Market Check - The South Keeping a Lid on Northern Wheat Prices

The South Keeping a Lid on Northern Wheat Prices

In a below average production year, the Australian domestic market needs to maintain a healthy premium over the export driven markets to keep grain onshore. The market leader in the delivered markets is the Darling Downs with an annual feed grain demand of 2.5mt million tonnes. Due to its large demand base and Queensland (QLD) historically being the smallest grain producer of the major grain producing states, it needs to draw grain from further south. How far south depends on how much grain is available within the closest drawing arcs and this year there isn’t much. Production in NSW and QLD combined was 7.5mt for wheat, barley & sorghum, down 5.06mt on the 5-year average. This combined with very low carryover stocks means grain must be drawn from even further south than it traditionally reaches.

SFW1 delivered onto the Darling Downs has paid a big premium all season, prices have ranged from $320 to $340 between November and March. Recently however, we are seeing prices start to push above $350 per tonne and remain supported by the ongoing CHINA – US trade dispute. This raises the question; how far can these prices keep going?

Because of the particularly low production year in NSW, the QLD domestic market has needed to pay a large premium to draw grain from southern regions. This drawing arc has reached as far as Ouyen in VIC at its peak, so if the QLD markets rally further, it will eventually reach a point where it becomes feasible to ship grain from South Australian (SA) ports. SA wheat prices traditionally trade at a discount to all other states due to the minimal domestic market and expensive supply chain costs. As seen in the chart below the spread for APW from Brisbane (BNE) to Port Adelaide (PTA) since August last year has traded between a $60 and near $100 per tonne premium. That said if we see decent planting rain across the East Coast, this spread will fall as the northern market prices come off.

Understanding the economics of shipping feed wheat from SA markets onto the Darling Downs gives us an idea of where the short-term roof is in the northern feed grain markets. The below table gives us a quick snapshot of this calculation.

If the Brisbane feed wheat market can be supplied from SA at around $370, then up-country feed wheat stocks remain bound for Darling Downs at the relative freight spread which is around -$15-20/mt. But if selling dries up on tight stocks then, in theory, the Darling Downs market can trade above the Brisbane market. This is worth considering when making your next marketing decision, as a trader once told me, you can’t get fired for realising a profit.

Nick Weal, 10 April Market Check

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