Seasonal pressure set to weaken global grain prices

Current US crop conditions continue to deteriorate plus there are ongoing concerns over Canadian production amid low soil moisture and snowstorms causing sowing delays. Recent price action has put this uptrend under question as US soft and hard red wheat futures are currently under pressure and testing support.

Significant forecast rainfall for key US winter wheat zones over the next couple weeks has put a halt to prices marching higher. A bull market needs to be constantly fed and it seems all the negative supply news has been factored into the market for the time being.

US exports have been extremely sluggish for the 21/22 season, as US wheat has effectively been priced out of the market. Funds are also relatively long on SRW and HRW futures. As such, if we see continued improvement in precipitation across US winter wheat zones over the next month, we could see prices give up more of the recent gains.

Seasonally, we generally see weakness in global prices over the next three months. This is due to the expectation of decreased demand and increased supply ahead of harvest in major importing and exporting northern hemisphere countries. However, this year is not normal and as such, seasonal pressure could be somewhat muted.

On the supply side, India has stepped up to help fill the hole left by Russia and Ukraine. Egypt announced it has accepted India as an import origin. The first cargo of wheat from India arrived in Vietnam during April. India has also announced it plans to send delegations to other major importers. Indian exports are forecast at a record large 10 million tonnes for the 22/23 season by the US Department of Agriculture, while India's Commerce Minister announced it has the capacity to export up to 16mt. The Indian forecast seems optimistic as this part time exporter may struggle to meet the forecast of 10mt. India's 22/23 season yields are under threat from heatwaves impacting northern cropping regions, and the country continues to battle rising food price inflation amid record large domestic consumption.

Locally, SA 21/22 season wheat prices have rallied strongly, with APW1 in OH up nearly $A50 a tonne over the past week. Low grower liquidity and a strong shipping program has helped push prices higher amid elevated global prices and a lower AUD/USD. As wheat stocks in SA really start to tighten up, buyers don't want to be caught short on upcoming vessels.

22/23 season Aussie wheat basis against US, Can and EU remains at extremely weak levels. While our crop prospects look positive (healthy South East soil moisture, La Nina and forecast negative IOD), unfortunately in the short-term it will be difficult for our 22/23 basis to improve significantly if futures remain elevated.

India is selling at competitive levels and US/Can crop concerns are keeping futures well bid. However, with all else being equal, in the medium-term, if India can't live up to the expectation of 10mt-plus exports, Aussie wheat starts to look very cheap at current basis levels.