Australian farmers are some of the most efficient in the world. We are also some of the least subsidized in the world. Figures I saw in August 2007 suggested less than 9 per cent of agriculture’s income came from subsidies, the main contributor being drought assistance. Drought assistance, in that form, is no longer available.
As a grain farmer I produce a bulk, undifferentiated product. Prices are set on the world market, generally in the United States. To give people a general outline of how my price, for wheat, is set I will give a broad outline of the factors at play, and how they form a wheat price on my farm.
Before a farm gate price can be determine we first need to understand the world price. There are three main factors in determining Australian prices, futures prices; currency and basis
Generally the Chicago Board of Trade (CBOT) wheat price is used as a benchmark for international pricing. See www.barchart.com/commodityfutures/Wheat_Futures/ZW?search=ZW*
It is the most fluid futures market in the world. Last night (July 3rd) 48 800 contracts traded for the front month wheat. These are in lots of 5000 bushels, or 136 metric tonnes. One metric tonne equals 36.74371 bushels. Because Australia’s wheat harvest is generally in December, the Dec 12 contract (ZWZ12) is used as the basis for pricing our new season wheat. This last traded at US813.75c/bu
As wheat is traded internationally, in USD’s, the exchange rate has an impact on my returns. Like all Australian exporters the high dollar is hurting me currently. Out of interest, use the formula provided below, with an AUD of 75c.
The third factor in pricing wheat is a thing called the “basis”. Generally the basis is small, or negative. When grain is short in the domestic market the basis can become positive, revealing a domestic demand over and export demand. The basis is deducted from international pricing to form the AUD price, usually expressed as “delivered port” as a Multi Grade contract. The base grade is Australian Premium White (APW) with different grades attracting a different price. Premiums are paid for high grade milling wheats, discounts for lower grades of milling and feed wheat. See www.sturtgrain.com.au/public/editor_images/Prices%20040712.pdf
Here is a simple formula for determining AUD value of wheat, from CBOT ZWZ12 futures, and a spot AUD.
APW MG Pt Adelaide = (US futures/AUD)*Bushel conversion factor + basis
APW MG Pt Adelaide = 813.75 * 36.74371 + basis
APW MG Pt Adelaide = US$ 299.00 + basis
APW MG Pt Adelaide = US$299.00/A$1.002
+ basis = A$293.13 + basis
APW MG Pt Adelaide = A$ 284 today
Today the basis, relative to ZWZ12, is –A$9.13 This has been a very simplistic exercise in describing how my del Port grain price is determined. A grain trader would have a more in depth answer, with many more factors coming into play than I have mentioned, and this is what forms the basis.
From the Port Adelaide price I then deduct the location differential (freight) from my local site, Pinnaroo, back to Port. This year (2011/12 harvest) this was $31.79/tonne. Any grain I sell for 2012/13 delivery will be subject to the new season location differential. See http://www.graintrade.org.au/sites/default/files/file/Location%20Differentials/Location%20Differentials%202011_2012/Copy%20of%20GTA_2011_2012_LDs_SA_9_November_2011.pdf
Unseen costs in the delivered Port Adelaide MG price include storage and handling charges. These are deducted before the price is posted. These are approximately $35-40 per tonne. They are charged by the bulk handler in SA, formerly ABB Grain, currently Viterra, and soon to be owned by Glencore.
I hope this has given you a very simple overview of how grain is priced domestically, for export. While not designed to give the ultimate answer, I hope it helps identify the key components in the grain pricing pie.