Category: Business

Is it on or off?

The US grain market gets plenty of attention usually, however in recent times it is the clearly dominant story, and for good reason. Politics is impacting, with a massive export program to China under the Phase 1 deal a big story, we also have the current harvest and crop outlook to contend with. Throw in the dealing from the US government of huge farm subsidies and there is plenty to feed grain news stories.

The scale of the farmer “aid” is huge, with the Trump administration announcing a total of $28 billion in aid for farmers in 2018 and 2019, funds the president says come from the tariffs levied on China. The administration secured another $23.5 billion to help American farmers through the $2 trillion coronavirus stimulus package passed in March.”

While this type of support is never going to occur in Australia, it has impacts on our price and market access.

The other big issue is the China Phase 1 deal, and depending which day it is or which diplomat is speaking it is either going ahead “full steam”, or about to be dumped. This is a big factor for all grain producing and importing countries, China agreed to purchase between $40 billion and $50 billion of U.S. agricultural goods in each of the next 2 years.

If the deal goes ahead, the rest of the world’s grain exporting nations will search for other markets; if the deal collapses China will scramble for replacement products.

Harvest in the northern hemisphere is ramping up, and by-and-large the results are positive for supply, which means negative for price. All markets are tending softer, with the exception of the European rapeseed/canola market where production disruptions are impacting locally. However, in Russia and France good harvest reports caused markets to soften. The CBOT SRW contract now looks well settled below 500 c/bush, losing a further cent to 485.5 cents this week.

Domestically the weaker international values combined with continued good weather and the prospect of rain in July to see “new crop” prices ease around $10 for wheat & $3 for F1 barley.

Delivered prices to Melbourne for ASW1 wheat is quoted $350 for “old crop” and $290 per tonne for “new crop”. The ASX Jan 2021 contract pulled back another 3 dollars to $285, while the US CME Dec 2020 contract also continued to retrace, ending the week just under 495 cents per bush.

Buyers seem to be in a comfortable space regarding grain requirements up to harvest and happy to let the market soften, while growers are yet to face harvest prices although the continued good seasonal outlook could encourage selling soon.

Next week?

The market is not providing any signals that prices will improve, in fact, the latest BOM weather outlook has July delivering rain that will only improve the outlook for harvest. We will keep a close watch on harvest yield reports from the Northern Hemisphere, if these continue in a positive trend expect further price weakness.

Higher yardings see a slip from record values

A return to more normal yardings last week had the typical effect on prices. The record young cattle prices from last week didn’t hold, with the correction pulling the Eastern Young Cattle Indicator back to levels of the week earlier.

East coast saleyard throughput levels rebounded from the previous weeks low with all states contributing to the lift. A 34% rise saw 46,548 cattle yarded for the week ending the 19th of June.

The number of cattle slaughtered in east coast yards last week was marginally (2%) down on the week prior. Queensland was the only state driving down the figures with 6% fewer cattle slaughtered compared to the week prior. A total of 123,125 cattle were processed which was 20% under the same week last year.

The Eastern Young Cattle Indicator (EYCI) lost 2% on the week, returning back to 754¢/kg. The National Heavy Steer also lost some of last weeks gain, falling 15¢ to 367¢/kg lwt. There was a show of support for cows with the National Medium Cow price receiving a small lift of 5¢ to 279¢/kg lwt. Processor steers ended with week higher again, up 5¢. While Feeder yearling steers lost some ground, moving back under the 400¢ mark to 397¢/kg lwt.

The 90 CL Frozen cow price crept lower last week, falling 1% to 747¢/kg in AUD. The Meat & Livestock Australia Steiner report indicated the “imported beef trade has become especially sluggish”. Slowing beef demand in the US and higher production as processing capacity is back to normal is putting pressure on US cattle values.

Next week:

Recent rain in southern parts of the country will no doubt be reflected in next weeks yarding figure release. Looking at the BOM forecast for the next week, there’s a good chance of another soaking in Tassie and the WA coast, however, the rest of the country is expected to remain fairly dry which won’t do much for demand.

Fact or fiction?

Sometimes the hardest thing to do when looking at markets is to decipher the real message from the published message. There is a lot of rhetoric around the China imports and US exports of grain and beans, with polarized stories representing positive and negative positions. It seems that “fake” news is a distinct possibility.

Usually this misinformation revolves around supply, but its intention is to influence market prices. The best approach in understanding the real picture is to refer to the data.

The University of Illinois in their Farm Policy News (FPN), reported that last week was the largest sale of soybeans so far this marketing year was enacted. While 39% of this was to China, a further 39% was to “unknown”, with FPN speculating that this “very likely a lot/most to China” also

When combining other “facts”, the answer becomes even more obvious. Under the agreed trade deal between China & the US, China agreed to take $36.5 billion in American agricultural goods in 2020. In the first 4 months with the disruption as a result of COVID-19, only $4.65 billion was exported.

Both sides have said they have a commitment to honoring the phase 1 deal, so expect a ramping up of activity in the next couple of quarters.

In related news, FPN reported “The American Farm Bureau Federation on Wednesday sent a detailed list of recommendations to Congress to help farmers, stating that even though lawmakers had provided earlier aid, more is needed because of economic losses facing the industry.”

This aid is running into the billions, and with corn prices falling 50 cents per pound to around US$3.20, the National Corn Growers Association calculates a loss of $49 per acre, they are asking for more.

Subsidies are in the news at the moment, (see China barley tariff report) but the consequence of this US government support will be to incentivize US growers to plant, causing the supply demand message to be muted and the continuous high level of world stocks to remain.

The ASX Jan 2021 contract slowly eased this week to end 10 dollars lower at $288, while the US CME Dec 2020 contract pulled back further, ending the week just under $497.

Domestic delivered prices tended to firm this week as buyers sought supply while growers were cautious in accepting old crop pricing, with it still a month or two away before producers have the confidence to sell “new crop”.

Next week?

Weather is all important in influencing grain prices, especially at this time of the year the weather in the Northern hemisphere. This week the news from the US is that after a period of dry the forecast is for rainfall over the next 7 days is predicted, this had the expected result of causing the market to soften.

Domestic focus drives an EYCI record

Young cattle prices continued to climb this week to hit a new high, taking no notice of lower export market values. The local supply situation and decent rainfall forecasts has saleyard prices trading back at global market values.

The Eastern Young Cattle Indicator (EYCI) lifted to find it’s new record on Wednesday at 772¢/kg cwt. This solid rise pushed the EYCI just a few cents above the previous high set in March.

Tight supply helped lend support to most categories of cattle. The heavy steer saw the best result with a weekly gain of 9% to close at 382¢/kg. Medium cows rose 3% to 271¢/kg lwt. It was only the Restocker Steer category that softened, albeit only marginally, down just 5 cents to 271¢/kg lwt. Both Processor and Feeder Steers found some support.

East coast cattle yardings saw a significant drop on the week as shown in Figure 2. Just 34,744 cattle were yarded in the week ending the 12th of May, which was a 29% drop on the week prior. Much of the fall was driven by Queensland with nearly 10,000 fewer head presented, but all states contributed to the tighter supply.

Slaughter levels rebounded slightly after last weeks low, rising 5% to see 126,034 head processed on the east coast. This was 12% under the same week in 2019.

Next week:

There isn’t much rain on the short term forecast for anywhere outside of Victoria, Tassie and the coastal fringe of WA, and even that looks set to be light. However, if slaughter and yardings stay this tight we will continue to see support for prices at the saleyard. How long tight supply can prop up saleyard cattle prices despite weaker export markets is the unknown we’re waiting to play out.

Demand & supply heading for a mismatch

Key Points

With harvest underway in parts of the US, the World Agricultural Supply & Demand Estimates (WASDE) report was released last night our time and was met with a neutral response from commentators.

Markets confirmed no surprises with a stable response, with the USDA lifting wheat production by around 1% on the back of stronger South American production. They noted this was slightly more bearish for wheat price outlook.

The expected record US corn crop is combining with other feed grains to look likely to produce a record feed grain crop. The USDA predicting a 5% increase on last year. While the US corn crop is driving 80% of this increase, Mexico, Brazil & Ukraine will also contribute.

This comes at a time when global feed demand has taken a hit with the African Swine Fever wiping out around 70 mill tonne of demand. Adding to this, CV-19 restrictions are impacting gasoline demand, particularly in the US where corn-based ethanol is mandated into the mix.

The upshot is that low prices are expected to continue into next year, with countries who have had their currency devalue against the USD less impacted. This will likely maintain high levels of plantings in these countries despite the lower prices.

Domestically ABARES has lifted the outlook for wheat by 25% from last month, aiming now at a wheat crop of 26.7 mill tonnes, while barley is expected to be up 17% year on year to 10.6 mill tonnes.

All this positive news for production is weighing on prices, with the ASX Jan 2021 contract easing below the $300 mark to $297, while the US CME Dec 2020 contract after testing the 535-cent mark also pulled back 20 cents per bushel to 515 cents.

Domestic delivered prices continued to ease as we move closer to “new crop” pricing and buyers’ seemingly content anticipating a significant export surplus for the coming harvest. Despite the BOM changing their prediction of median rainfall for the winter, many grain regions are comfortable for now with soil moisture levels, and with forecast showers in the week ahead, are daring to feel optimistic about production.

Next week?

The widespread frosts across eastern Australia continued making the prospect of some (any?) rain slightly more urgent.

I am regularly reminded by experienced grain producers that “it’s not in the bin until it’s in the bin”, however, the prospect for a large crop is in place, with a couple of key rain events needed in late winter and spring to create a year to remember.

Export price correction but restockers don’t care

Cattle supplies have continued to tighten in June, with Queensland slaughter moving sharply lower last week.  While prices are running hot, there were some worrying signs in export markets and with currency movements.

In the week ending the 5th of June, it looks like Queensland cattle slaughter fell off a cliff.  Figure 1 shows that Queensland posted its lowest full week slaughter level since March.  The closure of Dinmore for a couple of weeks was likely responsible. Lower slaughter driven by plant closure, is less likely to impact price on the positive side, it could actually see prices fall.

Prices didn’t fall, which suggests the supply of available slaughter stock eased in line with the demand reduction. In Queensland over the hooks indicators all gained ground, with only Cows (512¢/kg cwt) remaining under 600¢/kg cwt.

The rally in export beef prices, as indicated by the 90CL came to a halt last week. Figure 2 shows the 90CL Frozen Cow in our terms losing 53¢ to head back to 763¢/kg swt (Figure 2).  The fall was partly driven by the Aussie dollar heading back towards 70¢ but was largely due to a 2.6% fall in US prices.

With US cattle slaughter reportedly back at 95% of the levels of this time last year, all beef prices are on the wane at wholesale. Obviously, this means weaker demand for imported beef and lower prices.

Restockers with grass tend to take little notice of export beef prices, and they, along with domestic processors and feeders helped lift the EYCI a few cents above 750¢/kg cwt.

Next week.

There is some rain forecast for South East Queensland next week, which will help support young cattle prices. The question is how far export prices can drift before processors start to hurt and cut slaughter rates and over the hooks quotes.

On the weather front over the medium term, things are looking rosy again.  Figure 3 shows the Bureau of Meteorology (BOM) three month outlook, and after looking decidedly drier last week, has reverted to previous positive projection.

Waiting ….. waiting… waiting.

Key Points

It feels like the Australian grain industry is operating with a sense of calm despite the global chaos regarding China and COVID-19. The cause for this calm in Australia is the rainfall to date or the “seasonal conditions”.

Focusing on the domestic front, growers are content to focus on growing a crop and leaving sales to later. This is not an unusual situation at this time of the year, and with the best seasonal conditions in a couple of years across much of the grain area, the expectation of a good crop is cautiously in consideration.

A look at the difference in price between “old crop”, that is 2019/20 production, and “new crop”, 2020-21 production, helps to tell the story both in regard to price and supply.

Using ASW delivered Melbourne prices from feed millers as the reference, prices bid today are circa $370 per tonne, however, the forward bid for the crop in the ground is $60 lower.

This reflects the drought affected supply of last year with stocks tight to meet domestic demand this year, however, looking ahead consumers are expecting (hoping) that a big crop will lower their costs. They, therefore, have little appetite to secure supply by forward purchasing, content with the outlook for production and the sufficient supply expected.

For Barley the “old crop – new crop” spread is $15. The tighter spread compared to wheat is a result of the recent China tariff announcement which took the wind out of the sails of any unsold barley closing the gap to “new crop” prices. You can read more about these impacts on Mecardo here.

So the summary to buyer and seller activity is wrapped up in the uncertainty worldwide and the Australian crop expectation. Growers are resisting the lower bid prices and following reports from other grain-producing countries of murmurings of concern regarding weather.

On the other hand, buyers have little perceived domestic supply risk so are not providing any aggressive bidding and will remain calm while the good growing conditions persist.

Regardless of which way the weather goes, it will change sentiment in the coming months. Either buyers will begin to accumulate if conditions tighten or growers will start a selling program if their confidence in the season builds.

Next week?

The talk about weather this week was dominated by the widespread frosts across eastern Australia. The fact that little concern was raised by growers reiterates the level of comfort they have with soil moisture levels (generally speaking).

The focus on rain will begin to take on more urgency coming out of the winter, with spring rain now the key element in what the eventual crop production figure will look like.

It will be nice to see you EYCI

It has been a week since Meat & Livestock Australia’s (MLA) Officer’s returned to saleyards, and now have and Eastern Young Cattle Indicator (EYCI) for the first time in 9 weeks. It remains volatile, however, opening high and losing 10¢ in a couple of days.

The EYCI opened up at 756¢ earlier in the week, easing a little by yesterday to close its first week back at 746¢/kg cwt.  There should be no complaints from sellers, with the EYCI currently 50% higher than this time last year.

Buyers on the other hand, are paying through the nose. Over the hooks quotes for finished cattle were higher this week, around 600¢/kg cwt. The EYCI/finished spread only gets this wide when restockers are on a rampage.

Strong prices are drawing some more cattle out.  East Coast slaughter has rallied for the second week in a row. Last week cattle slaughter was up 3% (Figure 2), but it is down 18.5% on the same week last year.

On average, cattle slaughter peaks at this time of year, and processors would be concerned if we are in for a gradual decline in slaughter supplies from here.

The rising Australian dollar is not great for cattle prices, but for last week at least, increasing US 90CL export prices outstripped the currency increase. Figure 3 shows the bounce in the 90CL continues, pushing up to 816¢ in our terms.

Next Week

This week’s pause in the price rise might signal a peak for now.  Supply will be tight, but there remains some risk of lower prices for those carrying cattle through the winter. If the rain continues to come, it is hard to see prices falling too far until finished cattle start flowing off grass.

Look at them go

A good winter outlook, moisture in the soil and the lowest yarding levels all season have seen cattle prices hold ground this week for most categories. Although over the longer term it has been a good run for prices all year with average monthly price gains since January between 18%-35% across the CV19 reported categories.

The Bureau of Meteorology released their end of May three-month climate outlook yesterday and it shows a 60-80% chance of a wetter than average winter is expected for much of Australia. Furthermore, the very much above average root zone soil moisture seen during May across large areas of eastern NSW is giving some confidence back to producers impacted by the dry conditions seen in 2019 (Figure 1).

East coast cattle yarding levels have eased to the lowest weekly point this season with only 15,558 head presented for the week ending 22nd May, which represents a 73% reduction from the five-year average trend for this time in the year (Figure 2).

A breakdown of the three key east coast states shows cattle yarding in Queensland is running 63% under the five-year trend, while Victoria is at 73% below average levels. However, the state really dragging down the total east coast yarding numbers is NSW with a mere 3,841 head presented last week, 83% below the seasonal trend for this time in the year.

The combination of a favourable climatic situation and tight supply lent support to some cattle categories this week. The MLA CV19 for National Vealer Steer indicator showing the best result with a weekly gain of 4.4% to close at 420¢/kg lwt. National Medium Steer was up 2.4% and Medium Cow managed a 1.2% lift.

The National Heavy Steer softened 1% on the week to close at 351¢/kg lwt and Yearling Steers were off by 4.5%. However, a look at price gains since the start of the season highlights how 2020 has turned to favour producers with gains from 18%-35% across all reported categories (Figure 3).

What does it mean/next week?’

As outlined in last week’s market comment the improving picture in US Live Cattle Futures markets (up nearly 4% this week and closing at 101.6US¢/lb overnight) along with the combination of tight local supply and a good rainfall forecast all bodes well for cattle producers as we head into winter. Expect domestic cattle prices to continue to be supported over the short term.

You don’t know what you’ve got til it’s gone

Key Points

As we head into June, a period of uncertainty looms. Do we see price rises as weather concerns mount, or does a large global crop hamper upside? One thing for sure is that the next two months will be volatile.

CBOT wheat futures lost steam this week but have tried to regain ground overnight. There are concerns that poor weather in Europe has hampered crop production. The December wheat futures in US$/mt have returned to the same level as last Thursday. The Australian dollar has gained ground however and is currently trading A$4 below last Thursday.

Risk management and examining prices are some of the most important factors in running a grain growing enterprise. There were fantastic opportunities to lock in high futures levels in March. The market since then has fallen from A$355 to A$291 (Figure 1).

There is always a potential for the market to rise back to those levels, but it’s always advisable to take some cover when it is available – at least for a small portion.

As a tip, it is important to ensure that you have the correct facilities available and open to use the market to your advantage. It takes time to set up the correct facilities and by the time they are in place, the opportunity may have passed. You don’t know what you’ve got til its gone.

At a local level, the ASX futures market has slightly declined, with both old and new crop pricing down around A$2/mt (Figure 2). As we draw ever closer to harvest we are likely to see the spread between new crop and old crop trend lower. There may be times when the market jumps up as domestic buyers hit the market, however, the trendline will be for that spread to narrow.

If you are holding old crop, it might be time to sell and take advantage of the remaining drought premium.

The three-month outlook for Australia looks positive (see here).

What does it mean/next week?

Next week we will be moving into June. If previous years are any indicator, we are likely to see some volatility. This could provide opportunities for farmers to increase their hedge positions, especially as good rainfall reduces potential production risk.