IKAR in Mass and Industry Media

OPINION: Russian production cuts is good news

farmweekly.com.au

WITH the harvest of European, Black Sea and United States' spring crops underway, the Russian crop has thrown up a bit of a surprise.

USDA estimates that 28.5mmt of wheat will be produced this season, but if favourable conditions persist, production is more likely to be above 30mmt

Respected Russian agriculture consultancy Sovecon recently cut its wheat production forecast by 5.9 million metric tonnes (mmt) to 76.4mmt on the back of a reduction to area harvested, as well as anticipated lighter yields.

If accurate, this would be a 10 per cent reduction on the 85.4mmt of wheat produced in 2020/21.

While Russian wheat production forecasts vary - S&P Platts Analytics estimate 83.3mmt, Russian Ministry of Agriculture 80.7mmt and IKAR consultancy 78.5mmt - the consensus is that the current US Department of Agriculture (USDA) estimate of 85mmt is too high and is likely to decline in subsequent reports.

So, what does this mean for global supply and demand balances?

Using current USDA estimates, table 1 shows that wheat ending stocks are forecast to increase one per cent on last year

But applying Sovecon's downgraded forecast changes things significantly, One assumption in table 2 is that production estimates in other major exporting countries don't change.

At this stage, the only country with significant upside to 2021/22 production is Australia.

USDA estimates that 28.5mmt of wheat will be produced this season, but if favourable conditions persist, production is more likely to be above 30mmt.

Another assumption for Russian ending stocks is that Russian exports, which the USDA has pegged at 40mmt, doesn't change.

This is highly unlikely given Russia's floating wheat export levy introduced to protect domestic supplies.

This is where the good news comes in for Australia.

This season we've seen the effect of reduced European and Ukraine production, with Russian wheat having to fill the gap.

This opened opportunities for Australian wheat into Africa and increased demand from Asian markets from previous drought seasons.

European Union and Ukraine wheat production are forecast to increase 10pc and 18pc respectively from last year which more than makes up for reduced Russian supply.

While we may not see the same level of demand from African countries next season, opportunities will still exist and with rising freight rates Australian wheat will hold market share in South East Asia.

Russia accounts for about 20pc of global wheat exports which means movements in Russian prices have significant impact on global prices.

After Chicago Board of Trade (CBoT) wheat futures softened late July, a combination of reduced Russian production and continued poor conditions across North America saw CBoT wheat futures gain about $50/t.

Australian wheat normally trades at a premium to overseas values, but in years of high production, basis (the difference between Australian and CBOT wheat) turns negative as it is now.

This means, with another good production year forecast, Australian wheat is likely to follow the trends of international values.

Russia reduced its export wheat tax in July, dropping from US$41.20/t to US$31.40/t at time of writing.

However, any increase to Russia's wheat export tax would place upwards pressure on global prices, with Australia likely to follow suit.

Australian wheat prices will come under pressure as harvest nears, particularly if current production estimates hold up.

However, while it's probable basis will remain negative for the upcoming season, high prices overseas should support Australian prices and provide above average returns compared to other seasons of similar production.

https://farmweekly.com.au/story/7379183/opinion-russian-production-cuts-is-good-news/

12.08.21

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