The week that was in grain markets

Internationally all grain markets have moved higher for the week, with the biggest moves coming from corn and soybeans. However with near ideal growing conditions present across Australia, the full rise in futures hasn’t been reflected in new crop prices. APW multi-grade prices have only gained $8/t in WA and $4/t along the East Coast, while basis has declined $4 to +$14/t in WA and $8 to -$11/t for East coast prices.

Concerns with dry spots in the central US Midwest persist, with the bullish element of “what if” continues to drive markets higher amid fears on yield and further production cuts. The market is mindful that yield potential has been hurt by hot and dry weather in July, with the crop getting smaller now and not bigger. The trade has aggressively added risk premium back into prices amid crop uncertainties, a feature that helped offset the volatile movements of equity markets earlier in the week.

Bullish sentiment continues to swirl around the US wheat market, with talk of a smaller spring wheat crop, potential smaller winter wheat (HRW) crop next year due to drought combined with increased wheat feeding in stock rations at the expense of record corn prices. Exceptional drought continues to strangle cropping country in the southern plains, with the forecast dry for the next couple of weeks. Going forward these dry conditions will sway the market, as by mid Sept 20% of the crop should be planted. Although lower priced Russian wheat has been dominating international tenders of late, the price gap between Black sea and other countries offers has been narrowing. This has helped to support higher international prices. This is on the back of the International Grain Council forecasting the third largest wheat crop on record! The rise in production was mainly due to much better weather conditions in recent months in Russia, Ukraine and Kazakhstan. At the same time, however, the USDA is also expecting a rise of global usage.

Our colleagues at Pro Farmer USA have finished their Midwest crop tour, finalising 2011 US corn crop at 317mmt with an average yield 148 bushels per acre (ba). The latest USDA forecast was 153 ba, with total production at 328mmt. Pro Farmer believes USDA will eventually lower harvested acres for both corn and soybeans, but USDA’s August 1 harvested acreages were used in making these estimates. So further cuts would be on the cards. This creates an extreme stocks scenario and is why corn is currently sitting at record prices. This will be an additional boost for Australian feed grain exporters, who managed to muscle their way into traditional corn homes in Asia over the past year and this trend will set to continue.

Pro Farmer pegged 2011 US soybean crop at 84mmt; with an average yield of 41.8 pa. Latest USDA forecast was 41.4 ba, with production at 83.1mmt. However, yields could come in better then expected on the back of one of the most disease free bean crops the tour has seen in many years. On lower yield estimates soybeans have broken the previous seven-month chart resistance at 1400c, settling at its contract high.

Statistics Canada estimated 2011/12 Canadian canola production at a record 13.2 mmt up 11% from last year. This estimate was on the lower end of trade estimates who were expecting around 13.6 mmt. Canola has been trying to move lower, but keeps getting support from US soybeans. However with a bin-busting crop anticipated, strong grower selling should be just around the corner and this may have the potential to limit any further strong price gains. The next couple of weeks is forecast for minimal rainfall and frosts across the Prairies which will be welcome news, especially with harvesting and windrowing behind the eight ball in Alberta.

WA New Crop Basis weakening

There have been vast improvements in Western Australia for July and August, especially with good rainfall being received through some of the drier parts of the eastern central and lakes region of the wheat belt. The improvement puts crops back on track for at least average yields. In comparison to the rest of the state the Geraldton zone had a timely autumn break with conditions since then being excellent. CBH have forecast receivals to potential pass 3mmt this year, breaking the previous record of 2.6mmt that was delivered in 2008. Australian Crop forecasters have thus increased the WA crop by 1.2mmt to 7.9mmt, this compares to the five-year average of 6.4mmt and the 10-year average of 7.2mmt.

With the improving WA crop condition and wide spread rain throughout the East Coast last week, new crop basis has been weakening. Basis is the difference between CBOT futures, converted into Australian dollars with the domestic cash price subtracted from this. So comparing basis for new crop, we compared APW MG 2011/12 forward price compared to the Dec ’11 CBOT wheat contract.

Basis in drought years and especially in harvest like last year for the east coast plays a role in inflating domestic prices. The first big spike in basis levels was in early December when record rainfall across eastern Australia. The resulting delayed harvest stimulates strong prices and demand (both domestic and internationally) for higher protein wheat as bumper crops across Australia where downgraded into feed. Basis levels declined as weather cleared in second half of December and January, with headers stripping again placing record amount of grain into the market place.

At the start of the year basis was averaging -$10/t for Jan/Feb, bottoming out at -$25/t on 11^th Feb. However as conditions continued to be dry and long range forecasts predicting no relief, basis moved into positive territory. Since Mid March until now it has averaged +$26/t. After basis reached a peak of +$38/t on 14^th June, it has been in a slow decline as the WA crop has slowly improved. Currently basis is now sitting at its lowest price since the end of May at +$16/t.

When basis is high, rather then using swaps it’ll be better targeting forward sales with a forward contract. As swaps won’t have the high basis included, this is a good way in adding the extra premium on forward sales.

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.

Decline in the dollar, cushions grain prices against outside fluctuations

After the US debt package was finalised last week, many wondered if this would quell global markets. However ongoing negative sentiment resurfaced in jaw dropping scale with the US Dow Jones having its biggest decline since the early dark days of the ‘Global Financial Crisis’ three years ago. Local markets were not immune with investors wiping $100 billion off shares last week. Negative sentiment flowed through this week when credit rating agency Standard & Poor downgraded US rating from AAA to AA+, severely impacting equity markets for a second week and heightening fears of a looming double dip recession.

So what about grain futures..? Commodity prices have come under pressure on these fears that global economic slowdown will limit demand for proteins and grains. Weaker oil prices will also impact on the profitability of ethanol production and the demand for corn. Although appetite for risk from investors will be greatly diminished in the short term, agricultural prices may show some resilience in the face of strong equities sell off.

This purely reflects the lingering bullish element about future crop losses particularly in the United States. The USDA will release eagerly anticipated crop estimates this Thursday night, however despite many analysts cutting their corn yield estimates sharply in recent times, the USDA is expected to take a far more conservative measure as they take a “wait and see approach” to not raffel more feathers in an already volatile environment.

Domestic cash prices have been largely immune from this outside market pressure, largely on the back of a strong sell off on the Australian dollar. The high dollar of late is apparent, reaching a post 1983 float high of 110.79 against the greenback last week. Amazingly, the dollar has been above parity since 21 March, enjoying a 5c trading range since mid April.

Since that time with economic upheaval, it has dropped around 10c (A$21/t) in a week and has now reached its lowest level against the greenback since 4 April 2011. This has helped cushion domestic prices from wild US futures price fluctuations. There is no technical reason for such a sell off, just fear and panic, with the Australian dollar historically dumped in such conditions. It's like Brian Lara on a flat Trinidad pitch when he passes a 100 runs- you knew there’d be plenty to come; there is still plenty to come here too.

US drought intensifies

The southern US drought is slowly extending its tentacles north and east as hot dry weather continues unabated. Although there was some rain in North Kansas over the weekend, and showers forecast across Oklahoma and North Texas this week, most precipitation will not be great enough to counter stifling evaporation. This will only exacerbate an already dire situation, as conditions continue to worsen across south-central US, where the combination of a historic ten-month drought and relentless summer heatwave leave little hope for rain-fed crops. These conditions will also place significant stress on livestock and irrigated crops. Record temperatures continue to be broken, with Oklahoma City averaging 32°C in July. This was the hottest month on record, smashing previous records set during the infamous 'Dust Bowl droughts' that took place in the late 1930’s. These drought affected regions account for 11.5% of corn and 76% of sorghum and with Hard Red Winter (HRW) sowing ramping up next month, acreage could be vastly down on average.

Generally most crop conditions were lower this week on the back of last weeks heat and dry conditions. The portion of the US spring wheat crop rated good/excellent declined 4% last week to 66%. Apparently the seasonal ratings tend to decline as the crop moves toward maturity. With the warmer weather, both winter and spring wheat harvest is going side by side in the Northern Plains, with winter wheat (85%) and spring wheat (6%) complete. Pacific Northwest (which accounts for 15% of acreage) is only 20% complete. Corn states of Kansas, Missouri, Nth Carolina and Texas (12% of US acreage) are dragging up the rear, with an average of 50% of these states in a very poor – poor condition. Whilst the key three states of Iowa, Illinois and Nebraska (42% of total acreage), an average of 67% is rated good to excellent.

Although the extent of the Midwest heat wave has disappeared for now, the extreme heat would have taken its toll on corn. With night temperatures last week 3 -4°C F above normal and afternoon highs, 2-3°C above the average. An estimated 70% of corn was pollination during this heat; this is a period of intense plant activity and accelerated moisture requirements. Unsuccessful pollination results in blank spaces on ears, where kernels are supposed to be developing. Watch this space…!

The week that was in grain markets

With the Australian dollar at record highs against the greenback and the US government missing a bullet on their debt default, the negative macro factors hopefully should cool down in the short term. The absence of fund speculative activity has been noticed after stepping aside from the market of late (apparently still licking their wounds after being on the wrong side of the bearish USDA June 30 report). Global weather patterns continue to keep the trade guessing as to where the market will head in the second half of the year, as is evident in the choppy trade that has occurred since prices had their seasonal lows in early July. Although there is small bullish element in regard to low US yields, the market won’t get a feel for this until later this month. Until then, prices should remain in their current range. Considering the consent flip-flop of global weather forecasts, uncertain weather patterns are likely to continue.

The US government has finally thrashed out an eleventh-hour deal on Sunday night to prevent a default on its spiraling debt. Although disaster has been avoided for now, many ponder if it is just delaying the inevitable crash further down the line (And the odds are getting scarily high for GFC mark 2 eventually occurring). The House of Representatives passed the bill – considered the challenging part- and the compromise now needs to be voted through the Senate. The deal requires USD2.4 trillion in spending cuts and savings over the next ten years; these will be gradually implemented as to avoid putting additional pressure on an already fragile economy. In terms of impact on US agricultural, ethanol subsidies and tariffs are already in the firing line whilst acres in the Conservation Reserve Program -which has close to 32 million acres in fallow, will also be up for review.

US crop conditions continue to bear the brunt of extreme July temperatures. In summary, corn crop are losing yield potential, with detrimental extreme heat contributing to excess moisture stress for usually thirsty corn. Temperatures have averaged 3C above normal, with July ’11 ranking amongst the hottest Junes on record. The kicker has been nighttime temperatures have also been well above average, enhancing respiration loss. There has have been just enough rains to keep the trade from getting overly concerned. The problem, however is that the rains have continued to come in the same locations, generally in the northern and western Corn Belt (Nebraska, Minnesota through to Ohio). Meanwhile, crops in southern Corn Belt, (Kansas & MIssouri & Texas) are burning up amid continued heat and dryness.

Lowdown on Indonesian Wheat trade

During last week’s AGIC conference in Melbourne, a director of PT Indofood Indonesia talked about future trends on our most important trading partner. Last marketing year, Australia exported 3.2mmt of wheat into Indonesia. This represents 22% of our total wheat exports; our next largest customer was Vietnam at 8% and Japan at 7.6%. So the importance of Indonesia is paramount.

Total capacity of Indonesian wheat mills is 6.9mmt, with Bogasari mills taking the lion’s share of this trade spread between their two mills at Jakarta (2.8mmt) and Surabaya (1.5mmt). The bulk of the mills are still located on the more populous island of Java. Further growth is also expected with eleven new mills in the pipeline, with a capacity of an extra 1.5mmt, only capacity of six are known so future capacity would be much higher. And whilst flour consumption has been growing at 10% since the record high prices of 2008, consumption is only at 21kg per person. This ranks Indonesia at number 32 in the world, well behind leading consumption of the central Asian state of Azerbaijan of 220kg. So there is still a large potential for future wheat exports.

Australia dominates wheat exports to Indonesia with 66% (3.2mmt) of total market share in 2010, up from 40% in 2008; ahead of Canada at 15.8% and US at 13.2%. Before lasts years export ban, Russian imports had accounted for 6% of market share. With many new mills being built and stiff domestic competition, cheaper Russian lower protein imports would be expected to increase and possibly be blended with Australian higher protein grades.

What could generate more demand for Australian grain into this market place, is the soon to be enforced “anti-dumping” tariffs on imported flour. Particularly Turkish imported flour, which dominates the market with 59% share (454kt). This refined flour lands into Indonesia at similar prices as bulk grain eroding local mills margins.