Despite a continuation of severe rainfall deficiencies, wheat production rose marginally in 2019-20, aided by modest yields with the bulk of production originating from southern areas of the state. Wheat prices remained strong, as local supply imbalances remained the driving factor. With very well timed and above average rainfall for the 2020-21 wheat planting, production fortunes are expected to recover as evidenced by the disparity between old crop and new crop pricing.
The permeation of COVID-19 throughout the globe has resulted in rising national food security concerns and as a result, restrictions on some wheat exports from some of Australia’s major competitors in the Black Sea. Should similar restrictions remain in place leading into the next NSW harvest, additional export opportunities may re-surface.
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Production was up slightly at 13% on the previous year to 2.09 million tonnes, although this was still down significantly on the moving 10-year average of 6.49 million tonnes 10. The drought conditions took a toll on wheat production with a general absence of reasonable planting moisture and limited follow up rain in most of the cropping belt. Some farmers that did plant resorted to grazing or bailing crops, rather than harvesting.
Yields were estimated at 1.1 tonnes/ha which again was down 48% on the 10-year average. While low, the yields were better when compared to the millennium drought where yields dropped to as low as 0.62 tonnes/ha 10. This is partly attributed to more robust livestock prices over the past few years and the extra incentive to graze off low yielding crops rather than harvest compared to during the millennium drought.
Local wheat prices remained elevated in comparison to global wheat prices, a trend that has prevailed since the drought intensified across the eastern states of Australia. Prices reached a fiscal year high of $440/tonne (H2 delivered Port Kembla) in April 2020, however, has since declined by approximately 19% to $355/tonne as at the end of June 2020 72.
The high fiscal year prices were a combination of stronger global wheat prices and lower exchange rates, but overwhelmingly reduced domestic supply was the major contributor.
The recent high prices also pose the likelihood that domestic prices will converge to parity with global wheat prices, as the prospects local supply constraints begin to dissipate the as NSW gets closer to the next harvest.
Due to the poor season in 2019-20, exports of wheat from NSW were limited to 104 thousand tonnes, down 93% on the moving 5-year average 94. The poor season also meant that grain (including wheat) was moved from interstate locations such as Victoria and South Australia to support intensive livestock, supplementary feeding and feedlot operations.
In addition, there have been a number of international shipments of high protein wheat from Canada for use in gluten manufacturing at the Manildra Group’s Bomaderry facility. In September 2019 it was forecast that 400,000 tonnes of high protein wheat would be needed to meet the high protein wheat demand of livestock operations, flour millers and the Bomaderry starch and gluten manufacturing operations 91.
Global production and consumption are expected to reach record levels in 2019-20, at 765 and 743 million tonnes respectively. As has been the case since 2013, production is expected to balance or outstrip consumption leading to a build up in closing stocks annually (USDA, 2020).
A major factor playing out in the global wheat market since the beginning of the COVID-19 pandemic has been restrictions placed of exports of wheat from the worlds largest wheat production region, the Black Sea. This was a result of fears around national food security in these countries.
Russia placed an export limit of 7 million tonnes for the June Quarter 2020, while Ukraine placed a season total export cap of 20.2 million tonnes up until the end of June 2020 as concerns from the baking and milling sectors over an increase in bread prices due to COVID related supply shortages (Reuters, 2020). These export volumes are actually quite high in comparison to historic precedent.
Nonetheless, these limits have now been reached, resulting in at least short term opportunities for competitors such as the EU and the US who have exportable surplus available. Australian wheat exporters will be eagerly awaiting news of any further export restrictions in the second half of 2020 as we approach new crop supply.
From July the recently ratified Indonesia-Australia Comprehensive Economic Partnership (IE-CEPA) is due to come into effect. Under this agreement, Australia has gained duty free access for 500 thousand tonnes of feed grain, increasing by 5% annually.
Wheat production is forecast to rise sharply in 2020-21, with the latest forecast estimating a 391% increase to 10.3 million tonnes in production. This is a combination of the largest wheat area planted since the 2010-11 crop at 3.8 million hectares and well above average yield forecast 10.
Global prices are expected to come under some pressure as another large consumption to production supply deficit will lead to record closing stocks leading into the next fiscal year. Reports of the largest Russian wheat crop since the 1970’s has also provided some pessimism to the market with more wheat likely to make its way into our competitor markets 113. This could be partially offset if Black Sea producers continue export restrictions to protect domestic wheat supplies however, whether retained as stocks or released as exports, this will still need to be factored into global pricing at some point.
The largest driver to local prices this year will be attributed to the domestic wheat harvest at the end of the year. With a large national crop forecast, prices are expected to come off a further 20% to bring them in line with export parity 8.