Limited upside for wheat prices with high stocks
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Limited upside for wheat prices as ‘high-stocks’ game continues


As planting of the Australian wheat crop wraps up, any prospect of a significant recovery in global wheat prices in the 2017/18 season remains dampened by the high stocks-to-use (S/U) ratio, according to agribusiness banking specialist Rabobank.

In light of this, Rabobank is forecasting CBOT wheat prices to increase only marginally over the coming 12 months – in the vicinity of 10 to 15 per cent – to reach US490c/bushel by mid-2018.

In its recently-released industry report, Australian wheat outlook 2017/18 – the high-stocks game continues, Rabobank says with Australian wheat stocks also at historically high levels, the greatest prospect for local prices is the likely depreciation of the Australian dollar, which should push prices into firmer territory over the next 12 months.

Report author, Rabobank senior grains analyst Cheryl Kalisch Gordon says the “world is awash with wheat” with the global S/U ratio (defined as the level of carryover stocks as a percentage of total use) now at 33 per cent, well above its historical average of 29 per cent.

“To see the global grains market return to a S/U ratio of 29 per cent – which is considered the point that delivers more attractive prices – we would need to see global production fall by 29 million tonnes this season,” she says.

“While the US have cut their wheat planted acreage to its lowest level in 100 years, it would take a significant production failure in one or more major supply regions to see the market start to recover strongly.”

Dr Kalisch Gordon says while wheat acreage around the world is fairly static, up just one per cent in the past five years, it is the yield advancements in Russia and the Ukraine, and also parts of the EU that is driving the increase in global wheat production. World wheat yields are now estimated to be around eight per cent higher than they were five years ago.

“Simple agronomic advancements, such as strategic herbicide and insecticide use, are delivering strong yield growth in the Black Sea region,” she says, “and with the region also renowned for its rich, black top soils, there is significant upside to their production – even without any increase in planted area.”

With global wheat production increasing by around three per cent each year (in the five year period to 2015/16), it has “well-and-truly outstripped growth in demand, with consumption only growing by an average annual rate of just under two per cent during the same period”, she says.

“Consumption growth goes hand-in-hand with economic growth and we have come through a period of lower world growth. While consumption does continue to increase with income growth and westernisation of diets, it would need to increase by a massive, and extremely unlikely 13 per cent, to return the global grains market to equilibrium this year.”

Where are the stocks?

The report says with “much of the stock accumulation occurring in China”, Chinese wheat stocks need to be “at least partially taken out of the equation” when looking at global market price dynamics.

“Stocks in China account for around 45 per cent of global wheat stocks, with China holding an estimated 100 million tonnes in storage at the start of 2016/17,” Dr Kalisch Gordon says.

“However with China accounting for just 1.1 per cent of world wheat trade, their stock levels but also their consumption should be arguably discounted when assessing the prospects of a global price recovery.”

Dr Kalisch Gordon says even if China was to be removed from the equation, the global S/U is still 25 per cent higher than its 10-year average, indicating just how high stock levels are around the world.

In contrast, and more importantly for Australia, she says the Ukraine has very low stocks at just under two million tonnes.

“This is important to note, as the Ukraine accounts for 10 per cent of global wheat trade, and their wheat has been increasingly competitive in Australia’s all-important South-East Asian market,” she says. “And with their stocks at such low levels, this will limit their export capacity over the coming year.”

Australian outlook

The report says Australia is also heading into the 2017/18 season with high wheat stocks, estimated at close to eight million tonnes, the highest level for almost 20 years.

“Despite low wheat prices, the area planted to wheat is expected to be in line with last season at around 12.9 million hectares,” Dr Kalisch Gordon says. “That said, production is anticipated to be down around the five-year average, and there is further downside with the unfavourable weather forecasts.”

In light of this, Dr Kalisch Gordon says, the greatest prospect for Australian wheat prices is the expectation of a softening AUD/USD exchange rate which could ease to USc 0.72 by the end of 2017.

“While the upside to Australian prices, through lower new season production, will be muted by high stocks both within Australia and also globally this season, there are some other factors that could provide support over the next 12 months,” she says.

“Namely, Ukraine will have reduced capacity to be aggressive with their export program into South-East Asia this season and there is also expected to be less high quality wheat out of the US and Canada, which could see the spread between higher protein wheat and mid to low protein wheat widen further in coming months.”

Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.

Media contacts:

Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand 
Phone: 02 8115 2744 or 0439 603 525 

Skye Ward
Media Relations Manager
Rabobank Australia
Phone: 02 4855 1111 or 0418 216 103