The 2016 wheat seeding season will be an important one for investors, as traders attempt to determine how production and exports will lead to price changes in the markets. There will be a number of factors that may affect the changes to exports, which include fluctuations in the Australian currency, import growth into the world’s second largest economy and the recent installation of the protocol between the governments of China and Australia in December 2014.
Most of Australia’s wheat is grown during the winter season as grain rely on the rainfall pattern that is experienced in the wheat growing regions during this time of the year. The timing of the wheat growing varies by region, while planting and harvesting date vary based on the timing of rainfall. As moisture builds up, farmers will begin seeding in mid to late April when temperatures drop to appropriate levels. Seeding in Australian is usually complete by mid-June but can extend into July.
The harvest season in Australia begins in October in the regions where lower rainfall occurs. Regions that experience higher precipitation will wait until late October or early November to begin their harvesting activities, and can extend in some years into January.
Seeding will take on a more important role in 2016, and with optimal rainfall, could generate a bumper crop. Australian farmers have adopted higher rates of seeding as part of an integrated weed management strategy. Higher seed rates do not necessarily result in higher plant density, but the strategy has become widely accepted.
The increase of seed rates has been adopted following a protocol that was installed between the governments of China and Australia. This wheat protocol was based on Chinese requirements for trade of wheat from Australia.
The protocol was implemented by both Australia and Chinese in February 2015 and it was agreed that Chinese importers as well as Australian growers, would adhere to the new rules outline by officials of Australian and China.
With seeding rates increasing, traders will be carefully watching rainfall throughout the growing season. A stronger than expected yield could overwhelm demand and generate headwinds for prices. In addition, the combination of a declining value of the Yuan and a stronger value of the Australian dollar could make products coming from Australian much more expensive. A higher overall currency value could reduce demand from Australia, generating price declines for Australian wheat.
There is also more competition, and the recent increase in the Australian currency by near 4% in 2016, might be considered unwelcome. The U.S. has also become a competitor in the grains space. According to the US Department of Agriculture, Chinese imports increased beginning in 2011 and has expanded and in the past decade has risen more than 125% until 2015. In 2015, China purchased nearly $25.9 billion in U.S. commodities, accounting for about 16% of all U.S. agricultural exports.
Chinese imports of U.S. commodities are projected to decline to approximately $17.5 billion for the fiscal-year 2016. Imports in general into China have experienced recent contraction. According to officials, Chinese imports declined by 18.8% in January, one of the weaker showings in nearly 2-years. In December, imports fell 7.6%, contracting for the 14th straight month. Exports also declined in China, which produced a $60.09 billion trade surplus for December.
In closing, the Australian seeding season will be watched carefully given the new protocol, and the potential for over-seeding to potentially generate higher yields than in the past. Trades will be carefully trying to predict a scenario where higher yields are combined with a stronger Australian dollar, lower imports into China, and continued exports from the United States. If all signs point to these factors coming into play, traders may be quick to pull bids from the market and let prices fall, before attempting to purchase wheat for harvest beginning in October.
