Grain markets seem to be balancing the bearish with the bullish, despite unpredictable weather and political events.
Last year’s grain markets were characterised by huge price swings and volatile reactions after every major announcement. This year, by contrast, has been markedly different.
The market in 2023 has traded in quite a narrow band, particularly in recent months, especially the ASX contract.
The Chicago Board of Trade contract, on the other hand, has been declining in Australian dollar terms.
There have been plenty of news stories in the past two months that should have driven markets higher, including:
- speculation that Russia wouldn’t extend the export program ex Ukraine;
- speculation of huge floods in China; and
- the bombing of a huge dam in Ukraine.
The reality is these incidents have only caused blips. The market is showing an incredible ability to be both boring and exciting at the same time.
So what is happening, and what should we keep an eye on?
Conditions: France
France is Europe’s largest wheat producer, and we closely examine how conditions are forming there as it is a good indicator of their total crop production.
The EU produced 140.5 million tonnes of wheat last year, 38.5mt of which was exported. Many of us forget that Europe is a major player, especially in trade with the North African countries.
So how are the conditions this year? If we compare the most recent data against the period from 2012, then it’s good.
At present, the conditions are rated 88 per cent good/excellent. This is only 1 per cent lower than in 2015, a year in which the EU produced a bumper crop.
Conditions: US
The US is another important global producer of grains. France is going gangbusters, but America isn’t so lucky.
Drought conditions have affected crop conditions; this has been caused by La Nina, which tends to have a negative impact on the US Midwest cropping regions.
The chart shows the average June conditions in the US since 2010 versus the current June conditions. Conditions are below average across all the major grains, especially winter wheat.
At this stage, I’d be keeping a close eye on corn and its development. If we see further downgrades, that can have a big impact.
Speculators
Speculators, love them or loathe them, have an impact on the market. They bet on the future value of commodities. They make their crust by effectively attempting to guess the direction of the market; they can be short or long.
- Short
They are betting on the market falling further. Short sellers have effectively sold something they don’t own and will aim to buy it back at a lower price in the future.
- Long
They are betting on the market rising. They own the commodity and aim to profit from selling it at a higher price in the future.
While many people don’t like the idea of speculation, it serves many useful functions and markets would be difficult without them.
So what are they (speculators) doing just now? At present, they are holding the longest net short position since 2018.
It is important to note that if something occurs to turn the market bullish – such as anything substantially affecting supply – then those who are short will have to close their positions by purchasing. This pushes prices up as buyers hit the market.
So what’s happening?
Currently, the market doesn’t seem to be showing too much reaction to events. The market is balancing the bearish with the bullish.
The world is still in a dicey position, with the ongoing war in Ukraine, which doesn’t seem likely to end any time soon, and also with stocks within the world’s exporters forecast to be the lowest since 2007.
In recent years, Australian farmers have been lucky to have good crops and decent prices come harvest. This year it is more important to think about your selling strategy.
Keep it simple, but we can’t expect a huge global jump without a major hiccup in the Northern Hemisphere. If we get a local jump, it will be down to local issues.
A local issue, with the corresponding high basis, might sound good on paper, but it generally means you have less to sell. In a perfect world, we’d have high prices caused by overseas factors and high local production.
Hope for the best, but plan for the worst.
• Andrew Whitelaw is co-founder and director of Episode 3 (EP3)