Smart Marketing | Wheat market’s indecision

Wheat market's indecision


Cropping
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Prices have recovered from the lows of two weeks ago, after US export data showed a marked improvement

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THE Australian grain market is entering a state of confusion as traders, growers and endusers try and estimate how much grain is about to be harvested, where it is located, and what the quality will be.

Pricing did not change a lot last week, leaving basis against Chicago Board of Trade December futures at a massive $200 a tonne in NSW, dropping back to $130/t in South Australia, and to $100/t in Western Australia.

South Australian prices remain $30/t above Western Australian prices, when a $25/t discount to Kwinana based prices would be normal most years.

The price differential this year is reflecting the market structure that grain will go east from South Australia, and the freight advantage, particularly for overland movements, is keeping the Port Adelaide based price at a premium.

What is somewhat confusing still is that not all the grain to be produced in Western Australia will need to go east, and the same will apply to South Australia.

If we assume a national crop of 16 million tonnes, and domestic consumption of eight million tonnes, then there still should be eight million tonnes available for export spread across Western Australia and South Australia.

Compared to previous years, export prices for wheat have settled at a basis of about $20/t in South Australia, and $45/t in Western Australia.

This year it seems as though export sales are being executed out of Western Australia at a basis of $100/t.

To support such a price premium there must be a quality issue.

In other words, wheat available from, say, the Black Sea into South East Asia is not able to meet the quality required.

That gives Australian wheat the opportunity to continue to move into those markets at what appear to be very high prices compared to international price benchmarks.

Meanwhile CBOT futures have held their ground over the last week.

Prices have recovered from the lows of two weeks ago, after US export data showed a marked improvement.

At the same time the market has not overshot to kill off US export competitiveness.

Most commentary is reporting that US prices will have to remain subdued to prevent killing off any lift in exports at this stage.

That is likely to leave nearby CBOT wheat futures hovering about the A$260/t mark.

If this becomes the benchmark price as we move into harvest it will be interesting to see if our exporters can sustain prices with the current high basis level.

If they can, then current prices across Australia should be secure.

Growers are also considering the post harvest period as well. It is possible that too much wheat will be exported from Australia before domestic demand has been fully covered.

The current high basis levels also set us up for grain imports.

Rains in eastern Australia would also build a bigger sorghum crop to help fill feed grain demand. We might also see international factors support a lift in global wheat prices, particularly US wheat prices. 

Probably the post harvest market is unpredictable.

Will excessive exports, and support from offshore drive prices back up from harvest levels, or will imports and a bigger summer crop burst the price bubble?

Most market participants will form a view one way or the other, but some of them will get it wrong.

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