Tag: Grain

It was steady as she goes for wheat and barley markets, while canola has been on the slide this week.  In fact, canola basis weakened further and now sits at levels more expected during a bumper harvest, not a year of tighter supply

Since the heavy fall in December, local canola prices have had trouble recovering, especially in the south.  Figure 1 shows ICE Canolafutures, and the Geelong track price, and basis has widened recently.  The strong rally in ICE Canola futures thanks to deteriorating soybean conditions in South America, wasn’t matched by local values.

Figure 2 shows basis at negative $24/t is the lowest level since the middle of June 2015.  To take advantage of this growers still holding last year’s canola can sell swaps and hold physical.  The would pay off either through ICE Canola falling, or physical prices rising.

As outlined last week local wheat basis has weakened, also due to rising international futures not being matched by local markets.  Having said this, APW in southern markets is $30 stronger than it was at harvest, so it has been a good year for holding.

Whether wheat can find more strength is questionable, we are still hearing it is overpriced in international markets.  Basis could improve, but this would come from CBOT falling.  Again, it’s a case of selling futures or swaps and holding physical.

What does it mean/next week?:

It’s a rare year when over 10% profit is made from holding wheat from harvest through to March.  As such, it might be worth making some sales to take advantage of this, in case current prices disappear as we move towards the northern hemisphere harvest.

Many growers are holding wheat as a drought hedge, which is fine, but it might be worth taking some cover on futures or options to protect against falling international values.  In the case of a delayed autumn break it will be basis that improves, not international prices.

It’s been an interesting end to February, providing reasonably strong increases in futures prices. Overnight the WASDE report for March was released, has it provided any fire?

The USDA have yet to switch over to forecast the coming crop, therefore at this point in the year the potential for large changes is limited. The main takeaways from the report, were a continued increase in end stocks for the 17/18 season to 268mmt (figure 1).

The report was largely neutral to bearish for wheat. The story for corn was somewhat more bullish, with South American weather woes leading to a 7.7% production fall in Argentina. The end stocks are forecast to end 14% (table 1) lower than last season, and the lowest since 2013/14.

The futures market has provided some good increases in value for producers in the past three weeks, but last week the market has traded in a directionless band whilst the trade awaits potential rains. In figure 2, the December futures (in A$/mt) is displayed. At present, the pricing level has provided better opportunities for locking in profitable prices for the approaching harvest.

What about basis? Well as expected premiums have fallen dramatically since harvest (figure 3). In past analysis articles, we have pointed towards the record levels and the likelihood of a correction. This has led to our prices at a flat price remaining relatively flat, as futures increase, basis levels fall.

Our article outlining our strategy in October, would have worked perfectly for producers this year. We advocate that producers move away from flat pricing and look to lock in component pricing separately to ensure that little is left on the table.

Lock in premiums, keep exposure

What does it mean/next week?:

It will be interesting to see if there are any reactions to the Trump tariffs. Will this lead to a trade war which could begin to envelope agriculture commodities?

The panic has set in. US wheat markets are caught in a classic weather scare, with the dry conditions outlined in our analysis this week set to continue for another couple of weeks. This has seen ever increasing moves higher in the last three sessions.

Yesterday I was asked, ‘how long have I got to get a hedge on?’ The answer is you’ve got until some rainfall comes on the 7 day forecast for the US. It really is that simple at the moment. Dryness has spurred the market. The start of the month saw funds jump on board. With very little change in fundamentals, in three days CBOT wheat has gained 39¢/bu, or 9.5% with the May contract at 515¢/bu.

In our terms the May CBOT contract is $243/t (figure 1), December 18 at $264/t and March 19 is at $270/t.  The pricing for our new crop, with around average basis, will give a price close to $300/t.  In fact, ASX East Coast Wheat futures are offered at $303/t this morning, but this would be a good jump higher (figure 1).

As expected, local prices haven’t risen as quickly as CBOT. There will be further upside today, but in the Geelong Port Zone the $15 rise in CBOT to yesterday had translated into just a $6 rise in APW. Figure 2 shows the decline in basis.

Canola has also found support this week, with ICE futures up again last night to almost meet its early December high in our terms (figure 3). Again, local prices have found some strength from the international market, but basis has weakened to the negative $20-25/t level.  This is extremely low.

The week ahead

Should we be selling into this rally? Good question. We don’t like selling at weak basis, but absolute prices are easily at 2018 highs for wheat, barley and canola. One strategy would be to sell futures or swaps for the new crop, and wait for basis for old crop to improve. This will either come from higher physical prices, or lower international values. Most likely lower international values, especially for wheat.

In a good week for grain growers the Aussie dollar is a bit lower, and international oilseed prices have found a bit of strength.   CBOT Wheat steadied after a down week, which didn’t impact locally.  All this translated into higher physical canola prices yesterday, and there might even be a bit more upside today.

In looking for some commentary on the AUD exchange rate we found an article saying the Aussie had been ‘poleaxed’.  Sounds promising for export orientated markets, but on further investigation ‘poleaxed’ translates into a 1% fall, with the Aussie at 78.4 US¢ this morning (figure 1).

If we were to use some of the terms we see in the financial press to describe grain prices this week we could say canola is rocketing higher, and wheat smashed lower.  In reality ICE Canola has finished the week 1% higher at $508CAD/t (figure 2), and CBOT wheat 3% lower at 450¢/bu.  We’d hate to see what financial reporters would make of the volatile commodity markets.

Locally there has been a bit of rain about, which usually loosens growers grip on grain, but we’ve seen a relatively flat week.  Canola has returned to the ‘highs’ seen two weeks ago, but at around $500 port we are still a long way from December values, and at weak basis.

For those in the south, who have held onto canola, there is a bit of hope.  Boats coming into Geelong and Portland might see some demand, and hopefully, basis improvement.

The week ahead

CBOT wheat came off on the back of a better rain forecast for key wheat areas, but this rain is yet to eventuate so there might be a bit of upside yet.  As we keep saying, however, world wheat supplies are abundant.

Locally rain in NSW might encourage a bit of a sell off of cereal, but in reality there is not much grain up there so we can expect wheat and barley prices to remain steady.

The grain market stands at a cross roads. In the past two years, we have seen concerns in the market which have led to short rallies. Will conditions provide the opportunity for a sustained rally, or will it fizzle out?

After a strong January & early February, the past week has seen the futures market trade in a narrow band (figure 1). The futures currently rest at A$213/mt, up A$21 from the same time last month. The futures have been rising due to ongoing weather concerns in the US. Abnormally conditions persist across much of the country (see below), with many areas receiving next to no rainfall since the onset of winter.

Coming back down under, BOM have signaled that the next four months are liable to be drier than average. This is not good for farmers struggling with already limited subsoil moisture. Although, as an eternal optimist, I must point to the fact that BOM themselves admit to only having a moderate level of accuracy, and only low to very low in SW WA and SA.

When we look at flat prices of APW1 in Australia (figure 2), although futures have risen the follow through locally has been more tempered. In Port Kembla & Kwinana the rise has been more restained at +$2 and +$8 month on month. In SA & Vic the ascension has been stronger with +$12 added to the flat price in the past month. It is not surprising that Port Kembla pricing was more lackluster in experiencing the benefit of the futures rally, as basis levels were already at very strong levels.

There were a number of reports in recent days about the lack of competitiveness of Australian wheat versus Black Sea region supplies. This is something we have been discussing for the past two or more years, and its likely to continue into the future. At present pricing levels, Russian and Ukrainian farmers are profitable, and with freight rates continuing to be depressed (figure 3), their supplies can compete into our traditional markets.

Although the Black Sea is likely to be the powerhouse of international wheat in the coming decade, we only have to look back to 2010, when drought ravaged their crop. As the world becomes reliant on this producer, and with US acreage dropping – at some point Russia will get its bad year.

See previous discussion of this topic:

Has Australia lost its geographic advantage for grain?

A slump in shipping rates is eating away competitive advantage

What does it mean/next week?:

US weather woes continue to plague the market, and it will be interesting to see how the speculators in the market react to this on the weekly commitment of trader’s report.

Although we have seen a rally, it is yet too early to determine whether this will form what I consider to be a sustentative rally.

An exciting week in markets, with volatility across equities and currency. In the past week wheat futures have performed well, but has the benefit been passed onto local growers? Overnight the WASDE was released, and it provides some data that is good for Australian grain in the long term.

The WASDE report was released overnight. The report was largely bereft of much in the way of surprises, with tinkering around the edges. The summary of the report is provided in table 1. On a month on month basis, the end stocks for wheat, corn and oilseeds were all reduced. This has to be tempered by the fact that season on season, end stocks are still strongly up, with the exception of corn.

An interesting piece of data in the report, was the imports of wheat. Egypt has traditionally been the largest importer of wheat; this year Indonesia is expected to take the crown. As we can see in figure 1, there has been a rapid increase in imports in the past five years. Increased Indonesian imports are of benefit to Australian farmers, as we have a geographic advantage into this destination. The question remains on whether imports have been higher due to low pricing, or whether this will continue to be a long-term trend when prices rise.

The futures market overnight took a tumble (figure 2), nonetheless futures when converted into A$ remain $15 higher than the same time last week. At a local level the full benefit of the futures rally has not been passed onto local growers, with basis levels (figure 3) falling between $5 and $11 dependent upon zone.

One thing to keep in mind is that although basis levels have fallen since harvest, they have fallen from close to record levels. In our articles prior to harvest, we recommended selling basis, as it was very top heavy.

I recommend re-reading the article ‘3 elements that need to be considered when selling grain’, this will gives some indication on how we can improve our risk management strategies.

What does it mean/next week?:

The A$ is currently falling, which if it continues this trend will add additional value to export pricing, and make it more attractive to buy in Australia.

The key focus will be on the US weather, with drought seemingly spreading further their productive potential will be constrained, if no rain is received in the next six weeks.

Time flows like water down the river rapids, we are now into February and the holiday season is now but a distant memory. January has come to an end, and it’s worth examining how the start of the year has gone.

The futures market has risen sharply in the past three weeks (figure 1), this has been as a result of a depreciating US dollar (discussed here) and weather concerns. The market is concerned about weather patterns in the US (see map), which show abnormally dry conditions across much of the country. Although still early in the season, the speculative short in the market as at close to record levels, which can lead to sudden swings in the market. Time will tell whether the weather risks, are enough to warrant a sustained rally or whether the large global stocks are enough to constrain pricing.

The A$ has been like a steamroller since the beginning of December (figure 2), with 81¢ being achieved last week. Whilst there has been

a modest fall, it has remained stubbornly above 80¢. The RBA have their first meeting of the year next week, and it is expected by most that rate will remain at current levels (1.5%). However, currency analysts are having divergent views on when rates will rise, with the following forecasts:

• ANZ forecast two rises in 2018, with the first possible in Q2
• Credit Suisse believe that there is the potential for a rate cut in 2018
• UBS forecast no rate hike in 2018
• Morgan Stanley forecast no rate hike in 2018, but a rise in 2019

I was asked this week why local prices have not moved in line with futures. The futures prices have rallied, at the same time as the A$. This takes some shine off when converting to a local value. However, the basis level has slid downwards since harvest. It has to be remembered that basis levels are still very strong, and technically we are actually receiving very strong prices compared to the rest of the world.

In recent months, we have discussed the reality of high basis prices and provided some advice on ways to lock in basis through a physical sale, and keeping exposure to the futures market. Those who followed this advice, have now benefitted from locking in a historically strong premium, and can now also benefit from futures rises.

I recommend reading the following article on, which briefly explains a number of strategies:

How to defer grain pricing

What does it mean/next week?:

As always at this time of year the market will be looking towards the weather, what does it have in store for the northern hemisphere crop. It is currently a balancing act between potential depleted production in 18/19 against record global stocks.

The RBA interest rate announcement will be made, it is likely to remain the unchanged and remain at record low levels.

The week has overall ended up positive for grain producers in Australia. The market has been largely driven by noises from the white house, which seem to have very opposing views on the future of their economy. In this weeks comment, we take a look at the descent of the Chicago futures, and the strong ascent of the Australian dollar.

The futures market has regained some traction in the past week, with Chicago spot futures up 4% since the 19^th Jan. There are some concerns about weather in the northern hemisphere, but the increase in futures has largely come from weakness in the US Dollar. In figure 1, the spot Chicago futures are shown in both US¢/bu and A$/mt.

The fall in the US$, and the subsequent rise in A$ has led to the increase in A$ wheat swaps being weaker, albeit still reasonable at 3% week on week.

The US$, has been weakening in the past fortnight due to mixed signals from the US administration. The US secretary of state, had made comments pointing towards a weaker US$ being positive for the economy. This sentiment points to the likelihood of limited interest rate rises in the coming year. However, President Trump provided a conflicting view that the dollar will be stronger, and that was the aim of the government.

In figure 2, the US dollar index (DXY) is plotted. The DXY is an index based on a trade weighted basked of currencies against the US$. In recent weeks, the greenback has declined to it’s lowest point since December 2014.

This weakness has flowed through to the A$, which has gained ground to close above 81¢ (figure 3). The improving value of the A$, contributes to making local export commodities less competitive on the world stage, however in theory imports should be cheaper.

The current rise in the A$ is largely as a result of US weakness, and with the unknowns of the political machinations of the white house, we could be in for a rocky period of time. If the market regains confidence in President Trump’s claims of a stronger dollar, we could see a decline in the A$.

What does it mean/next week?:
The market continues to look towards the northern hemisphere. We are currently experiencing La Nina conditions which can lead to a drier than normal conditions in the US, this is starting to be seen.

We are still a long way from the finish line when it comes to the US crop, but signs are point towards relatively poor conditions, and with low planting figures any issue can be exacerbated.

The markets have been very quiet over the past week, with little in the way of new information to get the trade excited. Usually in our Friday comments, we would take a look at the past week. This week, I thought I would take a quick review of the past two years.

In figure 1, the Chicago spot wheat futures, converted to A$ has been plotted. The past two years has not been pretty, the average price in this period has been a meagre A$211/mt. The futures price makes up the bulk of our price in Australia, we have a very low floor with which our local premiums can contribute to.

The basis is our premium or discount between the physical and futures market, and typically we compare Australian prices to Chicago futures, but it can be against any other pricing point. Basis is important as it can help substantially to increase the prices that we receive locally.

In figure 2, we can see the basis between APW1 and Chicago futures. As we can see, for the bulk of the past two years levels have been at a premium, with a short period of time where SA has experienced negative levels.

This season we can see that basis levels have been extremely strong since seeding. This is due to the weather risk, and then the realization that the Australian crop was going to end up below average. This basis has helped push up localphysical prices to provide a much stronger return for growers.

What is important to remember is that basis levels are largely driven by supply (or lack of), and if Australia had produced an ample harvest, then our basis levels would have been much lower, in combination with a period of low futures prices.

You would have to be living under a rock, if you hadn’t heard about the stratospheric rise of bitcoin. Although of little analytical benefit, I thought this was quite interesting to look over time at how many tonnes of wheat that you can buy for 1 bitcoin. This is displayed in figure 3, in mid-December a bitcoin could get you 122mt on the Chicago futures market, today it will get you 73mt.

What does it mean/next week?:

The market is likely to be quite dull in the coming weeks. There now seems to be less concern about the northern hemisphere crop, and every week that flows without an issue removes risk.

It sounds bad, but we need a supply issue to our fellow farmers in the north. We can’t rely too heavily on basis to make us profitable.