Over the last week, off shore wheat futures markets have fallen and Australian values have largely held steady. The seasonal cycle continues, and marketers are looking toward the northern hemisphere new crop production for price signals. Lower planted acreage in the United States this season will continue to be a price factor. However, current supply and demand data continue to paint a bearish picture with comfortable stocks in Australia and abroad.
On Thursday, March 9th, the USDA updated their World Agricultural Supply and Demand tables. The Department of Agriculture confirmed wheat supplies have increased, especially in Australia following last season’s banner harvest. Consumption has also increased slightly, leaving the available stocks to requirement at a very comfortable 33.71%
There has been discussion among analysts over the decrease in US planted wheat acreage. The below graph demonstrates the decline in wheat plantings in recent years. This is a result of farmers reacting to lower pricing and seeking substitutes to create a better return.
The above image contains 30 years of data which shows wheat plantings are at a low. In fact, it is believed US wheat plantings may be at their lowest point in 100 years, since the data was first recorded! Lower acreage will inevitably lead to less production as the world works through a burdensome wheat balance sheet.
On February 23rd, the Bureau of Meteorology updated the Australian three month weather outlook. The Bureau cited increased probabilities for warmer and dryer conditions particularly in south eastern Australia. This is following on from an intensively hot summer where parts of northern NSW and southern QLD experienced record long heat waves.
ABARES released their first estimates for 2017/18 production which ran as follows.
- – Wheat at 23.98MMT – 32% decrease from 2016/17 season
– Barley at 8.5MMT – 37% decrease from 2016/17 season
– Canola at 3.69MMT – 11% decrease from 2016/17 season
The ABARES estimates are very early but it does reflect the change in weather outlook from the 2016/17 season.
Demand for Australian wheat and barley remain very strong at current pricing. ABS export data for the month of January was very impressive as multiple records were set. 2.53MMT of wheat exports and 1.041MMT of barley exports were both records for Australia. This trend is expected to continue into the second quarter of the calendar year.
In regards to the outlook for the AUD, the US Federal Reserve will meet later this month to discuss lifting the US interest rates. The majority of market participants believe a rate rise in the US is imminent and has likely been priced into our currency, which is trading down 140 points from this time last month at 0.756. The risk for grain prices will be the Federal Reserve not lifting rates and the Australian dollar reacts by rallying.
The second half of the Australian marketing year will be driven by events in the Black Sea. Russia has become the world’s largest wheat exporter at 30MMT for the 2016/17 season. Russia’s main wheat exporting window is from June until October putting pricing pressure on Australia in the second half of the year. Russian production has been pegged this year at 68MMT. This is 3MMT down from the current season, but still the second largest wheat crop produced. Over the years, better technology, farming practicing and land clearing has allowed Russia to improve its agricultural industry. However, the 2012/13 season showed us no one is above the effects of nature. Both Russia and Ukraine were impacted by a hot and dry season causing poor production. As a consequence, demand for exports swung back to Australia and North America and higher prices ensued.
Despite the currently bearish supply and demand table, markets will continue to look toward new crop production in North America and the Black Sea for price indication. Any decline in production will increase global pricing and swing more export demand toward Australia.
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