Category: Grain

We set out trying to work out what the heavy rain which is falling across all eastern cropping zones over the coming days will do to prices.  It’s not as simple as looking back at 2010-11 when harvest was delayed, as that was a bumper crop, and this is not.  We’ll have a look anyway.

Figure 1 shows the impact of heavy December rain back in 2010 on feed wheat prices delivered Melbourne.  Over the course of two weeks the price lost $70/t as shot and sprung wheat was harvested and overwhelmed feed users.  Basis to CBOT moved to an all-time low of around -$70/t, as CBOT rallied due to the now tighter supply of Milling Wheat coming out of Australia.

Due to the much tighter total supply of wheat, we don’t expect such a dramatic fall in feed prices this year.  We could however see a spike in milling wheat prices, as already low supplies are exacerbated by downgrades.

The market has already started to move.  APW Geelong rallied $5/t today, up to a 7 week high of $265/t.  In PortAdelaide APW gained a little ground, but remains at $250/t.  SFW delivered Geelong hasn’t moved yet.  In fact it was a little yesterday, at $228/t.

In international markets price were down this week, Dec-17 CBOT hit a contract low 411¢/bu (figure 2).  In AUD terms CBOT is at just $202/t, down around $8 for the week.  Basis just keeps getting stronger.

The week ahead

As we outlined in the Canola analysis earlier in the week, it looks like a hold at the moment.  Sales of milling wheat, for those fortunate enough to have it in store already, can probably and wait to see how prices wash out after the rain.  Feed grain prices are unlikely to find any strength from here, so if looking for cash flow, feed barley and wheat would be grains with the least upside, and most downside.

The Chicago futures market was closed for the thanksgiving holiday, causing the market to be quiet. In this update we take a look at pricing, and radioactive issues in Russia. We know the Russian crop is growing, but is it also glowing?

The markets were quiet this week, as they celebrate thanksgiving in America. In figure 1, we can see that the futures market continues to trade in a narrow range of around 10¢/bu (A$5/mt). The lack of fresh news is likely to continue trading this range for the rest of this year, with the worlds production now largely locked in.

The one piece of potentially bullish news, is the BOM prediction of a La Nina event over the summer. They are predicting that this event will be weak, and likely to lead to heatwaves in eastern Australia as opposed to the usual La Nina effect of wetter conditions. Typically, a La Nina event can cause dry conditions in the US cropping belt (see map), however is unlikely to have a significant impact unless it continues through into our Autumn.

The local harvest is not without its issues, we have seen hail in Esperance & rain in SA/VIC challenging farmers patience. The pricing around the country has flatlined, with little in the way of movement since the beginning of November (figure 2). Interestingly, the major frost event in the western districts of Victoria has had little in the way of impact on the Geelong price. The question will be whether there is enough grain to avoid a price rise, or is the trade underestimating the impact?

The Russian crop continues to place pressure on the wheat market, with black sea origin wheat winning nearly every tender since September. In figure 3, the wheat production from Ukraine, Russia and Australia are plotted since 1988. It is clear that the advancements in the Russian crop through a combination of opening new land, agronomy and technology have led to a stratospheric rise in production.

It is growing, but is it also glowing? It was revealed that a radioactive substance ‘Ruthenium 106’ had been detective in the Ural Mountains at 1000 times higher than normal levels. This indicates the likelihood of an incident at a Russian nuclear facility. It is expected that although high levels, that it is not at the degree to impact lives. There were rumours of traders covering short positions, as this news developed. However, it is unlikely that this event will cause a huge impact to the Russian grain machine.

Here’s a joke for the weekend:

What did the nuclear physicist have for lunch?

Fission chips

I don’t envisage the market reacting to the Russian radiation story, so I wouldn’t be hoping for a price rise based on this.

The futures market is likely to continue treading water next week, as there are limited drivers in the market. At a local level basis levels remain small, but there could be potential for price rises in Geelong as a result of the realisation of the extent of the frost damage in the Western Districts.

The market continues to trade with a lack of strong fresh information. The real focus now is on what is happening locally. We continue to sit at strong local levels, but how long will it last?

On the global stage, Chicago wheat futures took a tumble this week (figure 1), returning to levels from the beginning of the month. The market continues to trade on the large global stocks, and eyes will be on export numbers to determine how quickly end-stocks will be depleted in the major exporters. As it currently stands without increased weather woes in the northern hemisphere there is likely to be little in the way of upward momentum.

At a local level, prices have been trending downwards to flat (figure 2) during November. However, across the board, APW1 prices have fallen substantially since the beginning of October.

• Port Kembla -$39
• Geelong -$30
• Adelaide -$18
• Port Lincoln -$20
• Kwinana $-14

On the first weekend of November, an unseasonal frost event impacted Victoria. Our discussions with numerous consultants point to major losses to cereals. This is yet to be reflected in pricing with Geelong trading lower than the beginning of the month.

During October strong rainfall events have added some confidence to the summer sorghum crop, which reduced the concerns that domestic feed consumers had. This has led to a fall in basis levels (figure 3), especially in the areas which are within a potential drawing arc of NNSW/SQLD. We have highlighted the risk in pricing levels falling as we advance into harvest, these are worth re-reading.

Lock in premiums, keep exposure to the market

Wheat seasonality: Imitation is the sincerest form of flattery

Let’s look back at historical basis

What does this mean?

The key concern we see, is the status of the crop in Victoria. It has been two weeks since the major frost event, which is considered a 1 in 20-year event. The crop was looking fantastic in the Western Districts, and to see it fail so close to harvest, is completely heartbreaking and devastating. The full extent of the damage will be only be realised when the header goes into the crop.

The US Department of Agriculture released their World Agricultural Supply and Demand Estimates overnight. In this week’s comment, we will take a look at the impact on wheat, and report on new import barriers being erected in India.

In last week’s comment, I mentioned that this report would be released, and that there would be little in the way of surprises. This has largely been the case, with no major changes occurring. Unsurprisingly, the Russian crop was further increased by 1mmt, to a record wheat harvest of 83mmt. All in all, without beating around the bush, we are still in a world with a glut of wheat (fig 1). There are arguments that a large proportion of this stock is in China and not available to the export market, however the reality is that global prices are likely to stay depressed for some time.

The USDA have a relatively poor performance when it comes to forecasting Australia, and we tend to believe that the WASDE is usually around 2 months out of sync with reality. In table 1, the WASDE details for Australia are detailed. The items which stand out for future revision for me are:

• Beginning stocks: These are likely too high, and after such a strong export program this is likely to be revised back close to 5-5.5mmt.
• Production: USDA remain on the high end of the spectrum when it comes to Australian forecasts. A final production figure closer to 7mmt is more likely.
• Exports: An export program of 17.5mmt is extremely ambitious for the coming year, and when production and beginning stocks are brought back to reality will be a hard task to complete.
• Domestic consumption: The domestic consumption figure is sitting on the previous ten-year average, however this year there are a record number of cattle on feed.

So how did the WASDE report impact the markets? The answer is unfortunately for growers is minimally (figure 2). There was little in the way of surprises, and the report largely met trade expectations. After some short covering in the lead up to the report, the market regained it’s losses and is 5¢/bu or A$1 higher than this time last week.

A couple of weeks ago I flagged in the comment, “An Indian Summer”, that the Indian government was likely to implement a 20-25% import duty on wheat. In the past two days, the import duty on wheat was set to 20%. This is in place to discourage imports of wheat, and give positive price signals to local growers. In figure 3, Indian wheat futures on the NCDEX exchange are plotted, and we can see that yesterday the market started the day at A$345 shortly hitting A$353, and ending the day up A$3.

Although we don’t regularly examine pulse markets, a massive duty of 50% has been applied to peas. This is largely to disrupt the import from Canada, but for pea growers in Australia this will be felt.

What does this mean?

The November report is out of the way, and the December report is largely void of any worth. This means that by now and February the only influences on the global market from a fundamental point of view with any value will come from either Australia or South America.

We are going to have to wait until the northern hemisphere weather risk period to see any substantive rallies in the futures market. This does however provide opportunities for consumers to hedge values, or for growers to take out long swap positions.

Australian is on the cusp of being full blown harvest, with all states (ex Tasmania) showing some activity. In the coming weeks, harvest proper will be upon us, and we will start to see how accurate the crop forecasts have been.

The futures market saw a sharp drop mid week, with the December 2017 contract falling to contract lows (fig 1). This follows the seasonal pattern which has emerged over the previous two years “Wheat seasonality”. The lack of fresh data, along with a global glut of wheat has given rise to a continued bear market. However, overnight we saw a strong rally (fig 2) which recovered most of the losses of the past few days. This was likely a result of speculators taking profits from short positions, potentially (or hopefully) a sign that the market may be reaching a floor.

The bulk of the harvest is currently centred around NNSW, Queensland, Geraldton & Esperance. In the coming weeks it will move into full swing in the other areas. At present there have been some surprises, with growers getting better results than expected in Qld & NNSW, however the outcome is still going to be well below average.

In local pricing (fig 3), the benchmark APW1 price has seen falls of 1-2%, with South Australia seeing the largest falls. The market however continues to show very strong basis levels, and there are potential downside risks as outlined in our article, “Let’s look at historical basis”. The lack grower forward selling this season, could lead to a pressure on harvest pricing, which we have seen in recent years.

As more certainty on production comes to light, it is advisable to consider trading some physical wheat, as a cover for if basis levels do fall.  At present due to the unknown quality profile, it is prudent to continue to utilise multigrade contracts.

Next Week

In the next week the November WASDE report will be released, it is not expected to bring many surprises and the market will continue to have a neutral to bearish tone. It is unlikely that large market rises will occur prior to the start of the northern hemisphere risk market.

The market continues to follow a similar pattern to recent weeks. In this week’s comment, we look at futures & basis levels. In addition, we look at where our main competitor (Russia) is pricing its wheat. 

When it comes to wheat markets, we are in the dead zone. A time when there is a lack of fresh data to give the market a strong direction. In figure 1, Chicago wheat futures are displayed in both A$/mt & US$/mt. In A$ terms the Dec futures are up $7/mt week on week, however remain $1.7 down since the start of the month. The fall in the A$ against the US$ has helped balance against the fall in futures, so the fall has not been as strong (figure 1).

Throughout October, we have been warning readers that basis levels were unlikely to be maintained at levels seen at the start of the month. In the past week, basis levels have continued to fall (figure 2). This in combination with the low futures levels, reduces the overall price available to growers. The analysis article yesterday “Swap update” delves into more detail on using swaps to gain full advantage of the market.

The Russian crop keeps going from strength to strength, with estimates >82mmt. As we all know Russian/Ukraine are now our biggest competitors on the export market, and it is of paramount important to keep an eye on them. In figure 3, we can see that in A$ terms Russian wheat has increased strongly in the past month. This is helpful for Australian growers, as it makes our wheat compete more effectively.

Next week

At a local level, Australia is weeks away from the start of harvest and that is where our focus should lie.

It is important to ensure that you have a plan in place, for marketing your grain. At present grower selling is very low, and this could lead to a degree of harvest pressure on pricing.

The Australian Bureau of Agricultural Resource Economics and Sciences (ABARES) made an interesting move this week, warning of crop downgrades.  Meanwhile the United States Department of Agriculture (USDA) made their monthly predictions.

ABARES don’t often flag what they are going to say in their reports, but this yesterday they put out a release telling us what we already know.  Growing conditions have not been great in NSW, and there is likely to be some yield downgrades, but they also noted that recent rain may have saved some crops in the Riverina and Central cropping zones.

This news was picked up in international markets, but like here, it has been widely reported and didn’t have much impact on markets.

The World Agricultural Supply and Demand Estimates (WASDE) from the USDA did move the market however.  Figure 1 shows the changes from September, with the headline figures being the downgrade in Oilseed stocks, and the upgrade in wheat stocks.

The USDA predicted lower yields for soybean crops being harvested now, and this wiped half a million tonnes off US production.  The market was expecting an increase, and the report saw soybean prices jump 2.4% higher.  Unfortunately for Australian growers this didn’t really translate into higher prices, with ICE Canola up just $2 to $CA502.6/t for January 18.

Global wheat production was lifted 5.3mmt thanks to improving production in the EU and India.  The USDA did downgrade the Australian crop by 1mmt to 21.5mmt.  Figure 2 shows we are still well and truly on track for a record carryout for 17/18.

The week ahead

Wheat prices in Chicago lost a few cents last night, but the AUD was up so swaps will be a bit weaker today.  Domestic basis is driving most of the change in price at the moment, and recent rain has seen it weaken, especially in southern states.  Sellers will obviously be more confident of production now.

Historically October marks the seasonal low for corn and soybean prices, so we might find some support for international markets over the coming months, translating into better prices here.

Futures markets edged lower this week, but were balanced by a fall in the Aussie dollar. In this week’s comment, we look at rumours of increased import duties in India, and local premiums over Chicago futures.

The futures market lost strength over the past week, with a week on week change of 11.5¢/bu (figure 1) or approximately A$5.4/mt. There hasn’t been much in the way of fresh information in recent weeks to drastically move the markets.  The A$, has also fallen to 77¢, from 80¢ this time a month ago, provided some comfort to pricing.

There are rumours that India will increase import duties from 10% to 20-25% in the coming weeks. The Indian government are likely to introduce to an increased wheat import duty in order to encourage local producers to plant wheat, by making foreign wheat more expensive. India is very much an on-off importer (figure 2), and in recent years has become more important, however as we can see in figure 2, they often switch between an exporting and importing nation. It must be said that as the Indian economy grows, along with an expanding population that imports are liable to swell.

At a local level, we have seen some rain around the country. I am sceptical at this point that it will be beneficial in northern NSW & QLD, however will help the Victorian crop. At present basis levels continue to stay strong due to the domestic demand, and in Port Kembla premiums over Chicago futures continue to remain at historically high levels (figure 3). The question remains, how long will these premiums remain. In Australia around 8-9mmt of wheat is required domestically, even though this is a poor production year we will have more than enough to meet requirements especially when we consider carryover from last season.

There are very few growers who have forward sold for the coming harvest, it is advisable to consider selling a small parcel, as these levels are attractive. If it turns out to be the worst price you receive for the season, then it is still a good number.

Next Week/What does this mean?

The WASDE report is due on the 12^th, however it is hard to see much in the way of surprises. I would expect Australia to be downgraded from 22.5mmt to 20-21mmt.

It is likely that an official announcement on wheat import duties into India will be announced in the next week.