Agfarm World Market Update, January 2017

Harvest is fast approaching completion for most in Australia. The above average rainfall and cool temperatures through September have resulted in record yields for wheat and barley. Quality for the most part was also good. The challenge is now in logistics and grain storage. Trucks have increased freight rates due to demand outweighing supply, and available silos are also proving difficult to find, forcing growers to travel further to store their grain. As a result, on farm silo bags have provided an alternate solution and had record sales across Australia. With many opting to store grain and wait for better pricing, it is time to look at what 2017 may bring in terms of price direction and the influencing factors.

For Australia, low grain values are a function of the large harvest and the necessity to reduce the 2017 grain balance sheet. The good news is, current prices make Australia very export competitive into most key offshore consumptive homes and we continue to secure business over other exporting nations such as Russia, Ukraine and the EU. The shipping stem for the first quarter of the year remains well sold, creating solid demand for grain to meet export commitments.

The weather outlook is showing some dry patterns starting to play out. BOM have reported it’s likely to be drier than normal from January to March for the east coast of Australia, slightly drier than normal for South Australia and southern Western Australia, and wetter than normal for the north of Western Australia. If Australia were to experience a dry 2017, domestic consumption homes would look to buy grain today and hold as a hedge against the potential dry outlook. If this occurs, we would see a sharp rally in domestic prices.

The Australian economy is relatively weak with low economic numbers and growth projections. This has put the Reserve Bank of Australia in a predicament with little room to continue decreasing interest rates. Glenn Stevens has recently ended his 10 year career as governor of the Reserve Bank of Australia. Over the time of his career he was responsible for decreasing interest rates to assist in creating stable inflation numbers. The new governor Philip Lowe will now be responsible for lifting rates from the current record low of 1.5%.

Moving overseas, the news and events to monitor over the coming six months is planted acres in wheat, especially in the US. The current wheat and barley prices are providing weak returns for growers, especially for lease hold growers. This will likely see a swing from acres in wheat and barley to soybeans, canola and other grains where returns are more attractive. An important argument to note is the economic verse agronomic payoff. While economics will paint a picture of the best returns for growers, it always comes down to the agronomics of what the grower can plant and the acres they can change to other commodities. Any change from acres out of wheat and barley will reduce production potential for 2017 and affect the pricing structure.

China is the second largest producer of wheat in the world at 128MMT, behind the EU at 158MMT. Many analysts believe this grain should be ignored in global supply and demand models because it is purely a domestic Chinese market that does not interplay with the global market place. If this grain were to be ignored in the supply and demand models the world wheat ending stocks would not appear to be so burdensome.

Charts WMU20170113

Chicago wheat futures look to have printed the lows in December and are starting to show higher lows and higher highs creating a tighter trading range. There remains a very sizeable short fund position which has been on the short side of this market for 18 months. At some point this will need to be purchased back. Due to the size of the fund short position, if the majority of funds try and purchase this back over the same period, we would see a significant rally in Chicago wheat.

Continuing Chicago Wheat Price 2013 – 2016

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These elements are only some of the price influencing factors that could sway price direction throughout 2017. Regardless of the catalyst, we are coming to a time where volatility is entering the markets, hopefully equating to a bullish year.

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