Can cattle come to the aid of Australia's weather-dogged wheat farmers?
The country's booming beef industry to support wheat prices, with harvest results showing that, while yields have held up better than many growers had feared, quality has taken a hit.
Rabobank, which last month estimated the Australian wheat crop at 23m-24m tonnes, refined its estimate to 23.5m tonnes, a drop of 1% year on year, although above many market expectations earlier in the year as "unfavourable weather conditions… damaged yield prospects across significant parts of the country".
However, the bank cautioned investors to expect "quality downgrades" in Australian wheat thanks to weather setbacks in the late growing and early harvesting period.
An October which "was the warmest on record on for New South Wales and Victoria… has resulted in higher screenings and smaller test weights", the bank said.
Screenings, which indicate the size of kernels, and test weights, the mass per given volume of grain, are among key specifications for determining wheat's suitability for milling.
"Additionally, heavy November rainfalls in some east coast cropping areas have resulted in the possibility of quality downgrades," although moisture damage typically shows itself in sprouting, and a low Hagberg falling number, a particularly important milling specification.
Quality concerns were flagged too by grain trader Nidera, which said that "South Australian farmers continue to be frustrated by high screenings in wheat.
"The range on test weight and protein is also very wide."
In New South Wales too, the second-ranked wheat producing state after Western Australia, "if we want to get picky there is a screenings issue", Nidera said, if terming protein there "decent but not extraordinary"
The prospect of a lower quality crop has enhanced milling premiums, with New South Wales-based AgVantage Commodities reporting that "high grade wheat", such as APH and the particularly high protein AUH class, "are very well priced" in the Narrabri cash market in the north of the state.
The price of high-grade durum, the type of wheat used in making pasta, at Aus$420 a tonne in the port of Newcastle, "shows a good selling opportunity", AgVantage said, adding that "one feels pressure on this market is increasing with a major buyer sitting aside for the time being".
However, Rabobank highlighted softer prospects for lower-specification wheat, with the compromised quality profile of Australia's harvest likely to result in "widening price spreads.
"Prices for feed quality grain are expected to come under pressure as harvest progresses."
Against this background, the strong demand for Australian beef, with herd rebuilding curtailing US supplies, is offering some hope for providing a ready market for low-quality wheat.
The number of cattle on feed in Australia, at 961,328 head in the July-to-September quarter, was close to a record high, data this week from the Australian Lot Feeders Association showed.
"Strong international demand, as well as some rain across the eastern states, saw feeder cattle prices record robust growth during the quarter," the association noted.
"Domestic demand for wheat continues to track near all-time highs," said Nidera.
"A high portion of the cattle ration is made up of wheat due to the current price spread to other competing grains such as sorghum in Queensland and northern New South Wales, and barley in other states."
However, the trend may not last.
"It is expected that cattle numbers on feed will reduce for the December quarter due to high feeder cattle prices and tighter cattle supply brought about by the declining herd," Dougal Gordon, the association's chief executive, said.
Furthermore, the recent rains, besides threatening wheat quality, have presented a second whammy to growers too in encouraging beef producers to look to herd rebuilding on improved pastures, rather than selling to feedlots.
Mr Gordon forecast "increased backgrounder and restocker demand following good November rains".
The trend has been reflected in a resurgence in cattle prices, which had shown some weakness in October on a fall-off in exports as volumes approached US quota limits.
The benchmark eastern young cattle indicator on Friday hit a fresh record high of 595.5 Australian dollar cents a kilogramme.
By Mike Verdin