Australian wheat and the BRI: The economic geography of the world’s grain trading

The Australia-China wheat trade has deep roots, tracing back to the 1960s when Australia supplied grain to China during a famine, despite objections from the United States. This act of goodwill, facilitated by Xi Zhongxun, father of China’s current President Xi Jinping, established a durable trade partnership. 

However, rising geopolitical tensions — particularly Australia’s refusal to engage with the BRI and its commitment to the AUKUS security pact — have strained this relationship. The assumption that China will continue to purchase Australian wheat unconditionally is a strategic misstep.

The Belt and Road Initiative and grain trade

China’s BRI, a sweeping infrastructure development strategy, is redrawing the map of global grain trade. By strengthening agricultural cooperation with countries along the ancient Silk Road, particularly in Central Asia, China is reducing its dependence on traditional suppliers like Australia.

The development of the Sino-Russian Land Grain Corridor exemplifies this shift. This infrastructure project, designed to transport Russian wheat to China via rail, not only bolsters China’s food security, but also elevates Russia’s position as a key player in the global wheat market, displacing traditional exporters like Australia.

BRICS with Blockchain

The proposed BRICS grain exchange introduces another complication for Australia. By uniting some of the world’s largest grain buyers and exporters, this exchange could shift trade towards BRICS members, reducing reliance on Western suppliers like Australia.

Moreover, the BRICS grain exchange plans to facilitate transactions using blockchain technology and national currencies, bypassing the US dollar. This innovation could have far-reaching consequences:

– Reduced market visibility: As BRICS nations increasingly trade within their bloc, non-BRICS countries like Australia may lose critical insights into global grain markets, making it harder to gauge supply, demand, and prices.

– Fragmented price discovery: Blockchain transactions conducted in national currencies could fracture global price discovery. Prices set within the BRICS exchange might diverge from those on Western platforms, complicating risk management and hedging for Australian exporters.

– Shifting power dynamics: By enabling trade in local currencies, the BRICS exchange may further weaken Western financial dominance. Traditional grain trading hubs like Chicago and London — and, by extension, Australia — could see their influence wane.

The strategic dilemma

Australia stands at a crossroads. Its decision to abstain from the BRI and deepen security ties with the US through AUKUS would not have gone unnoticed by China. Early signs of weakening Chinese demand, seen in the cancellation of Australian wheat shipments earlier this year, signal the realignments in trade that lie ahead.

While Australia has been a major beneficiary of China’s growing wheat demand, relying on this position is unwise. China’s increasing agricultural collaboration with Russia and other BRICS partners risks relegating Australia to a supplier of last resort.

For Australia, survival in this shifting landscape requires a nuanced approach. While maintaining its security alliances, Australia must find avenues to re-engage with China and the BRI. A continued lack of engagement risks the collapse of a trade relationship that has been mutually beneficial for decades.

Diversifying export markets is also crucial. Exploring opportunities in emerging markets across Asia, Africa, and the Middle East, and investing in value-added processing could shield Australia from the fallout of a deteriorating relationship with China. Focusing specifically on Southeast Asia, where wheat demand is growing, and sub-Saharan Africa, where food security remains an issue, would be pragmatic steps.

Additionally, Australian policymakers must prepare for the implications of the BRICS grain exchange and blockchain settlement. Developing new strategies for price discovery, risk management, and hedging in an increasingly de-dollarised world will be critical. Monitoring developments in the BRICS exchange, even as an observer, could provide valuable insights into shifting market dynamics.

Conclusion

The changing landscape of the global wheat trade, driven by the BRI, the BRICS grain exchange, and shifting geopolitical tides, presents both challenges and opportunities for Australia. The notion that China has no alternatives, but to continue purchasing Australian wheat may prove to be mistaken.

As the world’s grain trading patterns evolve, Australia must adapt its strategies to ensure the long-term viability of its wheat exports. This will require a pragmatic approach that balances security concerns with economic imperatives and recognises the complex interdependencies that characterise the modern global economy.

The historical ties that have underpinned the Australia-China wheat trade, symbolised by the legacy of Xi Zhongxun, should serve as a reminder of the value of constructive engagement and mutual understanding. In an increasingly interconnected world, where blockchain technology is reshaping the very foundations of trade, the path to prosperity lies in building bridges, not walls.

Source: John Menadue