We’re in the witching hours before harvest 2019. Headers and tractors are being serviced, silos are being cleaned, trucks are being secured and small loads of grain have started trickling into bulk handling sites around the country. Everyone is on edge waiting for the thick of it to start and to end what has been quite a challenging season for many. An ongoing east coast (EC) drought has tested the resilience of even the most robust. Western Australia (WA) had a great finish to the 2018/19 season but experienced a late break this year with poor follow up rainfall during the business end of the growing season.
Grain markets have trailed the volatility expected alongside such circumstances with price swings of $30-40MT for most of the year. We expect this volatility to continue with another small national crop.
With this in mind, let’s drill down into key production areas around the world to see how they’re fairing and what this means for Australian grain prices.
The Americans experienced the opposite of what Australia did this year. Record rainfall during the seeding period of April to June led to scenes of bridges, damns and riverbanks being washed away along rivers bulging with flood waters. Flooded paddocks led to a record late planted crop which is now exposed to late season frosting and a market uncertain of the actual acres’ farmers were able to plant. Now, in October, northern growing areas are expecting their first snow fall on fields where corn crops are still maturing. These issues mean we will not have a true sense of how good or bad the American corn crop is until the headers start to roll. It is possible the USDA will have to reduce predicted corn production over the coming months, which would put upward price pressure on all cereals globally.
While Australia was thirsty during April and May and America was swimming, Argentina experienced ideal sowing weather. However, our South American colleagues have now experienced a change in fortune. According to USDA data, the Buenos Aires region is the largest producing region in Argentina, responsible for 43% of their wheat production. (Figure 1)
The August-September growing period saw Buenos Aires receive only a quarter of its average rainfall. Rains have improved in October, but production cuts are still expected for this region in the upcoming USDA balance sheet reports. (Figure 2)
This year Canada has experienced a hard finish to their growing season. It has been delayed due to an early onset of rain, cold and snow. This has led to quality downgrades and, most likely, an eventual decrease in harvested acreage. (Figure 3)
The Russian Bear
Lower cost Russian wheat continues to hold market share of international trade that historically sat with Canada, the United States and Australia. This season winter wheat production underperformed. The USDA data set is calling the current crop at ~72MMT, but this could increase over the coming months with the late harvested spring wheat outperforming. Sowing of new season winter cereals is currently underway in the Black Sea.
Analysts expect Australia to produce in the vicinity of 16MMT of wheat and 8MMT of barley this season. This would be the smallest winter cereal crop in 10 years caused by the worst ongoing drought to impact Australian agriculture since the Federation drought last century. The current drought will break, it’s just a matter of when.
What does all this mean for Australian grain prices going into harvest?
Overall, issues with production in Argentina, Canada and Australia should put a floor in global wheat markets as we enter the southern hemisphere harvest. Russian production could get a bit bigger, but this is not being reflected in Black Sea values presently. The major risk remains in US corn and the impact on global cereal pricing could be profound due to the size of this American crop. Locally, it is expected prices will see normal harvest pressure as tonnes come to market. However, as we have found over the past few years, Australia is likely to run its own volatile domestic pricing race post-harvest and is expected to do so until the east coast drought breaks.
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