Tag: Grain

The world has been awash with wheat over the past six seasons. The adoption of modern farming practices and favorable weather around the world has created a situation where we have produced too much. We take a look at some new projections, and what has driven prices up in the past week.

I’ll admit, that it is a bit of an exaggeration to say that wheat stocks are crashing. Overnight the International Grains Council (IGC) have lowered their expectations for the 2018/19 global crop, with production falling 16.9mmt year on year, and end stocks down 3.4mmt. As we can see in figure 1, this is the first year since 2012/13 that end stocks are predicted to fall.

Although the world will still be left with abundant stocks at the end of the season, it will only take further downgrades in this season and 2019/20 to start placing pressure on supplies. Although it’s not nice to say, we need farmers in other territories to have a bad time.

The wheat market gave a solid attempt at a rally throughout the middle of the week, with futures up A$14/mt from the end of last week on Thursday. However, as we regularly witness with wheat maintaining a rally is a struggle, and A$3-4/mt were lost overnight (figure 2). It is expected that a large proportion of the fall overnight was spec driven, yet the fundamentals are still in play for a volatile futures market and we may yet see further advances due to US weather concerns.

As all farmers in Australia know, Anzac day is the traditional point when the planting of the crop goes into full swing. In our conversations with growers around the country, it is clear that a lot of the crop is going into the ground dry, with the hope of some starting rains in the coming weeks. At present the soil moisture profile (see map) remains poor across the bulk of the Australian wheat belt.

What does it mean/next week?:

Producers: The focus will continue to be on planting the crop and performing rain dances. The buyers are likely to continue paying strong basis levels whilst major crop concerns persist. This will allow Australian producers to maintain a strong premium above international levels.

Consumers: There is a long way to go before harvest, and the rain could come and produce a bountiful crop, however it is worthwhile enacting a risk management plan to ensure that you are not exposed to worst case scenarios.

The wheat market has regained some of its strength on the back of fundamentals. This is great timing as we start to plant the crop for the coming season. In this week’s comment, we look at the SRW/HRW spread and the iron ore market.

The wheat futures market has improved over the past two sessions, to return to the levels from mid-Thursday last week (figure 1). The trade continues to be concerned about weather conditions in the US, both with the winter crop, and potential issues with spring crop planting.

In Texas, Oklahoma and Kansa, drought ratings remain severe (see map). The continued drought conditions have started to place a premium on the HRW grown in these areas (figure 2). The spread between HRW and SRW has been very narrow in recent years but have now started to branch from one another. Many will remember the same happening last year with MGEX futures, heading to a massive premium over SRW/HRW.

The Australian dollar has continued to remain strong at a range between 76¢ and 78¢, for the past two months. In the past week, an upsurge in crude oil prices, has flowed onto the iron ore market, with an expectation of increased demand. In figure 3, Singapore iron ore futures are illustrated alongside the A$. We can see a relationship between the two, which points towards a strengthening of the A$ if the iron ore rally is sustained.

A rise in the A$ will make our export products less attractive, however on the flipside will in theory make our imported products cheaper (fertilizer/chemicals/machinery).

What does it mean/next week?:

The situation in the US is poor, and the further we get through the year with sustained drought conditions the less likely they will have a reversal of fortunes. The question still remains, with huge global stocks, how far can the market go?

For those of a superstitious bent, Friday the 13^th is considered to be unlucky. In this week’s comment, we take a look at futures pricing & the USDA update to global wheat supply and demand, in order to determine whether we are lucky or not.

The futures market rallied during has rallied strongly since the beginning of April, however in recent days prices have fallen as a result of bearish data in the WASDE (more on that later), and the increasingly tense stand off between US & Syria/Russia. However, prices remain 3% higher than the close last Thursday, and 8% up on the start of the month (figure 1).  So in this case we are definitely lucky, to have much higher prices than the start of the month.

The April WASDE report was bearish for wheat, with production estimates for the current season raised by 962kmt, which mainly came from a month on month increase in production estimates of 13.47% in Morocco. Raising global production to 759mmt, the highest global production on record (figure 2).

Due to the rapid export pace in Russia, their ending stocks were reduced by 1.1mmt, which is a bullish factor. However, lower feed usage in Iran offset much of this with an increase in end stocks of 2.3mmt. Overall, global end stocks are forecast to end at 258mmt, 14mmt higher than last season and also an all-time record (figure 2).

The WASDE paints a concerning picture, with world production and stocks for 2017/18 at record highs, it reduces the potential for the market to provide sustained strong rallies. The world needs a very large drop in production in one of the major northern hemisphere to provide a drive in the market to benefit Australian producers.

I recommend you read Tuesdays article “How do you eat an elephant?”, in order to get some ideas on hedging strategies for the 2019 crop.

What does it mean/next week?:

At a local level, we need to keep a close eye on Australian weather, many cropping regions are yet to receive meaningful rain. It is however very early in the season, and there is still everything to play for.

You might notice a bit of a pattern of involvement here, but in coming weeks posturing between Trump/Russia, Trump/China and Trump/TPP countries will have an impact on global markets both for commodities and equities.

The market has been knocked around this week, by both fundamental factors driving pricing and the black swan event in the form of President Trump. Although volatile, the market can provide pricing opportunities for Australian producers.

This week has seen a huge degree of uncertainty across all markets. The talk has moved away from the fundamentals, and onto the spectre of a volatile trade war between the worlds two largest economies. The futures market took a dive immediately after the announcement of tariffs by China, in response to comments by Trump. Overnight however, the market recovered, taking us to two-week highs (figure 1).

At a local level, cash APW1 prices have traded in a narrow range since the fall of the market in mid-march (figure 2). This week however, prices have shown some upside, with between A$2 & A$6 rises across the country.

Although the tariff wars provide some interesting news, the fundamentals continue to be a strong driver of markets. Many areas of the US continue to experience drought conditions (see map), leading to reduced expectations for the winter crop. At present, only 32% of all winter wheat acreage in the US is considered to be good-excellent. This is an extremely low figure, and places it at the lowest level since 2002. In order to recover decent rainfall will be required in the next fortnight, without rain further downgrades are expected.

In the coming weeks we may experience some upside in pricing as markets take into account drought conditions in the US.

What does it mean/next week?:

The market is going to continue to be extremely volatile. At present, Trump has already pointed towards a further $100bn in additional trade tariffs, which will likely be met by retaliation by China. The story is far from over, and is likely to continue to be a cause for concern, although potentially offer opportunities for Australia.

All eyes need to be on the weather, with poor forecasts throughout many areas of Australia’s grain growing regions.

Trump. The president who sticks to his promises. Overnight the trade scuffle, turned into a trade war with China increasing the number of imports which would attract tariffs after increased rhetoric from the US president. Although not wholly unexpected, this trade war can have huge ramifications for global trade.

The Chinese government were never going to stand back, whilst Trump continued to sabre rattle and threaten increased tariffs. The new list is extensive and could impact up to $50bn of trade. The products include soybeans, wheat, corn, sorghum & whisky*.

Through reading the list of products likely to be hit by tariffs (here), it could be construed as a savvy political act, as many of the products/commodities will impact the pockets of voters in Trump strongholds.

The impact of the tariff has been quite stark, overnight the Chicago soybean futures contract traded in a 58¢/bu range (figure 1). The introduction of tariffs specifically on US exports has instantly made US soybeans uncompetitive into China and will make it easier for alternate origins to compete i.e. Argentina and Brazil.

The tariffs however, leave a number of questions around the capability of China to continue with trade restrictions. In figure 2, the imports/exports and production of soybeans is displayed. Over the past ten years China has on average imported 62% of the worlds export soybeans, this places a huge strain on China’s ability to find alternate origins, especially in light of the US providing 40% of the worlds exports.

In order to satisfy the demand into China, without paying tariffs, close to 100% of the global trade in soybeans (ex USA) will have to go into China. This will have flow on impacts into other soybean destinations, which will likely change origin to USA.

Interestingly, China has not declared when tariffs will be in place, and there is some speculation around the fact that Chinese purchases tend to be reduced at this point of the year.

*Only real whisky comes from Scotland anyway.

What does it mean/next week?:

It is not wholly surprising that this trade war has commenced. The Trump campaign was largely based on curtailing the advance of China, and regardless of opinions on him, he tends to do as he promises. The real test will be whether there is a further escalation in tariffs.

The good fortune we have seen with barley and sorghum imports into China is likely to continue, as US exports will be uncompetitive.

Key Points

• China over the past ten years imported on average 62% of the worlds global trade in soybeans
• The US contributes 40% of the worlds global trade in soybeans on average.

There is an old Chinese curse, “May you live in interesting times”, used ironically to suggest that uninteresting times are more life enhancing than interesting ones. It seems our friend Donald, would like to consign us to a lifetime of interesting times.

After experiencing strong momentum in March, it seems that gravity has exerted its force on the wheat futures market, with a return to pre-rally levels (figure 1). In recent days much needed rainfall has fallen in US growing regions. It was not unreasonable to expect this fall in the market, especially as the US falls in importance on the international wheat market.

In the Black Sea nations, conditions continue to be promising for the coming season, with winter kill below average. Although the crop will be unlikely to match last year, it will still dominate the export market. Interestingly a Russian government official commented that fertilizer and seed purchases had increased 30% this season.

In figure 2, the basis levels around Australia as a percentage of the overall price has been displayed. During this harvest, basis increased dramatically, becoming a third of the pricing complex in some states. Although since weakened, basis levels remain strong, and protect us from falls in the futures market.

In recent weeks, Trump has been rattling the tariff saber with China. During the Trump election campaign, he ran on a platform of reforms to trade. In his defence, Trump has certainly gone all in, however only time will tell whether this will be to the betterment or detriment to the voters.

In figure 3,4, & 5 (animated), we can see the futures prices of a number of commodities (pork, soya, soya meal), which all have strong links with China. As we can see these markets have experienced strong falls in recent weeks, as discussions become more heated.

On a regular basis China turns around vessels of soya and corn from the US; perhaps we will see an upsurge of cargo rejections in retaliation.

What is assured, is that we are unlikely to be living in tranquil times for the foreseeable future, and black swans are likely to be a regular occurrence.

What does it mean/next week?:

The ‘tariff war’ is going to place Australia in a difficult diplomatic position, between an important customer and a traditional ally.

However, if handled well by our government could provide a favourable result for Australian industries.