In fishing, the drug, or ‘lure’ if you will, lies in ‘reeling in the big one’. And those of you lucky enough to have hooked that prized fighter on your post-harvest fishing trip to the coast, would rightfully still be reminiscing about that euphoric sensation.
A surprise call from a Melbourne based grain marketer, however (at half past four Queensland time), quickly reminds you that it’s that time again, time to check the planter is in good order, and ready to kick off the new winter crop season.
As always, there are still more questions than answers when facing the full stretch of a new crop campaign. Let’s raise a few of key points we think most pertinent to their outlook.
Much of the poor U.S crop condition has is priced into the market, which means the market will need to look for crop problems in the Black Sea or Europe for further upside. Australian wheat prices will benefit most from a Black Sea production issue where new crop production consensus is at 75MMt versus 85MMt this year. Given that wheat has progressed through winter unscathed, and with good snow cover, the level of concern is low for the moment.
Price relativity for new crop against the Black Sea, is not necessarily a driving factor this far out, given the critical weather for both the Black Sea and Australia is still to come. It is too early for Asian consumers to engage for 2019 demand, but as a guide, APW in Western and South Australia is at a USD 10 premium to $12.5 Russia on CFR basis to Asia. Taking into account, the superior Aussie quality and moisture level, the premium would be narrower, which shows Australia is reasonably priced.
On the issue of escalating U.S-China tariffs, we won’t delve into the guessing game of what may transpire, especially given the magnitude and intricacies of the global flows involving two of the most influential economies in the world. We will finish by saying that the exceptional global economic growth experienced through the last half-century, is attributable to increased global trade and reduction of protectionism.
A reversal of this progress will generate casualties on both sides of the Pacific, hindering economic growth prospects for all those involved, both directly and indirectly.
The recent politics though may end up being merely a bad haircut. For Australian wheat farmers, this issue is more likely a boon in the short term, (without a significant shift in global SnD), on the back of reduced competing origin. In the long run, however, it won’t do any good for most of market participants.
The talk around town is how many acres will swing into Barley, especially given that prices have been relatively high this season, thanks to consistent Chinese demand. It’s a question that is not only for Australia but all around the globe. We expect to see Chinese demand continue to flow at new crop price levels, of which, are heavily inverted across many origins. Subsequently, we anticipate good underlying support in new crop prices.
Political risk is also extreme for barley. It is relatively immune on the surface, however amongst Chinese tariff issues, policy on domestic corn will need to be monitored with care. Further implementation of the protectionist policy increases the likelihood of China being able to fortify their local grain and oilseed supply through higher subsidies to growers.
With increased production, this may mean lower domestic corn prices, and eventually, this may translate to lower barley prices for Australia.
Despite the announcement of a planned 25% tariff on U.S Soybeans, the Australian and European Canola markets have remained largely unmoved. This statement caught a few oilseed traders by surprise, given the news was anticipated, and markets moved quickly to reprice specific origins to alleviate the expected change in trade flows. As a result, soybean basis in Brazil firmed instantly given it will be the major substitute.
Having seen prices almost double what farmers are currently seeing for new crop chickpeas, the rational thing to do is switch excess chickpea acres to cereals. Even with the switch, an average yield will get national production close to 1MMT.
With Indian exports coming to an abrupt halt, it will mean that even 1MMt will generate a loose SnD. Also, the first of the monsoon forecast shows a minor skew towards above average rainfall, which translates into better new crop prospects for India. In turn, Australia can expect extended tariffs on chickpeas. And, while chickpeas have had a couple of years in the spotlight, things are pointing to a subdued season.
In the end, take your pick on which commodity to be a bull or a bear, but don’t be a pig…
Source: This week’s article comes from Thomas Kim who works for COFCO in Australia