There were some interesting price moves in the week ending Friday, March 8. Despite further losses in CBOT futures (down $A7.24 a tonne), Australian prices were unchanged (Newcastle and Kwinana) or up (Pt Kembla, Melbourne and Port Adelaide). It seems like the Australian market is finally exerting some muscle to keep the trade interested in shifting grain from WA and SA to NSW and Qld.
The lift in basis seen last week should work to keep enough tension in the Australian market to get grain moving from west to east. What we don’t know is just how supply and demand are balanced for the rest of the year. Any slip up with too much exported could see the east coast market really fire up. On the other hand, if supplies stay plentiful in WA and SA, price gains will remain capped.
Meanwhile the global market focus is shifting to new season projections. Of course, at this stage of the year it is just a guessing game with assumptions largely that production revert back to average in key production regions in the world, including Australia.
The FAO has released its first forecast for 2019/20, and has pegged the global crop at 757.4 million tonnes. That would represent a 3.4 per cent lift on last year and propel production back towards the record set in 2017/18.
Most of the gains in the global crop will be driven by the EU, where acreages are up 3pc, and a mild winter has seen low levels of frost damage. Russia is also expecting a big lift in output.
The Australian crop has been pegged at 24mt, but as we know this is just guessing. A respected NSW-based grain marketing and advisory service tweeted that the Australian crop was forecast to come in somewhere between 10 and 30mt, and to be honest, that’s about as good a forecast as you can get in early March.
However, it is worth looking at the consequences of the global crop recovering to the extent the FAO are suggesting.
The problem with a rebound in global production is that will only generate a small drop in global stocks outside of China, even with a modest lift in global consumption. Add to that increased exportable supplies from the EU and ongoing exportable supplies from Russia, and it will remain hard for the US to do much with their stock levels.
If the FAO is near to being on the money, it will result in a benign wheat market, with a reasonable chance that end-of-year CBOT futures values will be weak.
The problem in the medium term is that the market will focus on this “endgame” for 2019/20, unless we see some perceived threats to the northern hemisphere crop. We will need that to give us a reasonable mid-year rally from the March low, wherever that may finally be.
What we might have working in our favour is currency. Right now, the dollar is close to 70 US cents, and that is down from 78 US cents at this time last year. That is worth over $20/t for us at the moment, and it should be a buffer we retain during 2019 unless our currency finds some extraordinary support from somewhere.