Western Australian grain growers don’t just have thousands of kilometres of ocean separating them from overseas buyers, they are also 4000kms away from 90% of Australia’s population - a land island within an island. The issue with that is obvious – WA grain growers are a bloody long way away from those who buy most of their product. The next issue is that WA growers produce prodigious quantities of product, as last year’s record harvest attests.
So how can an individual farmer sell their harvest direct to a customer? Except for the relatively few tonnes sold domestically within WA, they can’t.
That’s where the “Trade” plays its role. There are a number of compelling factors for the Trade: Grain needs to be bundled into efficient sea freight parcels, typically in the order of 50kt, with shipping capacity booked into the export program long in advance of actually owning the grain. In addition, international customer relationships need to be formed, trade finance accessed, shipping companies engaged, a back office managed to handle the maze of market access issues, and the ability developed to bear risk by going long or short to absorb the mismatch of seasonal supply versus steady demand. These are just some of the aspects of the trade role.
There was a rumour a few years back that a shipment of Australian grain reached the destination port and the hatch opened to reveal a kangaroo carcass lying on top of the cargo. There is no playbook for dealing with that contamination issue - and no debating its source - but it will involve time, cost and a likely discount to sort out. In the meantime, $15mt of grain is sitting idle in a foreign port. The Trade has to handle these types of things as well.
Over the years, numerous attempts have been made by growers to ‘cut out the middleman’ and go direct but, invariably, it’s a one and done scenario. Once the covers are pulled off to reveal the pit of vipers that is the international market, it becomes clear the effort to avoid being bitten negates the potential upside for a part-timer.
So, like it or not, the grower is dependent on the Trade to access the international market. But who is the mysterious Trade? Well, the answer to that is fluid.
Not that long ago, the global grain industry was dominated by the ABCD – Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus. There were others scattered around doing reasonable volumes, including the big Asian trading houses, but the ABCD were the original Big 4. Even when Australia had single desk counterparts such as AWB (wheat) and GrainPool (coarse grains), they sold significant tonnages direct to these traders.
When industry consolidation started in earnest at the turn of the millennium, the ABCD were waving fistfulls of dollars like it was the last round at the pub before closing.
In Australia, the first wave saw the South Australian version of CBH (ABB) fall to the Canadian mob Viterra, AWB gobbled up by Cargill, Archer Daniels Midland have a crack at control of GrainCorp (which failed), Sumitomo snaring Emerald, Glencore dipping its toes and taking over Brooks Grain and CBH (after absorbing Grainpool) shunning approaches from all and sundry, with one consequence being Bunge building their port in Bunbury. In the next wave, Glencore bought Viterra and, last year, Viterra bought the US group Gavilon (which had tried and failed to establish a Perth office previously). Locally, Louis Dreyfus snapped up Emerald after previously shutting down their WA office. Which left us with a Big 5 – ABCD&G (the G being Glencore).
But not anymore. This month it was announced that Viterra and Bunge are merging, with the owners of Viterra (Glencore and friends), taking a third of the shares of Bunge fattened by consuming the operations of Viterra. We will have a Big 4 again.
What this means is one less major trader buying WA grain. In 21/22 Viterra and Bunge combined to buy 20% of the WA exported crop. Given that CBH are number one every year, with around half the crop, 20% is second place before daylight comes third.
Although the recent large crops and high trading margins have seen smaller traders such as Aaax, Brahman Commodities and Riordan Grain Services enter the WA market, trading conditions are not always lucrative and deep pockets are required to weather the inevitable trading storm (lest we forget CBH Marketing and Trading’s loss of $120m reported in 2019). For certain commodities and Port zones, having a thin buying market can mean significant volatility in pricing. At times this season, the second highest price was $50 behind CBH and CBH had heavy buying restrictions in place.
It’s not panic stations but healthy grain pricing involves healthy competition and we are now a ‘trader down’.
