Agfarm World Market Update, March 2018

Drivers affecting grain prices around the world.

 

Chris Coore, Agfarm Advantage Manager

Each year as we move through March and into April, the question ‘what are grain prices going to do next season?’ starts playing on the mind. The price of grain largely affects what, and how much we plant. So, let’s take a look at what domestic and international factors are driving grain prices as we move into planting.

Global estimates for wheat production in the coming 12 months are predicted to decreased year on year for the first time since 2011. The main regions affected are India, where wheat production is set to fall 3.5 million metric tonne (MMT) from 98.5MMT to 95MMT, and Russia and the Ukraine combined is likely to experience an 11.5MMT decrease in wheat production from 141MMT to 130MMT.

Why are India, Russia and the Ukraine important?

Depending on the levels of domestic wheat production, India can change from being an importer to an exporter. Indian wheat consumption has been steadily growing year on year and their demand is now 100MMT annually. Typically, India will buy around 1MMT of wheat for flour demand per year however, in years where they experience drought they can purchase millions of tonnes to meet their demand. History tells us, when India experiences production issues, they look to Australia to fill the short fall. Thus, over the next 12 months, if the reduced estimates ring true, this will increase demand for Australian wheat and in turn favour Australian grain prices.

As we’re all aware, when Russia and the Ukraine produce large wheat crops they compete aggressively against Australia for Asian demand. Due to the sheer size of the crop, they have the ability to drop prices and increase their market share, making it near impossible for Australia to compete. Therefore, if the reduced estimates become reality, Australian wheat prices should see support moving forward.

What about the Americas?

In the short few months of 2018, we have seen global wheat, corn and soybean futures all rise due to production concerns around the world. Chicago wheat is up nearly $AU30 per metric tonne (MT) since 1st January 2018 rewarding growers who deferred their grain sales program this year. On the 8th of March 2018 the United States Department of Agriculture (USDA) released the World Agricultural Supply and Demand Estimate (WASDE) report, publishing the impact of the recent dry weather in Argentina. The WASDE report predicted Argentina would now produce 47MMT of soybeans, down from 54MMT in their February report and it lowered Argentinian corn production from 39MMT to 36MMT. This large reduction in South American corn and soybean production has likely created a floor on Chicago wheat, corn and soybean futures for the moment, as funds are quickly buying these contracts in hope prices will continue rise.

 

 

And in Australia?

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) recently updated their 2018/19 wheat production forecast to 23.77MT, from 21.2MMT last season. Excluding Western Australia, the majority of Australia’s cropping belt has had a dry start to 2018 creating below average sub soil moisture, which is not ideal for winter crop plantings, and the fear of another dry growing season is a little too much for many to think about. If this dry weather continues and the autumn rain breaks late, Australian production estimates will need to be revised again, causing domestic values to adjust accordingly.

What does all this mean for Domestic Prices?

Over the past three years, traditional demand for Australian wheat out of South East Asia has been under attack by record crops and discounted prices coming from Russia and the Ukraine to gain a bigger share of the market. Over the past two months, Russian wheat prices have been moving higher and at a faster rate than Australian prices, which is narrowing the pricing spread between ours and their wheat values making Australian wheat more attractive. As a result, the shipping pace is building for wheat exports, creating more buying demand in export pathways around Australia.
The added exports from Australia, more buyers on the bid side of the market and the expected demand from India due to the smaller production, should see grain prices remain firm over the next 12 months.
 
To print or download this Agfarm World Market Update, click here.
 

Follow us on social media