Is this the new dawn for high commodity prices..?

As we enter 2011, high commodity prices continue unabated with countries across the globe increasing imports, reducing tariffs and releasing supplies from state reserves to cool inflation. Most agricultural products are not immune with coffee and cocoa at historical highs whilst cotton and sugar at their all time highs. Even wool is seeing its highest prices since the end of the reserve price scheme in the late 1980’s, which also has been exacerbated by our sheep numbers are their lowest for over a century.

The grains and oilseed complex is also at their highest prices since 2008, so is it still relevant comparing prices to say 10 years ago? Firstly the Australian market place has changed considerably especially with the removal of the single desk and deregulation of the bulk wheat export trade in 2008. And more importantly per capita income and the decline poverty rates is increasing demand for agricultural products across the globe.

For the ten-year period between 1996 and 2006, APW wheat only reached above $300/t in Sept ‘02, and nearly reached it in Sept ‘06 (both drought years). But if you take out these two brief spikes the average price paid during these 10 years would be around $170/t. With a low of $136/t in Dec 1999.

However since mid 2007, prices have become more volatile. In '07 the second drought year in a row, mixed with small global crops sent wheat to new levels. A price peak of $475/t in Mar ‘08 (Port Adelaide) was recorded, with prices more or less above $300/t until July ‘09. Even with prices in the doldrums, hovering around $210/t for eight months between October ’09 and June’10, the average price during Jul ’07 and Feb ‘11 was $278/t. This is $108/t higher then the preceding ten-year average.

With today’s price of $325/t at historically very high levels and uncertainly with the 2011 global crop, prices could still continue higher. With increasing world demand, and tighter world stocks it seems Australia has seen a new “higher” floor in domestic grain prices over the last three years. Even if a new green revolution is around the corner a swelling global middle class is demanding better diets and standard of living. This will easily consume any future surpluses and hopefully for grain growers will spell the end for low priced wheat!

Has the market priced in weather risk for the first half of 2011

Australia has just experienced one of the strongest La Nina events on record. With the last comparable strong La Nina from 1973 to 1975 brought similar calamity, including the record Brisbane floods, cyclone Tracy and flood waters nearly reaching our property at the end of the Wimmera river for the first time in a centaury!

Whilst La Nina brings wetter conditions to eastern Australia it is the opposite effect across the Pacific. With warmer temperatures fast approaching, the northern hemisphere winter wheat crops will be coming out of dormancy over the next month, and so far conditions in the US and China are poor. China for example has got 5.16 million hectares out of 14 million of winter wheat in threat and this level is creeping up daily. Although dry winters are the norm, it seems this winter is a record dry. Across the Pacific the US winter drought is now encroaching on the eastern corn belt, and in Texas extremes temperature swings of 45 C over a week; this isn’t ideal conditions to be growing wheat!

Over the border, Canada could be in for a case of déjà vu, with early reports that 2011 could mirror 2010 in being an extremely wet spring. Profarmer Canada is reporting that much of Manitoba and eastern Saskatchewan soil moisture conditions are already at peak holding. Critical areas are along the Red River Valley, which flows through key spring wheat states of Manitoba, Minnesota and Nth Dakota. With snow conditions very high, the spring thaw will be critical, with any late season storms (snow or rain) will be detrimental for sowing. If sowing is delayed maybe more acreage will be switched to shorter season crops like oats and barley however return on acreage isn’t nowhere near as enticing.

Although predicting the weather is as precarious as predicting the futures market, it seems unstable weather conditions and price volatility will prevail into 2011.

Update on Chinese Winter Wheat

Here at Profarmer we have been tracking the latest developments on Chinese winter wheat growing regions. It is interesting to see the how the story has snowballed, first little snippets getting picked up the middle of last month, and then gradually you hear more on trade wires which then eventually appear on main stream media after it was made official by a United Nations Report.

With the previous seven months producing nothing but bullish news to push the grain markets to 2 ½ year highs, we may see the record prices of 2008 being eclipsed if China starts buying more wheat. Depending on the weather reports that you read, some key wheat growing regions haven’t had a good drink since October, and although a dry winter is the norm, it seems it is the driest for some regions in 100 years. However saying this, if the spring rains do eventuate, winter wheat production (which accounts for 85- 90% of total wheat tonnage) is reversible. Considering the current global climatic conditions, anything is possible. If rain isn't on the horizon when the crop flowers in April, Australian grain will easily fill the void.

The provinces hit hardest in China are Shandong, Jiangsu, Henan, Hebei and Shanxi, which accounted for 67 % production last year. China has 14 million hectares planted with winter wheat in those areas, of which about 5.16 million hectares are recording historical low levels of rain. China is the undisputed world wheat powerhouse, and is largely self sufficient in wheat, producing 115mmt of wheat last year. While production has plateaued out the last couple of years, domestic consumption has sky rocketed. Australia last marketing year (Oct ’09 – Sept ’10) exported 850,585mt to China, the highest amount since 2004/05.

The Chinese government not wanting a repeat of the waves of unrest that has been hitting Northern Africa and Middle East are preparing to take any measures necessary to avoid a food shortage. Thus it was announced that USD 1.96 billion would be spent to bolster grain production and fight drought. This includes releasing reserve stocks, and importing wheat (this could be anything over 4 mmt!) this may lead inventories potential dropping to 6.4% this year.

So how much wheat would the Chinese buy if there were a serious shortage? Chinese domestic wheat is about US$465 mt, a reasonable premium to US$390 mt FOB for east coast Australia. With runaway inflation and a country getting increasingly frustrated at rising food prices, the government is making domestic food sustainability their number one priority.

Chairman Mao once said that if the communist party lost support of the peasants it would lose control of China. So how much is too much to pay when insuring there is adequate food and no riots? Especially with China having an extremely strong undercurrent of anti-government feeling amongst the 800 million marginalised peasants. They could purchase 10 mmt of foreign wheat and not put a dent in their currency reserves, but what would this do to international prices!

The reality is that it is far too early to be calling Chinese production levels down, and with huge stocks in China, there is no guarantee that a drop in production for the coming harvest will have any effect at all. It is stocks outside of China that are of more importance, and they are high. Current USDA estimates have got US wheat stocks at three times the levels in 2007/08.

Future Price Direction for 2011/12 Canola

Prices for old crop canola (2010/11) seem to have taken a breather this week, and stabilised around $600 in VIC & SA ($630/mt WA). Whilst prices for new crop have keep an upward direction and reached their current contract highs of $620/mt in VIC & SA ($620/mt in WA)

Reason for last week’s sluggish movement? The futures market lacked some fresh supportive news, with China (who has been driving the demand side of this bullish market) on the sidelines for the Lular New Year. So we will get some idea of their buying indication (and future price direction) after the weeklong holiday finishes up the end of this week.

Supportive for Winnipeg canola this week was Statistics Canada updated their final canola stocks position for 2010 at 8.24mmt (the smallest level since 2007), compared to 9.44mmt in 2009. Although this number was tighter then expected, it shouldn’t came as too much of a surprise given that since August canola oil exports have been running at more then double their five year average. Speaking to my mate Andrew from CWB in Winnipeg today, and he were saying authorities were already handing out sandbags for record floods that are anticipated when the snow melts in Mar/April! Potentially the 2011 could be worse then last year that severely delayed sowing. Still early days, but well worth keep an eye out for.

South American soybeans will be hitting the world markets next month, and with the latest forecast of a bumper Brazilian crop, may weigh on prices for the short term. The large crop may offset the declines in the Argentinean forecast, with the Argentine exchange keeping their forecast of 47mmt, but this still remains well short of the USDA’s January forecast of 50.5mmt. Timely rains across key soybean growing regions also was a drag on prices however has it got the potential to add yield or simply just reduced the El Nino inflected losses?

The USDA will release its February world supply and demand report this week, with the oilseed complex tasting yearly highs the market may succumb to profit taking and dump some positions. Nevertheless, the market maintains an overall bullish picture, with outlooks for the USDA to further tighten low projected US year-end inventories.