Stars align as yields, prices hit highs

The international wheat market has continued to rise over the past month, spurred primarily by uncertainty over the winter crop in Russia and Ukraine, where conditions have been too dry to plant.

Grain industry analysts have continually questioned the fundamentals of the rally, but prices are still heading north - rising a further $A20 a tonne this week, with prices at most Australian ports for APW quality wheat now around $325/t.

In context, it means prices at close to double that offered in 2016-17 which could be the only year with larger production than what is forecast to come off over the next two and a half months.

With harvest kicking into full swing in NSW and the frost window rapidly closing in southern cropping zones, flooding is now the only peril that could write off large swathes of crop.

"Provided no black swan events occur, we can expect the happy duo of good volumes and price this harvest," said Andrew Whitelaw, market analyst with Thomas Elder Markets.

He said the year was unusual in that prices were on the rise leading into the Australian harvest.

Generally, harvest selling pressure sees prices fall as the headers start rolling, apart from in years of drought.

This year, with international factors the major driver, the price curve is rising.

Mr Whitelaw said price rises in the last quarter of the year in Chicago Board of Trade (CBOT) terms was unusual, but not unknown.

"2014 was one of the biggest late season rallies in futures in Australian dollar terms, but it has happened in 2000, 2006 and even the past two years.

"The difference is this year it is rallying off already strong values."

Nick Crundall, head of strategy at Market Check, said the strong prices at present were likely to mean farmers would take cash at harvest time rather than storing grain and looking for higher values into the new year.

"At $325/t port for wheat most growers are going to be pretty willing sellers at those values, the high prices mean it is a totally different ball game to 2016-17," Mr Crundall said.

"Canola is another one where the price is right up, while even barley, where you could probably get $200/t ex-farm somewhere like the Mallee is not too bad a number, especially for those growing big tonnages," he said.

Ron Storey, Storey Marketing Services, agreed the prices would see many farmers sell at harvest.

"I think people will see the price and they will see yields that are often 50 per cent above average and do the sums and see gross margins they are very comfortable with and sell off the header," Mr Storey said.

He said there would likely be some forward contracting at current values, although he added concerns about a wet harvest may keep committed tonnes lower than otherwise would be expected with these prices.

Mr Crundall agreed, saying there had been solid, but not spectacular sales prior to harvest.

"It is a decent wedge for sure, but given the predicted crop size keeps getting bigger I would not think it would be any more than 15pc of the crop."

Both men said while the cash price at harvest was likely to mean good returns there were further advantages those with more expertise in the market could seize.

"The basis is very low in historic terms and that could present some opportunities," Mr Crundall said.

"If you can sell using a method where you can exploit that low basis then you've got a chance to improve that figure even further."

Mr Storey agreed.

"For most, the cash price is very good, they're making exceptional returns so that is fine, but for those a little bit more sophisticated using swaps that allow you to lock in basis later could provide a little cream on the cake."

There is good news for growers on the robustness of the current values.

Mr Crundall said the international dynamics meant the prices were not just a flash in the pan.

"We've see the international number continue to rise and we've now got a situation where Australian wheat is the cheapest in the world into south-east Asia.

In spite of a couple of years where south-east Asia has turned to origins as diverse as the Black Sea and Argentina for supply given Australia's dearth of wheat for export, Mr Crundall said customers were happy to buy Australian wheat.

"The myth of the big premium for Australian wheat may have been exaggerated but at the same price, with our advantages, our lower moisture, good quality and quick turnaround the Asian millers will always use Aussie wheat if it is around the same price as the competition."