Weekly Market Report 18th of June 2018.
Tim Murray, Wheat Trader COFCO International Australia, Melbourne Office.
It’s been “government report week” as USDA and ABARES released updates for their relevant papers on crop production. The results have sparked up markets as the July CBOT wheat contract traded a 52cent/bu weekly range (AUD 27) and ended closing lower at 499.50 US cent/bu.
Despite repeated claims, no one believes the numbers the USDA produce, and the response to the World Agricultural Supply and Demand Estimates (WASDE) may suggest otherwise as the bullish numbers initially sent CBOT Wheat and Corn higher by the equivalent of $11 and AUD 5 respectively. It was their production estimate of the world’s largest wheat exporter that provided the story, with the WASDE report revising Russia’s new crop wheat production lower. The 2018/19 crop was reduced by 3.5 million metric tonnes (MMT) to 68.5mmt noting “drier-than-normal conditions this spring in winter wheat areas and excessive wetness in spring wheat regions lowering plantings”.
But why did the market believe it? Only twelve months earlier in their June 2017 report, USDA cited the Russian crop at 69mmt, then forced by record export pace to revise higher for subsequent reports to reach 85mmt where they stand today. Maybe we are a little harsh on the USDA, but given the 145US cent/bu down move from July to September 2017, this suggests they weren’t the only one to get Russia wrong, and it’s highly unlikely we will see another 85mmt crop as the conditions have not been near as kind as 2017. Regardless, when it comes to Russian Wheat there are only a few things that are clear; that is, that they are getting better every year at growing it, and no one knows how much better until at least after their harvest.
One thing, USDA didn’t bother touching on Australian wheat production; however, we only needed to wait a few hours to see ABARES early call on our national production with scores of 21.9mmt for wheat, barley of 9.2mmt, and canola at 3.1mmt. Given the planting window hasn’t even closed, I would think it’s fair to say that this is not really a forecast, but more an early guess and few in the trade will be holding ABARES to their number. If your bullish or a farmer, you could easily say these numbers are too high as much of the crop has been planted in sub-par conditions and the outlook is poor. Conversely, if you’re bearish or a consumer, you may have read the report and said: “plenty of water to go under the bridge, hopefully!”. There is enough evidence for both the bulls and bears to support these arguments – the Bureau of Meteorology (BOM) joined in at the government report party with their Climate outlook and favoured below average rainfall and above average temperatures for most of our cropping belts, only giving WA a greater than 50% chance of average rainfall.
June 2018 Climate outlook below has less than 50% chance of median rainfall for most of Australia
June 2017 Climate outlook above had a similar forecast for Eastern states to 12 months later
However, just like the USDA reports of Russian production forecast, those more optimistic on Australia can say we’ve been here before. As shown above, the BOM June Climate outlook for 2017 is comparable to this year’s forecast for the East coast, worse for the West coast, yet last year, we still managed a 21mmt crop. In that time some areas did it very tough, others had a favourable run home, but more importantly, like the Russian farmers every year, Australia’s farmers get better at growing their crops. All the consumers along Australia’s seaboard, or in the food bowl of Asia that are now left anxiously watching on should be thankful for that.