Year: 2018

Those who are lucky enough to be still harvesting are receiving an early Christmas present in the form of a reduced fuel bill. Diesel is one of the biggest costs on farm, so it’s worthwhile looking at this downward move.

In mid-September, I covered fuel in the sarcastically titled ‘The great fuel robbery of 2018’. During this time fuel prices in Australia had risen dramatically to the highest since 2014. This led to calls to boycott the fuel companies. My view, in this case, was that boycotting the fuel companies was an ineffective action as the price of fuel is based on factors largely out with the fuel stations control. It is a function of commodity pricing.

In early October crude oil futures reached a four-year peak (Figure 1). The market has fallen dramatically since then. Diesel is a derivative of crude oil therefore when crude falls, in theory so should diesel (and vice versa).

To show this, I examined the weekly change in price between crude oil and diesel over the past six months. In figure 2 the movement in price (as a %) is displayed, clearly showing a strong relationship. This chart uses a lag of one week, which signifies that there is a delay between the value in crude moving and diesel prices.

The correlation between the two commodities is displayed below, with 1 being a perfect correlation and 0 being no correlation.

• 0 lag : 0.33
• 1 week lag :78
• 2 week lag :66
• 3 week lag :41

The result of this downward movement in crude has been that diesel prices in Australia have started to reflect the fall (Figure 3). This means that any purchases at present should be considerably cheaper than pre-harvest which will be welcome to all.

What does it mean/next week?:

November was the weakest month for crude oil futures during the past decade. This is due to supply outstripping demand, with US stockpiles at record highs in recent months.

Prices are likely to stay weak until we see either an improvement in global economic growth or production curbs enacted by OPEC.

Key Points

• Diesel is a derivative of crude oil.
• There is a strong correlation for a 1 week lag in changes in crude oil being reflected in diesel prices in Australia.
• In November, crude oil had its worst month in ten years.

This weekend Russia and Ukraine edged closer to war. Many may recall the short conflict between Russian and Ukraine in 2014 which provided a short rally in pricing. In this analysis, we look at what the impact could be if this conflict was to escalate.

On Sunday a Russian naval vessel opened fire on three Ukrainian vessels, detaining them and causing injury to six sailors. The incident occurred in the Kerch Strait, which is a contested area between the Azov and Black sea (see map).

There is an agreement that both countries will have entry through this strait to access their respective ports on the Azov sea. However, in the past year, there have been concerns from both sides regarding inspections of vessels which have slowed down trade in this area.

In early 2014, Russian back separatists fought against Ukrainian forces which resulted in Crimea being annexed by Russia (see map). This has led to a tense environment with fighting continuing albeit largely forgotten about by the rest of the world, despite estimates of 10,000 being lost in the conflict in recent years.

During the initial period of the 2014 conflict, risk premiums emerged within the agricultural markets. However, when it was realized that supply chains would be largely unaffected the market fell back.

The main ports on the Ukrainian side of the Azov sea are Mariupol and Berdyansk. These ports are mainly used for the export of steel and grain. The drafts at these ports limit the volume which can be exported. The quarterly exports from both ports are shown in Figure 1, with annual exports at 1.1mmt.

It is important to note that that majority of Ukrainian exports are loaded on the black sea, which is not likely to be disrupted by the current tensions. On average the Azov ports load around 8% of Ukrainian wheat exports (Figure 2).

The risk is limited at present, whilst the tension is restricted to the Crimea and the Kerch Strait. However, if there is an escalation of hostilities, the disruption could spread to the black sea ports. It is important to remember how vital Russia and Ukraine are to global wheat exports. In this season it is expected that Russia and Ukraine combined will contribute 30% of the global export task (Figure 3).

What does it mean/next week?:

An escalation to a full-blown conflict is highly unlikely at present and not in the best interests of either country. However, all eyes will be on Putin and Poroshenko in the coming days and weeks.

The international community have expressed concerns with the Russian behaviour, however, it is unknown how much pressure the west can really exert.

In the event of major disruption to the black sea grain trade, there is likely be very strong premiums enter the market, especially considering the reducing global exportable surplus.

Key Points

• Russian naval vessels attacked and detained three Ukrainian vessels in the Kerch Strait.
• The ports likely to be impacted at in the Azov sea; Mariupol and Berdyansk.
• These ports load on average 8% of Ukrainian wheat exports.

It’s been an interesting week, with geopolitics front and centre. Early in the week, we had a fracas between Russia and Ukraine and today the leaders of the world meet for G20 talks. In this comment, we look back at the big drivers in the market.

This weekend the leaders of the G20 will meet in Buenos Aires. This could be a very interesting meeting, with the US-China and Russia-Ukraine issues being a considerable talking point. The market has reacted to the potential for positive discussions between Trump and Xi with Soybeans up 3% or 24¢/bu (Figure 1).

The US soybean market has fallen dramatically since China announced tariffs against imports, which in turn resulted in Brazilian exports trading at a strong premium to the US. There are expectations that positive conversations would lead to a relaxation of the current tariff structure.

Chicago wheat futures fell to end the week down 2% or A$8.9/mt (Figure 2). The concerns of distribution to trade flows in the black sea have largely been removed from the market (see Crimea River), as ports in the affected region on export <10% of the Ukrainian crop.

The planted area for the 2019 wheat is expected to be high. Russian winter plantings are expected to reach record levels this season, which although there is a long time until harvesting does point towards the potential for another strong year of production.

Due to the China-US tariff scuffle, soybeans are being held in storage which is becoming a concern for prices during the 2019 season. It is expected that after a 100 year low in wheat planting for last year, we will see a resurgence of wheat acreage.

In the past week, local prices have risen whilst Chicago has dropped, therefore providing an improvement in basis levels (Figure 3). At present, farmers are reluctant sellers, especially with the stop-start harvest that we are currently experiencing.

It is important to remember that these basis levels (or premiums) over Chicago are very strong (see This isn’t the new level). As grower selling starts to increase we may see a decline in premiums, albeit still remaining at historically high levels.

What does it mean/next week?:

If we see a positive meeting between Xi and Trump, we are likely to see a positive impact on markets. There are concerns that continued tariff restrictions between China and the US will have wider economic ramifications, an easing of the tariffs will lead to increased confidence.