Since Christmas, what has happened? Well domestically not a lot, the country is still groaning under a mountain of grain (mostly feed grain) and this continues to put pressure on markets trying to rally like their international counterparts. Futures continue their weather/short covering rally after the New Year extended holiday. Whilst a higher Aussie dollar, which has gained 2c from the end of Dec continues to take some shine of the surging market. Although international markets have been highly volatile over the last three weeks, APW continues to be stuck in a tight trading range. While strong offshore demand for lower protein grades have narrowed the discounted spread to APW. Domestic APW basis languished around contract lows late last week (Vic -$31 & WA +$2). Although cash prices have remained relatively steady, basis has regained some ground. Vic y’day was -$23 and WA +$5. At the start of harvest Vic was +$4 and +$21 in WA.
Due to strong demand from countries like Saudi Arabia (470kt since Oct), feed barley prices have climbed off their mid Dec lows to be at their highest price since late October. Further highlighting the strong premium for F1, delivered export markets has only got a small premium for APW over F1, while in WA F1 is at a premium.
International markets continue to closely monitor South American weather, the uncertainty of Argentina (too dry) and Brazilian (too wet in central east) crop potential continue to support higher prices. Temperatures have been hovering around 40˚C in Argentina and rainfall averaging 20% in key production regions. Although at this stage the bean crop is less susceptible compared to corn to Argentinian dryness, the country is still the world’s third biggest producer behind Brazil and the US and the world’s second biggest corn exporter. Just to show how erratic the bean market has been since Christmas, it has had two +36c moves, two +20c, one -20c, and two -11c.
Although significant relief is expected in Argentina’s heat and drought stressed crop areas over the next few days. Rain may come too late for some of the crop where soil moisture has been absent and temperatures too hot for several days. Follow up rain will be extremely important, however there is not a tremendous amount coming. Every weather dominated rally is prone to sharp sell offs, and that is what happened a couple of times this week and will continue to be the theme until at least the Northern Hemisphere crop is in the bin. However how much damage has already been down?
The other big event of the week is Thursday's nights USDA report which will likely feature downgrades to South American corn and soybean production plus revised final estimates on 2011 US production and US all wheat acres. If that wasn't enough we'll also get new quarterly and 2011/12 ending stocks numbers too! The market has experienced limit moves following the last five Jan reports. In 2011 + 30c, 2010/09 -30c and in 2008/07 +20c.
Global wheat markets are finding it difficult to trade on their own merits and with world ending stocks 2mmt off the record, the bulls are looking for other markets for inspiration. But what could be a factor in supporting domestic off spec wheat is continuing international demand at the expense of higher value US corn. A large Korean feed producer has bought two cargoes of US corn, plus two cargoes of optional origin feed wheat. The wheat was priced around US$ 60/t cheaper, continuing the demand for off spec Aussie wheat and continuing the theme of 2011 by diluting expensive corn requirements.
Unusually warm temperatures continue to impact much of the Canadian prairies with Dec temps +7˚C above average. Parts of the US Midwest hit 20˚C last week shattering previous high winter temps. Combined with the higher temps, rainfall has been lacking, with the last three months of the 2011, saw one of the driest finishes to the year in Western Canada.
The lack of snow coverage leaves winter crops (especially in the southern US plains) exposed to erratic cold snaps. Rain is needed in Canada and the US. Weather patterns in North America may be changing to support a better chance for storminess in each of these areas over the next two weeks raising soil moisture and snow cover. Still very early days, but a Ukraine agency has estimated this year’s grain harvest at 44.7 mmt, -3.8mmt from 2011. Due to poor winter wheat sowing, wheat has been pegged at 14.5 mmt, -6.1mmt from last year.