Monday, May 10, 2010

Better week for grains

While most eyes in WA remain firmly focussed on the skies, the grain market has made a few tentative steps forward over the past fortnight. Since bottoming in early April, wheat swaps (our preferred hedging instrument) have recovered $20/t to around $226/t.

The recovery was sparked by news that China was buying US corn. Reports continue of corn sales out of Government stocks to key corn production areas. If the Chinese Government runs out of corn this could lead to further buying out of the US – this would be a huge fundamental boost for the market.

The biggest catalyst however was the divergence in movements in the $A from those of the grains market. For the past couple of years movements in $A have essentially mirrored grain price movements. Last week though, as global equity markets got the jitters, the $A came under pressure and money began to flow of out equities and into wheat and corn.

All we need now is for some sort of production issue to spark the market to a higher level. It is unlikely that the cold weather forecast for the US this week while cause much damage and rain across Europe seems to have alleviated concerns about spring crops. Dryness in WA doesn’t seem to have hit the radar screens of international grain traders yet, but if it extends into June it will.

There are two important reports scheduled for release this week; Canadian 31st March grain stocks and the USDA’s first attempt at forecasting 2010/11 crops. It is unlikely these reports will bring much joy. However, if the market can withstand these and then find a production issue or two and some ongoing Chinese demand for corn, wheat swaps might be a chance of advancing from current levels.

Those in safe production areas, should consider hedging wheat at swap levels better than $230/t. Average yields this year will see grain stocks again increase. Combined with a large carryover from last year, this means that we need to be defensive with our 2010 hedging programs. With swaps in place we can wait for the market to find better basis levels to enhance our returns.

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