Wheat production: the outlook is worsening. Previously, we made the case that global wheat production was vulnerable to spreading drought. This week, the USDA left the U.S. wheat balance sheet unchanged and only made small adjustments to global wheat estimates. Although recent rains may allow U.S. farmers to increase wheat plantings by 2 million acres, the evidence increasingly suggests global wheat output could fall below expectations. This is due to intensifying drought in Russia, the third largest exporter, and the potential arrival of El Nino weather conditions, which historically brings drought to Australia, the world’s second largest wheat exporter. El Nino rains may also thwart market hopes for bumper South American wheat production to bolster world stocks. Already low inventories at major exporters, including Canada and Russia where wheat stocks are at multi-year lows, will help keep upward pressure on prices. As a result, we believe wheat could rally to new highs in the weeks ahead as El Nino conditions take hold and would be strong buyers on a pullback.
Britain faces food price hikes as fears grow that drought-hit Russia may impose export ban on grain – Russia expected to produce 75m tons this year – 30% less grain than 2011 – ‘Market is very fearful,’ said cereals analyst Jack Watts – Drop in yields could push up price of food across the world
The USDA now estimates global wheat production will be 0.6% lower than forecast a month ago, primarily due to drought in Russia. World wheat production is expected to total 658.73 million metric tons in the year ended May 31, down from a forecast of 662.8 million tons in August, and 695.04 million tons last year. Russian wheat output is forecast to fall to 39 million tons, down from 43 million tons estimated last month. Russian wheat production is now expected to be smaller than the 41.5 million metric tons produced during 2010, during Russia’s worst drought in 50 years, and the smallest crop since the 2003-04 season, according to SovEcon. More ominously, Russia’s wheat stockpiles are 15% to 17% smaller than in 2010, when severe drought and heat led to a doubling in the grain’s price, according to Oleg Sukhanov, head of analytics at Ikar, a Moscow-based institute. Russia may run out of exportable grain surplus by November.
Although Russia has said it won’t restrict wheat exports, observers believe this policy may change after local elections in October. Ukraine will likely follow suit if Russia moves to restrict grain exports. Ukraine exporters recently said they would voluntarily curb exports of all grains in early 2013, and agreed to limit wheat sales to 4 million MT, with about 40% already sold.
Market hopes for bumper southern wheat output to replenish world stocks are diming. Last week, Australia’s Bureau of Meteorology stated that oceanic indicators for El Nino conditions have surpassed all thresholds. Historically, El Nino conditions bring drought to Australia. Western Australia wheat production could fall to 6-8 million tons, from 11.7 million tons last year, as parts of the region received record low rains in July.
Estimates for Australian wheat output are now falling. This week, the Australian Bureau of Agricultural and Resource Economics and Sciences cut its forecast for the country’s wheat output to 22.5 million tons, due to drought, which is well below the USDA’s projection of 26 million tons. This follows last week’s reduction by Rabobank to 22.8 million tons, representing a 20% decline from last season’s record, and below a market consensus of 23.2 million tons. China, which has been suffering from spreading wheat fungus, may import up to 4 million tons of feed wheat this season (mostly from Australia), on a wheat harvest that may only total 105 million tons–13 million tons below the USDA forecast, according to Rabobank. The World Bank also warned that global food prices may extend gains if El Nino conditions develop or if importers begin hoarding supplies.
In Argentina, the southern hemisphere’s other major wheat exporter, wheat sowings fell more than 20% to historically-low levels, as farmers planted other crops that have less export restrictions. Last week, the Buenos Aires grain exchange also said that recent rains, which were initially viewed as helping increase wheat prospects, proved to be too much for some crops. “Rains recorded in the last few days have exacerbated the excess of water in extensive areas” of the Buenos Aires province, which produces nearly half of the country’s wheat production, said the exchange. Some areas west of Buenos Aires reportedly suffered total or partial loss of crops from soil saturation.