Agfarm World Market Update, February 2018

What’s Next for the Australian Grain Market?

Chris Coore, Agfarm Advantage Manager

Now the 2017/18 harvest is well and truly finished, the grain marketing begins, so let’s take a look at what happened over harvest, what has happened since harvest and where we expect grain markets to move from here.

It’s no secret this year’s total winter crop production was significantly down on last year. This was partly due to last season breaking records, but also due to lack of rainfall and late frosts in many growing areas throughout the country. In total, there was 20 million metric tonnes (MMT) of wheat harvested this season down from 33.5MMT the previous season, and there was 7.6MMT of barley compared to the previous year’s 12.8MMT. Despite the decrease in grain production, harvest prices were still under pressure, reaching a low of $238/MT for APW wheat in Adelaide and high of $255/MT today.

Since harvest, canola has taken a bit of a downward slide due to the lack of export pace and the larger than expected production, but has been trading sideways to slightly firmer from the start of February. On the other hand, wheat and barley markets have been rallying in Australia, rewarding those who have deferred their grain sales this season.

What has caused the rally?

Domestically, despite Australian prices firming, the grain market is still lacking in liquidity. Combine this with the 45% reduction in Australian wheat and barley crops year on year, and exporters and domestic consumers are faced with the challenge of purchasing enough grain to cover their demand, in turn pushing prices higher. The Australian dollar has also been on a roller-coaster ride since October last year trading a high of 0.81 cents in late January and declining since, supporting Australian grain values moving out of the harvest period.

AUD_USD small

Internationally, Chicago wheat futures saw a strong rally to start 2018, up 40 cents per bushel or $AU18.50 per metric tonne. This was driven by a large short position being carried into the new year with the view wheat futures would continue to fall in 2018. The rally meant speculators, or fund managers, had to purchase back their short position to stop losing money. On top of this, the US has seen the smallest planted acres of soft red winter wheat in 109 years, and are currently facing weather concerns in North and South America. As we know, the smallest changes in weather patterns internationally, can have quite large effects on the Australian market, which is what we are seeing at the moment.

chicago wheat

So what happens now?

The big factor moving forward is rainfall to help sorghum production and onfarm feed for livestock over the winter period.

Many had their bets hedged on a big sorghum plant after the late rains last year, and this was meant to provide relief to domestic consumers filling the void of grains to feed livestock. However, hot and dry weather is impacting production and time is quickly running out to get the Central Queensland crop in the ground. While we anxiously wait to see if this is planted, the price of wheat and barley is gradually going up.

There has also been some increase sorghum demand coming from China based on the rumours a 25% tariff will be placed on sorghum leaving the US for China, to make their domestic feed grains more competitive. The problem here is, China don’t only use sorghum for feed grains, they use it to make the spirit Baijiu, which is a huge and growing market. Therefore, the Chinese are looking to Australia to fill the void. This means, sorghum destined for the Darling Downs could be shipped out of the country, thus putting further pressure on the shrinking Australian sorghum crop and pushing wheat and barley prices in South Australia and Victoria higher to ensure the Darling Downs feed market still gets their fill.

So, with Australia’s winter crop significantly smaller than last year, little liquidity in the market, decreased planted acres in the US, and China competing for our available sorghum, we remain optimistic prices will continue to rise over the coming months. However, we all know grain markets are fickle and can change at the drop of a hat, so next month could be an entirely different story.

 

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