Wheat prices, already down sharply in 2014, are forecast to continue to fall over the rest of 2014, as rising global production offsets the early impact of drought in Australia and the US.
With iron ore and coal prices already declining and hurting our trade performance (and sending the trade account into the red in April for the first time in five months), the wheat forecast by the US Department of Agriculture (USDA) this week, and another from the Australian Bureau of Agricultural and Resources Economics and Sciences (Abares) means further strains for our exporters later in the year.
In fact global wheat prices are now in a bear market, which is a 20% fall in price from its most recent peak. The closing Chicago Board of Trade futures price is now down 20% from the 14-month closing high of $US7.39 on May 6, according to Bloomberg data.
The USDA has forecast a possible rise in global wheat production to 701.6 million tonnes (from 697 million tonnes), thanks to higher production from Russia, China, India and the European Union.
Wheat stocks (called carryover stocks in the grains trade) are forecast to reach a high 180 million tonnes mid year, placing further downward pressure on prices.
Abares trimmed our 2014 wheat production estimate fractionally this week to 24.4 million tonnes from 24.8 million forecast in March and 27 million tonnes produced in 2013.
The fall is down to a sharp fall in output in Western Australia, partially offset by higher production forecast for NSW. But with a 70% chance of an El Nino dry weather event happening later this year, that forecast could weaken in later updates.
The Bureau of Meteorology issues an updated El Nino forecast next Tuesday.
The USDA forecast for wheat could see the key indicator price – the Chicago Board of trade futures price – hit $US5 a bushel later this year compared to $US5.88 a bushel this week. That however equalled a low reached back on February 28.
A fall to $US5 a bushel would take the price loss for the year to close to 30%. That would cut Australia’s export income as well.
It would also add to the pressures on the major East Coast grain handler GrainCorp which last week revealed a three year restructuring plan to cost $200 million, with job losses and facility closures. The aim is to reduce cartage costs for clients.
The rise in wheat production mirrors one forecast for corn, with the USDA now predicting a two million tonne increase in worldwide output to 981 million tonnes. Soybean output was left steady at around 284 million tonnes.
US analysts at Capital Economics reckon the rise in corn production and overflowing stocks of the grain will push prices down 20% over the remainder of the year.
Because grains are traded in a group and sometimes are interchangeable so far as some areas of consumption are concerned (such as animal food and foodstuffs such as breakfast cereals and breads), a sharp fall in corn prices has the capacity to drag the already weak wheat price lower and put downward pressure on soybean prices (which remain subject to the buying whims of China though which is the world’s biggest buyer and consumer of the oilseed).
Corn futures fell 10% in May and are down around 20% over the past year.
Capital Economics expects the price of corn to finish the year at $US3.50 a bushel, from the current price at around $US4.41. Soybean prices are forecast to end the year at $US10 a bushel, down from around $US14.60 at the moment.
The USDA however pointed out that the forecasts were early and tentative with planting in the northern hemisphere (especially the US) still underway and not due to start in the southern hemisphere (Australia, Argentina and much of Brazil) until later in the year.
