Australian wheat prices hurt by deregulation, financial crunch
Australian Prime Wheat is quoted at US$40 a tonne below futures on the Chicago Board of Trade at ports along the country's east coast, said Brett Stevenson, managing director and analyst with advisory firm Market Check at Agrisk Management Pty. in Sydney. Such a discount is "historically quite hefty" and "may widen once the harvests swing into full force in mid-November,'' he said.
"Australian wheat has become quite discounted compared with the international price," Stevenson said. "The trouble is we've got both deregulation and the credit problem."
The wheat marketing year started June 1 is the initial year that Australia deregulated its wheat sales system. The country will allow multiple groups to ship the grain from this harvest after it stripped AWB Ltd.of its monopoly on overseas shipments.
Wheat prices in Chicago have dropped to the lowest in about 16 months. The contract for December delivery traded at US$5.6750 a bushel today, 58 percent off a record US$13.495 a bushel February 27.
Cash-strapped farmers may rush to sell the grain once "the bulk of the harvest gets started," Stevenson said. Still, merchants, those who buy from farmers and sell overseas, may be reluctant to hold too much inventory in the current credit environment, he said.
Farmers have just started harvesting in Queensland and the northern part of West Australia. The harvest season runs from November to late December and early January, he added.
The last time Australian wheat fetched a discount lower than the current level was in January 2006, when the grain was selling for US$50 a tonne below Chicago futures at ports, Stevenson said, adding "2006 Australia had a big crop.''
The drought reduced grain production in the past two years. The nation is still seen to be the world's third largest exporter this year, according to the US Department of Agriculture, as production rebounds from the dry spell. The US is still the largest exporter, followed by Canada.
But for the basis to be so discounted so early in the harvest is very unusual, especially when the world is so short of milling wheat, said Stevenson. The result could be a combination of "farmers wanting to sell to get their money" and the limited "ability of merchants to fund their buying" because of the tight credit environment, he added.
Discounts may only start to narrow later in the harvest cycle and when "the world realizes that the Australian crop is smaller than we originally expected it to be,'' Stevenson said.
Australia is estimated to harvest a crop of 19 million tonnes, up from 13 million tonnes last year, he said. That's lower than the 25-26 million tonnes forecast by analysts and some 11-12 million tonnes might be sold to overseas markets, he said.