WHILE current subdued prices are providing a significant challenge for the Australian wheat industry, the longer-term price outlook is more positive, an international specialist on the global grains market has told local growers.
Luke Chandler, global head of Agri Commodity Markets Research for Rabobank in London, says lower global wheat plantings forecast for next year were likely to set the scene for some price recovery in 2010-11.
“There are increasingly positive signs that we will see some upside for prices in 2010-11, as production around the world is adjusted downwards with growers responding to the current lower price signals, resulting in reduced supply,” he says.
“In addition, we are starting to see some improving signs for demand from biofuels and Middle East imports, although supply levels remain more than adequate at present.
“Wheat prices have effectively been reflecting the bearish fundamentals following two successive seasons of record world production.
"The commodity price boom of early 2008 saw a sharp upturn in wheat plantings around the world.
"That, together with favourable seasonal conditions, have resulted in the largest and second largest world crops on record during the past two seasons.
"Nothing kills high prices like high prices and this production response has contributed to the massive collapse we have seen in prices since then.”
Mr Chandler said reduced wheat production next season was likely to see global stocks left unchanged, or possibly lower, in 2010-11 – the first time stocks would not have increased in three seasons.
“And this is without a drought occurrence somewhere in the world,” he says.
This would likely see some upside for prices next season with Rabobank forecasting nearby CBOT wheat futures to reach $US5.50 a bushel by mid 2010 or to $A220 per metric tonne at current exchange rates.
Mr Chandler, who was in Australia recently as part of Rabobank's Visiting Experts program, warns that world agricultural markets had entered a new era of price volatility, with speculative investors playing a key role in driving price moves.
"This development was likely to remain a key function of world commodity market volatility."
Price volatility had “exploded” since 2008 because of the flow of outside money, with trading ranges far greater than they had been in previous years.
This has made price risk management increasingly important for the grains industry from grower through to end user, he says.
Mr Chandler says longer-term demand drivers such as "Chindian" (China and India) demand would be the driving force for future global demand for agricultural commodities.
“The GDP growth rates in China and India, along with Russia, are seeing these countries have a rapidly increasing percentage share of world GDP. The economic growth in these countries – along with their enormous and growing populations – is fuelling the growing demand for agricultural commodities,” he says.
Commodities such as soybeans – key in animal feed and edible oil – are particularly in demand as a result.
“While the Chinese are self-sufficient in wheat and corn for example, they are a significant net importer of soybeans from the US and South America.” Mr Chandler says.
Mr Chandler also spoke about the increasing influence of the Black Sea countries of Russia, Kazakhstan and the Ukraine, and the potential to further ramp up production of wheat and other grains increasing their importance for world trade.
“They could do this very easily if they sort out the barriers they have which are slowing development there such as political and financial risk and logistical issues,” he says.
“There is a lot of potential there. They have some great soil and the yields can be phenomenal. The land is cheap and they have attracted a lot of attention for investment from western Europe and elsewhere however the on-going risks remain.”
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