30 - Volatility in Australia’s wheat export supply chains

Professor Ross Kingwell - Chief Economist - AEGIC

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Dorothea Mackellar’s famous poem, My Country, sums up Australia as a land “of droughts and flooding rains”, with “Her pitiless blue sky, When sick at heart, around us, We see the cattle die.” Written over a century ago, even then the seasonal volatility in Australia was well-known. Drought, floods, fires, frosts and pests were, and remain, acknowledged disruptions to Australia’s grain production and international grain trade.

In spite of the relentless vagaries of Australia’s weather, over many decades, Australian farmers, scientists and governments have developed coping mechanisms. Australia’s grains industry has learned to adjust to the highs and lows wrought by changeable seasons. How well are our wheat exports faring, wheat being Australia’s principal grain? Is volatility in wheat production and export still a pronounced feature of Australia? Is there spatial variation in the volatility of wheat exports across Australia?

 

Spatial volatility of wheat production in Australia

Table 1: Volatility of wheat production in Australian states

Table 1: Volatility of wheat production in Australian states

Data in Table 1 indicate that over the last 20 years NSW and Qld have remained characterised by pronounced volatility in their production of wheat. By contrast, WA and SA have improved the reliability of their wheat production. Over the last decade Vic also has increased the reliability of its wheat production, although relative to WA and SA it remains a more volatile producer of wheat.

How does this spatial pattern of the volatility of wheat production affect the reliability of wheat exports? The volatility in wheat production affects each state’s exports of wheat differently; some states are more affected than others. For example, due to three-quarters of Australia’s population residing in Qld, NSW and Vic these states have a large domestic demand for wheat used in human consumption and animal feeding (e.g. poultry). In addition, in years in which grain production is low, pasture production is also low which increases the demand for grain for feeding farm animals. Hence, any low volume production year in NSW, Vic and Qld greatly curtails wheat exports. By contrast, in a state like WA that has a very small domestic market and far fewer livestock, most wheat produced is exported, even in low production years. 

Table 2: Volatility of wheat exports from ports in Australian states: 2014/15 to 2018/19

Table 2: Volatility of wheat exports from ports in Australian states: 2014/15 to 2018/19

Table 2 lists the reliability of wheat exports from the ports in each state over the last 5 years. It’s no surprise that NSW and Qld are characterised by marked volatility, whereas the opposite is true for WA.

Export volatility affects the costs of owning and managing export supply chains. GrainCorp, for example, as a principal storage and handling operator in NSW, Qld and Vic faces the prospect of owning and managing port terminals and associated grain storages that are substantially under-utilised in years when grain production is low. Conversely, the greater reliability of export grain flows in WA facilitates investment decisions by CBH, WA’s principal grain handler.

 

Take-Away Message

Volatility in wheat production and export is a key feature of Australia’s eastern states; Qld, NSW and Vic.  By contrast, over the last decade SA and WA have been increasingly reliable sources of wheat exports.

* The measure of volatility is the coefficient of variation of time de-trended production. The coefficient of variation is a statistical measure of volatility. It is the standard deviation of a dataset divided by the mean of that dataset. Where production is subject to a time trend then variation around that trend is a more meaningful measure of volatility.

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Ross Kingwell