Global wheat markets remain soft and sluggish. EU, Black Sea, North and South American yields have all been strong this season (all be it, with some quality issues in the US). This has culminated in a buyer’s market and a global marketplace that is well supplied. In such an environment, normal Australian harvest sales pressure is compounded by large global spot availabilities with exporters competing for the same limited business. In a well-supplied environment, export consumers can afford to buy on a just in time or ‘hand to mouth’ basis.
Let us put global wheat supply and demand numbers around this scenario. For an independent perspective we will reference the International Grains Council report, dated November 19, 2015. For the third season in a row global wheat carry out is expected to expand. In the 2013/2014 season we had a global carry in of 170M MT. The current forecast for global carry out for the 2015/2016 season is 207.8M MT. Many industry participants use the stocks to usage ratio as a guideline. As a percentage, global stocks to usage has increased from 24.4% in 2013/2014 to an anticipated 28% in 2015/2016.
These production increases have been offset in the local market by several factors. First, global consumption has increased by 23.4M MT over that same period (almost the size of the entire Australian wheat crop). Second, over the last three seasons intense competition by exporters in SA & WA led to large upfront premiums paid for export slot bookings on a ‘use or lose’ basis. Third, due to international demand and the lower AUD, cattle on feed numbers continue to be very strong.
So what does this all mean?
We expect global wheat consumption to continue to grow at a pace of 1-2% per year, as it has over the last three seasons. Export slot premiums this year have come back to an average of $8-$10 from $30-$50 per MT last season. This decrease in trade investment means that the basis in export zones should not see the highs of last season. Cattle on feed numbers will increasingly be driven by the availability of animals. However, we see no indication beef export demand will decline in the near future.
Where is the opportunity?
Due to this global scenario we see a much larger than average speculative short in the CME futures market. The speculative funds have sold over 77,000 contracts as of December 6, 2015. This equates to over 10M MT sold, which is nearly the size of the entire US SRW crop! SRW is the acceptable quality for delivery against this contract.
Over the next four months, northern hemisphere crops will come out of winter dormancy and require good weather and moisture to continue the production pace we have seen over the last three seasons. Growers know how volatile the weather and production can be better than anyone else. If there are any supply disruptions over this period, the CBOT market could become extremely volatile due to the short sold nature of the current contract.
Agfarm Advantage pools run programs that conduct an equal amount of sales over the time period of your choice. For example, if you choose the Advantage 5 program; you would receive the average monthly price over the months of January 2016 through May 2016. This would be an ideal way to take advantage of a northern hemisphere Spring short squeeze in the CME futures market.
Payment terms on all Agfarm programs are flexible. Growers can choose an advance payment, monthly payment or deferred payment to suit their business needs.
Agfarm Advantage is happy to accept all ‘off spec’ grades of wheat and barley this season.
Please speak to your local Agfarm representative for further information on how to participate.
The Agfarm Team