Knife edge market

This time of year, has typically been one of great volatility as the northern hemisphere commences harvest. This can easily be seen in the current market, where the weather is the major driver. The market stays on a knife edge, where every new piece of information is propelling the market.

The past week has been quite exciting in the grain market. The USDA release weekly crop condition reports, which has shown the lowest good/excellent condition since 2006 at 45%. This in combination with continued poor weather across the US has led to all futures contracts experiencing strong rallies of around 2-4% (figure 1).

The fear in the marketplace is largely centred around high protein wheats, due to deteriorating crop condition of spring wheat. This can be seen clearly in the ascent of the spread between the CME soft red winter wheat (SRW) and MGEX hard red winter wheat (HRW). The HRW contract is high protein with protein specs of 13%. In the past two months, the spread has increased dramatically (figure 2) to 180¢/bu on the spot contract. If there is a shortage of protein around the world, this could be some stronger local premiums for export protein.

In the past week, the WASDE and ABARES crop reports were released, however had little in the way of surprises. They do however each contain positive insights, and are discussed in more details on the following links:

Global wheat stocks have fallen and risen
The average ABARES

At a local level, the dry weather continues to paint a bleak picture for much of the country especially SA/WA. This has resulted in continued strength of APW basis levels in Adelaide & Port Lincoln (figure 3), which since harvest have remained quite stagnant.

Next Week

The US crop condition report is released this weekend. I wouldn’t be surprised to see spring crop conditions deteriorate further.

The recent rally has provided some good pricing opportunities to capture some strong basis around the country. It is worthwhile to consider your marketing options, one of which could be the sale of physical and the purchase of call options to continue to have exposure to the futures market.