Agfarm World Market Update, September 2018 – To Sell or Not to Sell

To Sell or Not to Sell?

Chris Coore, Agfarm Advantage Manager

September 17th 2018

We’ve heard it over and over again for the past few months, ‘a low production year equals higher prices and for those with grain this harvest, it will be a sell’. This, I am sure will hold up in the general sense, but just because grain prices are high doesn’t necessarily mean it is the best sell. Now don’t step back gasping. We’re not saying, ‘hold all your grain for the next six months, prices will rise’, we’re saying with all the moving parts at play in grain markets, there could be other opportunities to maximise on the little grain Australia has this year. So, let’s take a look at what the market has done over the past few months, current pricing signals and where this market may go to assist you in your grain sales for the coming harvest.

As we’re all aware, most key global production regions have seen a decrease in production year on year for cereal crops due to adverse weather conditions, and it seems to be dropping further than originally expected. The Australian bureau of Agricultural and Resource Economics and Science (ABARES) released their September 2018 Australian winter grain production estimates and pegged wheat down 14% from last year to 19.05MMT, barley down nearly 10% from last year at 8.3MMT and canola has been reduced 10% from last year to 2.8MMT. Australia isn’t alone in this situation, and due to the rapid drop in global production, price has increased to help curb demand and ration the reduced supply.

What can we expect to see this coming harvest?

As we quite often see, prices will likely drop during the harvest period purely based on the increased liquidity harvest brings. However, if you look further than harvest and into next year – the period this grain is grown to supply, it doesn’t look as though prices will fall significantly any time soon, and here is why.

To put it simply, with a sever production downfall there will be less grain to sell resulting in less grain to buy. All players in the Australian grain market have a job to do. The domestic consumers need to ensure their sheep, cattle, chooks and pigs are fed, while the exporters need to ensure the contracts they have committed to are filled. This creates a price war, domestic against export and pushes prices higher. So, with NSW and a large portion of QLD still in drought and sourcing grain from Australia’s traditional export states, VIC, SA and WA, there is a battle in the making. Obviously, rain in these drought affected areas will change the state of play, with the possibility of a summer sorghum plant and increase forage for livestock. However, we don’t know when this will occur.

The anomaly at play here; is in a year where Australia is experiencing adverse weather, the tug-of-war for grain isn’t usually this extreme, as other producing areas will fill the export void. But, as mentioned before, Australia is not alone in this situation. Russian wheat production and exports are expected to decrease which will mean Australia will not only need to focus on feeding domestic demand, especially on the East Coast, but also support exports of wheat and barley to our key trading partners putting pressure on ending stocks. This pending tug-of-war bodes well for strong grain prices into 2019.

What should you do with your grain marketing this season?

In a year where both grain production and price are within a normal or average range, a strategy of selling a third of grain pre-harvest, a third of grain during harvest and a third of grain post-harvest is quite easy to adopt. However, in a year like this, where forward selling grain is almost impossible due to production risk and price looks like it will continue to increase, it can create more uncertainty and doubt in choosing a grain marketing strategy to both manage risk and capitalise on the possible upside. So, to protect yourself against any future pricing downside a drought breaking rain might bring, selling a portion of grain at harvest is a good strategy. Particularly with prices where they are or look like they will be at harvest. But with so many moving parts this year, and grain prices able to move dramatically at the drop of a hat, it is important not to put all your eggs in the one sales basket and remove the cashflow emotion from your grain sales. Based on discussed market indicators, selling the second portion of grain post-harvest to capitalise on the pending domestic vs exporter tug-of-war, could be the big pay off this season.

The recommendation? As always, it’s hard to say, as a ‘one size fits all’ approach in grain marketing doesn’t seem to exist. But, with so much grain predicted to move within Australia, not out of Australia, there is a good possibility that until the drought breaks in NSW and QLD, grain prices will be well supported and could continue to go higher. By putting some of your grain marketing eggs in the deferred sales basket, you will be in a good position to capitalise on the upside, as well as hedge against future production risk. If Australia experiences another tough season, grain prices should continue to rally and just because prices may be high at harvest doesn’t conclude they can’t go higher.

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