Weather gods hold price key for Aussie farmers' fortunes

Melissa WilliamsCountryman
The West logo

A leading US-based grain marketing consultant has predicted an almost $US2 a bushel - or up to $73 a tonne - rise in already surging Chicago wheat futures as the drought across that country's grainbelt deepens without any relief in sight.

Mike Krueger, of The Money Farm in Fargo, North Dakota, said Australian farmers would capitalise on bullish wheat prices if they met forecast production levels.

He said if Australia failed to deliver its estimated 24 million tonne 2012 winter wheat crop, which would be 18 per cent lower than in 2011, global grain supplies would remain seriously tight.

Corn futures prices in the US hit a record high on Monday of $US8.10/bu, or almost $320/t, and September Chicago Board of Trade wheat futures lifted 10 to 12USc/bu to $US9.24/bu, or about $340/t.

Mr Krueger predicted corn prices could jump to $US9/bu, or $354/t, and wheat to $US10.50 to 11/bu, or $386 to 404/t, in coming months.

In WA, AWB daily contract prices for 2011-12 fixed grade H1 wheat reached $319 to 325/t early this week and $299 to 305/t for APW2. For the 2012-13 season, AWB's fixed grade APW2 was trading about $333/t.

Mr Krueger said the US Department of Agriculture (USDA) had revised down its 2012-13 US wheat estimates from about 50 million tonnes to 43 to 45 million tonnes.

He said, coupled with reports that Russia's wheat harvest could fall to 41 to 42 million tonnes or lower, the world's wheat supply could contract to levels much lower than was anticipated as recently as two months ago.

He said the USDA's latest world wheat ending supply estimate in July was 182 million tonnes, but likely increased feed wheat consumption in the US on the back of the worsening drought could reduce this to 157 to 162 million tonnes.

He said almost 77 million tonnes of that carryover - or nearly 50 per cent - would be in China and India.

"If dry conditions persist in wheat growing areas of WA, this will further impact on global wheat stocks," he said. "The world wheat outlook is joining that of corn and soybeans.

"And most of the world doesn't understand just how serious the super tight supply situation is for corn and soybean, with production issues in the US, Argentina, Brazil and the Black Sea region.

"I think we will see several months of good strong (grain) prices as a result, which is positive news for grain growers in Australia."

While Australia's wheat crop represents a small portion of total annual global wheat production of about 660 million tonnes, as one of the biggest wheat exporters it has a major influence on world trade and stocks.

A poor spring and subsequent lower yields across the country could have big repercussions in global markets.

And the latest August-October rainfall outlook from the Bureau of Meteorology points to an increased likelihood of drier than average conditions persisting into mid-spring for big crop producing areas in central WA and south-east, central and north-eastern Australia.

Across the globe, in the past week, the US drought has intensified at an unprecedented rate in the heart of the corn belt in Nebraska, Iowa, Illinois, Indiana and Ohio and further south in the major livestock areas of Kansas and Texas.

The US Drought Monitor reported an almost threefold increase - to almost 30 per cent - of areas experiencing extreme drought in the nine Midwestern states responsible for three quarters of the country's corn and soybean production.

It said almost two thirds of continental US was now suffering drought conditions, which was the biggest area recorded since the Drought Monitor project started in 1999.

Mr Krueger said scattered rain last weekend reached only 10 to 15 per cent of the corn belt, the outlook for rain for the coming 10 days was poor and high temperatures were forecast to persist.

He said strong and rising grain prices were reflecting anticipated crop shortages - made worse because the 2012 corn crop had been predicted to be the biggest ever in the US - and this was also starting to impact on cattle feed and production, ethanol production and food sectors.

"We will have to have significant rationing of the corn crop for livestock and I think we can expect to have a sharp decline in cattle, pig and poultry herds due to lack of feed," he said.

"Meat prices have been high, but we may see these falter as a liquidation of livestock takes place.

"But eight months from now, the US will face a big shortage of livestock."

The US cattle inventory at 97.8 million head is understood to be the lowest since the USDA started a July count in 1973.

Mr Krueger said there had been some suggestions about importing corn and soybean from Brazil to the US for stock feed, but it was becoming clear Brazil would be unable to supply sufficient volumes.

He said US President Barack Obama was calling for Congress to open protected land for grazing and had called on crop insurance companies to forgo interest charges to help farmers hit by the drought.

"The federal crop insurance program will protect grain grower incomes, but there is no similar insurance scheme for livestock people," he said.

In the southern state of Kansas, beef, dryland wheat and maize producer and farm consultant Roy Dixon said when farmers could import corn from Brazil cheaper than US corn, things were getting critical.

He said summer corn, wheat, soybean and alfalfa hay crops across northern and southern Texas, Oklahoma and Kansas were badly drought affected and many would not be harvested due to poor yields.

"Bumper winter wheat crops in Kansas were also hit with hot weather at the pre-harvest milk phase in June this year and yields fell more than 75 per cent," he said.

"Corn and other summer crops are now at their peak of production and are being hit with excessively high temperatures and no rain."

Mr Dixon said feed grain costs were soaring, up from $85 to 90/t to $200 to 300/t, which was unaffordable for dairy producers, feedlotters and cow-calf units.

"We are losing $240 to 290/head in feeding and selling cattle in good condition and we are now seeing record numbers of stock being slaughtered - including good-quality cows - and farmers selling out," he said.

"It will take us eight to 10 good or above average wet years to recover pastures and stock numbers coming out of this drought.

"For survival, the US will have to rely on certain levels of imports of livestock for finishing and meat until we do recover."

The USDA last week issued retail price forecasts for 2013 that show impacts from the drought.

It said consumers could expect to pay 3 to 4 per cent more for their groceries later this year and into 2013.

Ephraim Leibtag, of the USDA's Economic Research Service, said the 2013 numbers reflected higher-than-average inflation, which was partly a function of the drought and partly higher crop prices.

In Australia, there have been estimates of bread prices climbing 10 per cent by the end of 2012, eggs costing an extra 50 cents/dozen and beef costs going up on the back of high grain prices as a direct result of the US drought.

Get the latest news from thewest.com.au in your inbox.

Sign up for our emails