Monday, September 17, 2012

Production on a downward bias

Spring is always the make it or brake it time in Australia, were a wet start to the cropping year can become unstuck with little rain or moisture sapping howling hot northerly winds. On the other hand, crops can “get out of jail” on limited rainfall, with timing the critical component of this going forward. However I feel the last two month rainfall deficit will soon become apparent. Combined with the windy warm conditions that have been apparent in the start of the month and as such continue to favour a downward bias on 12/13 production.

Although visually crop conditions out in the paddock don’t look too bad. But to be honest, if crops don’t look good heading out of winter then we are in serious trouble! The real crunch will come in the next couple of weeks and with temperatures and plant moisture uptake climbing and rainfall outlook continuing to be dry, some may say they can see the “dollar signs disappearing over the crops”. Rain is critical to maintain the previous good start in VIC/NSW/QLD while rain is needed ASAP before irreversible damage is done to the crops in WA and western EP. WA APW basis levels over CBOT are slowly increasing as the season dries out. After averaging +$4/t in July, last week it averaged +$28/t. Basis on the East Coast continues to be steady, however may not be too long before this always nudges higher.

Internationally prices were mixed last week, wheat +19.25¢ (highest level in two months), corn -17.50¢, soybeans +2.50¢ and canola $27/t. Global physical prices continue to rally as is evident by the recent Egyptian wheat tender. Monthly purchases from the world’s biggest importer have exceeded 1.7mmt this month, with the mix of cheaper Black Sea origin wheat quickly diminishing. The USDA released their latest S&D estimates, delivering no real surprise. Black Sea production was pegged back a further 4mmt, which is 35.5mmt lower then 11/12.

 Australia’s wheat crop output was surpassingly left unchanged at 26mmt; current forecast range between 21 – 22mmt, looks like the Yanks must be referring to different weather maps. So by the look of it new crop prospects are getting smaller, and with some rubbery numbers has the potential to be a lot lower in a couple of months. Stocks to use ratio are at their lowest since 2008/09. The global protein spread is diminishing, last week MGEX premium over CBOT averaged +54¢, this compares to +145¢ in June. A big Canadian crop of 27mmt (biggest since 2008) is just under half in the bin, and by all accounts protein has been excellent further pressuring this spread.

The global oilseed market continues to strengthen, but will continue to face profit taking pressure, with updated figures revealing funds are holding the equivalent of 32mmt of long positions! Global 12/13 ending stocks are now pegged at 53mmt, only slightly below last month. However these numbers are anticipating a bin busting South American crop. A crop that isn’t even in the ground yet! These numbers have the potential to look a whole lot uglier, and stocks could be hard to acquire between dwindling US and Sth American new crop early next year. But as always Mother Nature will have a big say in this. Although it is going to be a large Canadian canola harvest, quality and yields have failed to live up to previous bullish estimates, as a result canola futures are at their highest in 2012.

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