the primary driver for price. Looking into the commodities and focusing on the big three feed grains of barley, lupin and oats, let’s lace up a steel cap and kick the tyres of this assumption:
1) Barley prices have escalated in recent months due to strong Chinese demand for cheap(er) malt (i.e., FAQ barley) now that tariffs have been lifted. The primary driver here is the lack of economical alternatives. China was accessing French barley that was much more expensive than WA barley and have since been prepared to pay to turn WA vessels their way. Generally, markets have a habit of settling down after the initial excitement of a new market, which China’s re-entry effectively is. Will the new season be more stable? With nearly 4mt of barley forecast this harvest, domestic demand for feed barley in WA is tiny compared to the tonnages that are put on a vessel. Even if local demand increases above the norm, it shouldn’t have a major impact on the price set by exporters whilst tonnes remain uncommitted. So, it’s all eyes on China for barley pricing.
2) Lupin is an interesting crop, as the food market is irrelevant and offshore buyers are niche. Lupin’s primary role is as animal feed, but only in countries that know how to use it. South Korea, Spain and Europe are the usual suspects, but their demand is contingent on price as they have alternatives. If soybean or sunflower meal is within cooee of lupin, then they lose interest. This means that, for prices to rapidly escalate beyond meal parity, local demand has to absorb what international demand would normally sop up, plus more. How much can WA animals eat? (noting that whole seed lupin can’t be shipped east due to lupin anthracnose).
3) The days of oats being fed to animals are passing faster than Lewis Hamilton from the back of the grid. The vast bulk of oats gets milled for human food, either processed onshore in WA at the three major mills, or exported in raw form for milling, mostly to China. That demand is relatively fixed and, with other large oat producing regions (i.e., Canada) not looking strong, a shortage in global supply can drive prices. Whereas local processors are inclined to buy forward, including at planting, to ensure they have enough to keep their mills running, overseas processors who have choice of origination countries are shorter term in their purchases. What happens when demand is constant but available tonnes are short? Prices go up. And, of course, the opposite happens when demand is satiated and there is still plenty of the WA crop trying to find a home. Keeping tonnes on farm to feed to sheep has a unique way of compounding the issue through reducing forecast supply – but the bad news is then feeding oats with a 4 in front to sheep!
The wild card is demand from the east coast. A long, hot summer sparks eastern feedlotters to punch in the WA area code as they desperately try to find feed grains. As Australia cannot import grain from overseas without extensive biosecurity controls, the cattle heavy states of NSW and QLD become a captive market for those Australian states carrying an export surplus – with WA being the largest. But one summer tropical rainfall event can stop Brisbane bound boats at berth and send WA back to supplying overseas markets which have more choice.
The flipside of the grain equation is feed pellets. Pricing of pellets is not driven by supply and demand of the pellets themselves, but by the cost of the inputs. Even with input price volatility, pricing is ‘sticky’, as the input costings are averaged across commodities, and over a period of time. So even if there is 10,000 tonnes of demand for 1,000 tonnes of supply one month, unlike grain, the pellet price will not change. This can prompt speculation of selling grain at the high and buying in relatively lower priced pellets for feed. However, in this example, it’s worth remembering that nine thousand tonnes of demand goes without.
Fortunately, Milne Feeds’ mixed farmer customers have the option to hedge their grain crop with pellets through the Milne Grain Trade program which, importantly, locks in tonnes for calendar year slots, as well as price.
As always, gamble responsibly.
