Agfarm World Market Update, July 2016

The grain outlook and what to monitor

Nothing has fundamentally changed in the current grain markets with wheat and barley continuing to be under pressure as global crops get bigger. The function of the market in this environment is to price new demand in order to reduce growing stock piles.

The surprising Brexit result spurred markets to behave radically as investors pushed money into traditional assets such as gold and the USD. This weakened the USD to 0.733 (now trading at 0.754), the Pound dropped to a record 30 year low and the AUD experienced a 300 point swing on the day the Brexit results were announced. This is the equivalent of a $10AUD move in Australian wheat prices.
The Australian election is now formalised with the Coalition retaining power. However, it took over a week to finalise and Australia’s perfect AAA credit rating is now under scrutiny by credit rating agencies. As a result, many senior economists are urging the government to act with economic sensibility. They believe the current economic outlook for Australia could lead to a credit rating downgrade. Ongoing reactiveness and political indecision will fail to strengthen the economic landscape in Australia.

Macroeconomic events such as the Brexit and Australian Government policy will both have an impact on what grain buyers are able to pay for stock.

The Australian winter crop is off to a great start as rain continues to fall in most major production areas throughout the grain belt. Most commentators are now pegging the Australian wheat crop between 25.5MMT – 26.5MMT and barley estimates are either side of 9MMT. From 2005/06 to 2015/16 the average wheat crop was 22MMT. However, it is important to note that the 2006/07 and 2007/08 seasons lowered the average, with a total wheat production of 11MMT and 13.5MMT respectively. There is no doubt that Australia’s production has been steadily increasing due to improved innovation, technology, science, machinery and better farming practices, and the coming season will be no different.

Australia traditionally exports wheat, barley and canola from December until July. At that point, the northern hemisphere harvest comes off and the Aussie export pace reduces. For Australian wheat, the average yearly exports over the past decade have been approximately 15.5MMT. However, for the current season (2015/16 season) exports are expected to reduce 500KMT to 15MMT. This will increase the carry out of wheat into the coming season. On top of this, the cost of ocean freight has reduced due to cheaper world fuel prices, which has led to Australia losing some of its freight advantage into Asia. Competitive Black Sea and EU grain prices have compounded the issue. Therefore, Australia will need to be price competitive in the export arena to see a rise in exports over the next 18 months.

CBOT wheat in AUD/MT since 2007

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Barley and sorghum pricing is influenced by demand rather than competition. Over the past three seasons China has been a major feed grain importer as they looked for alternative feed grains to their high priced domestic corn. As a result, barley exports to China soared. However, domestic Chinese corn production also flourished leading to the current glut of Chinese corn in storage which must be consumed before feed grain imports can ramp up again. We anticipate this to be a 12-18 month process.

 

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Australian new crop prices are not competitive into export markets at current values with other origins up to $US40/MT cheaper than Aussie into Asia. Below is a chart illustrating export parities from different countries for October 2016 – January 2016.

 

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What does this all mean?

Failing an unforeseen event, it is not a bullish outlook for grain prices.  It is important to understand external influences and the products on offer to help you achieve the needs of your business. When creating a grain strategy for the coming year, ensure you take into consideration your personal cash flow requirements, the cost of production vs achievable margin, counterparty risk and any possible tax implications. Based on the fickle nature of the grains market and the significant external influences, it can be a good idea to invest in a number of product offerings rather than just one.