WITHOUT appearing to be too alarmist, we feel that the rhetoric around a potentially large Australian wheat/barley crop does not reflect the actual situation most of the country finds itself in.
Putting New South Wales aside, we have four States that are, historically, in a poor position in terms of stored moisture.
This means that leading into spring, we have sub-par conditions in areas that normally produce, on average, more than 16 metric million tonne of wheat.
In terms of local rainfall across Western Australia, most events have been very timely but underwhelming, which leaves us very reliant on above-average moisture over the coming months and exposed to yield losses should the forecast disappoint.
We clearly do not want this to transpire but, based on our analysis of some weather analogues, there is potential for the wheat crop to be as much as 4-5mmt lighter than what is forecast by the United States Department of Agriculture, Australian Bureau of Agricultural Resource Economics and Sciences and other private firms.
In addition, we will close the year with a record low carry-out and with a reasonable harvest sales program on the books already for new crop.
This means that any sizeable production cuts have the potential to dramatically change the demand profile of Australian wheat and barley.
If we overlay the world picture, the price strength we have seen recently is a response to crop revisions in Russia, Europe and potential for declines in Argentina.
Add to this the possibility of increased demand in China, due to lower than expected ending stocks and there is potential for decent volatility in new crop wheat pricing.
China's new crop production for feed grains has also been severely threatened by excessive flooding in the Southern region and its ending stocks (according to the USDA) were most likely overstated by tens of millions of tonnes.
This has resulted in their local corn prices rallying 10 per cent in the past three months and has encouraged a steep increase in their imports from the United States, Europe and the Ukraine of wheat, corn and barley.
Just as China's tariff decision was a major risk to our local barley price, its re-entry to the market (as unlikely as it sometimes may appear to be) could also pose a major risk to the upside.
Considering these supply and demand risks, we are not comfortable using futures as we could see a revision of production in Australia and increased prices around the world (similar to that seen in 2007).
At the time of writing, our preference is to favour options as the downside is known and growers are still able to participate in price increases if their production is impacted.
- More information: Adrian Mondy on 0428 722 524 or flexigrain.com.au
