WA door open as US crops fail

The drought gripping the Mid West of the United States could be good news for WA growers.

Speaking at a breakfast hosted by Rabobank, Chicago-based grains market commentator Dan Basse, who is also the president of the AgResource Company, said WA growers could be the beneficiaries of poor crop conditions in the US and across the former Soviet Union.

The drought in the US is the worst in decades and last week the US Department of Agriculture (USDA) slashed further its harvest expectations for corn and soybeans.

The nation's corn crop is now expected to total just 10.8 billion bushels and with an average yield of 123.4 bushels per acre - the lowest in 17 years.

Just a month ago the USDA predicted a soybean haul of 3.05 billion bushels but that too has been slashed to 2.69 billion bushels.

However, US wheat production expectations were increased by 1.2 million tonnes.

The news has done little to give wheat prices an immediate boost but Mr Basse said the US situation was likely to worsen.

"We don't think USDA caught all of the yield decline in corn or soybeans and with an arid pattern continuing through August we think the crop size will continue to drop," he said.

"In Illinois they are expecting a zero yield from 17 per cent of all cornfields."

And as adverse conditions and drought continue to impact crops in the former Soviet Union, analysts are bracing for Russia to stop exporting grain.

Romania, Bulgaria, Ukraine and Kazakhstan have all cut yield expectations and Mr Basse said it would not be long before Russia took action to shore up its own food supplies.

"With Russian wheat and flour prices at record highs, the pressures are building on President Vladimir Putin to do something," he said.

"We would imagine by October, after the Russians export some grain, he will be forced to close trade, either through higher export taxes, duties or some kind of direct ban."

Should that occur, it would leave the world market with just Australia, Canada and the US as significant suppliers of wheat and create a price spike.

High-protein milling wheat will be in short supply and Mr Basse said considering the issues with the US corn crop, strong demand for feed wheat would emerge, particularly from the Chinese.

For that reason, Mr Basse is recommending that WA growers hold off on forward selling more grain.

"You may have some forward portion sold but I wouldn't want to be aggressive at this point," he said.

"If we're correct, the high in the US and world market should come between October and November, which would be nearly identical to the Australian harvest."

But the good times will not last forever and Mr Basse said biofuel crops, which have competed for US acreage with food crops in recent years, would lose their prominence.

In his presentation, Mr Basse said the US had managed to use far less crude oil than the Government had anticipated, and consequently ethanol demand had fallen.

"US consumers have driven fewer miles and become more conservative on gasoline consumption," he said. "All this has led to a stabilisation in the ethanol profile and we think some decline - the US has fallen out of its love affair with ethanol.

"Biofuel will no longer carry the grain markets to higher highs as it has in the past when we were always increasing demand and increasing consumption rates."

Mr Basse believes the US agricultural sector will now devote more land to food crops, which will decrease competition and ultimately negatively impact on wheat prices.

"If you want to be bullish, the only other remaining driver (of wheat prices) we see is China in terms of its rising caloric intake and its potential for extra grain imports," he said.

"But unlike biofuels, China comes and goes and it's not the same kind of bullish phenomenon we had with biofuels.

"We will see continued volatility but in a lot of cases, once this high is completed, the volatility will be to the downside.

"After we see a high this fall or the period between September and November due to the drought loss in the US and Russia, we will see prices retreating if normal weather comes around. We think that retreat could maybe last 18 to 24 months at the minimum."

Ultimately, Mr Basse is predicting global wheat demand will remain stable but supplies will rise.

Rather than forward selling tonnages for this season, he believes WA growers may gain more from forward selling grain for the 2013-14 season.

The big question now for US growers is what will happen with winter wheat plantings?

"We start planting the winter wheat crop in late September," Mr Basse said.

"If we don't get a change in the weather pattern, that next crop of US wheat will be impacted by the drought also.

"It's a little difficult to know what it means for production but anxiety will be the big topic in terms of will we have enough going forward."

He said that surprisingly weather records dating back to the Civil War showed the US had never suffered back-to-back droughts.