Monday, September 27, 2010

Watch out for the sleepers

Grain markets seem to have reverted to following gyrations in outside markets, now that most nearby supply and demand factors (Russian export ban, lower corn yields, milling wheat issues) have been hard coded into current price levels.

When the macro factors are at play, the impact of movements in international grain prices are neutralized by offsetting movements in the $A. So making grain pricing decisions based on how the macro factors will play out is a bit of a waste of time. It is the S&D shocks that cause most of the large movement in the $A value of your grain.

So looking ahead we feel that there are a couple of sleepers that could affect the global S&D balance and influence the value of your grain in the months leading up to harvest.

The first is the production situation in WA. One of our team has just completed a crop tour of WA and can’t put the wheat crop at much above 4-4.5mmt. This will have ramifications for WA values as growers wash out of forward contracts and importers battle for the scarce supplies of WA grain. This should continue to assist WA basis and support WA grain prices in the lead-up to harvest.

Another factor with major implications for global grain supplies in the medium-term are Russian new crop plantings. Russian winter grain plantings will fall short of last year’s levels. The Russia’s Ministry of Agriculture was targeting winter grain seedings of 39-42 million acres, but this has now been adjusted to 36.75 million acres.

Recent rains have improved conditions, but more rain is needed as growers try to wrap up plantings by late October. Last year, Russia pushed winter grain seedings to 44.1 million acres, which was about 7.35 million acres above the five-year average.

The next sleeper we can identify is sth American planting conditions. While it is not unusual to be hot and dry ahead of summer crop planting (nth Brazil, particularly has distinct seasons, not unlike our top-end), this year it has been exceptionally dry and hot. Planting delays seem inevitable and current production estimates are at the top end of possible outcomes.

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