Swings and roundabouts

Peter McMeekin, Nidera Australia, 09 May 2017, May 9, 2017

In a week of ups and downs for wheat futures markets, the United States Department of Agriculture (USDA) has decreased the nationwide wheat crop rating just one percentage point to 53 per cent good to excellent. This was at the top end of market expectations, but well down on the 62pc rating this time last year.

The other surprising news was the solid advance in the spring wheat planting program, which came in at 54 per cent complete, versus the market expectations of 45pc, up from 31pc complete last week.

Nidera Australia, Peter McMeekin

However, the major news story over the past week was the wide-scale snowfalls across parts of western Kansas on April 30, which led to a bevy of road closures, power outages and damage to the Hard Red Winter (HRW) wheat crop as it was coming into head.

As a result, the wheat futures markets opened last week firmer, with the Chicago May contract closing up 24¼ cents per bushel (c/bu) in Monday’s trade. In the same session the Kansas HRW wheat futures contract finished up 28c/bu. In Australian dollar terms, these futures moves equated to around AU$12.00 and AU$13.50 respectively.

Wind the clock forward to Friday morning Australian time, and we woke up to see the futures markets had given up almost all of the early week gains, with the Chicago and Kansas contracts closing down 17c/bu (AU$8.50) and 18c/bu (AU$9.00) respectively at the end of the US Thursday trading sessions.

So what changed? Why were the futures markets up significantly one day and then down significantly a few days later? Well, it was all about the Kansas phase of the US Wheat Quality Council (WQC) crop tour. Reporting before the markets opened on Thursday, they estimated the Kansas wheat yield at 46.1 bushels per acre (bu/ac) or 3.1 metric tonnes per hectare (mt/ha). This was above the 30-year trend, and well above the market expectations of 41.6bu/ac (2.8mt/ha).

This was enough to turn Monday’s big buyers into Thursday’s big sellers, as the market perceived a reduction in US wheat production risk. Of course, the big swingers here are the funds — the market speculators — who came into last week with a record short. It is these large fund positions that increase the futures market volatility, and make it highly susceptible to hefty movements due to adverse weather and/or production scares, particularly of US origin.

Nevertheless, the Kansas story is not over yet. In last year’s WQC crop tour, the scouts visited 655 paddocks across the state before reporting their yield estimate. This year they were only able to visit 469 paddocks before reporting to the market last week. Many stops were not made because the wheat was still under snow, plants were laid down flat in some areas, and conditions simply did not allow an adequate inspection.

The swings and roundabouts over the past week are symptomatic of global grain markets at this time of the year. There are so many market influencing stories at play all at once. We have the critical spring-maturity phase of the northern hemisphere winter crop coinciding with the South American summer-crop harvest, the US and European spring and summer-crop planting season, and the southern hemisphere winter-crop planting program.

I am confident that there will be many more stories and events over the next few months that will culminate in fat market swings. Some of these swings will certainly provide new crop pricing opportunities for the Australian grain grower as the domestic winter crop is planted and production certainty increases down under.


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