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.
