Downgrade risk requires careful review of contract options

GRAIN MARKETING: Downgrade risk requires careful review of contract options

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Agribusiness
DON'T PANIC: With concerns about downgrading and delayed harvests, it is important to carefully check contract details to avoid difficulty.

DON'T PANIC: With concerns about downgrading and delayed harvests, it is important to carefully check contract details to avoid difficulty.

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The Bureau of Meteorology did get the above average spring rainfall forecast correct in the end.

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The Bureau of Meteorology did get the above average spring rainfall forecast correct in the end.

It is just a pity it wasn't two months earlier and before growers across the state started harvest.

Harvest is just about one-third complete at this stage, with a large amount of the crop still in paddock to be harvested.

There are reports of large downgrade events in NSW, where hectares upon hectares of standing crop have experienced massive downpours or flooded conditions.

This is after producers were racing to recruit contract harvesters and trucks to assist in moving the crop from paddock to silo, attempting to beat the rain.

Since then, we have gotten a sense of the impacts through numerous images on Twitter of floating canola windrows or sprouted wheat. SA, too, has copped the November rainfall.

As some areas have received more than 160 millimetres of rainfall for the month of November, with crop still standing in the paddock, quality concerns are definitely on the rise throughout parts of the cropping zone.

Parts of the earlier cropping zone are reporting sprouting events in wheat, with different bulk handlers now opening up segregations to manage this.

Wrinkling in lentils and marking on other pulses, due to wet weather, is also a phenomenon we are starting to see in unharvested crops.

Australia usually produces a largely hard wheat profile, something that would be favoured in a year like this, where wheat quality globally is on the lower side.

This year, the proportion of ASW1 quality or lower wheat is likely to be closer to half of total wheat production.

This is up from the 35 per cent usually seen in an average season.

The interesting part of this is that we are expecting around 6 million tonnes of feed wheat, triple what turns up most years, but less than the 14 million tonnes in 2010-11.

So, what can we control?

For those with forward contracts in place, the best way to manage a downgrade event is through use of the spreads on contracts.

Early contracts might have had AGP1 discounts as low as $25/t, later contracts can be as much as $120/t discounts to AGP1.

Depending on port zone and buyer there is a wide variation in spreads.

This indicates that before filling a contract, it might be worth looking at what quality is sitting in warehouse and what is left to come in from the paddock.

Wheat won't be the only commodity affected by the increases in spreads.

As the spread to SFW1 and similar wheat grades widens, this puts pressure on the feed barley price as both cereals price competitively into feed rations.

What feed millers will be looking at is energy and protein of both types of grain, and adjusting their rations accordingly to make it the most cost-effective feed mix possible.

This is one to watch as the spreads increase, but barley pricing still remains strong at historically high levels, just without the underpinning support of the Chinese buying activity we have had in seasons pre-2020.

In those later areas, it is likely also time to start considering the delivery dates on some contracts, especially where focus is still on moving break crops out of the paddock.

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This is becoming a larger concern where crops are still green coming into December, meaning harvesting periods may be pushed into January.

There are shipping commitments that the trade will have to meet over this period though, with the world supply of wheat at historically low levels, and Australian export pace running high.

There is also a need for growers to manage their January transfer contracts.

A number of buyers were offering a few dollars extra for the transfer of grain into January, or delayed payment, to spread out when the trade are taking ownership or paying for the grain themselves.

This is as the ABARES November Crop Report indicates a record wheat and canola crop, as well as the second largest barley crop, are on the cards for this season, even with the wet harvest towards the east coast.

With this in mind, make sure you are monitoring the tonnage required for these later transfer contracts so as to not double sell or overcommit tonnage.

The most important part of grain marketing decisions is the age-old adage of, "when the markets panic, don't".

Give the market time to breathe and absorb the quality news before getting too caught up in the panic.

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