Wheat quality worries extend to China, supporting Australia export hopes

(AgriMoney) – Australian officials extended the round of forecasts of elevated milling wheat premiums as they added China to the list of countries with needs for higher quality crop.

Abares, the Australian commodities bureau, said that “the margins between milling and feed wheat prices are expected to be larger than usual”, joining the list of observers, most lately the US Department of Agriculture last week, forecasting an unusually high wheat quality premium ahead.

Abares cited the impact of a world harvest which – while record in quantity terms, and upgraded 13m tonnes to 743m tonnes by the bureau – has fallen short in quality in many geographies, in part reflecting high yields, which tend to come at the expense of protein levels, but also weather setbacks.

Indeed, it added China, the world’s top wheat-producing country, to the market’s watchlist of nations whose latest harvest has suffered quality setbacks.

‘Higher imports of milling wheat’

“In China, wet weather hindered the harvest and quality of winter wheat,” Abares said.

The need for higher quality supplies will mean that Chinese wheat imports rise in 2016-17 despite the country holding “burgeoning” stocks of the grain, pegged ending the season up 15% at 90m tonnes.

Besides being a 17-year high, inventories at this level would represent 39%, on Abares estimates.

“Imports of wheat into China are forecast to grow moderately, by 2% in 2016-17,” contrasting with a forecast 2% dip in world wheat trade overall, the bureau said.

“An abundance of lower-quality domestic wheat will constrain feed wheat imports into China, but this is expected to be offset by higher imports of milling wheat for human consumption.”

Export upgrade

China’s needs stand to represent a notable boon to Australia, a major supplier, typically of higher quality wheat, to Asia.

“China in particular is expected to continue importing milling quality wheat from Australia in 2016−17 to supplement its domestic harvest of lower protein wheat.”

This dynamic would be reflected in other buyers too, with Abares saying that overall that “import demand for milling quality wheat is likely to support higher export volumes from Australia”.

Such demand – coupled with prospects of a “bumper” Australian harvest, which the bureau upgraded last week – prompted Abares to estimate the country’s exports in 2016-17, on a July-to-June basis, at 18.40m tonnes, an upgrade of 1.20m tonnes from the previous estimate.

It would also represent a rise of 16.6% year on year, and Australia’s best wheat export performance in four years.

Wetness worries

The forecast assumes, however, a good quality Australian harvest – an outcome over which some commentators have doubts, given the continuation of rains in eastern areas even into the run-up to harvest, when moisture can turn from a help to yields to a threat to milling specifications.

At Commonwealth Bank of Australia, Tobin Gorey on Tuesday that that “the trade’s worries about milling grade supply in eastern Australia” had been “bolstered by a wet weekend”.

He added that Western Australian sources had reported “some suspected frost damage from the weekend that might crimp production in Australia’s western grain region”.