GRAINS NOTE 07.08 - ANZ · GRAINS NOTE 07.08.2018 AUSTRALIA As the dry season continues across much...
Transcript of GRAINS NOTE 07.08 - ANZ · GRAINS NOTE 07.08.2018 AUSTRALIA As the dry season continues across much...
GRAINS NOTE07.08.2018
AUSTRALIA
As the dry season continues across much of Australia’s grain growing regions, wheat production forecasts continue to be downgraded, particularly for the East Coast.
In particular, the concern remains for the dry crops in NSW and Qld, as well as South Australia, where this year’s rainfall conditions in cropping regions are among the lowest on record. Yields are likely to be down across the board.
Looking ahead, while not quite in uncharted territory, the Australian wheat complex is potentially facing a tighter supply outlook than it has for decades. Most recently, USDA downgraded their production forecast for the 2018/19 Australian wheat crop from an original 24 million tonnes (MT) to 21 MT, roughly equivalent to 2017/18.
As Australian wheat growers are well aware, weather conditions can change a crop markedly right up until harvest – last year’s late season frost in many regions was a stark reminder of this. The big challenge for the industry, and particularly grain users, will be around the ending stocks, and what this will mean for grain procurement, and grain prices, in 2019.
On current USDA forecasts, assuming production of 21 MT, exports of 16 MT and domestic consumption of 8.1 MT, Australia’s 2018/19 wheat ending stocks would be just under 2 MT. This would be the lowest figure since 1995/96, and the second lowest since 1977/78, when end stocks fell below 1 MT.
In terms of stocks to use ratios, the outlook is even starker. The forecast figure of 8.1 (exports plus domestic consumption, divided by ending stocks) is only marginally higher than the two lowest figures since 1960 – 7.4 and 7.3 in 1972/73 and 1977/78 respectively. This translates as Australia having just fewer than 30 days wheat requirements at hand, well under the average of 80 days over the past decade.
In looking ahead as to how the coming two years may play out, it’s intriguing to reflect on similar situations in the past. Over the past 40 years, while Australia has had fluctuating wheat production levels, there have been arguably seven seasons where the crop was significantly impacted by drought, and production levels fell from the previous year by around 25 percent or higher.
On average, the percentage fall in production in these years works out at roughly similar to the fall in exports that year – both at around 40 percent. This is way below the average positive annual growth in production and exports over that whole period, of around eight percent.
The telling figure, which may have the largest implication for the industry, is the pattern for domestic wheat consumption. While the average annual growth figure over the past forty years has been just three percent, the average over those toughest years has been four times that, at twelve percent.
The obvious explanation for this would be that dry years will also see a need in feed requirements, and that prices paid for feed grain will divert supplies away from the export market. On current weather forecasts, there is little reason to think that 2018/19 will be much different.
If this trend plays out over the coming year, then a national wheat crop of 19 MT would see exports fall to 13.5 MT, the lowest since 2007/08, but not disastrous.
The most watched impacts of these developments will be in terms of price, and the ability to obtain tight supplies. In addition, the industry will want to see if the weather has impacted crop quality in a way which would affect market specifications.
So far this year, the late start to the crop, and the uncertainty surrounding production, has seen buyers keen to lock in supplies, in case conditions continue to worsen.
Unless there is a major change in seasonal conditions, it seems likely that upward pressure will remain on prices for some time. This will be driven not just by domestic conditions, but by reduced crop forecasts for a number of major global exporters.
Despite the tightness, it remains unlikely that grain users, such as feedlots, would look to import grain, given the extremely strict quarantine requirements. In addition, the industry will look to utilise carry-over grain from last season, although the true total quantity in up-country and on-farm storage could be difficult to estimate, a factor which may also impact domestic pricing.
Australian Wheat Production vs Stock to Use Ratio
Production (LHS) Stock to Use Ratio (RHS)
0
thou
sand
tonn
es
Stoc
ks to
use
ratio
0%
10%
20%
30%
40%
50%
60%
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1977/1978
1979/1980
1981/1982
1983/1984
1985/1986
1987/1988
1989/1990
1991/1992
1993/1994
1995/1996
1997/1998
1999/2000
2001/2002
2003/2004
2005/2006
2007/2008
2009/2010
2011/2012
2013/2014
2015/2016
2017/2018
Major Global Wheat Exporters
Source: ANZ, USDA
Source: ANZ, USDA
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2000
/200
1
2001
/200
2
2002
/200
3
2003
/200
4
2004
/200
5
2005
/200
6
2006
/200
7
2007
/200
8
2008
/200
9
2009
/201
0
2010
/201
1
2011
/201
2
2012
/201
3
2013
/201
4
2014
/201
5
2015
/201
6
2016
/201
7
2017
/201
8
2018
/201
9
ROTW
Kazakhstan
Argentina
Australia
Ukraine
Canada
USA
EU
Russia
thou
sand
tonn
es
2
GLOBALLY
The dry weather impacting Australian wheat remains a common theme, also affecting global markets. In particular, the major EU wheat producers of France and Germany, as well as the Ukraine, have all seen poor weather hit their production forecast. In Russia, the world’s largest wheat exporter, yields were forecast to hit a three year low.
According to the most recent USDA forecasts, global wheat stocks are likely to see their first decline in six years. However, despite the fall in global stockpiles, the actual stocks to use ratio of around 35 percent, should put the brakes on any overly bullish forecasts.
For the US, wheat production figures continue to be strong, with good growing conditions – Canada is also looking at a similar positive outlook.
The challenge for the US will be the impact of trade tensions with China. China has normally purchased around 550,000 tonnes of US wheat in March to June for the past three years. However, this year saw Chinese customers stop making new purchases of wheat in March when the Chinese government threated to impose a 25 percent import tariff on US wheat, in retaliation for the threat of US tariffs on Chinese imports.
The concerns around trade are limiting potential increases in US wheat prices. Despite the US having increased supplies at a time of falling global production, the threat of increased tariffs, and reduced buying by China, is keeping US price rises subdued.
This could have longer term impacts, as US farmers delay or reduce their planting intentions, as their crops are left at a disadvantage in global markets.
BARLEY
The outlook for other major crops in Australia is likely to be similarly weather-impacted to that of wheat. While barley plantings in Australia are likely to rise to 4.3 million hectares (M HA), the second highest level since 2009, the production forecast is static, on decreased yields – in particular as yields in Western Australia return to average.
Globally, Canada presents an interesting barley competitor to Australia. While Canada’s barley exports are around a third of Australia’s, their export focus has shifted away from the US and Japan, to competing with Australia in China.
Australian canola plantings in 2018/19 are forecast to fall around ten percent to 2.45 M HA, as many growers waiting on rain elected to take the later planting options of wheat or barley. Similarly, as yields return to more normal levels after last year, production is likely fall faster than acreage, dipping around 16 percent to 3.1 MT.
Globally, canola production is likely to see a slight fall, largely due to decreased production in the EU. However, an increase in global exports at the same time is a signal for canola being one commodity poised to benefit from the China/US trade issues. With the imposition of tariffs on US soybeans, Chinese oilseed and meal buyers are increasingly likely to look to canola as an alternative.
World’s Major Wheat Importers by Global Share 2018/19f
Egypt7%
Indonesia 6%
Algeria 4%
Brazil 4%
Bangladesh 4%
Japan 3%
Philippines 3%Mexico 3%
European Union 3%
Nigeria 3%
China 2%Turkey 2%
Vietnam 3%
Korea, South 2%United States 2%Iraq 2%
Afghanistan 2%
Saudi Arabia 2%
Thailand 2%
Uzbekistan 2%
ROTW38%
Source: ANZ, USDA
Australia vs Global Days Supply of Wheat
Australia Global
0Day
s Su
pply
of W
heat
(Ann
ual U
sage
vs
Endi
ng S
tock
)50
100
150
200
250
300
350
1960
/196
119
62/1
963
1964
/196
519
66/1
967
1968
/196
919
70/1
971
1972
/197
319
74/1
975
1976
/197
719
78/1
979
1980
/198
119
82/1
983
1984
/198
519
86/1
987
1988
/198
919
90/1
991
1992
/199
319
94/1
995
1996
/199
719
98/1
999
2000
/200
120
02/2
003
2004
/200
520
06/2
007
2008
/200
920
10/2
011
2012
/201
320
14/2
015
2016
/201
720
18/2
019
Source: ANZ, USDA
3
Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. Item No. 94840 08.2018 W597949
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