The 2015 Australian wheat crop won't be one for the record books, but there may be little further downside from current predictions.
With the crop in the midst of grain fill and maturation, recent drought-like conditions have sparked fears over major yield losses. And even with some rain in the forecast, harvest is rapidly approaching and it is uncertain how much damage has already been done.
El Nino often arrives in Australia with harrowing drought and has eliminated up to 50 percent of the wheat crop in past seasons, so the market has been closely watching for signs that the 2015 crop is going to take a major hit.
Additionally, many were puzzled when the U.S. Department of Agriculture increased Australian wheat production in October to 27.0 million tons, about 1 million tons higher than the country's recent five-year average. Australia can export up to 80 percent of its wheat in a good year, so tight supply in Australia can have a ripple effect across global balance sheets.
But Australia's state agency ABARES said in a statement last week that wheat production was likely to tally 24.0 million tons, down from the 25.3 that they called for in their September report. This presents a historically large disparity between ABARES and USDA at this point in the season.
USDA is likely too high and ABARES' prediction is on the lower end of the spectrum, but historical report revisions and the past few months of weather seem to suggest that final production will be pretty close to the current range. In other words, no shocking surprises are likely.
Agency Track Records
The recent 2015 production estimates from USDA and ABARES are unlikely to change significantly from now until final. Historically, both agencies have had a tendency to underestimate the crop during this time.
When ABARES increased their estimate in September and USDA increased in October, the revisions were based almost entirely on elevated yield. ABARES has pulled back since then, but unless they have adjusted harvested area, their new estimate implies that they didn't decrease yield by more than 5 percent.
ABARES releases official estimates only quarterly, with their typical mid-season update every September. Over the last three years and during both of the last El Niño or El Niño-like episodes, 2009 and 2012, ABARES' September estimate was within 1 million tons of the final.
The only time since 2000 at which ABARES' September production number was significantly overstated compared to final was 2006, when they were still close to 6 million tons above. However, they adjusted in October in their supplemental drought report to within just over 1 million tons of final.
Since 1996, USDA has a worse track record on the downside of things in their October report. When they have underestimated final production in October, the deviation of the miss is twice as large as the deviation when they overstate.
Additionally, in the last three years where USDA's September estimate was drastically above final, the October correction was nearly dead-on with final.
Both of these figures would suggest that although 27.0 million tons have caused many to raise an inquisitive eyebrow, USDA could be in the ballpark. Interestingly, if USDA's largest ever October upside miss is applied to the 27.0, ABARES' 24.0 is the result.
And it would appear based on recent conditions that ABARES might currently be closer to final than USDA. So USDA could be heading for a historic miss.
Weather Not Good, But OK
Concern was looming before the 2015 wheat crop was even planted amid solid predictions for a record El Niño toward the end of the year. From the beginning of planting in May through most of August, soil moisture and rainfall had been average to on the low side.
Even still, the vegetation index derived from satellite imagery (NDVI) had mostly been tracking above average, and everyone sat patiently waiting for El Niño to shut off the rains and for the NDVI to tank.
But it didn't tank. NDVI was at or near a record high during peak greenness in some of the states and close to the 15-year average in others. Only recently did NDVI begin to fall considerably below average in parts of Western Australia, the country's largest wheat-producing state.
Overall, temperatures have been fairly average to even cool, probably most importantly last month amid a record dry September. Historical yields suggest that if August and September had been even 0.5 degree Celsius warmer, losses could have been much worse than current expectations.
October has heated up though, and combined with the recent lack of considerable rainfall, the 2015 Australian wheat crop is having a flashback to 2014, in which a very similar chain of events happened.
NDVI was quite high from the get-go in 2014, but with the expectation of El Niño lurking in the background, many initially low-balled the crop. Conditions were actually OK up until July, where temperatures tracked roughly 1 degree Celsius warmer than 2015 all the way through October. The 2014 crop yielded near 10 percent below trend values.
But 2014 should be a good lesson for this year's crop. The situation was very similar, and despite El Niño conditions setting in towards grain fill, healthy conditions early on were enough to prevent the catastrophic losses that have been observed in past El Niño seasons.
Recent trends in prices also don't seem to be reflecting major supply anxiety outside of what may be expected at this stage in the game in a similar year.
In comparing 2016 and 2015 January expiration contracts of New South Wales wheat on the Sydney Futures Exchange, both had begun their upwards push toward the end of September. As of now, they sit at relatively comparable prices (http://tmsnrt.rs/1Nrc2dX).
January 2015 wheat continued a general upward trend through the end of the year and last year, the supply issues should have been mostly accounted for by now, as production estimates for the 2014 harvest have only dropped 1 ton on average since then.
Cash prices at major ports have also tracked very similarly to last year over the last month or so. Premium white wheat at the western port of Kwinana and the eastern port of Kembla increased both this year and last year at the end of September by roughly the same amount. Additionally, prices for feed wheat are flat or even down from one month ago at these two ports.
Overall, recent Australian wheat market dynamics, weather, and recent agency expectations don't appear to be withholding any unknowns. Without any unexpected disasters between now and the end of harvest, 24.0 million tons seems like a reasonable floor for Australian production.