It’s a bit of an understatement to say there is a bit going on in grain markets at the moment. Here we’ll cover price and supply and how it is feeding into local values.
As outlined in Friday’s comments the wheat market has woken up, and consumers are starting to manage the risk of tightened supply out of the Black Sea. December 26 Soft Red Wheat (SRW) futures tipped over $400/t in Australian terms on Friday night.
The gains have been typical of a supply squeeze rally. A couple of limit-up moves, fuelled by consumers managing prices, and speculators getting on board, or closing outsold positions which were moving further into the red.
Figure 1 shows SRW has now gained $50/t in two weeks and $90/t from the doldrums seen early in June when the US harvest ramped up.
Conventional wheat hedging theory suggests that when markets rally at this time of year – sellers should stay on the sidelines. That is because rallies in late winter and spring are usually caused by drier conditions in the southern hemisphere, which tend to get worse rather than better.
This rally is different. There might be some support from issues with corn in the US, but it’s a supply bottleneck rather than a lack of production.
We are due for an updated Australian Crop Report in September, but until then we can use Wheatcast as a guide to production. The latest Wheatcast release on the 15th of August saw yield forecasts bumped higher, back to 2.54t/ha, with the bottom of the range lifting to 2.2t/ha. Recent rains through Victoria, NSW and SA are responsible for the lift in forecast yields, with WA easing marginally.
Stronger yield forecasts, along with concerns around Black Sea wheat hitting the market at some stage, might explain why ASX Jan-27 wheat is sitting at a $30/t discount to Dec-26 SRW. Local wheat only trades at such a discount during bumper harvests, at the height of harvest pressure. It is not a selling proposition for growers at the moment.
Growers looking to manage price, could be trading SRW futures or options, as there is the potential that local prices will either rise to meet SRW, or SRW will fall to meet ASX.
What does it mean?
Wheat prices at $400/t, combined with some good yield forecasts, might have some growers itching to start hedging prices. There is the potential for significant upside in the market if Black Sea wheat supply remains weak as we can see in figure 2, with the 2022 rally being the worst-case scenario.
Key Points
- The rally in wheat prices has added nearly $100 per tonne since June to SRW.
- Better yield prospects are helping keep local prices lagging the international.
- Growers could look at hedging options based on SRW rather than local values.
Click on figure to expand
Click on figure to expand
Data sources: Wheatcast, Bloomberg, Mecardo
