Month: November 2019

Think before locking in physical sales

It’s the start of harvest, but bids for the 20/21 harvest are now being presented to growers. In this analysis, we look at whether these offer more value for the producer or the buyer.

It is extremely important to be examining the forward markets, as they can often provide strong opportunities to price grain at high prices. The strategy of performing risk management through some forward selling can be through derivatives or physical contracts.

In this analysis, we will look at the current bids for Kwinana and Adelaide.

  • Kwinana: A$314
  • Adelaide: A$300

At a basic examination, these bids look quite attractive, it provides the grower with a price above the psychological barrier of A$300. However, let’s break it down.

The forward curve for wheat futures (Chicago) is in contango, where the forward months are trading at a premium to spot. Today the Chicago contract (Dec’20), which corresponds with the 20/21 harvest, is trading at A$291. This places the contracts at a basis of +A$23 in Kwinana and +A$9 in Adelaide.

In order to determine whether the current bids provide a good price, let’s look at the historical basis. In figures 1 & 2, the average basis from harvest (specifically December) is displayed in green bars, with the orange line representing the basis on offer with the current 20/21 bids.

As we can see, in the bulk of years basis at harvest has tended to exceed the current basis on the offer of A$9 in Adelaide and A$23 in Kwinana. This was especially so during 2018 when drought had hit Australia and prices responded accordingly.

The buyer at these bids can lock in the basis at below-average levels, and then protect their risk from movements in futures. They will then likely be able to sell the basis on at higher levels at a future date.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean?

If we see a bumper crop in 2020/21, then basis could fall to minus levels. However, at present, we have no way of knowing whether that will be the case.

If we went on the law of averages it would be a better position for a producer to sell futures, and hold locking basis until harvest (or until a better bid is provided).

At present on a flat price basis, these bids are attractive, but by taking them, there is the potential for money to be left on the table.

If you are a premium subscriber and would like to discuss this in further detail – feel free to get in touch.

Mutton still finding support

There was no real impact from the rain this week in sheep and lamb markets, with a cautious approach seemingly being taken. There was also the issue of the three month outlook and continued strong supplies.

Figure 1 shows sheep supplies in saleyards have been running well ahead of last year’s levels, and the five year average. Sheep yardings are rarely above 100,000 head but it hasn’t really dampened the price at all.

The National Mutton Indicator (NMI) managed a small lift this week, despite the strong supplies.  Figure 2 shows the NMI is a touch under 550¢, largely being propped up by Victoria where mutton is making 594¢/kg cwt.

Lamb markets were also steady on the east coast, as the spring flush of lambs stalled. NSW remains at a solid premium to other east coast markets, at 777¢ vs 735¢/kg cwt in Victoria and SA.  On the west coast, lambs are a long way behind the east coast.

Figure 3 puts the Western Trade Lamb Indicator (WATLI) at 632¢/kg cwt as lamb supplies continue to flow. The WATLI is, however, at a historically strong price for this time of year, and has plenty of upside.

Restocker lamb prices continued to fall this week, with the rain having little impact on the expected trend. As we draw closer to summer, declining feed reserves will continue to put pressure on restocker values. That is, of course, if rainfall doesn’t see feed reserves improve in a hurry.

Next Week.

The three month rainfall outlook isn’t great for most areas, and given the length of the drought, no one is ready to jump in just yet. Lamb supplies should continue to edge higher, but sheep supplies could easily contract, whether it rains or not. There might be a little further downside for lambs, but it looks like support for sheep is here to stay, and that should put a floor under lamb values.

May I have some more please?

Isn’t it great to see rain falling to parts of NSW and Queensland that have been missing out for some time? Certainly, cattle markets have responded kindly, but we really need to see more rainfall to get the confidence of restockers to re-engage with the market in a meaningful way.

Figure 1 shows the distribution of rain over the last week across the country with falls up to 100 mm noted for parts of western NSW. East coast cattle markets are benefiting from the wet, with younger store cattle and breeding stock posting price gains.

Meat and Livestock Australia are reporting weekly price lifts for east coast feeder steers, up 2% to 296¢ and east coast yearling steers gaining 1.5% to finish at 283¢. Stronger price movements were noted for east coast medium cow with a 3% increase to 242¢/kg cwt.

The benchmark Eastern Young Cattle Indicator (EYCI) mirrored the positive tone with a 2% rally on the week to close at 521.75¢/kg cwt. The EYCI has been climbing steadily, having risen over 11% since late September. The last three seasons we have seen the EYCI climb through spring, so it is not an uncommon scenario, but the recent rain is helping to underpin young cattle prices – Figure 2. The EYCI is currently sitting just 3¢ above where it was this time last season.

An additional factor underpinning cattle prices more broadly across Australia has been the ongoing surge in demand for beef coming out of China. The October release of trade data from the Department of Agriculture shows average monthly beef flows from Australia to China are running 122% above the five-year average trend. This is due to Chinese consumers needing to attempt to fill some of the void created by the crisis impacting their pork sector presently.

Indeed, China is closing in on Japan as Australia’s top beef export destination with current market share proportions showing China at 22.9% compared to Japan’s 24% – Figure 3. Remarkable, considering China finished the 2018 season at 14.5% of the market share of Australian beef exports and was sitting at just 10.8% in 2017.

Next week

Unfortunately, the forecast for next week shows the rain absent from much of mainland Australia, with falls between 25-50mm limited to eastern Victoria and coastal sections of western Victoria.

Several more weeks of rain like what we have experienced this week is required in NSW and Queensland before we can confidently expect restockers to get active. However, the Bureau of Meteorology three-month outlook released yesterday signals a low chance of any significant follow up rain during November for NSW and Queensland.

This lack of follow up rain is sending me “around the Twist” and suggests further cattle price gains will be limited for young cattle, but offshore demand should keep finished cattle prices buoyed.

Sellers unimpressed

As reported last week, sellers have been prepared to step out of the market when demand is weak, and this week the high pass-in rate told the story of the wool market performance.

There is no doubt that demand is not great right now, however, if the supply was not lightened by the high pass-in rates in the weeks where the market retreat, we could well be seeing bigger falls and greater fluctuation. It is hard to quantify the effect this grower response is having, but it must be supportive for the market.

This week the Eastern Market Indicator (EMI) lost 39 cents (after rising 77 cents over the last 2 weeks), to close at 1555 cents. The Au$ fell over 0.5 cents to US $0.686, causing the EMI in US$ to also fall 36 cents to 1,068 cents. The WMI also fell, albeit with a stronger finish in Fremantle (with a gain of 10 cents on Thursday), however for the week the loss was 25 cents for a WMI close of 1662 cents.

As the three-week run of improving markets came to an end, so too did the single-digit pass-in rates, – sellers again deciding to hold wool back on a falling market. This week the PI rate was 17.5% nationally. As a side note, almost 25% of Merino Fleece wool nationally was passed in on Thursday; in the West almost 26% of the offering was passed.

Sydney seemed to struggle to find a footing all week, with a specialty fine wool sale unable to inspire, although buyers selectively bid on wool with good measurements. Melbourne and Fremantle reported a positive tone towards the end of selling on Thursday, no doubt supported by firm grower reserves limiting sales.

There was a slightly smaller offering of 34,084 bales, just over 4,000 bales fewer compared to last week’s volumes. The high pass-in rate meant that there was also a big drop in in the number of bales sold, over 6,000 fewer compared to last week at 28,112 bales. The supply shortfall continues, with 105,884 fewer bales sold compared to the same period last year. This equates to an average weekly gap of 6,617 bales since July.

The dollar value for the week was $48.84 million, with a bale average value of $1,737, down $87 per bale on last week. The combined value so far this season is $726.90 million.

AWEX reported that the Crossbred and Cardings sections were not spared and gave up significant ground, however, a mild recovery in the Cardings in Fremantle was in line with the generally positive close to the week.

The week ahead

Next week an increased offering is listed, with 38,500 bales across the three centres.

We have been taking the lead for the upcoming week based on the closing sentiment in Fremantle, so we have a cautiously positive outlook for next week.

Anti-dumping probe continues to leave uncertainty

Usually the market is relatively busy at the start of harvest, however, at the start of November things are going off with a whimper. In this update we talk about the lack of bids & volume on ASX.

The ASX wheat contract has been relatively inactive this week. The contract for Jan 2020 has been settling in a very narrow range of A$337-339/mt for the past nine days. The spread between bid and offer has remained wide during this time, and traded volume is low.

In figure 1, the seasonality of ASX volume is displayed. Throughout most of this year, volume has followed the 2019 contract. This week however, volume has dropped to 75 contracts (or 1500mt). This volume is likely to increase into December as positions are closed.

The big talking point with consumers and growers is barley pricing. This week prices have declined marginally, however, they have been on a downward plunge since seeding. Due to this discount to wheat, barley is now far more attractive to feed consumers. Bids from buyers have dried up with consumers buying hand to mouth.

The big question at present is the result of the anti-dumping investigation by China. As the investigation was instigated last November, the results should be published this month. The World Trade Organisation stipulates that anti-dumping investigations must be completed within a year, although there is the possibility of a six-month extension.

This uncertainty has meant that exporters are unwilling to take a ‘punt’ on the resolution, especially after many trading businesses made large losses during the past financial year. This has removed a large proportion of demand, with domestic being the only available avenue open.

What does it mean next week?

The uncertainty around the barley anti-dumping probe is impacting trades capacity to purchase large volumes of barley. In addition, there is a question mark in relation to Chinese feed demand due to the African Swine Fever outbreak.

The WASDE report will be released overnight. At this point of the year, the report should provide some stable numbers for this season. This will give some clarity on carryout.

No real reaction to rain forecast -yet

This time last week we were bemoaning the lack of rainfall on the forecast, and predicted more sideways action in markets. They say a week is a long time in football, well it seems to take forever when rain comes on the forecast and we wait for it to fall.

The rain that has fallen in Western Queensland, and is forecast to fall over the weekend (Figure 1) in New South Wales and Victoria hasn’t yet had much of an impact on markets. The Eastern Young Cattle Indicator (EYCI), the price most likely to get a boost from rain, did rally 10¢ this week though.  Yardings were up by over 5%, so perhaps demand did improve a little, to push the price to a six week high.

In Victoria, it seemed the flow of grassfed cattle to yards overwhelmed demand to an extent.  Domestic feeder steers held their ground, but heavy steers were 12¢ lower at 566¢/kg cwt.

There was a lot of action in over the hooks markets in Queensland last week. Trade and heavy steers lifted 20¢ to 580 and 590¢/kg cwt respectively. Finished cattle supply in the north must be waning, with Queensland now at a premium to WA.

Cows in Queensland were very strong this week. A 16¢ rally took Queensland cows to 483¢/kg cwt, a 12 month high. Figure 3 shows cows have gotten expensive all across the east coast, with export prices driving competition.

Next week:

What happens next week really depends on how much of the forecast rain actually falls. Some key cattle areas are going to miss out, but those which have had a good year to date will have spring extended.

Prices aren’t likely to go down in the current environment, but the upside is also limited until there is some follow-up rain.

Pressure on markets but support should be found

Sheep and lamb markets continued to slide this week, with supply ramping up. We don’t know what happened with yardings and slaughter this week yet, but last week sheep slaughter was heading higher.

Figure 1 shows sheep slaughter on the rise, well above average levels and heading towards last year’s extraordinarily strong

rates. Improving supply of sheep, and to a lesser extent lamb, has put a dampener on prices.

The Eastern States Trade Lamb Indicator (ESTLI) fell 12¢ to 760¢/kg cwt (Figure 2), a six month low.    Figure 2 shows NSW Mutton prices fell more heavily, losing 34¢ to 550¢/kg cwt, but they are doing a bit of a yo-yo at the moment, having gained a similar amount a fortnight ago.

In Victoria, Mutton prices held around 600¢, as while supply is increasing, demand for mutton is supporting prices.

Store sheep markets are running hot. With young ewes making well over $200 per head and ewes with lambs reportedly making over $400, it appears restockers are getting in before the anticipated price rise.

The price rise could come sooner rather than later.  At least markets should steady with the rain on the forecast over the coming week. There might not be many sheep left in NSW, but the rain will see any that might have been sold being held. It will be hard for sheep slaughter to keep rising.

WA sheep and lamb markets continue to lag well behind the east coast. This isn’t unusual for this time of year, with the season finishing. Demand from across the Nullabor might add some support if the rain keeps coming.

Next Week:

There were some strong forward contracts released for Northern NSW yesterday, with lamb at 820¢ and mutton over 600¢ in January. These prices are ahead of current rates, but if the forecast rain falls, and is followed up, we could get there a lot quicker.

Sellers line up

It is an unusual situation in commodity markets where the seller can move the market price, but a glance at the wool market over the last few months shows growers either selling aggressively on market rallies, or holding back on soft markets.

The pass-in rate has been in direct contrast to market moves, a falling market met with high pass-in rates and vice versa. This strategy has certainly supported the wool market with sellers reducing supply in the weeks where buyers have had little interest.

This week the Eastern Market Indicator (EMI) gained 49 cents (after rising 28 cents last week), to close at 1594 cents. The Au$ also rose to US $0.693, causing the EMI in US$ to also lift by 46 cents to 1,104 cents. The WMI also rose, however, a softer market in Fremantle on Thursday resulted in a gain of just 15 cents to 1687.

This market rise resulted in another week of single digit pass-in rates – sellers taking the opportunity to clear wool on a rising market. This week the PI rate was 6.4% nationally.

There was a bigger offering of 37,381 bales, almost 8,000 bales more compared to last week’s volumes. This resulted in a big lift in the number of bales sold, up 7,200 on last week to 34,870. This is the largest clearance to the trade since May. The supply shortfall continues though, compared to the same period last year 108,541 fewer bales have been sold. This equates to an average weekly gap of 7,200 bales since July.

The dollar value for the week was $63.65 million, with a bale average value of $1,825, up $55 per bale on last week. The combined value so far this season is $678.15 million.

AWEX reported that the Crossbred section was the strongest on the week, with prices lifting 35 – 70 cents. Cardings again were quoted dearer with locks, stains and crutching posting 50 to100 cent increase, to average a 65 cent lift.

The week ahead

Next week another solid offering is listed, with 36,400 bales across the three centres. This size roster is forecast for the next three weeks.

Despite the increased offering the market this week was strong, there was however a cautionary note with Fremantle on the last day tending weaker.

Ever tightening cattle supply projections

We can’t keep slaughtering female cattle at such a rapid rate without having an impact on the future herd and cattle supply. Meat & Livestock Australia’s (MLA) October update to its Cattle Industry Projections has taken recent slaughter into account and forecast the lowest slaughter in thirty years, for two years in a row.

Continued strong cattle slaughter in general, and female slaughter in particular, has seen MLA revise 2019 total slaughter higher again. This time MLA have lifted 2019 cattle slaughter to 8.1 million head, 3.7% higher than the August estimate (figure 1). Since the first projections of the year, MLA has added 800,000 head, or 10.5% to 2019 slaughter.

The dry weather and continued herd liquidation have driven the rise in this year’s slaughter and taken cattle away from the future. MLA made minor changes to herd estimates. Figure 2 shows the herd is expected to decline by 2 million head when we see the June 30, 2019 herd figures. Continued strong slaughter in the second half of 2019 will see a new low, but only a slightly lower herd in June 2020.

With most of the herd decline expected to be behind us, plenty of cattle needed to be stripped from future slaughter to see herd growth. Figure 1 shows that MLA has kept the slaughter forecast for 2020 at 6.9 million head, but decreased the 2021 slaughter forecast to a new 30 year low of 6.8 million head.

The 2021 slaughter forecast is to be 5% lower than the previous forecast and a massive 19% decline in 2019. The last time slaughter was below 6.85 million head was in 1989, thirty years ago. The increase in 2019 slaughter has effectively been taken off 2021. In 2022, cattle slaughter is expected to get back to 7.5 million head, which could be a struggle with the herd still growing.

Live exports are also expected to decline in the coming years. Figure 3 shows that after an 8% rise in 2019, MLA expects a 23% fall in 2020. Strong live export demand is expected to keep numbers at levels well above historical lows, despite what is expected to be very strong slaughter pricing.

What does it mean?

We have been talking for some time about strengthening export beef demand and if we get something near a normal season, we are going to see a collision on tight supply and strong demand.  We saw something similar back in 2016 and 2017, but this time supply will be tighter, and demand is currently stronger.

It is safe to expect strong rises and record prices for all cattle categories, but store cattle are going to see the largest upside.

This is a landmark harvest, but we will get clarity soon.

It’s six days after Halloween. A night of monsters and scares. However, for farmers the scariest matter this year has been the downward progression of crop yields. This has been a landmark harvest where production has been massively down, but prices have declined, however, the headers will give the industry its much needed clarity.

The crop forecasters are now suggesting a <16mmt wheat crop. Which is substantially lower than the ABARES estimate in September of 19.1mmt, and down on last years 17.3mmt. We have spoken at length about the difference in the two years as production shifts back to the east coast.

The market has lost steam in recent weeks as consumers have confidence in being able to accumulate their volumes.  As harvest advances, we will get some clarity on the accuracy of forecasts.

One of the few places in Australia hanging on has been Victoria. In recent weeks the Grain Industry Association of Victoria has performed a crop tour. The forecast wheat yield is 2.31mt/ha (wheat) and 3.32mt/ha (barley). Abandonment has also declined year on year, with 8% being cut for hay versus approx. 30% last year.

When we remove this abandonment from the ABARES September forecast, it is now forecast that Victoria will produce 3.4mmt of wheat and 2.6mmt of barley.

How are the markets reacting to the lower crop? Well there is a continued fall in prices in Australia. The ASX contract has fallen 3% week on week, or A$9 (figure 1). The gap between this year and last year has widened dramatically. At present the ASX contract is A$97/mt lower than this point in time last year.

This year due to the uncertainty most growers have sold less than normal ahead of harvest. This makes perfect sense as a strategy whilst crops have deteriorated. This however especially in Victoria could lead to a large volume of grain hitting the market all at the same time.

What does it mean / next week?:

Consumers are now examining their ability to increase their use of barley. Due to the wide spread to wheat, it is more attractive to feed. This will likely add some pressure to wheat prices, as demand technically drops by the maximum volume allowable as barley in a ration. However this may be short-lived.