Volatility in the market

Interesting looking at grain futures over the last week, with speculative money flowing in and out of the market on news of Chinese interest rates and the ongoing concerns on sovereign debit in the EU. Although there was a short term sell off; the true fundamentals remain strong going into 2011.

Fundamentals still play an important role, however speculative money flow is a much more important part of the price structure in grain and oilseed futures than it used to be. Remember when funds started getting into soft commodities during 2007/08, with the futures markets regularly hitting limit up/limit down!

The days are long gone when you can simply focus on production and old crop supplies carry through. Now traders & growers alike must keep track of the above mentioned market fundamentals - both domestically and globally while also closely monitoring the dollar, ethanol mandate levels and the health of many global economies, all while trying to gauge investor’s appetite for risk. As a result, it is becoming a delicate balancing act in the grain and oilseed market and that's creating extreme price volatility (and expect this volatility to continue over the coming months)

While excess volatility gives you potentially historic pricing opportunities, it also increases the daily fluctuations in silo bids and thus general risk. As a result basic supply/demand fundamentals must remain the basis for making long-term marketing decisions.

For wheat, the fundamentals outlook isn't as nearly as strong as say oilseeds (with strong Chinese demand), but it isn't bearish either. With the increasing precipitation along the east coast, the trade will be well bid for higher protein wheat. Also there are enough wheat crop concerns around the world to limit the downside unless there's a widespread commodity collapse. And if those concerns turn into full blow crop problems (Russian and US winter wheat worries?), it would likely be enough to ignite another wave of strong buying in wheat futures.

Western Australian Malt Barley Premiums Plummet

It was an interesting week last week for the Western Australian malt barley trade! Despite the WA barley harvest finishing up and malt recievals only at approximately 30%, combined with a major exporter rumored to have booked 300,000mt in export commitments. Prices fell from $353/mt (that was offered on 12th Nov) to $301/mt FIS Kwinana being offered last Friday (19th Nov). During the same time east coast malt bids remained stable ($280/mt Geelong). Basically WA prices were slipping back to export parity.

So what happened!!

A rumor doing the rounds last week was that due to the high cost of WA malt barley, Joe White has decided to reduce processing throughput at its Forrestfield malting plant to concentrate on running its eastern states plants at higher capacity. When Viterra dropped its price by $35/mt last Wednesday (17th Nov), other traders soon followed.

However today Graincorp has entered the market today lifting the marketing by $20/mt to $320/mt Kwinana zone. Maybe Graincorp has re-entered the market as they could be getting worried about another large weather front that is forecast to dump up to 25 – 50mm of rain just when the barley harvest is starting to get into full swing after a relatively cool damp spring. This will further worry east coast maltsters who are getting increasingly concerned that the malt barley harvest window is quickly diminishing, with all that will be left standing in the paddocks will be weather damaged barley!

If you miss out on these prices, don’t panic! Harvest pressure should start to ease and there is a fair chance that export parity will rise after our harvest. Especially as we are hearing of the increasingly tight supply situation in Europe and Canada and with traditional malt exporter Ukraine facing export constraints, it may not be too long until prices rally again internationally.

Confidence growing in 2011 outlook

While the 2010 harvest will be a write-off for many WA producers, the good news is that wheat prices for next season have started to take on a leadership role. 2011 CBOT wheat futures contracts last week again challenged contract highs at just under $8/bu.

During the early stage of the current rally, prices were driven by immediate needs; to replace Russian grain exports. Since then concerns about corn yields started to take centre stage. But now widening dry conditions throughout the US Hard Red Winter (HRW) wheat-belt and thoughts that not enough winter wheat has been planted has started to drive the grain complex.

Wheat is now completing head on with corn, soybeans and cotton to attract its fair share of northern hemisphere spring plantings. This is a bullish scenario.
On top of this, concerns about the impact of a strengthening La Niña is one of the reasons traders seem more concerned about the HRW crop than the SRW crop that’s heading into dormancy. One of the impacts of La Niña is the potential for above-normal temps and below-normal precipitation in HRW country, while the weather phenomenon normally brings at least normal precipitation into the Ohio Valley and northern SRW production areas.

Traders are anxiously waiting to see USDA’s supply/demand estimates this week. While a smaller crop estimate is expected, it’s the usage side that will likely be more important to near-term price direction. Any declines on the demand side of the balance sheet would suggest prices have hit a level that is starting to ration use. And that could be enough to trigger a short-term corrective pullback. But there are likely to be plenty of buyers — in both futures and the cash market — if there is a price pullback, which limits near-term downside price risk.

Confidence growing in 2011 outlook

While the 2010 harvest will be a write-off for many WA producers, the good news is that wheat prices for next season have started to take on a leadership role. 2011 CBOT wheat futures contracts last week again challenged contract highs at just under $8/bu.

During the early stage of the current rally, prices were driven by immediate needs; to replace Russian grain exports. Since then concerns about corn yields started to take centre stage. But now widening dry conditions throughout the US Hard Red Winter (HRW) wheat-belt and thoughts that not enough winter wheat has been planted has started to drive the grain complex.

Wheat is now completing head on with corn, soybeans and cotton to attract its fair share of northern hemisphere spring plantings. This is a bullish scenario.
On top of this, concerns about the impact of a strengthening La Niña is one of the reasons traders seem more concerned about the HRW crop than the SRW crop that’s heading into dormancy. One of the impacts of La Niña is the potential for above-normal temps and below-normal precipitation in HRW country, while the weather phenomenon normally brings at least normal precipitation into the Ohio Valley and northern SRW production areas.

Traders are anxiously waiting to see USDA’s supply/demand estimates this week. While a smaller crop estimate is expected, it’s the usage side that will likely be more important to near-term price direction. Any declines on the demand side of the balance sheet would suggest prices have hit a level that is starting to ration use. And that could be enough to trigger a short-term corrective pullback. But there are likely to be plenty of buyers — in both futures and the cash market — if there is a price pullback, which limits near-term downside price risk.