Markets

Don’t forget the record carry-out

Peter McMeekin, Nidera Australia, July 25, 2017

A RECENT crop tour of Western Australia followed by a visit to the NSW ski fields certainly emphasised the poor season being experienced by precipitation-dependent industries across the southern parts of Australia this winter.

Nidera Australia, Peter McMeekin

While the correlation is not always precise, the lack of rainfall across Australia’s prime cropping regions over the past four months is certainly being reflected in the mountains by way of below-average snow falls to date.

This lack of snow will mean reduced spring run-off into water storages in the upper reaches of the Murray and Murrumbidgee River systems which, in turn, will lead to a reduction in irrigation water availability for the summer croppers feeding off the two longest rivers in Australia.

One thing water and grain stocks have in common is their ability to carried forward from season to season, to be consumed when demand dictates.

Stocks in south-east

Even though the pace of grain exports has been quite impressive since harvest, last year’s record wheat and barley production, combined with our more recent lack of competitiveness, means this season’s national carry-out will be huge.

The location of that carry out is the critical point to note. Come October, the Western Australia cupboard will be quite bare. However, a drive around Victoria and the western parts of NSW reveals fences lined with silo bags and bunker after bunker still brimming with grain from last year’s harvest.

This means the carry-out in Australia from this season into the next will be exactly where it is needed most, behind the majority of Australia’s domestic consumption, in the eastern states of Australia.

A tad overcooked?

The international markets have been on fire over the past eight weeks, as production issues emerged in the northern hemisphere winter crop. After four consecutive years of record global wheat production, and the subsequent building of world stocks as supply exceeded demand, the tide has turned somewhat and the funds (speculators) have been spooked.

The market ran up as short positions were liquidated. However, the market is now reassessing, realising world stocks are still quite healthy and the futures markets may have been a tad overcooked.

In the first trading session of this week, the Chicago Board of Trade December contract closed almost 80 cents per bushel (c/bu), or A$36, lower than the intraday high on the 5 July.

The fall in the Minneapolis Grain Exchange December contract has been almost as dramatic, despite the main production issues in the United States being in the spring wheat production regions of the north.

Being a major exporter of grain into the world market place, the production issues here in Australia are also starting to attract attention globally. It is not a disaster yet, but production of wheat and barley will certainly be less than last year.

Better-than-average rainfall over the next two months and mild finishing temperatures will be required to keep that decrease to less than 40 per cent nationally.

This is where the size and the location of the carry-out from last season comes back into the discussion; as mentioned earlier, it is well positioned to satisfy domestic demand in eastern Australia in a lower-than-average production year.

Despite the rally in global markets, it will also temper any rally in domestic basis, as there will most likely be an exportable surplus on the east coast of Australian and cereal values are currently well over export parity in most port zones.

Source: Nidera Australia Weekly Market Report.

Peter McMeekin is Nidera Australia’s origination manager.

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