IN all markets there is a time to be buying and a time to be selling. Of course this is easy to say, but how does one recognise the right time to buy and the right time to sell?
Put simply, in bull (rising) markets, you want to buy the dips; in a bear (falling) market you want to sell the rallies. Or as a contrarian would say; the time to buy is when everyone hates something; the time to sell is when everyone loves it!
The Australian grain grower comes out of harvest each year long grain. There may be some forward sales that need to be filled, but for most growers that would be a minor proportion and the main marketing campaign begins once the grain is in the bin.
All growers will have individual business influences such as cash flow requirements, debt repayments, capital expenditure decisions and tax considerations. However, it will be the market type (bull or bear) that will ultimately determine the approach to the grain marketing campaign. Will the grain market pay more than the “opportunity cost” of the income from selling now if I hold the grain and sell later?
Like all commodity markets, the two main drivers of sentiment are supply and demand. The Australian grain market is no different. On the supply side, Australia has just produced record wheat and barley crops. And these records were not by small margins, surpassing the previous marks by 18 and 28 per cent respectively. In racing terms, these were Winx like performances, with daylight to second.
After adding the carry in from last season, Australia has around 54mt of wheat and barley on the supply side of the equation. To put that in perspective, total wheat and barley supply from the 2015-16 crop was around 38mt. That equates to an increase in supply of 42pc, or 16mt, in just 12 months.
On the demand side of the balance sheet there are two primary influences, the domestic market and the export market. So what has happened to demand in the past 12 months? Domestically, it is relatively unchanged at 11mt, give or take. That leaves circa 43mt available to the export market before the new crop harvest.
In the 2015-16 marketing year Australian exports of wheat and barley are estimated to have been 22mt in round numbers. If you add the carry out for that season of 5mt to the equation, the market had an exportable surplus of 27mt. That means that this year the quantity available to the export market is 60pc higher than last year.
The pace of Australian exports season to date have been impressive, with monthly records being broken in a number of ports over the last three months. The most optimistic estimates I have seen have wheat and barley exports at 24mt and 8mt respectively. For the sake of this exercise let’s assume that is possible. That will still leave a carry out at the end of the marketing year of 11mt. Huge!
A quick look at winter crop progress in the northern hemisphere does not raise any alarm bells at this stage of the growing season. An average or better harvest in that part of the world will see them aggressively competing with Australia as an export origin in the second half of the calendar year.
So what is all this telling the long holder of grain in Australia? Sell the rallies…
- Peter McMeekin is Nidera Australia’s origination manager.
