BULLISH FACTORS
DRY US Southern Plains, with v poor early Wheat ratings for main Winter producer states. Dust storms in the news, early days.
DRY soils in Canada, not fully replenished from drought despite some turnaround in conditions over last months.
DRY Sth American Corn/Soy areas.
LA NINA forecast until at least April May.
INPUTS costs continue in higher price bracket, higher break evens, loss acres, farmer shy seller.
GLOBAL conflict/food security (Russia/Ukraine, China/Taiwan, Central Asia unrest).
POTENTIAL for Russian export limitation escalation in Q1 / Q2.
BALANCE SHEET (Globally) is tight and you won’t completely loosen that in one year easily
BEARISH FACTORS
GOOD MOISTURE conditions in the majority of Black Sea and Europe, with significant turn around on moisture for Russia year on year.
SOME MOISTURE IMPROVEMENT in Canada and Northern US (esp PNW) Wheat areas year on year.
ARGENTINA wheat crop bigger than expected despite tough finish.
AUSTRALIAN wheat crop bigger than many expected, will compete vs Nth Hem with a long tail.
ENERGY prices have retraced, may have seen top in Fert. Also flow on Oil / Corn effects.
POTENTIAL for no Russian export limitation escalation.
INTEREST RATE rise pressure, US markets talking more hikes this week
FlexiMeter Status
HARVEST WRAP 21/22
As we come to the end of the harvest, we are pleased to hit, or possibly exceed our crop estimates of 36-37 mmt Wheat and around 14.2 mmt Barley. New and equal records respectively.
NSW we expect to exceed our early estimates, with a record crop of around 14.5 mmt Wheat and 3.6 mmt Barley. That makes a record year on a record year for Wheat. The comparison to average of 6.28 mmt and 1.84 mmt is notable. NSW yield (via loss and abandonment) was hampered by wet weather and the crop had the potential to exceed today’s numbers all going well.
NSW Wheat quality was severely affected by wet weather at harvest, with significant volumes of downgraded Wheat in the market. Our estimates on the downgrading are largely unchanged and the grower continues to hold low grade Wheat, creating a floor in the market for the short term at least.
VIC crop will largely be in line with expectation of 3.8 mmt Wheat and around 2.6 mmt Barley, after some frost in the Wimmera areas reduced the ability to outperform V’s the average of 3.6 mmt and 2.7 mmt.
VIC quality has been very good on Wheat, with an above average quality profile, surely a shock to some who expected the entire east coast wheat crop to be downgraded. Quality / selection was below average on Malt Barley, but Malt production is still sufficient for local needs and a smaller export program.
SA crops were the worst relative performers on yield, with Wheat expected at 3.8 mmt and Barley at around 2.4 mmt. Below average production of 4.2 mmt and 2.3 mmt.
SA quality was the true mixed bag, with significant downgraded production on the EP, vs largely high quality Wheat elsewhere. Malt selection was again pretty disappointing, but spreads have relaxed now confidence is there that domestics and early malt sales will be covered.
WA was big as per our expectation, surpassing previous record Wheat production by around 10%. This has surprised many and it may continue to surprise as late receivals continue. We currently sit at 12.6 mmt Wheat and 5.3 mmt Barley, but we leave the door open to creep a little higher.
QUALITY & HARVEST DELAYS have been a huge influence on prices and order flow this season, which is something we haven’t seen for many years. For late Nov and Dec, the market was in a clear short squeeze, with exports to be loaded and domestics uncovered in front of a known record harvest. This squeeze and the price action it created caused a run on protein, with many in the market thinking / suggesting a short on milling wheat and Malt Barley, which today has been put into history as incorrect. The market reacted very poorly to not being able to cover what it needed in the early harvest and many domestic and exporters were found to be short grain, despite ample full carry opportunities on old crop cover for early sales (except in SA).
State and grade price disparities have been wide and look to stay this way, owing to the limited flexibility in elevation space across the board. The export program cannot switch export demand around the country to match production as well as it used to, with minimal truly national exporters.
ELEVATION MARGINS were initially very high for all commodities, with the range being AU$40-120/mt depending on zone, commodity and grade, before the short / delayed harvest squeeze eroded the exporters’ take across the board, via a local rally of circa AU$100/mt. This caused some elevation margins to turn negative. Local harvest pressure in all zones has rebuilt some margins, but we have not gone back to the peak margins we saw pre harvest – Nor do we think we will go there in the short term, without a significant global rally.
The overriding factor is still more grain and demand vs elevation capacity. This will not change for the front half of the season in Vic and SA and will certainly be a year long scenario in WA and NSW.
Today we see elevation margins per state as below;
NSW Barley around AU$40-50/mt, Feed Wheat around AU$50/mt and mid to high grade wheats AU$50/mt and above if you can find the volume. The higher the grade, the higher the margin, but buying volume high grade wheat is a tricky proposition.
VIC Barley around AU$15-20/mt, Mid to high grade wheats are around AU$50/mt. There is no feed surplus in Vic, aside from the Red Wheat / High Rainfall SFW varietal production, and this sits with a fairly low margin today of AU$10-20/mt, but margin scenarios for delivered port in the immediate catchment will be very good.
SA Barley is basically a no margin scenario today. Low grade Wheat still has a strong margin of around AU$35-40/mt, with higher grade wheat margins around AU$20-30/mt
WA Barley is around AU$40-50/mt, with ASW around AU$70/mt. Higher grade Wheat is tight and there is minimal business on for this. Margin is available, but liquidity is an issue.
BARLEY
FOB / CFR (Cost and Freight) numbers gravitating around the US$250 FOB WA mark or AU$295-300 CFR Middle East, with significant business sold to Saudi / Other for Q1 and Q2. Saudi buyer reported to be largely covered to March / April and will no doubt be looking to play the convergence between old crop Aussie and Black Sea.
China has been active for New crop Ukraine in volume, indicating we should be using high overall demand numbers for Barley Globally and that relative base price should remain elevated vs longer term levels.
Australia is the price setter internationally, with values here breaking lower and ending up steeply discounted from Black Sea and European old crop values by circa US$50/mt. Australian traders have been happy sellers at these levels, with good margins generally available for shippers, barring the early harvest squeeze period.
Looking at new crop Black Sea (July forward), the global market should remain more or less flat, with Australian old crop and Black Sea new crop pricing Saudi Arabia circa AU$300 CFR. A successful long Barley trade into Q3 and Q4 of 2022 is therefore (at least partially) reliant on a Black Sea / European move higher between now and harvest, or a local short / drought scenario.
From a purely Barley perspective, a significant global rally seems unlikely today, with weather in Black Sea and Europe looking pretty good. China is underpinning overall Barley demand and balance sheet tightness, along with price, with significant volume of new crop purchases in place for Ukraine and French recently at very good premiums to generic (Saudi / Middle East).
Other than that, generic Barley markets should trade very seasonally and with a very high relative stocks position in Australia (WA) in Q3 and Q4 this season we should see New Crop Black Sea harvest and Australian old crop selling fighting for Saudi / Other generic demand for most of the back end of 2022 – This long tail in Australia will likely be a surprise to some in the global market.
Without significant other commodity or weather influence, this may be a prolonged soft point for global Barley prices, after which the market will take direction from Australian new crop production, which is likely to be lower than this season’s record.
We have heard the rumour about the return of China demand for Aussie in Early 2022. Our thoughts below:
From a feed perspective, we have seen no indication that the market expects to access Aussie exports in the near term, with recent purchases of Ukrainian for Jul/Aug at around AU$60/mt higher than the Australian export market indications. They would also prefer the Aussie on quality. You don’t buy this if you are about to be allowed to buy the cheaper / more preferred option.
For Malt, the situation is less clear, with Europe very short and premiums sky high. China is more heavily affected by the inability to buy Malt / FAQ Barley ex Australia than feed Barley. It makes sense, that if anything was to open, it would be on Malt only.
An outside chance, but we will keep an eye on and update any changes.
WHEAT
Export / FOB markets held up well vs board sell off and harvest pressure which saw short, sharp pressure on local values. We see Feed Wheats around US$290-300 FOB, ASW carrying a premium of US$10-20, depending on protein levels and higher grades trading strongly, with WA base offers reluctant to discount the approx US$350 – 380/mt range for APW-H1 where the majority of business was put on during the rally over the prev months.
Broadly, Aussie Wheat is still cheap in every category and from every state for Q1 and Q2. This is likely to continue to varying degrees into Q3 and Q4, as one can expect in a record crop, the long tail is really only attributable to NSW and WA Wheat and therefore with the quality skew we see, it is likely to be a low protein ASW and downgraded “feed” style wheat program that takes us through to EOY 2022, not the milling Wheat that the world was hoping for.
It has been quite a ride for Wheat, with the late harvest driving a brutal short squeeze as outlined above. For sure there is no protein squeeze today, with elevation margins returning across the board. The trader is aware that protein / high grade Wheat is valuable internationally, so while we have seen the short fear situation quelled locally, we have not seen the same downward pressure on the world market.
For Feed Wheats and ASW the journey has been different, with supply loading up on the market and forcing values to access secondary demand in Asia, competing with Corn and Barley demand to adjust the program to suit the skew of the downgraded crop.
In this movement, we have seen ASW diverge from Feed and even intricacies develop in the usually standard feed space. We have differently priced feed for high pro, along with discounts developing for high sprout. As usual with feed, once you discount to corn parity or close into Vietnam, Thailand and Korea the market finds itself with ample demand and quickly pulls the parachute on its price freefall.
Interestingly in all of this (and in many areas), the grower is a slow, maybe unwilling seller of feed wheat today, which is driven more by the spread to other wheats than the outright values, which traditionally are pretty good. The continuation of this is unclear at this stage and we probably need to see the grower come back to market in Feb to judge better their intentions.
Conveniently for our quality skew and supportive of our lower grade prices, China has and is buying all the ASW it can get, which explains the 2 speed market for Feed vs ASW (when ASW is at a traditional production surplus and needs to chase feed demand). We estimate 5-6 mmt of business has been done to China, but it can be even more!
China demand is less inverted than other markets too, due to inability for lower grade Black Sea Wheat to take that market at their harvest. French Wheat will compete, but the relatively higher freight turns China into a premium destination to the global market and therefore less inverted when you consider Australian execution (and relative freight discount)
Also notable for feed wheat demand and price is the Corn complex. Current feed Wheat values (base prices) are underpinned by a high, but inverted Corn market, which sees an approx US$20/mt CFR Asia price drop in May/June as we see more Sth American production hit the water.
This Corn inverse has implications for feed Wheat prices ex Australia, without large stocks of downgraded production expected to be shipping all year. Beware of carrying feed grains into the back end of the season with La Nina here (no drought flag), high stocks and inverse. Will need support from the world market to make a big run higher generally.
Corn is in the beginning of a weather market, with South American drought present in Arg and Brazil First Corn crop areas. Stone X has recently cut Brazil Corn prod due to this and we are seeing some risk priced into US Corn futures and cash corn prices ex South America. We are watching this weather very closely.
La Nina also remains in place, which is generally negative Sth America and US Corn production. The market will take this threat seriously until La Nina fades or rains fall.
Global Milling Wheat is high priced and inverted, largely driven by very tight old crop balance sheets (milling especially), along with Russian export tax. This inverse is further supported by recent kind weather in the Black Sea Winter areas, shoring up new crop production, especially in the ukraine.
The Australian milling wheat short squeeze was also a consideration for the global inverse (promoting a higher inverse due to global milling squeeze), but as this situation resolved, we have seen some softening / correcting of the inverse.
Out the curve, as usual US Wheat loses its competitiveness and becomes relatively very poorly priced to hit anything other than its true core demand.
Australian Wheat has had a relative fall from grace on competitiveness.
We have gone from very cheap spot at a discount to Black Sea FOB, to a significant premium, but not enough to lose our immediate geographic demand profile
And in the deferred we have seen our premium rise from around US$30/mt in Nov, to around US$60/mt today.
Our deferred competitiveness on Wheat into Asia is becoming questionable, which looks strange considering our crop size, but does make some sense as we will likely have very little milling wheat available for export for Q3 and Q4. The market is correctly pricing that Aussie will not need to compete heavily in the back end for Milling Wheat, it will be Feed and ASW (which today will be largely China)
Australia stays competitive to China vs French new crop today, which is a very important relativity to monitor considering the significant Chinese demand we have seen and the quality skew of our carry out
In the end cash Milling Wheat becomes the Black Sea show, with weather and Russian politics likely to be the main price drivers.
BALANCE SHEET – MAJOR 8 EXPORTERS
In the past month wheat Stocks:Use for the Major 8 Exporters has increased from 12.14% in November to 12.58% in December.
USDA increased global wheat production by 4.4mmt with Australia doing the heavy lifting, +2.5mmt and Russia adding 1mmt. Australia’s production was still understated and will likely be revised over the coming months.
USDA also reported an increase of Australian wheat exports by 2mmt.
