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Tuesday, December 23, 2014

Wheat a selling opportunity despite upside potential

By Angus Brown  |  Source: CME, ASX

Key points

  • Concerns surrounding restrictions on Russian wheat exports give a potential price upside to $380/t in our terms.
  • Local wheat basis has been squeezed with the international market rise, with basis upside largely reliant on a falling CBOT price.
  • Wheat prices around $300/t are worth hedging, and any further upside used to average up.

2014-12-23 Grain Article FIG 1

2014-12-23 Grain Article FIG 2

2014-12-23 Grain Article FIG 3

All the talk about Russia and its potential to ban, or restrict, exports, has driven wheat markets higher. For this reason, it’s easy to get excited about increasing hedging positions, or holding physical. However, before doing so it’s worth looking at the last time we saw a Russian export ban and the impact on wheat markets, and also how basis is faring after the international market rally.

We published figure 1 last week, but it’s worth another look.  It shows the global wheat stocks-to-use ratio and the average CBOT Wheat price over our harvest for the last 10 years.  In general, a higher stocks-to-use ratio (a measure of supply vs demand) corresponds with a lower price. That said, there is one major exception to this.  In 2010-11 the stocks-to-use ratio fell marginally, from 30.9% to 30.3%, but prices rallied from 513¢/bu to 797¢/bu, or 55%.  Figure 2 shows the peak of the market that year was at 850¢/bu in February.

The wheat market was being driven by a ban on exports from Russia, and subsequently found support from issues with sowing of the US corn crop.  Interestingly, despite the Russian export ban, the wheat market was back at 600¢/bu by July and largely traded in the 600-700¢ range until US corn prices took off again because of drought.

Currently, CBOT Wheat is sitting at around 630¢/bu, having gained 130¢ (26%) on the back of Russian murmurs and some issues with the US crop.  The buying spree has been largely led by concerns that any Russian export ban would add another 220¢, or 35%, to prices.  In our terms, at the current exchange rate, 850¢/bu equates to $380/t. 

The rise in the CBOT Wheat price hasn’t been fully reflected in the local market, with figure 3 showing the ASX NSW Milling Wheat futures premium to CBOT wheat.  Local basis has crashed from a peak of $81 on 13 of November to $34/t today, as ASX Wheat has gained just $25 compared to the US market gaining nearly $70/t. 

Local wheat basis is now back in a more normal range, and it does have some upside. However, we suspect this will be more due to CBOT falling than local prices rising.  Basis for 2015-16 currently sits at around $10-20, which is pretty standard on a historical view.

What does this mean?

Many wheat growers see $300/t as a good place to start pricing, and this still stands despite all the uncertainty in the market.  This is also the case for those holding physical as there could be basis improvement. However, this is more likely to come from falling international prices than rising local prices, so some cover can be taken on swaps for grain in the silo. 

If the wheat market does continue to rally it will provide an opportunity to average up prices for next year. It would be prudent to continue selling swaps through to March and taking an average price, as history shows that prices are unlikely to be this strong come next December.  If wheat is more than $300 next harvest and we produce a good crop, it will be happy days for Australian grain growers.

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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