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Tuesday, June 30, 2015

Sharp rise in grain prices sense of déjà vu – will it keep going?

By Angus Brown  |  Source: CME, ASX

Key points

  • Wet weather in the US saw wheat and corn markets rally strongly last week, hitting six-month highs.
  • The nearest year in terms of weather conditions is 1993, when corn crops were washed out and prices rallied for the second half of the year.
  • More rain is required to realise wheat values above $300/t, while the rising international market may provide some basis buying opportunities.


2015-06-30 Grain Market Up FIG 1

2015-06-30 Grain Market Up FIG 2

2015-06-30 Grain Market Up FIG 3

CBOT Wheat futures received a big boost on Friday night following continued wet weather across large parts of the US red winter wheat growing area. Analysts in the US are comparing this weather with 1993 (the last time weather was similar), at which time prices rallied in the second half of the year. Locally, basis is weakening, which may provide an opportunity for consumers to convert CBOT positions to local prices.

More rain has been forecast for already wet parts of the US winter wheat growing area.  Some crops that are ready to harvest are already standing in water, and more rain will only further delay harvest and increase risks of disease and abandonment.

The wet weather delays, possible decreased wheat supply and, more importantly, spooked speculators drove CBOT wheat 30¢ higher on Friday night to hit a six-month high of US565¢/bu.  Along with the fundamental factors pushing the market higher, the fact that wheat broke its 200-day moving average and pushed well past the recent resistance level of 535¢, saw the record number of ‘short’ investors turn into buyers to avoid further losses.

In A$ terms, Dec-15 CBOT Wheat also moved to a six-month high (figure 1), reaching A$280/t and well and truly breaking through the previous resistance at $265/t. 

Corn markets have also moved higher, largely in sympathy with wheat. While wet weather now might cause some abandonment or washouts for corn, it should not impact corn yields negatively overall.  December-15 Corn has hit $211/t (figure 1). This is close to a 12-month high, but only $5-10 above March levels.

Speculators are getting nervous as the current wet weather doesn’t have any precedent in recent times. The markets are talking about 1993, when the US corn crop was cut by 33% because of flooding.  We are yet to hear reports of flooding, but the impacts on wheat are expected to be similar.

In June 1993, CBOT Wheat and Corn gained 10-15% to August, then rallied a further 20-25% through to the end of the year on tight supplies. Wheat and corn have already gained around 12% on average June prices, so that part fits with 1993 nicely. If the rain keeps coming and we see a dramatic impact on the corn crop, a 22% rise will see Wheat at $340/t and Corn at $257/t in A$ terms by the end of the year.

What does this mean?

Looking at the price movements in 1993 gives a pretty good indication where the price risk lies, and why markets have been rallying despite any hard data on weakening supply.  Obviously, the wet weather would have to continue to see prices increase by a further 20%. 

On the other hand, if the rain moves north to the dry Canadian prairies and the US harvest gets going, the impact on grain supply might be heavier feed supply, and weaker milling wheat supply, with little impact on total production.  This will likely send CBOT Wheat and Corn prices lower, but support ASX Milling Wheat.

ASX basis was back at $45-50/t yesterday (figure 3). This is the bottom of the recent range, and might provide an opportunity for consumers hedged on CBOT to convert to ASX at a reasonable basis level.

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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