Category: Grain

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.

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).

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.

World 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.

In 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.

In 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.

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 7^th 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.