Aussie cash price risk

Australian cash prices at risk


Grains
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Either prices will pull back towards levels indicated by US futures or, if US futures rally, our market may not respond.

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US futures prices are at similar levels to 12 months ago. And while the Australian dollar is slightly higher, nearby futures are up about 13 US¢/bu in US$ terms, or A$5.76 per tonne.

QUERY: Why have wheat prices not responded as expected? "It may well be supplies of milling quality wheats to domestic markets ... are now higher ... as a result of the rain."

QUERY: Why have wheat prices not responded as expected? "It may well be supplies of milling quality wheats to domestic markets ... are now higher ... as a result of the rain."

In both cases, the A$ value of nearby CBOT futures are under A$200 per tonne. Against this, current cash prices in the Australian market are high. Compared to a year ago, Newcastle-based prices are up about $75 to $80 per tonne. Port Kembla prices are $65 to $80 per tonne higher, while Melbourne zone prices are $46 per tonne higher.

Even the export-based port zones of Port Adelaide and Kwinana are up year on year by $37 per tonne and $26 per tonne respectively. Of course, this might just mean that US futures prices are lower than they should be, and there is some evidence this may be the case, with futures tending to be at a discount to domestic cash prices in the US. It probably also means Australian cash prices are fairly robust at current levels, and that upside might be hard to achieve.

Whichever way we look at it, Australian cash prices are at risk. Either they will pull back towards levels indicated by US futures, albeit holding some additional value from our own domestic market factors, or, if US futures rally, our market may not respond, letting that process pull us closer to US futures.

In the last week, Australia has moved further away from the significant rainfall events that have plagued the harvest in Victoria and NSW. Many growers would have been expecting that this would push prices for milling quality wheats higher. In reality, Port Kembla and Melbourne port zones prices fell in the week after the rain, and by more than the drop in US futures. Overall, our cash market has received no support from the wet harvest, and remains vulnerable to a further drop in US futures values.

So, why have wheat prices not responded to the rain event in the way expected? It may well be supplies of milling quality wheats to domestic markets, and to exporters, are now higher, not lower, as a result of the rain. There’s no doubt the small crop in NSW has pushed wheat prices high. In these circumstances, feed users chasing wheat will buy any grade available, including milling wheat grades. In turn, those needing milling wheat for domestic use push prices higher to slow the flow of good wheat to the feed market.

When we get a significant rainfall event, the supply of feed wheat suddenly jumps. The feed market no longer needs to chase milling wheats, leaving more of the already harvested crop available for the local market, and for exports. If supply increases against demand, prices ease. We have seen this play out in southern NSW and Victoria, with wheat prices falling since the rain.

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