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Commodities

Historic drought in Australia rattles global farm goods market

Wool, wheat and sugar prices spike as exports dwindle

Wool prices are on the upswing due to the extended drought in Australia, which supplies 40% of the global market.   © Reuters

TOKYO -- The unrelenting drought ravaging Australia is disrupting international markets for agricultural products, as reduced exports of wool, wheat and sugar from the continent have pushed up prices in recent months.

Amid the worst drought in over half a century, the Australian Bureau of Agricultural and Resource Economics and Sciences expects the value of the country's farm products exports to fall 8% on the year for fiscal 2019.

The driest spring on record has created severe shortages of water used for livestock and hay in major sheep-producing states such as New South Wales. Wool production is expected to fall to 272,000 tons for the current season through June 2020, nonprofit research organization Australian Wool Innovation said last month, lowering its forecast by 5%. The latest number would come 9% below the previous season's output, which was the lowest since auction markets were launched there.

Wool is now sold for about 15.50 Australian dollars ($10.70) at Australia's east coast auctions -- up 14% from the AU$13.60 level hit in mid-September, when Chinese garment makers stopped buying because of U.S. tariffs on luxury apparel.

Falling production in Australia -- which accounts for roughly 40% of world wool exports, according to the government -- is disrupting the textile supply chain around the world. Reduced supply will keep prices high for now, predicts an official at Toabo, a Japanese maker of woolen yarns and fabrics.

These manufacturers are passing higher costs onto customers. Japan Wool Textile, known as Nikke, will raise prices on wool textiles for school uniforms and knitted products by 10% to 15% starting with April shipments, marking the first increase in five years. Toabo says material costs are rising faster than price hikes for its products.

The drought is also shrinking wheat yields in the southwestern region. Australia's wheat exports will fall to 8.4 million tons for the current year, the U.S. Department of Agriculture said in a December report, downgrading its forecast by nearly 10% from the previous month. The new figure would mark the lowest since the 2007-2008 year. Australia is responsible for about 5% of global wheat exports, and reduced shipments are feared to affect global supplies.   

Benchmark wheat futures in Chicago were trading at about $5.50 per bushel in mid-December, hitting a 16-month high at one point. The prices have come down somewhat but are still 20% above levels seen in September. If buyer countries raise prices sold to milling companies, they in turn may hike flour prices.

Sugar is also on an upturn in international markets. Raw sugar futures in New York are selling for the upper 13 cents range per pound, up nearly 30% from mid-September and the highest in 14 months.

The sugar market is expected to experience a supply shortage in the current year, with output falling at major sugar producers such as Brazil. Australia's production is seen declining 10% on the year to about 4.1 million tons, the lowest since 2011.

This is worrying buyers in Japan, which gets about 70% of its sugar imports from Australia. While supply has not tightened thanks to ample inventories, "if the drought continues and output falls further, this would be a problem," said an official at a sugar company. Given the upturn in global markets, the quarterly Japanese benchmark for wholesale prices is expected to rise for the January-March period, said an executive of another company.

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