NAB warns on wheat prices - and on El Nino threat to Australian farms

21.02.2017

Wheat prices will struggle for headway this year, National Australia Bank said, citing the potential test of an El Nino for Australian farmers, at risk of seeing a sharp drop in their next harvest.

The bank downplayed the potential for a revival in wheat prices left "moribund" by a series of strong harvests, the latest of which being the "unprecedented" 35.1m-tonne Australian crop.

Although there have been some modest downgrades to estimates for this year's Black Sea harvests, following cold weather threats to autumn-planted crops, and US sowings have fallen to the lowest in more than a century "it remain unlikely that dollar prices [of wheat] will rise significantly this year", NAB said.

"The sad reality is that grain prices are for the most part disappointing.

"Furthermore, we are not expecting much of an improvement over the coming year as global supply of major crops continues to track at record or near record levels."

'Production rising more than consumption'

NAB agribusiness economist Phin Ziebell added: "Ultimately, it's hard for prices to rise when, globally, production is rising more than consumption."

The comments amid some debate in grain markets as to whether bear market in Chicago wheat futures – the world benchmark – is showing signs of exhaustion, after nearly nine years.

Ideas that further price falls may be harder to come by have spurred hedge funds into a wave of short-covering which in the latest week saw them halve their net short position in Chicago wheat futures and options to some 40,000 contracts, the lowest level in 15 months.

Currency factor

The bank saw Australian wheat prices showing some outperformance in rising by "around 12%" by the end of the year, a slightly bigger increase than the 9.0% improvement being factored in by investors, comparing the price of January 2018 futures with the spot March contract.

However, this increase was "based largely on our expectations of a lower Australian dollar", NAB said.

"If the Australian dollar says higher, local wheat prices are likely to remain lower."

If the Australian dollar, currently at some Aus$0.77 to $1, does not fall to Aus$0.70 by the close of the year as expected, "there is commensurate downside for local wheat prices".

The bank was downbeat on prospects for chickpea prices too, saying that the slump in values to roughly Aus$800 per tonne, from highest close to Aus$1,300 a tonne last year, looked set to continue "on an improving global supply outlook".

'Somewhat more concerning'

The bank cautioned over the potential for a setback to Australian growers from a reversal in production fortunes too, given signs of an El Nino, which often brings unduly dry weather in particular to eastern parts of the country such as New South Wales, which proved the top wheat-producing state for 2016-17.

"While 2016-17 saw a bumper year, the outlook for the coming season is somewhat more concerning.

"The [Australian] Bureau of Meteorology's models point to the emergence of El Niсo in winter this year.

"While these projections naturally carry a degree of uncertainty, El Niсo events tend to bring hotter and drier conditions on average to eastern and northern Australia."

That would contrast with, in 2016, the "very wet" winter and spring, factors "consistent with the near La Niсa conditions recorded throughout the year", and which enabled the strong yields recorded in the latest harvest.


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