To celebrate six months since we kicked off our coverage of Asian grains markets, here are a handful of trends that have emerged in this space.
Forex matters more than futures
The Chicago Soft Red Winter wheat futures play a significant role in dictating sentiment in the Australian wheat export market, and initially showed a reasonable correlation of 75-80% with Platts’s Australian Premium White (APW) wheat assessment, from late last year until February 2016.
During this period, APW was on average $40/mt above the prevailing CBOT futures contract, or a cash premium of $104-114 cents/bushel, a range which became very familiar to us through our daily interactions with market players.
A number of Asian flour millers currently prefer to think of regional wheat prices in terms of cash premiums over Chicago futures rather than flat prices, due to the historical prevalence of Chicago as a global wheat benchmark, and because many have built their hedging strategies around these futures, in spite of the imperfect correlation to their regional purchasing prices.
Subsequently, a significant forex fluctuation from Jan-April (with the AUD strengthening by more than 9% against the USD), the futures’ correlation to Australian export prices fell to 60%.
The cash premium of APW over CBOT rose by about 18% from February, in response to the forex movement, with premiums mostly above 120 cents/bushel at the time, and nearly hitting 130 cents/bushel in April, as Australian exporters lifted their USD-denominated offers for Australian wheat to offset the USD weakness.
This pushed up APW wheat pricing, despite a falling international wheat pricing trend in March-April.
Meanwhile, flat prices were said to be more attractive than the basis formula during this period, with changes of about 4.8% seen, or at about only a quarter of premium changes.
Indian buyers anticipate import tax cut
In April, the reverse happened… In spite of a weakening Australian dollar and lackluster interests from key Indonesian buyers, APW wheat prices remained firm, attributed partly to a series of rallies in CBOT futures during second half of April.
Indonesian millers were said to be extra cautious in late Q1 2016, as the depreciated rupiah shrank their purchasing power for raw materials.
Meanwhile, some traders pinned the firm APW pricing to Indian demand, which at the time was anticipated to amount to 1-3 million mt in 2016, to fill up a local deficit in the world’s second largest wheat producer following three consecutive years of drought affecting crops.
Indian millers from Tamil Nadu, in the southern India region typically imports wheat from the major wheat producing states in northern India or from overseas, amid inadequate wheat production in the region.
A growing concern over inadequate supply of higher quality wheat lead importers to source for APW wheat, despite an import tax of 25%, which was expected to end in late March, but was eventually extended until end-June.
Australian wheat imports pricing, including the cost of a 25% import tax were said to be marginally higher than domestic wheat by about Indian Rupee 550-600 /mt ($8.30-9.10/mt), but would be a lot more attractive if the import tax is removed by end June, prompting a substantial amount of trade to occur in anticipation of a tax removal.
“If Indian production is really below government estimation of 92-93 million mt whilst state procurement target of 30 million mt for buffer is unmet, local pricing could be buoyed further” commented one international trader.
Australian wheat exporters lost $6-7/mt
Export elevation margins on Australian wheat have been on average -$7/mt during the 2015-2016 harvest, a worrying trend for those international trading firms locked in to five-year take-or-pay agreements.
Highlighting an extremely tough environment for international traders, Australian wheat export deals since the start on November 2015 have been on average $7.02/mt below the replacement value for comparable wheat on the day at the same port.
This unusual phenomenon is a result of an oversupply of shipping slots relative to exported volumes, and the fact that traders would often rather discount their wheat than forfeit the value of an unused shipping slot.
In spite of a couple of trading firms giving up on the Australian wheat market in recent months, this negative export elevation margin is currently closely aligned with the cost of these shipping slots (about $5-9/mt), which shows there is still intense competition to utilize this pre-sold export capacity.