Wheat: June quarter 2020
World wheat prices to remain low, Australian prices to converge
Abundant world wheat supplies are expected to keep global prices low. The world wheat indicator price is forecast to remain low in 2020–21, at an average of US$222 per tonne. A forecast fall in production in some major exporting countries will be offset by weaker world demand for discretionary foods due to restrictions introduced to slow the spread of COVID-19.
Milling wheat has few substitutes and relatively inelastic demand as a staple food. This means that the underlying demand for wheat is unlikely to be significantly affected by the COVID-19 pandemic. Weaker global economic growth as a result of COVID-19 is likely to reduce demand for higher-value wheat flour products (cakes, biscuits and pastries) and higher-value meat and dairy products. The fall in demand for grain-fed meat and dairy products and an abundance of feed grain substitutes (cheap corn) will result in lower feed demand for wheat. The duration of these impacts remains uncertain. The longer it takes for economies to recover, the greater the effect on demand and the potential downside risk to prices.
Major wheat importing and exporting countries are at varying stages of dealing with the impact of COVID-19. The economic cost of measures to contain COVID-19 in Australia's major export markets will depend on how well these nations contain the spread of the virus and how soon they can safely relax containment measures. For example, the effect on economic activity in Indonesia is assumed to be greater than in Japan and Vietnam, which have both managed to contain the spread of COVID-19 relatively quickly and are therefore likely to recover sooner.
World production to reach record high
Mostly favourable seasonal conditions in major wheat-producing countries are forecast to result in record high world wheat production of around 767 million tonnes, a marginal increase from 2019–20. Increased production is forecast in Argentina, Australia, Canada and Kazakhstan. Despite production in the Russian Federation being forecast to increase year-on-year, the forecast has continued to be lowered as seasonal conditions deteriorate. Production in the European Union, United States and Ukraine is forecast to decline from 2019–20 levels. This is due to less favourable seasonal conditions, particularly in France—the European Union's biggest wheat producer.
Production in China and India (the world's second- and third-largest wheat producers after the European Union) is forecast to increase. This reflects an increase in the area planted and favourable seasonal conditions. China and India usually only import significant amounts of wheat if their domestic production is adversely affected by poor seasonal conditions. Ending stocks in China are forecast to reach just over 130 million tonnes, accounting for around 44% of global stocks. Stocks continue to build in China because production has exceeded estimated consumption since 2013–14 and imports have averaged around 4 million tonnes per year. These stocks are generally not available to the world market.
Australian wheat production to recover in 2020–21
Australian wheat production is forecast to increase by 76% in 2020–21 to 26.7 million tonnes. If realised, this will be the biggest wheat crop Australia has produced since the record high of 2016–17. The area planted to wheat is forecast to increase following an excellent start to the winter cropping season in New South Wales, Victoria and parts of South Australia. Conditions in Queensland and Western Australia have been less favourable. A later start to the season is not unusual in Western Australia and it has not limited production in recent years. A positive outlook for winter rainfall is contributing to forecasts of better yields in 2020–21 compared to the drought-affected 2019–20 crop.
Australian stocks depleted
Australian wheat supply has been adversely affected by 3 consecutive years of below average production. Additionally, supplementary on-farm feeding since late 2017–18 due to poor pasture growth and the continued expansion of intensive livestock industries resulted in a significant increase in domestic feed demand. The increase in demand and lower supply has led to a significant drawdown in domestic wheat stocks, which are forecast to fall to 2.8 million tonnes by the end of the 2019–20 marketing year (end of September). This is the lowest level of stocks since 1998–99.
Low supply has resulted in high domestic prices, and a greater proportion of production being consumed domestically and limiting export supply. The cost of complying with strict biosecurity protocols for bulk grain import permits allows domestic prices to increase well above world prices. Domestic prices are forecast to remain high until there is more certainty about the size of the 2020–21 winter crop. Prices are then likely to fall to parity with much lower world prices.
Domestic wheat use comprises milling wheat for flour, livestock feed (direct to end users or stockfeed manufacturers), wheat for industrial use and for use as seed (seed retained to sow crops). Milling wheat for flour usually accounts for around 35% of total domestic use at an average of around 3 million tonnes. Growth in use of wheat for milling has been relatively flat.
Total domestic livestock feed use is forecast to fall by 10% in 2020–21 to around 4.5 million tonnes. Feed use currently accounts for around 60% of domestic use, peaking in 2018–19 at around 5.5 million tonnes. Easing of drought conditions in the eastern states has reduced the need for supplementary on-farm livestock feeding and the number of sheep and cattle being finished in feedlots. Lower demand for grain-fed beef due to COVID-19 restrictions is also forecast to reduce feedlot numbers.
The poultry meat and egg industries are also major domestic feed grain users, with around 60% to 70% of feed rations generally made up of cereal grain (wheat, barley or grain sorghum). An initial surge in retail sales of eggs and poultry meat due to COVID–19 restrictions is likely to be offset by a downturn in the food service industry.
Australian exports to recover from drought-affected lows
Australian wheat exports are forecast to increase in value and volume in 2020–21 due to increased production and lower domestic use. Australian wheat exports in 2018–19 and 2019–20 were significantly below average, reflecting consecutive years of drought-affected production.
Continued growth in world food and industrial wheat use, in line with population growth, is expected to support demand for Australian wheat in export markets. However, uncertainty about the adverse effect of COVID–19 on global demand for high-value foods made from flour may constrain growth in demand for higher-value milling wheats. South-East Asian wheat imports have more than doubled over the past 10 years. This reflects rapidly expanding populations, increased incomes (higher demand for western-style bakery products) and an increase in intensive livestock production. However, with economic growth forecast to slow in 2020, growth in imports is likely to slow or may even fall, particularly for imports of higher-quality milling wheat and feed wheat.
Opportunities and challenges
Export restrictions in major exporting countries
In March 2020, the Russian Federation set a 7 million tonne grain export quota for April to June that included around 5 million tonnes of wheat. The quota was implemented to protect domestic supply and keep prices from rising during the initial uncertainty about the effect of COVID-19. The quotas end when the new marketing season starts on 1 July 2020. Kazakhstan also restricted exports to 200,000 tonnes per month until the end of June. Ukraine's export quota for 2020–21 will be agreed on with traders in July 2020. Export restrictions lead to market instability and increased price volatility. If further export restrictions are announced for new crop supplies, prices are likely to increase and may provide an opportunity for Australian exports.
Indonesia–Australia Comprehensive Economic Partnership Agreement
The Indonesia–Australia Comprehensive Economic Partnership Agreement (IA–CEPA) will come into effect on 5 July 2020. In the first year of the agreement, Indonesia will issue automatic import permits granting duty-free access for 500,000 tonnes of Australian feed grain, including wheat. The tariff quota volume will increase by 5% annually. This agreement will boost Australia's competitiveness in what has traditionally been one of our biggest wheat export markets.
|Wheat outlook – June 2020 PDF||5||1.4 MB|
|Agricultural commodities: June quarter 2020 - Commodities - data tables XLS||12||186 KB|
|Agricultural commodities: June quarter 2020 - Statistics - data tables XLS||32||592 KB|
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