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It was the best of times; it was the most volatile of times

16 May 20224 min reading

There were times over the past five years when I was starting to think that grain markets were a bit boring. We didn't have the same excitement that we saw during the period 2005 to 2015; well, we couldn't have asked for more excitement in the market than 2022 has brought us. 

Andrew Whitelaw
Manager
Thomas Elder Markets
Melbourne


It seems that there has been more uncertainty and volatility than we would have in a decade, only slightly more than four months into the year. 

As Lenin famously said:

"There are decades where nothing happens; and there are weeks where decades happen"

Chart 1 below shows annualised volatility of wheat as a monthly average. The last couple of months have seen higher volatility at higher levels than the commodities boom of the mid-2000s. 

The primary driver of this has been the invasion of Ukraine by Russia. This is a terrible situation for the people of Ukraine, but it is also having a huge impact upon people across the developing world as food prices rise further, to being close to unreachable levels. 


Food protests are occurring in many of the world's nations, including Sri Lanka, Peru and Iran. Even if Ukraine were able to commence exports, it would take a long time to alleviate the issues faced. 


While supplies from the world's most important exporters are constrained, the USA is facing a downgrade in their wheat potential. The lingering effects of the La Nina, are causing large parts of the United States to fall into drought. The overall US winter wheat crop is showing good to excellent conditions of 27%, the lowest since 1989.

While supplies from the world's most important exporters are constrained, the USA is facing a downgrade in their wheat potential. The lingering effects of the La Nina, are causing large parts of the United States to fall into drought. The overall US winter wheat crop is showing good to excellent conditions of 27%, the lowest since 1989.

Predicting the weather is difficult, but traditionally a La Nina has correlated with dry conditions in the US, but it is not all bad. Australia is a major beneficiary of La Nina. 


2018 and 2019 were terrible droughts which took their toll on the Australian grain industry, however, those years feel like distant memories. The past two years were the 1st, and 2nd largest wheat crops that Australia has harvested, and 2022 is in position to be 3rd largest.

The soil moisture levels around large parts of the Australian cropping regions has been close to perfect, with more rainfall forecast. The local forecaster has parts of Australia receiving record rainfall during May. This is all positive for another fantastic year of production in 2022, weather permitting, all going well.


The wheat export program has been working overtime during 2022 to export our country's record production. Typically the export program in Australia is front-loaded, with most of the exports occuring during the first six months after harvest.

This season, Australian exporters have been maintaining a strong pace. Due to high overseas prices, the incentive to export is available to the marketplace, and we anticipate that exports will be higher than in 2021, when 26.1mmt was shipped. The question is how much, as supply chains come under considerable pressure.

Typically Australian wheat prices have traded at a significant premium to overseas values. The chart below shows the monthly average basis between Chicago and ASX wheat futures since 2010. There were times of extreme premiums during the recent drought. 

The current situation is showing an extreme discount, making Australian wheat very competitive versus the rest of the world. The heavy discounting also applies to the 2022 harvest, with a discount of approx A$130.

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