Tuesday, August 16, 2011

Another year of tight high protein stocks..?

Will 2011, mirror the same results that we witnessed in 2010 with low global supplies of high protein wheat and durum. Although I touched on this on a previous post on 29 June, last week USDA report has further highlighted an increasingly diminishing supply situation unfolding across the Northern Hemisphere. This will place extra importance on how the Australian crop will emergence after the spring.

In last weeks USDA report, US durum wheat production is forecast at 1.5mmt, down 47% from 2010. Spring wheat is forecast at 15mmt, down 15% from last year. Whilst Canadian spring wheat production has been reduced by 1mmt to 23mmt. On the other side of the Atlantic, rain has downgraded Western European crops in France and Germany, whilst Ukraine wheat is expected to be 60-80% feed. Durum stocks in the EU, US and Canada are forecast to fall by a third from last years level.

These quality issues with the EU and Ukraine crops and reduced plantings of spring wheat in Nth America bode well for premiums for higher protein wheat (and durum) heading into harvest. The shortage could also be compounded by dryness creeping into northern NSW and southern QLD, especially with late sown crops appearing more at risk with little rain received since planting. From May to June, vast majority of Eastern Australia had been in decile 2-3 rainfall range, this means rainfall was 50 -100mm below average. The dry trend has been further exacerbated by northern NSW being in decline 1 for July and the first half of August.

High protein premiums are creeping into US futures, with MGEX premium over CBOT during August averaging 119c/bu with todays spread at 140c/bu. This compares to the 2011 average of 78c/bu. Back home these premiums for now haven’t been reflected in new season multi-grade contracts, however we have seen premiums emerge in northern ports of Newcastle and Brisbane over southern ports. Higher protein grades are trading at historical spreads, but feed wheat spread has been discounted by as much as $85/t.

The trade was badly stung last harvest, with record volumes of feed wheat delivered into MG contracts and the higher protein sold into the spot market, the feed leg is thus heavily discounted. When you take out a multi-grade contract with a trader, make sure if the spreads are applicable on the day of the contract or at time of delivery. As these spreads higher protein spreads could widen going in harvest.

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