Downward Revision To Support Wheat Prices

BMI view: We have revised down our forecast for wheat production from 25.5mn tonnes to 24.0mn tonnes after the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) revised wheat output to 24.5mn tonnes. We still forecast a rebound in production balance but expect the country's share of global exports to shrink in 2013/14. Even after we acknowledge the country will play a significant role in supplying Asia, we believe that Australian and Argentine supply will still not be sufficient to significantly loosen the global market, and prices will likely trade upwards in the short term.

We have revised down our forecast for wheat production from 25.5mn tonnes to 24.0mn tonnes after the ABARES revised wheat output to 24.5mn tonnes. The revision comes on the back of dry conditions over most of Western Australia, and over-abundant rainfall in Eastern Australia. We expect more revisions to be made to output in the coming months and have placed our forecast slightly below the current official estimates. However, we believe more significant losses to output will be unlikely as yields are still expected to be higher than in 2012/13. ABARES and the USDA both forecast wheat yields around 1.85-86tonnes/hectares in 2013/14, compared to 1.67tonnes/ha in 2012/13.

Even after this revision, we forecast a rebound in the country's production surplus, even if we do not expect a return to record surpluses of the 2010/11 and 2011/12 seasons. We forecast the country's production surplus to grow from 15.2mn tonnes in 2012/13 to 170.2mn tonnes in 2013/14, compared to 23.4mn tonnes in 2011/12. Still, the country's exports could reach 19.0-19.5mn tonnes in 2013/14 according to the USDA and ABARES. However, the country's share of global exports will be diluted by the strong expansion in the rest of global production, especially from North America and Europe. The USDA forecasts Australia's share of global exports to shrink from 13.7% in 2012/13 to 12.2% in 2013/14.

Worse Than Expected
Australia - Wheat Area Harvested (hectares) & Yields (tonnes/ha)

BMI view: We have revised down our forecast for wheat production from 25.5mn tonnes to 24.0mn tonnes after the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) revised wheat output to 24.5mn tonnes. We still forecast a rebound in production balance but expect the country's share of global exports to shrink in 2013/14. Even after we acknowledge the country will play a significant role in supplying Asia, we believe that Australian and Argentine supply will still not be sufficient to significantly loosen the global market, and prices will likely trade upwards in the short term.

We have revised down our forecast for wheat production from 25.5mn tonnes to 24.0mn tonnes after the ABARES revised wheat output to 24.5mn tonnes. The revision comes on the back of dry conditions over most of Western Australia, and over-abundant rainfall in Eastern Australia. We expect more revisions to be made to output in the coming months and have placed our forecast slightly below the current official estimates. However, we believe more significant losses to output will be unlikely as yields are still expected to be higher than in 2012/13. ABARES and the USDA both forecast wheat yields around 1.85-86tonnes/hectares in 2013/14, compared to 1.67tonnes/ha in 2012/13.

Worse Than Expected
Australia - Wheat Area Harvested (hectares) & Yields (tonnes/ha)

Even after this revision, we forecast a rebound in the country's production surplus, even if we do not expect a return to record surpluses of the 2010/11 and 2011/12 seasons. We forecast the country's production surplus to grow from 15.2mn tonnes in 2012/13 to 170.2mn tonnes in 2013/14, compared to 23.4mn tonnes in 2011/12. Still, the country's exports could reach 19.0-19.5mn tonnes in 2013/14 according to the USDA and ABARES. However, the country's share of global exports will be diluted by the strong expansion in the rest of global production, especially from North America and Europe. The USDA forecasts Australia's share of global exports to shrink from 13.7% in 2012/13 to 12.2% in 2013/14.

China Frenzy
LHC: Australian Wheat Exports ('000 tonnes); RHC: Select Country Wheat Imports ('000 tonnes)

Still, we believe the country will play a significant role in supplying Asia and especially China and will benefit from exports in the middle of a supply trough from the Northern Hemisphere. The official China National Grain and Oils Information Centre Bureau has suggested that Chinese imports of Australian wheat could total 3m-4m tonnes in 2013/14. This is a significant share of the 9.5mn tonnes the country is expected to import this season. Also, Australia will benefit from selling most of its wheat at the start of 2014, when stocks from the Northern Hemisphere will be depleted and Asian importers will be forced to turn to Southern-Hemisphere producers.

Moving Towards Resistance Now?
Front-Month CBOT Wheat (USc/bushel, weekly) & RSI (below)

As a result of our revision to Australian output, and our view that output from Argentina, another significant Southern Hemisphere producer, will disappoint, we are turning more positive on wheat prices in the near term. We forecast prices to rebound towards the USc700/bushel levels by the end of 2014 as Australia and Argentina face difficulties to step in after exports from the Northern Hemisphere dry out. We expect prices to remain strong in the first months of 2014 and to moderate again as the Northern Hemisphere harvests its 2014/15 crop from June 2014 onwards. We forecast prices to average USc650/bushel in 2014.

Australia Wheat Production & Consumption
2012 2013 2014f 2015f 2016f 2017f
Notes: f BMI forecasts. Sources: 1 ABARE; 2 USDA.
Wheat Production, '000 tonnes 1 29,900.0 22,080.0 24,000.0 24,600.0 25,387.2 26,148.8
Wheat Consumption, '000 tonnes 2 6,500.0 6,831.5 f 6,981.8 7,086.5 7,192.8 7,300.7

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Sector: Agribusiness
Geography: Australia, Australia, Australia, Australia
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