November 2, 2012

Australia's declining wheat shipments to affect global exports

After droughts withered crops around the world, the deepest slump in Australian wheat exports in six years will aggravate the biggest decrease in global exports in a generation.

Sales by Australia, last year's second-largest supplier, will tumble 31% to 17 million tonnes in the 12 months through September 30, based on the median of seven analyst estimates compiled by Bloomberg. The prediction is one million tonnes lower than forecast by the USDA. The most widely held option on the Chicago Board of Trade gives holders the right to buy the grain for delivery in December at US$10 a bushel, or 16% more than now, bourse data show.

A lack of rain is also curbing corn and soy harvests, driving futures to records and contributing to the highest global food costs in six months, United Nations data show. Countries will spend more than US$1 trillion on food imports for a third year in 2012, the UN estimates. Wheat surged 32% this year, the most since 2007, after dry weather in the US, Europe and Australia. The USDA expects worldwide exports to drop 16%, the biggest decline since 1986.

"The rain didn't come until late," said Maitland Davey, a 69-year-old who farms 3,700 acres northeast of Perth, the capital of Australia's biggest exporting state. "I hate ripping that ground up dry, dust just flying everywhere," he said, predicting a 30% decline in his harvest this year.

Wheat traded at US$8.645 on the Chicago Board of Trade Wednesday (Oct 31) and averaged about US$7.41 this year. Futures may climb 7.6% to US$9.30 by the end of 2012, the median of 16 trader and analyst estimates compiled by Bloomberg shows. The Standard & Poor's GSCI Agriculture index of eight commodities rose 12% this year, and the MSCI All-Country World Index of equities gained 9.9%. Treasuries returned 1.9%, a Bank of America Corp. index shows.

Global wheat production will drop 6.1% to 653.1 million tonnes this marketing year, steeper than the 2.5% decline in demand to 678.2 million tonnes, the USDA estimates. That will reduce stockpiles by 13% to 173 million tonnes, the smallest since 2009, the agency says. The London-based International Grains Council said October 25 that combined grain stockpiles in the largest exporters will drop to a 17-year low.

The USDA's estimates may still be too optimistic. While the Washington-based agency expects Australian output to be 23 million tonnes, the median in a Bloomberg survey of six analysts and traders was 20.8 million tonnes, implying a decline of 30% on a year earlier and the lowest since 2008. Surging prices may curb consumption more than the USDA anticipates. Demand contracted 3.5% in 2004 after futures advanced for four consecutive years. Livestock farmers, who use wheat in feed, are accelerating slaughter rates because the jump in grain prices eroded margins. US pork inventories on September 30 were the highest for the period since the USDA started compiling the data in 1915. Farmers historically have responded to rallies by planting more crops the following season.