Tag: Grain

In recent times, there have been accusations of Russian tampering in western politics. In the wheat game, the Russian crop is interfering with our grain pricing! In this week’s comment, we highlight the Black Sea, and its impact on global pricing.

In figure 1, the spot futures are plotted. It’s not a pretty chart. The Chicago futures market has lost 142¢/bu or approximately A$66 since the peak of the season in July. This rally has provided many of our readers with good opportunities, for those who covered swaps or confidently contracted physical forwards. It is important that when we have such an oversupplied market that, when markets rally substantially, we begin to lock away price. We must make sure we don’t aim to hit the top of the market, as you will be perpetually disappointed.

The recent fall in the market can partially be attributed to growing expectations of the Russian wheat crop. The recent WASDE report, alongside many private forecasters have tipped that the Russian crop will be the largest the country has produced at 77mt (figure 2), 7% above last year and well above (+40%) the ten-year average of 55mmt. Although, the Ukrainian crop has marginally dropped year on year, it also remains large at 22% above average.

The expectations of an immense Russian crop, alongside a low rouble, has resulted in Russian wheat becoming extremely attractive with an A$/mt terms 12.5% protein wheat pricing at $233 fob. The Black Sea crop will continue to place pressure on prices, as their export program will be substantial this year, and will be competing into similar markets to Australia.

Next Week/What does this mean?

This year seems to have parallels with the past two seasons, however last year the majority were gifted with strong production in Australia.

The focus at a local level will firmly be on the crop, at the moment the rain is coming in leaps and bounds. How long will this continue, and how much surety in the crop do we have. At present estimates of the overall crop have improved from the end of July, and it wouldn’t be unexpected to reach the upper end of the 17-22mt range.

The first week in August. This month is one of the most important in the cropping year, as we will have increased certainty on the rest of the world’s crop, and start to gain greater clarity on how good (or bad) Australia is going to be come December. It is the knife edge time of year.

The global markets over the past week have continued to decline (figure 1). In straight futures, the market is now down to levels below the June/July rally, in the past week in A$ the fall has been $10.

In figure 2, we have shown the three US futures contracts, converted into A$. We can see that all futures have fallen considerably. The premium between SRW/HRW and HRS continues to trade at a strong level, this is as expected due to the poor growing season which corresponds with the hard red spring contract. The issues around the world when it comes to wheat are largely around quality, particularly the lack of high protein wheats. At present low protein wheats are still in strong supply.

At a local level flat price around the country have fallen since a peak on the 11^th of July (figure 3). During the first week of July all port zones were able to achieve historically competitive prices, however few growers have taken advantage of the prices available. Since the 11^th, across all ports in figure 3, the price has dropped by $32 per mt.

At present the ‘Garden of eden’ prize in Australia currently resides with Victoria, with crops progressing well and receiving beneficial rain in recent days. However, other areas of the country are not in such great shape. If conditions deteriorate around the country, we would expect basis levels to bolster.

Next Week

The next couple of weeks will be instrumental in developing the Australian crop, and at this point in time the range of possibilities is as wide (15-21.5mmt). What falls from the heavens will determine where we end the year.

The grain market is one of the most interesting to be involved in. There is always ups and downs, always something interesting happening to change the direction of prices. This week is no exception with some big moves both internationally and locally.

At global level, we have seen further deterioration of Chicago wheat futures, with the spot market falling to as low as 474¢/bu, from a high at the end of June of 539¢/bu (figure 1). The market has lost 3/4 of its gains in ¢/bu since the rally in the end of June. The fall in SRW wheat is not unexpected as weather issues around the world are more a quality than quantity issue at present, and with beneficial rains being received throughout the US, risk to this crop has reduced and priced into the market.

When we however look at the futures converted to A$/mt, the losses have fallen well below the pre-rally period to $220 for spot and $230 for the December contract. This is due to the rise in the A$ which has been a surprise to many.  The majority of analysts have been calling the A$ overvalued for the past 18 months, however it never fails to surprise. In the past week, we have seen the dollar rise due to continuing negative sentiment from the US, however, continued firming in the wider commodity market (iron ore etc) has seen support levels firm.

At a local level, there has been good news, with many in the cropping belts receiving much needed rainfall and forecasted falls due in the coming days. Let’s hope the BOM are correct, as there are a lot of expectations resting on these forecasts.

As the concerns continue with the Australian crop, basis levels have continued to stay strong (figure 3), providing good flat price opportunities for growers. As volume is likely to remain depressed this season, basis levels would be expected to continue to remain on the higher end of the range.

Next Week

The focus will be on the weather. What will the results be of the crop in the northern hemisphere, and as we go into August will we maintain the current crop potential?
The forecast is for drier conditions for the next three months, will we see further downward revisions?

After falling heavily last Thursday night Chicago Soft Red Wheat (CBOT) Futures largely held their ground this week.  The real issue for local values came from the Australian dollar, which this week hit a two year high and is dampening the value of our grain.

CBOT wheat prices managed to track sideways this week as the market digested the World Agricultural Supply and Demand (WASDE) report and weather outlooks improved.  While the spot and Dec-17 CBOT wheat have fallen 50¢ from the peak, the Dec-18 contract is down 35¢.  Dec-17 currently sits at 529¢/bu, with Dec-18 at 585¢ and full carry back in the market.

The rise and rise of the Australian dollar has wiped some more value off swap prices.  This morning Dec-17 is priced at $242/t and Dec-18 at $268/t.  Good employment data yesterday pushed the AUD to 80US¢.  The 5¢ rise in AUD since the start of June has wiped $16/t off the value of CBOT wheat futures in our terms.

Locally new crop ASX East Coast Jan-18 Wheat futures have also fallen, but basis is strengthening.  The Jan-18 ASX contract settled at $290/t yesterday, which at $48 basis is historically pretty strong, but not yet ‘drought’ basis as seen last in 2007 (Figure 2).

After also falling heavily last week, ICE Canola for Jan-18 has steadied at the $515CAD/t level.  The Canadian dollar has matched the AUD increases, with the two currencies locked at parity, so swap prices remain around the $515/t value.  With local port prices at $530-535/t, the basis value doesn’t look to be there, so swaps would be the way to go at the moment.

The week ahead

The forecast shows another 8 days without rain for anywhere but South West WA and parts of Victoria.  The weather is still cool but the need for rain on the East coast is increasing, and basis should continue to climb, for both wheat and canola.

The US market seems to have found a level it’s comfortable with for the time being, but as we move towards the corn and soybean harvest the risk of downside will increase.

This week we saw the USDA release their July World Agricultural Supply and Demand estimates, the market has reacted to this news. In this update, we take a short look at Chicago futures & the dollar.

The last two sessions in the wheat market have been in the red (figure 1). The market has been on a skyward journey over the past two weeks, however it came to an end when the USDA report came out. The WASDE report was bearish with world stocks up 1.62mmt.

This bearish report, alongside welcome rains in the US has spooked the speculators in the market. However, the SRW futures falling should not be much of a surprise, as the world issues are largely around quality not quantity. It must be noted that we typically expect any falls in production to have a 2-month lag before appearing in the WASDE report. Therefore, the August report might provide some fireworks.

To add insult to injury, the AUD has reached four-month highs (figure 2), barrelling above 77¢. This makes our wheat more expensive to export. The AUD has gained value after better than expected Chinese trade data, and remarks from the US Fed Reserve that interest rates in the US may not be as soon or as frequent as expected.

Next Week/ What does it mean?

The commitment of trader’s report will give an indication into how the speculators in the market are positioned, and we would expect them to have reduced their long positions.

There will be another weekly crop report released, and we would expect the spring crop ratings to be reduced. Although at this time of year, a large degree of quality risk will already be priced in.

In the late 1600’s Sir Isaac Newton, developed the theory of gravity. It seems that in addition to determining that apples will fall from trees, it seems that what goes up in the grain market also comes down. After a sustained rally over recent weeks, some of the gains have been lost, however there are still good opportunities.

The wheat market has had a stellar performance, with the SRW contracts rising an average of 87¢/bu since the start of last week (across the 6 nearby contracts). The market however lost around a 20¢ (figure 1) overnight. The market had become quite overbought in recent days, and it seems that speculators in the market have started to take some of their profits.

In figure 2, the three main US futures (spot) contracts are displayed. In this chart we can see that the rally for most of June was largely in MGEX spring wheat futures, before some flows into SRW. The reality is that the worst weather issues are currently around the high protein wheat (mgex), which globally is likely to be in demand, however we still sit on ample low protein wheat.

Although the market has fallen, it is still at an attractive level compared to the period since harvest. There are ample opportunities, for the grower looking further forward. As discussed in the analysis piece “Should we lock a far forward swap”, the high carry in the market place allows us to lock in close to a $300mt swap for 16 months time.

In reality, we do not know what will happen between now and then, there could be massive or miniscule harvests in 2018. However, starting the 2018/19 season at those levels traditionally would be attractive.

Next Week

The USDA will release their WASDE report in the middle of the week, which will likely see a reduction in crops in US, Australia and Western Europe. However, to what extent is the question, and what difference will that make to overall stocks.

The US crop condition will likely also show a reduction in crop condition, but with harvest in full swing it is likely with a negative result expected that this is priced in.

Well this is good news, wheat is on a journey to the moon, and at this rate beyond the planets. The downtrend of the past week has been reversed in dramatic fashion, is this a sign of things to come?

It’s the middle of the weather market, and as we have mentioned for months this is where opportunities can arise when the trade gets jittery. Overnight we saw futures close up across the board, with US futures up 5%, and Matif following up 2%.

The market has rallied on the back of continuing bullish data being release to the market, with the US drought monitor showing large parts of the Great Plains being in a rainfall deficit, and a corresponding drop in the crop potential. In Canada, canola planting according to Statscan have exceeded wheat, as a result of more attractive gross margins on the oilseed.

In figure 1, we can see the rise in nearby Chicago SRW futures, the rise was so high that I had to change my scale this morning to fit it on the chart. The spot contract has not been at this level since mid-June last year, before it fell as production became sure. As we go through the next month, how will the weather impact on the crop?

The rise in SRW has been fantastic, and most welcome to farmers around the world. However, it is dwarfed by the Minneapolis spring wheat contract which has been a stratospheric rise the like of which has been seen for a long time. In figure 2, we can see the SRW, HRW & Mgex contract converted into A$/mt since the start of the year.

The spread between SRW and HRW/MGEX is shown in figure 3, and it currently sits A$124 above spot SRW. This is due to the expected shortage of hi-pro wheat, will this rise be sustainable and make it past the moon, and beyond the Kuiper belt or will it crash back down to earth?

Next Week

The USDA will release their quarterly grain stock reports, will this show a downturn in US stocks or has less been used than expected. This report has traditionally had the capacity to move the markets markedly.

All strategies must evolve to take into account the potential average-low production environment in the coming season. There is no point removing price risk in order to replace it with production risk.