Australia is unique in that it is one of the few grain producing regions that has a paltry population relative to its grain production capability. Western Australia is even more unique as, although it produces around 40% of Australia’s crop, its population is only 10% of Australia’s and~4,000 km away from the other 90%. All of which means that domestic (local) WA grain demand is relatively low, at somewhere around 5 to 10% of the annual crop on average. The rest of our grain gets bundled into 50kt sea freight parcels at ports and poured into vessels for a one way trip to a foreign land.
Many producing locations have access to domestic demand sufficient to absorb large amounts of the crop freighted to the customer via train, barge or truck, in parcels which farmers are able to bite off individually or via local marketing groups should they choose. Even export might simply be crossing a land border (take US imports of Canadian grain for example). WA farmers don’t have that luxury.
The commercial rationale for duplicating storage, on farm and then at CBH, is questionable if it ends up at a CBH port anyway. CBH receival fees are payable regardless and those receival fees are used to invest in more off-farm storage so farmers don’t have to build their own. Accordingly, WA growers have some of the lowest capacity on-farm storage of any major producing region globally.
However, every year, more and more on-farm storage is built in WA. Why is that?
The major pros of on-farm storage are:
1. Improving grain quality through blending/screening/drying.
2. Avoiding receival and carrying charges for domestic use.
3. Hedging markets and seasons (how many growers are currently holding lupins on farm as sheep feed in case the season turns cactus?)
4. Providing a buffer between harvester capacity and receival capacity, enabling farmers to spread out the harvest delivery period whilst minimising standing crop risk.
5. Marketing direct to domestic processors, Bunge or container packers.
6. Being able to grow and market niche and off-spec grains and qualities that the bulk handler doesn’t have a service for.
7. The traditional on-farm use of seed and feed.
But there is always a flipside:
1. Capex costs are high. It’s one thing to chuck a few tonnes in a shed, it’s another to have a concrete-aproned receival grid, a weighbridge and a sealed, self-emptying string of silos.
2. Managing on-farm storage demands time, expertise and attention to detail to maintain grain quality, monitor inventory, and prevent pest infestations.
3. Degraded grain quality or losses if (2) is not up to scratch. How many sausage bags have been torn open by cockies for a summer thunderstorm to drench the contents? Losing 10 tonnes makes the off-farm receival costs on 100 tonnes look attractive.
4. Working capital constraints. By storing grain on-farm, farmers tie up capital in inventory that could have been invested in other areas of the operation or used for debt reduction. With interest rates rising, this cost becomes more significant. Holding a tonne of ASW for 6 months racks up ~$14pt @ 8% interest.
5. Market limitations. There are only so many buyers of particular grades of grain. Just-in-time spot markets can reap rewards or result in old crop languishing into the new season.
6. Getting the timing wrong. CBH makes reference to the grain market being $25pt higher in the front half of the year (on average) prior to increased competition from Black Sea production. If the export market drops their prices, then domestic usually follows.
Every grower works out their own specific pros and cons though, commonly, most growers are pointing to their spanking new harvester and the increasingly difficult maths in matching its take-off capacity with the time to freight it to the nearest service as to why a shiny new steel bin is a good idea.
But there are also more and more growers, particularly those within reasonable freight distance of the metro area, who want to have additional direct marketing options. For those growers, the Delivered End User price regularly posted by the likes of Milne Feeds provides an alternative market to export. Besides different contracting options, domestic can also offer flexible solutions (handy if you accidentally put 10 tonnes of wheat in your new barley silo!).
