Market wrap: Rising prices the path of least resistance

The theme has been consolidation in global Ag commodity futures markets with Corn and Soybeans both closing higher every day last week. While still 15-20% off the May highs, the continued positive closes suggest the ‘trade war rout’ might have abated for now. Wheat futures have fared better than their row-crop cousins, currently sitting at only 10% below the May highs. This is due to more fundamental support with gradual global stock reductions getting closer to eventuating, most significantly in the Russian and European winter wheat crops with yields lower than expected as harvest progresses. Limiting factors include wheat still being offered relatively cheaply out of the Black Sea region and good Northern Hemisphere Spring wheat conditions. With US stocks at 50% of annual production, combined with a surplus in shipping capacity (no US soybeans moving to China), the world is not about to run off wheat today and there should be no trouble moving the supply to demand destination. 

 

Nowhere is the declining stocks and worsening outlook more evident than in Australia, and the heart of the concern is NSW and QLD. It feels local markets are now fully accounting for a much reduced crop, with Brisbane track new crop wheat values pushing up through $400/tn for the first time last week. This is near full execution values above WA and SA prices, although with the WA crop in average condition and the SA crop below average, prices there are also unlikely to be stagnant. New crop values on the East Coast have now either converged or surpassed old crop values. 

 

Unlike the NSW and QLD crop, there is both more upside and downside potential in the southern crops with many growers currently looking skyward for the key determining factor. Although we are a few dollars off being export competitive, whether rain or no rain, local demand will need to continue to hold prices above global values, to ensure production stays here.

 

Newcastle and Port Kembla track values are currently running $30/tn and $35/tn behind Brisbane respectively, being geographically closer to the southern production zones. However if the Riverina and Victorian Mallee have a less than ideal spring, expect grain to come from further afield and these spreads could tighten.

 

Locally both old and new crop canola prices were up roughly $5 for the week, in line with futures market moves. Similar to wheat, we can expect poor local conditions to provide a buffer against lower offshore prices, while any global pick up should also flow through to our prices. A weaker AUD has also been supporting local prices and we seem to have found a comfortable level at ~US74c with the AUDUSD trading within the 73-75c for the previous 5 weeks. 

 

Originally published 24 July, 2018