Local and international wheat markets continued to edge higher this week. Local markets are still trying to get a grip on where the crop will end up, as it shrinks by the day. The international market remains awash with wheat, but a rising rouble gave unlikely support.
Regular readers will be aware of the heavy wheat crop in Russia, and subsequent cheap exports emanating from the Black Sea. This week those exports became a little dearer, as the Russian currency, the Rouble, rallied against the US dollar.
This helped lift CBOT wheat futures to a five week high, with the December contract gaining 8¢ for the week to get back to 452¢/bu last night (figure 1). The Aussie dollar is not doing grain producers many favours, it’s stuck at 79US¢, putting December Swaps at $210/t in our terms.
Locally the dry spell in NSW continues to run down the potential crop, with prices responding accordingly. ASX East Coast wheat, which we must remember is now deliverable in Victoria, was quoted at $283/t yesterday, up around $10 for the week. Interestingly Geelong continued to lag a bit, although it was up around $14 for the week to $274/t (figure 2).
The more stricken zones of Newcastle and Port Kembla hit $321 (figure 2) and $316 respectively. A good price but unfortunately there won’t be much wheat to deliver at these prices.
Barley prices are lagging significantly in the north, priced at $268 (Newcastle) and $250/t (Port Kembla), but in Victoria they are at a more normal spread, about $40 behind APW, at $240/t.
Canola values are also at a premium in the northern cropping zones, but not as much as you would think. Newcastle Canola is priced around $550, with Geelong just $15 behind, at $535/t. It’s hard to see much canola being produced in NSW, but there might have been enough carry over from last year to satisfy local crushers.
The week ahead
While it remains dry the question is how much more of a premium can local wheat markets get on Chicago. In Port Kembla APW basis to CBOT broke through the $100/t mark this week. The old ASX wheat contract, which was deliverable only in NSW (figure 3) only went higher than $100 premium to CBOT during the 2007/08 harvest.
On Thursday, I will be presenting to the Crop Science Society of South Australia on the topic of GM crops, and the markets associated with them. I thought this was therefore an opportune time to look at the GM moratorium, and whether the promised premiums are available.
The South Australian government may point to a knock-on effect where other commodities are receiving a boost. In that case, we thought it was worthwhile checking how strong the premium for cattle and lamb had been due to being from a GM free state.
The South Australian ban on GM cultivation is providing little if no extra premium to prices of livestock and canola. There may be premiums in other sectors such as the seafood and wine industry, however this is of little comfort to canola producers.
The Australian east coast crop is a tale of two continents, with the bulk of NSW and QLD in a poor state, and Victoria/ East SA developing. The market is well and truly capturing the status of the crop, and the domestic market is pricing accordingly. This creates an issue of premiums being available (half full), but being unable to take advantage of them (half empty).
If a grower in Port Kembla had taken out a swap during the height of the July rally, then their overall price today would be >$370, which shows the value in strategic marketing using derivatives.
In the next week will we see the speculators continue to view the market as bearish, or will we start to see additional profit taking?
The US were busy celebrating labor day on Monday, well at least those not bracing for (or recovering from) Hurricanes. The market had a strong recovery prior to the holiday, with short sellers taking profits after a continuous decline over the past month (figure 1), however over the past two sessions the market has lost around half of these gains. The market was not helped by the Food and Agriculture Organisation raising its expectations for the global cereals crop to 2.6bmt, which would be the highest on record.
In figure 3, the basis levels as a percentage of the overall price are plotted. As we can see, there have been considerable rises in all zones. The rise was far more sedate in Kwinana, which has for the past 8 weeks maintained at strong levels, and the bulk of issues in the WA crop have been priced in. The basis levels as a percentage of the price in Kwinana and Port Kembla are now at historically high levels.
The key will be the USDA report, will there be any surprises? The recent upgrades to the Russian crop will likely give a bearish edge to the report.
In nautical terms, ‘Dead Calm’ is completely still sea, with the absence of wind or waves. The grain market could be considered to be in a period of dead calm, with the market waiting for some wind or waves in the form of substantial new data to blow us either way.
In contrast, Victoria seems to be the jewel in the crown and after having covered part of the state in recent days the crop looks to be in almost perfect condition, appearing to be on track for well above average yields.
In two weeks, we will have the September WASDE report released, along with the ABARES report. The question will be whether the trade has priced in any downgrade, or whether any likely downgrades will cause a stir.
In recent times, there have been accusations of Russian tampering in western politics. In the wheat game, the Russian crop is interfering with our grain pricing! In this week’s comment, we highlight the Black Sea, and its impact on global pricing.
In the past week there has been significant posturing from both the Donald, and North Korea threatening to bring ‘fire and fury’ upon one another. It looks like the USDA might have fired the first salvo, with the release of the August WASDE report. In this week’s comment, we will look at what the fallout has been.
The first week in August. This month is one of the most important in the cropping year, as we will have increased certainty on the rest of the world’s crop, and start to gain greater clarity on how good (or bad) Australia is going to be come December. It is the knife edge time of year.
At a local level flat price around the country have fallen since a peak on the 11th of July (figure 3). During the first week of July all port zones were able to achieve historically competitive prices, however few growers have taken advantage of the prices available. Since the 11th, across all ports in figure 3, the price has dropped by $32 per mt.
At global level, we have seen further deterioration of Chicago wheat futures, with the spot market falling to as low as 474¢/bu, from a high at the end of June of 539¢/bu (figure 1). The market has lost 3/4 of its gains in ¢/bu since the rally in the end of June. The fall in SRW wheat is not unexpected as weather issues around the world are more a quality than quantity issue at present, and with beneficial rains being received throughout the US, risk to this crop has reduced and priced into the market.
CBOT wheat prices managed to track sideways this week as the market digested the World Agricultural Supply and Demand (WASDE) report and weather outlooks improved. While the spot and Dec-17 CBOT wheat have fallen 50¢ from the peak, the Dec-18 contract is down 35¢. Dec-17 currently sits at 529¢/bu, with Dec-18 at 585¢ and full carry back in the market.
After also falling heavily last week, ICE Canola for Jan-18 has steadied at the $515CAD/t level. The Canadian dollar has matched the AUD increases, with the two currencies locked at parity, so swap prices remain around the $515/t value. With local port prices at $530-535/t, the basis value doesn’t look to be there, so swaps would be the way to go at the moment.