2017/18 December Pool programs and market summary update

It is now over two months since the 2017/18 Australian wheat harvest commenced and due to some unfortunate weather disruption only 60% of harvest is complete. This year’s national wheat crop will be significantly down on last year’s record crop mainly due to drought, late start to the season and adverse weather conditions.

While rain through the past month has delayed harvest in parts of the Australian wheatbelt and caused some significant localised quality issues, on the whole the rain caused less of an impact than forecast. With no further disruption it’s looking likely that harvest will be 95% complete by Christmas.

At this stage the crop quality is looking fairly balanced across the wheatbelt, with ASW dominating in Western Australia followed by APW & H2 quality and comparatively APW & H2 are dominating in South Australia and the East Coast.

Domestic markets have been focused on potential quality and yield impacts from the recent rain event. This has seen domestic feed markets weaken due to an expected increase in downgraded wheat and a much improved outlook for the 2018 sorghum crop.

To complicate matters the Australian barley and sorghum demand has picked up in China, which helps put a floor in the feed price in Australia. On the milling quality side, downgraded wheat with high protein has gained interest from milling wheat consumers, hoping to use this in place of higher priced high spec wheats. Pleasingly the season has assisted in producing a higher proportion of high protein milling wheats across South Australia and the East Coast.

The crop still largely sits unsold in the growers’ hands so we have only recently started to see the impact of ‘harvest selling pressure’ as higher yielding crops are reaped in Southern parts of the wheat belt.

 

The AWB pools continue to focus on taking advantage of ‘at harvest’ premiums paid for milling grades and out of spec feed grades. We typically will replace this wheat with grades which are easier to market later in the year to inelastic demand customers. The alternative to buying Australian physical wheat is to instead switch this exposure into the global wheat derivative markets. Due to the global grains balance sheet remaining oversupplied, the US wheat markets are again trading at 12 month lows in the nearby futures contract and the forward curve continues to pay a fairly healthy premium to selling wheat in the deferred months – which is effectively the market saying, don’t give it to me now, keep it yourself until later. With US wheat effectively on its knees, the cost of buying upside options is also historically very cheap. Long story short the market on the whole is presenting plenty of opportunities for us to add value to your bottom line through gaining exposure to a mixture of physical markets, grade spreads and offshore futures and options markets.

I would like to take this opportunity to wish you a safe, happy and healthy Christmas period and a prosperous new year.

Regards,
Charlie Brown (AWB Pool Manager)