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Frost, rains hit Australia wheat crop, drag on quality

Unseasonal rains in Western Australia and frost on the country's east coast have hit wheat crops in the world's No.2 exporter of the grain, dragging down quality and reducing harvests.

A decline in supply of high-protein wheat from Australia could force major buyers such as Indonesia and China to seek more volumes from the United States and Canada, underpinning prices there.

Australian wheat has seen strong demand this year, with almost half of estimated exports for 2013/14 already sold by traders. China has been at the forefront of this buying after its own crop was damaged by unfavourable weather earlier in 2013.

"The impact of frost damage is a greater proportion of small seeds," said Luke Mathews, commodities strategist at the Commonwealth Bank of Australia, referring to grain that must be removed before milling. Crops must contain no more than a limited number of undersized seeds to meet standards set by trade body Grain Trade Australia.

"We are seeing screenings (for small seeds) coming in from the east coast harvest higher than we would normally expect, which can obviously push the grades down," Mathews added.

Unsure about grain quality, Australian farmers have been reluctant to forward sell their crops, leading to shortages in the market. About a quarter of the country's wheat crop has been harvested.

"Traders have been able to cover just about 30 percent of what they have sold," said one Sydney-based broker. "Growers are not selling and offshore demand is very strong."

The crop in parts of New South Wales and Victoria was hit by frost last month, although other regions of the eastern grain belt, including Queensland, have produced high-protein wheat.

GrainCorp last week warned of the impact of unfavourable weather in areas of New South Wales. "We expect the harvest (quality) to be revised down because of the frost damage," said Alison Watkins, the company's chief executive and managing director. "To what extent, is not yet clear."

Elsewhere, unseasonal rains are likely to hurt wheat quality and output in Western Australia, where harvesting is 10 percent complete.

Going to America?

Crop-downgrades in Australia are likely to create more demand for hard red winter wheat traded on the Kansas City Board of Trade and spring wheat on the Minneapolis Grains Exchange.

U.S. hard red winter wheat prices dropped to a two-month low on Monday, the same day that spring wheat slid to lowest since June, 2012 as U.S. shipments face stiff competition in the international market.

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