Category: Grain

Chicago Soft Red Wheat managed to maintain its upward trend this week. It had an attempt at moving lower but bounced stronger on Wednesday night. Local wheat prices also tried to go lower but found strength on Thursday.

Figure 1 shows CBOT wheat in AUD/t sitting just below the highs hit at the end of May. Still, $267/t is close to the best swap price we have seen for the December contract since 2015. The market did move a little lower earlier in the week before recovering. Apparently there was some speculator profit-taking triggered by the higher levels, and the Aussie dollar found some strength this week.

The AUD is actually back at 76.5US¢, its highest level in six weeks thanks to some stronger economic data.

Locally wheat prices followed CBOT’s trend, finishing the week on a high. While new crop APW basis in the Newcastle zone is at around $100/t basis, in the south it’s close to $50/t (Figure 2). If crop prospects continue to weaken Geelong basis could rally to $80-100/t as well, so at $320/t it could end up being cheap.

Old crop markets continue to tighten, with any remaining grain being held tight, and buyers having to pump up prices to get hold of it. A good rain and some grass growth might take some of the pressure off demand, but supply relief won’t turn up until the new crop arrives; if it does at all.

The week ahead

Figure 3 shows some good rain forecast for Victoria and southern NSW this week. In fact, most of the Mallee, parts of the Riverina and SA are expected to get their monthly average rainfall over the coming 8 days. This will give crops a start, but with no subsoil moisture, follow up will be required before the heat comes out of markets.

In recent years our comrades in Russia have been the most important driver of the wheat market. Their technology and logistics have improved to ensure that they are efficiently (& cheaply) producing a huge exportable surplus. When there is a hiccup in this region, the impact is felt around the world. In this comment, we look at the past weeks performance, and specifically what is happening in Russia.

The weather market is in full swing. Last week saw the market lose most of its early month growth, only to post a very strong turn around (Fig 1). At present, December wheat futures are up a$9/mt since the close last Thursday.

The rise in the market can be attributed to poor weather conditions in Australia (more later) and Russia. The Russian wheat growing regions have experienced warm and dry conditions over the past fortnight. These dry conditions in conjunction with limited forecast rain has resulted in concerns mounting. The Russian wheat crop has been down grade with estimates from 70mmt to 77mt, this is a huge drop from the 17.18 record of 84-85mmt.

It is important to put this downgrade into perspective. In figure 2, Russian wheat production since the end of the USSR to present has been displayed. The estimates for this season are displayed in orange. Dependent upon analysts estimates, Russian could produce either the 2^nd or 3^rd largest wheat crop. It is also mindful to remind ourselves that the average crop for this decade is 58mmt, or 54mmt if you don’t include the past season.

At a local level, the Australian crop remains on the precipice. There has been some meaningful rainfall in parts of central and northern WA, however initial reports are that the great southern and Esperance have largely missed out. The weather forecast has led to a fall in basis levels (figure 3), from the week prior, albeit they remain at attractive levels.

What does it mean/next week?:

The most important factor for Australian producers and consumers of wheat is the local weather. The 8 day forecast for NNSW & QLD remains bleak, and this is where the largest concentration of domestic demand is situated. The continued poor conditions could lead to the incredible high old crop values persisting into the new marketing season.

The negotiations between the US and China will be of interest. Although not set in stone, China have agreed in principle to purchase US$25bn of US agricultural products per annum. It is not clear when this will commence, or what commodities they will accumulate.

The weather continues to be the biggest driver of the market both globally and now increasingly at a local level. The Australian crop is currently on the precipice, with a huge degree of risk currently being priced in. In this weekly comment, I take a look at the weather forecast and basis levels.

Figure 1 displays the December wheat futures contract since the start of the year. This contract aligns with the Australian harvest and is typically the most appropriate for hedging purposes (for producers). As we can see much of the gains of early May have been lost. At it’s highest point in May the December contract was at A$279/mt, although in recent days the market has gained some traction, the current level of A$261/mt is not an insubstantial fall. The market however is prone to volatile behavior at this point of the year, and large market swings can potentially occur.

Our biggest concern for both grain producers and consumers in Australia, are the local conditions. The BOM released their rainfall forecasts for June to August (see map). This map details the change of above median rainfall. Our concerns are growing for the majority of the wheatbelt, but especially NSW and WA. Our hope is that the forecasts are wrong, and that a deluge is imminent.

Let’s take a look at basis levels (Aussie premium or discount over CBOT). As we all know, our basis level will increase when weather conditions deteriorate. In figure 2, the spot (old crop) basis is show, as we can see the basis level has increased dramatically in the past week. This is as a result of both the weather premium, and demand for the shrinking stockpile of old crop, especially in northern feed demand areas.

In figure 3, the new crop APW1 MG basis is displayed. The basis level has increased to it’s highest point this season. Although there is still a long way to go before harvest, if weather conditions remain dire, then this basis level will increase. This will provide minimum solace, as high prices and poor yield is a poor outcome for everyone.

If you are interested, I was asked to give a summary of the market to the Sky News Ag Show. The video is on the link below. However, please note I am not a seasoned TV personality!

https://www.weeklytimesnow.com.au/agribusiness/the-ag-show/the-ag-show-featuring-auctionsplus-chief-executive-anna-speer/news-story/6c3256aef5e4a96b32a6b6ecb1709280

What does it mean/next week?:

Let’s just keep an eye on the weather. Although cash prices are currently high, it is prudent to think strongly about physical risk, and washouts at present.

After an exciting two weeks previously in the grain market, we keep a largely directionless week. The market continues to keep a close eye on the weather around the world, with the wheat production in an increasingly fragile position.

Overnight the USDA released the may WASDE report. The may report is the first of the year to forecast the coming season. Although, with these initial estimates, it is probably worthwhile taking them with a pinch of salt. In figure 1, the global projections for wheat production and end stocks are displayed. These unsurprisingly show a decline in both, with production down year on year 10mmt, and end stocks 6mmt. This is slightly above most trade expectations, but there is still a long way to go.

One thing to keep an eye on is Russian wheat production, as we all know they have been one of the most important factor in global trade. The USDA forecast at 72mmt, a huge reduction from last years 85mmt.  Although this must be put in perspective, 17/18 was a record production year in Russia, and even with such a large fall, production is estimated at 3^rd highest on record.

The futures market fell at the end of last week, but since has been largely directionless (figure 3). The market is remaining at substantially more attractive levels than it was at the beginning of April. The market and farmers are still watching and waiting on weather forecasts, which will determine the production for the coming year.

What does it mean/next week?:

The cold snap which has brought rain (and snow) to the east coast has largely been limited to VIC and east SA. The country is in dire need of rain, especially in NSW and Victoria.

From all account, it looks like farmers are reassessing their planting intentions, and canola will be the loser.

The force is strong in the wheat market, with positive pricing signals coming forth. The northern hemisphere “weather market” period is always the most volatile time for pricing, with the majority of the worlds crop being in the growth phase. After six years of strong production, the weather strikes back.

The futures market continues to rally (figure 1), with its fifth straight session of gains. The market is now 12% up on the close of trade last Thursday. The annual tour of the Kansa wheat belt released the results from their annual crop tour, with yields forecast at 37bpa. Last year the yield was 47bpa, after suffering through terrible snow storms in early May, and the five-year average is 41bpa.

As Kansas is the largest wheat production area in the US, this has dire positive consequences for prices, and now there is limited potential for substantive increases in yield in this region.

The wheat market is now attracting the focus of the dark side, with speculators starting to pour money into ag commodities. In figure 2, the commitment of traders report from last week shows that since early February, bullish sentiment has increased, with the overall speculator position at -50k contracts, whereas short contracts were at -165k. The updated data on trades sentiment will be released over the weekend and will undoubtedly show a decrease in the short position.

At a local level, much needed rainfall fell across much of the country in the past 24 hours. This will bring relief to many, after a poor summer rain season for the most part. It is definitely too early to determine the outlook for the crop, but this rain for many will help. In figure 3, we can see that basis levels are remaining strong, as buyers continue to pay a premium for access to stock. If the potential for the crop improves in the coming months, then this premium is liable to deteriorate.