Key Points

• The expectation is that the wheat market will put in a short term low until the impact of the cold snap and dry conditions in the US can be assessed.
• Ramp up sales of old season wheat in the second half of January against any lift in the market and short term demand as Australian traders fill track contracts before the end of January.
• Build new season sales at prices above $260/t APW port basis, making use of any rallies. The expectation is that global prices will be lower than this by December 2014. Consider the impact of another dry year on the east coast though, which is where swaps come into their own versus fixed price contracts.

Wheat Futures Down

Nearby CBOT wheat futures have now traded down to levels last seen in December 2011. We then go back to July 2010 to see the market below current levels.

The final straw for wheat was last week’s USDA Report, which saw wheat consumption for feed use pull back more sharply than expected, and in association with upgrades to crop output in China and the Black Sea region, saw global stock estimates continue to lift, along with a lift in US ending stock estimates.

No commentators are positive about grains this year, with wheat, corn and soybean stocks all rising after the 2013/14 season, and with the prospect that stocks will continue to rise in 2014/15.

That outlook creates some urgency to make sure that old season wheat is sold in the near term, making use of any price recover from current levels as the market assesses the im- pact of the recent cold snap in the US, dry conditions in the US, and possible risk for winterkill issues in Russia and Ukraine, where protective snow cover early in the month had been assessed as being a bit thin.

The expectation is that, once we are through the danger period of breaking dormancy, and enter the growing season for northern hemi- sphere crops, the market will come under more pressure before finding a longer term low for the year, probably during the northern hemisphere harvest.

Australian Market

The Australian market has split into two parts, with prices for Port- land and zones west falling, and prices Geelong and east/north rising. This is reflecting the tight stocks position in the key domestic con- sumption market zones on the east coast, versus the export zones further west.

However, prices in all zones have held up well against the A$10.90 per tonne drop in US futures from 6 January to 15 January, with basis levels lifting as a result. Even Adelaide basis levels have lifted $8 per tonne over the period despite the $3/t drop in cash prices.

Because basis levels are so strong, do not expect all of any lift in US futures to be passed on in our cash prices. That will limit the extent of any upside from current price levels in all port zones.

However, make use of any slight rallies in January, particularly as local traders fill track contracts going into the end of January, to get further sales of old season wheat in place.

Assume that you will need to have all of the 2013/14 crop sold by early March with or without any significant lift in the market. That means a disciplined approach to making regular sales and trying to achieve the best result possible from whatever the market gives us to work with.

New Season Wheat

For most growers, an APW port based price of $260 per tonne is the line in the sand at aver- age yields if the busi- ness is to be somewhere near fully profitable.

That is where the market is right now, having fallen from levels around $275/t when the market last peaked in early December. Prices are similar in all port zones, with Newcastle showing just a $5/t premium to Pt Adelaide for new crop at the moment.

Growers need to protect their bottom line for 2014/15. Although current prices are below the average for the harvest just gone ($5/t under in export based zones and much more on the east coast), the expectation is that prices will be lower than current levels by December 2014.

The biggest problem with locking in fixed prices close to $260/t is if we have a dry season in Australia, which keeps our prices very high against US futures prices (much as we have seen on the east coast this year). This is where using swaps can lower the risks of entering into forward sales.

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Key Points –

• Wheat prices have fallen $4—$5/t over the last week, and $9/t over the last month.
• The drop in basis levels is having the biggest impact on prices at the moment.
• The Australian market is transitioning from a forward market to a harvest market where we expect basis levels to come under pressure.

NEW SEASON WHEAT PRICES EASING

New season wheat prices have fallen by $4 — $5 per tonne over the last week, and by $9 per tonne over the last month. In both cases wheat prices in US$ terms have risen, but in A$ terms the market is down A$1.75 per tonne over the last week. Over the last month the futures market has risen A$15.86 per tonne.

Two things have driven our prices down. They are currency and basis.

1. The change in currency since September 5 is -A$7.13/t.

2. The change in basis is -$17.73 /t.

Most growers express concern about the impact of a rising dollar. Very few are seeing that changes in basis are having a more profound impact on prices in recent weeks.

The reality is that right now there is very little that can be done about either. It is a matter of waiting to see if basis and currency reverse in the next few weeks, or simply waiting until harvest before planning our next marketing moves, and that will be determined by what grade we harvest, and what grade spreads are doing at the time.

SEASONAL PATTERN

Right now we are in transition from a forward market to a harvest market in the Australian wheat market. The main changes we expect to see in this transition are a drop in basis levels in our own market, and hopefully a stabilisation in international prices.

Basis levels have been every high this season, and so to see them fall now is not unexpected. We are not having a drought anywhere that would justify the basis levels seen so far, and with good rains in September in Western Australia and parts of NSW, pressure on Aus- tralian prices has eased.

Basis has probably also eased because of a slow down in export sales after the flurry of sales to China. We have also seen a lot of growers make forward sales, so the trade should be well covered as they head into our harvest as well.

Internationally we are moving past peak harvest pressure, and to a point where major importers are likely to have worked their way through their own domestic stocks. That may begin to underpin global wheat prices in time for our harvest.

From here we would expect downward pressure to continue on basis levels, and for pressure to still come from the record wheat crop coming off in Canada. Support should come from ongoing export sales to Brazil from the US, and from another round of sales to China.

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Key Points –

• Dec wheat futures have lifted by A$16.35/t over the last week.
• In US terms futures are back above the June – August average signalling a lower risk for those who want to add to forward sales.
• Lower basis levels are hitting our prices so our cash prices are still lagging the June – August average by about $5/t.
• Concerns about the Argentine crop, winter wheat plantings in Ukraine, and demand potential have driven this rally.

WHEAT RALLIES

December wheat futures have posted strong gains over the last week, adding 36.75 USc/bu since Monday last week to start this week on 683 USc/bu. In A$ terms this is a gain of A$16.35 per tonne.

The market is now at its highest level since July 15th in US$ terms, but because of weakening basis levels this month, our cash prices are back at levels seen in the first week of September.

What the rally has done is push US$ futures back to levels just above the June to August average. For sales made at this time of the year, getting set at above this average will reduce the chances of harvest prices overtaking any sales being made now.

One dilemma for us is that the new season prices here in Australia have not quite got back to their June to August average of $278.95 per tonne. At $274 per tonne today at Pt Adelaide, we are falling short by close to $5 per tonne.

However, if we assume that basis levels won’t be any higher than current levels by harvest time, then maybe taking our lead from the level seen in US terms is warranted in saying that we are once again entering a lower risk price range for anyone wanting to add further to sales before harvest hits.

Since September 6 basis at Pt Adelaide (and elsewhere around Australia) has fallen by $13.73 per tonne. This is probably a function of

• Rains in September easing production concerns nationally.
• Growers forward selling and allowing traders to get stocks for early export shipments including to China
• A lack of new sales to China to drive demand
• Australian wheat being overpriced in most export markets.

The overall price move since September 6 has been down $2 per tonne. Currency has stripped $5/t, basis $13.73 per tonne, but the lift in futures has added A$16.84/t.

USDA STOCKS REPORT

This report is due tonight. The view is that it will show more US wheat consumed than expected, further tightening US ending stock estimates down the track. It may also show that some of the 2014 corn crop has already been used, thus reducing ending corn stock estimates as well. We will see tomorrow and in following days, but there seems little need to have been a seller of wheat today given that A$ contract prices are just not quite at the June—August average to reduce the risk.

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Key Points –

• Dec wheat futures have good support at around 640 USc / bu on the charts
• APW Pt Adelaide has slipped to $261 per tonne with futures near the bottom of their trading range, a lift in the dollar, and a further small drop in basis levels.
• The big risk for wheat is falling corn prices, if they punch below 450 USc/bu.
• Shortages of wheat in Argentina and Brazil will add to demand for US wheat and provide some price support.

Wheat Futures

Wheat futures have been range bound since the beginning of August, trading in a range of 638 to 680 USc/bu. We have not had a daily close below 640 USc/bu, and this has become a relatively strong level of support in the current market.

At the same time we have had corn prices hold above 450 US c/bu, further adding to the support for December wheat futures at around the 640 USc/bu mark.

The wheat market is getting support from a projected decline in stocks in the US this year, and in fact lower overall supplies available for export (ie carry in plus production less domestic use is lower for 2013/14 than it was for 2012/13).

However, if corn prices move to new lows, it will probably allow wheat to break support and move lower as well.

We also have support for wheat prices from demand for US wheat into Brazil. At the moment they are buying, with none available from Argentina. There are expectations of ongoing demand as well, with poor weather hitting the Brazilian crop, and the Argentine crop not recovering in full from the drop in production last year either. The Argentine crop is pegged at 12 mill t, up from 10 mill t in 2012/13, but well down on the 15.5 mill t produced in 2011/12. The crop in Brazil is currently pegged at 4.745 mill t, up from 4.3 mill t last year, but down from 5.8 mill t in 2011/12.

Brazil is expected to import 7.7 mill t this year, which is the highest out of the last three years, and without a full recovery in Argentine production, which will limit their exports to 6 mill t. Hence the view that Brazil will continue to import wheat from the US during 2014.

On the downside, we have corn. Will demand for corn be rebuilt at current prices of around 450 USc/bu, or will prices test the 2009 lows of 350 USc/bu, before full demand for corn is rebuilt? If it is the lat- ter, then lower corn prices will begin to put pressure on wheat and drive US futures below the current support at 640 USc/bu.

Hopefully though, with some favourable exchange rate moves and basis not falling away any further, $250 per tonne will become the base for APW in the Pt Adelaide zone this year, with premiums to that in other port zones based on shipping and domestic issues. Under that scenario, there is still about $10 per tonne downside on wheat prices.

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Key Points –

• The A$ value of US futures have now pushed below the lows seen in August.
• APW at Pt Adelaide is now below the price base of $271 per tonne that has been in place since April.
• As expected, the price drivers for this year’s June—August period are different and are not currently able to hold prices above the March/April or June—August averages.
• More down side is expected as the US corn harvest comes in and as we get past the northern hemisphere wheat harvest

Wheat Futures

Over the last two weeks the futures market in US$ terms, has held above key resistance levels, but with a higher Australian dollar, A$ values have been pushed below the recent lows seen in August, to their lowest levels since April 12th.

In turn, this has dragged the APW cash price at Pt Adelaide down to $262/t, some $9 per tonne below the lows seen since the end of April. This downside in the market is not unexpected. With the US corn

harvest getting underway, and the European and Black Sea harvests getting close to finished, the bulk of the global grain crops are locked in for the year. There is little more that can go wrong, apart from in the southern hemisphere, to drive prices higher. Against a lack of bullish factors, and ongoing upward revisions in key wheat and corn crops around the world, the path of least resistance for prices is down.

Key Price Levels

We have little way of knowing how low the market will push wheat prices leading into our own harvest. Traditionally stronger prices in the June to August period compared to the March April period is a positive for prices for our harvest period. However, the drivers of this year’s higher prices are different.

Traditionally higher prices in the July August period have been driv- en by issues with the global crop, as we saw in 2010, and 2012, and then back in 2007, 2006, 2002 etc. By September/October these fac- tors are irreversible and contribute to good prices for our harvest.

This year the global crop is not in trouble. In fact it is the opposite, heading towards a comprehensive new record, Instead the strong mid year prices were driven by

• Tight corn stocks ahead of the US harvest
• A lower Australian dollar,
• Higher basis levels
• Aggressive buying by China during July (adding also to basis levels we think).

Of these, some are reversible (tight corn stocks), possibly reversible or run out of steam anyway (currency), or may weaken as our harvest gets underway (basis).
That just leaves demand into China as the one prop from those mid year price drivers, and no-one can be sure when or even whether the Chinese will be back in the global wheat market as our harvest gets underway.
Right now the value of A$ futures have slipped below the June August average, and the March April average. APW prices are just above the March April average.
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Key Points –

• Last week’s USDA Report was negative for grain markets and wheat in particular.
• Global wheat stock estimates were lifted by 3.29 mill t, to move from a small rundown in global stocks to now a 2.43 mill t lift in stocks year on year.
• Global wheat production is set to hit a new record a4 708.89 mill t, 11.72 mill t above the previous record.
• An increase in the estimates of global and US ending corn stocks is a further negative to grain markets with a spillover to wheat.

Global

• Global wheat production was lifted by 3.51 mill t from the August estimate, to a record 708.89 mill t, up 11.72 mill t on the previous 2011/12 record.
• Production estimates were lifted for Canada, the EU, and the Black Sea region.
• Canada is set for a 31.5 mill t crop, up 2 mill t, after a cool end to their season favoured yields.
• The EU crop projected at 142.9 mill t, up 1.53 mill t from the August estimate, and up 9.85 mill t year on year.
• Globally production is up 42.6 mill t on 2012/13, to 708.89 mill t. The big gains are in the Black Sea (29.68 mill t in total), the EU and Canada.
• Of major wheat producing countries or regions, it is only the US and India that are projected to have lower production this year.
• This is supportive, with a lower supply of exportable wheat from the US this year, and India will be less active in exports than last year .
• Global stock estimates have lifted by 3.29 mill t since the August estimate as a result of the production increases and a small decline in consumption estimates.
• Importantly, this now pushes us to a point where global production will out strip consumption, allowing global stocks to lift by 2.43 mill t year on year. This is different to the conclusions reached last month.

CORN

The very tight supply situation for corn has underpinned grain markets for the last 18 months. As the US heads to a record crop, corn prices have come under pressure. Wheat has opened up a premium to corn, but it is probably near its limit, so any further downside on corn will have a bearing on where wheat prices head.

The USDA Report added to global and US corn supply estimates, despite the recent hot weather in the US that might have damaged a part of the late corn crop.

The USDA Report was bearish for corn and therefore will exert a bearish spillover to wheat.

• US corn production lifted by 2.04 mill t to a record 351.64mill t.
• US opening stocks were revised down against an ongoing strong US rundown in old season stocks, but 2013/14 ending stock estimates lifted by 440,000t.
• Global stock estimates lifted by 1.25 mill t.

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Key Points –

• US wheat futures are still in a downward trend and will come under pressure as the corn harvest advances despite the recent hot, dry weather.
• The Australian crop is getting smaller, with some analysts suggesting a fall of 2.5 mill t after recent frosts and dry weather
• Prices in NSW and Vic are rising faster than in SA because of the crop downgrades
• Be wary of more forward sales unless we see prices at , or near, new highs.

Wheat Futures

The recent hot weather in the US has taken yield potential away from both corn and soybeans. This has provided support for US wheat futures over the last week, along with ongoing sales of wheat from the US to Brazil. However, note that in USc/bu terms, the market is still in a solid downward trend. In A$ terms we are sideways. If we had continued to follow US futures down in A$ terms, our forward prices would be around A$235 per tonne, not $280 per tonne.

Although the market is reacting to the hot dry weather in the US, the corn harvest is underway, and pressure is coming onto corn prices. This will eventually see feeders switch from wheat back to corn in the US, and put wheat prices under pressure.

Attention is now turning toward southern hemisphere crops, with frost damage in reports from Argentina, and frost and hot dry weather sapping yield potential here in Australia.

The Argentine crop is important for the US as it will dictate total exports to Brazil for the year. Brazil will import until new season wheat is available from Argentina, but it may have to come back into the market in 2014 if that crop falls short.

It is being reported that some production estimates for Australia are being wound back by as much as 2.5 mill t after frosts and dry weather, mainly in northern NSW.

Australian Season

Here in Australia the season is at a critical point. The rainfall maps for the growing season to date (April to August) continue to show that South Australia is the only state with above average rainfall, and above average yield potential. August was dry, barely making average in most of South Australia, and falling short in critical parts of NSW, Queensland and Victoria.

Production potential held in South Australia in August, but with the exception of small areas in WA, and the very south and west of Victo- ria potential fell. When frosts in the northern and on Eyre Peninsula in South Australia are added to the mix, it is no wonder that production estimates are falling.

We are seeing cash prices rise in NSW and Victoria, against prices in SA (and WA), and against US futures.

With crops getting smaller in the US, and Australia, it is a dangerous time to be adding to forward sales without very good prices.

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Strategy –

• Although forward sales programs should be locked in by now, there will still be growers looking to add to sales.
• There is potential for down side in prices as the US corn crop comes in, particularly if conditions for the soybean crop stabilise.
• However,in years like this where average A$ futures prices in June August are higher than average prices in March April, there is a risk for those making late sales.
• The risk of selling now will be minimised by making sales on days when the A$ value of December futures has risen above the June August average of A$266.69 per tonne.

Wheat prices can fall sharply from the July August period into our harvest period at the end of November. If we look at the A$ value of December futures there are 4 years out of the last 13 where the market has fallen by $36 to $46 per tonne, and 4 years where the market has either lifted a little or fallen a little. So there are price risks from now until our harvest.

When we look at the years where the market rallies from the middle of the year, they are all characterised by price rallies mid year that push the June August average A$ Dec futures price above the March April average (eg 2002, 2006, 2007, 2012).

This year we also have the June to August average coming in above the March April average, so there is a precedent to suggest that prices at the end of November might be at, or above, the June to August average.

It is true that the circumstances that have delivered the strength in the market this year are different to previous years. In the past it has tended to be a shortfall in wheat production either from a drought in the Black Sea (eg 2010 and 2012), or a drought in Australia on top of production shortfalls elsewhere (2002, 2006, 2007).

This year the lift in the market has been more driven by corn supplies (particularly in the US), demand from China in July, and the drop in our dollar. Some of the factors that we would normally see carrying through to our own harvest are going to dissipate. The main one will be the support from corn as the US corn harvest replenishes supplies and rebuilds stocks sharply. If China does not come back into the market it my also remove support that was present mid year by the time we get to our harvest.

The key message is that there are downside risks in the market between now and harvest, but we should target sales on days when the A$ value of December futures are at or above the June to August average. This will increase the chances that sales made now will be competitive with cash prices at harvest.

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Strategy –

• Forward sales programs should be complete by now, with the prices above $280/t from late June to early August providing an unexpected opportunity to lock in more tonnage after we at least had some production potential in place.
• For those short on sales for harvest cashflow, plan on having to wait as long as until late October/early November to make sales before basis weakens under harvest pressure
• Assume that the post harvest period will deliver good selling opportunities after the Russians have sold out and while risk premiums are in the 2014 forward market.

The market stabilised a little last week, with the USDA Report providing some support for corn and wheat prices, and later in the week, a report that planted corn acres might be lower than the USDA are suggesting also provided support for corn, and therefore for wheat.

The wheat harvest in the EU is getting close to finished with over 90 percent of the French crop in the bin. The Russian harvest is also progressing, with 34.7 mill t harvested this year against 27.9 mill t last year. There are also good moisture conditions for planting the US winter wheat crop, with the planting window now opening.

On the export front, demand for US wheat from China has dried up after the initial flurry of activity in July. Also, EU wheat prices have fallen to become more competitive with Black Sea origin wheat, and both Black Sea and EU wheat is undercutting US wheat.

With a lift in the exportable surplus in the EU and Black Sea, as well as Canada, the US will face strong competition for exports this year. This may keep US futures prices on the defensive for a while.

Early in 2014 it is expected that the Black Sea will pull back from exports after a strong early program, the EU will also be working through their export program, and we should see risk premiums in wheat prices until it becomes clear that global production will be enough to allow stocks to rebuild a little.

For now, corn prices are likely to drive the direction of wheat prices. December corn futures have bottomed out at around 450 USc/bu so far, and may go under that resistance once harvest gets underway. Wheat is struggling to go more than 175 USc/bu above corn prices, and so is likely to challenge 600 USc/bu on the December contract if corn does trade below 450 USc/bu.

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