Category: Grain

The local market has risen in the last week, presenting strong prices for those who are fortunate enough to produce grain this year. In this week’s market comment, we look at ASX for 2021 and an opportunity for a Kansas-Chicago spread trade.

At a local level the ASX wheat futures market for Jan 2020 has risen by A$12 since last week. The volume traded however has declined with 17980mt versus 59200mt in the week prior. The continual poor outlook for the coming harvest is placing consumers on edge.

It is unlikely that prices will rise to the same levels as last year, as even though grain production is down the east coast is still likely to produce more than last year. On a year by year comparison the harvest contract for last year was trading at A$441 during the first week of October, this week it has traded at an average of A$365.

Whilst January 2020 has risen, so has red crop. The 2021 is now trading at A$336.50. Although this is at a discount to 2020, it is important to remember that this is a price for next harvest and although we have had a 2^nd poor season, next year could (hopefully) be a good crop and this price may be a good starting point for marketing.

If we look globally the spread between Kansas and Chicago remains of interest. The Kansas contract typically trades close to or at a premium to Chicago. At present Kansas is trading at a 21% discount, since the turn of the decade Kansas has been trading at a 3% premium on average.

This may present an interesting opportunity to take out a spread trade with the view of the Kansas spread returning to more normal levels. This trade would be selling Chicago and buying Kansas for one of the forward months i.e. September 2020. Those taking this trade would only be exposed to the spread between the two commodities.

What does it mean/next week?:

In the next week the WASDE report will be released by the USDA. There have been private analysts releasing estimates for corn which are very strong. It will be interesting to see whether these are reflected in the WASDE.

There remains a huge amount of uncertainty when it comes to the production of this years’ Australian grain crop. This didn’t stop the ASX wheat market declining.

The ASX wheat market in recent weeks has been like a Mexican stand-off. The spread between the bid and offer was wide and there was limited volume trading. The volume started picking up this week, with the largest trading day on the current contract on Wednesday.

The volume coincided in a fall in pricing. During the week the ASX with buyers happy to come to the table when the price fell. On Thursday last week the Jan 2020 contract was at A$367, last night it settled at A$352.50.

It is likely that the market will remain volatile for the coming weeks, as although we are very close to harvest there is little in the way of certainty.

In other news the International Grain Council revised downwards the Australian grain crop to 31mmt, above last years 28.3mmt but down from the previous forecast of 34.2mmt. The new global result was however unchanged due to increases to European production.

Locally the final chapter on the Grainpro saga was closed. The company which went into administration in October was finally put into liquidation this week. It is reported by the administrators that the company had been trading insolvent for a considerable period. The likely payment back to unsecured creditors, many of which are growers will be 20¢ in the $.

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What does it mean/next week?:

The rainfall outlook remains perilous for the next week. Will we see a rebound in prices as risk increases?

The grain market in Australia has been on a rollercoaster since last year. The excitement has continued, and we see local markets continuing to rise. In this update we take a look the woes in Western Australia and look at whether we will hit last years pricing environment.

Australian grain markets continue to be focused on local conditions, with little influence from overseas. This is due to the continuing poor conditions within Australia. During last week the ASX contract had lost steam after a sharp rally and had fallen to A$355. This week, the Jan 2020 has slowly crawled back to A$367. The market has however had slim volume (figure 1), with only 421 contracts trading. This equates to 8420mt traded, which is a reduction on the previous weeks 52320mt.

In recent weeks one of the banks were quoted as saying that prices could rise above last years levels. I thought it would be of interest to see how the market is tracking compared to last year. In figure 2, the average price for each of the weeks running up to last years and this year’s contract expiry. As we can see the contract has increased in recent weeks, but not to the same levels.

This time last year the Jan 2019 ASX contract was trading at A$442 whereas the Jan 2020 contract this week is trading A$78 lower. It is not impossible that the price will rise above last year, but we will have to see a very strong rise to exceed the same levels. At this point of the year the price rise is unlikely to come from overseas moves, so will require a further strong reduction in domestic production.

In 2018 the west coast won both the grand final and prize of a large crop. In the past fortnight both have been blown out of contention. The dry weather and frost damage has reduced the potential of the crop, with GIWA showing the following amendments:

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What does it mean/next week?:

There have been concerns about frosts in Victoria and South Australia. In the next week the market will get a handle on any losses.

The black sea region is in the process of starting to plant the winter crop. Recently these areas have experienced dry conditions. It will be interesting to see whether there will be a reduction in planting.

The Northern hemisphere is largely complete, with little in the way of uncertainty to move the markets. The focus is now on what happens locally. The risk is definitely back on the table in Australia.

In the past week, Chicago wheat futures have declined by A$7. The market overseas has largely been driven by concerns related to the corn crop in recent months. The delay in planting was expected to cause concerns with slow growth, however, benign weather has assisted. There was some scepticism of the numbers released by USDA in recent months, private crop forecasters have released figures which concur with the government forecaster estimates.

The concerns right now are related to the local crop. Overall Australia is heading towards a similar year to last, with poor growing conditions permeating.

In NSW & QLD the crop is largely finished, with very little potential even if the rainfall did land in coming months. The risk now is that there is inadequate moisture and little forecast to make a summer cropping program viable.

Jack Frost has reared his head again. In the last week, there have been reports of frost events which have caused damage in SA, VIC and WA. Although its not yet known how much damage these have caused, it remains a risk factor for the next month.

The market has started to react with the ASX gaining ground week on week. Due to production concerns there is limited growers selling at present, which has meant that consumers are switching to ASX in order to gain some cover.

In figure 1, we have plotted both the Jan 2020 & 2021 ASX wheat contract. Keep a close eye on the 2021 contract, as these both follow one another. Although we are having a second bad year (three for some), we have no idea what next season will bring. If the market rallies further, it is worthwhile taking some cover for the following season.

What does it mean/next week?:

The USDA will release the September WASDE report next week. The key focus will be on any amendments to US corn.

There are many agronomists advising to cut crops for hay throughout Victoria. It is important to think this through carefully as hay prices may not be as high as last season.

This week I was lucky to get the opportunity to travel to the west coast to talk to producers and stakeholders within the industry. In this week’s comment I’ll cover the big talking points in the west.

It’s a tale of two wheat markets at present, with overseas and local futures diverging from one another. Chicago wheat futures for December are largely unchanged at A$258/mt, however, during the past week we have seen a rise in ASX futures from A$325/mt to A$342/mt.

At the moment Australia is on a knife-edge with the BOM releasing a negative rainfall outlook for the coming weeks. Whilst Victoria and South Australia are in reasonable shape, New South Wales has little hope left and this forecast is the nail in the coffin.

In the west, the crop is not looking anywhere near as good as last year, with canola crops looking in very poor shape. The rainfall over the past day and tomorrow will help provide a boost, but more will be needed by the middle of September – especially if they continue to have record breaking heat.

Last year the east coast relied on Western Australia to meet the domestic demand and it is likely that there may be transshipments again into NNSW/QLD.

Whilst at the Dowerin field day, we had a good chance to find out what was on the minds of the industry:

Agricultural Produce Commission: There is a lot of concern about the introduction of a levy to create a broadacre research fund. This levy is already in place in South Australia through GPSA. At a time when membership of local representative bodies is in decline, this levy has some merits for ensuring grower centric research.

I personally wouldn’t be in favour of this levy, however the fact that it is opt-out means that growers can elect whether they want to contribute.

CBH: There was a lot of discussions related to CBH at the field day. The major talking point from growers was the $43m interest free loan to their joint venture flour mill in Indonesia. There is a lot of concern that this type of deal isn’t in the best interest of grower shareholders.

The trade participants who I spoke to were all talking about the A$200m trading loss which CBH are rumoured to have made this season.  There were many calling for the CBH trading business to be completely separated from the storage and handling business.

WAF-PGA merger: These two organisations have at times had oppositional viewpoints on several topics, but every couple of years the idea of a merger is debated. It would make some logical sense to have a single organization which represents producers, but in reality, I think these organisations are ideologically opposed and a merger will be forever out of reach.

On the topic of WA, the state’s biggest commodity (iron ore) has taken a substantial hit over the past month (figure 2) as a result of trade woes due to US-China tensions. Historically iron ore has been a driver of the AUD, this fall could lead to the continuation of the current weakness against the USD.

Although we all know that commodities go through boom and bust cycles, we are likely to see ore rebound in future – it might even make those Karratha property investments profitable one day.

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What does it mean/next week?:

At present, there are continuing concerns over the east coast crop which will keep interest in the ASX strong as consumers aim to get some cover for the following year.

On the futures front, it is rare to see rises in the market from August onwards, as the bulk of the world’s crop is a certainty. However, this year with concerns that the USDA may have overstated the corn crop and its slow growth could lead to surprises.

The South Australian government after 15 years has finally decided to scrap its moratorium on the cultivation of GM crops. The Mecardo team were instrumental in providing analytics to assist in the decision-making process. In this update, we examine the spread between GM and Non-GM and provide some thoughts for growers considering GM canola in South Australia next year.

We produced an in-depth report in early 2018, ‘Analysis of price premiums under the South Australian GM moratorium’. This report was used by Grain Producers South Australia to lobby for the removal of the GM moratorium and led to further independent reports by Emeritus Professor Kym Anderson.

The summary of our reporting was that there was no evidence of the GM moratorium providing a premium for most farmers in South Australia. In my view farmers should be given the choice to use whatever tools they need to be as productive as possible. The 2020/21 season will be the first-time farmers in South Australia will be able to utilise genetically modified crops.

This makes an opportune time to examine GM spreads around the country. It will come as no surprise, but GM canola trades at a discount to non-GM varieties. What is important is how much of a discount that it trades at.

In Figure 1 & 2, the premium for non-GM is displayed for both Melbourne and Kwinana. This spread is shown on a two-week moving average, with an average for the period displayed. In recent months, the discount in Melbourne has reduced close to parity, whilst Kwinana has seen the opposite with the spread rising to record levels. The premium for non-GM is A$37 in Kwinana and A$35 in Melbourne.

The spread between GM and Non-GM and is quite volatile with a lot of movement within the season. It is therefore worthwhile keeping a strong eye on the spread, however the overall return is far more important in reality.

One factor to understand in the early stages of the introduction will be the volume overall produced. If we look at the overall volumes typically grown to GM varieties (see GM Crops: How has the Australian farmer embraced them?), it typically ranges around 10-15% in NSW & Victoria. I would expect similar levels in South Australia within a few years.

South Australia has produced around 334kmt of Canola since the turn of the decade. If we take the top end of the range, there will be 50kmt of Canola produced. This will be spread on a wide geography from the limestone coast to the Eyre peninsular.

This makes it very difficult in the initial stages to develop a market as there will be difficulty achieving volumes for bulk. It may end up that the Eyre peninsular will end up shipping out individual holds, whilst the eastern parts of the state may end up mainly utilizing container trade or the domestic market in Victoria.

I recommend that farming representative groups (such as GPSA) work closely with industry to ensure an orderly approach to the marketing and logistics of GM canola in South Australia.

What does this mean?

The early stages of the introduction of GM canola will have its ups and downs, however, it is great to see farmers having all the agronomics tools available to them. This will be especially important as new varieties are released such as omega oil canola.

It is important to get some independent advice from your agronomist in order to gain a monetary value of any agronomic benefits (which may not all occur in year 1). This will determine whether the spread between GM and Non-GM is acceptable.

The midyear fall that has been a striking pattern in recent years has reoccurred during 2019. The middle of the year is always full of little surprises which can drive the market strongly but quite often the bearish fundamentals come back to bite.

The Chicago wheat futures market has fallen rapidly from recent highs in early June. The current December contract is now only 20¢ off the contract lows. This is concerning for farmers, however, the rise did provide growers with good opportunities to hedge at healthy levels.

There is a strong correlation between wheat and corn futures (see here), which means that when corn falls – wheat will follow. The market rallied due to excess water concerns and the reduced ability to plant the US corn crop.

The USDA, however, has released report after report showing that planting and yields were strong. A sentiment which surprised many industry participants. Crop tours of the major corn belt regions have shown results which are variable but better than expected overall. This, in connection with benign weather which will help crop development, has led to a further bearish undertone.

Locally, the ASX contract has seen falls, with the harvest contract declining to A$327. The contract has stayed stubbornly strong despite falls in overseas levels, which has meant that basis has risen strongly. The east coast Australian crop is still on a very, very sharp knife-edge. The forthcoming critical growing period needs to provide rain for the regions that still have potential.

The trading range for ASX over the past six months has been extremely wide, with a low of A$296 to a high of A$359.50. These are levels which have provided attractive opportunities for both producers and consumers.

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Next week?:
The trade participants will be digesting the insights from the US crop tours. If the weather across the corn belt continues to be conducive to the growth of the corn crop, I wouldn’t be surprised to see pricing fall to May-contract lows.

Locally in Australia, it is a very tense time where all eyes continue to be on rain radars!

The USDA report surprised most stakeholders within the industry this week. It wasn’t a welcome surprise with prices declining across the board. In this update we take a look at the impact on pricing, and how Australian pricing is remaining strong.

This time last week there was a lot of anticipation by market participants of the forthcoming USDA reports. After false start 19/20 reports in July, the August reports were going to provide some much-needed clarity on the corn crop. It would give some certainty to how many corn acres had been abandoned. The reality was that the report had acreage and yield higher than most analyst expectations.

The result of such a bearish report on corn was as could be expected, falls in prices across the board. In A$ terms December futures retreated 5% or A$13.5/mt. This is a substantial fall and places December wheat futures back at the same level as mid may removing all the value of the June rally.

At a local level the ASX contract fell from A$342 last week to A$326, but has since rebounded to A$331 (figure 1). The basis between ASX and CBOT increased dramatically during July as CBOT declined and ASX remained stubbornly in a narrow trading range. This basis is since although conditions are reasonable (touch wood) in Vic/SA both NSW/QLD are in dire straits.

In figure 2, the basis levels between CBOT & new crop pricing around the country are displayed. As we can see all areas have increased. The biggest increase is in the Port Kembla zone which is a region unlikely to provide much to the Australian wheat balance sheet this season. This season will see continued movements from the south to the north to meet demand, this flow will likely to continue unless there is a strong sorghum crop.

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What does it mean/next week?:

The 8 day forecast shows good falls for much of the southern cropping regions. As has been the case throughout this season (and the last two) the north is missing out.

If the USDA data is correct and is maintained through future updates, it is likely that globally we will maintain a low pricing environment. In Australia however basis will remain strong on the east coast whilst local demand remains strong and supply is short.