Category: Grain

The market was always going to react when the rain arrived. There are many who started their 2019 marketing strategy in the middle of last year. In this update we take a look at physical pricing and basis for new crop around the country.

At its most basic, wheat prices are based on supply and demand, with supply being the most important part of the equation. When there is a sudden shock to supply such as a drought, prices move sharply upwards. The reverse happens when beneficial rainfall arrives, and we see prices fall. This is due to buyers having more confidence that supplies will be available.

In last weeks market comment (see here) and podcast (see here), I mentioned that ASX had fallen 7%. This is a significant fall, and it is under further pressure today with buyers being reluctant to raise bids.

The ASX is a good barometer of grain prices on the east coast. It is important to remember that there is still a basis element between the futures and physical even though it is Australian based.

We are now at the point of the year where physical new crop bids are easily accessible, therefore many farmers who don’t utilize derivatives will be using physical contracts to reduce price risk.

Figure 1 displays the physical contract price for APW1 multigrade and Figure 2 shows the basis versus December Chicago futures. I have selected a number of ports to give a broad spread of the nations’ wheat growing area.

As we can see, the domestic dominated areas have the highest pricing levels. This is due to concerns related to tight stocks in these areas coming into the new season. All zones have experienced dramatic falls since the middle of April when new crop concerns were at their peak.

The rest of the world has seen wheat prices slump as production in the key northern hemisphere growing areas continues to impress. This has meant that our basis over Chicago futures has come under pressure, albeit remaining at traditionally strong levels in the east.

What does it mean/next week?:

It is still very early in the season and rainfall will be the primary driver for Australian basis over the coming months. If we receive plentiful rains, then basis will fall further. Conversely a dry spell will see basis increase in a flash.

Speculation tends to get a bad rap, however, it provides the liquidity to ensure that grain markets operate correctly. 

The commitment of traders (COT) report is a weekly report produced by the US Commodity Futures Trading Commission. The report is released every Friday and is based on the closing position of traders on the close of trade on Tuesday.

The purpose of the report is to provide an insight into the sentiment of the market and where different market participants are trading. When using a futures contract, it is either a long (buy) or short (sell) position.

In the COT report, trader’s positions for contracts are compiled and the area of most interest is where the overall position of speculators lie. The simplest explanation of how to interpret the positions is below:

• If the speculators in the market are net long, then they are bullish and are hoping to capitalise on a rising market.
• If the speculators in the market are net short, then they are bearish and are hoping to capitalise on a falling market.

We all know that speculators bring a huge volume of liquidity into the market and for better or worse they provide the ability to easily trade in and out of positions.

The current position for managed money (or speculators) is shown in Figure 1. This represents the combined position of Chicago, Kansas and Minneapolis wheat. The combined managed money short by 134234 contracts. This means that managed money is currently bearish on the market.

As we can see this bearish slide started in January and has been almost relentless, as global crops started to look promising. It is important to examine the seasonality of the sentiment, which is shown in figure 2.
In this chart, we can see that the current sentiment is extremely bearish compared to typically experienced at this point of the year. It is clear that seasonally the middle of the year is where the speculative money turns bullish. This tends to occur as any crop concerns start to develop.

What does it mean?:

At present, the speculators in the market are very short. However, if we see the release of bullish data, their sentiment can change rapidly.

With the advent of algorithmic trading, it is possible that there can be overcorrections where the market makes substantial movements as traders attempt to close their positions to curb their losses.

Pluviophile – A lover of rain; someone who finds joy and peace of mind during rainy days. The rain has teased in recent months, however this week it has delivered to many in need – and the market has reacted.

After months of dry weather we finally see a rainfall event in the east that provides. In the animated map, we can see that large swathes of New South Wales and Victoria have received an opening break, with many receiving >50mm over the two days.

There are some who missed out on the rainfall, however there is still plenty of time to go.

In recent weeks there had been concerns that the rain was never going to eventuate, with ASX futures rising A$20 since the start of April. As we all know prices move when the rain arrives, and the market followed the forecast.

In figure 1, ASX wheat for Jan 2020 is shown since the start of the year. In the past week, the contract has fallen 7% or A$25. The contract is now at its lowest level since April/May last year.

The market now has confidence in the crop, it will quickly revert if rainfall is not forthcoming over the next three months. The crop is not yet made, but in Victoria and parts of New South Wales it is off the starting block.

In September last year, I proposed a strategy of selling ASX (see here), which would have provided a return of A$68/mt. At current levels of A$313, many consumers are considering taking some cover, as memories of the prior years’ levels are fresh in mind.

On another note, If you are looking for something to listen to whilst seeding – give our podcast a shot:
Click here

What does it mean/next week?:

The overseas markets have stabilized over the past week, and it is likely that we will see short speculators start to take profits.

I don’t expect old crop to lose a huge amount of value due to the lack of available supply, however new crop is liable to come under further pressure as buyers pull the brakes.

Grain in Australia is a tale of two markets. The country is still in an effective drought, whilst the rest of the world is on course to produce a bumper crop. In this article, we will update on the situation with the A$ and overseas production.

The Futures market continued its downward transition this week, with the December Chicago contract down 2% since the last day of trading before the Easter break. Although the contract has marginally recovered, it was at contract lows yesterday. The contract converted to Australian dollars experienced a gain of 1% to close A$1 higher (Figure 1).

The Australian dollar has provided this gain. Australian inflation has been lower than the RBA target for the past three years. The banks are now expecting that there will be one or two rate cuts. The result has been a fall from 0.7152 to 0.7019 over the past week (Figure 2). This will likely help with those variable rates and improve our attractiveness for exports of all commodities.

The international values have taken a dive in recent weeks, as the world looks likely to produce a substantial wheat crop this year. In recent days, several bearish data points have been released:

• Canada

The Canadians have reduced their canola acreage as a result of the continuing trade concerns with China (see here). In turn, they have increased barley by 10.2% (+662k/acre) and wheat by 3.8% (+939k/acre).

• IGC

The International Grains Council has increased its forecasts for the global wheat crop to 762mmt, 27mmt more than last year. This leads to a year on year increase in global end stocks of 10mmt (274mmt).

• Black sea

The Black Sea continues to perform well. The crop in Russia, Kazakhstan and Ukraine are experiencing favourable conditions with adequate soil moisture. It is likely that the Black Sea nations will continue to be the dominant export players this season.

• Australia

Anzac day is the traditional starting point for seeding around the country. However most growing regions have inadequate soil moisture, and rainfall forecasts have tended to tease rainfall on the 14-day forecast, but not eventuated. There is substantial rainfall on the horizon, we just need it to fall.

Next week?

Pricing is a tale of two markets at present: International and domestic.

Barring any major disaster overseas the world is liable to produce a bumper crop, this will keep pricing depressed. At a local level, we are however still in an effective drought phase, which maintains our domestic premiums over the rest of the world.

Overnight the commitment of traders report will be released which will outline the sentiment of the speculators. It will be of great interest to see whether they are still holding a very bearish position.

The lack of rain continues to be a weight upon the entire agricultural industry. The forecasts tease moisture, but they never seem to bring much excitement. In this weeks’ market comment we look at how consumer jitters have driven the local market.

The forecast rainfall in the past month has tended to look promising but not deliver. This has started to cause consternation to everyone in the industry. The lack of rainfall has brought a decent rise in Australian values, with ASX January 2020 futures rising 4% or A$14.5/mt (figure 1). This returns the contract to levels seen in early March.

This buying by consumers is an attempt to ensure that they have some cover as we start the new season marketing period. There is still great uncertainty on how the season will transpire, however, the memory of the past year is fresh – and A$339 is more attractive than a possible >A$400.

Although still insulated from events overseas, it is important to maintain an eye on the offshore markets. The Chicago futures market took a tumble on Wednesday night dropping 3% or A$7 on the December contract (figure 2).

The fall in US values is attributed to continuing strong conditions for the US winter wheat crop, with 60% rates as good/excellent. This is 29% above this time last year and 16% on the 5-year average. This bodes well for the US crop, although seeding pace for spring crop has been hampered by inclement weather.

The Americans, however, are not alone when it comes to positive outlooks. Our Russian competitors are in good shape, with analysts predicting another high production year – at 83.4mmt. This would place the crop at the second largest and ensure another year of strong exports out of the nation.

Germany had a poor year in 2018 due to drought, however, production is expected to rebound this year with a jump of 21% to 24.44mmt.

These conditions all point towards a generally bearish tone to the international market, however at present we continue to be more concerned about the local crop.

On another note, If you are looking for something to listen to whilst seeding – give our podcast a shot:
Click here

What does it mean/next week?:
It will be a short week due to the Easter holiday and ANZAC commemoration.

It cannot be said enough that the Australian market is driven by risks of a second drought. If this eventuates then our prices will be extremely high, although that is not a great result as we will have a reduced volume to sell.

If we see an average or above average season, then we are likely to experience some downward pressure in the second half of the year.

African Swine Fever (ASF) is the talk of the industry at present. Data out of China tends to be open to a level of interpretation and expectations are that there are higher levels of culling than government reports would suggest. In this article, we will talk about the impact of ASF on the oilseed industry.

Angus has written an article today on the potential impact of the ASF outbreak on the Australian meat industry (Read here)

At present, it is expected that 35-47% of the Chinese pig herd will be culled during this outbreak. A fall of this scale, if realized, will result in reduced demand for animal feed of which Soybean meal makes a large proportion – around 20%.

Since the turn of the century, China has become a whale in the soybean industry. In the early 2000’s they were importing <25% of the global trade in soybeans, they are now importing >55% (Figure 1).

The profit margins from a crush plant are derived mainly from the oil and meal components. If meal demand drops, their crush margins will fall and demand for soybeans will be curtailed.

The current reliance on China as a customer for the global soybean crop will make it difficult to find alternate markets if there is a sharp reduction in demand.

A good indicator of the pig industry in China is the Dalian Soybean meal futures contract. There has been a 42% drop in values from the high in October to the present day (Figure 2). This points towards a major drop in demand and corresponds with the timing of increased incidences of ASF outbreaks.

On another note, If you are looking for something to listen to whilst seeding – give our podcast a shot:
Click here

What does it mean?:

If the forecasts are realized, the demand for animal feed in China will drop drastically. This will have a flow-on effect onto the soybean market, and then onto the rest of the oilseed complex (canola/palm etc).

There will also be an impact on demand for other feedstuffs such as corn and barley. In recent times, Australia has exported substantial volumes of barley into China.

It is important to maintain a close eye on reports from China as this disease could have a major impact on the global grain and oilseed supply chain.

Key Points

• It is expected that China is likely to lose 35-47% of its pig herd.
• China is the worlds largest importer of soybeans.
• Dalian soybean meal futures have experienced a sharp drop in values since the increase in the occurrence of ASF.

The USDA released their updated world agricultural supply and demand estimates (WASDE) report on Wednesday. As we approach the new marketing year the WASDE report becomes less relevant as the data contained within is largely set with only minimal tinkering around the edges.

The most important data in relation to wheat at this point of the year is the ending stocks. This will define the starting point for the new season, and global stocks were revised upwards. The stocks were raised by 5mmt to 275mmt (figure 1).

This is a fall of 6mmt from the previous marketing year, nonetheless global stocks remain extremely high with levels being the 2^nd highest on record. The current situation points to continuing low international values for the coming three months unless disaster hits the northern hemisphere crop.

The trade has largely shown little concern to any of the data in the WASDE report with the market being relatively unchanged. The CBOT contract has been trading in a narrow range of 487-495¢/bu which equates to A$249-256/mt (figure 2).

The ASX wheat contract has lost volume in recent days, and has traded around the A$320, giving a strong premium above CBOT.

This premium is due to the uncertainty remaining with the 2019/20 Australian harvest. The BOM have released their 3-month outlook which doesn’t look great for northern NSW and South Queensland.  Nonetheless there is still plenty of time to pass between now and harvest.

On another note, If you are looking for something to listen to whilst seeding – give our podcast a shot:
Click here

What does it mean/next week?:
There is unlikely to be much movement in the international market during the next week, as there is little in the way of fresh information being released.

Key Points

• Old crop trades at a substantial premium to new crop.
• Basis levels are quite strong for new crop vs Dec’19 Chicago wheat futures.

In this weeks’ market commentary we take a look at the World Agricultural Supply and Demand Estimates (WASDE) report, and the lacklustre market.

It’s too early to call the season, with the majority yet to sow their first seeds for the year. In this update I examine pricing for the new season. Should producers be selling wheat at these levels?

This season has been astronomical in terms of price with the market reaching historic highs across most zones in October. Although most of the benefit has been felt by producers in Western Australia who have had a very strong year in terms of production.

The spot market has fallen from these peaks since the start of the year (figure 1). At present pricing has found its floor, as consumers purchase hand to mouth. The only supply available will be from Western Australia until the new crop. This is likely to keep prices around this level until the new crop arrives.

The question now really remains – when we get to new crop, the price will be dependent upon the rainfall from here on in.

At present however, prices are still reasonably strong for new crop (figure 2). This is due to the great uncertainty when it comes to the crop. Currently subsoil moisture is low, and the pantry will likely be empty by harvest. As time counts down to harvest the new crop and old crop will converge, if conditions don’t improve then the price will converge upwards to meet old crop pricing. Conversely the opposite will happen if the conditions improve.

The price premium for spot over new crop currently sits at the following:

• Adelaide 11%
• Geelong 17%
• Kwinana 14%
• Port Kembla 17%
• Port Lincoln 15%

This shows up in the basis levels versus the CBOT Dec’19 contract. At present the Dec’19 contract is at A$253/mt. This results in attractive basis levels on the east coast ports (figure 3), especially if recent drought premiums are excluded.

What does it mean/next week?:
I have always tended to advocate a conservative ‘small bite’ selling strategy for producers. Locking small proportions over time dependent upon price, with a view to aiming for an average to above average price.

At present prices on offer for the 2019/20 harvest are historically attractive, and they do offer some value in selling

If the season becomes bleak that price might not be attractive, whilst conversely it could become your best. It’s all about minimizing exposure at this point of the year.

This also applies in the same way to consumers of grain, purchasing at these levels removes exposure to >$400/mt values if a second year of drought eventuates.

Key Points

• Old crop trades at a substantial premium to new crop.
• Basis levels are quite strong for new crop vs Dec’19 Chicago wheat futures.

The 2^nd quarter of the year is the most important part of the year for world grain production. During this period of time, the major growth phase of the northern hemisphere crop will develop. This can lead to volatility in pricing as the Northern Hemisphere will largely determine pricing for the remainder of the year. In this weeks’ comment we will take a look at some of the forecasts for the major production areas.

Australia
The Australian crop is forecast by ABARES at 23.9mmt, however at this point of the year it is a meaningless figure. The variables required to accurately predict the crop with any degree of accuracy are inherently volatile until the post-seeding period.

Russia
In the late 80’s/ early 90’s Russia was an Insignificant participant in the grain export trade. In the early post-Soviet period, Russia would import up to 15mmt. The introduction of foreign investment and techniques has led to Russia becoming the number one exporter at >40mmt (figure 1).

Therefore, the influence of Russia on global supply cannot be underestimated. This seasons’ estimates for the crop are very positive, with the Russian agricultural ministry forecasting 75-78mmt of wheat. This would be the 2^nd highest wheat crops the nation has produced. If this is realized, it will likely help maintain a ceiling on global pricing.

Europe
The European trading bloc has produced on average 138mmt of wheat since the start of the century. There have been large tracts of the European growing area which have been unseasonably dry during March. However favorable moisture profiles in the main production areas in France and Germany are likely to lead to production of 149-154mmt.

United States
The United states have experienced their worst flooding in history during March. This has resulted in the loss of a substantial quantities of stored corn and soybeans. The majority of states are showing considerably improved conditions from this time last year.

Although conditions are still close to optimal the excess moisture has the capacity to reduce the potential of the winter crop, conversely it provides great starting moisture for the spring crop.

What does it mean.

We’re heading into the seeding period within Australia and all eyes will remain on weather, and more particularly the timing of the Autumn break. As outlined above, at this time in the season all predictions of crop size must be taken with a grain of salt until the situation post seeding becomes clearer. The best you can do at the moment is keep your eyes on the skies.

After such a terrible year there is a sense of trepidation as we move into the Australian seeding period. In this week’s grain comment we take a look into ASX pricing and the ramping up of volatility in pricing.

The Chicago futures market has traded in quite a narrow range over the past fortnight, between a high of A$258 and 251. The floods throughout the USA have seemingly been the worst on record, however, there hasn’t been much of a reaction in the markets. The market could see surprises over the next couple of weeks as damage is assessed.

There was substantial rainfall across much of Queensland, however it wasn’t quite as beneficial for NSW as expected. The local futures market (ASX) fell late last week, and into the start of this week. The lower than expected rainfall has resulted in the market rallying A$8 (figure 1). There has also been some decent volume on 2021. At present producers on the east coast can use ASX futures to lock in prices above $300 for the next two years.

In January I discussed volatility in the wheat market. At that point in time volatility well below the bottom of the expected range for the time of year. This lack of volatility continued through February, however March has seen this spike (figure 2).

As we get close to the northern hemisphere harvest we will likely see volatility increase. Typically, July is the most volatile time for the wheat market.

If you think Australian politics is a mess, look at the UK. Today was expected to be the day that the UK left the European Union. However there has been a kerfuffle over the process. This has caused a huge amount of uncertainty with no-one knowing when or if the UK will leave and how it will be done. The Prime Minister has even announced that she will quit, provided that the parliament votes for her deal with the EU.

What does it mean/next week?:

As we get close to the new marketing season, the market will be examining planting and export figures.

Russia has been the most important global exporter in recent years, and the ag ministry is calling for another large crop. However the IGC see global stocks declining at the end of this season as consumption rises.