Analysing the 2022 Wheat Market and Strategies to Consider (Jan-22)
Harvest is here and wheat prices remain strong both domestically and internationally. But what is the best grain marketing strategy to capitalise on the current market and what should growers be doing with their wheat? Before we dive into the wheat market situation and strategy approaches, we must remember that we never throw all our eggs in one basket when approaching the marketing of our grain. A balanced approach is always best which incorporates a mix of cash sales and carrying grain both unhedged and hedged into the post-harvest market. Post-harvest hedging in non-drought years has proven to elevate returns as part of a balanced strategy and given the extremely weak Australian wheat prices versus international benchmarks at the time of writing, the opportunity in this strategy is very compelling.
Firstly, why are wheat prices where they are, and can they be sustained?
Global exporter wheat production using Black Sea, US, EU, Canada, Australia, and Argentina has increased by only 10.7 Mt over the past 10 years using latest WASDE data to around 375 million tonnes (Mt). This pales in comparison to the increase in global wheat imports of 50.8 Mt to 201 Mt over the same period since 2011. The net result is a tightening in major exporter wheat ending stocks as a percent of global imports to 12%, the lowest level on record. This is the primary driver of global wheat prices where Mar-22 CBOT wheat futures are trading around $390/t at the time of writing compared to the highs of A$305/t hit in early 2011 (our last feed wheat event) and over $85 per tonne higher than this time last year. No doubt international wheat prices can lift further but given the steep discount we are currently witnessing in Australian wheat prices vs global benchmarks (eg basis US futures), a post-harvest hedging strategy is a worthwhile consideration in any marketing plan this year. Local prices for wheat are strong on face value, especially for milling wheat and hence selling a decent portion for cash at harvest is worth considering. But we never throw all our eggs in one basket, especially when on closer inspection we are the cheapest wheat in the world.
Australian Wheat Remains Relatively Cheap
Australian wheat is relatively cheap into the international market with ASW1 trading at around -$60/t under the nearby CBOT wheat swap in the Victorian and Newcastle port zones. Downgraded quality feed wheat grades such as AH9, AGP1 and SFW1 are a whopping -$110/t under the nearby CBOT wheat swap at time of writing right across the East Coast. We are at a significantly bigger discount to the world market versus 12 months ago. The reason being the record large Australian wheat crop which is estimated at over 35 Mt is placing downward pressure on the market as exporters simply cannot buy and execute it all in the short term. The fact that our domestic prices, when converted to delivered Southeast Asia equivalent, are around A$60-80/t cheaper than our competition (as our freight is also cheaper than Russia) illustrates just how historically weak our relative pricing is currently.
For growers who might be unfortunate enough to harvest downgraded quality feed wheat this harvest, don’t be fooled by the extremely steep discounts being shown in the market. History tells us that often ‘wheat becomes wheat’ in the post-harvest market as can be seen in the chart below. Exporters are short (have sold) largely milling quality wheat and hence the demand is currently relatively better for milling quality wheat and canola, as a result feed wheat is not catching a decent bid. Many growers, traders and analysts are discussing the 2010/11 feed wheat event and what happened during the post-harvest market. During 2010 crop feed wheat grades converged with higher grades and our relative value offshore (and basis US futures) rallied post-harvest. It’s a distinct possibility that the market evolves in a similar fashion this year.
Which Strategy to Execute
Yes, the global wheat stocks situation is different this season compared to 2011, but this may be largely factored into global prices with US wheat futures over $90/t higher than the highs of 2011. Prices for Aussie wheat have never been this cheap relative to the rest of the world. It would be remiss to have a grain marketing strategy that didn’t recognise this and allocate a portion of our marketing plan that gives us the opportunity to capitalise on the normalisation of our relative value (which the hold & hedge strategy does).
Market Check’s Strategic Program executes an actively managed balanced strategy which incorporates hedging, with flexible payment options including cash advances and deferred payment, with all sales credit insured. Harvest cash sales are warranted given the flat price in front of us for milling wheat but it’s worthwhile considering some balance to your approach and incorporating a disciplined post-harvest hedging strategy. Feel free to visit our website at www.marketcheck.com.au to learn more about our strategies and managed programs or feel free to reach out to any of our experienced advisers if you wish to discuss your grain marketing approach this season on 02 9499 4199.
Editor: Richard Perkins, Market Check