Mecardo Analysis - The golden rule of grain: “Keep your mouth closed”
- By: "Farm Tender" News
- Cattle News
- Sep 18, 2018
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By Andrew Whitelaw | Source: CME, ASX,Mecardo.
At the end of last week, I was musing with a range of industry stakeholders as to whether WA had the capacity to beat previous records. The season for most has been almost perfect. My view as of Friday afternoon was that WA would produce the 2nd or 3rd largest crop. As is always the case, what is given with one hand is often taken by the other.
This weekend the West Australian wheat belt was impacted by a major frost (see map). This was a severe event and will cause damage to crops, especially in the great south and central wheatbelt. Luckily the Geraldton zone which has been performing extremely well was saved from any impact. The severity of the event was high, with a number of stations on Saturday experiencing -2°C for 6-7 hours (see details).
It can be very difficult to judge the full extent of frost damage, but estimates range from 500kmt through to a high of 5mmt. The reality will not be fully determined for another week or so.
When it comes to pricing the WA market received a good kick on Monday, with new crop APW up A$10 to A$360/mt. The market lost some traction in the latter half of August falling back to $332, however, has regained 8% during September.
The basis (or premium) level for WA has performed strongly compared to Chicago with an increase of A$14 since Friday. At current levels, Kwinana basis is at its highest level this season, at A$101 above December SRW futures.
There is a limit to how high the WA price can increase. The crop is currently receiving strong prices due to the east coast drought. Even with a downgrade in production, WA will still have excess capacity to meet feed requirements.
At present, WA is already achieving very strong premiums over the rest of the world. The price will be limited by import parity, which is the cost to import feed from another origin.
Key points
* WA was expected to produce a close to a record crop - likely 2nd or 3rd largest.
* A severe frost on the 15th and 16th September will likely lead to a reduced outcome.
* Several stations experienced -2°C for 6-7 hours.
What does this mean?
The first lesson for everyone involved in the grain industry (especially in Australia) is not to not ‘count your chickens before your eggs hatch.’
Where to from here? The Western Australian crop was set to provide the backstop for east coast consumers. There will still be ample crop to meet east coast requirements, and with WA largely pricing away from the export market there is a limit to how high prices can feasibly go.
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