By Augusto Semmelroth | Source: CME, ASX
International grain prices have found a solid base in recent weeks and are unlikely to see much downside in the short to medium term. In the meanwhile, domestic prices continue to show a moderate degree of volatility as a result of exchange rate fluctuations and harvest pressure. What are the key risks and opportunities for unpriced grain?
As discussed in the article What to do with wheat swaps?, producers holding CME Wheat Dec-13 swaps (closing this week) have basically four options right now. Sell grain off the header, take a physical forward position, roll the CME swap forward to March or sell an ASX MW Mar-14 contract. For producers with unpriced grain, the options are pretty much the same. The only difference is that you will miss the cash benefit from settling the December swap.
Despite relatively stable international wheat prices, ASX MW Jan-14 rallied $14 to A$293/t in the last eight trading days. During this period the A$ fell 3¢, or 3.4%, to 0.91US¢. As such, much of the upside was derived from the falling A$ rather than local influences. That said, basis to Chicago still moved $4 higher to A$28 as northern harvest pressure eases. There seems to be squeeze on APW for delivery into futures contracts.
Going forward, we don’t see a lot of downside in international markets in December/January, especially when prices have eased through the year as they have. However, downside risk could still be up to $20, including currency movements. As for upside potential, it may well be up to $20-30 on the back of adverse winter wheat growing conditions in US/EU/FSU.
In physical markets, Victorian and SA’s APW prices are around $270-275, while ASW is quoted at a $15 discount. Victorian basis to Chicago is still $10-15. There may be more upside post-harvest like this week in NSW when harvest winds down, which probably won’t be until January.
Red wheat (SFW) is currently priced at around $245-250/t into delivered markets at harvest, and $260-265 ($15 discount to ASW) post-harvest, at around parity with CME wheat. Last year, feed wheat delivered in Melbourne got to a very small discount to ASW and a $20 premium to Chicago. Nothing’s for certain. However, SFW basis downside is likely to be limited after January.
With downside risk from international markets seemingly low, the two main short term risks are local basis and exchange rate. While basis downside risk seems limited after harvest, pricing some of the wheat on the back of this currency price rally seems prudent. For that, ASX MW Mar-13 at $293/t and forward contracts are good options.
For unpriced wheat, selling better quality rather than feed grains off the header is more sound. APW is holding a decent premium to international markets, and is likely to have smaller upside than feed wheat post-harvest.
On the barley front, feed barley prices are still around $80 and $50, respectively, lower than APW and SFW. That’s about its maximum discount and, as such, is possibly a good hold for next year. Malt grades are up to $35 (GA1) above F1, making a strong case for selling malt grades off the header.
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