There is a common misconception not only in Australia, but also throughout the world, that grain prices and grain markets are complex, with the skill of understanding and the ability to read the market trends and pricing, bestowed only upon a select few. However, understanding the grain market, and how grain market prices work in Australia can be understood with far greater ease, by focusing on the key components that make up the equation, factors such as the cash price and futures market.
We take a look at what grain market prices are and how they work in Australia.
What are grain market prices?
In order to understand how the grain market, and in turn grain market prices work in Australia, it is vital to understand what the grain market is.
The grain trade, or grain market on a global scale, is the oldest market in existence, to the point where it is thought to have predated civilization. The grain market originally commenced due to farmers transitioning from small cropping where they produced small amount of grain, to larger scale farming operations, where they grew and produced large quantities, therefore requiring a platform or a market to sell their product.
Today, just as it was back then, several thousand years ago, the grain market both globally and in Australia, provides farmers with this same platform to sell their product, and connecting them with buyers. Grain market prices, established by the market process reflecting the price that the product sells and is distributed for, to buyers and in turn consumers.
How are grain market prices calculated?
Grain prices in Australia take into consideration three vital components of futures, foreign exchange rates and basis points, all of which have significant impacts upon grain market prices.
The US futures market is used as an underlying price for the Australian grain industry, with the actual local Australia price wither higher or lower, with the variance between these two figures known as the basis, or basis price, which is calculated in US cents. Whilst sounding complex, futures contracts are simply, legal documents between grain producer and grain byer that sets an amount of grain and the price paid per bushel, with details regarding the delivery of the grain product at a future date.
The third component, the exchange rate, also has a significant impact on the final grain price, due to the fact that most Australian grains are sold in US dollars. A lower US exchange rate meaning that Australian farmers receive more from their product, and a higher return on their farming investment.
Whilst this process may seem complex, these three factors determine a grain producers bottom line, turning their grain product into dollars.
What affects grain markets in Australia?
Grain markets and grain prices in Australia can move sharply, with prices significantly swinging day to day. Whilst this can add to the complexity of the grain market equation, these sharp swings can be explained predominantly by the principals of supply and demand.
There are many things that can affect the grain market and overall grain prices in Australia, particularly in terms of exports.
Generally, grain market prices are affected by three main factors, which are;
- Supply – how much product is available in the market.
- Demand – how much product buyers are looking for, and how much of the product is needed.
- Growing conditions, including whether conditions.
Whilst Australia produces approximately 25 million metric tonnes of wheat each year, Australian wheat only accounts for roughly 16% of global wheat trade. Despite this, the economics of supply and demand can have an impact on the grain market price in Australia, with domestic wheat prices heavily influenced by the global price of wheat, which in turn is set and influenced by global supply and demand. Put into an example, as Australia exports the majority of its wheat product, a global over supply, will see the global wheat price fall, and will see the Australian, local wheat price low, where as lack of supply, with have the opposite effect, and see Australia farmers receive higher returns.
Supply and demand are not the only two factors that influence grain market prices in Australia, with the weather or seasonal conditions also playing a significant part of the grain market price equation. Dry growing conditions generally equates to less wheat, so less product available for sale, with lower yields leading to higher process, as there is again, a greater demand for the product, with premium growing conditions typically creating the opposite effect.
Another important grain market price influence is natural disasters. For countries and areas that experience a natural disaster like large storms, fires, or a freeze, where crops are decimated, this will also have a significant impact upon pricing both on a local and a global level.
Grainwise – How the experts can assist you with grain market pricing
As experts in grain markets and grain market pricing, particularly grain market prices in Victoria and the Riverina, our team have the skill and ability to read and understand both grain market and grain pricing, providing critical advice to producers. Our expert advice ensures that our farmers are making the best decisions and transactions based upon the market trends.
Our team work hard to negate any adverse market factors ensuring that terms and conditions of market transactions suit your business needs, providing more marketing options, including a broader access to buyers and prices.
If you are a local Australian grower, looking for some guidance with understanding grain markets and grain market prices, and how you can future proof your crops for better future returns, give the team at Grainwise a call today!