Australia will issue its 2014/15 wheat production forecast this week, but with hot, dry weather across its east coast and the threat of a dry El Nino weather pattern developing, the supply picture from the world's second largest exporter is uncertain.
The Australian Bureau of Agriculture, Resource Economics and Sciences (ABARES) will publish its wheat forecast on Tuesday, with analysts expecting an estimate of around 25 million tonnes, which if realized would be the country's fifth largest crop.
A bumper Australian crop would add a bearish tone to prices. Chicago Board of Trade wheat futures have fallen more than 5 percent in the last three sessions amid concerns that U.S. wheat is are more expensive than rivals, denting export prospects.
However, analysts said that with much of Queensland and New South Wales states recording near record low rain in the last three months, conditions are less than ideal for east coast farmers as they approach the start of the growing season in May.
"The financial incentives to plant are there for Australian farmers ahead of the 2014/15 season," said Luke Mathews, commodities strategist, Commonwealth Bank of Australia, who sees production at around 25 million tonnes.
While global wheat prices hit multi-year lows, a record low in Australian beef prices and weaker canola futures are incentives for growers to maintain wheat acreage.
Risk of El Nino
The Australian Bureau of Meteorology says the outlook for Queensland is for drier conditions in the next three months and weather models show an increased chance of El Nino, which if realised could see warmer, drier conditions across the east coast, exacerbating drought conditions in Queensland.
An El Nino can have a devastating impact on Australian grain production, with wheat production falling as low as two-thirds from typical harvest seasons in strong El Nino years.
Australian farmers on the east coast could plant in May without rains, but dry planting wheat is less than ideal. The amount of rain the crop receives in September, a key time in the growing season before end-of-year harvesting, is the biggest factor in determining a crop's success.
Western Australia state, the largest wheat producing state accounting for more than a third of national production, has a much better weather outlook.
"Weather models are suggesting wetter than average conditions for Western Australia but the outlook for the east coast will depend on whether we get that weather break, which they really need," said Mathews.
Many cattle farmers on the east coast have already been bought to their knees by a two-year drought in the country's prime beef producing state Queensland.
Without rain, grass growth in Queensland, home to half the country's 28 million head, will remain stunted, and the dry weather could also weigh on beef quality.
Drier conditions will lead to higher protein wheat production, shrinking the amount of feed grade wheat available to farmers, who have had to turn to grain to keep starving animals alive.