Markets jittery over Aussie drought

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Published: September 13, 2007

Australia’s searing drought is igniting a fire under wheat prices.

“It’s extremely critical in Australia,” said Canadian Wheat Board weather and markets analyst Bruce Burnett.

“If they don’t get the rains in the next two to three weeks, crop yields are going to drop quite dramatically.”

Good rain at seeding time encouraged planting of a large area, but conditions turned dry in many areas of Australia in August and stayed that way in September as the crop moved into its critical heading stage.

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Forecasters have downgraded early projections of an Australian wheat harvest of 23 million tonnes, with some projecting a maximum of 20 million tonnes and others suspecting that a 15 million tonne crop is possible, with implications for global wheat supply.

The International Grains Council expected in late August to see world wheat stocks by the end of 2007-08 fall to 112 million tonnes, the smallest amount since the early 1980s.

But that was before Australia’s problems became acute and the next report will likely shrink year end stocks further.

A Rabobank report says Australia should produce 15 to 19 million tonnes of wheat this season, although there is “risk to the downside if conditions remain dry over coming weeks …. The first two weeks of September will be critical in determining the size and quality of the grain crop. Without rain, some regions will soon begin to sacrifice crops to grazing.”

Because of Australia’s problems, U.S. wheat analysts expect to see their country’s wheat exports continue at a rate about double last year’s.

“We’ve had huge export numbers every week – 80 percent higher than last year’s,” said Erica Peterson of the North Dakota Wheat Commission.

The impact on Canadian farmers can only be good.

The CWB raised wheat and durum prices in its recent Pool Return Outlook, partly because of poor crop prospects in Canada and the northern United States, but also because of the Australian drought.

It all adds up to a stunningly different situation than the one that confronted Agriculture Canada wheat analyst Glenn Lennox in May, when he published a wheat situation report.

He thought then that “for 2007-08, world wheat prices will be pressured by increased supplies in the major exporting countries.”

He chuckles now when he looks back at that forecast.

“There are a lot less supplies than there were in May,” he said.

Australia knocks the supply and demand ball out of the ballpark, and no one knows where it will land.

“It’s making price forecasting rather interesting because … we’re in record low (stocks) territory. How do you extrapolate from that?”

Market watchers are also keeping an eye on Argentina, which is a few weeks behind Australia in terms of crop development.

Between now and next summer, the only significant wheat crops that come to market are in Australia and Argentina, so the world will be keenly interested in what happens to the two major southern hemisphere crops.

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Ed White

Ed White

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