The latest long range weather updates are not looking great for the coming cropping season. Local cereal prices are starting to move on the forecasts, along with concerns around marginal country coming out of rotations. Here we take a look at some scenarios.
Watching the latest weather update from Nutrien’s Eric Snodgrass (Link to video here) paints a potentially gloomy picture for east coast croppers. It explains that while the probable El Nino doesn’t necessarily mean less rainfall, it does decrease the changes of average rainfall.
It’s important to watch the video until the end, where Eric talks about how climate drivers can swing significantly in May and June, which makes predicting things like El Nino at this time of year somewhat problematic.
Whether it is rising transport costs, or concerns around El Nino, is hard to quantify, but local wheat markets have moved to a stronger premium to SRW in recent weeks. Figure 1 shows it is more to do with local prices holding their ground in the face of falling SRW, which eased on the back of the massive increase in WASDE ending stocks.
Figure 2 shows ASX Wheat basis rallying to its strongest level since July last year. Basis is term for the premium (or discount) ASX Wheat holds over SRW. The ASX price is sitting at just over a $40 premium to SRW, a level which is historically strong in a year when supply is good.
The market is likely starting to factor in a weaker crop in the new season, but while the east coast of Australia produces an exportable surplus, basis is limited.
Unfavourable seasonal scenarios would be a year like 2023 or even worse 2019 when winter crop production shrunk thanks largely to a lack of rainfall. The 2023-24 winter crop (figure 3) was large enough to supply local needs without imports, but ASX basis did reach $60/t.
In 2019 the ASX premium to SRW was over $100, which was import parity. Import parity would be higher now, with freight costs increasing, but 2023 did show that improvement in cropping techniques can produce more grain from less rain.
What does it mean?
With the crop only just going in the ground we are a long way from harvest, but the impacts of high input costs and dry forecasts are only going to see the area sown decrease. Rainfall will remain the main driver of crop production, and therefore the local basis. It’s important to remember that El Nino forecasts are not set in stone, and if it eventuates it indicates a stronger chance of it being dry, it doesn’t necessarily mean it will be a drought.
Key Points
- Long range climate models are showing a strong chance of El Nino this winter and spring.
- Grain producers are already under pressure from higher input costs.
- Worst case scenarios see a strong premium for local prices, but it’s no certainty.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: ABARES, Bloomberg, Nutrien, Mecardo
