Wednesday, January 26, 2022

Weak base level no wonder

Nearby futures had three major peaks during 2021. It hit below 770 US cents per bushel for the first time in April. The second major peak came in August and that too failed at just below 770 USC/BU. We had a third run up in November, in which the market reached 797 USC/BU before moving up to 863 USC/BU on 24 November.

Since then, the market has been in a declining trend, rising last week, to a low of 749.75 on Thursday night, before recovering to 760.5 USC/BU on Friday night.

It is no surprise that Australian cash prices have also declined, first due to the resumption of our stalled harvest in mid-December and then the fall in offshore prices.

The South Australian market continues to lead the country, but prices fell to $377 a tonne at the end of last week. Kwinana FIS prices were reported at $370/t, and the second port zone near Port Adelaide was Pt Kembla, with some preferred sites in that zone approaching a $375/t port basis.

Base levels measure the difference between the $A value of Chicago Board of Trade futures and our own cash market. At the end of last week, PT Adelaide prices were at $12.41 a tonne under March CBOT futures. This is not bad in the context of the current market.

While the base is as weak as we can see in general, in the context of very high global prices and a huge Australian crop, this is not a surprising base level. Add to that the idea that CBOT futures (that is, United States wheat prices) are uncompetitive in global markets, so for us to compete we need to trade slightly lower than US futures in general.

Some growers are milling wheat from the crop on the assumption that global shortages, and heavy weather damage to our own crop, will see a reduction in wheat milling during the year, returning prices in excess of $400/t.

It is always possible, but I do not share the enthusiasm. Much of Australian wheat was downgraded, but even with a sizable harvest, there is still a large supply of milled wheat for both exporters and domestic users. Expecting a wholesale rally for wheat milling seems a bit excessive on domestic supply issues.

US futures prices (ie, US and global wheat prices) are more likely to bounce back above $400/t in 2022 due to problems with the wheat harvest in the Northern Hemisphere. To reach there we are likely to see a 100 USC/BU rally in wheat futures from current levels, and on a stronger footing.

The story’s weak base level no wonder first appeared on Farm Online.

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