Category: Grain

Another relatively quiet week in the grain trade both locally and globally. In the past week, there have been further crop forecasts released, weather woes and political posturing from the Trump administration.

The wheat futures market has been on a downward trend since the start of the month (figure 1), and fell to as low as 398.5¢/bu. Overnight, futures rose around 5.75¢/bu (or A$2.8), it’s not enough to get overly excited about but any rise is better than a fall. The rise can be attributed to a recovery from falls in previous nights over concerns of posturing by Trump (more below), and concerns relating to cold weather. Although there will likely be issues with yield and quality in the US, it is still too early to get a realistic picture of any damage.

The International grain council (IGC) released updates to their projections, there were few surprises. Overall grain supplies are projected at their historic high (2.6bn mt) for 2016/17, and old crop end stocks will largely cancel out lower production in the 2017/18 season. Our view still remains the same that a large supply shock is required to put fire under wheat prices to an excitable level.

At a local level this week has been a short one due to the ANZAC day commemorations, which also traditionally has been a trigger for widespread crop planting around the country. Where it is not too wet to get machinery into the paddocks the country is for the most part in full swing. However, we have seen a sudden dip in basis levels across all port zones (figure 2), with Adelaide now following Port Lincoln into negative basis territory.

This week there were concerns that Trump was ready to scrap the North America free trade agreement (NAFTA), however it was later announced that there would a ‘renegotiation’. Free trade agreements were at the centre of Trumps campaign, with fears that they negatively impacted on American jobs. The removal of NAFTA would be a worry for American grain growers, as trade with Mexico has drastically increased since 1994 when it was enacted (figure 3). The overwhelming majority of imports are from the US but in recent months it is speculated that Mexican buyers have been examining options from the South (Argentina & Brazil).

What does this mean?

The grain trade will be keeping an eye on the weather in Europe and North America, in order to determine whether there are any major concerns.

At a local level, most farmers will be concentrating on getting a crop into the ground and marketing for old and new crop will largely be put to the back of the mind.

On a separate note growers holding old crop grain in silo bags in areas where mice are starting to become a ‘plague’ concern are advised to double check any bags for infestation.

Another week, and another week of relatively flat prices for wheat.  There was some upside for canola in international markets, which is providing some opportunity.  There has been some talk around regarding CBOT wheat being primed for a spike, and there might be something in it.

Earlier this week we took a look at some of the production data US wheat markets take note of, and there is also some data which shows how traders react.  The CFTC Traders Summary tells us what type of trader holds long or short positions in CBOT wheat.

The most interesting data in the Traders Summary report comes from the Managed Money positions, where they report how many are long and how many are short.  Figure 1 shows the Managed Money short positions have been climbing stronger, and sit close to an 18 month high.  The Net Short, that is the number of short positions minus long positions, also sits close to a high.

This basically means that speculators are punting on wheat prices falling, as they are heavily sold.  While this is the general feeling in the market, it does bring opportunity.  If something does go wrong with production somewhere, there are a lot of sold positions which will need to be bought back in a hurry, which can add impetus to any price rally.

Canola has found some strength in Canada this week as wet weather delays sowing.  The spot ICE contract rallied over $30 to $520/t, while Jan-18 gained $15 to sit at $497/t today.  With the weather forecast not looking favourable for sowing, there could be some more upside for Canola.

The week ahead

With Anzac Day, and rain falling last week, conditions for sowing are almost ideal.  Any grain growers who haven’t started yet will be well and truly underway next week, and old crop selling into delivered markets might slow.  This could see some improvement in local basis, but I’m not sure I’d want to be a seller in 6 weeks’ time when growers look to quit some stocks.

The Chicago wheat market found a bit of strength this week on the back of some less than ideal sowing weather.  This sees spring crop going in late, and the spectre of some areas not getting in at all.  All this despite another relatively bearish WASDE report.

In reality, price movements were small in international markets this week.  But after months of tracking sideways at low levels, commentators need something to talk about.  CBOT wheat gained 9¢ over a few sessions, to hit a two week high of 432¢/bu.  In our terms this puts spot wheat at $212/t (figure 1), and December 17 at $235.

In oilseeds the usually benign April WASDE report threw up a few surprises.  The USDA increased Brazilian soybean production by nearly 3mmt, which had the flow on effect of increasing global ending stocks by 5.6% (figure 2).  This was well beyond expectations and saw soybeans fall around 10¢, before recovering to actually post a gain for the week.

ICE Canola followed soybeans lower, but changes were marginal with Jan 18 sitting at $481/t.  With the AUD/CAD currently at parity it’s not hard to work out what the price is in our terms.

Locally there is little going on in markets.  Wheat, barley and canola prices continue to track sideways as growers and buyers continue the standoff.  Growers say they need higher prices, buyers know there is heaps of wheat out there which has to be sold at some stage.

The week ahead

The coming month sees the USDA release their first estimate for the 2017/18 growing season, and this can often bring volatility to the market.  There is no doubt US wheat production is going to be lower, but whether this can move the market remains to be seen.

In the short term selling opportunities continue to revolve around export deadlines and delivered markets.

When the weather is benign the market starts looking for reasons to move.  Last night it was the slow pace of wheat shipments leaving US ports.  Locally markets have been rather steady, with some short term opportunities cropping up on shipping squeezes.

Figure 1 shows a rather boring CBOT wheat chart.  Recent swings in prices have been small on an historical scale. As the volume of supplies dampens any attempts at a real price rally.

CBOT finishes this week down 2¢ at 423¢/bu, having been as high as 429¢ and as low as 421¢.  In our terms, CBOT remains stuck in its $225-235/t range, which while being unexciting on a hedging front, will deliver a price at least 10% higher than the 16-17 harvest.

ASX East Coast Wheat Futures are maintaining their premium to CBOT, possibly assisted by the Bureau of Meteorology’s latest 3 month outlook (Figure 2).  ASX Jan-18 currently sits at $241/t which is obviously better than current values.

The new ASX contract is deliverable in Victoria, NSW and Queensland, which makes it more attractive to sellers.  Even with the spot contract for May at $221/t, there would be an advantage at some Victoria sites in selling futures and going to delivery, rather than taking site bids which equate to prices $5-10 lower.

There has been intermittent interest in Canola, ASW and Feed Barley in recent weeks, with some growers managing $10-20 premium on published bids when buyers are trying to fill ships.  If you’ve got wheat in store it’s worth looking at the shipping stem to see when boats are going and trying your luck with offers on Clear, or by talking to buyers or brokers.

The week ahead

Figure 2 is even making news in international grain wires, with some concern around the sowing of the coming winter crop.  It hasn’t done much for prices, but if we do see a late autumn break, spot prices are likely to creep higher as growers use abundant grain in store as a drought hedge.

Our target for hedging new crop continues to be at the $250/t level for wheat, and $500 for Canola, both of which are a little way off.  As usual growers are should be hoping that Figure 2 is wrong, and US and or Russian growers get some bad weather during their spring and summer, to take the edge off heavy world supplies.

In nautical terms, dead calm is the absence of wind or waves. It feels that way at the moment in the grain trade. The market has largely drifting with little in the way of wind or waves to give momentum in any direction. Will the USDA & IGC report provide some wind behind our sails?

In the summary, we pointed out the largely directionless market, this can be seen in figure 1. The futures market has traded in a largely narrow band between 420-430¢/bu since the beginning of the year, with the exception of a short rise in mid-February caused by concerns of poor US rainfall. It has to be noted that the rise in February, although it looks large on this chart, it is far from an astronomical rise equating to only around $9.

However, a rise in futures does not always equate to a rise in local prices, in figure 2. We can see that during February basis levels around Australia fell close to the same level that futures rose. A real case “One hand giveth, the other taketh away”. In the past ten days, basis in the main ports around Australia has largely stabilised.

Yesterday the International Grain Council (IGC) released their global crop forecasts, and although not particularly positive for prices, does provide some hope for the future. The report indicates that in 2017/18 global wheat production would fall from 745mmt to 735mmt, with end stocks to be around 484mmt versus 513 this year. It has to be tempered that this would still remain the 2^nd highest stocks in history. However, it does start to show a depletion in global stocks.

Next week

Overnight the USDA will release their stocks and prospective plantings report for the US. The report has the potential to move markets, and with expectations of diminished plantings in the US – will there be any surprises?

There are a lot of growers holding grain in their ownership, either on farm or central storage. In a directionless market, it is time to start thinking of alternative strategies to avoid accumulating storage charges.

I will be on holiday for the next three weeks in sunny Scotland, however my counterpart Angus will be covering the grain analysis and commentary.

At times, I feel jealous of my counterparts writing about the livestock and wool markets. They always seem to have something positive to comment on with markets driving higher. However, markets are cyclical and things can change quickly.

The futures market has subsided (figure 1) in the past week, as areas of dry concern receive forecasts of substantial rain in the US, and minimal bad news coming out of Europe. The reality is that the trade is concerned about USDA stock reports due next week. This asks the question, what if exports have not been high enough to deplete stocks?

The extent of the global stocks is applying pressure, which since the start of the year has seen the spot futures trade in a band of 20¢/bu from 420¢ to 440¢. When we look at the seasonality of the spot futures contract (figure 2 -animated) we can see that we are well below the average since 2010, yet looking back further to 2000 & 2005, we are closer to the average futures price.

However at a local level, we have seen basis increase across all port zones (figure 3) at an average increase week on week of $3.50/mt. This is using the public bid, and there are further opportunities out there for non-public sales.

We expect also that in coming weeks, we may see improving feed barley prices as buyers scramble to fill orders for the massive sales into Saudi Arabia. So, it’s not all bad!

Next week

All eyes on the northern hemisphere, every day that goes by without hiccup is a day with less risk. The major risk is huge carryout and an average to above average crop.

We will get an insight into inventory levels with next week’s USDA quarterly stock report.

Another interesting week in the markets this week. The grain markets lost some ground, before regaining their losses. The US fed increased interest rates for the 2^nd time in three months, however the impact on the A$ was not as expected due to less hawkish sentiment.

Early this week wheat futures fell on the back of lack of fresh data, and encouraging crop conditions in eastern Europe. The generally benign conditions and the large global surplus is keeping a dampener on large upside potential. The market fell around 15¢/bu ($5.7USD/mt), before regaining strength to hold currently 8¢/bu ($2.3USD/mt) above last Friday (figure 1).

At a local level we saw basis levels fall across the board (figure 2). The average change from early this week to yesterday was $8/mt, although the Eyre Peninsula was the poor cousin losing $10/mt in basis. In the chart it is quite clear that Port Lincoln since early December has struggle to gain any local strength.

This week the US fed jacked up their interest rates by 25 points, typically this would put pressure on the Australian dollar however this was not the case. The Australian dollar rose to above 77¢ (figure 3), and the AUD trade weighted index rose dramatically.

The fall in the US dollar was a result of the trade expecting, more bullish sentiment in the fed commentary, with the expectation of a more expedient increase in rates over the next 12 months. At a local level some analysts are projecting an Australian rate rise as being likely in the coming months. However, with inflation as low as it is at the moment its unlikely to see a local interest rate increase in the short term.

Next week

There are some concerns in the US related to dry weather, and eyes will be on weather forecasts pointing toward a deluge in the coming weeks. If this eventuates it will lead to an improvement in US crop potential.
As always at this time of year the focus is on the performance of the northern hemisphere, and each week which passes without incident will result in an eventual erosion of any weather premium in the market.

The United States Department of Agriculture (USDA) released their monthly World Agricultural Supply and Demand Estimates (WASDE) last night.  While there was little action in wheat markets, some rather large upgrades to production in soybeans and corn battered some prices.

It’s a bit unusual to get large shifts in supply or demand in the WASDE report at this end of the growing season.  Most world crops are all but in the bin, with just South American summer crops, corn and soybeans still to be harvested.

It was South America, and more precisely, Brazil, where the action was.  The USDA increased Brazil’s soybean production by 4mmt, and while the market was expecting a 2mmt rise, the size of the increase still gave it a jolt.  Brazil is now expected to produce 110.81mmt of soybeans this year, up nearly 11mmt on last year.  To put this in perspective Australian Canola production this year is expected to be 4.1mmt, so Brazil has added an Australian Oilseed crop in the last month.

Table 1 shows the lift in Brazilian production managed to shift world oilseed ending stocks nearly 3% higher (figure 2).  Increasing consumption means the stocks to use ratio is 17.2%, marginally higher than last year’s 16.9%.

The USDA also lifted Brazilian corn production, increasing 5mmt, and Argentina by 1mmt.  This increased world ending stocks by 1.4% thanks to some increases in consumption.  This sees the global stocks to use ratio still marginally lower than last year, which should provide some price support.

The week ahead

Not surprisingly grain prices fell across the board on the WASDE report, with soybeans down 1.5%, corn down 1.3% and wheat down marginally to sit at $215/t in our terms this morning.  ICE canola managed to hold it’s ground.

In local markets there was strong demand for wheat again this week, with the strong export program providing support despite the small decline in international wheat values.