Futures markets have been tossed around by weather concerns for the US Hard Red Winter wheat crop, and the South American corn and soybean crops, for some weeks now. Last week we added uncertainty about a trade war between China and the US into the mix, as well as speculation about longer term interest rate moves in the US.
On a day to day basis there is little warning as to what will drive the market. Will it be a forecast for rain/no rain, or will it be an escalation of trade issues between China and the US? In turn there is the impact on the value of the US dollar from trade war speculation, and speculation interest rates.
On Friday night we saw a sharp selloff in US futures markets, only for that to be reversed, particularly for corn and wheat, which are both seen as being outside the direct fallout from a trade war with China.
Corn garnered support from a recovery in wheat prices during Friday night as dry forecasts triumphed over the negativity of trade issues. Corn also rallied strongly against expectations of a poor corn harvest in Argentina, and from expectations that the corn acreage in the US is likely to fall this year.
For wheat the net result for the week was a further drop in futures values of 7.5 USc/bu, or A$3.40 per tonne. However, we did finish last week well up from the lows set early in the week.
Also hitting the headlines last week were statements from global grain traders like ADM, Louis Dreyfus and Cargill, indicating that their traditional models of being grain merchants and traders were over.
No longer does buying grain and holding it until the market rallies drive business models like it used to. That is interesting because the big global grain trading houses built their businesses on buying from famers at harvest when farmers wanted income, and then basically managing the supply until prices rose for them to sell at a profit.
Time has caught up with this simplistic way of doing business, primarily because growers are now using technology to know what is happening in the market and are taking more control over when and at what price they will sell.
Cargill are saying that they can no longer profit from originating, storing and trading crops. Louis Dreyfus are saying that low price volatility, and dents to margins from increased competition, improved market knowledge and increased farmer storage are forcing them to change their approach to business.
ADM have just announced their second business restructuring in three years as they seek to differentiate their product and service offerings and respond to customer needs.
Australian growers won’t be immune to these shifts. If traders are not going to buy, hold and sell, growers may find that there will be periods of time when they cannot sell their grain. We are already seeing this in some port zones where prices seem to be abnormally low because exporters don’t need to own grain at that point in time.
Australian growers might also have to think about more on farm storage so that collectively they can control when grain is moved into the marketing supply chain. The days of harvesting and delivering to a centralised storage system, and selling most of the crop during harvest, or shortly after, may well be over. – Malcolm Bartholomaeus
