Grain market widens

And even with values now pushing above A$310/MT delivered Darling Downs for sorghum, the nearby demand continues to come - particularly from Chinese importers eager to get their hands on the red grain for Baijiu production.

But support beyond third quarter looks tenuous at best, with expectations that global and domestic grain supplies will be far more plentiful once new crop harvests commence.

For the here and now, however, supply is tightening – particularly for sorghum - and the market does not yet appear to be destroying sufficient demand to take the pressure off the domestic balance sheet. The weaker Australian dollar is a contributing factor, given the fact that over the last few weeks currency depreciation has “added” about A$30/MT to domestic values without altering the export offer in US Dollar terms.

And complicating the whole issue is that we simply don’t know what we don’t know about our new major export customer. Can China get import permits for US sorghum as readily as for Aussie sorghum? What are their domestic sorghum production and logistics issues? What impacts does the Chinese central government’s strategic reserves policies for corn, wheat and soybeans have on their domestic sorghum market? At what price do we actually switch off their demand?

The reality is that we just don’t know... and the horse has probably bolted anyway.

At current values Chinese customers are still lining up to buy Australian sorghum out into July/August delivery slots, meaning that – as per our calculations in last week’s report - there is now a very real risk that sorghum supply dries up before we reach the winter crop harvest slot.

As a consequence price spreads to old crop wheat and barley have flattened – favoring a readjustment of feed rations where possible. It has also forced inter-zone price spreads to levels that are dragging grain into the Southern Queensland/Northern NSW market from further and further afield.

The premium for readily available grain over new crop wheat and barely has also widened substantially – a clear indication that the market is less concerned over grain availability beyond the winter crop harvest slot.

Old crop APW is now trading at close to a $40 premium over new crop in the Brisbane and Newcastle track market – having widened substantially from a flat price structure in mid April.

Feed Barley spreads are even more dramatic – with old crop now almost A$65/MT more expensive than new crop in the Brisbane and Newcastle track markets!

Meanwhile, old crop and new crop APW spreads in South Australia and Central Queensland have remained relatively flat the whole way through, while feed barley has built a slight inverse.

And the reality is that the East Coast inverse could widen even further as global crop prospects continue to improve – particularly if forecast rains deliver across much of NSW and Queensland in the next few days.

In a nutshell, the longer term outlook is less and less supportive - regardless of nearby supply tightness. In the USA, the “uncertainty” premium is starting to erode in the corn market, with warmer, drier conditions likely to assist crop development in the next week or so. Their winter wheat crop harvest is also underway, with yields reportedly exceeding early expectations in many areas.

The Black Sea wheat harvest is also commencing in some areas, with reasonable yields reported and values starting to retreat. Qatar purchased 40,000MT of Black Sea 12.5pc protein wheat over the weekend at around US$331/MT C&F.

Overall, this market dynamic continues to suggest domestic tightness will keep values supported for any grain deliverable up until September/October – but it's a riskier bet as we get closer to harvest.