Agfarm World Market Update, May 2018 – Global Weather Markets Create Uncertainty

Global Weather Markets Create Uncertainty

Chris Coore, Agfarm Advantage Manager

May 15th 2018

Weather, production and grain prices; the three topics on the tip of everyone’s tongue, and with good reason.
Usually it is the northern hemisphere weather market we watch closely at this time of year. However, it has been an interesting season for weather markets with multiple grain growing regions around the world seeing adverse weather and tossing around surprises grain marketers haven’t experienced for some time, causing the watchful eye to shift from one location to many. So, let’s take a look at what’s happening in weather markets around the world, what this has done to global production estimates, and as always, what it means for Australian grain prices.

Global Weather Highlights

The Black Sea region currently has an average subsoil moisture. This can be 100% accredited to the good rains and snowfall received earlier in the year as Russia and the Ukraine made the history books recently for the driest April on record.
The United States wheat growing regions have also suffered a concerning dry spell, especially in the Hard Red Winter wheat cropping regions of Colorado, Kansas, Nebraska, Texas, Oklahoma and Wyoming. Not only has the dry spell affected the wheat filling process for Hard Red Winter, but it arrived when corn and soybeans were being planted in North America which increased cause for concern.
Unfortunately, Australian weather conditions have also been quite poor with the majority of Australia’s cropping belt experiencing deprived subsoil moisture levels due to warmer and dryer conditions since late 2017. And with the optimal Australian planting window closing quickly, many growers are left with the tough decision to plant now and hope for rain or wait for rain and hope it isn’t too late.

What has this done to global production?
Over the past five years, better crop management, better technologies and favourable weather have seen the world’s wheat crop grow larger and larger. This rapid increase in global wheat production has mainly been driven by the countries experiencing adverse weather. The end result; global wheat production is set to decrease for the first time since 2012.

You might look at this chart and think, we’re above the 20 year average, and we’re only estimated to decrease by eight million metric tonnes (MMT), so we should be okay. Well what we need to look at here is demand, and demand for wheat has been increasing each year with production. The world’s demand for wheat is estimated to be 754MMT over the next 12 months, which is concerning as this is higher than the expected production of 751.8MMT.

What does this do to Australian prices?

As we have touched on in the past, there are a few influences that affect grain prices; supply and demand, political risk like what we are seeing between China and the US, global economic conditions, and weather. Naturally when grain production is under threat prices will drift higher and there has certainly been no exception to the rule this year. On top of this, growers have been holding any unsold 2017/18 grain as a hedge against their new crop production in case it doesn’t rain, forcing the exporter to continue bidding the market higher. Looking into the 2018/19 season, growers are hesitant to book forward contracts until they see more certainty around production and rainfall, causing both 2017/18 and 2018/19 season wheat and barley prices to rally.

What now?

This is the toughest question to answer in grain markets. All around the world the grain industry is seeing weather concerns leading to global production concerns. And despite certain areas having time on their side for things to improve the big unknown is how much will production decrease this year from last, and what affect will that have on international and Australian grain prices.

The way we see it; until the market sees precious H20 falling from our skies and possible production estimates stabilise or increase, it’s unlikely prices will free fall and more likely prices will continue to rise, rewarding those who are undersold, those with some type of production security or those still holding grain from last season. However, this is where we must exercise caution when holding grain into a weather market… the longer you hold, the chance of rainfall and a price fall increases.

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