Weather Remains Key Grain Price Driver
Chris Coore, Agfarm Advantage Manager
March 18th 2019
What is happening to grain prices this year? Prices in Australia and around the world have been jumping on a daily basis and the market is having a tough time keeping up with it all. Things we have come to believe as the ‘norm’ over the years, like Australian grain prices following Chicago futures markets, just don’t seem to be occurring as we expect. So, let’s take a look at Australia’s resilience to the Chicago wheat futures sell down and key price drivers moving forward.
Since February 2019, volatility in the Chicago wheat futures price has increased. Funds, or managed money, have created a near record short position in Chicago wheat futures and have continued to sell down the futures to build a larger position. The managed money will financially benefit if futures continue to fall but at the same time, they are also creating a potentially dangerous position for themselves. When funds create such large positions, if the market turns and they need to purchase back their short positions, it will be a rush at the door to get cover. This will add fuel to any bullish story, and we would expect to see a violent upsurge in price.
Despite the aggressive sell down in Chicago, Australian grain values have remained relatively stable of late. This is a result of adverse weather conditions in Australia, domestic buyers entering the market and a lack of grower selling.
Throughout the key cropping belt of Australia, nervousness is brewing around what this coming season will bring. With depleted sub soil moisture and the Bureau of Meteorology (BOM) forecasting only average rainfall over the next three months, it is unlikely we will produce an average crop for the coming winter season. This not-so-positive outlook is bringing grain buyers back into the market in the hope of gaining cover now, just in case BOM is in fact correct, and prices start to spike again.
However, not only grain buyers watch the weather. Grain producers are also keeping a keen eye on weather models and those who have grain stored are not inclined to let it go, for the exact same reason. They know the situation better than anyone, if we don’t get above average rainfall this season, it’s likely we’re going to get a below average crop. This equates to less supply with usually the same demand and in turn higher grain prices. So, many are holding their stock, which should gradually push the price of grain up, as long as the weather models stay the same. All players, growers and buyers alike, will be watching the weather forecast with their dancing shoes on in hope of better than average rainfall and a better than average season.
Moving overseas, weather is still the main driver. Russia and Ukraine have become our biggest exporting competitor over the years. The Black Sea region has been gaining market share for wheat and barley into what used to be our typical export markets in South East Asia. The reasons for this are; improving and more regular quality produce, cheaper shipping costs eroding our freight advantage and increase in production allowing a longer shipping window. The total size of the Black Sea’s crop will influence price direction globally over the next 12 months, even if our weather situation doesn’t improve.
What does this mean for the price of grain?
As always, it’s a tough question to answer. Historically, the price drivers of dry weather, small crops, limited selling and increasing demand would be a sure fire ‘prices are going to go up’. But, as we’ve mentioned earlier, things seem to be changing at a faster pace and in directions we aren’t expecting. Realistically though, until the Australian cropping belt receives above average rainfall it is very unlikely we will see much grain being sold. So as demand for grain increases so too should the price of grain. If it remains dry, it is likely grain values will stabilise or increase to find sellers and we will continue to run our own pricing race in Australia.
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