THE International Grains Council are projecting a 25 million tonne drop in global wheat output on the back of a small decline in planted area, and a return to average yields.
On their reckoning, it will push the global crop back to 706 m/t, which would be a three-year low. This should push global stocks lower, even with an assumed drop in consumption as wheat used for feeding declines.
The two standout features for the 2016/17 seasons so far are the reduction in the area of winter wheat in the US, and the poor crop establishment and loss of planted acres in Ukraine.
Here in Australia, prices in the export based Port Adelaide zone fell from $262 per tonne to $250 per tonne. On the east coast, Newcastle prices fell from $305 per tonne to $280 per tonne, for an 8.2 per cent decline, as basis levels eased after a better season. Melbourne prices fell by 7.7 per cent.
Clearly the lower Australian dollar has shielded Australian growers from the full force of the price decline being realised in other producing regions of the world. It is hard to see why the Australian dollar will strengthen significantly during 2016 with general commodity prices still falling, and already at low levels. However, we have also probably seen the bulk of the declines. That means we are going to be at the mercy of where CBOT futures head during 2016.
If we return to a better season right across the eastern seaboard, we will probably also lose the premium in basis that has persisted for the last few seasons.
A 25 m/t drop in global output should deliver a small decline in global stocks, but more importantly, should begin to show weakness in the global balance sheet if another year of lower production were to follow in 2017. With ongoing low prices expected generally there is little to trigger a lift in output.
The other aspect is that a fair proportion of the reduced production is going to be outside of China. Outside of China global stocks only lifted by 6.06 m/t in 2015/16. Even if we only allocate 15 m/t of the drop in global output to countries outside of China, and assume a five m/t drop in non-Chinese consumption, we still drag non-Chinese stocks down by four m/t this year.
Not a lot more needs to go wrong for the northern hemisphere crop, or for consumption to hold a little better than projected, for non-Chinese stocks to fall further. The key to where prices go will then be whether tightening stocks outside of the US pushes residual demand back to the US, allowing US stocks to come under control, and giving support to CBOT futures prices. That is where upside for 2016/17 will come from.