What does the frost in the Black Sea have to do with me?


What does frost in Russia have to do with the price of wheat in Dooen? Quite a bit. Of all the commodity markets Australian farmers deal in, it is grain which reacts the quickest to global supply and demand shifts.

Regular readers will know that there have been some production issues in Russia and Ukraine, both of which are major exporters to key markets in the Middle East and North Asia. When perceived supplies are dropping in these regions, futures markets react strongly, especially when wheat supplies were historically tight to start with.

While we’ve been looking at the World Agricultural Supply and Demand Report over the last couple of weeks, the forecasts are almost certainly out of date already for Black Sea production.  This is not to say that good growing conditions in other areas won’t counteract the weaker supply, but bad news on production will move a market much quicker than good.

Figure 1 shows Chicago Soft Red Wheat (SRW) for December, and ASX Wheat for January. The two contracts have pretty much moved in lockstep since marketing a low in March.  SRW has posted a 10 month high, while ASX is back at $400 for the first time since December.

In terms of historical movements, the rally has been significant.  The 29% rally from March lows is the strongest since the war in Ukraine saw volatility dial up.  We can see in figure 2 that the rally is by no means unprecedented over the last 20 years.  The period from 2006 to 2012 saw wild volatility, and price rises in the order of 60% over three month periods.

One of the more interesting points is the fact that ASX Wheat remains on a par with SRW.  When local APW prices (ASX is an APW based contract) are at parity with SRW it suggests an above average crop here. 

With the winter crop here still going in the ground, there is plenty to play out, and we would suggest given the seasonal risk still to come, that selling local wheat at zero basis is a risky proposition.

What does it mean?

Forward selling wheat at all when prices are rising at this time of year is also usually a risky proposition, but usually it’s due to issues in the US, not other countries.  

It will be interesting to see what happen when the US harvest starts in the coming weeks.  Prices are similar to this time last year, and crops are good, which could encourage selling and stifle any further rises. That is, of course, dependant on Black Sea crop forecasts stabilising, which is no guarantee.  

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Key Points

  • Production concerns in the Black Sea region have seen wheat prices rally strongly.
  • Australian prices have also rallied, although basis remains relatively weak.
  • The coming US harvest could see further rallies stifled, pending the Black Sea situation.

Click on figure to expand

Click on figure to expand

Data sources: USDA, CME, Refinitiv, Mecardo

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