Category: Grain

In recent weeks the major discussion point in the grain market has been the difficulty in planting the US corn crop due to the torrent of rainfall. However, the market has suddenly lost steam over recent days. What is happening?

I have been asked a few times in recent weeks why the focus is on corn. Figure 1 shows the relationship between corn and wheat, which represents the returns or the weekly price change in percentage for both grains. As we can see, there is a high degree of correlation between them, which effectively means that if one goes up the other will follow (and vice versa).

This highlights the relevance of changes in corn supply and demand to wheat pricing. So why has the market suddenly fallen?

The USDA released their acreage report. This report provides an insight into the planted areas for each of the main commodities grown in the US. The biggest surprise, however, was that after all the reports of drenched paddocks and flooded rivers, corn was suddenly 3% higher year on year (Table 1).

The reason why is that the survey conducted for the acreage report was conducted in early June, at the mid-point of the monsoonal conditions. The figure also included the intended acreage from early June, which is now very unlikely to have been achieved.

The USDA has realized that the data is likely to require revision and are going to resurvey to update the figures for the crop report due to be released in August.

What does it mean?:

The algorithms which trade on data are likely to be a significant factor driving the fall in futures prices. Although on paper acreage has increased, it is highly likely that this data is erroneous and will be updated.

We may just be seeing a breather and when updated data is released there is the possibility of a rebound.

Key Points

• Corn and wheat follow one another with a strong degree of correlation.
• The acreage report shows an increase year on year to the area planted to corn.
• This data is liable for major downward revisions.

The International Grains Council (IGC) released their June projections last night, with the changes in production largely expected.  The IGC might have disappointed a little on the corn and soybean front, with prices easing, while wheat stayed at its peak despite growing production.

The headline numbers out of the IGC Grain Market Report were a 2% reduction in forecasted corn production in 19/20.  The year on year fall in corn production is expected to be 3%.  There was little movement in corn markets last night, with CME Corn losing a little ground.

The IGC also cut soybean production for the coming season.  Soybeans were pegged 3.5% lower than the last projection, and 3.8% lower than last year.  Again, the declines in world production was largely expected, with soybean futures also easing marginally.

The IGC raised their wheat production forecast marginally, which took the year on year rise to 5%.  The wheat market ignored the increased production, and the falls in corn and soybeans to remain steady.  Recent dry weather concerns in Europe and the Black Sea regions have not been taken into account in the IGC forecasts, and the market is factoring in some weakening in production.

Figure 1 shows CBOT wheat and corn futures, and both are coming up against resistance at 550 and 450¢/bu respectively.  Given the still heavy supply forecasts for wheat it’s hard to see it gaining too much more ground without some serious cuts in production.

CBOT wheat is also finding some support from a slow harvest.  To last Sunday just 15% of US winter wheat was harvested.  This was well behind last year, and the five year average, of 39% and 34% respectively.

What does it mean/next week?:

There is more rain forecast for the US this week, so harvest is likely to remain slow, and support for prices continue.  The higher AUD this week has taken some of the shine of swap pricing, with figure 2 showing it’s not quite back at highs.  Even though it’s not at $300, swaps still look reasonably attractive.  A slow harvest in the US doesn’t mean the grain isn’t there, it might be downgraded, but should still see some harvest pressure when it dries out enough.

Improving prospects in WA contrast the continued dry weather in the east. Markets are reacting as would be expected, with confidence in the NSW crop starting to wane. Internationally, last week’s gains have been given back and east coast markets are still taking some notice.

WA’s rain for the month to date, combined with next week’s forecast, will see many cropping areas hit their June average.  While APW Multigrade prices in the west are not far off the highs seen at the start of the month, the improving prospects in the West have seen basis to CBOT weaken.

WA port prices for new crop wheat are currently in the $310-320/t range, and it’s not far off being priced into northern NSW and Queensland markets.

ASX wheat weakened a little this week, falling back to $334 from a high of $350/t earlier this week.  The fall has been largely in line with an easing CBOT, which yesterday settled at $285/t for Dec-19.

CBOT wheat bumped up against a ceiling at 550¢/bu. Figure 1 shows that 550¢ has been a solid resistance level since 2015. It is going to be hard for CBOT to move much higher without some issues with the Black Sea spring crop, or a serious push from corn.

New crop Canola prices have shown some more strength this week. The Geelong quote is at a new high of $587/t, which is a solid premium to old crop. Export demand seems to be holding new crop Canola at levels higher than old crop. It’s an odd conundrum that this years’ supply falling below an exportable surplus saw prices fall. We might see it again if ABARES forecasts are to be believed.

next week?:

Local wheat markets seem to be comfortable with southern states producing an exportable surplus of cereals. This is keeping a lid on ASX basis for the time being. Grain prices are still high in northern NSW and Queensland, with southern states simply at the freight difference.

If and when it does rain in NSW, it might be more a case of the north/south spread narrowing rather than ASX prices, which are currently priced in the south, moving lower.

Have you heard the one about the rain on the US Plains? Thought so. It might seem like déjà vu but the story remains the same, with a few twists thrown in this week.

More rain is falling or is forecast to fall across US cropping areas. Northern areas are being most affected, with soft red winter wheat quality now coming into question.  This concern, along with further rises in corn, managed to push CBOT back to recent highs last night.

Figure 1 shows the bounce CBOT experienced in US terms, just making a new three month high.  With the Aussie dollar relatively steady for the week, CBOT is also back to a three month high in our terms, at $287/t.

Jan-20 ASX Wheat traded at $333/t yesterday, with the rain across the cropping areas of SA and Victoria helping depress basis.  ASX basis is now down back under $50 per tonne (Figure 2) as the southern cereal crop now has enough moisture for the next month.  There is a long way to go though.

ASX Feed Barley traded at $278.50/t, and is now at a $55 discount to the wheat contract.  Barley rarely gets to such a discount, and this suggests it might be good buying for consumers.  World feed prices have been on the rise, with CBOT Corn now at $250/t in our terms, so further downside might be limited.

What does it mean/next week?:

It is now just NSW which needs the rain in a hurry. There is little prospect for the next 8 days, so we’ll have to wait a bit longer. Internationally the heavy supplies of wheat are being offset by tighter supplies of corn.  There could be further issues for corn, with the target for many the magic $300/t wheat swap, within reach.

The three week rally in Chicago wheat futures came to an abrupt halt this week. Despite little relief in terms of the weather in the US, the market turned around and took our new crop prices with it.

The market seemed to realise that even with rain impacting spring plantings in the US, there is still going to be plenty of wheat in the US this year. This, along with a little relief for Russia in the way of rain had CBOT wheat posting a 34¢ fall for the week.

In our terms CBOT has fallen from close to $285/t on Friday, to sit at $268/t last night (Figure 1).  This takes CBOT from sellable, with it representing a local port price over $300/t with a little basis, to a price which is neither here nor there.

ASX Jan-20 wheat has been all over the place. Figure 2 shows it peaking at $360/t last week, with sellers coming out this week and pushing it back down to $326 at yesterday’s close. While ASX has moved with CBOT, basis has still ranged from $75 at the peak, back to $60 yesterday.

The good rains forecast for cropping areas of Victoria, SA, WA and the Riverina (Figure 3) might be encouraging sellers. Maybe not growers, but speculators and the trade might be getting in on the selling.

Old crop bids have largely held their ground, despite the falls in new crop prices. Any grain which is yet to be sold is likely to be held now for the new financial year, and there seems to be no urgency from buyers.

Next week?:

With new crop ASX basis now back at the comfortable level, we’ll be back to following what is happening overseas. There is plenty of uncertainty there, with Swine Fever’s impact on demand being offset by potential lower supplies of corn in the US.

• Soybean prices hit 12 year lows earlier in the month but have recovered some ground.
• Canola and Rapeseed futures have also rallied, taking new crop Australian prices higher.
• Current new crop prices look like good selling with plenty of uncertainty in Canola markets.

International oilseed markets have been in the doldrums, with heavy supplies and weakening demand seeing prices hit a 12 year low. There are suggestions that the soybean market might have found a base, with local canola prices to benefit.

The United States Department of Agriculture’s (USDA) production forecast for 2019-20 is a new record. Despite an increase in consumption, ending stocks are expected to increase marginally.

The increase in stocks, along with concerns around the demand from China given trade wars and African Swine Fever, drove soybeans to new lows. In fact, it was only two weeks ago that soybeans hit a 12 year low of 780¢/bu (Figure 1).

In the last two weeks, soybean prices have rebounded, gaining 8%. The wet weather afflicting the spring cropping areas of the US was initially expected to be positive for soybean production. Later planting is better for soybeans than corn. With the wet continuing, support has started to come for soybeans, although it is way behind corn, which hit a one year high yesterday.

Adding to momentum in oilseeds is dry weather in Canada, which is helping ICE Canola move higher.  It has gained $21 in the last fortnight in our terms, moving higher from doldrums, induced by weak soybeans and China’s ban on Canadian Canola.

Our canola values have been held above $500 by strong European Rapeseed values. Figure 2 shows Matif Rapeseed prices are almost back to $600/t and this is having more of an impact on new crop prices than old.

Old crop canola values have found a little strength this week, gaining $10 to hit $560-565/t in southern ports. New crop Canola is $15 above old crop, and importantly, at a $30 discount to Matif.  The Australian discount to Matif generally doesn’t get any narrower unless we have a very small crop, like last year.

Canada’s issues with China see our Canola at an even stronger basis to ICE than last harvest. Australia’s strong basis is likely being helped by demand which has shifted from China, with few other major Canola producers to fill the hole.

What does it mean?:

By most measures, new crop canola prices look pretty good. Obviously, another drought affected crop could see canola rise further before harvest, as basis to Matif rose to $50 last October. There is some downside risk if China changes their view on Canadian imports, and if we get a big local crop.

With political issues clouding normal pricing relationships, it’s even harder than normal to forecast prices, but there is some merit in looking at prices which are at the top of the historical range.

What a difference a month made, seven hundred and thirty little hours. The market has turned 180° since this time last month. In this week’s comment, we take a look at what has caused this move.

The market tends to be volatile towards the end of the second quarter of the year (Figure 1), and this year is no exception. At the start of May, the global environment had a bearish undertone. The USDA had forecast a year of ample production with most of the grain growing regions experiencing strong annual growth. This led to a projected production of 777mmt and end stocks of 293mmt, both record levels.

The picture with wheat is likely to change in June when the USDA releases their updated datasets, however not by much. So why is the wheat price globally jumping?

The US has received unprecedented rainfall during May, which has meant that areas forecast for corn are now more suited for trout. In the United States, producers are heavily reliant upon insurance. To comply with the insurance coverage there are set final planting days. If you plant beyond the date coverage is dropped by 1%.

Click below to see maps:

• Soybeans
• Corn
• Winter Wheat
• Spring Wheat

The impact has been dramatic, with corn and wheat prices on CBOT rising 23% (Figure 2). Although wheat production remains favourable the issues with corn have flowed through to wheat.

Agricultural commodities tend to have relationships with one another, as they are ultimately in groups of replaceable products. As an example, soybean and canola can be interchanged (to a certain extent). This is also the case with corn and wheat, which both have a high degree of relatedness.

This relationship can be seen in figure 3, which shows that as the price of either commodity rises the other will follow.

On our podcast, we had a chat with Brett Hosking, chair of Grain Growers. In this conversation, we discussed the opportunities for the grain industry over the next few years and the importation of wheat in Australia.
Click here

What does it mean/next week?:

The market will remain well supported in the coming weeks (and months) the nature of the rainfall events in the US will lead to a very sharp drop in expectations for the corn crop.

There are many who are considering that the rise in corn price will lead to farmers planting later and accepting a lower coverage. However, I don’t see this as likely as logistically it seems implausible for many farmers to be able to plant.

In Australia, expectations are also deteriorating with the outlook for rainfall not promising. Every week without decent rainfall will lead to an increase in basis levels.

The market is turning around, with overseas concerns starting to be a primary driver on our price (as opposed to drought). In this weeks market comment, we take a look at pricing/basis and the newly launched farm aid package for US farmers.

Since July last year our prices have largely been guided by events locally. The drought has pushed basis (premium/discount over Chicago) to levels unseen during the de-regulated marketing environment. This has meant that broadly prices have been strong, and that events overseas have been mostly inconsequential as drought bites. The story over May has largely changed.

The futures market declined steadily from Mid-October through until the start of May. This was driven by positive prospects for the northern hemisphere crop. The speculators jumped in and became extremely short, driving the market further south.

The US however was hit by rainfall throughout recent weeks which has resulted in delays to the planting of the corn crop. As we are all aware there are relationships between agricultural commodities which has caused a flow on to wheat. In the month of May the December futures contract has risen A$23 (figure 1).

When we look locally at our basis (figure 2), we can see that it has fallen since harvest. The biggest falls have occurred in May when beneficial rainfall hit during the start of the month providing some early confidence to buyers. The increase in futures prices is welcome, and if we see continued dry weather in Australia, basis will likely rise further as buyers return to a state of nervousness.

In the United States, the newest installment of farm aid was launched. The farm aid package is designed to compensate farmers (who happen to be Trumps support base) for losses from the trade kerfuffle between China and the US.

It is not yet clear how the fund will be distributed, but it will be based on a county by county basis. This is in order to ensure that it doesn’t impact upon planting intentions, however there are concerns that it will still increase soybean acreage.

The following statement was made by the US President during a press conference:

“The farmers have been attacked by China, but the $16 billion of funds will make clear that no country has veto on America’s economic and national security” Donald Trump

What does it mean/next week?:

The update on planting progress in the US will be the primary driver of the market in the coming days. If we see corn planting remaining well below expectations, it wouldn’t be surprising to see another rise in levels.

The COT report will also provide an indication of the change in positioning of speculators. It is likely that their net short position will be reduced quite dramatically after recent rises.

This week sees the first permit for the importation of wheat into Australia since 2007. This has caused a great degree of consternation with producers in the eastern states. But has it had any impact on prices?

The import of wheat into Australia has the potential to cause two issues to grain producers:

1. Biosecurity
There is a concern that the importation of grain could bring foreign diseases or pests which are not currently an issue to Australian producers. There is the potential for large losses to production caused by these pests.

2. Economic
At times there will be the potential to import grain from overseas cheaper than buying domestically, especially in times of drought. Hypothetically the importation of overseas grain would place a ceiling on the domestic price of grain.

At present, the numbers don’t stack up for imports into Australia from any other origins, due to the post-harvest fall in pricing and cheaper options from Western Australia. Nonetheless, this permit approval potentially sets a precedent for future import programs in the event of a drought.

In figure 1, the futures prices for ASX (Jan 2020) and CBOT (Dec 2019) is shown, as we can see prices have risen in both contracts.

The rise in Australia is mirroring the rise in the US, as they struggle to plant their crop due to the recent rains they have experienced. Although prices have risen in Australia, it is not due to the vessel.

The impact of wheat imports of this scale (and time) are negligible from a pricing point of view.

What does it mean/next week?:

The single vessel import permit for Manildra will have limited impact upon the market in its current form. However, if future perpetual permits were issued there is a likelihood of import parity becoming a more realistic issue in times of drought.

In an average year, importation will not be a feasible enterprise for grain consumers.