This month’s world market update explores the firmer wheat and barley market we have experienced since the start of the year. Specifically, the drivers of the market, what to keep an eye on moving forward and how the off shore rally is reflected in Australian grain prices.
Since the beginning of January, Chicago wheat futures are up approximately 45 US cents per bushel and the Australian dollar is firmer by 5 cents. As a result, Chicago wheat futures are up $AU10.50 over this time period, a return to values not seen since June of 2016.
The rally has been driven by:
- – Seasonal cycles, as the marketplace looks forward to new crop production risks
- – Lower than expected planted wheat acres in the US
- – The USDA’s recent 4.6MMT reduction in global wheat supplies, mainly due to India’s decreased production
- – A short speculative funds position in Chicago wheat, which may need to be repurchased if the production outlook declines
- – Trade tensions building between US, Mexico, Russia and China
- – An increase in political tensions between the Ukraine and the biggest global wheat exporter for the 2016/17 season, Russia
The marketplace saw a similar scenario in March of 2014. Funds had sold 75,000 contracts of Chicago wheat futures, we were entering the key period of spring weather volatility in the northern hemisphere and there were tensions building between the Ukraine and Russia.
FUNDS POSITION (Non-Commercial) – CHS Inc
When Russia invaded the Ukraine in early 2014 it sent wheat futures $AU60+ higher in the space of one month. Following this, the US winter wheat crop experienced setbacks in production outlook which supported a firm market throughout the first half of 2014. These scenarios, although not yet to the same extremes, look to be repeating themselves this season, and should be watched closely.
The latest USDA report showed US wheat acres are down 10% year on year. This has been driven by growers swapping wheat acres for more profitable commodities such as soybeans or corn. The latest WASDE report stated global wheat production is 4.4MMT lower and demand is 500KMT higher. This has reduced world stocks by 4.6MMT to 248.60MMT giving a stocks to use ratio of 33.58%. As it stands, this stocks to use ratio is relatively comfortable, however 50% of the worlds carry out is in China and is likely to never be exported. Therefore, it is an overstated figure and if it were discounted, we could rapidly see a bullish grain market.
The Australian Dollar continues to show strength. There are many underlying factors for this, most notably the new White House administration continuing their hawkish and pro-business rhetoric, leading to pressure on the USD. This combined with recent rallies in iron ore and coal lend itself to a strengthening AUD. A stronger dollar should equate to lower Australian grain prices, however this season, both wheat and barley have seen a strong rally, a result of Australia’s competitiveness into global export markets and strong demand from exporters to originate behind their export sales.
This week, ABARES increased Australia’s wheat and barley production estimate to a record 35.13MMT and 13.41MMT consecutively. Both comfortably above the previous record, with wheat 5.23MMT higher. Traditionally an oversupply of grain in Australia equates to prices remaining low and flat. This season however, local grain premiums in Australia have rallied, largely due to:
- – A very strong first quarter for the Australian grain export program
- – Exporters covering in their short positions
- – Decreased sorghum production due to extremely hot and dry weather in Queensland and northern New South Wales
- – Domestic consumers taking advantage of low prices and covering additional demand for next season
Lower grades of wheat and barley have shown more of the move than higher protein wheat and malting barley. This is due to the pricing structure coming out of harvest, and ASW1 wheat and F1 barley being sold into the export pathway. We expect this demand to continue and narrow the price spread for lower grades of wheat and barley.
With tension building between Russia and the Ukraine, wheat acres down in the US and global markets looking toward the new northern hemisphere crop, we expect to see continued price volatility for 2016/17 values over the coming months.
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