Thursday, April 1, 2010

Market signals starting to work again

Last week I was asked to present at an FC Stone seminar about changes in the wheat market since export wheat market deregulation.
The naysayers who are blaming the current tough market conditions on the demise of the single desk have it wrong...just as they were wrong about the benefits of the single desk. But in saying that, there have been significant changes to the market structure.

WA/Eyre Peninsula prices have improved relative to the eastern states as prices now reflect cheaper freight and S&H charges and the fact that these growers are now not burdened with full National pool management costs when east coast growers abandon the export pool in favour of their more lucrative domestic market.

Generally prices are now better reflecting market signals. Through 2008/09 lower quality wheat in WA was trading at a premium to high protein wheat in QLD. This had a lot to do with the increased Iranian demand for wheat and their wheat import specifications and the large production of high protein wheat in the east coast that overwhelmed the relatively small Japanese high protein wheat market.

The pool system ‘managed’ these perceived ‘anomalies’, to the extent it encouraged production of high protein wheat in favour of other wheat until production eventually grew to a level where it outweighed demand from a relatively small premium market.

Noodle wheat premiums seemed to have suffered from the same symptoms…..but are now returning to normal.

Those opposed to deregulation lament the loss of the WA Noodle wheat premium. In the last 4yrs of the Single Desk the pool paid an average $21/t premium above APW for Noodle Wheat.

In the years following the demise of the Single Desk, Noodle Wheat pool returns fell to a discount of -$7/t (currently AWB are estimating a discount of $5/t in the 2009/10 pool).

But cash market premiums for Noodle wheat are now on the rise, peaking at $19/t above APW wheat shortly after the latest Japanese tender results were announced.

It is our view that the return of the Noodle wheat premium coincides with a fall in Noodle Wheat production. The premium Asian noodle wheat market uses around 1.2-1.6mmt annually. In 2008/09 Noodle Wheat production rose to an estimated 2mmt but has since contracted back to around 1.5mmt. Once the 2008/09 carryover has been exhausted, look for the Noodle wheat premium to revert back to normal. No conspiracies here, just the laws of S&D working.

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