Wheat
Since the start of August, wheat pricing for the 2021/22 season has traded around or above the 90th percentile range for 5 year pricing and hasn’t backed off. Over the last eleven years pricing has never had such sustained strength prior to harvest. Typically having such strong pricing over such a sustained period is rare, and represents an excellent sales opportunity, right? But where does this sit in the grand scheme of things?
That’s where we look at basis – a mythical number open to interpretation, basis demonstrates how our Australian pricing stacks up against international pricing. A positive basis indicates our grain is selling at a premium to international prices. In the last five years basis has barely dipped below $0/t, and the months leading up to and during harvest have typically yielded a basis result above the 80th percentile ($48/t for Kwinana to $39/t for Esperance). In the 2021/22 season so far, we have seen basis sitting well below the historical 50th percentile mark, going as low as -$27/t for Kwinana and -$32/t for Esperance.
What does this all mean for prices at harvest? Recent cash prices still represent exceptional value – wheat in the $370/t to $390/t range is a great price any day of the week. But we are being hampered by international issues that have made getting Australian grains harder and more expensive than in the past. Shipping freight has become astronomically expensive, with shippers diverting capacity to more profitable routes in the EU and USA. Not to mention the global shortage of containers. The energy crisis in China is having flow-on effects into many different industries and fueling decreased production of goods and natural resources, impacting supply chains and causing significant changes to global markets.
There are also significant local issues impacting on basis with traders very nervous about delays in getting grain to port and on a boat in time. This has led to basis being forced down dramatically as traders want to experience a solid few months of successful harvest shipping to regain confidence in the system. Any blowouts in loading ships will continue to hurt pricing. An additional factor is buyer credit levels. They are now paying twice as much per tonne of grain as last year. This means they will hit credit ceilings quicker and with a big crop will secure the grain they need easily to fill their boats. This could very easily lead to a larger decrease in prices in the middle of harvest as lots of tonnes hit the market and get sold straight away.
With so many variables at play, and so much instability globally, it is impossible to truly predict what markets will do going forward. We can make educated guesses, but in real terms (flat pricing as cash), current wheat pricing represents good value.
Canola
While not immune to the issues mentioned above, canola has been fueled by an incredibly strong demand story which started with two years of reducing soybean stocks in 2019 and 2020. This set the scene for a Canada drought, which has wiped around seven million tonnes off their annual production. Add to this flooding in Europe, and a commodity market that represents a “safe haven” for investors and the result has been the highest ever $1,000/t canola pricing. The ups and downs of this rally have been intense. There has been plenty of times over the past 6 months where the market appeared to have been ready to fall, only for canola to surge past its losses and set a new high limit.
Spec and Index funds are moving towards being more bullish on grains and less on oilseeds. This current pullback may be a sign of downward momentum starting, but we will really, only know that in a week or two. For now the base prices are excellent as we do not expect too many growers to hold for long during harvest.