WHILE Australian grains producers remain, for the most part, profitable at current prices, the situation is not the same for producers in the United States.
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Although the US may seem a world away, the response of US producers to this period of the unprofitability will shape the supply balance, particularly in feed grains markets, and impact feed grain prices globally, including in Australia.
For US producers, who have not had the benefit of a depreciating currency, and who have produced record or near-record crops for three years in a row, prices being received are well below the cost of production. Data released by the Iowa State University, located in the heart of the US corn belt, shows this is particularly true for corn and soybean producers.
US corn growers, who are currently receiving $US146/tonne on the Chicago Board of Trade (CBOT), are estimated to have a cost of production of about $US176/t, when planting corn following corn. This implies a loss of US$29/t.
Soybean producers are currently receiving $US324/t on the CBOT, while cost of production is estimated at $US381/t. This represents both fixed and variable costs.
Interestingly, despite prices being below the cost of production, it is not anticipated that a large amount of acres will stripped out of production in the coming season.
Although early days, the USDA is forecasting 2015-16 corn harvested acreage to total 32.7 million hectares – a reduction of three per cent year-on-year, while soybean harvested acreage is predicted to total 33.1m ha – a 1pc reduction year-on-year.
One of the reasons we have not seen production respond to lower prices is that US producers are incentivised to produce through the US Farm Bill, with crop protection insurance encouraging production.
When we look at other large feed-grain-producing nations, such as Brazil, low US dollar prices are in fact leading to increased production, although the mechanics encouraging production are very different to the US.
A depreciating currency has meant Brazilian soybean farmers, for example, are receiving higher prices now, with soybeans at a five-year low in US dollar prices, than at any time over the past five years.
So what does this mean for the Australian producer?
Given the current market dynamic, we can expect to see limited upside in CBOT corn and soybean prices, assuming normal weather conditions.
While Australia is not a large producer of either corn or soybeans, it is the linkage they share with both wheat, and other feed grains, including sorghum and barley, that is important for the Australian producer.
In particular, combined with sluggish demand for Australian feed grains in China (a result of changes to government import policy) the outlook for feed grain prices is subdued.
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