Grower dilemma on rising wheat prices

31 May, 2012 04:00 AM
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Katanning farmer Kallum Blake has already locked away a percentage of this year's prospective wheat crop for $261 a tonne.
Katanning farmer Kallum Blake has already locked away a percentage of this year's prospective wheat crop for $261 a tonne.

WA growers are facing a double-edged sword as they grapple with early grain marketing decisions.

In the space of a couple of weeks APW2 prices have jumped by up to $30 a tonne.

With the knowledge many growers view $250/t as a break even figure, the price increase could suggest a large percentage of farmers are currently looking to lock their 2012/13 APW2 into early contracts.

But it's a chicken and egg scenario.

This season a huge percentage of wheat acres were replaced by canola and barley plantings and to add to the worry, a significant lack of steady rainfall has meant Wheatbelt paddocks have continued to dry out.

Last week APW2 was fetching $260 a tonne at Geraldton and $258/t at Kwinana - some of the highest figures seen in a long time.

But as Louis Dreyfus State manager David Syme explained, it was difficult to tell whether the favourable prices would stick around or more importantly, whether growers should lock their grain into contracts knowing there wasn't significant soil moisture available to their recently sown crops.

He said growers were keen to lock in APW2 at current prices but were clearly reluctant for good reason.

"Prices are being driven by moisture," Mr Syme said.

"We're seeing these basis levels for a combination of reasons including the fact it's dry.

"If paddocks had sufficient soil moisture there would be a far greater uptake of wheat forward selling than there has been so far."

He also said the relatively high prices had largely been driven by weather fears in the Russian region.

CBH Grain wheat trading manager James Foulsham said the value of all grades of WA's old and new wheat crop increased after the July Chicago Wheat Futures rallied from under 600 to above 700.

He also cited the combination of Russian, Australian, USA and Chinese weather concerns as the main catalyst for the recent sudden price rally.

He said traders would continue to monitor weather closely during the next few weeks because wheat prices had the potential to move significantly higher or lower as more information came to hand on what the global crop might look like.

"There has also been a round of short covering," Mr Foulsham said.

"Wheat futures have been steadily falling for the last six months and because of this a lot of funds and traders have been shorting the market.

"The concern over dryness also saw a lot of short positions bought back in a short space of time which helped to drive the sharp price rally."

Mr Foulsham said the significant rally of the last few days had changed the dynamic of the market significantly and wheat prices had been closely tracking the price of corn and macroeconomic events for the bulk of the season.

But the concerns over dryness around the world meant the spread between wheat and corn had also blown out significantly.

He said prices for WA growers had also been helped by a pull back in the Australian dollar.

"With all the recent bad news coming from Europe and concern over Chinese growth, the Australia dollar has fallen sharply to trade back around the 97 cent level." Mr Foulsham said.

When asked if he thought the sudden price rally would encourage WA growers to lock their new season grain into early contracts and whether the State's significant carry over stock from the 2011/12 season would have any impact on respective prices, he said he couldn't predict or control grower behaviour and it was still too early to tell how residual stock would impact prices.

But Mr Syme confirmed WA's 2011/12 APW2 carry over crop was certainly on the trade's mind.

And so much so that even the US's trade was keeping an eye on WA.

Farm Futures magazine senior editor Bryce Knorr, based in Wisconsin, said recent rain in NSW, Victoria and South Australia meant the US continued to watch WA's season with increased concern.

He said if WA weather conditions didn't improve soon it would be likely production out of Australia would repeat a pattern he had already witnessed throughout the world with the 2012/13 global crop.

"No single global region is suffering devastating losses like the situation that developed in the former Soviet Union in 2010 but original production estimates are trending lower for most of the major exporting regions," Mr Knorr said.

"A shift to a wetter pattern in April and May stabilised conditions in Europe which was hurt by dry weather last fall and then cold weather over the winter.

"Winter wheat production in Ukraine also will be lower with losses extending into south Russia.

"But enough rain appears to have fallen recently to prevent a repeat of 2010.

"Still exports from Russia may be cut by a third in 2012/13 because its stock was depleted by a big export program before problems became apparent.

"Plus some of its inventory is out of position deep inside the country where it can't be exported easily."

Mr Knorr said farmers had planted less wheat in Argentina and high prices for corn and soybeans caused by the drought in the country this year had caused the switch.

He also said India should have a good crop but was mainly a regional exporter of small shipments.

Among the traditional exporters, Canada so far appeared to be the major grain growing region which had so far escaped problems as moisture recovered nicely in spring after a dry winter.

When asked how the US's position would impact on wheat pricing in WA, Mr Knorr said exportable supplies of wheat continued to shrink so areas with a good crop would always find buyers.

"The biggest single factor affecting wheat prices in the US right now are the commodity funds," Mr Knorr said.

"Big speculators built up a record net short position in Chicago wheat futures, betting that prices would fall.

"As prices rise those speculators buy futures to close out their positions, so buying can start to feed on itself."

Mr Knorr said this "short covering" was a major reason why the market rallied more than 15pc in less than a week earlier this month.

If global financial markets avoid a meltdown over Greece it could even help lay the foundation for a longer term rally into September.

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