Lentils hold firm despite Aussie dollar surge

Interestingly, in the latest (December) crop report, ABARES revised the SA lentil crop higher by 30 per cent compared to its September data - though this directly contrasts with the yield results being reported by growers after a poor finish to the season. The late rains in November caused delays and potential quality downgrades through the back-end of harvest and were too late to provide any substantial benefit to the SA lentil crop. If there was any expectation of a production increase, it could be tacked-on to the Vic crop, which saw more substantial rainfall in the same period with the crops still in the ground. With that said, early harvest reports still include some damage due to earlier frost events and some subsequent yield losses - but this cannot be attributed to the whole state. With the Vic harvest ongoing, price upside in the near term is expected to be limited, however the low levels of grower selling liquidity are equally expected to cap price losses.

One of the strongest price indicators for the lentil market outside of harvest is the Aussie dollar, which has surged higher over the last month. Before the most recent Reserve Bank of Australia meeting, the Aussie was pushing above resistance at 66c after increasing nearly 5pc from its November lows. As a guide, for every 1c move in the AUD against the USD, lentil prices are subject to swings of up to $15/t in AUD terms.

Comments from the US Fed coupled with apparent desired impacts on US inflation to date have each affirmed the broader market view that US interest rates will be put on hold in the near term. There is also anticipation that there will be multiple rate cuts by the US Fed in the first half of 2024. In contrast, we've seen a more hawkish stance from the RBA where demand-driven inflation is expected to lead to tighter monetary policy. With that said, recent CPI and retail sales data has come in below expectations, resulting in rates being left unchanged in the latest December meeting. At the time of writing, the AUD has subsequently fallen back below the 66c level, but remains nearly 3pc higher than the November low.

With such big moves in the exchange rate, lentil prices have not felt the consequent price pressure - this is testament to the underlying fundamental support to the market. Total lentil production between Australia and Canada (as the major exporters) is projected to be roughly 920,000t lower year-on-year; this comes despite the latest upward revision from Stats Canada. It's noted that total supply from Canada is still worse than the drought-ridden 2021 year by roughly 10pc.

The market will be looking at the outcome of the Vic crop and the selling-nature of growers through their harvest. The next cues will be taken from India's rabi crop - their biggest pulse crop - where lentil growing conditions have improved of late but harvest won't be for a few more months.