Wheat prices in Australia continue to edge lower. Apart from harvest pressure, prices are still adjusting from the high levels reached in early October. Prices are also under pressure from a stronger Australian dollar this week, and from ongoing stagnation in US futures prices.
The week before last, US futures spiked strongly for one day as shorts in the market were suddenly washed out (i.e. funds holding net sold positions in the market bought futures). That rally proved to be short-lived, and the market has pulled back to “safer” territory just above 500 USc/bu.
The problem for US exporters is that when CBOT futures rally, US wheat becomes uncompetitive against Russian and EU wheat in global markets. That stifles export sales and shipments. At the same time, prices for US wheat are low enough that growers are scaling back on their sales, limiting the supplies that exporters have to move.
Basically, prices need to be higher for US wheat exports to increase, and that means international prices, or more specifically, Russian prices, will need to be higher to allow that to happen.
Australia also needs a lift in international prices if our current market is to get enough support to prevent further price falls. CBOT futures in $A terms are still around $A254 a tonne, leaving our prices well above normal against US futures for this time of year, even with a drought.
On the currency front, we could be in for further strength if the trade war between China and the US is resolved. This issue is always a moving feast, but if tweets from President Trump are any indication, it would appear that the two parties are at least a little closer to talking about their differences.
The Australian dollar strengthens against “good” news about the trade war because the US dollar tends to fall, but our dollar also rises because whenever global economic conditions appear to be improving. Our dollar seems to lift against the US dollar, and other currencies as well.
So far, the net result of the lift in our exchange rate with the US, and the soft CBOT futures price, has been to push the A$ value of nearby futures down to levels seen on just one day in October when futures last bottomed out, and then for two days in September. We then go back to July to see prices consistently around, or below, current levels.
If we do a year on year comparison, nearby CBOT futures are $A40/t higher. At the same time cash prices are $150/t higher in the Newcastle zone, $131/t higher in the Port Adelaide zone, and $76/t higher in the Kwinana zone.
Therein lies the risk. Last year the drought basis in the Newcastle zone was $100/t in mid to late November, and in the Port Adelaide zone it was $41/t. Both these basis levels are high, but similar to other recent drought years in NSW.
This year’s basis levels are still extreme against anything we have ever had before. That should stifle exports even from WA, while at the same time keeping the door open for either grain imports or grain product imports. That needs to be balanced against the reality that Australia in total (from WA and SA at least) will have an exportable surplus.
