Australian drought adds anxiety to wheat market

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A long lasting dry spell damages crops and raises supply concerns. Farmers pray for rain as they watch their crops wilt; estimates for yields are cut. No, this is not the U.S. Midwest or the black soil region of Russia. This is Australia, the world’s second largest wheat exporter in 2011/12.

In its Sept. 12 World Agricultural Supply and Demand Estimates (WASDE) report, USDA forecast that Australia would produce 26.0 MMT of wheat in 2012/13, unchanged from its August prediction and 12 percent lower than a record Australian crop the previous year. However, dry weather across much of Australia over the Southern Hemisphere’s winter and spring seasons is leading some groups to predict a smaller crop. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), in a report released Sept. 11, predicts production will only be 22.5 MMT. Some private analysts are even predicting that production could fall below 20.0 MMT if the current drought persists.

Export predictions for Australia also vary. USDA currently estimates that Australia will export 21.0 MMT. Surprisingly, the ABARES estimate is actually higher at 21.5 MMT because it believes the country’s strong beginning stocks will make up the production shortfall. Even if the ABARES estimates for production and exports are realized, Australian ending stocks for 2012/13 would be as low as 2.1 MMT if ABARES’ numbers for production and exports are substituted into the WASDE data. That would be their lowest level in more than 10 years. Australian grain traders attending a grains industry conference in Thailand earlier this month were less optimistic, estimating exports as low as 16.0 to 17.0 MMT.

Not all of Australia is affected by the drought equally. The eastern growing region (Queensland and New South Wales) is the primary exporter of Prime Hard (APH) and Hard (AH) and is relatively unscathed. ABARES is predicting production there will only drop 8 percent compared to last year. However, the southern (Victoria and South Australia) and western (Western Australia) regions, primarily exporters of Premium White (APW) and Standard White (ASW), will not be so lucky. ABARES predicts production in the southern region will drop by 18 percent, while production in the western region will drop by 40 percent.

Reports are that the western growing region is the hardest hit by Australia’s drought. Its farmers were forced to plant into dry soils and winter (June to August) rainfall was well below average. Analysts with the grain handler CBH noted that rain before harvest will only protect current yield estimates, not increase them. Those same analysts are forecasting that if rainfall in the region does not increase, production in the western growing region could fall by as much as 50 percent compared to last year. The western growing region is the primary source of high quality Australian mid-protein wheat exports and specialty noodle varieties for Asian markets.

With Australia’s wheat harvest expected to start in October, growers there and buyers around the world are anxiously awaiting the results.

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