Category: Grain

Trump, Mandates, Exports and a bigger South American crop

Markets showed some of their traditional (northern hemisphere) spring volatility this week.  Rumoured ethanol mandates in the US pushed all markets higher, before some of the sting came out of the rise thanks to increases in South American corn and soybean production forecasts.
There were rumours this week that there might be some form of ‘Executive Order’ regarding the amount of Ethanol to be produced in the US.  Without boring you with the details, the market took the view that Trump was going to increase the demand for ethanol, which means more corn and oilseeds will be required in the US to make it.

The market was looking for some news, and it jumped higher on Tuesday night.  Wheat gained 14¢, Corn 10¢ and Soybeans 16¢.  In Canada canola joined in, with the ICE Spot contract gaining $17 to hit a new 3 month high in Canadian terms.  In our terms ICE has been bouncing between $500 and $520/t since November, with physical prices in a similar, but slightly higher range (figure 1).  This week canola was close to its highest levels since November.

Despite the AUD sitting around 76US¢, CBOT in our terms reached a new 8 month high this week with the May contract hitting $217/t (figure 2).  Dec-16 is back above $240/t and looks reasonable selling value.  Especially compared to ASX Jan-18, which at $248 is showing weaker than normal basis, although we do have a big crop to carry through.
There was some export demand in markets this week, pushing wheat prices slightly higher.  Plenty of APW trades went through on CLEAR at levels $10-15 higher than published bids, but prices were still only in the $210-215 Port range.  This is close to parity with CBOT wheat.

The week ahead

The grim weather outlook released last week might add a bit of strength to grain prices.  From now on many grower will take the view that grain in store is a good drought hedge, with prices likely to have a lift if the autumn break is late, or worst case, non-existent.

The problem with this theory is that there is still a lot of grain out there, which will could flood the market at certain times.  As usual the key is to watch the basis, as this is a good indication of selling opportunity.

 

 

Grain prices have improved…….

The futures market has improved since the start of harvest, but locally that hasn’t transpired into higher prices. In this week’s comment, we look at the direction of the market since the beginning of November, and where the winners and losers have been.

The futures market has trended upwards since the beginning of November. This can be seen in figure 1, where the market collapsed in early December as record global stocks were realised. The market has since recovered as increased demand and weather concerns in the northern hemisphere fill the news.

The difference between the low and high of this period, equates to A$33. Whilst between the low and current levels is A$25. The A$ has averaged 74.8US¢ during this period.

When we look at a local level, at the physical APW1 price (figure 2), the trend across most ports has been for the market to trade in a narrow band and is currently sitting at similar levels to the start of November. The glaring exceptions are Adelaide, Port Lincoln and Geelong which are trading substantially below their start of harvest pricing levels.

The fall of local basis will hardly be a surprise to anyone reading Mecardo website. We have been discussing this as a likely reaction to the reality of a huge local production throughout 2016. The fall in basis levels can be seen in figure 3.  Again, Port Lincoln is noticeable with APW1 at port falling into negative basis in mid-Dec. Geelong and Adelaide have both danced around negative basis but have never strayed below for an extended period of time this harvest.

 

Next week

All eyes on the weather. Locally the BOM point towards it being drier than normal for the next three months, which will start to zap away some of that beneficial subsoil moisture that has been retained from the wet winter and spring.

The IGC have forecast that the 2017/18 global wheat plantings will largely be similar to 2016/17. We need to keep a close eye on what is happening in the north, and a major crop disaster is required (hopefully elsewhere) to give a substantial rise.

Boats float the price

Soft wheat and feed barley prices have continued their move higher this week. Exporters are chasing these lower grades as they have become very cheap. Chicago Board of Trade also found some extra strength, until last night, which has been adding support locally, and providing some opportunity for new crop.

Most of the talk this week has been around ASW, especially in Victoria. With the Shipping Stems showing multiple boats are coming into Melbourne, Geelong and Portland over the coming month, looking for wheat, buyers are having to lift prices to secure supplies.

Plenty of ASW has been bought on CLEAR Grain Exchange, and direct through brokers at around $200/t Port in Geelong and Portland. Port Adelaide has seen action on ASW between $190 and $200/t. In the Melbourne Port Zone ASW had been up to $205/t.

The improving prices for ASW have been due to both increasing CBOT values, and rising basis. Geelong ASW basis has bounced off a four year low of -$27, to sit at a more respectable -$14 yesterday (figure 1). Additionally CBOT wheat has held onto most of its gains from recent weeks, sitting at $215/t in our terms. The result is ASW up around $20 from its lows. While the absolute price doesn’t sound great, a more than 10% increase should be welcome.

Feed Barley has also made gains, but more moderate, up $10 from the lows to sit at around $165/t at Port. Again, absolute prices are not great, but the increase has at least provided some payoff from storing.

The week ahead
CBOT tried to break out of its five year downtrend last night, but came crashing back thanks to the sheer volume of wheat in the world. December-17 and March-18 CBOT wheat is priced around $250/t, and at better than full carry to the current market. This equates to a local APW price of $240-260/t under current basis levels, which looks pretty attractive given the state of the market at present (figure 2).

Wheat gets a boost from the WASDE

Normally World Agricultural Supply and Demand (WASDE) reports released early in the year are relatively benign. The old crop is largely known, with only minor changes in exports to move the market. Not this month however, with wheat getting a boost thanks to some surprises.

Picture1World wheat production was cut by 4.4mmt this month, largely thanks to a downgrade in India. The United States Department of Agriculture (USDA) are still saying 2016-17 will be the biggest crop on record. However, a small increase in consumption (Table 1) and a decrease in ending stocks saw the stocks to use ratio decline from 34.2% to 33.5%. Sounds small, but as shown in figure 2, the stock to use for 16/17 is now smaller than last year.

Picture2In theory, a smaller stocks to use ratio should mean higher prices than last year. This had funds jumping out of wheat last night, pushing the CBOT spot contract to a 7 month high of 442¢/bu (figure 3). Still a long way from the 500¢ of February 2016.

Picture3In our terms the stronger AUD sees prices just below the 7 month highs hit in January, with the spot contract at $213/t, up $5 for the week, and Dec-17 at $238/t, shown by the red line on figure 3. There is full carry into Dec-17, and those concerned about prices ticking along at current levels for another year might be tempted to sell a bit at these levels.
Soybeans took a bit of a hit on an upgrade in US stocks, but oilseeds in general were stronger. ICE Canola has moved back to its recent high of $CA527/t which in our terms is exactly the same, thanks to the currencies being at parity.

The week ahead
Old crop wheat has found a little bit of strength in the last week as a stronger CBOT, and buying for export shipments has added $5-10 to APW and ASW prices. The latest jump in CBOT might add another few dollars today.

The latest WASDE shows we are entering a traditionally volatile period for grain prices on international markets, and there might be opportunities to take some derivative cover for next year, or even on physical sales to be made later in 2017.

Ameri-can and Mexi-can’t

It’s now nearly a week since Trump was sworn in,
and he has been busy signing executive orders. The
market is tentatively watching Trumps actions,
especially when it comes to corn.

One of the first acts which Trump performed was a
freeze on the activities of the Environmental
Protection Agency (EPA). This has caused a high
degree of consternation by climate change proponents
throughout the world. One of the key environmental
policies introduced by the EPA under the Obama
administration was the renewable fuel
standard/biofuel mandate. This required petroleum
producers to blend at least 10% bioethanol with fossil
oil, and there were plans to increase the blend.

This is great news for corn producers in the US, as it
created a relatively inelastic demand for corn to
maintain the blending ratio. It is speculated that
Trump may at the least curtail the biofuel mandate,
which would have a detrimental impact on demand
and therefore price.

In addition, Trump has continued his calls for a wall
between Mexico and the US which unsurprisingly is
increasing tensions between the two nations. The US
and Mexico are strong trade partners when it comes to
corn, with nearly all corn imports in Mexico originating
in the US.

Any issue with trade between the two countries would be
likely to impact corn (and linked feeds), as Mexico is the
2nd largest importer of corn in the world. In recent months,
Mexican buying power has already been eroded, with the
value of the US$ rising against the Peso, since the day of
the election (figure 1).

The biofuel mandate and the deteriorating Mexico-US
relations have impacted the corn market (figure 2) in recent
days, a deteriorating corn price will flow through to other feed
grains such as sorghum and barley.

Trump’s executive orders could be extremely negative to US
corn farmers. It is yet to be seen how far the policies enacted
by the president will marry up with his election speeches, but so
far, he has held up to his word. I would however expect that the
strong farm lobby in the US, where has a high degree of support
will in time make his moves more cautious.

The Week Ahead

Politics will continue to play a part as the market unwinds
Trump’s intentions, however eyes will start to move towards
the progress of the northern hemisphere crop.

It is still too early to form a strong view on the global crop,
but to raise prices substantially we do require a supply shock.

Make grain great again

This week Obama is out, and Trump is officially in.
The world will be watching as the new ‘leader of the
free world’ takes office, and whether he will still be
moving the markets through his twitter account.
The market is looking forward to the 2017/18 harvest,
and wondering how the global wheat crop will look
for next year. Will plantings be down?

The futures market had a strong rally since the USDA
set their forecasts for the US winter wheat planting
at the lowest level since 1909, however the reality
has crept back into the market that global end stocks
are still record high. Although US plantings of wheat
are expected to be reduced, it is expected by the
International Grain Council (IGC) that the rest of
the world will largely be unchanged. The IGC point
to favourable conditions in the northern hemisphere
resulting in a predicted 17/18 crop of around 735mmt,
and the third largest on record. We have to remind
that forecasts at this time of year are open to large
margins of error, yet the market has responded with
falls overnight (figure 1).

At a local level it will not be a surprise to anyone
reading Mecardo updates over the past year that the
size of the harvest is pressuring basis. In table 1,
we have shown basis levels across a number of ports.
The general trend is that basis is slipping across all
ports, the most exceptional is Port Lincoln which
has steadily fallen into negative territory. In
Kwinana basis is still strong, however looking back
at December levels were greater than $50.

All eyes in the coming weeks will be on President-elect Trump,
with a wide degree of volatility expected.
This has already been seen with traders dumping the
US$ (figure 2) despite comments from federal reserve
pointing towards interest rate rises in the coming
weeks. Overnight Trump appointed George Perdue
as the secretary for agriculture. Perdue is the first
agriculture secretary since 1994 from out with the
Midwest, but has a wide range of experience within
the grain and livestock industries.

The Week Ahead

The inauguration will be held at 3am east Australian
time on Saturday morning, I will probably be up at
that time watching it thanks to a sleepless newborn.
There are a lot of contrary views when it comes to
Trump and regardless of your view of him his election
has produced a lot of energy. In the coming months,
we will get a strong view of whether candidate Trump
is the same as President Trump. One of the risks in
markets which is always extremely difficult to predict
is political, and we could see black swan events in the
coming months, and that is before we look at the
coming EU elections.

The world continues to be awash with wheat, and barring
any major weather event in the next 6-8 months, prices
will remain low. In the last four seasons the global crop
has largely made it through without any major hiccups –
can we get a “five-peat”?

The 7th poll & speculators

A great week for farmers on the grain markets. The speculators whom many like to chastise for being involved in the grain markets, in combination with worsening weather, have helped put a little fire under the wheat market.

The futures markets have provided a welcome rally in the past week (figure 1) for grain growers. The market has largely been moved by poor weather conditions in the US & Europe. The speculators being very short in the market has led to ‘short covering’, which has magnified moves. So in future, when people complain about speculators in the market, remind them that it works both ways.

East coast basis levels have conserved their gains from last week, and continue to be in positive territory across all zones which we regularly monitor (figure 2). Although basis and futures have both risen, unfortunately for growers the A$ has also risen to 75.2¢ which has reduced some of the benefits but still overall positive for pricing.

The Poms went back to the polls last night for the general election to decide on the government for the next 4/5 years. This will be the 7th major vote the UK has had since 2014, if they were spread evenly they would have went to the polls once every 159 days! The first exit polls have been released pointing towards a hung parliament, but we have to take them with a pinch of salt. The result however of the exit poll, has been a fall in the pound (Figure 3), as a hung parliament will put the government in a weak position for Brexit talks.

Next Week

The USDA will release the June WASDE overnight. Will there be any surprises in this month’s report? We have seen issues in Europe, and it wouldn’t be a surprise to see some production downgrades.

On Wednesday ABARES will release their quarterly Australian crop forecast. The dry experienced in WA/SA will result in lower yields for the coming season. This is traditionally a volatile time, and if positive reports emerge we can easily see much of these gains lost.

Conflict Grains

The last week has been quite quiet in the grain markets, with little in the way of new information. The lack of fresh data has had traders clutching at straws. In this week’s comment, we will take a general look at a potential source of volatility.
Figure 1
One of the pieces of information which traders have been keeping a close eye on is the situation in Ukraine. The eastern districts of Ukraine have been a flashpoint over the last couple of years with continuing violence between Russian backed rebels and the Ukrainian government. In recent weeks fighting, has escalated.

In recent years this violence has produced a number of black swan event which have driven prices, however the markets soon corrected as the flow of grain was largely unaffected. In figure 1, we can see that although violence has erupted, the Russian grain market has largely been unaffected.

Although it is always important to keep an open mind to these type of events, I am confident that unless wide scale warfare breaks out that the Russian/Ukrainian situation will have a minimal impact on pricing.

Figure2At a local level, we continue to see basis come under pressure. In figure 2, we can see that Geelong has now joined Port Lincoln in the negative basis club, with likely Adelaide to follow soon. The weight of harvest could likely keep basis levels depressed for sometime.

 

 

 

 

 

 

Next week

All eyes continue to be on the northern hemisphere weather, and the condition of the crop. At the moment there are no real major emergencies, and the market is quietly confident about the condition for 17/18.

The USDA world agricultural supply and demand estimates are released on Thursday, and we will update on them in next Fridays update.

 

Searching for some upside

The wheat market is trying to have a rally, at least in international
markets, while locally the sheer volumes of wheat in store, and
seeping out into the market appears to be depressing basis.
Canola basis has improved, but unfortunately it’s been due to futures
falling, not physical rising.

You wouldn’t know it looking at cash prices, but CBOT wheat has
gained $18/t, or 9%, since the start of December. Figure 1 shows
that the spot contract, which is now March, is sitting at a 6 month
high in our terms, but it’s still just $209/t.

Locally some of the price increase was seen, with track APW moving
from around $212 to $223/t, although late this week it dropped
back to $215/t. APW Basis to CBOT is now just $5/t, and it’s safe
to say we are now sitting at export parity. The good news is that
basis is unlikely to weaken further, and price movement will be largely
dependent on what happens in the international market.

Canola prices have eased in the last week, now sitting at around $520/t
on a port level (figure 2). The fall has been due to easing ICE canola
prices, with local basis improving marginally (figure 3). It appears
there is still plenty of Canola finding its way into the market, hence
basis being $50 lower than in October. There remains some potential
for basis upside.

Barley prices are ok at Port terminals at $170/t, but up country values
have fallen to around $152/t on a Port equivalent. Feed Barley prices
are now likely to be below export parity, and as such there is no hurry
to sell at these levels.

The Week Ahead

With the decline in wheat basis, it is now only the H2 wheats and better which look like reasonable selling, everything else looks like a hold, as there is very little downside to be concerned about. Unless, of course,
the international market returns to December lows, but this is unlikely
at this time of year.

 

A relatively sedate week

After weeks of ‘excitement’ in the grain trade, it’s a relief to see a relatively sedate week. In this week’s comment, we look globally and locally. We also revisit the forward curve, and the opportunities for locking in forward swaps.


Let’s start globally, by taking a look at futures. In figure 1, I have plotted the spot futures. The market closed at a low of 402¢/bu this week, however overnight has regained some composure to close at 409¢, however ultimately is down 5¢ on the week. This is a fall of around A$2/mt which in the overall scheme of the previous weeks falls is miniscule. The market is treading water whilst we await more data, however with the northern hemisphere weather risk market close to an end the signs are not good, and growers need to make sure their strategy reflects this.

Yesterday I examined the proposition ‘Can basis save us?’, ultimately it cannot save us, but it can insulate us at times from the rest of the world. In figure 2, the basis levels are displayed, In recent weeks basis levels have traded in a narrow range, however maintaining at strong levels. At present grower selling is low and sporadic, therefore the question remains of what will happen when harvest arrives and growers start to sell.

In early July we recommended the use of a Dec’18 Chicago swap in our article ‘Should we lock a far forward swap?.’ In figure 3, we have compared the wheat forward curve for yesterday and the 3rd July, when the prior article was written. In that time the Dec’18 wheat futures have fallen A$42/mt stripping away the opportunity which was present.

What does this mean?

The focus firmly remains on the Northern Hemisphere. There are a few questions still remaining; How close have USDA estimates been to reality on both the wheat and corn crop?, how is the quality profile stacking up in France and Germany?, What will the Canadian spring wheat perform?

We have always advocated having an appropriate risk management strategy, to ensure that you are able to weather the storms as they develop.

The futures prices seen in July, are unlikely to be seen again this year, and we have to prepare for that.