Worldwide wheat forecast
United States slump tipped to pick up in the warmer months
THE wheat market has finally shown some anxiety with Chicago wheat rallying around 10 per cent since mid-January which begs the following questions: What is driving the market to rethink the bearish tone that shadowed the grain market? And what’s in it for Australian growers?
Let’s consider and explore the first of these questions.
The global market becomes fixated on two factors at this time of year.
Corn and soybean prospects in South America.
Winter cereal conditions in northern hemisphere.
Over the past week, the rally in grains and soybean propagated from two roots.
Central parts of Argentina turned dry with no relief in the forecast until mid-February.
This instigated market participants to start flagging reduction to production.
Secondly, the USDA released its January US winter crop conditions, which revealed deteriorated conditions across the key producing states Kansas, Oklahoma and Texas to make it among the worst in the past 10 years.
On the first issue of Argentinian dryness, if we see precipitation revert to normal in mid-February, the production reduction will be insignificant, and the market will swiftly discount any concerns.
The subject of poor wheat conditions stems from the soil moisture deficits across vast areas of the southern half of the United States which encompass the major winter wheat growing region symptoms of La Nina that bring increased chances of a dry winter.
The US production prospects should not be discounted yet as favourable spring weather can dramatically improve conditions, hence funds are yet to capitulate on their large accumulated short position.
At this stage however, long-range forecasts are calling for dry conditions to extend into spring, which will ignite the wheat market if such a forecast transpires.
So, what’s in it for Australian growers?
The Chicago rally observed so far has not translated to the same increase in domestic prices given Australian wheat was already uncompetitive into Asia versus Russian wheat.
The spread between APW and comparative Russian wheat has narrowed to USD$15 into Asia, which is still too wide for the many of the buyers that can buy
cheaper Russian wheat, even after taking into consideration the marginal moisture and quality advantages of Australian origin.
Consequently, we do not anticipate Australian wheat substituting Russian origin in the near term but expect a round of buying from Asian buyers on a USD$5 pull back to keep Australian wheat
prices supported.
Other major northern hemisphere winter production regions though are faring well.
Russian conditions have improved with better snow cover and the EU continues to have a relatively benign winter.
One exception is India, where their primary wheat producing northern and
central states have had sub-par germination conditions on a lack of rain.
The bull in the wheat market is understandably not firing on all cylinders yet but given what we are seeing in the US and what the medium-term climate drivers are suggesting, there is real potential for increased volatility over the next few months.
❝We do not anticipate Australian wheat substituting Russian origin in the near term.