IN FOCUS: WHEAT PRODUCTION OUTLOOK JULY 2017

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1 IN FOCUS: WHEAT PRODUCTION OUTLOOK JULY 217 Author Phin Ziebell, Agribusiness Economist Photo Carl Davies CSIRO

2 Sunset at Euroa, Victoria Photo Mai Thai CONTENTS 3 Summary and forecasts 4 Planting conditions 5 Climate outlook 6 Appendix I: Methodology 8 Appendix II: Monthly rainfall in wheat regions CONTACTS Phin Ziebell Alan Oster Riki Polygenis Khan Horne Justine Dimond Agribusiness Economist Chief Economist H-O Australian Economics General Manager Senior Consultant +61 () NAB Agribusiness +61 () Important Notice This document has been prepared by National Australia Bank Limited ABN AFSL ("NAB"). Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, NAB recommends that you consider whether the advice is appropriate for your circumstances. NAB recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it. Please click here to view our disclaimer and terms of use.

3 SUMMARY AND FORECASTS KEY AUSTRALIAN WHEAT FORECASTS NSW VIC QLD WA SA TAS AUS Area ha Yield (t/ha) Production < AUSTRALIAN WHEAT PRODUCTION Million tonnes 4 El Nino La Nina Production RAINFALL SHARE OF AVERAGE TAS SA WA QLD VIC NSW This report presents our initial estimates for Australian wheat production for the season. While last season smashed records, this season our model points to a much closer to average season with risks weighted more to the downside amid a very very dry start to winter following a mixed autumn break. Our central case estimate for the Australian wheat crop is 23.3 million tonnes, based on rainfall to date and assumed average rainfall in major cropping areas for the rest of the season. This would represent a 33.8% drop in production on last season. Before the release of e rainfall data, our model pointed to a crop of 24.4 million tonnes, showing just how severe the rainfall deficits were last month. While this decline appears to be substantial, given last season broke the previous record crop by over 6 million tonnes, it was always unlikely that this figure would be matched. ABARES latest forecast is for wheat production to reach 24.1 million tonnes this season, released before e rainfall data was available. Winter rainfall to date is well below average and decent rainfall soon is desperately needed if wheat yields are to reach average levels. While the El Niño outlook has moderated significantly over the past few months, the Bureau of Meteorology s latest forecasts still point to drier than average conditions across most of Australia s wheat regions for the remainder of winter and into spring. We will update our estimates monthly over the rest of the year. % 1% 2% 3% 4% 5% 6% Source: Bureau of Meteorology, ABARES, Australian Bureau of Statistics and NAB Group Economics 3

4 PLANTING CONDITIONS RELATIVE ROOT ZONE SOIL MOISTURE 2 y 217 Source: Bureau of Meteorology Highest on record Very much above average Above average Average Below average Very much below average Lowest on record The autumn break this year was rather mixed, with some areas receiving good rain and others missing out. Western Australia saw widespread well above average rainfall and flooding in ruary, only to see a very dry autumn. Cropping areas of New South Wales and Queensland saw big rains in ch in the wake of Cyclone Debbie, but have since seen well below average rainfall. South Australia mostly missed out all autumn, especially on the Eyre Peninsula. Western Victoria enjoyed a generally good break, while northern Victoria was more patchy. More worrying than the patchy autumn break has been the extremely dry start to winter, which has been widespread across Australia. Our analysis of Bureau of Meteorology data for major cropping regions shows that e rainfall Western Australia s wheatbelt saw only 23% of the long term average, New South Wales 44%, South Australia 23%, Victoria 18%, Queensland 36% and Tasmania 29%. Root zone soil moisture is generally below average to well below average for this time of year, with record low moisture across Western Australia s northern wheatbelt, South Australia s Eyre Peninsula, the Riverina, large areas of Queensland and Victoria s north east and Gippsland. 4

5 CLIMATE OUTLOOK THREE MONTH RAINFALL OUTLOOK y to tember 217 BOM POAMA MODEL LONG-RANGE EL NINO OUTLOOK Monthly mean NINO e 217 The Bureau of Meteorology s three month outlooks have been forecasting well below average rainfall for most of southern Australia for most of 217. While the actuals outperformed the forecasts in many areas across autumn, winter is looking much drier so far. The Bureau of Meteorology s latest three month climate outlook for y to tember shows below average rainfall in the Western Australian wheatbelt and south west, most of Victoria and New South Wales, and parts of South Australia. If these rainfall levels transpire, there is a potential downside for grain yields. Source: Bureau of Meteorology While the prospect of El Niño loomed large earlier this year, the forecasts have now waned to the extent that the Bureau of Meteorology has now cancelled its El Niño watch, expecting neutral conditions for the rest of the year. Indeed the latest POAMA forecast track is trending closer to La Niña over the winter. El Niño events tend to bring hotter and drier conditions on average to eastern and northern Australia. The impact of any given event is difficult to predict, but the 26-7 El Niño saw Australian wheat production fall below 11 million tonnes. On the other hand Australia managed over 24 million tonnes in despite El Niño. 5

6 APPENDIX I: METHODOLOGY MAJOR CROPPING AREAS AND RAINFALL DISTRICTS INCLUDED IN ANALYSIS Major cropping regions Australian rainfall districts used in NAB analysis Our outlook for wheat production is based on analysis of district level seasonal rainfall (from il to tember each year) and state level wheat yields from 19-1 to We model various scenarios for the coming season based on varying rainfall estimates for the remainder of the season, combined with actual rainfall to date. Our central case is based on average rainfall for the remainder of the season, while our high case is based on 2% above average rainfall over the winter. We also model La Niña and El Niño scenarios, based on rainfall during these events going back to Federation. This report only contains our central case estimate, although further information will be provided over coming months. The forecasts are based on an OLS regression of rainfall and yields with a time trend to account for technological changes and improved crop management over time. Our forecasts are adjusted to address some underestimation of yields in the fitted results since the millennium drought, particularly for Western Australia. Source: Bureau of Meteorology, Geoscience Australia and NAB Group Economics. Note: rainfall district 51 not shown on map but included in NAB analysis 6

7 APPENDIX I: METHODOLOGY STATE WHEAT YIELDS NEW SOUTH WALES VICTORIA QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA TASMANIA Source: Bureau of Meteorology, ABARES, Australian Bureau of Statistics and NAB Group Economics 7

8 APPENDIX II: MONTHLY RAINFALL IN WHEAT REGIONS (MM MONTHLY) Long run average 19-1 to La Nina years 217 YTD 216 NEW SOUTH WALES VICTORIA QUEENSLAND WESTERN AUSTRALIA SOUTH AUSTRALIA TASMANIA Source: Bureau of Meteorology and NAB Group Economics 8