A STUBBORNLY strong Australian dollar has kept Aussie grain bids in a holding pattern in the last two weeks, despite signs of a heartbeat in offshore futures and physical grain markets.
With the AUD/USD now trading above 1.0450, our currency is heading back toward its September highs, putting it in the upper end of the approximate 0.9600 to 1.1000 two year trading range.
Needless to say, this is taking the shine off A$ values for any commodity destined for export channels. In fact, in a "direct relationship", every 1c move in the AUD/USD exchange rate equates to a move of about A$3/MT for our wheat price.
But as far as "picking" a direction goes, our view on the Aussie Dollar is clear - if anyone tells you they know where it is headed ... punch them in the nose. They are lying.
Currency movements aside, the salient point is that local grain prices are still historically very strong - particularly in global terms, and particularly considering we are in the gut slot of harvest.
So ... what are the chances for further upside from here?
Technically, Chicago wheat and corn futures contracts held, and then rallied from support at around US$8.50/bu and US$7.00/bu respectively despite heavy speculative selling in the wake of the November USDA Supply/Demand report.
This is a good sign - and with the "spec sector" now sitting on much more manageable positions, their appetite to aggressively sell futures contracts is likely to be far more limited.
Fundamentally, there are some competing influences at play.
The drought rally on the US corn market has run its course - and there is general consensus that damage has been done to the demand side of the US corn pricing equation, both in terms of ethanol consumption and cattle feeding. US ethanol stocks are up 8.5% on last year, and production has been down in recent weeks due to decreasing crush margins.
This ethanol demand could turn more positive relatively quickly, but for cattle feeding, the damage is likely to be longer lasting.
The US cattle herd started the year at 90 million head (which was the lowest since 1952) and it is likely that another 1 million head have been liquidated this year.
Cattle on feed numbers are clearly down substantially, and it will take several years to build these numbers back up.
That said, US corn is now about US$1/bu (or 12%) below its highs, and there is demand starting to build below the market.
US wheat is also starting to find strong physical demand - with more than 650,000MT sold for export last week.
This is the sort of signal the US futures market needs, given the fact their shipments are currently just 41% of the USDA export forecast (vs 50% average for this time of year).