Mecardo Analysis - Improving sorghum prospects seeing a flat curve
- By: "Farm Tender" News
- Cattle News
- Nov 15, 2018
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By Angus Brown | Source: ASX.
Those following feed grain markets closely will have seen the interesting flat curve for ASX Grain Futures. The most expensive ASX Wheat contract is January, and prices are the same, or lower for subsequent contracts. Part of the explanation for this is the summer crop which is hoped to be harvested in autumn, so it’s worth taking a look at its prospects.
The good October rains across Northern NSW and Southern Queensland has improved prospects for the sorghum crop - Figure 1. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) had pegged the 2018-19 sorghum crop tonnage to come in higher than the previous two seasons, as identified in Figure 2.
The ABARES forecast number comes from their September crop report, and it was 8% higher than last year, 1% higher than the five year average, but 15% lower than the ten year average.
Given the strong prices, and good October rains, it could be expected the sorghum production might now be a little higher than the 1.55 million tonnes pegged in September.
Looking back at previous years, sorghum production tends to improve when prices are higher. Given the flexible nature of summer cropping programs, it should come as no surprise that high prices will encourage stronger production.
The extreme was obviously 2007-08, the last time feed grain prices were over $400 per tonne. Strong prices saw large plantings, 66% higher than this year, and a good season allowed record yields of 4t/ha and a record harvest.
This year ABARES are forecasting yields of 2.7t/ha, the same as last year. The ten year average sorghum yield is 3.1t/ha, so there is some upside in production. An average yield of 3.1t/ha would push total sorghum production to 1.76 million tonnes, which would be close to 2015-16 yields, based on ABARES September planting estimate.
With less than 10 million tonnes of cereal grain expected to be produced on the east coast, a 15% boost will no doubt be welcome.
The ASX Wheat market seems to be factoring in what will be weaker demand for wheat, as sorghum fills some of the feed market demand in the north.
Key points
* Good October rain is seeing sorghum crop prospects improve.
* The possible increase in grain supply is seeing wheat futures flat for most of 2019.
* Lower prices after harvest should encourage strong selling at harvest.
What does this mean?
The spot ASX contract for the last 12 years, and the forward curve is highlighted on Figure 3. January-19 is the highest priced contract, while prices ease marginally for the rest of the year. Normally futures markets have carry built in, but this year it is actually cheaper to buy wheat further away from harvest.
For growers the ASX curve should encourage selling at harvest, as there is a risk a good sorghum crop could see prices ease in autumn. If there was a strong autumn break demand for wheat would diminish further.
For consumers a flat forward curve offers opportunity to do some pricing further out, at cheaper than harvest level. There will, however, be a strong temptation to go hand to mouth this year, hoping for a price decline.
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