Make grain great again

This week Obama is out, and Trump is officially in.
The world will be watching as the new ‘leader of the
free world’ takes office, and whether he will still be
moving the markets through his twitter account.
The market is looking forward to the 2017/18 harvest,
and wondering how the global wheat crop will look
for next year. Will plantings be down?

The futures market had a strong rally since the USDA
set their forecasts for the US winter wheat planting
at the lowest level since 1909, however the reality
has crept back into the market that global end stocks
are still record high. Although US plantings of wheat
are expected to be reduced, it is expected by the
International Grain Council (IGC) that the rest of
the world will largely be unchanged. The IGC point
to favourable conditions in the northern hemisphere
resulting in a predicted 17/18 crop of around 735mmt,
and the third largest on record. We have to remind
that forecasts at this time of year are open to large
margins of error, yet the market has responded with
falls overnight (figure 1).

At a local level it will not be a surprise to anyone
reading Mecardo updates over the past year that the
size of the harvest is pressuring basis. In table 1,
we have shown basis levels across a number of ports.
The general trend is that basis is slipping across all
ports, the most exceptional is Port Lincoln which
has steadily fallen into negative territory. In
Kwinana basis is still strong, however looking back
at December levels were greater than $50.

All eyes in the coming weeks will be on President-elect Trump,
with a wide degree of volatility expected.
This has already been seen with traders dumping the
US$ (figure 2) despite comments from federal reserve
pointing towards interest rate rises in the coming
weeks. Overnight Trump appointed George Perdue
as the secretary for agriculture. Perdue is the first
agriculture secretary since 1994 from out with the
Midwest, but has a wide range of experience within
the grain and livestock industries.

The Week Ahead

The inauguration will be held at 3am east Australian
time on Saturday morning, I will probably be up at
that time watching it thanks to a sleepless newborn.
There are a lot of contrary views when it comes to
Trump and regardless of your view of him his election
has produced a lot of energy. In the coming months,
we will get a strong view of whether candidate Trump
is the same as President Trump. One of the risks in
markets which is always extremely difficult to predict
is political, and we could see black swan events in the
coming months, and that is before we look at the
coming EU elections.

The world continues to be awash with wheat, and barring
any major weather event in the next 6-8 months, prices
will remain low. In the last four seasons the global crop
has largely made it through without any major hiccups –
can we get a “five-peat”?