Last week we received a query about the impact of dry conditions in southern cropping zones and the recent frost in the Riverina on the price of grain. Here we’ll have a look at how localized supply impacts are factored into pricing.
The very
dry autumn and winter have already had a significant impact on crop yields in
Victoria and South Australia. We looked
at the ABARES Crop Report for September a few weeks back, and it showed an 8.7%
decline in wheat production in Victoria, compared to the June report. In SA the decline was 6.3%. These figures were reflected across barley
and canola production numbers.
Since the September
Crop report was released, the major cropping zones in the Wimmera, Mallee and
South Australia have received below average rain, so a little more might be
wiped off the estimated yields of 2.65t/ha for wheat in Victoria, and 2.05t in
SA. Much of the damage has been factored
in, but we could see a further 1-2 million tonnes wiped off the balance sheet before
harvest is in the bin.
This would
see the East Coast wheat crop still 1-2mmt above the levels of last year, which
was 18.2mmt (Figure 1). Still a large
crop by historical standards, and more than enough to supply local demand. As such, the dry weather in the south is
still unlikely to move prices too much.
Onto the
frost damage. Here are some rough
numbers. If the frost impacted 20% of NSW’s
winter cropping area, that would amount to 750,000 hectares. A total wipeout of wheat crops, within this
area would see 2.2mmt of wheat taken out of the system. This is a gross overestimation, to be used as
an example.
Taking that
off our earlier estimate gives a wheat crop 1mmt smaller than last year. Again, this is still well above the level
where prices start to move independently of export markets.
Having said
all that, we have seen some improvement in local wheat prices relative to
international markets in the last fortnight.
ASX Wheat Futures are now at a $23 premium to Chicago Soft Red Wheat, up
from $10, but still below winter levels of $30-40/t.
In international markets taking a couple of million tonnes out of
Australia’s exportable surplus would add some support, but it’s unlikely to tee
off a sustained rally.
What does it mean?
Supply and demand does work, but in commodity markets, with exportable surpluses, it takes a lot of supply to be wiped out to really see markets rally strongly. A slow deterioration of crops in the south, even when combined with a sudden wipeout in southern NSW, won’t be enough to see prices head northwards in a hurry as we approach harvest.
Key Points
- Local negative supply news continues with dry conditions and frosts impacting expected yields.
- The localized nature of crop impacts means national production will remain strong.
- Prices have gained a little ground in recent weeks, but a sustained rally is unlikely.
Click on figure to expand
Click on figure to expand
Data sources: CME, ASX, Refinitiv, ABARES, Mecardo
