Buying grain requirements ‘hand-to-mouth’ has been the modus operandi for most domestic consumers over the past six months. Falling prices, a big crop in the making and a harvest inverse were the catalyst for their approach to the market last year. Now that record crop is in the bin the buyers have not been in any rush to get extensive cover out the demand curve.
Of course grain consumers worldwide are naturally short, as they have new demand every day that they open their gates for business. In essence, they are the opposite of the grain producer, who comes out of harvest each year long grain.
It is the interaction of these consumers and producers in the market place that enables various grains to be allocated prices. Relative prices, and changes in price, reflect the forces of supply and demand. Grain moves away from regions of surplus (low relative demand and low relative price) into regions of deficit (high relative demand and high relative price).
At the moment, Australia could certainly be considered a region of surplus. As I explained in last week’s report, even the most optimistic export estimates for the coming year will leave a record carry out leading into the new crop harvest. A large proportion of that will be in the eastern states, which is where the majority of Australia’s domestic demand resides.
As a result, the domestic consumer has been spoilt with choice. Not only is there a mountain of grain on their doorstep, there are is an abundance of marketers willing to show them offers. This has encouraged most consumers to take a conservative approach. From a price viewpoint, the market has been struggling to pay carry providing very little incentive for the consumer to cover much more than their first half of 2017 requirements.
So what will be the next influences in our market? What will be the drivers of domestic consumer sentiment as we move through the autumn and into the southern hemisphere winter?
In the summer cropping regions the story has been the antithesis of the last winter crop experience. The tap basically turned off in late October 2016 and, save for some isolated storms and a New Year’s Day downpour, the dryland sorghum crops have been suffering moisture stress for much of the growing season. With the February heat wave, Rutherglen bug damage and virtually no plant in Central Queensland, production estimates have plummeted to less than 1 million metric tonnes, and quality harvested to date has been poor.
This has certainly spooked the northern consumption markets with rising sorghum prices driving rallies in both wheat and barley. However, the reality is that the high sorghum price relative to wheat and barley has driven domestic sorghum demand to its lowest level in many years.
There is certainly enough grain in Australia this season to satisfy domestic demand, regardless of the size of the sorghum crop. In a normal year domestic prices would have to be at a level to prevent too much grain being exported. This year no matter the price, Australia simply cannot export enough grain to pressure domestic markets, in the absence of other mitigating factors.
Like markets worldwide, it will be the weather that drives the domestic market values and consumer sentiment over the next few months. We are now in the critical autumn phase in Australia, where both the producer and the consumer look for the summer drought to break and the crop to be planted on time.
If the rain comes then happy days! If the long range forecasters are right then life gets interesting.
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