NAB lowers Australian 2017-18 wheat production forecast to 23.3 mil mt on drought concern

04.07.2017

National Australia Bank in its report released Monday revised lower its forecast for the country's wheat production over October 2017-September 2018 to 23.3 million mt, based on rainfall to date and assumed average rainfall in major cropping areas for the rest of the season.

Australia's wheat marketing year starts in October and ends in September the following year.

Prior to the release of the Bureau of Meteorology's June rainfall report, wheat production in the world's fourth largest exporter was estimated to be 24.4 million mt for the period, NAB said, indicating that the latest revision reflects the severe impact of rain deficiency on wheat yield.

According to the latest drought statement released by the Bureau of Meteorology Monday, June rainfall was below average for most of Australia, and was the "lowest on record for much of inland northern and northeastern Victoria, adjacent inland southern New South Wales, southwest and western Western Australia, and eastern Tasmania."

Meanwhile, the Australian Bureau of Agricultural and Resource Economics and Sciences' latest estimates for the 2017-2018 wheat marketing year -- before the June rainfall data was released -- was 24.19 million mt.

Both national estimates pointed to normalized or lower yield after a record smashing output in 2016-2017 at around 35 million mt. APW PRICE GETS A BOOST

As the prospect of the newly planted crop seems bleaker, prices of Australian wheat were firmer over the past one month, with many sellers holding on to old crop as "drought hedge," a trader said.

"They would rather store the old crop now, pay storage fees and sell it at the new crop prices than having to buy from the physical market at much higher prices and absorb the differences," a major seller in Western Australia said, referring to slow selling by farmers.

Selling prices varied among major sellers, with Monday's indication from Western Australia's largest wheat seller at $270-$272/mt FOB WA for September, up by more than $5/mt from last Friday's indications.

"The farmers are not selling now, even with the current spike in prices, as they might have to pay the differences if prices moved up further and they can't deliver and have to buy from the market," traders said.

But given that Western Australia was the worst hit zone amid a dry start to winter, it's no surprise that offers from that region would be less competitive compared with other regions.

"WA prices are out now, and you can still get cheaper offers, even after normalizing the freight differences," a South Australia-based trader said.

Cargoes from the South Australia and Melbourne/Geelong port zone were available at $252-$253/mt FOB, which was on par with the replacement value on Monday, which equated to $257-$260/mt FOB WA after freight and premium normalization, he added.

APW prices on July 3 soared to the highest level since S&P Global Platts began the assessments on November 9, 2015, at $250/mt FOB Australia, and the price was also up nearly 20% from June 5 amid firmer indications and a stronger Australian currency.

On June 30, APW recorded its highest day-on-day rise for Platts assessments at $9.25/mt, to $244.75/mt FOB Australia.

Meanwhile, a stronger Australian dollar, which hit a three-month high against the US dollar on June 29, at $0.77, further reduced the export competitiveness of APW. It is still hovering around the same level, and has gained about 3% from a month ago.

Also, the most active US soft red winter wheat futures contract, on Monday spiked 6% from the close on Friday, despite shorter trading hours ahead of the US Independence Day holiday.

The US wheat futures contract rose sharply after the release of the USDA report Friday, which said the USDA had reduced its all-wheat planted area to just 45.657 million acres -- its lowest level since 1919, when USDA records began, and down 9% from 2016.

Nevertheless, given that most major end-users in the Asia Pacific have secured adequate volumes until September, bids from these buyers have not moved up in tandem with the rise in offers.

Additionally, given the slower ascend in prices of Black Sea new crop over the past one month, it is still much cheaper by about $50-$60/mt than similar protein wheat in Australia, buyers said.


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