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Monday, August 29, 2016

Protein speculation

By Andrew Whitelaw  |  Source: Trade

Key points

  • The average ASW spread for Australia is -$13.6, with the lowest spread in Brisbane at -10.
  • The average H2 spread for Australia is $8.6, with SA & WA having $4 lower spreads than the rest of the country.
  • H1 Currently sits at $15 above APW1. 

2016-08-29 Map

2016-08-29 Protein Speculation Fig 1

There is no getting away from the fact that the world is awash with wheat, and although yield will be a big bonus prices are likely to remain low. There are concerns that there will be an undersupply of high protein milling wheat in the world after high rainfall in France and Germany. In this report we will examine what the trade is paying for protein and whether chasing protein is currently worthwhile.

It’s important first of all to define the different grades which we will discuss in this report. The main grades and their minimum protein levels are H1 (13%), H2 (11.5%), APW1 (10.5%) and ASW1 (no min). These grade definitions are agreed and set annually by Grain Trade Australia, and are available here.

The high rainfall received throughout areas of the east coast will in all likelihood lead to fantastic yields, however on the flipside will result in reduced protein levels. If there is reduced protein in Australia, and as mentioned in the introduction elsewhere is it worthwhile chasing protein, especially in light of rainfall due in the next 8 days (see map).

Let’s have a look at the grade spreads around the country. Typically grade spreads on multigrade contracts when first offered will be quite conservative, in order to reduce risk to the buyer. Commonly we would expect at the start of the year small positive spreads to milling grades and large negative spreads to feed grades. The trade would then adjust these grades throughout the year as a view of the crop is realised.

We have taken the average of the grade spreads for ASW, H2 & H1 (figure 1) across the country. In collecting the grade spreads, we have used the advertised spreads from the major grain buyers to determine the best spread for each grade across the states. The spreads around the country show little state by state variation with the exception of WA and SA which have $4 lower H2 spreads.

The question remains whether it is worthwhile to apply late N in order to chase higher protein. It is important to answer the following questions about your enterprise:

1) With the anticipated high rainfall expected will additional N even help?
2) Will spreads rise?
3) What will the likely costs be to increase protein?

There is a large degree of speculation on whether it is a worthwhile exercise in a year like this to chase protein and it is necessary to understand that the grade spreads may or may not improve by harvest. 

What does this mean?

If you are taking out forward multigrade contracts and have the view that spreads to higher grades will improve then I would be looking at using floating grade contracts. These will give you an element of control of locking in grade spreads if they become more attractive however it is important to look into the terms of these contracts and how locking the spread is executed. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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