Tag: Grain

It’s the start of harvest, but bids for the 20/21 harvest are now being presented to growers. In this analysis, we look at whether these offer more value for the producer or the buyer.

It is extremely important to be examining the forward markets, as they can often provide strong opportunities to price grain at high prices. The strategy of performing risk management through some forward selling can be through derivatives or physical contracts.

In this analysis, we will look at the current bids for Kwinana and Adelaide.

• Kwinana: A$314
• Adelaide: A$300

At a basic examination, these bids look quite attractive, it provides the grower with a price above the psychological barrier of A$300. However, let’s break it down.

The forward curve for wheat futures (Chicago) is in contango, where the forward months are trading at a premium to spot. Today the Chicago contract (Dec’20), which corresponds with the 20/21 harvest, is trading at A$291. This places the contracts at a basis of +A$23 in Kwinana and +A$9 in Adelaide.

In order to determine whether the current bids provide a good price, let’s look at the historical basis. In figures 1 & 2, the average basis from harvest (specifically December) is displayed in green bars, with the orange line representing the basis on offer with the current 20/21 bids.

As we can see, in the bulk of years basis at harvest has tended to exceed the current basis on the offer of A$9 in Adelaide and A$23 in Kwinana. This was especially so during 2018 when drought had hit Australia and prices responded accordingly.

The buyer at these bids can lock in the basis at below-average levels, and then protect their risk from movements in futures. They will then likely be able to sell the basis on at higher levels at a future date.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean?

If we see a bumper crop in 2020/21, then basis could fall to minus levels. However, at present, we have no way of knowing whether that will be the case.

If we went on the law of averages it would be a better position for a producer to sell futures, and hold locking basis until harvest (or until a better bid is provided).

At present on a flat price basis, these bids are attractive, but by taking them, there is the potential for money to be left on the table.

If you are a premium subscriber and would like to discuss this in further detail – feel free to get in touch.

Usually the market is relatively busy at the start of harvest, however, at the start of November things are going off with a whimper. In this update we talk about the lack of bids & volume on ASX.

The ASX wheat contract has been relatively inactive this week. The contract for Jan 2020 has been settling in a very narrow range of A$337-339/mt for the past nine days. The spread between bid and offer has remained wide during this time, and traded volume is low.

In figure 1, the seasonality of ASX volume is displayed. Throughout most of this year, volume has followed the 2019 contract. This week however, volume has dropped to 75 contracts (or 1500mt). This volume is likely to increase into December as positions are closed.

The big talking point with consumers and growers is barley pricing. This week prices have declined marginally, however, they have been on a downward plunge since seeding. Due to this discount to wheat, barley is now far more attractive to feed consumers. Bids from buyers have dried up with consumers buying hand to mouth.

The big question at present is the result of the anti-dumping investigation by China. As the investigation was instigated last November, the results should be published this month. The World Trade Organisation stipulates that anti-dumping investigations must be completed within a year, although there is the possibility of a six-month extension.

This uncertainty has meant that exporters are unwilling to take a ‘punt’ on the resolution, especially after many trading businesses made large losses during the past financial year. This has removed a large proportion of demand, with domestic being the only available avenue open.

What does it mean next week?

The uncertainty around the barley anti-dumping probe is impacting trades capacity to purchase large volumes of barley. In addition, there is a question mark in relation to Chinese feed demand due to the African Swine Fever outbreak.

The WASDE report will be released overnight. At this point of the year, the report should provide some stable numbers for this season. This will give some clarity on carryout.

It’s six days after Halloween. A night of monsters and scares. However, for farmers the scariest matter this year has been the downward progression of crop yields. This has been a landmark harvest where production has been massively down, but prices have declined, however, the headers will give the industry its much needed clarity.

The crop forecasters are now suggesting a <16mmt wheat crop. Which is substantially lower than the ABARES estimate in September of 19.1mmt, and down on last years 17.3mmt. We have spoken at length about the difference in the two years as production shifts back to the east coast.

The market has lost steam in recent weeks as consumers have confidence in being able to accumulate their volumes.  As harvest advances, we will get some clarity on the accuracy of forecasts.

One of the few places in Australia hanging on has been Victoria. In recent weeks the Grain Industry Association of Victoria has performed a crop tour. The forecast wheat yield is 2.31mt/ha (wheat) and 3.32mt/ha (barley). Abandonment has also declined year on year, with 8% being cut for hay versus approx. 30% last year.

When we remove this abandonment from the ABARES September forecast, it is now forecast that Victoria will produce 3.4mmt of wheat and 2.6mmt of barley.

How are the markets reacting to the lower crop? Well there is a continued fall in prices in Australia. The ASX contract has fallen 3% week on week, or A$9 (figure 1). The gap between this year and last year has widened dramatically. At present the ASX contract is A$97/mt lower than this point in time last year.

This year due to the uncertainty most growers have sold less than normal ahead of harvest. This makes perfect sense as a strategy whilst crops have deteriorated. This however especially in Victoria could lead to a large volume of grain hitting the market all at the same time.

What does it mean / next week?:

Consumers are now examining their ability to increase their use of barley. Due to the wide spread to wheat, it is more attractive to feed. This will likely add some pressure to wheat prices, as demand technically drops by the maximum volume allowable as barley in a ration. However this may be short-lived.

This season is all about local elements. The overseas market can be forgotten for now. In this update we take a look at the factors holding prices down and why it’s worth keeping an eye on overseas futures for next year’s harvest.

It’s been a disappointing week for producers when it comes to pricing. As harvest starts to progress, the ASX wheat contract has experienced its third week of downward pricing. The ASX wheat contract has followed a very similar pattern to last year since the crop worsened albeit with a large discount year on year (Figure 1).

Last year the ASX continued to decline until the end of November, before rising towards the end of the year. So why is the grain price falling rather than rising?

• Growers are largely unsold coming into harvest. There is an increase in the number of offers from producers. The extra supply is in part pushing down pricing.
• The Australian crop may well be below 16mmt this season. However, the balance between supply and demand is pointing towards domestic demand either being met or limited transshipments being required.
• Overall demand in Australia is down year on year due to reduced feed demand after destocking. There is also the potential for imports into NSW to meet specific quality requirements, this may reduce a large proportion of domestic demand (approx. 500kmt.)

At Mecardo we think it is always important to look forward when marketing your grain. There are opportunities to be realized by having a forward-looking strategy. In Figure 2, the forward curve for the major grain bourses is displayed.

The market remains in contango. This is where the forward contract months are at a premium to the spot. This is a common occurrence in wheat and provides an opportunity to lock in high prices for future years.

Remember to listen to the  Commodity Conversation podcast by Mecardo

Next week:

It will be interesting to see whether this lower pricing point for ASX wheat brings consumers out of the woodwork.

There has been a hot blast drive through Victoria in the past three days. This could have hampered some crop development in the Wimmera and Mallee.

Many crop forecasters are calling the crop lower. It is therefore confusing for many why the price for cereals is dropping rather than rising. This time last year ASX wheat was A$444/mt, this week it is trading at A$353/mt. Why is that happening when the crop is in poor condition?

A small crop gets smaller is an adage that stands the test of time in Australia. The estimates for this year’s wheat crop are varied from 15.5mmt to 18mmt. I personally think the headline number is irrelevant. In a year like this (and last year), we need to be thinking of Australia as two countries – east and west.

I have mentioned a number of times in our weekly podcast and a number of articles (here, here & here) that the distribution of grain in the country would lead to lower prices than last year. The headline number is liable to be around similar levels to last year, but that doesn’t mean prices will be the same.

The ASX wheat contract rose during September, however, it has remained locked within a narrow trading range of A$350 to A$360 (Figure 1). In the past week, we have seen a softening of pricing with the average close this week at A$353. This is A$88 lower than the same week last year.

The ASX falling has come at a time when CBOT for a comparable period has been rising. This has resulted in basis falling to A$67. The high in recent months has been A$112.

Recent times have seen corn being the main driver, however, wheat led the charge in cereals overnight. This has resulted in December futures riding to a three month high. The market has been driven by wheat concerns around the world cold/snow (US & Canada) and dry (Australia & Argentina).

Early in the season, Argentina was on track to produce a record-breaking crop, with estimates up to 21mmt. However dry weather has resulted in a series of downgrades to 19.8mmt. This is 300km higher than last year and nearly 5mmt higher than the decade average (Figure 2). Although we may see production fall further, the impact on the record global balance sheet is likely to be minimal.

Next week:

The ASX market has fallen over the past week and is testing <A$350. If this occurs, we may see an uptick as consumers cover requirements at a lower level.

It is going to be a very volatile harvest as what grain that has been produced comes to market over the next two months.

It’s roughly four weeks until harvest starts in earnest. We will then truly get a good indication of how much the crop has fallen since the ABARES report in September due to frost and continued dryness. In the US, delays to harvest are causing concerns with Jack Frost on his way to their northern crops.

Over the past week, the ASX market has traded marginally higher (+A$1.5). The trading range has been narrower than the Moffat Star hotel (see link), with a range of A$356.50 to A$358.50.  We are only four weeks away from the bulk of harvesting commencing, and volatility is likely to return when the crop starts to get reaped.

Whilst ASX has largely flatlined, the December wheat contract has gained some ground. Week on week the contract is up A$6.

A plethora of trade analysts are expecting both the corn and wheat balance sheet to be trimmed in the overnight WASDE* report. This has resulted in gains this week, which are welcome news for producers. It must be noted that trade analysts also predicted bearish reports in July, August & September.

Another factor contributing to the improving pricing scenario for US futures (Corn, wheat and beans) is forecasts of poor weather (see map). Our regular readers will be aware of the poor planting conditions which lead to delays. The delayed planting is leading to delayed reaping, which with cold weather on the way is at risk of being damaged by frost (and snow).

*This week’s weekly comment was written prior to the release of the WASDE. My thoughts on the report will be included in the Commodity Conversation podcast.

Next week:

We expect that Australian production will be revised down from 19mmt to 18mmt, to reflect the poorer conditions since the start of September.

It will be interesting to see if there is any damage caused by this cold snap in the northern states, as this could provide the impetus for a further increase in overseas futures.