Month: November 2019

T-Ports: A look at pricing on the Eyre Peninsula

This year sees the opening of the T-Ports facility on the Eyre Peninsula. This facility brings additional export capacity and with that the potential for extra competition. In this update, we examine the historical spreads between Adelaide and Port Lincoln.

In recent days there has been commentary that the spread between Port Lincoln and Adelaide had narrowed as a result of the introduction of the T-Ports facility. We thought it was worthwhile to examine the historical spreads between the two-port zones.

The T-Ports facility is based at Lucky Bay and utilizes a different loading method from any other grain export port in Australia. Up until now, grain in Australia was loaded onto vessels in Australia direct from a berth, T-Ports will use a transshipment vessel.

The transshipment vessel ‘Lucky Eyre’ will load grain at Lucky Bay, which will then sail to deep water vessels to transfer the grain onboard. This is a relatively common way of loading vessels in regions where vessel drafts are an issue.

In figure 1, the historical prices for APW1 are shown for Adelaide and Port Lincoln. Typically, Adelaide and Port Lincoln have traded at similar levels for much of the past decade. There have, however, been periods when Adelaide has traded at a strong premium, especially during the past 18 months.

This spread is clearly displayed in figure 2. This chart represents the premium or discount between Port Lincoln and Adelaide. Last year saw the discount at its largest level versus the rest of the decade. However, recent months have seen the spread narrow.

There is some speculation that this narrowing of the spread is due to the extra competition encouraging buyers. However, at present, it is hard to confirm whether competition is the cause.

We do know, however, that last year Adelaide was pricing into the eastern state domestic homes, rather than the export market. As the market has come off the boil, Adelaide pricing has fallen dramatically. It is more than likely that the larger discount at Port Lincoln last year was a result of the cost of logistics to the domestic market.

What does it mean?

The T-Ports facility is a fantastic addition to the Australian grain export market. This model is one that can be rolled out in further regions, at a potentially lower cost than traditional berth-based discharging.

Grain growers on the Eyre Peninsula now have additional options for delivering their grain, which will in many areas reduce their freight costs.

More of the same for lambs and sheep

Sheep and lamb markets are doing funny things. Lamb slaughter is well behind the same time last year, yet prices keep falling. Sheep slaughter is the same as last year, and on the rise, but prices remain steady.

Figure 1 shows east coast lamb slaughter, which for the week ending the 15th of November was 6% below the same time last year. Victorian lamb slaughter was very close to last year’s levels, it was NSW and South Australia dragging the chain.

With Victorian lamb supply starting to flow, the Eastern States Trade Lamb Indicator (EYCI) continued to drift lower. It wasn’t only Victorian lambs that were cheaper, however.  Victorian Trade Lambs were down 26¢ to 703¢/kg cwt, while in NSW they were more expensive but still down 24¢ to 732¢/kg cwt. The ESTLI was not surprisingly in the middle of the two main states, at 718¢/kg cwt (Figure 2).

The ESTLI is still 29¢ stronger than the same time last year, which is partly explained by the lower slaughter.

We looked at the stronger sheep demand earlier in the week and it has continued. Figure 3 shows sheep slaughter lifting again last week to equal last year’s highs. The east coast mutton indicator was steady at 594¢/kg cwt this week, a massive 169¢ premium on last year.

Lamb prices in the West found some strength this week, up 20¢ to 680¢ and a three month high.  Mutton prices are still behind the east coast, at 458¢, while restocker lambs look very cheap at 475¢/kg cwt.  We suspect it was a small yarding.

Next week

There isn’t much rain on the forecast for the next week and the BOM has today given another depressing three month outlook.  It might be more of the same for lamb markets as Victorian supplies continue to flow.

Market unable to sustain momentum

Grower reaction to the recent better wool market resulted in an increased offering, however, this proved too much for the market and it lost momentum this week. AWEX reported that the retracement was across the board, following the weak finish in Fremantle last week.

While the trend for the week was softer, on the final day some support was evident and Fremantle was quoted as “ending on an encouraging note”.

The Eastern Market Indicator (EMI) gave up the 19 cents gained last week to close at 1,555 cents. The AU$ fell marginally by 0.03 cents to US $0.679. This meant the EMI in US$ produced a small retracement, losing 13 cents for the week to 1,057 cents.

The softer market saw the Western Market Indicator (WMI) down 22 cents on the week to close at 1655 cents.

Again, growers were happy to resist the softer market. The pass-in rate increased to 16.1% for the week, up 9% on last week. The national offering of 38,297 bales was a 2,000 bale lift to last week’s volumes. Despite an increased offering, bales sold, at 32,143 was 1,500 bales fewer than last week’s total. This season’s bale clearance continues to lag well behind 2018 at a difference of 100,639 bales. The average weekly bales volume is currently 5,500 behind last year.

The dollar value for the week was $54.37 million, with the average bale value sitting at $1,691, $90 per bale below last week’s average. The combined value so far this season is $841.1 million.

The crossbred sector is following its normal pattern, finding its lows over the past 5 years in November & December. On a positive note, recent history shows a firming trend for the new calendar year. The skirtings market found good support, especially for better style finer types, while cardings remained largely in line with last week.

The week ahead

A relatively large offering is scheduled for next week’s sales with 39,280 bales currently on the roster across the three selling centres. Again we pin our hopes on the encouraging tone observed in Fremantle to the end of Thursday’s sales.

ASF pressure sees EYCI-90CL spread to widest discount

US-based consultants Steiner, published by Meat and Livestock Australia, report a surge in the 90CL imported beef export price as panic buying sets in under strong African Swine Fever (ASF) induced demand pressure. Despite the big leap forward in the 90CL, domestic Australian cattle values softened across the board this week as the poor outlook for rainfall continues to bite.

The 90CL imported beef export price jumped 14% from 840¢ to 960¢ as both US and Chinese buyers fight it out for access to Australian and New Zealand manufactured beef products (Figure 1). This price point is well and truly into record territory for the 90CL and it pushes the spread between the Eastern Young Cattle Indicator (EYCI) and the 90CL to a record discount, on a cent per kilo basis.

Figure 2 outlines the historical spread between the EYCI and the 90CL in both ¢/kg and percentage terms. The sharp rally in the 90CL puts the discount at 443¢/kg, the widest it has ever been. Indeed, it was back in November 2014 that we saw the discount between the EYCI and the 90CL at anywhere near the current level when it blew out to a 351¢ discount spread during the midst of Australia’s last significant drought event.

However. a more accurate reflection of the magnitude of the discount spread is to measure the gap between the EYCI and 90CLl in percentage terms (as shown by the grey line on Figure 2). The current percentage discount spread has widened significantly to 46.1% but is yet to reach the record 51.6% discount recorded during November 2014.

Young cattle prices within Australia failed to respond kindly to the surging export market with the EYCI easing 4.25¢ to close at 512.75¢/kg cwt. A sentiment mirrored across all MLA reported categories of cattle across the eastern states this week with price drops ranging from 1.5¢ for Yearling Steer to 21¢ for Medium Cow.

Next week

Hampering the ability for domestic Australian prices to fully benefit from the rampant offshore demand for beef continues to be the poor outlook for rainfall in the coming month (Figure 3).

An expected delay to the northern monsoon season continues to see Queensland suffer under a very low expectation of exceeding normal rainfall levels for this time in the year, and this is particularly true for the far northern regions.

Local futures down

As we move into this harvest the local ASX futures decline further, in this update we look at the seasonality. We also update on some of the 20/21 global projections and the fate of the Argentine crop.

The ASX wheat contract has lost further steam this week with the weekly average settlement down A$4.6/mt. Interestingly, the contract has followed a very similar seasonal pattern from around week 39 to present. Last year we did see a rally back in the weeks leading to expiry (Figure 1).

In recent weeks, we have seen a rally in old crop pricing as consumers have had their hopes for an early Victorian harvest dashed. There were many who were hand to mouth and have now had to purchase old crop grain to keep them going until the harvest starts. This dry spell has kept the majority of headers in Victoria parked up, however, they are likely to continue with earnest over the next week.

On a global level, Chicago wheat futures for December fell A$3 overnight, with the contract trading in a narrow range of A$270 to A$278 this month (figure 2). There was some news released last night which influenced the market:

The Argentine Ministry of Agriculture has estimated their wheat crop at 19mmt, a large drop from early expectations of 21mmt. A production figure of 19mmt still places the wheat crop well above the five-year average (see here)

The International Grain council updated their forecasts for global production:

  • 20/21 Wheat acreage up 1%
  • 20/21 Rapeseed/canola acreage up 3%

The week ahead

Harvest will be kicking up a notch in Victoria. This may provide some harvest pressure on pricing levels, and those holding onto old crop are liable in the coming weeks to see the current strong premium decline.

Strong supply meets rampant demand

Cattle supply has shown no signs of slowing in recent weeks, with slaughter still running hot, but prices continued to rise.  As outlined earlier in the week, supply is outstripping demand at the moment, forcing counter-seasonal price rises.

Cattle slaughter has been steadily rising over the last month, and last week hit a four month high (figure 1).  It was no surprise to see NSW driving slaughter, recording its second highest week since 2015.

Despite the stronger slaughter, the market keeps on rising.   Even the Eastern Young Cattle Indicator (EYCI) has been rising, without any real rain.  Processors might move into the young cattle space to get beef to supply export markets.  Yesterday the EYCI moved to 517¢/kg cwt, the highest level since August.

The headline cattle indicator this week was the Medium Cow, which on the east coast made a 3 year high of 251¢/kg lwt.  A very tidy 23.5% increase on the same time last year.

It was export beef prices driving cattle prices again this week.  A further 21¢ rise in the 90CL took it to 840¢/kg cwt.  It’s not just lean trim which has found some strength.  The 75CL price has gained 28% on the same time last year.  In the coming week, we’ll see if we can find some prices for higher value beef cuts.

In the West young cattle are priced better, with the WYCI at 547¢/kg cwt, but cows are well behind at 197¢/kg lwt.  Supply is usually good at this time of year, but when it tightens cow values in the west should at least match those in the east.

Next week.

There is no rain on the short term forecast, and a largely dry outlook for the summer (figure 3), so further price rises are dependent on processor and feeder demand.  This week’s processor margin article showed there is still some room for cattle prices to move higher, but while supply continues to flow upside will be limited.

Wool preparation categories

It has been a decade since the Sheep’s Back to Mill was updated. The Sheep’s Back to Mill publication is a record of the cost of harvesting, testing selling and shipping greasy wool in Australia to overseas mills. One of the components of this publication is the proportion of the wool clip which passes through rehandles/bulk class facilities. This article takes a look at wool preparation in the clip, which in turn determines how much wool passes through rehandling facilities.

The latest Sheep’s Back to Mill (for 2009-2010) is available here. Traditionally this publication develops the cost of rehandle (‘bulk class’) by using the AWTA fee applied to the proportion of the clip sold in this manner. This method underestimates the cost of putting wool through a rehandle.

There is often a mismatch between the grower being paid out on rehandle wool and when the rehandle wool (which is aggregated with like wool from other growers) is sold. For this reason and the extra work involved, the broker will make a margin on the rehandle wool. It is a grey area that is not transparent and rehandles are profit centres in the broking business, so the less wool put through rehandles the better for growers. The counter-argument is that farmers can end up with parcels of wool (bags and butts) which are not large enough to make up a sale lot. Such small lots are legitimately aggregated into sale lots in good rehandles.

At Australian auction sales, wool is offered with an IWTO approved test certificate which shows the wool preparation standard for the lot (commonly known as the ‘cert type’). Table 1 shows the proportion of wool sold (clean basis) at auction during the past eight seasons by ‘cert type’. P certificate wool is a classed grower lot that meets the AWEX Code of Practice (COP) standard while the D certificate is a grower lot that does not meet the AWEX COP. I stands for Interlot wool. The Q and B suffix denote wool which has gone through a rehandle. Q certificate wool meets the AWEX Code of Practice while B certificate wool does not. Table 1 shows that between 10% and 11% of the Australian clip sold at auction passes through rehandles.

Figure 1 provides a breakup of wool sold at auction in 2018-19 by breed on a clean basis. Merino (and superfine) accounted for 78% of wool sold while crossbred accounted for 21%. Downs, carpet and other categories (such as runs with) accounted for 1% of the sales volume.

Table 2 breaks each breed up by wool preparation category. Some 7.6% of Merino wool (nearly 8 bales in one hundred) was processed through rehandles, with 17% of crossbred wool handled through rehandles. Note also the low level of P wool preparation standard for crossbred (45%) which reflects the decline in the standard of crossbred wool preparation in recent years.

What does this mean?

Some eight bales in one hundred of the Merino clip are processed by rehandles, which as an average seems high. Rehandles are not a charity – they have a cost. Marketing begins on the farm with judicious packaging of wool for sale, which meets the AWEX Code of Practice, not in Paris or Milan.

Important news from Ukraine and China

In the past 24 hours there has been two news items which are likely to have some impact on Australia. One in the mid to long term, and one in the short term. The uncertainty from China continues, and one of our major export competitors modernizes their practices.

The first piece of news, and most immediate to the Australian market is result of the Chinese anti-competitive dumping probe. This action was taken by China 12 months ago, and under world trade organization (WTO) rules, should have been completed on Monday.

In what is the least surprising news of the year, China has requested an extension. The WTO allow a six-month extension, which means the probing must be complete by the 19th May.

Figure 1 depicts the barley price since over the past year. As we can see the market has largely been drifting lower. These levels are at export competitive levels. The market has largely priced in this extension and we are unlikely to see substantive falls from this point onwards.

The second piece of news is one which is likely to be a slow burner but is likely to impact upon Australia (eventually).

Ukraine has been a powerhouse during the past decade. Exports (especially corn & wheat) have drastically risen (figure 2). This is even though Ukrainian land legislation is quite archaic to many other major cropping nations.

The increase in cropping production which allows for large exports programs is due to the large number of foreign investors. However, these corporate investors are unable to own the land that they are farming. It is not unusual for corporate farms to be leasing land from 100’s of individual landholders.

The opening up of Ukraine to foreign buyers will lead to increases in investments from on-farm right through the supply chain. It is also expected that this will lead to an improved economy for Ukraine.

This doesn’t however bode all that well for Australia, as this has the potential to drastically increase the competitiveness of Ukrainian exports.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean?

Harvest of barley in Victoria is going to jump up a notch this week, which may see some harvest pressure on pricing.

At present the barley-wheat spread is attractive to consumers, with most focusing on accumulating as we move into harvest.

Sheep prices defy volumes

Mixed signals for the lamb market this week as the spring flush appears underway in South Australia, but Victorian volumes still sheepish. Speaking of sheep, mutton prices are holding up resolutely in the face of elevated volumes at the saleyard and at processors.

East coast lamb prices reported by Meat and Livestock NLRS shows a 12¢ lift for the Restocker Lamb indicator to see it close at 820¢/kg cwt, underpinned by a big lift in SA Restocker prices which posted a 75¢ gain to 952¢. East coast Trade and Heavy lambs easing 15¢, with softer moves reported in Victoria and NSW for these two categories, to see them finish at 744¢ and 739¢ respectively.

Lamb prices in SA holding up reasonably well across categories this week with Heavy and Merino Lamb the only types to register a negative, and a small one at that, down 1¢ and 2¢. A good result for SA lamb producers considering the recent trend in yarding numbers show that they are amid their spring flush – Figure 1.

The wet week in Victoria seemingly taking some of the steam out of lamb yarding numbers there though, with weekly sale yard volumes easing back toward 50,000 head recently. Lower Victorian lamb numbers pushing the broader east coast lamb yarding levels to 175,000 head, 18% under the seasonal average for this time in the year.

East coast sheep yardings have softened during early November but they are coming off very high historic levels so they remain above the upper end of the normal seasonal range that could be expected for this time in the year and 30% over the five-year average trend– Figure 2.

East coast sheep slaughter remaining at elevated levels too at the top end of their normal seasonal range and running 16% over the five-year seasonal trend – Figure 3. Despite the high sheep supply east coast mutton prices are holding firm, posting a 9¢ lift to close yesterday at 590¢/kg cwt.

Next week

Limited rain is on the horizon in the coming week, even for Victoria which has been quite blessed in the lead up to summer. Late November/early December usually sees a significant lift in lamb volumes at the saleyard as the spring flush hits full throttle so there is likely some further pressure to be applied to lamb prices in the short term.

East and West straighten up

Fremantle’s market sat at the top of the table for many individual MPG’s last week with a strong final day of sale. However, the glory was short-lived with the momentum carrying into the new week and Eastern market prices quickly moving higher. With prices wavering on the second day of sale, AWEX reported all three selling centres moved back into alignment.

The Eastern Market Indicator (EMI) gained 19 cents over the week to close at 1,574 cents. Currency markets took another hit. The AU$ dropped 0.6 cents to US $0.679, falling below the $0.68 threshold that it’s been hovering over for the last month. This meant the EMI in US$ hardly felt the rising market, with just a 2 cent increase on the week to 1,070 cents.

In Western Australia, the market had a solid jump on day one, with Fremantle MPG’s rising 25 to 39 cents. The softer market on day two saw the Western Market Indicator (WMI) 15 cents higher on the week to close at 1677 cents.

Growers were clearly happy to sell into the rising market. The pass-in rate dropped down to 7% for the week. The national offering of 36,110 bales was a small lift to last week’s volumes. The larger move was the bales sold, at 33,584 this was 5,472 bales higher than last weeks total. This season’s supply continues to lag well behind 2018 at a difference of 103,787 bales. The average weekly bales volume is currently 6,105 behind last year.

The dollar value for the week was $59.83 million, with the average bale value sitting at $1,781. The combined value so far this season is $786.73 million.

The crossbred sector saw mixed interest but kept within a +/-10 cent range from last weeks’ levels. The skirtings market followed the lead of Merino fleece closely, rising one day and falling the next.

The week ahead

Reports from brokers suggest volumes in store are starting to stock up with growers content with passing in their wool if prices don’t meet their mark. Many might be holding hope that the market will experience its usual kick in the New Year. Of course, this movement is far from guaranteed and caution needs to be taken. If this approach is widespread, the extra supply might take the shine off New Year’s prices.

A stronger offering is scheduled for next week’s sales with 40,726 bales currently on the roster across the three selling centres.