Waiting on the weather in grain market

WITH rain popping in and out of the forecast for Queensland and northern New South Wales, the prospects for a start to the storm season could fray the nerves of domestic longs in the feed grain market - given a healthy regional "drought premium" is already priced into values.

But with such a tight regional grain balance sheet, why the nerves?

Clearly, with headers in the paddocks, any rain now is too late to benefit winter crops - so will not provide any immediate supply side relief.

And while 50-75mm of rain would plant sorghum - particularly on the Darling Downs - that grain won't be harvested until March/April, and so doesn't help ease the regional balance sheet.

Perhaps it's the demand side of the pricing equation we should focus on.

Firstly, a decent dollop of rain will start to grow grass - and grass feeds cows. If we get sufficient rain, it follows that this will reduce numbers heading into feedlots for custom feeding.

Secondly, with more grass available, fewer cattle will be heading to the saleyards as cattlemen look to restock, rather than dispose of distressed inventory at fire-sale prices. The resulting reduced supply of cattle and subsequent increased demand could easily see the price for store cattle lift by 10-15% according to agents. Thirdly, most feedlots are generally "well covered" for wheat and barley with immediate requirements being filled by harvest slot purchases direct from grower hands, as well as from the trade. Many feedlots also have coverage booked for at least a portion of their first quarter 2014 requirements.

All of that said, the current weather forecasts remain extremely nefarious with little consensus between different models.

So, while consumers and the trade are watching closely - until the forecasts "line up" with some certainty and/or we actually bog the Commodore, we are unlikely to see a sustained downside market reaction based on weather.

The other thing worth considering in the current "drought market" is the extent of the drawing arc for grain tributary to the Darling Downs/ Brisbane market, given the price spread to Central NSW has widened considerably

Depending on truck availability and grade produced, this could allow the trade to out-turn grain from as far south as Forbes to bring up to the local feed market. This widening arc could limit further upside for prices in northern NSW and Queensland, and needs to be considered in conjunction with the potential impact of rain on market psyche when weighing up the risk/reward profile of holding wheat and barley.

Topics:  commodities matt schmerl

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