The future for feed grain producers looks bright with demand remaining high and the constant uncertainties of supply set to keep prices above historical averages, according to a recently released Rabobank report. However as the global economy recovers, and in a deregulated Australian wheat export market, there is likely to be greater volatility in feed grain prices, the report says.
Report author, Rabobank Australia analyst, Adam Tomlinson, says that although demand has slowed in 2009 due to the global economic downturn, there are a number of factors that should sustain feed grain prices.
"The demand for animal protein globally remains at high levels. The growing world population and rising incomes in developing countries has led to greater demand for animal proteins and increasing global animal production for food," he says.
"We expect feed grain prices to remain above the long-term average and to track sideways during 2009 leading into 2010. However, a supply shock or dramatic rise in global energy prices could change this outlook to the upside. In saying that though, we do not expect that the record grain prices experienced in 2008 will be repeated in 2009."
US ethanol demand to continue to impact global feed grain prices
The US government's increasing renewable energy targets have seen more corn being processed for ethanol, which has contributed to the overall growth in demand and put upward pressure on corn prices. Globally, corn is the major feed grain and so any increase in demand or disruption to supply has a major impact on global feed grain prices, the report says.
"Biofuel mandates in the US have encouraged major developments in the corn market, with knock-on effects for other feed grains. In 2008, over 90 million tonnes of US corn was processed for ethanol, exceeding the amount of global corn production that was sold into export markets for the first time in history," Mr Tomlinson says.
"The strength of the relationship between the demands of the feed grain and biofuel industries has seen a stronger correlation between US corn futures contract prices and world oil prices. The stronger connection between crude oil and biofuels will further add to demand for grain. This is expected to keep upward pressure on international feed grain prices in the medium term."
Supply and price volatility remain key challenges
"The major challenge facing the domestic feed grain industry in Australia is the unpredictable nature of the Australian climate and the impact of drought years on feed grain production and prices," Mr Tomlinson says.
In 2006/07, for example, Australia experienced widespread drought conditions that halved crop production.
Mr Tomlinson says: "The big issue for Australian feed grain end-users is securing a consistent feed grain supply at the right price for use for livestock.
"Australia is a dominant exporter of grain with international benchmark grain prices influencing domestic grain prices. To overcome variable international grain prices and unpredictable Australian production in a deregulated wheat export market, it is most likely that feed grain end-users will need to manage feed grain input and marketing decisions by carrying grain inventory or taking forward positions more actively."
