If Australia Stays Dry U.S. Wheat Could Reach New Highs

Much of Australia's wheat growing area is suffering from abnormally dry conditions, which could prompt U.S. wheat to re-challenge record high prices.

Published on: Sep 18, 2007

Global wheat supplies are at record low levels caused primarily by a couple of years of adverse weather. According to Farm Futures analyst Arlan Suderman, every major wheat producing area in the world saw adverse weather at some point during this year. With that came higher prices in an attempt to encourage greater production and ration demand. Although several countries did try to ramp up production, adverse weather hampered their efforts to rebuild supply.

"Unfortunately, wheat being a food grain is an inelastic commodity, meaning it's difficult for higher prices to slow demand for a food staple," says Suderman. "So the world was hoping for a big crop from the Southern Hemisphere in order to meet regular growing demand."

However, Argentina was under a severe drought until the last week when about 80 percent of its wheat belt has received or will receive in the next few days some good rains that will allow at least a decent crop.

Australia has not been so fortunate. At least 30 percent of its wheat belt is under severe moisture stress, with almost the entire wheat belt receiving abnormally low amounts of rainfall over the past few months, so its production estimates continue to decline.

The Australian Bureau of Agricultural & Resource Economics released a new wheat estimate overnight pegging the crop at 15.5 million metric tons. ABARE lowered its estimate more than most analysts had expected. Most were forecasting an estimate of 18 to 19 million metric tons.

"Nothing is guranteed in the commodity market, but I anticipate we will see prices quickly go to new highs," Suderman says.

If the size of Australia's crop comes in lower than current trade estimates, the market has to go to higher levels to try to slow demand to ration out the remaining wheat supply.

"If good rains were received in the next week to 10 days to stop the deterioration of the crop and to salvage a crop, at that point prices could probably confirm a high and begin to work lower," Suderman says. "But we are running out of time for those rains."