A season of highs and lows – 2017 in summary
Chris Coore, Agfarm Advantage Manager
The 2017/18 winter cropping season has been a rollercoaster. We came off the back of a perfect growing season which created record production and records exports for Australia. This season began a little less favourably with a hot, dry start particularly in northern New South Wales (NSW), western parts of South Australia (SA) and the northern region of Western Australia (WA). Some planted hoping for the best while others did not, resulting in decreased acres across parts of the cropping belt. For those who planted, hopes were lifted in August when weather forecasters spruiked promises of a rain event to occur through the critical month of September, however this did not eventuate. The forecasting models were a month early and October proved to be the break of the harsh season. Wet weather arrived to improve conditions in southern WA, eastern SA, VIC and parts of southern NSW. And now, growers and grain buyers are hoping this late wet weather won’t have too much impact on quality, or delay harvest for too long. With the ups and downs of weather maps, we saw grain prices fluctuate accordingly causing one of the most volatile grain markets Australia has seen in the last five years.
It would seem Australia wasn’t wading through a volatile market alone. Chicago Wheat Futures experienced a sharp increase in volatility during July as well, and for much the same reason Australia did, a ‘flash drought’ in key high protein wheat producing states, North and South Dakota.
This volatility was heightened by the structure of the futures market. Speculative investment funds had forward sold the Chicago futures market creating a large short position. However, when the rally occurred they had to quickly buy these contracts back, throwing fuel on the fire.
Australian wheat and barley prices rallied over the same period to peak during the second week of July, 2017 at a staggering $303/metric tonne (MT) for APW1 wheat on the Adelaide track. This was a $80/MT increase to 2016/17 harvest pricing, which gave those with unsold stock a neat little mid-year income.
In a trend we saw continue through the year, the highs didn’t last long. During August, Australian weather forecasters promised rain and speculators listened calming the domestic market. Come September domestic feed consumers in northern NSW and Queensland (QLD) looked to the sky and couldn’t see a cloud. This, coupled with near record heat for the month struck panic, and once again forced prices up. The function of market at this stage was to turn off exports and conserve grain for domestic usage, and it worked. Grain in VIC and SA priced to move north and there was even talk of boats leaving SA to land in Brisbane to supply this market.
But, true to form going into harvest, we have seen a gradual decrease in prices across most growing regions through October and November.
Current values in Australia
At current values, barley in WA, SA and VIC is export competitive and recent reports indicate Chinese barley sales have already been made. This has helped create a bid tone in the market stabilising prices as we move into harvest.
Wheat values are higher year on year but this is not surprising with a 40% decrease in production over the same period. WA, SA and VIC pricing is export competitive and therefore keeping a floor in the market. NSW and QLD prices do feel slightly high, however we need to remember the job for domestic consumers this year is to ensure enough grain stays within Australian shores to meet their demand. Therefore, they are pricing themselves out of the export market.
Any discussion on Australian wheat prices must include the record Russian crop production this year. Since 2012 Russia has increased its wheat production by 40 million metric tonnes (MMT) to achieve a 2016/17 figure of 83MMT. Naturally, this has led to a more competitive environment in Australia’s key wheat markets of South East Asia and acted as an anchor on Australian values. In spite of this large wheat crop, off shore consumers do value Australian wheat quality higher than wheat from the Black Sea. It is also worth noting there is a heightened risk of Russian ports freezing over in December and January severely limiting grain export capabilities.
Although sitting relatively pretty at the moment, SA, VIC and WA cereal prices could come under pressure during the peak harvest period due to increased supply. Some market participants predict farmers are generally undersold coming into harvest which may lead to greater pricing pressure. However, time will tell if it is the grower or the shipper/consumer who is more sold.
Australian production is significantly down on last year. We have seen crops go through moisture stress, experience frost and wind damage, and now with the late rains we may see a drawn out harvest and possible quality concerns. The upside; less grain usually results in increase prices to ration demand. So what do we do now? Get the grain off the ground and into the bin, see what quality and quantity you have, and work out the best marketing program for your business.
To print or download this Agfarm World Market Update, click here.