Monday, December 1, 2008

Continued Downgrading attracts Premium for Warehoused Wheat

Rain and a lack of grower selling has seen markets add premium for quality wheat and prompt delivery. NSW growers are following the trend set by WA growers and opting to warehouse grain and this is tightening the prompt market for quality wheat with more boats appearing on the stem each week. South Australian and Victorian growers are starting to sell small amounts. The thinking is that premiums for quality grain will continue to tighten as a result of downgrading through harvest.

Heavy rain through the Liverpool Plains of nth NSW had added to the harvest woe. Significant rain (75-125mm) over the weekend and the resultant major flooding will see the majority of crop now downgraded. As harvest was at around 20% - 25% this is 80% of crop downgraded. Significant amounts of sorghum are under water which will need to be replanted and there are reports of sunflower crops in same predicament.

Already, before that, most of the grain left to be harvested, north of Coonamble was heading for downgrades. The best estimate now is that over 1mmt of wheat will be downgraded across the northern feed zone and with another big sorghum crop in prospect and pressure on feed barley export values, this has widened the discount to feed wheat to over $100/t.

The key for milling wheat and malt barley price prospects on the east coast will be the Central West of NSW. If harvest progresses and downgrading is not too significant, there should be enough quality grain produced to satisfy domestic markets.

Exporters suggest that current prices are above what export markets are willing to pay for deferred delivery and that current premiums are associated with exporters trying to source grain to meet nearby shipments.

A large exporter recently suggested to ProFarmer that it is unlikely that China will import any Australian malt barley at current price spreads against European and Canadian barley. Given the better availability of quality grain from these destinations, it is also unlikely that they will be interested in off spec malt barley. As such, further price premiums will need to be driven domestically rather than by export markets. The fate of malt barley values lies in whether there is enough malt barley produced to satisfy local demand.

We heard an estimate that the malt percentage could be as low as 20-30% nationwide, which represents a crop of 1.2-1.8mmt on our Nov barley production estimate. Domestic demand is estimated at about 1mmt (700,000t east and 300,000t west), and Japan need about 200,000t. Even our low estimate should have inelastic demand covered. Plus, the incentive to clean and blend is there, and already we have seen standards relax to try and fit the crop to malt specs. It may take a while but domestic demand should get covered.

The key will be WA. We heard that the malt deliveries were running as high as 55% in the Kwinana north zone prior to the latest rain. If downgrading across WA is not too bad, it is hard to see tremendous upside, but at this stage it is too early to assess the true extent of downgrading.

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