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Take a seat at the protein poker table…

by Peter McMeekin, Nidera Australia , 04 July 2017

ON the 4th July, 1776, the 13 colonies claimed their independence from England, an event which eventually led to the formation of the United States (US).

Nidera Australia, Peter McMeekin

Known as Independence Day, Americans celebrate this historic event on the 4th of July each year with a federal holiday.

It is a day that represents the Declaration of Independence and the birth of the US as an independent nation.

Less than 72 years later, the Chicago Board of Trade (CBOT) was established to provide a centralised location where buyers and sellers could meet to negotiate and formalise forward contracts.

The first contract, corn, was traded on the 31st March, 1851.

This signalled the beginning of futures driven, price risk management for agricultural commodities.

Today, the many futures markets across the globe not only provide a risk management tool for producers, consumers and commodity traders, they also provide a speculative market for large hedge funds and institutional investors to trade for investment and growth.

This adds liquidity to the market, but can also make it prone to exacerbated swings as the funds move in and out of their speculative positions.

US futures rally

Since the beginning of June, we have seen a substantial rally in the US futures markets, much of it driven by fund short covering.

The CBOT September soft red winter (SRW) contract has risen 112 cents per bushel (c/bu), or approximately A$60 per tonne.

The biggest mover has been the Minneapolis Grain Exchange (MGEX) hard red spring wheat (HRSW) contract. On the back of extremely dry conditions in the key producing states of the US and Canada, the September contract has risen almost 234c/bu, or approximately A$112/t.

Thirty-three per cent of that increase came in the two trading sessions (Friday last week and Monday this week) following the release of the United Sates Department of Agriculture (USDA) quarterly stocks and seeding report.

The report revealed smaller than expected US and Canadian spring wheat plantings, on top of the extremely dry conditions.

This prompted massive fund buying of wheat across all major exchanges, including Europe. Corn and soybeans also got caught up in the hype.

I think it is pretty safe to say the funds are now on the long side of this wheat market.

Delving a little deeper, there is a story within a story here.

The US spring wheat crop is a big producer, and supplier, of high protein wheat to the world. Much of that demand is quite inelastic.

Any significant reduction in production puts added pressure on other major, northern hemisphere, high protein origins such as Germany, Poland and the Baltic States (Estonia, Lithuania and Latvia). And, of course, it puts pressure on price, as we have seen recently.

Australian upside

Australia can also benefit. The domestic production woes have largely been ignored by the overseas pundits to date.

Many still have Australian wheat production up around long-term average levels of 24-25 million t (Mt).

The reality is the Australian wheat crop is suffering big time. Last year’s record production is now a distant memory, as the trade here in Australia come to terms with the possibility of a sub 20Mt wheat production year, for the first time since 2007.

With less rain, lower production and a more stressful growing season (for the plant), comes protein. The protein profile of this year’s Australian wheat crop will most likely be much higher than last year.

The high proportion of ASW seen last harvest will probably be replaced with a much higher proportion of H1 and H2, and even APH2.

In addition, continued high protein production issues in the northern hemisphere will quite likely manifest itself in very attractive protein spreads here in Australia.

How will the Australian grower capture these protein spreads?

I suggest that any forward wheat sales should certainly favour floating spreads on multigrade contracts at this stage of the season and let the global production, and protein, poker game play out.

Source: Nidera Australia Weekly Market report: Peter McMeekin is Nidera Australia’s origination manager.

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