US wheat prices seem to have support at levels that are reportedly close to, or lower than, the cost of production. With production forecasts rising here, we take a look at some relative pricing.
As outlined in Friday’s weekly comment, the United States Department of Agriculture (USDA) World Agricultural Supply and Demand Estimates (WASDE) was largely bearish for wheat and feed grain pricing.
The lift of Australian wheat production to 34mmt matches what the ABARES Crop Report forecast earlier in the month, and as we outlined a couple of weeks back, it will take a soft finish to realise.
Despite the increases in forecast production, the market rallied, which can sometimes happen when market expectations are met. Figure 1 shows that even with the rally late last week, the market is still bouncing along the bottom of the range of the last five years.
Ten years ago, $300/t was seen as a pretty good price, with plenty of forward selling at this level. With rising costs of production and global stocks that are still relatively tight, $300/t doesn’t seem that great. In fact, there is some talk that it is below the cost of production.
The ASX basis to CME SRW, which is currently sitting around a $20/t premium. There have been a couple of points in the last two years where basis has hit parity, but generally, Australian wheat has been at a premium.
With the local crop forecast at similar levels to last year, we can expect basis to continue to hover around current levels. If basis gets to zero on the back of harvest pressure, it’s likely a buying opportunity. If basis moves to $40 due to a rain-delayed harvest or similar production hiccup, it’s probably a selling opportunity.
Figure 2 shows Australian APW port pricing up to early last week. These values are likely to see a bounce this week, but it’s informative to look at the trend. WA has had the largest increase in production forecasts, and prices have fallen 8% since the end of June. Geelong has seen a similar decline, and Port Lincoln has been a little larger
What does it mean?
Grain producers will be hoping we have indeed seen the bottom of the market, and last week’s bounce is the start of an upward trend. For more upside to materialise, however, we will need to see some production issues somewhere, either in wheat or corn. Otherwise, wheat prices at or below the cost of production will take a season or two to recalibrate supply to achieve higher prices.
Key Points
- Wheat prices hit a low and bounced last week despite increased production forecasts.
- Local price premium to US values remains at similar levels to last harvest.
- For significant price upside, production issues are required.
Click on figure to expand
Click on figure to expand
Data sources: CME, ASX, Bloomberg, Mecardo
