Bear: “Who’s there?” ……
Bull: “It’s me, Bull. Let me in!”
The wheat market has finally shown some anxiety with Chicago wheat rallying around 10 per cent since mid-January which begs the following questions: what is driving the market to rethink the bearish tone that shadowed the grain market? … and what’s in it for Australian growers?
Let’s consider and explore these two questions.
What is driving the market?
The global market becomes fixated on two factors during this time of the year.
- Corn and soybean prospects in South America
- Winter cereal conditions in Northern Hemisphere (US/Europe/Russia/China/India)
Over the past week, the rally in grains and soybean propagated from two roots.
Central parts of Argentina turned dry with no relief in the forecast until mid February. This instigated market participants to start flagging reduced production, and;
USDA released its January US winter crop conditions, revealing among the worst-in-10-years January conditions across the key producing states Kansas, Oklahoma and Texas.
On the first issue of Argentinian dryness, if we see precipitation revert to normal in mid-February, the smaller crop size would be insignificant, and the market would swiftly discount any concerns.
The second issue, poor wheat conditions, stems from the soil-moisture deficits across vast areas of the southern half of the US which encompass the major winter wheat growing region. Weather patterns have been displaying symptoms of La Nina which bring increased chances of a dry winter. The US production prospects should not be discounted yet. Funds are yet to capitulate on their large accumulated short position because favourable spring weather could dramatically improve conditions.
At this stage however, long range forecasts are calling for dry conditions to extend into spring which would ignite the wheat market if such a forecast were to transpire.
What’s in it for Australian growers?
The Chicago futures rally observed so far has not translated to the same increase in domestic prices given Australian wheat was already uncompetitive into Asia versus Russian wheat.
The spread between APW (Australian Premium White) wheat and comparative Russian wheat has narrowed to US$15/t into Asia which is still too wide for the many buyers. Russian wheat remains cheaper, even after taking into consideration the marginal advantages, in moisture and quality, of Australian origin.
Consequently, we do not anticipate Australian wheat substituting Russian origin in the near term but would expect to see interest in Australian wheat from Asian buyers if the price gap were to narrow a further $5/t.
Other major Northern Hemisphere winter production regions though are faring well. Russian conditions have improved with better snow cover and EU continues to have a relatively benign winter.
However, India’s primary wheat-producing northern and central states have had sub-par germination conditions on a lack of rain.
The bull in the wheat market is understandably not yet “firing on all cylinders” but, given what we are seeing in the US and what the medium-term climate drivers are suggesting, there is real potential for increased volatility over the next few months.
Source: The Nidera article this week was contributed by Thomas Kim, Toowoomba-based COFCO grain trader, northern Australia region.