Market remaining sensitive to short term weather forecasts

Over the last week, grain and oilseed prices have generally been fairly steady, shrugging off higher international futures as the rising dollar erodes full upside. Erratic Sth American weather continues to have the trade guessing the extent to which recent heat/dryness has ultimately impacted corn/soybean production. Few analysts expect corn Argi production to be anywhere near USDA's 26mmt estimate, forecasts are now ranging anywhere between 18 - 20mmt. This will be the lowest crop since 2008, when 15.5mmt was harvested. The market could continue to remain sensitive to short-term weather forecasts. But February is an important month to determine soybean and late season corn yields, with Feb weather may also turn out drier.

Whilst Nth America cropping regions continues to experience a dry and mild winter. US Great Plains winter wheat crops are mostly dormant now, but have been getting good precipitation in the last couple of weeks. However, conditions still remain dryer then usual. After an earlier mild start to winter, conditions have turned colder in the Canadian Prairies, getting down to -26˚C over the last couple of days. However the lack of snowfall has resulted in many regions (Sth Manitoba and Nth Saskatch) having a record dry winter.

2012 US corn plantings has been earmarked at 94.7 million acres, (+2.8ma from 2011). If average yields eventuate (160bpa) then a monster crop of 335mmt (allowing usual abandonment) could be on the cards. This would be +41mmt from 2010. However as we learn many times, large acreage is one thing, but getting final yield in the bin is an entirely different scenario! Ag Canada estimate ‘intended’ wheat acreage this year at 24.2ma (+12% from 2011). While the Canuck barley area is +21.5% to a record 7.9ma. Canola +4.6% to a record 19.76ma.

Recent snow coverage has help insulate Ukraine winter wheat crop and to alleviate some moisture stress. However, a quarter of the crop still needs to be sown in the spring due to 2011 dryness. The farm minister expects corn plantings to rise by 700k ha in 2012 (to 4.3m ha) compensating for lost winter wheat acreage.

Whilst rumors circulating that the Russians and Argentinean governments may soon toy with the idea of implementing export tariffs/bans to ensure domestic prices remain stable. This news shouldn’t have come to a surprise for many, as Putin was flaunting a tax ‘may’ be in implemented back in October. After shipping up to 3mmt a month in the middle of last year, Russian export dominance is finally losing some steam. From July - Jan, grain exports came in at 20mmt, and it won’t be too long until the country reaches its pledge to curb exports once it hits 23 - 25mmt.

Chinese 2011 wheat imports rose 2.5% to 1.25mmt, an estimated 563k was imported from Australia. China imported 570kt of corn in December; cumulative Jan-Dec imports hit 1.75mmt, +11.5% from 2010. While soybean imports were pegged at 52.64mmt, this compares to only 10.38mmt in 2001. Sth Korea bought another 225kt feed wheat, which brings feed wheat imports a kiss over 1mmt over the last 15 days. While conr imports are reaching 800kt of corn. In Australia for the first four months of the marketing year (Oct – Jan), 9.5mmt of grains/oilseeds/legumes has been exported. Wheat has dominated this at 6.4mmt and barley at 1.7mmt.

Our friends over at CWB in Winnipeg are busily reading the job-classified section of the local rag, as provisions are quickly being made in a post CWB era. This morning was the first time since the Second World War where milling wheat/durum was traded in Winnipeg. However with legal wrangling’s still surrounding the outcomes of the Canadian Wheat Board (CWB), volume was limited. Spring wheat volume last year was 18mmt across the Prairies and 11mmt in northern US, it be interesting to see which exchange (either ICE or MGEX) will be the dominant high protein in Nth America. 

USDA predicts bin busting wheat stocks

Last week the USDA released their updated world agricultural supply and demand report, which surprised many market participants. US corn (barometer of global grain prices) production was surprisingly revised higher, while feed wheat demand was revised lower. Surprisingly given the high numbers of cattle and pigs on feed, maybe more feedlots are chasing distiller’s dry grain? Only conservative cuts (as was expected) were made to Sth American corn production. Further downgrades are likely, but it is worth noting that current forecasts are still records!  This provided a sharp drop in the futures market whilst dryness in South American lost its drive as weather forecasts projected some useful rain, which consequently removed nearby price support.

Global wheat stocks were revised higher +2.5mmt (691.5mmt), this is 40mmt higher then last year. Australian wheat crop was left unchanged at a record 28.3mmt. World ending stocks were pegged at 210mmt, +1.5mmt from last month and again surpassing pundit’s expectations. Even though USDA bumped up US exports by 680kt (25.8mmt) sluggish export news continues to weigh in on the markets ability to rally alone.

With Black Sea origin grain exports slowing, expect more aggressive Argi, Aussie and Canadian wheat filling the void. After dominating export sales (and depressing world prices) in the second half of 2011, Russian origin wheat is getting more expensive as the trade hunts further inland to secure supplies.

Dryness is still reported across the US southern Plains but will have minimal impact on the market until later in February as the winter crop starts to emerge from snow cover and commence to green up. Dryness in Ukraine is also raising a few eyebrows, with some pundits pointing to a wheat crop of only 12mmt (down from 22mmt last year). Due to dry conditions that have been in place since July, not all winter wheat has been planted/germinated. However lower yielding spring barley/wheat or corn can still be planted when paddocks thaws out in a couple of months. But like the States actual crop prospects will not be fully known until late winter- early spring.

Wheat continues to be priced into global feed markets with domestic feed wheat working into Asian markets at about a $60/t discount to US corn. With the way the market is going, current feed values could look awfully cheap in a couple of months or US corn too expensive.

Last week, we mentioned how dry conditions were severely impacting on corn and soybean yields in Sth America (particular in Argentina). Well heavy rain fell throughout all key-growing regions of Argentina, with blanket coverage of 50mm, with some regions having 100mm. The rain also bought a cool change with temps hovering around 27˚C. Better than expected rain event for Argentina helped drive the market lower. Unlike corn where damage could be irreversible, later planted beans yields can still bounce back. That is if the weather turns friendlier for mid-January through mid-February. Frequent showers and thunderstorms have slowed growth rates in central Brazilian growing regions and much of this region will continue to see frequent thunderstorm activity during the next two weeks that will continue to slow crop development rates. 

A drier forecast for the coming weekend could be seen as a positive force going forward. While the forecast is still drier, scattered rain coverage between 8 – 31mm is expected in Argentina. This lack of more than two major rain events in Argentina in the next few weeks has helped to provide underlying support as the rain amount trends could continue to decline into February.

F1 remains steady, sorghum sinks.

After slowly creeping up in price over the last month, domestic grain prices sunk today  in the aftermath of the USDA report. The barometer of global grain prices US corn, production was revised higher then expected; while only conservative cuts (as was expected) were made to Sth American corn production.

Although wheat prices sunk between $8 and $11/t, the drop wasn’t as severe as international grain futures. This is turn helped lift basis (current cash over CBOT March futures), to the highest price for five weeks (+$17/t in WA and -$8 East Coast). However feed barley prices continue to be strong, with burgeoning demand from Saudi Arabia. The kingdom’s unusual supplier is the Ukraine, which usually supplies 60 - 80% of barley requirements. However with a severe dry period that has been in place in July, combined with expensive export duty has reduced competiveness of exports.

After a relatively slow start to the WA export program due to the delayed harvest, wheat exports are set to eclipse 1mmt in January. This follows 260kt in Oct, 327kt in Nov and 689kt in Dec. CBH continue to dominate the bulk exports with 42% of the trade, followed by Glencore at 12% and Cargill at 11%. On the east coast Australia is heavily booked (although still some spare slots in QLD) until July/August, making it tough for anyone who hasn’t booked a slot to participate in bulk export business. The higher Australian dollar isn’t helping in creating new export business, currently at the highest level for nine weeks. While the downturn in the euro economy has got the Australian dollar trading at its highest level against the euro (81.45) since its inception in 1999.

Sorghum bore the brunt from the fall out from the USDA report. After Brisbane prices briefly flirted with $200 port ($198 CQ ports), which was the highest price since the start of December, prices have now tumbled $10. New crop prices are now back at their pre Christmas levels. Good rainfall over sorghum growing regions over the last week may have also contributed to the price squeeze. Delivered new crop sorghum prices into Brisbane continue to be well bid with most of the trade on $196, while Toepfer is on the better money for Darling Downs at $176. Sorghum exports is set to average 68kt per month until May.

The continuing strong domestic and international demand for feed barley has made the commodity largely immune from any strong downside pressure. Track and delivered prices are trading at their highest level since the end of October. Grower selling in the north is likely to increase as growers look to clear space for summer crop harvest and add to cash flow to meet commitments. Malt market as is usually the case this time of year is only showing minimal premiums to F1. Malt prices may get some upside later this month, if some positions are squeezed due to Dec/Jan contracts being finalised. But I wouldn’t bet on it. F2 discounted around $30 in track markets. Southern demand is dominated by export commitments, which is supporting prices.

Low protein wheat narrows discounted spread

APW prices are struggling to break their recent trading range, whilst the lower protein grades of ASW and FED spread continues to narrow as strong overseas demand supports higher prices. As what seems to happen every year, the malt premium to feed barley has whittled away. After averaging $50 in late November, it has now declined rapidly to be only a couple of dollars now. Domestic maltsters like to get their tonnage in early, and when they stop buying, so does the premium. Due to strong demand from Saudi Arabia feed barley prices have climbed off the mid Dec lows  and are currently at their highest prices since late October. Further highlighting the strong premium for F1, AWB have even a $5 premium for  for F1 over  APW.

 After rapidly falling $100 from early Nov to December, chickpea prices have stabilised at $440 Brisbane port. Pentag has been on this price since 21^st December, with Graincorp and AWB a further $20 behind. There isn’t any more bulk shipments until Gardner Smith is exporting 18k out of Brisbane in April. So at this stage the premium is delivering direct into packer. AWB, Pentag and Viterra are all offering bids. Viterra is offering a $15 premium ($405) over AWB at Goondiwindi, while Pentag are offering $450 at Oakey. Feed grades continue to be at a $100 discount.

After earlier favourable growing conditions, the last three months has been bone-dry conditions in India’s main chickpea production regions. Further exacerbating the issue is above-normal temperatures but they haven’t been extreme. You would assume the dry conditions have already impacted on yields. And although the dryness is staring to get some airplay, domestic prices haven’t moved much. The local Ag department has estimated that chickpea acreage is set to decline by 500,000 hectares (8.72mha) compared to last year. But there are conflicting reports out there, if this is actually the case. Unless weather related issues cause a spike in prices, domestic prices will remain relatively flat.

Over in the west, Grain deliveries in WA have broken through 14mmt, well ahead of the estimated 13-13.5mmt earlier earmarked. Geraldton has largely finished with 3.5mmt. Kwinana 6.5mmt, is expecting a couple of hundred thousand tonnes, and will be pushing close to 7mmt. Albany 2.4mmt, sites are starting to fill, but harvest will continue throughout January. Esperance 1.5mmt, continued wet weather over the last week has continued to drag out the remaining harvest.

Grain markets watching the heavens

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.  

Big crop always get bigger

The WA harvest continues to exceed expectations with 13.5mmt being received into the CBH system, representing 98% of total receivals. CBH has estimated that Geraldton has hit a new harvest record at 3.45 mmt (99% complete), while receivals in the Kwinana zone have surpassed previous estimates at 6.27 mmt (4% above prior estimates). Recent wet weather in the two southern port zones has continued to frustrate growers, with Albany 2.24 mmt (89% complete) and Esperance 1.42 mmt (95% complete) dragging out the harvest. The 03/04 harvest still holds the CBH record for highest grain intake for WA at 14.7mmt.

APW prices are above $240 for the first time since 5^th Nov, with AWB paying $241 ($2 higher then the next best price from CBH).  However the large WA wheat crop is continuing to weigh in on basis with it averaging +$5 over the past week, compared to average of +$13 in December. Looking back to last weeks drought ravaged crop, basis averaged +$66/t. Kal Grains continue to offer $200 for lupins in the Kwinana zone with AWB and CBH $20 behind, not willing to match their price over the last month.

The rallying US corn market (due to dryness in southern Brazil and Argentina) has helped drag sorghum prices higher. A weather market is developing in Sth America and as long as the forecast stays dry additional gains in the markets will be made. But with all weather markets, future forecast and subsequent price movements can fluctuate widely. And after the market rallied 80c in two weeks, the downturn could be equally as dramatic.

Even in the face of a bumper crop coming on line later this month, new crop sorghum values have surged to their highest level since 2^nd December. With Pentag and Viterra both paying the best money at $196 Brisbane. While for CQ ports Viterra is paying the same money, and is $3 better then the next best price. Grower selling was reported between Christmas and New Year although volume was light. Selling is anticipated to increase as it hits the physiological $200 port. Yield prospects on the Downs look excellent with high potential especially if rain falls within the next week. Growers are sitting on sizeable wheat stocks and finding room for the sorghum harvest will be difficult. This may result in some harvest pressure during the March timeframe although the market may already be discounting this possibility.

The harvest along the east coast is generally over, with the odd weather damaged paddock still to go. Yields were generally good, with quality suffering after the rain. Most wheat receivals after the rain event were largely AH9 and SFW. The market will need to shift large amounts of this off spec grain into export channels in 2012, representing good buying opportunities for feed users. Offers will need to be prices competitively, and will need a strong shift in the dollar or rallying international futures to drag prices higher from the recent depressed trading range.

Container and domestic markets continue to provide pricing opportunities from time to time, with APH, H2 and APW grades still in demand. Market depth is not deep, with activity for January shipments. Activity is expected to pick up this week and more trade to come back into the market.