Demand for grain in drought affected areas, combined with the failure of crops in northern New South Wales and southern Queensland, is keeping local prices firm in the face of falling global prices.
Luke Matthews, director of agricultural commodity research at the Commonwealth Bank, says there were big losses overnight in the Chicago benchmark contract, which was trading down to around 589 US cents a bushel, or about $244 a tonne in Australian currency, representing a slump of about 13 per cent since the start of December.
"Despite that weak offshore lead, local grain markets here in Australia have started the new year on a stronger note," Mr Matthews said.
He says there's been a combination of strong demand, trade shortages and expectations of extremely limited supplies in the northern New South Wales and Queensland markets.
"All of that has meant that New South Wales wheat futures for March 2014 delivery have bounced back above $290 a tonne."
Mr Matthews says a smaller crop from the harvest just completed in northern New South Wales and Queensland is contributing to a lack of supply in the region, and there's also an anticipated shortage of other feed grains, like barley and sorghum.
"On top of that, the drought has forced more livestock into the feed sector, that's supporting demand and the competition from other grains, in particularly feed barley, but most noticeably the sorghum market into that northern New South Wales, Queensland market, providing significant drive for wheat prices."
"The key theme that we are seeing here is the limited supply in the domestic market is certainly pushing up Australian wheat prices relative to those international benchmarks.
"In terms of the dollar per tonne premium, local markets are trading at around a $40 to $50 tonne premium, over those Chicago benchmarks, that compares with a normal premium of around $20 to $25 a tonne."
Nathan Cattle, chief analyst at grain forecaster Profarmer Australia, says demand for grain in northern New South Wales and Queensland is affecting where crops for export are coming from.
"We're seeing more exports get shifted towards, W.A, South Australia and Victoria.
"In normal production years, through Queensland, New South Wales, especially out of the Newcastle port, there's a lot of grain from there that generally gets pushed out of those ports.
"Given the crop failure the end user really needs that grain internally in Australia, so they are bidding the market up, so you are seeing a big premium in prices up that way to try and hold onto grain.
"There's basically nothing going to be leaving the country through those ports this year."
About 75 per cent of the Australian wheat crop is sold into export markets, with most going to the Middle East and Asia, which is emerging as a strong and growing market.
"Asia is an extremely important market for Australian wheat, particularly Indonesia which we are seeing great growth over the last five or six years and China, those markets are extremely important for the long term future of the industry here in Australia," says Chris Aucote, of the Australian Grain Exporters Association.
He expects Australian wheat will face competition in its export markets from traditional competitors like Europe and the Black Sea region, and especially Canada, which has had a record wheat crop this year.
© ABC 2014
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