Month: September 2019

The word in the west

This week I was lucky to get the opportunity to travel to the west coast to talk to producers and stakeholders within the industry. In this week’s comment I’ll cover the big talking points in the west.

It’s a tale of two wheat markets at present, with overseas and local futures diverging from one another. Chicago wheat futures for December are largely unchanged at A$258/mt, however, during the past week we have seen a rise in ASX futures from A$325/mt to A$342/mt.

At the moment Australia is on a knife-edge with the BOM releasing a negative rainfall outlook for the coming weeks. Whilst Victoria and South Australia are in reasonable shape, New South Wales has little hope left and this forecast is the nail in the coffin.

In the west, the crop is not looking anywhere near as good as last year, with canola crops looking in very poor shape. The rainfall over the past day and tomorrow will help provide a boost, but more will be needed by the middle of September – especially if they continue to have record breaking heat.

Last year the east coast relied on Western Australia to meet the domestic demand and it is likely that there may be transshipments again into NNSW/QLD.

Whilst at the Dowerin field day, we had a good chance to find out what was on the minds of the industry:

Agricultural Produce Commission: There is a lot of concern about the introduction of a levy to create a broadacre research fund. This levy is already in place in South Australia through GPSA. At a time when membership of local representative bodies is in decline, this levy has some merits for ensuring grower centric research.

I personally wouldn’t be in favour of this levy, however the fact that it is opt-out means that growers can elect whether they want to contribute.

CBH: There was a lot of discussions related to CBH at the field day. The major talking point from growers was the $43m interest free loan to their joint venture flour mill in Indonesia. There is a lot of concern that this type of deal isn’t in the best interest of grower shareholders.

The trade participants who I spoke to were all talking about the A$200m trading loss which CBH are rumoured to have made this season.  There were many calling for the CBH trading business to be completely separated from the storage and handling business.

WAF-PGA merger: These two organisations have at times had oppositional viewpoints on several topics, but every couple of years the idea of a merger is debated. It would make some logical sense to have a single organization which represents producers, but in reality, I think these organisations are ideologically opposed and a merger will be forever out of reach.

On the topic of WA, the state’s biggest commodity (iron ore) has taken a substantial hit over the past month (figure 2) as a result of trade woes due to US-China tensions. Historically iron ore has been a driver of the AUD, this fall could lead to the continuation of the current weakness against the USD.

Although we all know that commodities go through boom and bust cycles, we are likely to see ore rebound in future – it might even make those Karratha property investments profitable one day.

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What does it mean/next week?:

At present, there are continuing concerns over the east coast crop which will keep interest in the ASX strong as consumers aim to get some cover for the following year.

On the futures front, it is rare to see rises in the market from August onwards, as the bulk of the world’s crop is a certainty. However, this year with concerns that the USDA may have overstated the corn crop and its slow growth could lead to surprises.

Support found at 500¢

Despite rising slaughter rates, and more dry weather, the Eastern Young Cattle Indicator (EYCI) managed to find some support at 500¢.  The demand from export markets remains rampant, with slaughter cattle prices hitting new peaks.

The fall in the EYCI halted this week, with young cattle prices easing 4¢ to stall at 503.75¢/kg cwt.  Some of the heavy fall last week can be put down to stronger supply.  Figure 1 shows a 6% rise in east coast cattle slaughter, and a 5% lift on the same time last year.  The lift in supply was concentrated in Queensland, where a 12% rise for the week carried east coast slaughter higher.

The biggest move we saw in cattle markets this week was the Heavy Steer Indicator in NSW.  Figure 2 shows a 108¢ jump on last week, and 33¢ on a fortnight ago, to hit a three year high of 633¢/kg cwt.  Heavy Steer in NSW have only been more expensive at this time in 2016, and strong export prices are driving the rise.

Figure 3 shows export prices continue to rise, this week thanks to an increase in the US value.  Figure 3 shows how much the lower Aussie dollar has done for export values, and therefore cattle prices.  The 90CL price in US terms is at the top of the three year range, but in our terms it is approaching record values.  This week’s price of 715¢/kg swt is a new four year high, and just 30¢ off an all time record.

What does it mean/next week?:

The latest Bureau of Meteorology (BOM) three month outlook (figure 4), released yesterday, doesn’t hold a lot of joy for cattle producers.  With only parts of WA and Tasmania with a better than 50% change of stronger than median rainfall, it looks like spring might again fail for many.

The forecast doesn’t mean it’s not going to rain, but the chances of good rains are low.  This suggests pressure on young cattle, and support for finished cattle is likely to continue for the rest of the year.

Some thoughts on the removal of the South Australian GM moratorium

The South Australian government after 15 years has finally decided to scrap its moratorium on the cultivation of GM crops. The Mecardo team were instrumental in providing analytics to assist in the decision-making process. In this update, we examine the spread between GM and Non-GM and provide some thoughts for growers considering GM canola in South Australia next year.

We produced an in-depth report in early 2018, ‘Analysis of price premiums under the South Australian GM moratorium’. This report was used by Grain Producers South Australia to lobby for the removal of the GM moratorium and led to further independent reports by Emeritus Professor Kym Anderson.

The summary of our reporting was that there was no evidence of the GM moratorium providing a premium for most farmers in South Australia. In my view farmers should be given the choice to use whatever tools they need to be as productive as possible. The 2020/21 season will be the first-time farmers in South Australia will be able to utilise genetically modified crops.

This makes an opportune time to examine GM spreads around the country. It will come as no surprise, but GM canola trades at a discount to non-GM varieties. What is important is how much of a discount that it trades at.

In Figure 1 & 2, the premium for non-GM is displayed for both Melbourne and Kwinana. This spread is shown on a two-week moving average, with an average for the period displayed. In recent months, the discount in Melbourne has reduced close to parity, whilst Kwinana has seen the opposite with the spread rising to record levels. The premium for non-GM is A$37 in Kwinana and A$35 in Melbourne.

The spread between GM and Non-GM and is quite volatile with a lot of movement within the season. It is therefore worthwhile keeping a strong eye on the spread, however the overall return is far more important in reality.

One factor to understand in the early stages of the introduction will be the volume overall produced. If we look at the overall volumes typically grown to GM varieties (see GM Crops: How has the Australian farmer embraced them?), it typically ranges around 10-15% in NSW & Victoria. I would expect similar levels in South Australia within a few years.

South Australia has produced around 334kmt of Canola since the turn of the decade. If we take the top end of the range, there will be 50kmt of Canola produced. This will be spread on a wide geography from the limestone coast to the Eyre peninsular.

This makes it very difficult in the initial stages to develop a market as there will be difficulty achieving volumes for bulk. It may end up that the Eyre peninsular will end up shipping out individual holds, whilst the eastern parts of the state may end up mainly utilizing container trade or the domestic market in Victoria.

I recommend that farming representative groups (such as GPSA) work closely with industry to ensure an orderly approach to the marketing and logistics of GM canola in South Australia.

What does this mean?

The early stages of the introduction of GM canola will have its ups and downs, however, it is great to see farmers having all the agronomics tools available to them. This will be especially important as new varieties are released such as omega oil canola.

It is important to get some independent advice from your agronomist in order to gain a monetary value of any agronomic benefits (which may not all occur in year 1). This will determine whether the spread between GM and Non-GM is acceptable.

Weekly Wool Forwards for week ending 30th August 2019

While the auction market sings a Tom Petty tune, the interest and activity in forwards is flooding in, with nearly 30 trades this week as growers look to lock in.

In 19 Micron wool, eleven trades were deal this week. For September, trades agreed between 1,655¢ and 1,665¢. November and December saw agreements between 1,640¢ and 1,660¢ while for January and February of next year, trades were dealt at 1,610¢.

In 21 Micron wool, 17 trades were dealt this week. For September, trades agreed at 1,620¢ while for October we saw agreements between 1,620¢ and 1,625¢. November and December saw trades dealt at 1,600¢ while for January 2019, trades agreed at 1,570¢.

In 28 Micron wool, 1 trade was dealt, agreeing at 830¢ for September.

If falls in physical prices continue, we’re likely to see more growers locking in prices with Eddie, but just like the show, we’ll have to wait til after the break to see the results.