October 17, 2019 / 11:12 AM / a month ago

Column: Drought vaporizes Australia's share of global wheat exports

FORT COLLINS, Colo. (Reuters) - Drought has plagued Australia’s wheat crop for the third year in a row, and the sharp production losses have caused the traditionally major wheat supplier to slip into its most insignificant state ever on the global export scene.

Farmer Scott Cooper and his daughter Charlie ride their horses next to a fence that adjoins a drought-effected paddock, which used to contain wheat crop, on their property named 'Nundah', located south of the central New South Wales town of Gunnedah in Australia, July 21, 2018. REUTERS/David Gray

This has opened the door for other suppliers to take advantage, but global wheat supply is still comfortable and exports competitive even as Australia has been largely lacking from the equation for two years now.

Last week, the U.S. Department of Agriculture reduced Australia’s 2019-20 wheat harvest to 18 million tonnes from the previous estimate of 19 million. That would top last year’s 17.3 million tonnes, an 11-year low, but it is paltry compared with the country’s record 2016-17 crop of 31.8 million tonnes.

The harvest could shrink, however, as the dryness is more evenly distributed across the country than a year ago, and hot temperatures have made things even worse. Late last month, the Australian government pledged an additional $68 million in aid for its crippled agriculture sector after previously committing about $4.7 billion to the cause.

So far this year, wheat regions in leading producer Western Australia have received a third less rainfall than is normal. Out east in New South Wales, only half of the typical year-to-date precipitation has fallen.

For eastern and southern areas, this is the third year in a row of dryness. Precipitation in the crop-heavy areas of South Australia was 75% below normal in the full calendar years of 2017 and 2018, and so far 2019 is slightly worse.

As of Wednesday, forecasts suggested a wetter pattern could move in to parts of Western and South Australia toward the end of the month, but other regions are set to remain largely dry, and in some cases, it may be too late.

Australian farmers start planting wheat in April and May. Heading, which is the start of reproduction, begins in August and runs through September, and harvest is most prominent in November and December.

Many key growing regions were especially dry as reproduction began, and this could further stress the harvest volume. One year ago, USDA had predicted the 2018-19 harvest at 18.5 million tonnes, some 1.2 million more than the actual.

Australia produces white winter wheat, which is ideal for its predominantly Asian buyers as the variety is great for making noodles, dumplings and flat breads.

PLUNGING EXPORTS

In 2018-19, Australia’s wheat exports fell to 9 million tonnes, an 11-year low, and dramatically less than the 22.6 million from two years earlier.

Australia’s contribution to global wheat exports was just 5.2% last year, an all-time low in nearly 60 years of records. That replaced the previous low of 6.4% set in 2007-08. In 2016-17, Australia accounted for 12% of world wheat exports, taking the No. 3 spot.

USDA predicts that Australia’s wheat export share will rise slightly in 2019-20 to 5.3%, leaving other prominent exporters to pick up the slack for yet another year.

Prior to last year, Indonesia had been Australia’s top wheat destination for more than 15 consecutive years, but the drought-stricken country has been unable to keep up with the demand. Often Indonesia’s No. 2 supplier, Canada has been able to capitalize on the Aussie shortfall. Additionally, the United States exported a record 1.38 million tonnes of wheat to Indonesia in 2018-19.

But the United States has not had a banner wheat exporting year since 2016-17, when global trade peaked in a lower price environment. The United States was the top supplier that year at 28.6 million tonnes, but business has been markedly slower since.

Russia is now the leading global wheat exporter, and together with Ukraine, Black Sea wheat has been increasing its presence in Asian markets, especially given Australia’s misfortunes. Canada’s exports reached new highs last year and are set to match, if not top, those numbers this year.

Even with Australian wheat production and exports falling severely short of potential, especially in the last two years, the world is not short of wheat. However, supply relative to demand is a little tighter than usual.

Last week, USDA increased global wheat ending stocks for the 2019-20 marketing year to a record 287.8 million tonnes, including a predicted 2.5% rise in consumption to new highs. Wheat outside of China is seen rising 3% to 142.1 million tonnes, but that is still below the recent average.

Global stocks-to-use is implied at 17.7%, identical to 2018-19 and 2013-14, the last times the ratio was that low. The recent five-year average is 18.8%.

The 2020-21 wheat crop is currently being sown worldwide, but it will still be more than half a year until those supplies start becoming available. Further, it has been a couple of years since wheat crops in top-supplying countries have all flourished together.

Paddocks containing crops of wheat are seen on a property located on the outskirts of the town of Mallala, north of Adelaide, South Australia, August 21, 2018. REUTERS/David Gray

Russia has yet to match its record 85 million tonnes from two years ago, having harvested a crop this year nearly 13 million tonnes smaller. Europe’s recent harvest rebounded 15 million tonnes on the year, while the U.S. crop was more than 9 million tonnes off its bumper output from three years ago.

But Australia has recently been the clear underdog in the wheat market and should the weather pattern finally shift in its favor for the next harvest, it could have huge implications for global wheat supply and market participants will no longer be able to discount the Aussie grain.

The opinions expressed here are those of the author, a market analyst for Reuters. 

Editing by Matthew Lewis

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