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Tuesday, May 10, 2016

Many get a break and lower basis factored in

By Angus Brown  |  Source: BOM, ABARES, ASX, CBOT

Key points

  • Good rainfall has fallen across much of the east coast cropping zone, which should give crops a good start.
  • The BOM rainfall outlook is positive, which should leave crops in good conditions by the start of spring.
  • Good rainfall seeing stronger yields will have a negative impact on old and new crop basis.

2016-05-10 Give Us A Break Fig 1

2016-05-10 Give Us A Break Fig 2

2016-05-10 Give Us A Break Fig 3

May to date has seen what can now be classified as the autumn break across much of the east coast cropping zone. WA had an early start in April, so we can now say that everywhere except Queensland has had a start to the 2016-17 cropping season. Here we take a look at what this, along with climate outlooks, might mean for grain supplies for the coming harvest.

The latest available forecasts on crop area and production for Australia were released on the 1st of March.  While the numbers are a little outdated we can look at the weather assumptions for autumn, and make adjustments based on what has actually happened. 

Figure 1 shows the ABARES forecast for wheat yields and production compared to the last 20 years.  ABARES assumptions were for a reasonable April break across the eastern and western cropping areas, and for something around average seasonal conditions thereafter. 

What we have seen is a good April break in WA, which has seen the plant running ahead of normal.  On the east coast much of Victoria and NSW has seen good rain, or is receiving it as I write this.  The areas to really miss out are much of SA, far western Victoria and Queensland.

ABARES were forecasting higher Canola plantings this year in response to better relative prices, to see an 11% increase in production.  Anecdotal evidence suggests this may be overstating canola production, with the late break in NSW and Victoria leading to growers to forego canola in favour of cereals.  This may be offset somewhat by the early break, and good canola planting window in WA.

In terms of importance, WA and NSW produce 64% of Australia’s wheat on average, followed by SA (17%), Victoria (13%) and Queensland (6%).  In very broad terms, 77% of Australia’s cropping zone will now have crops which are in the ground, and growing under pretty good conditions.  The remaining 23% is still enduring poor conditions, and will still be waiting for rain.

The all-important forecast for May to July is currently looking good.  The BOM are forecasting a strong probability of better than median rainfall for much of the cropping zone (figure 2).

What does this mean?

With the recent rain, and the 3 month forecast, things are looking positive for the wheat crop, and it would not surprise to see average wheat yields rise from a 1.9t/ha forecast to 2t/ha.  A 2t national crop would see production of 26mmt, a five year high, and 1.8mmt higher than the 2015-16 crop.

As we know our wheat prices are largely driven by the international market, with local production impacting basis.  Figure 3 shows basis has been driven lower by big crops in 2010-11 and 2011-12, and for a short period during harvest in 2013-14, the last time we produced a 25mmt wheat crop. 

The market already appears to be factoring in a bigger crop, with ASX basis currently sitting at $25/t, well down on the levels of the last two years.  

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