abare.gov.au - Australian commodities – June quarter . volume 15 . number 2 2008

Wheat

Since reaching a peak of US$454 a tonne in March 2008, the world wheat indicator price (US hard red winter, fob gulf ports) has been declining. The indicator price averaged US$388 a tonne in April and US$346 a tonne in May. Despite the recent declines, world wheat prices remain at historical highs.

In 2008-09 the world wheat indicator price is expected to fall as world wheat supplies are forecast to rise by more than the increase in consumption. The world wheat indicator price is forecast to average US$320 a tonne in 2008-09 compared with an estimated average of US$362 a tonne in 2007-08. Despite the forecast rise in production, low stocks will support relatively high prices. Low stocks mean any disruption to wheat supplies could quickly lead to a strong upward movement in prices.

Forecast lower global wheat prices and an expected increase in domestic production are likely to result in Australian wheat prices being lower in 2008-09. The pool return for Australian premium white wheat (APW 10) is forecast to decline from an estimated A$419 a tonne in 2007-08 to A$370 a tonne in 2008-09.

World wheat production higher in 2008-09

The area sown to wheat is forecast to increase by around 4 per cent in 2008-09, the largest area sown to wheat in the past 10 seasons. The large area planted to wheat is a result of the historically high wheat prices currently being experienced. World wheat production is forecast to increase by around 45 million tonnes in 2008-09 as yields are expected to return closer to historical averages. This expected increase in production, combined with opening season stocks, is forecast to lead to a 5 per cent increase in global wheat supplies in 2008-09.

Out of the five major wheat producing regions, production in 2008-09 is forecast to increase in the European Union and the United States by 17 per cent and 13 per cent, respectively. In China, India and the Russian Federation, production is forecast to remain largely unchanged from the relatively high levels of the previous year. In the five major exporting countries (Argentina, Australia, Canada, the European Union and the United States) total wheat production is forecast to increase by around 40 million tonnes in 2008-09.

In the European Union, high wheat prices and policy changes reducing the set-aside rate (land left fallow) to zero, have resulted in the area sown to wheat increasing by around 5 per cent in 2008-09. Assuming favourable seasonal conditions continue in the European Union, production is forecast to be 140 million tonnes in 2008-09, around 20 million tonnes more than was produced in the previous year.

In the United States the area sown is estimated to have increased by 5 per cent in 2008-09, compared with the area in 2007-08. This is the largest area sown to wheat in the United States in the past 10 seasons. US production is forecast to increase by around 13 per cent, to 63 million tonnes. While production is forecast to increase, there is still concern over the condition of the crop. In the weekly weather and crop bulletin released on 17 June 2008 by the United States Department of Agriculture (USDA), around 22 per cent of the winter wheat crop was rated poor or below, and 47 per cent was rated good or above. This compares with a rating a year earlier of 22 per cent being rated poor or below and 50 per cent as good or above. Despite these concerns production is forecast to increase by around 7 million tonnes in 2008-09.

Higher consumption expected in 2008-09 despite relatively high prices

Despite the expectation that wheat prices will remain relatively high in 2008-09, global wheat consumption is forecast to increase by around 3 per cent.

The largest use of wheat is for human consumption, accounting for more than 70 per cent of global consumption. Wheat used for human consumption has been increasing by around 1 per cent a year over the past 10 years. In 2008-09, wheat used for human consumption is forecast to increase again by around 1 per cent.

Changes in the total quantity consumed generally move in line with changes in the use of wheat for livestock feeding. The largest consumers of feed wheat are the European Union and the Russian Federation, accounting for a total of 70 per cent of global feed wheat consumption. In 2008-09 the use of wheat for livestock feed is forecast to increase by around 15 per cent.

In the European Union the use of wheat for livestock feeding is forecast to increase in 2008-09 as supplies increase and the price of feed wheat declines relative to other feed grains.

The use of wheat for biofuel production (or industrial use) has been relatively small in terms of overall wheat consumption. Over the past five years, industrial use of wheat has been around an average of 2 per cent of total wheat consumption. In 2008-09, industrial use of wheat is forecast to increase to around 18 million tonnes, or around 3 per cent of total wheat consumption.

World trade to increase in 2008-09

World wheat trade is forecast to increase by around 4 million tonnes in 2008-09. In the major exporting countries a strong recovery in production (18 per cent increase) will be adding to the availability of exportable supplies in 2008-09. Total shipments from the five major exporting countries (Argentina, Australia, Canada, the European Union and the United States) are forecast to increase by around 2 per cent in 2008-09.

Notwithstanding forecast higher imports from Algeria, Indonesia, Iraq, the Philippines and Viet Nam, in 2008-09 import demand from India is forecast to decline.

Import demand from India is forecast to fall in 2008-09, as production exceeds 75 million tonnes for the second consecutive year. In 2007-08 Indian wheat imports are forecast at 2 million tonnes and in 2006-07 were estimated at 6.7 million tonnes. Prior to these two years, India’s annual wheat imports were around 23 000 tonnes. The Indian Government operates a procurement system under which it purchases wheat from growers to provide support and to meet commitments under the ‘public distribution system’, a government initiative introduced to ensure the ready availability of food grains to the population. It is forecast that purchases from domestic growers will be sufficient to meet government distribution needs. The Indian Government announced in late April 2008 there would be no need for imports in 2008-09.

Wheat outlook

2006

2007

2008-09

% change

World

Production

593

604

650

7.6

– China

105

106

0.0

– EU27

125

120

140

16.7

– India

1.3

– Russian Fed.

2.0

– United States

12.5

Consumption

611

612

632

3.3

– human

442

444

450

1.4

– feed

102

14.6

Closing stocks

120

112

131

17.0

Trade

110

105

109

3.8

Exports

– Argentina

0.0

– Australia

100.0

– Canada

6.7

– EU27

27.3

– United States

– 28.6

Price

US$/t

212

362

320

– 11.6

Australia

Area

’000 ha

11 798

12 345

13 971

13.2

Production

10 822

13 039

23 680

81.6

Exports

11 196

6 750

14 078

108.6

– value

A$m

2 765

2 592

5 037

94.3

APW 10 net

pool return

A$/t

240

419

370

– 11.7

f ABARE forecast. s ABARE estimate.

Wheat stocks remain low

Global wheat stocks at the end of 2008-09 are forecast to be around 131 million tonnes, 19 million tonnes more than at the end of 2007-08. Despite this forecast increase, the level of stocks will remain low by historical standards. The low level of wheat stocks will help maintain prices at relatively high levels.

Stocks of high quality milling wheat, held by the five major exporting countries, are forecast to increase for the first time in four seasons. At the end of 2008-09, stocks held by the major exporters are forecast to be around 38 million tonnes, 11 million tonnes more than the previous year.

Wheat stocks are also forecast to increase in China for the third consecutive year. In 2008-09, Chinese wheat stocks are forecast to increase by around 3 million tonnes.

Prospects of higher Australian production

The area sown to wheat in Australia in 2008-09 is forecast to increase to a record 14 million hectares, a 13 per cent increase on the previous year. Historically high wheat prices and the need to secure a quick recovery in incomes, have encouraged growers to plant a larger area. Wheat production in 2008-09 is forecast to be 23.7 million tonnes, nearly 11 million tonnes more than the previous year.

The start to the 2008-09 winter cropping season has been variable across the states. Widespread rainfall across the majority of the Western Australian’s grains belt in April 2008 provided growers in that state with a good start to the 2008-09 winter cropping season. However, a lack of follow-up rainfall since then is hampering crop germination and delaying planting completion. The area sown to wheat in Western Australia is forecast to be a record 5.2 million hectares.

Rainfall in early June 2008 across northern New South Wales and Queensland benefited crops that were dry sown in those regions and provided the rainfall growers needed to plant remaining crops. In southern and central parts of New South Wales, continued dry conditions have seen most crops dry sown in those areas. In South Australia and Victoria, rainfall in May across parts of the grains belt helped crops that had been dry sown and provided the opportunity for further plantings. Prolonged dry periods in these states mean follow-up rains will be critical.

The Bureau of Meteorology, in its latest seasonal rainfall outlook for the June to August period (27 May 2008), indicates the chances of receiving above average rainfall are mixed across the country. There is a 55 to 65 per cent chance of accumulating above average rainfall across most of Queensland and north-east New South Wales. In contrast, the chance of exceeding average rainfall across the south-west of Western Australia is 30 to 40 per cent. However, the Bureau has advised that because of technical issues, its confidence in the current outlook assessment for Western Australia is low.

Domestic wheat prices to fall

Forecast lower global wheat prices and an expected increase in domestic production are likely to result in Australian wheat prices being lower in 2008-09. The pool return for Australian premium white wheat (APW 10) is forecast to decline from an estimated A$419 a tonne in 2007-08 to A$370 a tonne in 2008-09.

Increased supplies of feed grains on the domestic market, particularly from the 2007-08 grain sorghum crop, and an expected increase in wheat production in 2008-09, has led to a decline in the domestic cash price of wheat. The cash price of wheat (delivered Sydney) used for livestock feed averaged A$430 a tonne in May 2008. This compares with an average of A$513 a tonne in March and A$470 a tonne in April in the same year.

Australian exports to increase

Reflecting an expected better harvest than last year, Australian wheat exports (October – September marketing year) are forecast to increase to around 16.3 million tonnes in 2008-09. The value of these exports in the fiscal year 2008-09 (July-June) is forecast to nearly double to A$5.0 billion. Reflecting the fall in world wheat prices, the unit value of exports in 2008-09 is forecast to decline to A$358 a tonne compared with A$384 a tonne in 2007-08.