Interview: Australian farmers who hedged prices less affected by damaging weather

The small proportion of Australian grain farmers who have forward sold their winter crop will likely still be profitable at harvest despite significant weather hurdles in the tail end of the season.

Australia's agriculture regions have suffered immense weather events in the final month before harvest, with eastern states suffering a deluge of rain and floods, while Western Australia suffered a bout of bitter frost, ripping off potential yield value.

It's too early to estimate the total crop damage, however the estimated 28.08 million tonne wheat crop - expected 2nd largest on record - will suffer a loss of protein. Protein is a key quality grading factor for wheat, but the wet end to the winter period is halting a lot of protein build up needed in high quality wheats for making bread and other consumer staples.

"If it stays dry between now and harvest (in November), that will improve things, but looking at the (Australian Bureau of Meteorology's) projects, that's not looking likely," Mercado analyst Andrew Whitelaw told Xinhua, noting the three-month outlook is for more rain than average.

The 2016/17 season is a doubled-edged sword for Aussie farmers following years of prolonged drought, as bumper crop is expected to further drag global benchmark prices in a world awash with wheat, despite a bullish U.S. Department of Agriculture report showing end stocks will slightly fall.

The severe weather over the past two weeks however has yet to be factored in. It's estimated anywhere from 500,000 to 2 million tonnes of lost production, though it still too early to tell.

Output losses of high quality wheat would limit exportable supplies, however Whitelaw said lost production would do little to support benchmark prices, potentially only adding a small basis over futures contracts.

Thus Australian farmers will likely do little more than break even as the majority of the crop is unsold following increased low-cost competition into its traditional Southeast Asian markets from eastern European producers.

It's not all bleak news for producers with those that forward sold a percentage of their crop - a minority nonetheless - hedging against further price rises. Some producers locked in contracts 12-months ago fetching 310 Australian dollars (236 U.S. dollars), while those who locked in prior to outlook increases by the USDA and Australia's chief commodity forecaster ABARES in July would be just below the 300-Australian dollar (229-U.S. dollar) threshold.

The key psychological barrier for local producers is 300 Australian dollars (229 U.S. dollars) per tonne, however spot prices at port Western Australia currently stand at 236 Australian dollars (180 U.S. dollars) per tonne.

"This is going to be the issue as a lot of farmers haven't forward sold anything for this season, and they're going to be subject for whatever the price is at harvest, which may not be that attractive," Whitelaw said. Farmers with forward contracts who have lost crops could still recover some costs purchasing through the sport market to meet delivery dates due to the glut in unsold grain.

There is a silver lining for wiped out paddocks with subsoil moisture providing new crops a strong start to the 2017 season. Australia can still expect a strong crop should rainfall be average, or below average in some areas.

"(But) if we have another big year (globally) next year, that's what I'm worried about," Whitelaw said.

"If the world produces another big crop, we're buggered. We need to start reducing supply to get prices kicking along." Endit