Wheat: December quarter 2020
World wheat prices to increase
The world wheat price is forecast to increase by 11% in 2020–21, to an average of US$245 per tonne. Higher prices reflect a fall in production in some major exporting countries in 2020–21, dryness during the 2021–22 winter crop planting window in the United States, the European Union and Russian Federation, and increased global import demand, particularly from China. High global demand for staple wheat products is likely to be partially offset by a fall in demand for discretionary foods which have been affected by weaker global economic growth resulting from COVID-19 containment measures.
However, containment measures have not affected underlying demand for wheat. Milling wheat has few substitutes and is used to produce bread, pasta and other staples. Demand for these products is relatively unresponsive to changes in income. A surge in demand from some major importers in the second half of 2020 may reflect attempts to secure supplies in the face of secondary outbreaks in the northern hemisphere. Demand for higher-value foods derived from wheat flour (cakes, biscuits and pastries) and higher-value meat and dairy products is likely to fall as a result of recurring outbreaks of COVID-19 and the impact of containment measures on economic growth.
Despite the COVID-19 pandemic, movements in supply, demand and stocks have remained the key drivers for price changes in world wheat markets. Wheat export prices increased significantly between early September and November 2020 due to strong global demand and the prospect of declining export availability due to poor seasonal conditions in Argentina and parts of the northern hemisphere. Price volatility is likely to continue until there is more certainty about the size of next year's wheat crop. Past significant sudden price changes, such as during the 2007–08 food price crisis, saw underlying market price movements exacerbated by policy interventions causing prices to spike. Such sudden policy changes have not been a feature of the COVID-19 pandemic.
World production to reach new record
World wheat production is forecast to increase slightly in 2019–20 to reach a record high of around 768 million tonnes in 2020–21. This is despite mixed seasonal conditions in major wheat-producing countries. Increased production in Australia, Canada, China, India and the Russian Federation is forecast to offset lower production in Argentina, the European Union, the United States and Ukraine.
Australian wheat production second highest on record
Australian wheat production is forecast to more than double in 2020–21 to around 31 million tonnes. Ideal seasonal conditions in New South Wales, Victoria and South Australia are forecast to result in above average yields, particularly in New South Wales. This is forecast to be partially offset by less favourable seasonal conditions in Queensland and Western Australia, where limited spring rainfall has reduced yield potential.
If wheat production and export forecasts for 2020–21 are realised, ending stocks will rebuild to around 5 million tonnes, more than double that of 2019–20. Australian wheat supply has been adversely affected by 3 consecutive years of below average production due to drought. Poor pasture growth and the continued expansion of intensive livestock industries during this period resulted in a significant increase in domestic feed demand. A combination of increased demand, low production and high costs associated with importing grain led to 2019–20 wheat stocks falling to a historic low.
Australian exports to more than double
Australian wheat exports are forecast to reach around 21 million tonnes in 2020–21, more than double 2019–20 exports. Improved seasonal conditions have resulted in significantly higher production and lower domestic feed use. This will drive up exports and lower prices in the domestic market.
Growth in world food and industrial wheat use is stable and will continue to increase in line with population growth. At the margins of global wheat markets, uncertainty surrounding the adverse effects on economic growth of COVID–19 containment measures is likely to place downward pressure on demand for high-value foods made from high-quality milling wheats. Demand for high-value meat and dairy products is also likely to be affected by lower economic growth. This will result in lower feed demand for intensive livestock production.
Opportunities and challenges
La Niña event to benefit yields but may impact quality
Higher spring rainfall has generally increased crop and pasture production across southern Australian agricultural regions. The current La Niña weather event has contributed to above average spring rainfall and is forecast to persist until the end of summer, when its impact on southern Australian agriculture will fade. The Bureau of Meteorology's 3-month rainfall outlook (December to February), issued on 19 November 2020, suggests that summer is likely to be wetter than average across most of Australia and higher rainfall will benefit agriculture in northern Australia.
Higher spring rainfall has been beneficial for crops in southern regions, but it has delayed harvest and damaged some crops in parts of Queensland and northern New South Wales. Isolated hailstorms have damaged some crops that were ready for harvest. A wet spring and summer are likely to result in a greater proportion of lower-protein wheat and an increased likelihood of damaged and downgraded grain. Despite this, the overall impact of La Niña has been positive for Australian crop production.
La Niña could lead to lower global wheat production
La Niña events can also result in drier than usual conditions in parts of major cropping regions of the United States, South America, the European Union and the Black Sea (see Seasonal conditions). Drought conditions in parts of Argentina have lowered yields. As a result, forecast production has been revised down from initial estimates of 21 million tonnes to around 17 million tonnes. Planting of the 2021–22 winter crop in parts of the United States, the European Union and the Russian Federation have been affected by dry conditions. If this continues, production is likely to be lower. Lower exportable supplies in these major exporters is likely to result in higher global prices.
Potential ban on Australian wheat exports to China
China may impose trade restrictions on Australian wheat exports similar to those imposed on barley and other commodities. Historically, China has not been a significant market for Australian wheat exports. High domestic grain prices are expected to result in China's total wheat import demand being the highest in 25 years, at 8 million tonnes in 2020–21. This demand is likely to be met by wheat exports from the United States and the Black Sea region. Smaller exportable surpluses from these major exporters will provide Australia with an opportunity to meet demand in other markets.
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