Markets continue to track sideways for the start of 2016 in a well-supplied global market place. Over the last month we have seen Argentinian exports increase market share which does not bode well for Q1 Aussie exports. However, the ongoing bearishness of the AUD is a bright spot for Australian values. Meanwhile, winter wheat seeding in the US and parts of the Black Sea have responded to lower prices and less than ideal planting conditions.
On January 20, 2016, Bloomberg reported “exports have been unleashed since newly elected President Mauricio Macri eliminated most crop export taxes and lifted four years of currency controls, leading to the biggest one-day peso devaluation in the last 14 years”. This has altered the trade flows for the first few months of 2016. We currently see Argentinian wheat going into the United States which is a net exporter of wheat. Argentinian feed wheat is also trading into South Asia at a discount to corn. Bloomberg went on to cite the deputy of Argentina’s agriculture ministry, that quality is not great as “farmers did not invest in fertilising wheat crops because of previous government rules that cut profitability”. Despite the quality issues; a renewed rush of Argentinian exports has put a bearish slant on the current export environment.
The AUD continues to tell a bearish story in line with the commodity rout and increased discussion around a hard economic landing in China. In 2015, the RBA conducted two decreases of the official cash rate for a total of 50 basis points. These forces combined have driven the AUD to fall by 25% over the last 15 months. Taken as a whole, this has buffered local grain prices in AUD to a large extent. There is discussion that the Reserve Bank of Australia rate cuts could continue and further economic woes in commodity hungry China, will both have a devaluing effect on the AUD. The following two charts show CME March 2016 wheat as of January 22, 2016. The first chart is in AUD terms at $206.63. The second is in USD terms at $144.58. This highlights the large difference in what Aussie growers receive from global grain prices in a falling AUD environment compared to their peers in the US.
On January 12, 2016 the USDA updated its supply and demand table. Current season wheat stocks to usage ratio was increased slightly to a more bearish 32.40% by adding 2.2M MT to the global carry out versus the December figures. However, the report did throw in an unexpected number in the form of winter wheat planted acres. Winter wheat acres in the US declined by 7.2% this season versus 2015. If we use last year’s yield of 48.6 bushels per acre as the trend; this will equate to a 3.75M MT decline in wheat production. The market is performing its function by driving higher cost producers (USD denominated wheat) to decrease production. This coincides with Ukraine new crop wheat seeding down 9% after a dry start to the season year.
As always, weather will be king. The world will watch two things over the coming months. First, cold temps in North America and the Black Sea, versus the amount of snow cover, for any sign of winterkill. Second, how spring weather performs after the winter thaw. Any weather induced supply side shock could take us from the current sluggish market into a more bullish environment.