THE Australian dollar price of grain is made up of three components – futures, the AUD/USD exchange rate and domestic basis.

For many months now the managed money (funds or speculators) in the US futures markets have been holding substantial net shorts in both wheat (a record) and corn futures.

In other words, when the positions were established they were betting that the futures market would go down and they have been handsomely rewarded for the risk they have taken.

To put the positions in perspective, the wheat short was equivalent to more than 20 million metric tonne (MMT) and the corn short was around 23MMT. Two weeks ago, the funds starting buying in their net short positions with the momentum increasing last week. The net reduction over the two week period has been almost 93,700 contracts of corn (11.9MMT) and slightly more than 48,800 contracts of wheat (6.64MMT).

So what has happened in global grains markets? Has this action been driven by a fundamental change?

Grain wires for many months have been talking about the large global supplies of wheat and feed grains. As the northern hemisphere winter harvest progressed, save for a few quality issues, the crops generally got bigger. In the US the corn, sorghum and soybean harvests are progressing well and yields are close to expectations. Basically, we are now at a point in this season’s production calendar where the southern hemisphere crops are the only unknowns in the global balance sheet and Australia is on the cusp of a huge harvest.

On the demand side there has been plenty of action with importers taking advantage of the favourable pricing environment over the past couple of weeks. Egypt, Algeria and Saudi Arabia all bought in tenders with European Union, Black Sea and eastern European exporters the main beneficiaries. Syria also bought Russian wheat. However, none of this is new demand so the impact on the world supply and demand equation is basically zero.

The interesting rumour to surface last week was India purchasing 100,000 metric tonnes of Australian wheat. The prices quoted were US$223 CNF for APW and US$216 for ASW. Freight is obviously dependent on vessel size, but let’s call it US$20. The quoted APW sale price works back to a grower bid equivalent of AU$220 Port Adelaide. When the business was done replacement value was around AU$5 higher, but the market has come back by that amount over the past week to be around AU$220 today – smack on replacement value.

But don’t get too excited as this demand is minor in the bigger picture. Australia will need to sell four times that quantity every week for the next twelve months, and the carry out may still increase with a huge crop about to hit the bins.

From a future viewpoint, corn production in South America is forecast to increase next year with the Brazilian planting pace well ahead of the average. The northern hemisphere winter wheat planting program is progressing well on the whole with total area in the US expected to be down only slightly on this year.

So no significant change on the supply side (increasing if anything), no demand surprises, a big Australian crop about to be harvested and no apparent production concerns on the global horizon.

As I have said in the column previously, there needs to be a significant production shortfall in one or more origins to push this market significantly higher. Looks to me like the funds are simply booking some profits and positioning themselves for the next opportunity, whatever and whenever that may be.

Source: Nidera Australia Weekly Market report: Peter McMeekin is Nidera Australia’s Origination Manager.