United States and Ukraine wheat appears to be in poor condition, giving Australian wheat a boost

United States wheat is forecasted to be in poor condition after a large drought, Ukraine continues to struggle to produce and export wheat, while Russia and the European Union look to improve on last year's harvest.

"As we move through the year, as Australian farmers, we want to see conditions around the rest of the world deteriorate," said Episode 3 founder and commodity market analyst Andrew Whitelaw.

"The reality is bad results overseas are what help our prices rally."

According to Clear Grain Exchange managing director Nathan Cattle, the critical northern hemisphere spring period has begun - which will determine the size of a large proportion of the world crop and affect Western Australian prices given they are an exporter of grains.

"Currently international futures markets appear to be pricing a high likelihood of a significant increase in global production this year," Mr Cattle said.

"This means the northern hemisphere weather through spring needs to be relatively favourable, particularly when the US winter wheat crop is in poor shape currently."

With the global crop and spring plantings expected to increase, this generally sees lower global prices and in turn, lower Australian prices.

"Thankfully Australian grain has been highly sought after in recent years with record production met with record Australian exports," Mr Cattle said.

"We'd expect this demand to continue into the future as the world needs more grain and Australia has good quality with a relatively reliable supply chain."

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US drought

Drought continues to be a major issue for winter wheat production in the US with 48 per cent of production estimated to be in regions experiencing drought.

The State of Kansas has the biggest share of winter wheat crop and, according to a recent Episode 3 report, the condition of the crop is the second worst since 2000.

As of April 23, the US Department of Agriculture (USDA) estimated the Kansas winter wheat condition rated 32pc very poor, 30pc poor and 24pc fair.

It is important to emphasise that yields are poorly correlated with crop conditions this early on, despite the bad start.

"Although it is clearly a horrific start, some promising news comes in the form of forecast rainfall this week for both Kansas and Texas," said a recent Rabobank report.

Ukraine production struggling

Ukraine continues to struggle to produce wheat, with landmines and availability of ships proving to be large hurdles for harvest and seeding.

The invasion led to a breakdown of farming operations due to the fighting and shelling on farm lands, while crippling agricultural logistics out of the country, leaving farmers unable to sell their crops at reasonable prices.

The Global Agricultural Information Network Grain and Feed annual report forecasted a further drop in production for 2023/24 as Ukrainian farmers are employing mitigation strategies to stay afloat during the crisis.

A decrease in grain exports is expected with the decrease in production.

As a result of the Black Sea Grain Initiative, Ukraine has been able to export through the ports about 3 million metric tonnes (mmt) of agricultural products per month since September 2022.

"However, it should be noted that this export volume is only half of what Ukraine used to export before the war through its ports," the report said.

"Furthermore, the Black Sea Grain Initiative is the subject of periodic extension every 120 days, creating uncertainty, thus opening up the ability for Russia, a prominent grain exporter and Ukraine's competitor in the global markets, to exploit it to gain a competitive advantage."

Wheat exports for July-December 2022 were 8.4mmt, a 47pc decrease compared to the same period in 2021.

According to a Rabobank report, China has been the biggest beneficiary of the Black Sea Grain Initiative, having received 6.7mmt of Ukrainian grains so far under the agreement.

Uncertainty of a renewal of the agreement may cause prices to rise, and for customers to turn towards Australian wheat.

Russia is competitive

Russian wheat is very competitive, with feed wheat currently priced at $US250 ($377)/mt, according to a recent Rabobank report.

The USDA Foreign Agricultural Service Commodity Intelligence report estimated Russia's wheat production for 2022/23 to be a record 92mt, up 22pc from last year and 18pc above the five year average.

Total wheat yield is estimated at a 3.17 tonnes per hectare, while total harvested area is estimated at 23 million hectares.

Russian exports have been extremely strong in the first 20 days of April, exporting 2.7mmt compared to 1.2mmt this time last year.

Weather across Russia was favourable for winter wheat planting and establishment, which has helped boost their predicted output this year.

European Union excelling

Similar to Russia, the European Union is also anticipated to excel past its previous season to 285mmt, up from 267mmt in 2021/22.

According to the Global Agricultural Information Network, favourable initial crop development conditions are reported across the EU, although spring rains in the EU's south west will be critical to replenish soil moisture and allow for yields to bounce back to average levels.

Area planted to grains in the EU in the 2023/24 financial year is expected to amount to 51.4m hectares, up from the 51m ha planted in 2022/23.

"Improved grain prices expectations for 2023/24, steady EU demand for food or industrial uses, together with new facilities entering production, expanding capacity, or increasing products range, and a looming reduction in Ukraine grain production, all contribute to projected expansion in EU grains area for 2023/24," the report said.