Summary
What Are We Doing with Wheat?
- Selling East Coast protein wheat – market is short and paying huge premium to the export market. Where adequate supplies in SA and WA are satisfying the demand. This won’t last forever.
- Holding/pooling ASW (if we were traders we’d be buying it) hedging currency, securing export capacity and looking at deferred offshore and local hedges to ensure that fair value is achieved.
- Combination of the two points above. Selling high protein, looking to purchase back ASW grades during peak selling pressure (we see good upside potential).
Why Are We Doing It?
- Available supply of exportable ASW is down significantly year on year, due to smaller national crops. But importantly due to high selection of high-protein wheats in SA WA.
- Market has forward sold plenty of ASW to China based on WA execution. Now caught in a jam because they have to replace them out of the East Coast. This has put pressure on protein markets in export states.
- China has been an active buyer of world wheat and does not appear to be slowing down. Puts a backbone under low-grade wheat, supports nearby futures, and improves the correlation (which has been lacking) between local wheat and US futures.
- Talk that China could increase wheat imports by 5mmt for stock rebuilding. This would have a dramatic impact on wheat prices in Australia, Canada, France, and the US.
- Aussie crop coming in slightly under market expectations, prompting a minor reduction in available export supplies.
- Large opportunities in grade spreads.
The weather has thrown a lot of doubt into the wheat market in the last few weeks. With fear driving prices and creating opportunities. We don’t think the East Coast quality is a problem, we see good opportunities.
YOY Quality
The 36% decline in Wheat production this season has limited our ability to fully service the export market. With this reduction comes a sharp change in exportable quality.
- ASW supplies down 68%,
- APW down 44.5%,
- Feed wheat 64.1%
- Hard wheat up 0.9%.
This figure has caught the market offside, with a lot of forward sales on the books as ASW to China. **it’s a lot less risky for traders selling new crop 3-6 months ahead, as low grades before harvest**
The quality profile across the states is very different this year, with SA and WA having a large % protein while the East Coast has a lot of ASW. We have seen this indicated in local grade spreads.
Order Book – Pre-Harvest Sales
We estimate that 1.5-2 mmt of low grades has been sold prior to harvest, of a total export supply of only 5 mmt.
This on its own balances out, but as we said earlier, it’s the location of this quality. WA has had a 7mmt drop in available exportable supplies. This sees traders looking to replace their shorts out of the East Coast and sell the higher quality they are getting in WA.
But we also have a significant demand profile from China, which looks to be building.
China
Global – China has been hunting for cheap wheat, which culminated in around 1 mmt of US wheat purchases in the last three weeks. There are rumors that China could allow an additional 5 mmt imports for reserve stock building on top of the 12.5mmt of wheat they are forecast to import. This additional 5mmt would lean heavily on Australia, Canada, the US and France. Australia’s market share into China last year was 60% at 7.8mmt, we have a significant reduction in available exports with total national export supply at 16.5mmt. If China continues at its current pace it’ll leave a very limited amount of available wheat exports for our numerous other inelastic buyers.
The 2023 calendar year marked the first time that China has imported over 10mmt since 1995. Something is going on in China??
China’s Spree Has Rallied US Futures
Global – China has been hunting for cheap wheat, which culminated in around 1 mmt of US wheat purchases in the last three weeks. There are rumors that China could allow an additional 5 mmt imports for reserve stock building on top of the 12.5mmt of wheat they are forecast to import. This additional 5mmt would lean heavily on Australia, Canada, the US and France. Australia’s market share into China last year was 60% at 7.8mmt, we have a significant reduction in available exports with total national export supply at 16.5mmt. If China continues at its current pace it’ll leave a very limited amount of available wheat exports for our numerous other inelastic buyers.
China purchased around 1 mmt of SRW last week, an unusual occurrence for the US wheat that typically prices itself away from export business. These purchases prompted a sharp rally in wheat futures, one that scared some of the funds into covering their excessive short position.
It tightened up the US Soft Red Winter (SRW) balance sheet, SRW is the grade that US wheat futures are based upon. It is the minimum grade to deliver against SRW futures contracts. If China was to continue buying SRW, it could remove a significant stock buffer and put a large amount of support behind nearby deliverable futures.
The market gave back some of last week’s gains, with the sell off triggered by the lack of new China sales being announced. But the market rallied a great deal after their first purchases, so it makes sense that they haven’t been continuing to buy on the way up. What this tells us though is that nearby wheat futures cannot afford to get too cheap, otherwise they’ll be back in.
China’s Context
On Friday 8th Dec the USDA increased their 23/24 China wheat import forecast up 500 kmt to 12.5mmt (July/Aug). China does not have the same availability of ASW wheat from Australia as last year, where we exported 7.8mmt in our marketing year, achieving 60% market share.
They are still buying Aussie, but our supply limits our ability to maintain market share. We are not always the most competitive on price. Or put differently, our supply is low enough to ensure our prices do not stay too cheap for too long.
But now we have rumors of 5mmt import potential outside their traditional purchasing mechanism, under the guise of stock rebuilding..
If this was to occur, world wheat will rally from the bottom up. The export task of Australia, Canada, France and the US would be dramatically stretched. Increasing price and competition from other importers that rely on this supply.
Implications For Australia
Last year, China was Australia’s largest wheat buyer. At 7.6mmt their market share was 24%, that was when we had a 31.8mmt exportable supply.
This year, we only have a 16.5mmt exportable supply, we estimate that China will buy >4mmt of Australian wheat, maintaining their market share. But this figure could increase, which will leave limited opportunities for our other consistent buyers to meet their demands. Some of whom are inelastic Australian buyers.
At 4mmt for China, we only have exportable supply for the top 9 export destinations to buy their 5 year average requirement from Aus. This is a startling figure, considering that the next 11 destinations accounted for 13% of our exports last year. These countries still have some requirements for Aussie wheat, and the only way to turn this off is price. Australian wheat can’t stay cheap for long.
ASW in Victoria is looking slightly undervalued and at current prices, it will head out the door very quickly. With a large ASW crop in Victoria, we feel the natural occurrence will be for traders to step back and let some export margin open up – something Flexi Grain can participate in.
Speak to your Regional Manager for more information or to discuss how Flexi Grain’s Tonnage Contracts could help form part of your 2023/24 Grain Marketing Strategy.
