Tag: Grain

‘A big crop gets bigger and a small crop gets smaller’. This seems to be an apt statement to apply to this year’s Australian production. Continued concerns in the east coast & now in WA have led to more positive price action in the past week.

The ASX wheat contract in the past has been quite illiquid, recent months has seen reasonable volumes move into the contract. The lack of grower forward selling due to drought (& frost) concerns. The contract is deliverable; therefore it provides an opportunity for consumers to have cover to meet requirements.

After a rapid rise through July and mid-August to $400-410, the market fell to $385. This dip was short lived, and in September continued dryness and frost in both sides of the continent have led to impressive gains. In the past week the price has risen $25/mt or 6% (figure 1).

At a physical pricing level the new crop multi-grade APW contract has seen a corresponding rise, however selling has been at low. Interestingly the market in Port Kembla, has seen a more sluggish (figure 2) rise than other east coast areas (Adelaide & Geelong).

What does it mean/next week?:

At present there are a high number of growers cutting grain and canola for hay. This leaves an interesting conundrum – will this increase in hay due to drought and frost lead to a downturn in hay prices?

One thing is for sure though, it’s time to strap on our helmets as its going to be a bumpy ride.

The second of the major supply reports of interest this week was the World Agricultural Supply and Demand Estimates (WASDE), released on Wednesday night. The United States Department of Agriculture (USDA) surprised the market by lifting production estimates for good crops, more than it cut estimates for bad crops.

The USDA stripped 2mmt off the Australian crop and 1mmt off Canada. Both being major exporters of wheat, this could be expected to initiate price support. However, the cuts were offset by a 3mmt lift in Russia and 0.5mmt in Kazakhstan. Apart from being the home of Borat, Kazakhstan is also an exporter of wheat. Both Black Sea countries are reporting good harvests to date, so the lift was somewhat on the back of actual supply, rather than estimates.

The impact on global supplies was a 0.5% lift in production and 1% lift in ending stocks. Figure 1 shows the stocks to use ratio sits at 35%. Down on last year but still very strong. It’s little wonder the CBOT Soft Red Wheat market fell back to 503¢/bu, a two month low.

To local markets, it seems the CBOT Dec-18 fall to around $270/t in our terms was of little consequence. Local markets actually gained ground, with wheat rallying to new highs across many markets.

In terms of international markets, we are now more interested in what they can do for us in the 2019-20 market. With CBOT at $285 in our terms, we might have to wait a little longer for it to hit the magic $300 mark.

What does it mean/next week?:

There doesn’t appear to be a lot of downside for local markets at the moment. As outlined in the ABARES report earlier in the week, supply relief isn’t likely to appear until at least the northern sorghum crop appears in March. That will require some rain, which is yet to appear on any forecasts.

Russia is in the press a lot at present, in geopolitics its due to accusations of Novichok poisoning. In grain, its rumours of export bans. In this week’s comment, we take a quick look at the chance of an export ban and the decline in the AU$.

At the end of last week, I highlighted the market concern related to potential export curbs. This had led to an increase in futures values (Figure 1) towards the end of the week. There was a meeting between the Russian government and exporters to discuss export pace. My view was that this would amount to nothing and that was the case.

The lack of any export controls, alongside some very cheap sales and strong export pace, has led to a softening of Chicago futures throughout this week. At present, December 2019 (& ASX Jan 2010) still offers a reasonable hedging option for producers to lock in strong prices for next harvest.

The Australian dollar has assisted by limiting the damage caused by the decline in offshore futures. In the past week, the AU$ has fallen to 20-month lows (Figure 2). The decline is attributed to a combination of concerns, with Asian stocks taking a tumble and the bank interest rate rises out with an RBA decision, this has limited the chance of further rises in the near future.

I was asked by a client this week to elaborate on my view that there wouldn’t be an export curb in Russia. There are several reasons why restrictions are unlikely, however, the main one for me is the combination of beginning stocks and production (total supply). The current year will be ranked 3^rd out of 32 for highest available production. There is no need to put in place a ban, as there are sufficient supplies for domestic demand.

*Article written on Thursday evening and may not reflect overnight moves.

What does it mean/next week?:

The next week will see the release of the WASDE and the ABARES crop report. It will be interesting to see where ABARES place the Australian crop. It should not come as a surprise to anyone that downwards in the East and upwards in the West will be the trajectory.

The drought has put the whole country on tenterhooks. The market is currently at very strong levels, any event has the capacity to cause very big swings in pricing. The weather at present seems to be trying to play its tricks and keep everyone on their toes. 

Chicago futures received some attention this week. At the start of the week, the market was on its eighth downward session in a row. The trend was bucked, albeit correcting itself the next day (Figure 1). The rise is due to continued concerns related to curbs of exports in Russia. At present, it is a case of will they, won’t they.

Russia is always a hard place to make views on, as they tend to play by their own set of rules. My view at present is that they are unlikely to drastically curb exports and at most, we will see an export tariff.

Welcome rains were received in northern NSW and southern QLD last weekend. They were however following the pattern of forecast rainfall events that we have seen throughout the year – much lower than projected. The rainfall for most in these regions is too little, too late. The market fell on the back of the expectations and projections that this event will be supportive of summer planting of sorghum (Figure 2).

The weather, however, had another trick up its sleeve. On Tuesday morning there was a substantial frost event impacting large tracts of the east coast. It is too early to ascertain the extent of any damage; however, many plants are still immature for this point of the year.  If we are lucky, we will have dodged a bullet. But the frost concerns did drive the market back up to sit close to highs of the past month, indicating just how nervous the market is at present.

What does it mean/next week?:

Canadian crop estimates will be released overnight. They have had some poor conditions in many regions and we could see further tightening of global stocks.

Rainfall is due to hit the NSW in the middle of next week, which will hopefully provide some confidence for the summer crop.

The week that was in wheat. There is always something interesting happening in the wheat market and when there isn’t, the industry can just make things up. In this week’s market comment, we provide some insights into fake news, futures pricing, local basis & the drop in barley pricing in WA.

The futures market lost its leadership this week when futures prices fell, albeit only to late July levels (Figure 1). The recent fall is largely attributed to the increasing corn yields in the US and the expected reduced feed consumption of wheat. I wrote about this potential issue in early July, as the wheat to corn ratio started to rise (see here).

There were rumours towards the end of last week of Russia enacting an export ban, which pushed up prices, at least momentarily. This was, however, another example of ‘fake news’, in a similar fashion to the rise in early August as a result of misinterpreted social media postings by a Ukrainian minister (see here).

A Russian export ban is not going to be legislated this year, it is important to keep perspective on the fact that Russia is still on track to produce its 3rd largest wheat crop. If Russia takes action to limit exports, it will be in the form of export tariffs.

These fake news incidents further highlight the importance of high quality information in the agricultural sphere. it is extremely important to ensure that you are getting information that is of high calibre, timely (but not at the expense of accuracy) and free from bias & interference.

The local market lost some fire over the week, with basis level across all zones falling (Figure 2). The smallest fall was in Port Kembla (-1%), which makes sense due to the norths dire need for feed. All other zones fell by 2-5%. There is rainfall on the horizon in NNSW, which has pressured the ASX contract. There are some anonymous commentators (see here) calling now for a rise in wheat production up 25mmt.

My view from discussions with farmers and agronomists in the region is that it is a case of being too late to make any substantive change. It will however, provide some valuable soil moisture for the coming summer crop.

The barley market in WA has been interesting this week, with prices dropping considerably. The kwinana zone has seen F1 feed prices drop by $25/mt or 7% since last Friday (Figure 3). It has to be noted that although the price has fallen considerably, it would still be considered a very strong price from a historical perspective.

What does it mean/next week?:

It will be interesting to see what happens to wheat during the next week. The market has fallen sharply, but aside from lower feed usage the picture is still pointing towards a bullish pricing scenario.

The Russian crop is going to win the war of exports over the next six months, however we are likely to see a switch back to the US in the early part of 2019.

We are starting to get through the northern hemisphere weather window and the crop condition is now largely known. European Union and Black Sea exports are going to decline and locally we can be sure that Australia won’t export. The task now returns to the US. In this weekly comment, we give a short overview of the market.   

Chicago wheat futures spent most of the week in the red, however overnight regained some ground. Overall, in Au$ the Dec’18 contract is $2 more than last week and Dec’19 is unchanged (Figure 1). The big surprise was the increase in export sales out of the US, at 803kmt it was a week on week increase of a whopping 153%.

The sales were to a wide range of destinations, including the Philippines, Nigeria, Mexico and Iran. This could point to further tightening of the global exportable balance sheet. The drought conditions in Europe, Australia and parts of the Black sea will eventually result in export volume switching to the US.

Although Australia will not be an attractive export origin this year due to the drought basis, the Australian dollar has taken a dive this week falling back to the lowest level since January 2017 (Figure 2). The fall is attributed to a combination of low wage growth and wider geopolitical concerns emanating from the trump tariffs with China and Turkey.

At a local level, the market seems to have stabilized this week, with most markets relatively unchanged since the end of last week. At present it doesn’t really matter what bid the market makes, growers are unwilling to sell due to lack of clarity on production and higher pricing expectations.

On the rainfall front, there is rain headed to the southern cropping regions, however, NSW and QLD are set to by and large miss-out. At this point, we can largely write off the NNSW and QLD crop, with the focus shifting to whether they can get enough moisture to plant a summer crop.

What does it mean/next week?:

Turkey remains an interesting conundrum as Trump looks set to enact tariffs against the nation. In the past month, the Turkish lira has depreciated by 20%. This has resulted in them cancelling their wheat import tariffs to make it more competitive to import.

The export data from the US in coming weeks will give an insight into whether this weeks export sales were an outlier, or whether this is a start of a trend of exports moving back to the US.

We are big fans of social media. It’s a great tool for communication around the world, but it can unfortunately have issues with miscommunication. In this weeks update, we take a look at the Facebook post which gave wheat futures a 6% rise overnight!

Over the past two days, I attended the Australian grains industry conference (AGIC). In the Uber on my way home from the evening ‘networking’, I looked at the futures market. I was shocked to see the market up 6% or A$16/mt (Figure 1).

There was little in the way of data releases, so what caused this rise? The Ukrainian Deputy Agriculture Minister posted on facebook about looming discussions between the government and the trade relating to export limits. This was however misconstrued as an announcement of a potential export ban.

Every year there is an agreement in Ukraine to determine the maximum export level for wheat. However, it just goes to show how jittery the market is at present. After the initial very strong rally, the market settled down only slightly above where it started the day.

Overall the Chicago futures market is up 6% week on week because of deteriorating conditions in the EU. At a local level, the NNSW and QLD crop is on the cusp of losing all potential if the there is no substantive rainfall within the next fortnight. The ASX contract has risen A$15 as domestic users attempt to get cover (Figure 2).

What does it mean/next week?:

The WASDE report will be released next week. There will be several major downward revisions in EU, Black Sea and Australia. However, this shouldn’t surprise many traders.