Monday, March 28, 2011

What now for new crop wheat?


New season wheat prices continue to offer attractive levels at $331/t (FIS Kwinana). As of December 1st, APW2 new season prices have averaged $333/t, after reaching a peak of $360/t in 14/15 February. Traditionally the February – April window offers the best returns for growers who wish to forward sell, and this year is no inception.

New season wheat basis levels (currently at +$A23/t over CME Dec futures) are following a typical pattern in a normal year. Basis levels start the year low, then fall at harvest before recovering in the post harvest period. This low basis early in the year is what makes fixed price forward contracts uncompetitive against forward selling with swaps. We have highlighted this over the past couple of weeks when swaps were trading at a $50/t premium over fixed grade contracts.

Targeting sales when basis levels are high can be a way of adding an extra premium to prices at already high deciles levels.

This time of year the international grain and oilseeds market tends to shift its focus from demand to weather, and this is definitely one of those years. Indeed, weather has been an issue since last Oct/Nov in the US when much of the western central and southern plains winter wheat was planted into very dry conditions, germination and emergence was paltry at best and winter offered no relief from the harsh conditions.

For most regions, the growing season is just beginning and weather is already a huge factor. If the rains do not materialise soon for the western US plains, wheat could easily have more rally power in it. Four of the top five producing Hard Red Winter states are reporting conditions that are 50% Poor-to-Very Poor! The seasonal tendency is for wheat to build a weather premium through much of April. I think it’s worth noting that some of that usual weather premium includes frost, which hasn’t even been mentioned yet.

Markets this week will be closely monitoring the USDA acreage report that is due Friday morning. This will give the market its first glance at what US farmers intend to plant, and what future price direction for most agriculture commodities will likely to be. With high prices not dampening export demand and tight US stocks, it will give the market what commodity prices need to do (either move higher or lower) to capture more acreage. Early indication corn will be the most dominate crop (most profitable) followed by a loss of soybean acres. Expect winter wheat acreage to be ploughed up and re-sown to corn.

The reality is that with prices again nudging $330/t decile 9.5 (that is over the preceding 10 year prices have spent 95% of the time at or below this price), this represents a good price to start hedging. Internationally there are many factors that could markets go higher in the short term (US spring time), but don’t set too aggressive forward price targets.

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