The last time we saw a weather event like this on the unharvested winter crop was in 2010/11. A great lesson was learnt in market psychology.
As Warren Buffet says,
“When people are scared, be greedy” and “when people are greedy, be scared”.
No doubt, people will be scared of the potential downgrades for Wheat, but we need to look at fundamentals before making any marketing decisions.
Now is the time to be composed and look at history and our local fundamentals. Don’t sell with the masses.
At this stage we feel that the market is overestimating the magnitude of the feed Wheat event, and also the extent of the sold position of the exporters on Milling Wheats, especially in NSW.
It is true that there are millions of tonnes of downgraded Wheat, largely in NSW, but our numbers suggest that we have a strong market for this Wheat, both locally and for export.
In 2010/11, quality spreads blew out at harvest time, with Feed Wheat getting as low as -$100 under APW. As the year progressed, this slowly climbed higher.
Why? Demand.
Figure 1.
In 2010/11 the low spec Wheat priced itself to find demand; the heavy discount got us to a point where we were the cheapest Feed Wheat on the world stage which prompted rapid import demand from consumers in Asia. We also switched local demand from Barley and some milling demand to off spec Wheat.
Feed Wheat prices across the country today indicate that we are already the cheapest Feed Wheat in the world, with the export market recently trading at ~US$320-330 FOB and implying significant margin opportunities for exporters. Likewise, lower grade Wheat is closing the local price gap on Barley, opening up some more domestic and export opportunities. Millers locally will certainly be able to use some downgraded Wheat too, especially the higher protein / low falling number Wheat in NSW.
In WA, the Feed Wheat export market works back to a conservative AUD 420 FIS WA. This has been the main market for lower protein ASW and obviously has a sizable margin for export, like everything in WA.
In South Australia, this same market is equivalent to around AUD $390-395/mt port vs Feed Wheat bids of around AUD $320-350/mt port. Some of the higher bids in SA are generated by prompt domestic shorts, so we are a bit sceptical about the depth of local demand at these prices. EP feed production is destined for export markets, for which the quality fits well today.
Victorian equivalent export price for Feed Wheat is AUD $380-385 port, whilst the Feed is bid around AU$100/mt under APW or AU$ 315 track with an approximately AU$80-85/mt elevation margin. At this point, we do not think Victoria will produce a large Feed Wheat crop, over and above the traditional Red Wheat crops in the Southern Districts. Victoria will see some Feed Wheat flows in from NSW, which should see the lower grade Wheat and BArley markets eventually pressured / capped.
NSW export equivalent price is similar to Vic, at around 380-385/mt port, with Feed Wheat grades pricing around $280/mt Port, an approx $140/mt discount and with a very attractive $100/mt + margin to elevate.
Across the country, Feed Wheat prices have the highest implied elevation margins vs other Wheat grades and we expect this to continue until the prompt squeeze on milling Wheat settles a bit with Vic, SA and the remaining NSW harvest.
Global Wheat prices are strong as the major eight exporter stocks are the tightest we’ve seen in +25 years. Feed Wheat prices are also bolstered by high corn prices globally.
Recent futures markets decline is heavily linked to wider market risk-off, although ABARE Australian crop increases, pleasing Argentinian yield results and rains across all Black Sea acres have added some pressure to the Wheat market individually.
Figure 2.
The local feed consumer will be watching East Coast rainfall events and price spreads with dollar signs in their eyes, but the price reaction and discount today is too extreme relative to the scale and risk of the events, especially when you look at export prices.
We anticipate that panic can set in with a weather event and market conditions like this, resulting in selling at overly discounted prices.
Feed Wheat spreads have already tanked. You can do better.
Flexi Grain is in a fantastic position to consolidate feed volumes and manage risk to help you to get fair value, not panic value.
Give us a call – Head office 03 5032 3377 or contact your Regional Manager below to discuss further.
