Wheat price signals confuse

27 Oct, 1999 09:58 AM
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JUST as we get closer to the bulk of the Australian harvest, the price signals for this year's wheat crop have become somewhat confusing. The confusion has been triggered by a sharp drop in futures prices in the United States, with the Australian market now having to determine the likely impact on this country's wheat prices. The legacy of the single desk is that AWB provides the only mechanism for international price signals to come into the country. As such, what happens offshore is irrelevant unless AWB Ltd reflects those changes back into the Australian market. If they send confusing signals, then it becomes less than helpful. The latest drop in US futures prices was triggered by a larger than expected stocks report. Basically, at the end of August, US wheat and corn stocks were much higher than anyone had been assuming. It came about because of an apparent sharp drop in domestic grain use, primarily in the stock feed sector. The change in US figures has then rippled through into global estimates as well, resulting in a lift in anticipated stock levels for the current year. Most people agree the US problems are more in their red wheats and that their supply situation on white wheats is not as burdensome. The net result is that ASW-based wheat prices are holding up relative to US futures. This is used as the rationale for the AWB Underwritten Pool holding its value. The confusing part is that AWB cash prices have fallen. This opens up debate about just how robust the pool estimates are. In the past month, US Chicago Board of Trade December futures have fallen US19 cents/bushel. AWB cash prices have fallen $7/tonne on both export-based multigrade contracts and on fixed grade domestic based contracts. These falls are probably a reasonable refection of the drop in US prices, given the relative strength in white wheat markets. Prior to this week's pool estimate review, AWB pool returns remained unchanged. Not only that, the net estimated return is some $15/t above the AWB multigrade forward price, and nearly $10/t above domestic-based prices. If the price base taken from US futures does not improve, one would expect AWB pool returns to end up lower than current levels. If they do not, one has to question the price levels being shown by AWB on its cash price contracts. However, for growers trying to organise their marketing, the Underwritten pool remains a low risk outlet at this point in time. Even if the pool returns do fall, it is unlikely they will go lower than current forward prices without a further deterioration in US wheat prices. Basically, the marketing alternatives to maximise final returns are simple. We cannot sell ASW and APW grades for cash at current prices, even though the current pool estimate is under downward pressure. It should be noted that this conclusion is not unusual at this stage of the season. Invariably, cash prices close to, and during harvest, fail to match final AWB pool estimates, and this looks like being the case once again. As in the past, the most effective cash sales are those organised as forward sales very early in the season.

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