A La Niña event brings less rainfall for WA, but recent history is not an accurate guide as to what it will mean for the state’s crop output.
The Bureau of Meteorology recently declared the world to be in a state of La Niña, and while good news for Australia it is not so positive for other parts of the globe.
Here is a technical explanation of a La Niña event from the bureau.
“La Niña occurs when equatorial trade winds become stronger, changing ocean surface currents and drawing cooler deep water up from below. This results in a cooling of the central and eastern tropical Pacific Ocean. The enhanced trade winds also help to pile up warm surface waters in the western Pacific and to the north of Australia.”
In layman’s terms, a La Niña event can make Australia’s east coast wetter, while the west tends to be less fortunate.
This is excellent news for Australia in general.
There have been 16 La Niña events from 1980 until the present day.
In the eastern states, 11 of these events have corresponded with grain production above the 10-year average.
The advent of La Niña now adds support to farmers who have struggled through a period of successive droughts in the eastern parts of the country.
The story is not quite as favourable for farmers in Western Australia.
The yield in WA has been positive a few times during these past 16 La Niña events, with only eight seasons showing higher-than-average production.
Conversely, there have been years when the west has suffered during La Niña; for example 2010, when production fell 40 per cent compared to the decade average.
Generally, the effect over the long term is that WA is hit or miss when it comes to La Niña, while the east coast is wet.
The grain market does not operate in a domestic bubble, however.
Our prices are typically more influenced by events overseas, such as political interventions and weather events in the Northern Hemisphere.
While we understand that effect of La Niña on Australian grain production, what about the other major growing areas of the world?
The US is one of the world’s largest producers of grain, growing large quantities of corn and wheat.
When La Niña strikes, there is a tendency for large tracts of the US to experience drier-than-average conditions.
The US wheat yield in La Niña years hasn’t been drastically affected compared to the decade average.
On average, the yield in a La Niña year has been down 1.22 per cent, however, the range has been from -13 per cent to +12 per cent.
The wheat price in Australia is not only influenced by overseas wheat prices but other allied commodities such as corn.
The use of biotechnology has boosted corn yields in the US from an average of 4.5 million tonnes per hectare in the 1960s to 10mt/ha during the past decade.
The corn yields during La Niña years have been more affected than wheat.
Overall yields have declined by 3 per cent in the US against the decade average.
The range has also been significant, from -24 per cent to +11.5 per cent against the decade average.
This is important as corn is the world’s most highly produced crop, and the US grows just over 30 per cent of global production.
The world has become reliant on a good US corn crop and the yields it produces.
If a major drop in yield is experienced, we will see a significant rise in Australian grain prices as a flow-on effect.
All in all, rainfall in Australia is driven by a range of factors.
History has shown that the east coast tends to get wetter and results in productivity gains.
The west coast is more complicated and is equally likely to benefit as lose due to La Niña.
There is a good chance that anything grown will be sold at a much higher price due to the impact of lower production in other parts of the world.
The perfect scenario for Australian farmers is good local production and poor overseas crops.
This would lead to the happy pair of volume and price.
Andrew Whitelaw is a manager of commodity market insights at Thomas Elder Markets (TEM)
