The market continues to follow a similar pattern to recent weeks. In this week’s comment, we look at futures & basis levels. In addition, we look at where our main competitor (Russia) is pricing its wheat.
When it comes to wheat markets, we are in the dead zone. A time when there is a lack of fresh data to give the market a strong direction. In figure 1, Chicago wheat futures are displayed in both A$/mt & US$/mt. In A$ terms the Dec futures are up $7/mt week on week, however remain $1.7 down since the start of the month. The fall in the A$ against the US$ has helped balance against the fall in futures, so the fall has not been as strong (figure 1).
Throughout October, we have been warning readers that basis levels were unlikely to be maintained at levels seen at the start of the month. In the past week, basis levels have continued to fall (figure 2). This in combination with the low futures levels, reduces the overall price available to growers. The analysis article yesterday “Swap update” delves into more detail on using swaps to gain full advantage of the market.
The Russian crop keeps going from strength to strength, with estimates >82mmt. As we all know Russian/Ukraine are now our biggest competitors on the export market, and it is of paramount important to keep an eye on them. In figure 3, we can see that in A$ terms Russian wheat has increased strongly in the past month. This is helpful for Australian growers, as it makes our wheat compete more effectively.
Next week
At a local level, Australia is weeks away from the start of harvest and that is where our focus should lie.
It is important to ensure that you have a plan in place, for marketing your grain. At present grower selling is very low, and this could lead to a degree of harvest pressure on pricing.
The futures markets are largely quiet, as the northern hemisphere is largely complete for 2017 and seeding progresses for next year. At a local level, it is important to start considering local premiums and how to take advantage of them.
At a local level, harvest has begun in the north and it won’t be long until the bulk of farms around the country will be ‘reaping what they have sown’. During October, rainfall has been strong through much of northern NSW and QLD, although not adding much in the way of benefits to the winter crop has added confidence in the summer crop. This has resulted in consumers reducing some of their buying appetite, as they reassess the situation for the coming 6 months.
At present there are considerable premiums available for growers. As growers start to sell the crop, the logic would be for basis to fall.
The Australian Bureau of Agricultural Resource Economics and Sciences (ABARES) made an interesting move this week, warning of crop downgrades. Meanwhile the United States Department of Agriculture (USDA) made their monthly predictions.
Global wheat production was lifted 5.3mmt thanks to improving production in the EU and India. The USDA did downgrade the Australian crop by 1mmt to 21.5mmt. Figure 2 shows we are still well and truly on track for a record carryout for 17/18.
Futures markets edged lower this week, but were balanced by a fall in the Aussie dollar. In this week’s comment, we look at rumours of increased import duties in India, and local premiums over Chicago futures.
The US Climate Prediction Centre, is currently on La Niña watch with an increased likelihood of the little sister to El Niño occurring before the end of the year, and into 2018. This can have very positive results for Australian grain growers, in this analysis we look at how we may benefit. 
In figure 1, we see the year-on-year impact of El Niño split into east coast and west coast. In the period 1960-2015, 7 of 11 El Niño years have recorded a reduction in wheat production, with 6 of these years recording a > 20% reduction. In Western Australia the impact of El Niño has been less negative, with 6 out 11 event years recording an increase. However, only two of these years record > 20% increase. In addition, during the years of production decline, 3 of these years recorded large production falls of > 20%.
At present, the market is not yet overly concerned with La Niña. However, it does have the potential to impact greatly on the US crop through drier weather and eastern Australia through wetter than average conditions. If La Niña starts to impact on the US crop production, then we are likely to see risk premiums emerge in US futures markets, which will flow on to our own prices.
Local and international wheat markets continued to edge higher this week. Local markets are still trying to get a grip on where the crop will end up, as it shrinks by the day. The international market remains awash with wheat, but a rising rouble gave unlikely support. 
Locally the dry spell in NSW continues to run down the potential crop, with prices responding accordingly. ASX East Coast wheat, which we must remember is now deliverable in Victoria, was quoted at $283/t yesterday, up around $10 for the week. Interestingly Geelong continued to lag a bit, although it was up around $14 for the week to $274/t (figure 2).
Canola values are also at a premium in the northern cropping zones, but not as much as you would think. Newcastle Canola is priced around $550, with Geelong just $15 behind, at $535/t. It’s hard to see much canola being produced in NSW, but there might have been enough carry over from last year to satisfy local crushers.
On Thursday, I will be presenting to the Crop Science Society of South Australia on the topic of GM crops, and the markets associated with them. I thought this was therefore an opportune time to look at the GM moratorium, and whether the promised premiums are available.
The South Australian government may point to a knock-on effect where other commodities are receiving a boost. In that case, we thought it was worthwhile checking how strong the premium for cattle and lamb had been due to being from a GM free state.
The South Australian ban on GM cultivation is providing little if no extra premium to prices of livestock and canola. There may be premiums in other sectors such as the seafood and wine industry, however this is of little comfort to canola producers.
The Australian east coast crop is a tale of two continents, with the bulk of NSW and QLD in a poor state, and Victoria/ East SA developing. The market is well and truly capturing the status of the crop, and the domestic market is pricing accordingly. This creates an issue of premiums being available (half full), but being unable to take advantage of them (half empty).
If a grower in Port Kembla had taken out a swap during the height of the July rally, then their overall price today would be >$370, which shows the value in strategic marketing using derivatives.
In the next week will we see the speculators continue to view the market as bearish, or will we start to see additional profit taking?
The US were busy celebrating labor day on Monday, well at least those not bracing for (or recovering from) Hurricanes. The market had a strong recovery prior to the holiday, with short sellers taking profits after a continuous decline over the past month (figure 1), however over the past two sessions the market has lost around half of these gains. The market was not helped by the Food and Agriculture Organisation raising its expectations for the global cereals crop to 2.6bmt, which would be the highest on record.
In figure 3, the basis levels as a percentage of the overall price are plotted. As we can see, there have been considerable rises in all zones. The rise was far more sedate in Kwinana, which has for the past 8 weeks maintained at strong levels, and the bulk of issues in the WA crop have been priced in. The basis levels as a percentage of the price in Kwinana and Port Kembla are now at historically high levels.
The key will be the USDA report, will there be any surprises? The recent upgrades to the Russian crop will likely give a bearish edge to the report.
In nautical terms, ‘Dead Calm’ is completely still sea, with the absence of wind or waves. The grain market could be considered to be in a period of dead calm, with the market waiting for some wind or waves in the form of substantial new data to blow us either way.
In contrast, Victoria seems to be the jewel in the crown and after having covered part of the state in recent days the crop looks to be in almost perfect condition, appearing to be on track for well above average yields.
In two weeks, we will have the September WASDE report released, along with the ABARES report. The question will be whether the trade has priced in any downgrade, or whether any likely downgrades will cause a stir.