Category: Grain

For those of a superstitious bent, Friday the 13^th is considered to be unlucky. In this week’s comment, we take a look at futures pricing & the USDA update to global wheat supply and demand, in order to determine whether we are lucky or not.

The futures market rallied during has rallied strongly since the beginning of April, however in recent days prices have fallen as a result of bearish data in the WASDE (more on that later), and the increasingly tense stand off between US & Syria/Russia. However, prices remain 3% higher than the close last Thursday, and 8% up on the start of the month (figure 1).  So in this case we are definitely lucky, to have much higher prices than the start of the month.

The April WASDE report was bearish for wheat, with production estimates for the current season raised by 962kmt, which mainly came from a month on month increase in production estimates of 13.47% in Morocco. Raising global production to 759mmt, the highest global production on record (figure 2).

Due to the rapid export pace in Russia, their ending stocks were reduced by 1.1mmt, which is a bullish factor. However, lower feed usage in Iran offset much of this with an increase in end stocks of 2.3mmt. Overall, global end stocks are forecast to end at 258mmt, 14mmt higher than last season and also an all-time record (figure 2).

The WASDE paints a concerning picture, with world production and stocks for 2017/18 at record highs, it reduces the potential for the market to provide sustained strong rallies. The world needs a very large drop in production in one of the major northern hemisphere to provide a drive in the market to benefit Australian producers.

I recommend you read Tuesdays article “How do you eat an elephant?”, in order to get some ideas on hedging strategies for the 2019 crop.

What does it mean/next week?:

At a local level, we need to keep a close eye on Australian weather, many cropping regions are yet to receive meaningful rain. It is however very early in the season, and there is still everything to play for.

You might notice a bit of a pattern of involvement here, but in coming weeks posturing between Trump/Russia, Trump/China and Trump/TPP countries will have an impact on global markets both for commodities and equities.

The market has been knocked around this week, by both fundamental factors driving pricing and the black swan event in the form of President Trump. Although volatile, the market can provide pricing opportunities for Australian producers.

This week has seen a huge degree of uncertainty across all markets. The talk has moved away from the fundamentals, and onto the spectre of a volatile trade war between the worlds two largest economies. The futures market took a dive immediately after the announcement of tariffs by China, in response to comments by Trump. Overnight however, the market recovered, taking us to two-week highs (figure 1).

At a local level, cash APW1 prices have traded in a narrow range since the fall of the market in mid-march (figure 2). This week however, prices have shown some upside, with between A$2 & A$6 rises across the country.

Although the tariff wars provide some interesting news, the fundamentals continue to be a strong driver of markets. Many areas of the US continue to experience drought conditions (see map), leading to reduced expectations for the winter crop. At present, only 32% of all winter wheat acreage in the US is considered to be good-excellent. This is an extremely low figure, and places it at the lowest level since 2002. In order to recover decent rainfall will be required in the next fortnight, without rain further downgrades are expected.

In the coming weeks we may experience some upside in pricing as markets take into account drought conditions in the US.

What does it mean/next week?:

The market is going to continue to be extremely volatile. At present, Trump has already pointed towards a further $100bn in additional trade tariffs, which will likely be met by retaliation by China. The story is far from over, and is likely to continue to be a cause for concern, although potentially offer opportunities for Australia.

All eyes need to be on the weather, with poor forecasts throughout many areas of Australia’s grain growing regions.

Trump. The president who sticks to his promises. Overnight the trade scuffle, turned into a trade war with China increasing the number of imports which would attract tariffs after increased rhetoric from the US president. Although not wholly unexpected, this trade war can have huge ramifications for global trade.

The Chinese government were never going to stand back, whilst Trump continued to sabre rattle and threaten increased tariffs. The new list is extensive and could impact up to $50bn of trade. The products include soybeans, wheat, corn, sorghum & whisky*.

Through reading the list of products likely to be hit by tariffs (here), it could be construed as a savvy political act, as many of the products/commodities will impact the pockets of voters in Trump strongholds.

The impact of the tariff has been quite stark, overnight the Chicago soybean futures contract traded in a 58¢/bu range (figure 1). The introduction of tariffs specifically on US exports has instantly made US soybeans uncompetitive into China and will make it easier for alternate origins to compete i.e. Argentina and Brazil.

The tariffs however, leave a number of questions around the capability of China to continue with trade restrictions. In figure 2, the imports/exports and production of soybeans is displayed. Over the past ten years China has on average imported 62% of the worlds export soybeans, this places a huge strain on China’s ability to find alternate origins, especially in light of the US providing 40% of the worlds exports.

In order to satisfy the demand into China, without paying tariffs, close to 100% of the global trade in soybeans (ex USA) will have to go into China. This will have flow on impacts into other soybean destinations, which will likely change origin to USA.

Interestingly, China has not declared when tariffs will be in place, and there is some speculation around the fact that Chinese purchases tend to be reduced at this point of the year.

*Only real whisky comes from Scotland anyway.

What does it mean/next week?:

It is not wholly surprising that this trade war has commenced. The Trump campaign was largely based on curtailing the advance of China, and regardless of opinions on him, he tends to do as he promises. The real test will be whether there is a further escalation in tariffs.

The good fortune we have seen with barley and sorghum imports into China is likely to continue, as US exports will be uncompetitive.

Key Points

• China over the past ten years imported on average 62% of the worlds global trade in soybeans
• The US contributes 40% of the worlds global trade in soybeans on average.

There is an old Chinese curse, “May you live in interesting times”, used ironically to suggest that uninteresting times are more life enhancing than interesting ones. It seems our friend Donald, would like to consign us to a lifetime of interesting times.

After experiencing strong momentum in March, it seems that gravity has exerted its force on the wheat futures market, with a return to pre-rally levels (figure 1). In recent days much needed rainfall has fallen in US growing regions. It was not unreasonable to expect this fall in the market, especially as the US falls in importance on the international wheat market.

In the Black Sea nations, conditions continue to be promising for the coming season, with winter kill below average. Although the crop will be unlikely to match last year, it will still dominate the export market. Interestingly a Russian government official commented that fertilizer and seed purchases had increased 30% this season.

In figure 2, the basis levels around Australia as a percentage of the overall price has been displayed. During this harvest, basis increased dramatically, becoming a third of the pricing complex in some states. Although since weakened, basis levels remain strong, and protect us from falls in the futures market.

In recent weeks, Trump has been rattling the tariff saber with China. During the Trump election campaign, he ran on a platform of reforms to trade. In his defence, Trump has certainly gone all in, however only time will tell whether this will be to the betterment or detriment to the voters.

In figure 3,4, & 5 (animated), we can see the futures prices of a number of commodities (pork, soya, soya meal), which all have strong links with China. As we can see these markets have experienced strong falls in recent weeks, as discussions become more heated.

On a regular basis China turns around vessels of soya and corn from the US; perhaps we will see an upsurge of cargo rejections in retaliation.

What is assured, is that we are unlikely to be living in tranquil times for the foreseeable future, and black swans are likely to be a regular occurrence.

What does it mean/next week?:

The ‘tariff war’ is going to place Australia in a difficult diplomatic position, between an important customer and a traditional ally.

However, if handled well by our government could provide a favourable result for Australian industries.

It was steady as she goes for wheat and barley markets, while canola has been on the slide this week.  In fact, canola basis weakened further and now sits at levels more expected during a bumper harvest, not a year of tighter supply

Since the heavy fall in December, local canola prices have had trouble recovering, especially in the south.  Figure 1 shows ICE Canolafutures, and the Geelong track price, and basis has widened recently.  The strong rally in ICE Canola futures thanks to deteriorating soybean conditions in South America, wasn’t matched by local values.

Figure 2 shows basis at negative $24/t is the lowest level since the middle of June 2015.  To take advantage of this growers still holding last year’s canola can sell swaps and hold physical.  The would pay off either through ICE Canola falling, or physical prices rising.

As outlined last week local wheat basis has weakened, also due to rising international futures not being matched by local markets.  Having said this, APW in southern markets is $30 stronger than it was at harvest, so it has been a good year for holding.

Whether wheat can find more strength is questionable, we are still hearing it is overpriced in international markets.  Basis could improve, but this would come from CBOT falling.  Again, it’s a case of selling futures or swaps and holding physical.

What does it mean/next week?:

It’s a rare year when over 10% profit is made from holding wheat from harvest through to March.  As such, it might be worth making some sales to take advantage of this, in case current prices disappear as we move towards the northern hemisphere harvest.

Many growers are holding wheat as a drought hedge, which is fine, but it might be worth taking some cover on futures or options to protect against falling international values.  In the case of a delayed autumn break it will be basis that improves, not international prices.

It’s been an interesting end to February, providing reasonably strong increases in futures prices. Overnight the WASDE report for March was released, has it provided any fire?

The USDA have yet to switch over to forecast the coming crop, therefore at this point in the year the potential for large changes is limited. The main takeaways from the report, were a continued increase in end stocks for the 17/18 season to 268mmt (figure 1).

The report was largely neutral to bearish for wheat. The story for corn was somewhat more bullish, with South American weather woes leading to a 7.7% production fall in Argentina. The end stocks are forecast to end 14% (table 1) lower than last season, and the lowest since 2013/14.

The futures market has provided some good increases in value for producers in the past three weeks, but last week the market has traded in a directionless band whilst the trade awaits potential rains. In figure 2, the December futures (in A$/mt) is displayed. At present, the pricing level has provided better opportunities for locking in profitable prices for the approaching harvest.

What about basis? Well as expected premiums have fallen dramatically since harvest (figure 3). In past analysis articles, we have pointed towards the record levels and the likelihood of a correction. This has led to our prices at a flat price remaining relatively flat, as futures increase, basis levels fall.

Our article outlining our strategy in October, would have worked perfectly for producers this year. We advocate that producers move away from flat pricing and look to lock in component pricing separately to ensure that little is left on the table.

Lock in premiums, keep exposure

What does it mean/next week?:

It will be interesting to see if there are any reactions to the Trump tariffs. Will this lead to a trade war which could begin to envelope agriculture commodities?

The panic has set in. US wheat markets are caught in a classic weather scare, with the dry conditions outlined in our analysis this week set to continue for another couple of weeks. This has seen ever increasing moves higher in the last three sessions.

Yesterday I was asked, ‘how long have I got to get a hedge on?’ The answer is you’ve got until some rainfall comes on the 7 day forecast for the US. It really is that simple at the moment. Dryness has spurred the market. The start of the month saw funds jump on board. With very little change in fundamentals, in three days CBOT wheat has gained 39¢/bu, or 9.5% with the May contract at 515¢/bu.

In our terms the May CBOT contract is $243/t (figure 1), December 18 at $264/t and March 19 is at $270/t.  The pricing for our new crop, with around average basis, will give a price close to $300/t.  In fact, ASX East Coast Wheat futures are offered at $303/t this morning, but this would be a good jump higher (figure 1).

As expected, local prices haven’t risen as quickly as CBOT. There will be further upside today, but in the Geelong Port Zone the $15 rise in CBOT to yesterday had translated into just a $6 rise in APW. Figure 2 shows the decline in basis.

Canola has also found support this week, with ICE futures up again last night to almost meet its early December high in our terms (figure 3). Again, local prices have found some strength from the international market, but basis has weakened to the negative $20-25/t level.  This is extremely low.

The week ahead

Should we be selling into this rally? Good question. We don’t like selling at weak basis, but absolute prices are easily at 2018 highs for wheat, barley and canola. One strategy would be to sell futures or swaps for the new crop, and wait for basis for old crop to improve. This will either come from higher physical prices, or lower international values. Most likely lower international values, especially for wheat.

In a good week for grain growers the Aussie dollar is a bit lower, and international oilseed prices have found a bit of strength.   CBOT Wheat steadied after a down week, which didn’t impact locally.  All this translated into higher physical canola prices yesterday, and there might even be a bit more upside today.

In looking for some commentary on the AUD exchange rate we found an article saying the Aussie had been ‘poleaxed’.  Sounds promising for export orientated markets, but on further investigation ‘poleaxed’ translates into a 1% fall, with the Aussie at 78.4 US¢ this morning (figure 1).

If we were to use some of the terms we see in the financial press to describe grain prices this week we could say canola is rocketing higher, and wheat smashed lower.  In reality ICE Canola has finished the week 1% higher at $508CAD/t (figure 2), and CBOT wheat 3% lower at 450¢/bu.  We’d hate to see what financial reporters would make of the volatile commodity markets.

Locally there has been a bit of rain about, which usually loosens growers grip on grain, but we’ve seen a relatively flat week.  Canola has returned to the ‘highs’ seen two weeks ago, but at around $500 port we are still a long way from December values, and at weak basis.

For those in the south, who have held onto canola, there is a bit of hope.  Boats coming into Geelong and Portland might see some demand, and hopefully, basis improvement.

The week ahead

CBOT wheat came off on the back of a better rain forecast for key wheat areas, but this rain is yet to eventuate so there might be a bit of upside yet.  As we keep saying, however, world wheat supplies are abundant.

Locally rain in NSW might encourage a bit of a sell off of cereal, but in reality there is not much grain up there so we can expect wheat and barley prices to remain steady.

The grain market stands at a cross roads. In the past two years, we have seen concerns in the market which have led to short rallies. Will conditions provide the opportunity for a sustained rally, or will it fizzle out?

After a strong January & early February, the past week has seen the futures market trade in a narrow band (figure 1). The futures currently rest at A$213/mt, up A$21 from the same time last month. The futures have been rising due to ongoing weather concerns in the US. Abnormally conditions persist across much of the country (see below), with many areas receiving next to no rainfall since the onset of winter.

Coming back down under, BOM have signaled that the next four months are liable to be drier than average. This is not good for farmers struggling with already limited subsoil moisture. Although, as an eternal optimist, I must point to the fact that BOM themselves admit to only having a moderate level of accuracy, and only low to very low in SW WA and SA.

When we look at flat prices of APW1 in Australia (figure 2), although futures have risen the follow through locally has been more tempered. In Port Kembla & Kwinana the rise has been more restained at +$2 and +$8 month on month. In SA & Vic the ascension has been stronger with +$12 added to the flat price in the past month. It is not surprising that Port Kembla pricing was more lackluster in experiencing the benefit of the futures rally, as basis levels were already at very strong levels.

There were a number of reports in recent days about the lack of competitiveness of Australian wheat versus Black Sea region supplies. This is something we have been discussing for the past two or more years, and its likely to continue into the future. At present pricing levels, Russian and Ukrainian farmers are profitable, and with freight rates continuing to be depressed (figure 3), their supplies can compete into our traditional markets.

Although the Black Sea is likely to be the powerhouse of international wheat in the coming decade, we only have to look back to 2010, when drought ravaged their crop. As the world becomes reliant on this producer, and with US acreage dropping – at some point Russia will get its bad year.

See previous discussion of this topic:

Has Australia lost its geographic advantage for grain?

A slump in shipping rates is eating away competitive advantage

What does it mean/next week?:

US weather woes continue to plague the market, and it will be interesting to see how the speculators in the market react to this on the weekly commitment of trader’s report.

Although we have seen a rally, it is yet too early to determine whether this will form what I consider to be a sustentative rally.