Know when to fold them

Winter grain crops struggle for moisture

NOTHING like a bit of dry weather and diminishing winter crop production forecasts to get the grain market a little hot under the collar. Wheat and barley values rallied across all port zones last week and the market appears to have moved into a supply-driven panic.

We know that the Australian winter crop has been struggling for moisture in most regions all year, the primary exceptions being Victoria and the Esperance zone in Western Australia. Sowing was delayed or simply didn’t eventuate in some districts and emergence was poor in others. Normal root zone development suffered as a consequence.

August finally brought some much needed precipitation across the southern reaches of the Australian cropping zone. This bought a breath of new life and optimism to domestic crop prospects. Long range forecasts turned neutral and it was game on.

Meanwhile, in northern New South Wales and southern Queensland the moisture from Cyclone Debbie was long gone. Growers, consumers and the trade had one eye on the withering crop and the other on the multitude of 15-day forecasts that constantly promised a lot but consistently failed to deliver.

We are now in the fourth week of September, the crop has rapidly moved into the critical reproduction phase and moisture requirements are peaking. Temperatures are increasing, setting September records in many locations, and evapotranspiration is high. There is one huge problem here! Almost the entire Australian winter cropping zone has had below average rainfall month-to-date. Demand for moisture is high but supply has been low.

Wheat and barley can struggle through the winter months on very little moisture, but September is the month when crops are made, or lost. The rapidly decreasing production outlook for southern Queensland and northern New South Wales pushed the Queensland feed grain market to, or close to, import parity at least a week ago. In the subsequent days that market has continued to trade higher bringing the southern and western port zone values along for the ride.

Let’s call current eastern Australian wheat and barley production 13 million metric tonne (MMT) and 5MMT respectively (including South Australia). Carry-in for the same commodities in the same part of the country will be close to 10MMT, maybe lower, depending on the pace of exports in the final two months (August and September) of the 2016/17 marketing season.

That is more than enough supply to satisfy eastern state domestic demand. Australia will have to export cereals from South Australia, Victoria and possibly even New South Wales in the 2017/18 season. However, the heat in the northern feed market has pulled South Australian and Victorian values higher and those origins are no longer competitive into export pathways. South Australian and Victorian APW wheat values currently sit around US$15 and US$30 above export parity respectively.

The Australian winter cereal markets seem to be running its own game at the moment, being driven by fear (or unrealistic optimism) rather than rational analysis. It appears to be a tad overheated and runs the risk of rationing demand when there will still be an exportable surplus.

This has all happened before. The lack of new crop grower selling as production estimates decrease. The grower holding old crop grain as a hedge against new crop production issues. The consumer wanting to cover their short but waiting for a market correction.

Something has to give! Will international markets rally? Maybe the Australian dollar falls. Perhaps harvest pressure brings a correction. Possibly a cargo or two from South Australia to Brisbane hit the stem. Or will the discrepancy continue until harvest is completed and production is locked in?

This season’s grain market is just like playing a game of poker.