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Drought Sends Australian Wheat on a World-Beating Rally

Drought in Australia is sending local wheat on a rally that’s beating gains in global prices, which are being driven by dryness and soaring temperatures in Europe and the Black Sea.

Not only that, eastern Australian wheat’s 20 percent surge last month beat all 22 raw materials in the Bloomberg Commodity Index, as the southern hemisphere’s biggest exporter had its driest July since 2002 and fifth-warmest on record. On the Chicago Board of Trade, hard-red winter wheat climbed 14 percent and the soft-red variety rose 10 percent.

After consecutive years of bumper harvests, global wheat output is set to fall to a three-year low on smaller crops in Europe, the Black Sea and the first drop in Russian output in six years. Australia in June predicted wheat production at 21.9 million metric tons, about 3 percent bigger than last year’s harvest, which was the smallest in a decade. National Australia Bank Ltd. warned last month that output could fall below 20 million tons due to “tough” conditions in many parts of the country.

“The persistent dry weather in Australia’s northeast cut summer grain production, and now that means the 2018 winter crops are likely to be modest at best,” said Tobin Gorey, a strategist at Commonwealth Bank of Australia. “Adding to the tightness is the demand for feed in eastern Australia. The same dry weather means pasture and forage growth has also been poor.”

Prices declined 0.8 percent to A$384 ($283) a ton on Thursday. In the U.S., hard-red winter wheat rose 0.6 percent to $5.6725 a bushel and soft-red advanced 0.6 percent to $5.6175 a bushel.

Coast to Coast
New South Wales, the country’s second-biggest wheat producer, had the driest July since 2002 and fifth-driest ever, according to Australia’s Bureau of Meteorology. About 99 percent of the state is affected by drought, prompting a A$500 million ($370 million) relief package from its government. Western Australia, the top wheat grower, has offered some optimism as rainfall in July may help boost yields even with average conditions for the rest of the year.

The worsening production outlook also threatens to tighten exports. Shipments to buyers in the Indian Ocean and northeast Asia may drop as Australia’s freight advantage declines, according to CBA’s Gorey. Australia’s government forecasts exports at 15.2 million tons in the year that started on July 1, the lowest in nine years. With some estimates of about 16 million tons, “we think the number is likely to be 3 million tons less, and with downside,” Gorey said.

There’s little relief in sight for farmers as hot and dry conditions are set to continue between August and October. There’s a more than 80 percent chance of a drier period for southern New South Wales and northern Victoria, according to the weather bureau. Large parts of northern and eastern Australia have an 80 percent likelihood of warmer days.

A looming El Nino may further stoke production concerns, with Australia on watch for the weather pattern that typically brings drier weather to the country’s east. Most climate models indicate the tropical Pacific Ocean will resume warming in coming weeks, with five of eight models showing El Nino levels will be reached in the southern hemisphere spring.

Source: Bloomberg

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