Are markets set to rally from a long slumber..?

Last week, agricultural commodities markets were in a world of hurt, with the three main international grades of wheat, corn and soybeans all experiencing their lowest prices for more then twelve months. Wheat futures had been at their lowest levels since early 2010, just before markets shot up on the back of the Russian drought and subsequent export ban. So far in Dec, wheat has increased 7c; this follows three months of previous price declines -50c (Nov), -26c (Oct) and -136c (Sept). With the last monthly increase experienced in Aug (+55c).

However since these lows late last week, market have rallied. With the trade pricing in weather risks in South America and the buying back of previous sold positions supporting grain markets. Funds still hold a sizable short in CBOT wheat, which may continue to limit downside potential, even though world stocks are seen at 10-year highs, and close to the highest on record.

APW cash basis (versus CBOT Mar) continues to erode in value as grower selling and harvest pressures prices domestic cash prices further. Currently at contract lows East Coast -$23 (after averaging $0 in Oct) and West Coast +$12 (after averaging $21 in October).  While canola basis is -$14 after averaging $30 in October.

The Russian harvest has bounced back from last year with output at 92mmt, (+31mmt from 2010). Exports of 25mmt are still expected, of which a staggering 17.5mmt has already been shipped since July. This makes March next year the time when their “self-imposed” limit of 25mm is reached. Whilst the Ukraine export program has concentrated its efforts more on shifting it's record corn crop, with their first wheat into Egypt not landing until the second half January. Kazakhstan is busy shifting its record wheat crop overland to southern markets, while sea exports have been minimal; waiting for some spare capacity to become available at Black Sea ports.

Hot and dry weather continues to threaten corn pollination period for the next several weeks in South America. Over the previous two months, Brazilian growing regions continue to be dry with rainfall 20-40% of normal. Only previous adequate subsoil moisture has carried the crop this far. Weekly forecast calls for more dry conditions in the south.

Hot (+40˚C) and dry conditions in the main central Argentine bean crops are persisting, but it seems some wetter weather is forecast tonight (20 - 30mm) in some isolated regions, which will bring some short-term relief. However there very little forecast on the radar for the rest of 2011, with hot conditions quickly returning making crops vulnerable to water stress.

As has been mentioned many times, the earlier record bullish crop estimates for Sth America were always going to come under pressure, be in weather and subsequent production risk. You have a feeling that a maybe a large move could be imminent over the next couple of weeks.

Ottawa passed the Marketing Freedom for Farmers Act on Friday, which sparked the buying of the deferred canola futures in hopes of preventing prairie growers from switching to wheat and barley acres this spring at the expense of canola. The marketing freedom Act allows Canadian origin wheat, durum and barley growers to sell those commodities to other outlets other than the Canadian Wheat Board. Although early days, rain across the Prairies since Sept have been very low with some regions experiencing a record dry.

Next year the EU is predicting a wheat crop of 133.5mmt (+4%), combined with the slow export pace in 2011 suggests a plentiful supply of exportable surplus wheat for first half of 2012. The Argentinian wheat harvest is roughly 70% in the bin, with some conflicting reports being circulated about projected tonnage. The government has revised its estimate lower to 12mmt. This compares to 13.6mmt form the Buenos Aires Grain Exchange and 14.5mmt from the USDA. Rainfall in key southern regions over the lasts five months have been at 57% of normal, I would be suggesting the lower end of these estimates.

US winter wheat plantings have been forecast at 39.8 million acres, down 813k from last year. As dry conditions in the main winter wheat regions of the US southern plains reduce plantings. Widespread rain/snow fell overnight with highest amounts of 60mm being recorded in eastern Kansas, while widespread rain of 15mm was common. Temperatures are still warm enough to stimulate growth, with snow coverage protecting emerging crop from high winds.

Although world grain stocks are nearing record highs (208mmt), they have too just to buffer against burgeoning demand.  Take India for example, the government has announced they’ll need a further 20-25mmt over the next five years just to keep up with rising demand!

Yield Prospects Improve for Sorghum

Wide spread rainfall over much of sorghum growing regions continues to pressure new crop sorghum prices on prospects of further late plantings. Brisbane track is bid at $188 (LDA & AWB) and $4 discount for CQ (AWB & Viterra). Old crop track prices are at a slight premium, with the trade appearing comfortable with stocks ahead of increased export program over the coming months.

Delivered cash markets into southern QLD have firmed with one buyer in the market bidding for Dec into Brisbane at $225 and $210 Downs, whilst other buyers some $10 discounted. Current delivered prices are trading parity with SFW wheat and F1 into the Downs. New crop Brisbane track prices have come off $9 to $190 (Pentag), with the Downs at a further $20 discount.

With prospects increasing for a favourable harvest next year, and the eastern states silos bursting at the welds under back-to-back bumper crops (mainly feed grain), price hikes rest on expanded export sales. Perhaps grower returns will be enhanced by greater yields at the expense of any price hikes. And although prices have averaged $210 over the last 10 years, there is strong grower reluctance selling at these levels, especially after prices averaged $225 in 2011.

Harvest is winding down in NSW, with Graincorp estimating that northern regions at 90%, central 70% and southern 80% complete, while some pockets in these regions may be still stripping until after Christmas. Selling pressure from the grower is drying up as prices for APW creep lower to $200 port. A price that has not been seen since July 2010, before price took off due to Russian dryness and subsequent export ban. Will it be a crash in the dollar (fallout from EU debt crisis), production hiccups in 2012, or even a drought in Australia (after experiencing the sixth consecutive year of higher production for the first time) that will drive prices higher in 2012? Or will burgeoning Chinese and East Asian demand provide an outlet for high stocks (not to mention the 9mmt of old crop carry over) in delivering some pricing support.

Although a lot of wheat has been downgraded, adequate supplies of milling quality are available to meet domestic and forward export commitments. The trade generally is comfortable with current ownership for milling commitments, although some premiums do exist in both track and delivered markets across the region. As a result track prices for milling grades continue to ease, while lower protein grades are resisting further downside.

The middle of last week APW2 broke its two-month trading range ($238 - $248) in WA, with values plummeting further on Tuesday to $229. The $7 decreased in basis, has wheat at its lowest level since May 2010. More rain on Monday night, with the heaviest rain (up to 70mm) falling in the central Albany zone. While rainfall tapered off further north. Wheat was only 30% complete in the Albany zone; with more falling number machines have moved into the zone. AGP and FED1 segregation have opened up at most sites in anticipation of widespread damage.

Due to last week’s heavy rain, receivals have slowed with only 1mmt being received into the system, down from 3mmt the week before. Total to date has been 9.2mmt, which CBH is estimating makes up 68% of the harvest. Geraldton has received 2.85mmt (+450kt for the week). For the rest of December, 270kt of exports are expected which will free up some more storage for the expected 3.2mmt. Wet weather slowed receivals into the Kwinana zone, with only 800kt for total receivals of 3.9mmt, representing 65% of expected output. Albany 1.27mmt (+100kt) with quality now being a major issue. Esperance 1.1mmt (+200kt), which is 75% of expected deliveries. 

DECEMBER USDA REPORT

The USDA released their latest December supply and demand (S&D) on Friday night our time, and really failed to offer the market any fresh fundamental news. However markets still reacted to the news, especially the oilseed complex. March wheat was 1c lower (596c/bu) while the Dec ’12 remains at 75c premium. Early selling drove wheat to lowest level since July 2010. Continued competition from traditional exporting countries continues eat into US market dominance. All traditional exporting countries were revised higher: Australia 28.3mmt, Canada 25.26mt and Argentina 14.5mmt.  As expected, US exports were revised lower by 1.36mmt to 25mmt for the 2011/12 (June- May) marketing year.

World ending stocks were pegged at 208.52mmt, +5.9mmt from last month. This is a new ten-year high. Word use was also revised 3.37mmt higher at record 680.2mmt. While output for the EU 137mmt, India 86mmt, Russia 56mmt, Pakistan 24mmt, Ukraine 22mmt, and Kazakhstan 21mmt were unchanged. World stocks to use ratio was adjusted 3.2% higher to a healthy 41.7%, and 6% higher then last year. US wheat-ending stocks were pegged at 23.9mmt, compared with 22.5mmt last month. HRW stocks were adjusted higher to 9.3mmt from 8.6mmt last month, while spring wheat was unchanged at 3.5mmt.

Corn was 6c lower (594.25c/bu), while Dec ’12 is at a 41.50c discount. The USDA S&D report was also seen as slightly negative for prices as stocks continue to swell. But like wheat, supportive news at the lows was enough to drag futures higher. Some dry weather concerns for the southern Brazil/Argentina corn crop for the next week plus news that China was buying 12mmt of corn for reserves from their producers were seen as positive.

World corn ending stocks were adjusted higher to 127mmt, +5.4mmt from last month and 1.08mmt lower then last year. Chinese stocks accounted for most of the jump, with production +7mmt to a record 191.75mmt. Amazingly the Middle Kingdom corn output over the 10 years has increased by 77mmt.  The jump in ending stocks was seen as negative, world ending stocks/usage is still just 14.6% vs. 14% last month and this is still the lowest since the 1973/74 season. US ending stocks for the 2011/12 season at 21.5mmt, compared with trade expectations at 21mmt and last months estimate of 21.4mmt. US Stocks to use ratio is still at a very tight 6.7%, which is the second lowest on record and down from 8.6% last year.

Beans coped a hammering, with Jan contract  -25.5c (1107c/bu) with the Mar ‘12 contract spread at a 9.50c premium. The contract closed at its lowest level for 14 months. But like other commodities rallied from the lows. World ending stocks for the 2011/12 season came in at 64.5mmt, which is the second highest on record. US (83mmt), Brazil (75mmt), Argi (52mmt) output remained unchanged, while Chinese (13.5mmt) was revised lower.

Unlike other commodities, global demand was 940kt lower to 260mmt. But still sharply higher from 238mmt in 09/10. The USDA pegged US soybean ending stocks higher at 6.2mmt compared with Nov estimate (5.3mmt) and Oct (4.3mmt).  This is a stocks/usage of 7.6%, which is the highest since the 06/07 season, and compares to 4.5% in 09/10. In regard to looming export completion to Sth America when new crop comes off in April/May. US Exports were revised down 680kt (35mmt) and crush down by 272kt (44mmt).

Winnipeg canola values also reacted strongly with Jan canola -$11.10 ($499.50), whilst the Mar contract for the first time in a while is at a premium (+$1.10). Canola coped a flogging, experiencing its biggest one-day decline for over two months and stopping the previous five sessions of positive price momentum. A strong reaction to the USDA numbers, with global oilseed stocks at large numbers and demand lowered pressured prices. Over the channel, Matif Feb ’12 rapeseed -€4.25 (€421.75), with the May contract spread at a €14.50 discount. In local dollar terms the contract has decreased by $6 to A$553.

So what is the wash-up…. The oilseed complex continues to be heavily influenced by outside macroeconomic noise, with ethanol subsidies under the spotlight. If global recessional fears spark a decline in oil prices Will it be a crash in the Aussie dollar (fallout from EU debt crisis), production hiccups in 2012, or even a drought in Australia (after experiencing the fifth consecutive year of higher production for the first time) that will drive prices higher in 2012? Or will burgeoning Chinese and East Asian demand provide an outlet for high stocks (not to mention the 9mmt of old crop carry over) in delivering some pricing support.

Harvest 2011 – Around the Paddocks

After experiencing ideal harvesting conditions over the last couple of weeks, rain fell over much of southern Kwinana zone and Northern Albany zone. Wide spread coverage of 25mm while falls up to 105 mm in eastern cropping regions occurred. Again raising quality concerns with the crop, and delaying receivals for the week. APW2 continues to be in a tight trading range during harvest, with prices in the Kwinana zone trading between $238 -$248 since mid October. While feed barley continues to trade in a similar tight pattern (low $220’s) since the start of November. Malting varieties continue the familiar pattern of falling away heavily once harvest has commenced. With the current spread to F1 now at $14 after being $50 at the start of November and out to $100 in July.

Receivals have ramped up in anticipating of beating the rain that fell across the region. CBH have estimated that over the week 3mmt has been received into the system, for a total of 8.2mmt this harvest. So far Geraldton has received 2.5mmt (+600kt fro last week), with wheat quality improving and now lupins freely flowing. Kwinana 3.5mmt (+1.5mmt), barley and canola receivals slowing down whilst more milling grade wheat is coming off. Albany 1.1mmt (+618kt) and Esperance 1mmt (+340kt) with wheat quality improving.

Grain prices have eased as international values decline and trade shorts become comfortable with current ownership levels and available stocks of milling wheat. The H2 premium to APW has eased $9 since Friday. DR3 discount to DR1 has been holding steady at  -$45 through late October and early November, with the discount of late widening out to -$62. But on Tuesday the trade sharply lowered their prices with the spread out to $102, as Graincorp sharply lowered their DR3 prices by $40 overnight.

Feed markets are showing signs of weakening in southern QLD with delivered Brisbane still bid $215 for SFW1, $198 Downs and Glencore paying $188 into Texas. Over the border Liverpool Plains region feed markets are weaker on available supply of feed quality. Further south SFW delivered into metro regions has held up as consumers take coverage.

Harvest has made good across the Eastern Australia, with the past weeks rain events have produced down graded quality in all regions to varying degrees. The region south of Moree and East onto the Liverpool Plains is more generally affected and high volumes of feed quality are expected from this region. Test weight quality is holding above 70kg/hl, making it suitable for domestic consumptive markets. While in southern regions AH9 has been reported the dominant grade being received. The Victorian Mallee will be having cut out soon; while south of the divide will be just onto canola. High protein wheat is being widely reported in SA, with yields all up.

Oilseed values continue to succumb to price pressure, with track bids weaker reflecting export parity. Although we have passed the peak of grower selling pressure, prices still are drifting lower (-$83 since October). Delivered crushing plant bids have reduced the premium to $1 - $3 over the track prices into port/ capital city destinations.

Global oilseed demand will be relaying heavily on outcome of the EU/US debit crisis, and if the huge Sth American bean crop has a good harvest in April/May next year.

Old crop sorghum continues to compete with feed wheat and is losing the battle with values on par with wheat, needing to fall to find increased market share. ABARE forecasts no change in area planted to sorghum, with increases in QLD covering for a small decline in NSW. Production is set to increase on increased yields with a crop of 2.4 mmt estimated versus a 2.1mmt crop last year. Exports are estimated to double to 668kt, while domestic feeding is increased 300kt, which maybe difficult to achieve given availability of feed wheat in the sorghum production regions and available low cost feeding options in the southern states.

Chickpea bids continue to weaken, in light of good Indian Rabi planting pace into good conditions. The rain across NSW and downgrading of crop quality has not spurred the market, potentially only provided another cheaper source of lower grade product. Brisbane track is bid at $430, and has now declined $100/t since it made a modest recovery in start of November.