Between late November 2014 and late November 2015, the Australian dollar fell from 85.3 US cents to 71.9 US cents. US futures also fell from around 550 USc/bu to 465 USc/bu.
However, that still didn’t stop our cash prices from falling year on year. For example, APW prices fell from an average of $306.58 per tonne during the 2014/15 harvest in the Newcastle port zone, to $280.78 per tonne this last harvest. That was a $25.80 per tonne price decline. We saw a similar price fall in South Australia, while the Victorian market fell by $19.60 per tonne.
With currency neutralising the drop in US futures, it was basis that finally resulted in prices falling for the 2015 harvest. A drop in basis in NSW would have been expected as more of that state moved out of drought, but we also had a similar fall in basis in the export states of South Australia and Western Australia.
Looking forward to the 2016 harvest, it is probably fair to say that we won’t get much more out of the dollar. We have already traded down to just under 70 US cents, and the reality is that we don’t spend much time trading below this level.
That means we could be exposed to a higher dollar if commodity prices stabilise and the RBA decides not to lower interest rate any more.
Basis is what hurt us for the 2015 harvest, but basis levels in export zones like Port Adelaide seem to be at the low end of what we would expect. So, we might not see a lot more come off export basis as we move from the 2015 harvest to the 2016 harvest period.
For NSW and Victorian growers, there is still a premium of $20 per tonne over the export price base in South Australia and Western Australia. If we have a strong production year in 2016, with exportable surpluses in all port zones, we might find that east coast basis levels do fall another $10 to $15 per tonne.
That aside, it leaves us with the move in US futures as the most likely driver of price moves from 2015 to 2016, particularly in Western Australia and South Australia where basis risk is less.
Here we might have some positive news. US futures prices are already testing post 2007 lows. Basically we are at the bottom of the trading range that has been in place for 8 years. A further fall, sustained until the end of the year, does not really seem justified.
Global stocks are high, as are US wheat stocks, but stock levels outside of the US and China are not excessive. They are simply at the top of their recent trading range, not setting new records, or growing strongly year on year. That should be enough to prevent US futures prices from collapsing further.
We then have some expectation that production will be lower in 2016, with fewer acres being planted to wheat, some yield losses expected in the Black Sea, and an expectation that EU yields will pull back to average.
While we might not see a surge in wheat prices this year, it does seem likely the export price base will at least hold, or maybe even lift a little, with a drop in basis in NSW and Victoria being the most likely source of price declines in those states. – Malcolm Bartholomaeus, Bartholomaeus Consulting