Tag: Grain

The US grain market gets plenty of attention usually, however in recent times it is the clearly dominant story, and for good reason. Politics is impacting, with a massive export program to China under the Phase 1 deal a big story, we also have the current harvest and crop outlook to contend with. Throw in the dealing from the US government of huge farm subsidies and there is plenty to feed grain news stories.

The scale of the farmer “aid” is huge, with the Trump administration announcing a total of $28 billion in aid for farmers in 2018 and 2019, funds the president says come from the tariffs levied on China. The administration secured another $23.5 billion to help American farmers through the $2 trillion coronavirus stimulus package passed in March.”

While this type of support is never going to occur in Australia, it has impacts on our price and market access.

The other big issue is the China Phase 1 deal, and depending which day it is or which diplomat is speaking it is either going ahead “full steam”, or about to be dumped. This is a big factor for all grain producing and importing countries, China agreed to purchase between $40 billion and $50 billion of U.S. agricultural goods in each of the next 2 years.

If the deal goes ahead, the rest of the world’s grain exporting nations will search for other markets; if the deal collapses China will scramble for replacement products.

Harvest in the northern hemisphere is ramping up, and by-and-large the results are positive for supply, which means negative for price. All markets are tending softer, with the exception of the European rapeseed/canola market where production disruptions are impacting locally. However, in Russia and France good harvest reports caused markets to soften. The CBOT SRW contract now looks well settled below 500 c/bush, losing a further cent to 485.5 cents this week.

Domestically the weaker international values combined with continued good weather and the prospect of rain in July to see “new crop” prices ease around $10 for wheat & $3 for F1 barley.

Delivered prices to Melbourne for ASW1 wheat is quoted $350 for “old crop” and $290 per tonne for “new crop”. The ASX Jan 2021 contract pulled back another 3 dollars to $285, while the US CME Dec 2020 contract also continued to retrace, ending the week just under 495 cents per bush.

Buyers seem to be in a comfortable space regarding grain requirements up to harvest and happy to let the market soften, while growers are yet to face harvest prices although the continued good seasonal outlook could encourage selling soon.

Next week?

The market is not providing any signals that prices will improve, in fact, the latest BOM weather outlook has July delivering rain that will only improve the outlook for harvest. We will keep a close watch on harvest yield reports from the Northern Hemisphere, if these continue in a positive trend expect further price weakness.

Sometimes the hardest thing to do when looking at markets is to decipher the real message from the published message. There is a lot of rhetoric around the China imports and US exports of grain and beans, with polarized stories representing positive and negative positions. It seems that “fake” news is a distinct possibility.

Usually this misinformation revolves around supply, but its intention is to influence market prices. The best approach in understanding the real picture is to refer to the data.

The University of Illinois in their Farm Policy News (FPN), reported that last week was the largest sale of soybeans so far this marketing year was enacted. While 39% of this was to China, a further 39% was to “unknown”, with FPN speculating that this “very likely a lot/most to China” also

When combining other “facts”, the answer becomes even more obvious. Under the agreed trade deal between China & the US, China agreed to take $36.5 billion in American agricultural goods in 2020. In the first 4 months with the disruption as a result of COVID-19, only $4.65 billion was exported.

Both sides have said they have a commitment to honoring the phase 1 deal, so expect a ramping up of activity in the next couple of quarters.

In related news, FPN reported “The American Farm Bureau Federation on Wednesday sent a detailed list of recommendations to Congress to help farmers, stating that even though lawmakers had provided earlier aid, more is needed because of economic losses facing the industry.”

This aid is running into the billions, and with corn prices falling 50 cents per pound to around US$3.20, the National Corn Growers Association calculates a loss of $49 per acre, they are asking for more.

Subsidies are in the news at the moment, (see China barley tariff report) but the consequence of this US government support will be to incentivize US growers to plant, causing the supply demand message to be muted and the continuous high level of world stocks to remain.

The ASX Jan 2021 contract slowly eased this week to end 10 dollars lower at $288, while the US CME Dec 2020 contract pulled back further, ending the week just under $497.

Domestic delivered prices tended to firm this week as buyers sought supply while growers were cautious in accepting old crop pricing, with it still a month or two away before producers have the confidence to sell “new crop”.

Next week?

Weather is all important in influencing grain prices, especially at this time of the year the weather in the Northern hemisphere. This week the news from the US is that after a period of dry the forecast is for rainfall over the next 7 days is predicted, this had the expected result of causing the market to soften.

Key Points

With harvest underway in parts of the US, the World Agricultural Supply & Demand Estimates (WASDE) report was released last night our time and was met with a neutral response from commentators.

Markets confirmed no surprises with a stable response, with the USDA lifting wheat production by around 1% on the back of stronger South American production. They noted this was slightly more bearish for wheat price outlook.

The expected record US corn crop is combining with other feed grains to look likely to produce a record feed grain crop. The USDA predicting a 5% increase on last year. While the US corn crop is driving 80% of this increase, Mexico, Brazil & Ukraine will also contribute.

This comes at a time when global feed demand has taken a hit with the African Swine Fever wiping out around 70 mill tonne of demand. Adding to this, CV-19 restrictions are impacting gasoline demand, particularly in the US where corn-based ethanol is mandated into the mix.

The upshot is that low prices are expected to continue into next year, with countries who have had their currency devalue against the USD less impacted. This will likely maintain high levels of plantings in these countries despite the lower prices.

Domestically ABARES has lifted the outlook for wheat by 25% from last month, aiming now at a wheat crop of 26.7 mill tonnes, while barley is expected to be up 17% year on year to 10.6 mill tonnes.

All this positive news for production is weighing on prices, with the ASX Jan 2021 contract easing below the $300 mark to $297, while the US CME Dec 2020 contract after testing the 535-cent mark also pulled back 20 cents per bushel to 515 cents.

Domestic delivered prices continued to ease as we move closer to “new crop” pricing and buyers’ seemingly content anticipating a significant export surplus for the coming harvest. Despite the BOM changing their prediction of median rainfall for the winter, many grain regions are comfortable for now with soil moisture levels, and with forecast showers in the week ahead, are daring to feel optimistic about production.

Next week?

The widespread frosts across eastern Australia continued making the prospect of some (any?) rain slightly more urgent.

I am regularly reminded by experienced grain producers that “it’s not in the bin until it’s in the bin”, however, the prospect for a large crop is in place, with a couple of key rain events needed in late winter and spring to create a year to remember.

Key Points

It feels like the Australian grain industry is operating with a sense of calm despite the global chaos regarding China and COVID-19. The cause for this calm in Australia is the rainfall to date or the “seasonal conditions”.

Focusing on the domestic front, growers are content to focus on growing a crop and leaving sales to later. This is not an unusual situation at this time of the year, and with the best seasonal conditions in a couple of years across much of the grain area, the expectation of a good crop is cautiously in consideration.

A look at the difference in price between “old crop”, that is 2019/20 production, and “new crop”, 2020-21 production, helps to tell the story both in regard to price and supply.

Using ASW delivered Melbourne prices from feed millers as the reference, prices bid today are circa $370 per tonne, however, the forward bid for the crop in the ground is $60 lower.

This reflects the drought affected supply of last year with stocks tight to meet domestic demand this year, however, looking ahead consumers are expecting (hoping) that a big crop will lower their costs. They, therefore, have little appetite to secure supply by forward purchasing, content with the outlook for production and the sufficient supply expected.

For Barley the “old crop – new crop” spread is $15. The tighter spread compared to wheat is a result of the recent China tariff announcement which took the wind out of the sails of any unsold barley closing the gap to “new crop” prices. You can read more about these impacts on Mecardo here.

So the summary to buyer and seller activity is wrapped up in the uncertainty worldwide and the Australian crop expectation. Growers are resisting the lower bid prices and following reports from other grain-producing countries of murmurings of concern regarding weather.

On the other hand, buyers have little perceived domestic supply risk so are not providing any aggressive bidding and will remain calm while the good growing conditions persist.

Regardless of which way the weather goes, it will change sentiment in the coming months. Either buyers will begin to accumulate if conditions tighten or growers will start a selling program if their confidence in the season builds.

Next week?

The talk about weather this week was dominated by the widespread frosts across eastern Australia. The fact that little concern was raised by growers reiterates the level of comfort they have with soil moisture levels (generally speaking).

The focus on rain will begin to take on more urgency coming out of the winter, with spring rain now the key element in what the eventual crop production figure will look like.

Key Points

As we head into June, a period of uncertainty looms. Do we see price rises as weather concerns mount, or does a large global crop hamper upside? One thing for sure is that the next two months will be volatile.

CBOT wheat futures lost steam this week but have tried to regain ground overnight. There are concerns that poor weather in Europe has hampered crop production. The December wheat futures in US$/mt have returned to the same level as last Thursday. The Australian dollar has gained ground however and is currently trading A$4 below last Thursday.

Risk management and examining prices are some of the most important factors in running a grain growing enterprise. There were fantastic opportunities to lock in high futures levels in March. The market since then has fallen from A$355 to A$291 (Figure 1).

There is always a potential for the market to rise back to those levels, but it’s always advisable to take some cover when it is available – at least for a small portion.

As a tip, it is important to ensure that you have the correct facilities available and open to use the market to your advantage. It takes time to set up the correct facilities and by the time they are in place, the opportunity may have passed. You don’t know what you’ve got til its gone.

At a local level, the ASX futures market has slightly declined, with both old and new crop pricing down around A$2/mt (Figure 2). As we draw ever closer to harvest we are likely to see the spread between new crop and old crop trend lower. There may be times when the market jumps up as domestic buyers hit the market, however, the trendline will be for that spread to narrow.

If you are holding old crop, it might be time to sell and take advantage of the remaining drought premium.

The three-month outlook for Australia looks positive (see here).

What does it mean/next week?

Next week we will be moving into June. If previous years are any indicator, we are likely to see some volatility. This could provide opportunities for farmers to increase their hedge positions, especially as good rainfall reduces potential production risk.

The grains industry has been fully focused on barley this week. This is hardly surprising considering the enormity of the impact of the Chinese import tariff. In this week’s comment, we will be giving barley a little break. Let’s look at what is happening in the wheat world.

The local market is a tale of two time periods. The weekly average price for the old crop has declined A$6 week on week. Last week the old crop price averaged A$366, this week it has declined to A$360. As Australia moves on from the recent drought, pricing is destined to remain high until new crop supplies can fill the pantry.

The inverse between old and new has fallen A$6 to A$56. This remains high and as time ticks closer to harvest, there will be a point where the two pricing points converge. As we have discussed in many articles and podcasts, it is highly unlikely that new crop pricing levels will rise to meet old crop levels.

After falling two weeks ago, the new crop pricing level has remained solidly at A$303, albeit with very little activity.

As we move into the silly season, when grain market volatility increases, we will experience wild price swings. We have experienced a taste this week with CBOT wheat futures rallying from 509¢/bu to 527¢/bu. In local terms, December CBOT was unchanged from last week as a result of the higher AUD.

Next week?

Historically the May-July period has been one of great volatility. This is due to the northern hemisphere ‘weather market’. Any little move or concern will likely lead to large swings in pricing (both ways).

Key Points

The world is slowly creeping out of isolation and there is still a large degree of uncertainty about the road ahead. Will there be a second wave? Will the economy recover? The wheat market, however, does not lack direction, it has got direction and it is in one way.

The Chicago wheat futures market has declined further this week. There has been continual deterioration with no days of gains since last Thursday. The market (in A$) has been in almost a continual downward direction since the 23^rd of March, when the December contract hit A$355. This same contract is now A$293/mt (Figure 1).

The USDA released their May WASDE report. This was a bearish report and has added extra pressure onto the market. Global supplies of wheat are expected to be record high, with at the end of this season the largest stockpiles of wheat the world has ever experienced (Figure 2).

As discussed numerous times on Mecardo, the corn market has been under pressure in recent months due to the demand destruction caused by reduced ethanol demand. Ethanol production will likely rebound when the economy reopens, albeit slowly if unemployment levels remain high. The result being that corn end stocks will be close to record high on a global level. In the US end stocks will be the highest since the late ’80s.

Corn and wheat are irrevocably linked. If corn continues to be under pressure, it is likely to see wheat fall in sympathy.

The USDA reported that Australia would be up year on year by 8mmt to 24mmt. The range at present is likely to be 24-27mmt based on the current outlook.

What does it mean/next week?

The world continues to be awash with cereals. The COVID-19 economic impact has raised new issues around demand which is likely to cause a large degree of uncertainty in the coming months.

Key Points

In this week’s market comment we take a look at the new-old crop spread, the discount for barley and the Chinese anti-dumping investigation.

At a local level, the new crop ASX lost A$1 during the past week, however, old crop suffered with the spot contract falling A$11 (Figure 1). In recent articles, we’ve discussed that the very strong premium for old crop would likely come under pressure.

The premium is in place due to the demand caused by diminished supplies in 2019/20, however, this will erode as we approach new crop. There may be times when the old crop pricing spikes up when large consumers attempt to cover requirements. It is important to realise that new and old crop are quite different beasts – do not base your expectations of price on the current year drought premium.

Barley has followed the rest of the market downwards in recent weeks. This has caused the spread between ASW and F1 to rise to high levels. As an example, the Geelong spread is A$79. This has caused more domestic consumers to increase their inclusion of barley in rations.

The barley market is likely to be quite interesting in the coming weeks. The long-awaited result of the Chinese allegations of barley dumping during 2016 is due by the 20^th of May.

As many will remember, 2016 was a big production year and prices followed their expected course. If China does find Australia ‘guilty’ then it could lead to tariffs being put in place which would potentially make Australian barley uncompetitive versus other origins (or other grains).

At present, it is difficult to see which way the result will go. In light of recent diplomatic woes between the two nations (see here), it wouldn’t be a huge surprise to see this decision going against Australia. However, that is just speculation.

What does it mean/next week?:

Next week will see the WASDE report released. This will give some insights into the expectations for the coming crop.

We will likely see reduced demand at least for corn due to the lower ethanol production in the US.

Key Points

Sentiment around the country is improving as seeding commences into moist ground across large parts of the nations cropping belt. This weekly comment looks at rain, the ASX new crop – old crop spread and International Grains Council forecasts.

The rainfall during April has been almost perfect through most of the east coast (see map) and has gone a long way to set up the crop through SA/NSW & Victoria. After talking to several farmers, the sentiment is very positive in these regions. In many parts, an average crop is almost assured.

There are still concerns for WA and QLD, however, there is still time.

At a local level, ASX wheat futures has posted losses in recent weeks (Figure 1). After reaching a weekly average of A$406 on the spot contract four weeks ago, the spot contract has declined to A$384.

At present, the market continues to trade old crop at a substantial premium to new crop. As we move closer to new crop, the premium for old crop is likely to converge with new crop. As confidence in new crop improves it is more likely that old crop will converge downwards instead of new crop rising to meet old crop numbers. It would be risky to hold onto old crop beyond July.

At a global level, pricing levels have softened. There was however some updated news overnight from the International Grains Council. The global wheat crop forecast has been reduced by 4mmt to 762mmt.

The reduction was as a result of deteriorating expectations in Europe and black sea nations. It has to be noted that 762mmt remains a record production level. This is at a time when ethanol demand has been destroyed, which will reduce overall grain demand dramatically.

Next week?:

More rain is expected in the next week. This will provide further confidence.

Key Points

The extraordinary times continue with crude oil crash into negative territory. In this update, we look at wheat futures (overseas and locally) and a brief discussion on negative crude oil.

Wheat futures rose at the start of the week, as concerns mounted of dryness in Russia and concerns that they would curtail their exports. The market has since retreated, however, remains higher than last week. In Australian dollar terms, the December Chicago futures contract has traded between A$325 and A$319, with the market currently A$3 above last Friday.

At a local level, ASX futures have lost some ground since hitting its current year high two weeks ago (at a spot level). The spot market has rallied during March from A$348 to hit A$406 a fortnight ago, it has now fallen back to A$397.

The inverse between new crop and old crop remains high at A$67. As we move closer to new crop the spread between the two will converge, either new crop will rise to meet old crop or vice versa. As the crop develops and things become more assured, I’d put my money on old crop falling to meet new crop.

At present, the basis between ASX Jan 2021 and Chicago Dec 2020 futures is currently +A$10, which is incredibly low level compared to recent years.

The current environment makes for interesting developments. During this week, the crude oil market fell to -$37/barrel. This was always a theoretical possibility; however, I don’t think many actually thought they would see the day that you could be paid to receive oil.

This is a relatively common occurrence in some industries such as natural gas or electricity. In this instance, the oil ran into negative values, due to the expiry of the May contract. At this point, those who were long WTI futures did not want to take physical delivery. This meant those holding contracts were looking for buyers who were scant on the ground.

A market with more sellers than buyers and rapidly filling storages meant that the price fell into negative territory. This problem is likely to arise as we come to the expiry of the June contract and bodes well for continued low fuel pricing.

It has however meant that ethanol and ergo corn prices are under some pressure. As per our prior analysis, corn & wheat have a strong correlation. Nonetheless wheat has diverged somewhat over the past couple of months.

What does it mean/next week?:

What’s going to happen next week? In this environment who knows. Presently the wheat market is still supported at current levels, however, an uncertain environment brings uncertainty.