Year: 2018

The drought continues to be the main talking point, with this September being officially the driest on record. The areas that were in reasonable condition at the start of the month (Vic, SA & WA) have all seen downgrades to their potential production. However, it’s not all doom and gloom with welcome rainfall in NSW.

The ASX futures saw strong volume this week, however, is currently marginally lower than the end of last week (Figure 1). Interestingly there was increased interest in delivery periods further on the horizon with trades at $370 for Jan 2020 and $360 for Jan 2021. I wrote on Tuesday about the importance of looking beyond the current harvest (Warning: This isn’t the new level.).

This has been a tough year, however, it is fantastic to see some reports of substantive rainfall in NSW and QLD (see map). It is much too late for many crops, but it will fill some dams and assist with the moisture profile for the coming summer planting. Most of all, it improves everyone’s wellbeing.

The CSIRO has released crop updates based on their Yield Gap model. They currently predict an overall yield of 0.62mt/ha, this equates to 6.8mmt. In comparison, in the last ABARES update a yield of 1.45mt/ha or 16mmt was forecast. This is a bold call from CSIRO, however as we all know a ‘small crop only gets smaller’.

This forecast would place the crop at the lowest level since 1972/3 (Figure 2). They may indeed be correct, but I think that market forecasts of between 12-16mmt are more realistic.

What does it mean/next week?:

In the next week, we will see the WASDE report released, I don’t expect many big surprises in this report as most crops are now a known entity.

There are many in the industry examining the possibility of importing wheat or by-products for feeding purposes, as many consuming industries are unable to remain profitable at these levels.

It’s another week of increased pricing. In this week’s comment we look at wheat pricing, the new action in canola and increased to global wheat production. 

The continued poor conditions and lack of grower selling has led to further increases in pricing in the past week. All zones have shown strong rises, with the lowest being in the Port Kembla zone, at a meagre 1% (figure 1). The reality being that in NSW and QLD, there isn’t much value in increasing prices because it just isn’t available to buy.

Two weeks ago I wrote about the relative inaction in the canola market (see link). At this point the canola market has only risen 10% since the beginning of widespread drought panic whereas wheat had increased an impressive 27%. A combination of the high price of hay alongside dry/frosted conditions in the east coast has led to substantial cutting for hay.

It seems that this is now starting to filter to the buyers. In the past two days prices have markedly advanced, with Port Kembla and Geelong rising 4-6% week on week (figure 2). The spread between Port Kembla and Geelong has decreased from its season high in early September, as buyers chase areas of potential production.

The International grains council has increased its forecast for this year’s wheat crop to 717mmt after improved prospects in Russia. This provides some limited breathing room for importers, but, for Australian producers the only real concern is the local situation.

What does it mean/next week?:

The market really is soaring like an eagle in Australia, but it is bittersweet. The reality is that this drought is no good for anyone on the east coast. The consumers of grain are paying prices which will massively impact upon their profitability. Grain producers will find that the higher price will nowhere near offset the reduced yield.

Fuel prices have seen a dramatic rise in recent days. Talkback radio has been airing calls to boycott the petrol stations. I thought it was therefore worthwhile revisiting fuel prices within Australia – are we being screwed over?

We start our journey in Singapore, where the bulk of our fuel is imported from. In Figure 1, the Singapore and the average Australian petrol price (at terminal) is displayed since the turn of the decade. There is an extremely high degree of correlation between (0.9615), with 1 being a perfect correlation and 0 being no correlation. In effect, this shows that when Singapore prices increase, our prices will also rise.

In Figure 2, the spread between Singapore and the average Australian price has been plotted, with the 7-day moving average to smooth out the data. This will give an indication of whether we are paying a higher premium, and therefore being gouged. However, the current spread is quite close (4¢) to the average compared to the start of the decade (61¢), but in recent years the trend has seen a rising premium in Australia.

The fuel premium in Australia over Singapore can be attributed to logistics and excise duties on fuel. However, the relatively narrow range that the basis trades within can allow us to effectively use Singapore fuel pricing to determine our price (or even hedge).

The major machinery items on-farm use diesel, and whilst we were looking at spreads, it is worthwhile to examine the spread between diesel and petrol prices. In Figure 3, we have plotted the spread, again using the 7-day moving average. At present diesel is currently pricing at a premium over 2.97¢ over petrol. This is above the average of 0.82¢ above petrol since the turn of the decade.

Interestingly however, since the start of 2015, the spread has been a lot lower, with diesel being discounted at 1.6¢ below petrol.

What does this mean?

In reality, this isn’t the great robbery, more a result of market forces.

The cost of my 600km a week commute has increased substantially. As much as it would be nice to blame the fuel companies, the price is a result of the market. It is important to remember that a large chunk of our local fuel price is fuel excise and we will be unlikely to see a government reduce taxes on fuel.

By looking at the numbers, it means that petrol and diesel prices are largely following the international market. There doesn’t seem to be any evidence of gouging, as spreads between Singapore and Australia have remained within the narrow band that we have historically experienced.

To those calling for a one-day boycott of fuel stations. It really won’t make a difference. Those who use a car have a relatively inelastic demand for fuel, if we don’t purchase on one day, we will buy it on another day. The impact on fuel companies will be infinitesimally small.

Key points

• The bulk of fuel in Australia is imported from Singapore
• The correlation between Singapore prices and Australian is 0.98, almost perfect.
• The spread between Singapore and Australia has risen strongly above the decade average.

‘A big crop gets bigger and a small crop gets smaller’. This seems to be an apt statement to apply to this year’s Australian production. Continued concerns in the east coast & now in WA have led to more positive price action in the past week.

The ASX wheat contract in the past has been quite illiquid, recent months has seen reasonable volumes move into the contract. The lack of grower forward selling due to drought (& frost) concerns. The contract is deliverable; therefore it provides an opportunity for consumers to have cover to meet requirements.

After a rapid rise through July and mid-August to $400-410, the market fell to $385. This dip was short lived, and in September continued dryness and frost in both sides of the continent have led to impressive gains. In the past week the price has risen $25/mt or 6% (figure 1).

At a physical pricing level the new crop multi-grade APW contract has seen a corresponding rise, however selling has been at low. Interestingly the market in Port Kembla, has seen a more sluggish (figure 2) rise than other east coast areas (Adelaide & Geelong).

What does it mean/next week?:

At present there are a high number of growers cutting grain and canola for hay. This leaves an interesting conundrum – will this increase in hay due to drought and frost lead to a downturn in hay prices?

One thing is for sure though, it’s time to strap on our helmets as its going to be a bumpy ride.