Category: Grain

We are starting to get through the northern hemisphere weather window and the crop condition is now largely known. European Union and Black Sea exports are going to decline and locally we can be sure that Australia won’t export. The task now returns to the US. In this weekly comment, we give a short overview of the market.   

Chicago wheat futures spent most of the week in the red, however overnight regained some ground. Overall, in Au$ the Dec’18 contract is $2 more than last week and Dec’19 is unchanged (Figure 1). The big surprise was the increase in export sales out of the US, at 803kmt it was a week on week increase of a whopping 153%.

The sales were to a wide range of destinations, including the Philippines, Nigeria, Mexico and Iran. This could point to further tightening of the global exportable balance sheet. The drought conditions in Europe, Australia and parts of the Black sea will eventually result in export volume switching to the US.

Although Australia will not be an attractive export origin this year due to the drought basis, the Australian dollar has taken a dive this week falling back to the lowest level since January 2017 (Figure 2). The fall is attributed to a combination of low wage growth and wider geopolitical concerns emanating from the trump tariffs with China and Turkey.

At a local level, the market seems to have stabilized this week, with most markets relatively unchanged since the end of last week. At present it doesn’t really matter what bid the market makes, growers are unwilling to sell due to lack of clarity on production and higher pricing expectations.

On the rainfall front, there is rain headed to the southern cropping regions, however, NSW and QLD are set to by and large miss-out. At this point, we can largely write off the NNSW and QLD crop, with the focus shifting to whether they can get enough moisture to plant a summer crop.

What does it mean/next week?:

Turkey remains an interesting conundrum as Trump looks set to enact tariffs against the nation. In the past month, the Turkish lira has depreciated by 20%. This has resulted in them cancelling their wheat import tariffs to make it more competitive to import.

The export data from the US in coming weeks will give an insight into whether this weeks export sales were an outlier, or whether this is a start of a trend of exports moving back to the US.

We are big fans of social media. It’s a great tool for communication around the world, but it can unfortunately have issues with miscommunication. In this weeks update, we take a look at the Facebook post which gave wheat futures a 6% rise overnight!

Over the past two days, I attended the Australian grains industry conference (AGIC). In the Uber on my way home from the evening ‘networking’, I looked at the futures market. I was shocked to see the market up 6% or A$16/mt (Figure 1).

There was little in the way of data releases, so what caused this rise? The Ukrainian Deputy Agriculture Minister posted on facebook about looming discussions between the government and the trade relating to export limits. This was however misconstrued as an announcement of a potential export ban.

Every year there is an agreement in Ukraine to determine the maximum export level for wheat. However, it just goes to show how jittery the market is at present. After the initial very strong rally, the market settled down only slightly above where it started the day.

Overall the Chicago futures market is up 6% week on week because of deteriorating conditions in the EU. At a local level, the NNSW and QLD crop is on the cusp of losing all potential if the there is no substantive rainfall within the next fortnight. The ASX contract has risen A$15 as domestic users attempt to get cover (Figure 2).

What does it mean/next week?:

The WASDE report will be released next week. There will be several major downward revisions in EU, Black Sea and Australia. However, this shouldn’t surprise many traders.

A relatively downbeat week in the grain trade, with the world watching and waiting for the next big driver of pricing. The big data release for the week was the USDA world agriculture supply and demand estimates.

There has been a high degree of volatility in the past week as traders scope for telltale signs of weather impacted yields in the northern hemisphere. The market has recovered A$5 overnight, but week on week the wheat futures market is down 6% or A$14 on the spot contract (Figure 1).

The July USDA report was released overnight. The report called major reductions for wheat production around the world. The global end stocks for the coming season were dropped to 250mmt, the lowest since 2016/17 (Figure 2).

The USDA has lowered consumption of wheat by 2.3mmt, however, this was more than offset by falls in production. Dry conditions around major crop growing regions are the driver of this downward movement in Australia (-2mmt), EU (-4.4mmt), Russia (-1.5mmt), Ukraine (-1mmt).

This report was generally bullish in nature and points towards a tightening global wheat market. Although global wheat stocks will still be the second highest on record, production by the main exporting nations is slipping.

What does it mean/next week?:

This week will see more certainty as the northern hemisphere harvest progresses. There are a few tenders in the next few days which will give some indication of pricing signals.

Locally in Australia VIC, SA & WA are forecast to receive reasonable rainfall events in the next eight days. It however, looks like NSW is set to miss out.

The past week has largely been void of new fundamental data to move markets. The big issues of the week are political in nature, with only one week until tariffs are in place against a multitude of US agricultural products. So, what do US soybeans and the socceroo’s have in common? They are both uncompetitive.

The wheat market continued to retreat over the week, with Chicago futures down 11¢/bu or A$3/mt. Northern hemisphere producers have started selling their crop, placing pressure on the market. Will this continue or will growers stop once they have met their cashflow requirements?

In Figure 1, the December futures contract for both 2018 and 2019 is displayed. As expected both contracts have experienced a decline in line with one another. In past analysis articles during April and May, we have outlined good hedging opportunities, especially for December 2019.

During this point in time, it would have been feasible to lock in A$295-300/mt. At even the most conservative estimate of basis, this would have led to a price well above $300/mt. At present, the Dec’19 contract has contracted to A$276/mt. Although a less attractive hedge, it would still provide an attractive price; using average basis levels this would likely lead to a $300-310 price.

We are one week away from implementation of Chinese tariffs against a multitude of US agricultural products (see here). China is set to implement a 25% tariff on US soybeans, this instantly makes US supplies uncompetitive versus other origins. The result can be seen in Figure 2, which displays both US and Brazilian soybean prices. Brazilian soybeans have moved from trading at a discount to the US, to trading at a strong premium (US$50/mt).

If the tit for tat retaliation between the US and China continues, we could see a reduction in global trade. Our currency in recent years has largely followed the economic performance of China. In the past week, we have seen the A$ drop to the lowest levels since early 2017 (Figure 3). It will be interesting to keep a keen eye on Iron ore pricing, as this can be an indicator of economic performance in China.

What does it mean/next week?:

There has been a lack of fresh data in the past week, however, there will be new data released from Canada and the US. Reports at this time of year can provide big surprises, as real data from the field flows into the analyst’s lap.

The rainfall in QLD/NSW this week was not quite as healthy as hoped however provided a lifeline. There are substantial falls expected for WA towards the middle of next week, which will hopefully provide a floor in yield.

The wheat market is firing on all cylinders. We are going to the moon. The pedal is to the floor. We are cooking with gas.  These are a few appropriate analogies for the market movement this week. In this article we look at the price movements in Australia and seven other markets around the world. 

The ASX east coast wheat coast contract has been on a steady climb over recent weeks however this week the market has been on fire. The price has increased a whopping $27 since last Friday (fig1). This is because of continued dry conditions on the east coast in conjunction with the flow on effect from the wider worlds woes.

It is a catch-22 for many, as although prices are high many are not able to take advantage due to lack of production especially in northern NSW/QLD. The high price is very unlikely to mitigate for the loss in yield. The producers in Victoria and parts of South Australia with reasonably good crops will all going well be able to take advantage of the benefit of inflated pricing.

As alluded to earlier, conditions in other parts of the world are on a downward trend. In last weeks update I mentioned that northern Europe is in dire straits. The last few days of harvesting are pointing to this resulting in Europe’s export capacity declining. This has resulted in futures around the world rising, with the majority of wheat exporters now seeing year on year declines in exportable surplus.

In the last fortnight the different wheat futures around the world have seen solid gains (fig 2), with only between 3-4 days of negative results (dependent upon bourse). It is going to be an interesting month as we gain more resolution on the northern hemisphere crop.

What does it mean/next week?:

In Australia the lack of rainfall is likely to result in continued strong pricing well into the 2019/20 season on the east coast.

The commitment of traders report will likely see an increase in the long (bought) position in wheat by speculators. At some point they will likely want to take their profits leading to some price correction. Nonetheless the fundamentals are supporting these strong levels, especially in Australia.

As we near the northern hemisphere harvest period, volatility comes into the market, further assisted (and at times hampered) by continued political posturing by the giants of the US & China. In this week’s comment, we look at weather concerns and pricing in the world’s largest wheat producer.

At the end of last week, the markets were rocked by the erection of tariffs firstly by the US, followed by retaliation by China. The worst impacted ag commodity was soybeans (see article), however, wheat didn’t fare all that better. The spot contract had lost 23¢/bu between Friday and Tuesday but has since regained its grounds returning to Friday levels (Figure 1).

The June/July period is typically the most volatile time of year due to the start of the northern hemisphere harvest. There are diverging opinions on the outlook for the black sea region, with some analysts dropping production estimates at the same time as other raising them. One thing we know with certainty is that that region has a high degree of uncertainty; surprises are common.

China is the world’s largest wheat-producing (and consuming) nation and they have had a hiccup this season. Poor weather has hampered the crop resulting in a fall in forecasts for the crop, with official Chinese government estimating a drop of 3mmt year on year. The crop concerns have resulted in local Chinese prices rising since the start of June, albeit from a multi-year low (Figure 2).

This may lead to an increase in imports which would likely originate from out with the US due to trade tariffs. We do have to be cognizant of the fact that China holds very high stocks of wheat (Figure 3), holding more than half the world’s wheat inventory.

What does it mean/next week?:

At a local level, there is welcome rainfall forecast for WA, NSW & QLD. The forecasts of rainfall for NSW and QLD in recent months have had a worrying tendency to fizzle out. Let’s hope that this rainfall comes to fruition.

It would not surprise me if we saw additional tariff announcements by the US this evening. If we do, China will ramp up its tariffs shortly afterwards.