Agfarm World Market Update, June 2018 – Global Wheat Set to Drop

Global Wheat Set to Drop

Chris Coore, Agfarm Advantage Manager

June 15th 2018

 
Grain industry participants around the world have their hands closely hovering over the big red panic button, and it would seem for good reason. The June 2018 United States Department of Agriculture grains report stated global wheat production has recently been cut to 744.7 Million Metric Tonnes (MMT); the first time we have seen global wheat supply decrease year on year for six years.
 
What’s the main driving factor for this reduction in wheat product? The weather!
It’s not often most of the key wheat growing regions around the world experience adverse weather at the same time, and this is causing serious concern for 2018/19 wheat and barley production.
 
So, let’s take a look at where the big drops in production are coming from, why this is so concerning and what it is doing to grain prices.
The major areas experiencing adverse weather are Russia, the US and Australia. As we know, Russia has become a power house wheat growing region in recent years as a result of three major factors; better farming practises, land clearing and good weather conditions. This year’s dramatically reduced rainfall for the region has seen Russia’s forecasted production drop by nearly 25% year on year, the first time their production has declined since 2012.

 

 

The US’s average wheat production over the past 10 years is close to 60MMT as shown in the below table, and although their wheat production is set to increase by a few million tonnes this season, they are still close to 9MMT behind their 10-year average.
 

 
At home, dry conditions are plaguing the Australian cropping belt which has caused many growers to reconsider their 2018/19 winter planting intentions. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) just released their June crop production estimates and are tipping the 2018/19 Australian wheat production to be 21.8MMT, barley at 9.2MMT and canola at 3.1MMT. Again, this isn’t a dramatic difference from last year, but is less than the 10-year average for the second year running.
 

 
Why is it concerning?
 
Global demand for wheat is not stagnant. As our global wheat production increased, so did demand, and the majority of this demand is inelastic, meaning it can’t be turned off.
 
To use one example, let’s look at the Australian feed market. As seen in the table below, the number of cattle on feed has increased in the last eight years. The recent dry weather in Australia has not only dried up prospects of a large winter crop, it has also dried up a lot of onfarm pasture, forcing those with livestock to supplementary feed, increasing demand for wheat and barley. This combined with high stock rates in Northern NSW and Southern QLD feedlots has seen grain move by road from Victoria (VIC) to the Darling Downs and by boat from South Australia (SA) into both Newcastle and Brisbane to help relieve the booming demand. This large influx of grain from SA and VIC is now creating logistical issues, with road freight rates increasing as trucks try keep up with the workload of distributing grain from ports to upcountry homes. This supply and demand example is not unique; it’s a similar story for all markets, which is where the concern lies.
 

 
How does all this relate to grain prices?
 
With all of the above in mind, it’s no surprise grain prices around the world have continued to firm over the last month.
 
Locally, Australian growers and consumers are holding on tight to old season stock and it’s logical to think grain supply will remain tight from now through to harvest. This will see old crop grain prices hold firm or move higher until the new crop harvest begins and bring relief to domestic consumers.
 
Looking forward however, its expected new crop prices will be volatile until there is more certainty around the coming season. Despite conditions in Australia looking concerningly dry now, if we get good rainfall through September, anything is possible for yield and overall production.
 
Internationally, total yield and production levels for Russia and the US will also be the driving factor which could push pricing levels in either direction. For example, if the Russian crop continues to decline, this will be supportive of overall pricing levels globally, however if the region receives good rainfall and a soft finish this will likely see global downward pressure on price and increased pressure on the Australian export market.
 
To print or download this Agfarm World Market Update, click here.

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