By Angus Brown | Source: AEGIC, ABARES, ASX, CME
As mentioned in last Friday’s weekly summary, the Australian Export Grains Innovation Centre (AEGIC) recently released its yield forecasts. These outlined what wheat yields can be expected this year based on seasonal conditions to date and forecast conditions for the finish. Basically, we are looking at the smallest Australian wheat crop since 2007-08, but there will still be an exportable surplus.
Figure 1 shows Australian wheat production by state for the last 12 years, along with the ABARES September forecast, and the AEGIC October forecast. The latter is based on an average Australian wheat yield of 1.59t/ha over ABARES area forecast of 13.837 million hectares. Total Australian wheat yields are expected to be down 21% on last year, with east coast production down 22%.
The expected WA crop of 8.5mmt is marginally above the five year average, but down 19% on last year’s bumper crop. Estimated East Coast wheat production is down 26% on the five year average at 12.8mmt. This is marginally below the crops of 2008-09 and 2009-10, but 65% above the 10-year low set in 2006-07.
Yields are cut across most states, with Queensland and Tasmania the only states to see bigger crops than last year: that said, Queensland was very low last year as well. Victoria is expected to see a 33% smaller crop than last year, while SA is back 27% and NSW a more moderate 18%, although this still equates to 1.2mmt.
Despite the cuts in wheat production, Australia in total, as well as the east coast, will still have an exportable surplus of wheat. Over the six years to 2012-13 Australia used, on average, 6.23mmt of wheat for milling, feed and seed. The highest domestic consumption year was in 2008-09 when 7.3mmt was used. Most wheat is used on the east coast, so if we assume this year there will be 7.5mmt of wheat used on the east coast, this still leaves 5.3mmt to be exported, if stocks remain the same.
As such, there is no reason for wheat basis to increase to import parity. This is why local wheat basis, as shown by the ASX NSW Wheat basis to CBOT Wheat in figure 2, has remained relatively steady between $55-70/t over the past six months despite worsening seasonal conditions. The current basis is apparently somewhere near the break-even for exporters of milling wheat.
Basically, the fact that Australia will not come near having to import wheat means that basis is unlikely to improve much on the whole. There may be some regional price and basis spikes if wheat has to be brought in from further than normal (ie Southern Queensland last year) to cover local feed requirements. However, in general, port-based prices should remain around their current basis to CBOT.
There is some basis downside if there is a flush of selling at harvest, but post-harvest basis should improve back towards current levels. As such, those looking for price improvements might be better off selling wheat for cash flow at harvest, and using derivatives to access upside in international markets.
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