Wheat: March quarter 2021
Prices to fall and ease further over the medium term
The world wheat indicator price is forecast to average lower at US$250 per tonne in 2021–22, down from US$255 per tonne in 2020–21. Lower prices are forecast to result from higher production in Argentina, the European Union, Ukraine and the United States and a fall in import demand following a surge in 2020 as a result of COVID-19 uncertainty.
World consumption is forecast to increase to a new record in 2021–22. Demand is expected to continue increasing over the medium term in line with population growth, changing diets and rising incomes as economies recover from the impact of movement restrictions put in place to control COVID-19. However, prices are projected to fall gradually (in real terms) over the projection period to 2025–26 as world supply grows faster than demand. This assumes there are no significant shocks to global production over the projection period.
Medium-term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian wheat are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat-sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of around deciles 3 to 4. For a more detailed explanation see the Agricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is still assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.
Wheat demand to rise with population growth
World wheat consumption is forecast to increase in 2021–22 to a new record and continue to increase over the medium term to 2025–26. In recent decades, demand for staple foods such as wheat has increased in line with population growth, particularly in developing countries. World consumption of milling and feed wheat now accounts for 90% of total wheat use.
Because milling wheat has few substitutes, demand for wheat has not been significantly affected by COVID-19 containment measures. Lockdown measures imposed by many countries affected demand in the hospitality sector. However, this was largely offset by strong consumer demand for food staples such as bread, pasta and flour for home cooking.
A surge in demand from some major importers (Algeria, Bangladesh, China, Egypt and Indonesia) in the second half of 2020 and January 2021 reflects attempts to secure supplies in the face of subsequent COVID-19 outbreaks in the northern hemisphere. Demand for higher-value foods derived from wheat flour (biscuits, cakes and pastries) and animal products (meat and dairy products) may fall further as a result of further outbreaks of COVID-19 and the impact of containment measures on economic growth.
Demand for feed wheat is price sensitive because of competition from substitute feed grains (barley and corn). Stronger global demand for all feed grains, including wheat, has been affected by a recovery in Chinese feed demand. China's pig herd is rebuilding after the spread of African swine fever, and feed demand from its poultry and dairy sectors also continues to grow. Over the medium term, global feed grain demand is projected to continue to increase as a result of projected higher meat and dairy production. The rate of demand growth is uncertain because of uncertainty in the pace of global economic recovery from the impacts of COVID-19 containment measures (for alternative scenarios see the Economic overview).
World production to increase throughout the medium term
World wheat production is forecast to increase to a third consecutive record of around 780 million tonnes in 2021–22. This largely reflects a forecast return to average production in Argentina, the European Union and the United States after poor production in 2020–21.
Area planted to wheat in the European Union is forecast to increase by 7% to around 25.4 million hectares, mainly driven by increases in France and Germany. Seasonal conditions across the European Union are generally good. However, there is concern about excess rainfall in southern Europe and a lack of winter hardening against winterkill in south-eastern Europe. Production in 2021–22 is forecast to increase by 13%, rebounding from the drought-affected harvest of 2020–21. Over the medium term, area planted to wheat is forecast to remain relatively stable.
India is estimated to have planted a record 34.6 million hectares of wheat in 2021–22. The continued expansion in area planted is a result of mostly favourable seasonal conditions and high support prices. Indian Government support for wheat producers is expected to continue over the projection period, keeping area planted at high levels.
In the United States, sowing was complete by November 2020. Area planted increased by 5% from the record low of the previous season as a result of high wheat prices at the time of planting. The area planted to hard red winter wheat increased by 4% and soft red winter wheat by 12%. Dry conditions to date mean that spring rainfall will be critical in many states. An unusually cold freeze in mid-February may affect dormant crops. Over the medium term, the area planted to wheat is forecast to remain relatively stable.
In the Russian Federation, sowing of winter wheat was complete by late November 2020 and is estimated to be slightly lower than the previous year. Dry conditions in the south and minimal rainfall in the Volga and Central Federal districts at the time of planting may have a negative impact on yields. Recent heavy snowfall will benefit crops by insulating them from winterkill and replenish soil moisture in spring. In Ukraine, area planted is estimated to be lower in 2021–22. Lack of early season rainfall in some areas has affected the condition of now dormant wheat crops. Spring rainfall will be critical for Black Sea production.
Over the medium term, the area planted in the Black Sea region is forecast to remain relatively constant. Production is forecast to continue to grow as investment in infrastructure and agricultural technology boost productivity and yields.
In other major producing regions such as Argentina, Australia, Canada and China the area planted to wheat is expected to remain relatively unchanged. Increased production in these areas will be the result of modest but steady productivity growth of around 1% per year.
Australian production to fluctuate with seasonal variability
Area planted to wheat in Australia in 2021–22 will largely depend on rainfall received between February and the end of autumn (May 2021). However, following a late-forming but moderate La Niña in 2020–21, production outcomes across much of the country for 2021–22 are more likely to be average to above average due to higher soil moisture levels at planting. Wheat production is forecast to fall in 2021–22 to around 25 million tonnes, reflecting a return to more average yields from the record highs achieved in 2020–21, particularly in New South Wales and Victoria.
Area planted to wheat generally accounts for over 50% of total winter cropping area, followed by barley at around 20% and canola at between 10% and 15%. The remaining area is planted to pulses and other crops. Over the medium term, the area planted to wheat is forecast to remain relatively stable and will be determined by seasonal conditions and the profitability of wheat relative to other winter crops.
Scenario analysis highlights uncertainty of supply
The upside scenario for wheat production would likely result in a new record. The area planted to wheat would increase from the high level planted in 2020–21 because of forecast high wheat prices combined with favourable soil moisture. Above average in-crop rainfall (assuming it is evenly distributed across all states) would likely result in above average yields. In this scenario, Australian wheat production, exports, gross value of production (GVP) and closing stocks would be higher in 2021–22 than seen in the forecast. Wheat production is projected to be below average in 2022–23, followed by a return to average production for the remainder of the projection period.
In the downside scenario, 2021–22 wheat production, exports, GVP and closing stocks would be lower than the baseline. Closing stocks in 2025–26, although low, would be unlikely to reach the historically low level of 2019–20. This low level of stocks was the result of 3 consecutive years of below average production (2018–19 and 2019–20 were particularly low), combined with a surge in domestic feed demand. Australian wheat stocks are forecast to be replenished in 2020–21 as a result of estimated record production.
Opportunities and challenges
Climate variability and its impact on prices
A significant proportion of global yield increases are a result of technological advances in genetics and the widespread adoption of improved farming practices. However, seasonal conditions remain the most important influence on the variability of agricultural production from year to year. More variable climatic conditions are expected to increase the variability of wheat yields and production in the future. The breeding of drought-tolerant and higher-protein varieties, adoption of improved agronomic practices for conserving soil moisture and increased fertiliser application will result in productivity gains despite adverse changes in climate.
Changes in global supply are the key determinant of world wheat prices. The projection of declining real prices over the medium term assumes seasonal conditions in major producing countries will lead to roughly average production outcomes. However, increasingly variable climatic conditions mean that over the 5 years to 2025–26, one or more of the major producers is likely to experience well above or below average seasonal conditions. This will add variability to the projected trends in production, exports and world prices.
Russian export taxes
Despite estimates of record wheat production in 2020–21, Russia imposed a wheat export tax of 25 euros per tonne starting 15 February in an effort to stabilise domestic food inflation. This export tax rose to 50 euros per tonne on 1 March and is intended to stay in place until 30 June. Russia will also impose export taxes on barley (10 euros per tonne) and corn (25 euros per tonne) from 15 March. In early February 2021, Russia announced it was setting a permanent formula-based export tax on barley, wheat and maize, effective as of 2 June 2021 The wheat tax will be 70% of the difference between the export price and US$200 per tonne. For example, if the export price is US$300 per tonne, the tax will be US$70. These taxes are on top of export quotas announced in 2020. Together, these trade restrictions will curtail the availability of Russian grains on the world market, providing an opportunity for grains from other countries, including Australia, to meet global import demand. There is some uncertainty about the impact of these taxes and how long they will be in place.
Australian exports competitively priced on world markets
Australia is estimated to have produced the biggest wheat crop on record in 2020–21 as a result of favourable seasonal conditions, particularly in New South Wales, Victoria and South Australia. Australian marketing year exports (October to September) are forecast to more than double to 21 million tonnes. This is the highest since 2016–17 and 22% above the 10-year average to 2019–20.
During the drought, low supply, increased domestic use, and high costs associated with importing grain resulted in high Australian wheat prices and low exports. Australia's major markets in South-East Asia, particularly Indonesia (the world's second-largest wheat importer) sourced wheat from other origins, including Argentina and the Black Sea region, to satisfy their import demand. With a significant increase in supply in 2020–21, Australian wheat prices are now competitive compared with other origin wheat, providing an opportunity for Australia to regain market share in our traditional export markets.
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