A feeling of doom and gloom is settling over the wheat market as December futures finished the week with a new contract low closing price. This comes despite weekly export sales being much stronger in response to the recent drop in US futures prices.
One view is that US corn prices will continue to come under pressure. Their harvest pace has been delayed, so there is still a lot of corn to be harvested, and come into the market. If corn continues to get weaker it will be hard for wheat prices to rally. In the US market, wheat has to remain competitive against corn in feed markets.
The added problem for the Australian market is a weakening of basis levels. Basis is the difference between US futures prices and our own prices, and with the dry season in Qld and northern NSW, basis levels had blown out to full drought mode levels a few weeks ago.
With the recent rains setting the season up for a summer crop, and helping to finish crops further south in NSW, wheat prices have fallen relative to US futures. Any fall in US futures will drive our prices even lower.
The erosion in basis is gradual. In the Port Adelaide export zone basis levels have fallen from $60.80/t at the end of September, to $44.26/t at the end of last week, with a $4/t drop for the week.
The real problem will start when harvest selling gathers pace. Those who harvest early are going to be active sellers to capture what premiums are left in the market.
The result will be further price falls before the main harvest period in late November and during December.
At this stage, US futures are A$5 to A$10/t above the levels being seen in late November last year, and the cash market is holding a $30/t premium to last year’s prices in SA.
That signals enough downside in prices for that part of the Australian market. Any price falls in the key export port zones will put pressure on eastern states zones as well.
Wheat prices in the Port Kembla and Newcastle port zones will come under further pressure as early harvest sales fill the residual local enduser demand, and as the prospects for a strong sorghum crop develop further.
Prices in the Pt Kembla zone are down $40/t from their peak, and are now moving below $300/t port basis. However, prices are still $50 - $55/t above Pt Adelaide prices. The risk is that this gap will close further as the season comes to a head.
Prices in the Newcastle zone are holding a further $5/t premium to prices in the Pt Kembla zone, and in Vic and SA. That small spread may persist, but it will be hard for prices not to ease if softer prices from the export zones begin to spread.
So, the risks for Australian wheat prices in the next two months come from harvest pressure, and from further downside in US futures, where apart from a move to stronger US export results, there is little in the way of potential short term positive price drivers.
