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Rain May Threaten Harvests But Supports Coal Prices

Commodities | Oct 05 2016

The wet end to winter looks to be continuing, threatening to spoil bumper crops while contributing in small part to the surging coal price.

-Bumper grain yields likely but at a time when international prices are very subdued
-Weather affecting coal production in China likely to be short term
-Still, China's production cuts and higher steel demand underpinning coal prices


By Eva Brocklehurst

Weather. Guaranteed to start a conversation anywhere in the world but nowhere more so at present than in the food bowl of NSW, the Riverina, where floods are the topic. South Australia has had its share, while an unusually rainy dry season has also confronted Northern Territory and Queensland. Moreover, with the bulk of Australia's coal mines located in NSW and Queensland any continuation of the extreme wet weather may affect production, underpinning surging coal prices.

September rain has drenched cropping areas, delivering in some cases four times the average for the month. While wheat and allied crops have had a strong start to the growing season it is now increasingly becoming a case of too much of a good thing.

If field drainage is good then prospects for the next harvest remain very good to outstanding, National Australia bank analysts observe, but yields may be affected in some areas and it remains to be seen how widespread is the inundation. Otherwise, there could be bumper yields, albeit at a time when international prices remain subdued. US wheat prices are observed to be the lowest in a decade, with prices suggesting higher closing inventories at the end of FY17 from abundant global production.

Agricultural commodities analyst at National Australia Bank, Phin Ziebell, expects the current year's wheat crop in Australia will be up 13.9%, nationally. Sugar and cotton production are also expected to be higher with cotton gaining from the extra water but with some uncertainty regarding a delay to planting times, at least in NSW's Riverina. On the cattle stations the re-stocking of national herds is expected to entail lower production of red meat.

On the subject of coal, any pullback in production as a result of the wet is expected to exacerbate higher prices. Both coking (metallurgical) coal and and thermal coal, have sparked attention of late as prices have surged on several factors. The analysts observe, from a low of less than US$70/t earlier this year, high quality coking coal prices have accelerated over recent weeks to hit US$200/t.

Bad weather in China has disrupted coal availability for the short term while the wet weather in key parts of Australia may have also affected production in recent months. Other factors supporting coal prices include reforms being conducted in the Chinese coal industry via production cuts, while higher construction and infrastructure spending has lifted demand for steel in China.

Adding this to the net increase in iron ore prices over 2016 and the analysts observe Australia's terms of trade are being well supported. The analysts expect a substantial rise in the terms of trade in the current quarter but then some retracement as the temporary supply side factors abate.

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