Category: Business

Australian Dollar at the back of the grid

Posted on by Caitlin Dearden

All markets have taken an absolute hammering since the start of March. The closure of many borders and the curtailing of global trade has resulted in red across the entire grid. However, the fall in the Australian dollar has propelled us into pole position.

The Australian dollar has declined rapidly and has fallen to its lowest level since 2008. When there is uncertainty in the global economy there tends to be a move away from our currency. The uncertainty caused by the US banning inbound flights from the EU has really put the jitters on the market.

The Australian dollar has fallen from 70¢ to 62.9¢ in the course of less than three months (figure 1). At the start of the year, most of the banks were optimistic and forecasting the dollar at over 70¢. Those forecasts are being rapidly redrawn.

In figure 2 the current December futures price is shown with the fx rate on 1st of January, 1st of March and today. If the exchange rate was the same as the start of the year the swap price for December would currently be at A$275/mt, at present, it sits at A$306/mt.

This provides an opportunity to again lock in a swap value at above A$300/mt. In the current environment of extreme uncertainty the market could go either way. This global pandemic is unprecedented and governments and traders have no real previous lessons to learn from.

What does it mean/next week?:

The Australian dollar has saved grain growers bacon with its recent fall. If we see rises in the dollar then we can rapidly see gains lossed. It is worthwhile having a chat with your advisor about risk management strategies.

Oil be damned

Posted on by Caitlin Dearden

May you live in interesting times. A phrase which absolutely applies to 2020. As well as Coronavirus, we are also an ‘oil war’ between OPEC nations. This has resulted in big moves in the oil industry.

The oil market was falling in recent weeks due to demand disruption caused by reduced trade and drastically falling passenger numbers on air travel. However, instead of curtailing supply the major producers have done the opposite!

The Organization of the Petroleum Exporting Countries (OPEC) had planned to reduce output in order to stimulate prices. However, Russia was unwilling to agree to plan. In response, Saudi Arabia threatened to flood the market with oil.

As the worlds largest exporter this represented a huge risk to pricing as with lower extraction costs (US$8.98), they can sustain very low oil prices for extended periods.

Diesel is derived from crude oil, and any changes to the price of crude will flow to our fuel prices within Australia. When converted to Australian dollars/litre the correlation between crude and local diesel is 0.95, with 0 being no correlation and 1 being a perfect correlation. This can be seen in figure 1.

In figure 2 both crude and oil are displayed in A$/litre. The crude oil price has been creeping down since the start of the coronavirus crisis, however, has seen its largest fall in over a decade in the past week.

Diesel prices have been falling this gradual decline to reach the lowest levels since last January.

What does it mean/next week?:
At a time of low demand for oil, the oil-producing companies have gone against logic and are increasing supply.

Crude oil prices have been absolutely smashed. There is a lag between the fall in crude and diesel prices, however, we would expect that prices will fall further throughout the week if crude remains at current levels.

This is good for my 120km daily commute, but will also be good for those preparing for seeding.

 

We may run out of toilet rolls, but there will be plenty of cereal.

Posted on by Caitlin Dearden

There has been a run on toilet roll in Australia, however, we will likely have plenty of cereal. In this update, we step away from COVID-19 and look at some of the fundamentals driving the market.

The December 2020 Chicago wheat contract has dropped 6% in the past fortnight (Figure 1). Levels have dropped considerably from A$318 to A$298, although in part have been assisted by a falling A$. If the A$ had remained at the same level as the start of the year the A$ swap would be around A$285.

Coming closer to home the ASX January 2021 contract has also experienced dramatic falls. The contract reached its peak in early January at A$360/mt but has since seen a gradual fall to A$317.50.

One of the reasons for the fall in pricing of wheat (and other commodities/equities) has been due to a risk-off appetite. This is where traders reduce their risk by moving to traditionally safe investments, which causes a sell-off. However it is not just this attitude that has caused a downfall in pricing, it is fundamentally driven.

After two years of drought, the east coast is starting (touch wood) to return to more fertile conditions.  This has provided confidence that Australia will produce an average or above average crop in the domestically focused areas. As a result, our basis has declined as buyers don’t have a ‘fear of missing out’.

On a global basis, the same sentiment dominates with global conditions improving. Overnight, the FAO forecast wheat production at 763mmt. If global weather patterns continue to be benign then there is every chance that the world will be awash with cereals.

Remember to listen to the  Commodity Conversation podcast by Mecardo

Next week

Markets will continue to watch the spread of COVID-19. Overnight it was confirmed that coronavirus had impacted staff at a commodity brokerage in London, this could spook the market.

On the data front, USDA will release their WASDE report next week. This will provide further insights into the supply scenario.

Record EYCI despite weakening export demand

Posted on by Caitlin Dearden

We know that grass fever trumps weak export demand, and this week we have seen it in spades.  Despite declining export beef values, the Eastern Young Cattle Indicator (EYCI) hit a new record on the back of rampant demand and tight supply.

Young cattle supply has tightened significantly in the last year. Figure 1 shows that this week EYCI yardings were down 30% on the same week last year.  EYCI yardings are highly variable, but this is a pretty good indication of how young cattle supply is tracking. In Queensland, Roma has even come off its perch as the top EYCI yard, this week accounting for just 14.3%, with Wagga on top at 17.4%

The EYCI itself continued its extraordinary rally this week. A further 26¢ upside saw the EYCI post a new record of 744¢/kg cwt yesterday (Figure 2). The market is up 85% on the same week last year, with restocker demand driving prices higher.

It is even the wrong time of year for higher prices.  The previous record EYCI of 723¢ set back in 2016 was at the usual peak time, in October.

We did see Heavy Steer prices ease a little this week, but only in Victoria where they lost 10¢ to 611¢/kg cwt. Queensland and NSW were still stronger, as were cows. Cow prices might find some resistance soon, with the 90CL Frozen Cow Indicator falling a little further, to 683¢/kg swt.

In the West, cattle prices are not as strong, but the Western Young Cattle Indicator is still up 141¢ on this time last year, at 642¢/kg cwt.  The discount to the east coast is probably not enough to see cattle flow east in great numbers yet.

Next Week

Figure 3 shows the last piece of the rainfall puzzle was largely coloured in this week, with more rain on Thursday bolstering the picture. The question now is how strong the EYCI can get. With finished cattle prices at 650¢, this returns over $2000 for heavy steers. Historically $200-300 has been an acceptable margin for cattle finishers, which means grass fever could see the EYCI run further.

EYCI solid, but fat cattle stall on processor concerns

Posted on by Caitlin Dearden

Increased cattle yarding across the eastern seaboard hasn’t slowed demand for young cattle this week but concern over export markets and the prospect of tighter margins appears to be slowing meat works appetite for finished cattle.

Figure 1 highlights the trend in weekly east coast cattle yarding levels and it shows in the last few weeks we have seen increasing numbers present at the sale yard. Weekly yarding has tipped over 60,000 head but remains under the five-year seasonal pattern – which is understandable given the lower herd this season.

Although, it does highlight demand remains robust and this is particularly true for young cattle with rainfall encouraging restockers into the market. Pushing the Eastern Young Cattle Indicator (EYCI) just short of record highs to close at 718¢/kg cwt, 7 cents short of the all-time peak. In the coming week, Mecardo will take a closer look at the restocker activity so far this season, so keep an eye out for that.

Finished cattle along the east coast has been having a good run of late. However, this week the eastern states’ heavy steer indicator took a pause, easing 3¢ to close at 341.75¢/kg lwt. The weekly trend in east coast cattle slaughter has dipped below the five-year trend in recent weeks highlighting the slowing processor demand in the face of high domestic prices, softening export prices and concerns around the ongoing spread of Covid-19 impacting global growth and weighing on international beef markets – Figure 2.

The 90CL benchmark beef export indicator dropped back under 700¢/kg CIF over the week, pressured by ongoing concerns over Chinese beef demand due to Covid-19 issues and higher NZ imported grinding beef supply into the USA. For the first time since the heady restocking episode of the 2016/17 season, the EYCI moved to a premium to the 90CL – Figure 3.

What does it mean/next week?

It still remains a bit of an unknown how the spread of Covid-19 will play out globally particularly with regard to the impact on beef export demand, but more clarity will be available in the coming weeks as we get access to the February trade figures.

Continued rain across the continent this week, including falls of up to 25mm in western NSW will continue to buoy young cattle prices and interest in breeding stock. There’s a good chance we will see the EYCI hit new all-time highs too. However, to really extend above into the high 700 cent region or even break into $8 territory we will need to see finished cattle prices continue to probe higher too, and this will only come with robust export markets.

Corona fears brewing

Posted on by Caitlin Dearden

The market has become increasingly worried about the impact of a potential global pandemic of Covid-19. This has resulted in a risk off attitude to commodities. In this update, we take a look at the CBOT market and ASX.

Until recently, Covid-19/Coronavirus was largely limited to China, however this week the number of daily cases outside China exceeded the source nation. This has caused a great deal of consternation relating to the potential impact on global markets.

The wheat market has not been spared from the sell off. US wheat futures for December have had a run of red days with the market falling to the lowest level since early December, wiping out all of the recent gains.

However, one factor to take into account is the Australian dollar. The economic impact of Covid-19 has been mostly felt in China, and our economy is highly reliant on the Chinese economy performing well. The concerns related to China have flowed through to bearish sentiment on the Australian dollar.

This has meant that when converted into Australian dollars, the fall in Chicago wheat futures has not been quite as severe (Figure 1). This has meant that the wheat futures contract corresponding with our next harvest still offers close to A$310/mt.

At a local level, the rain has continued to fall across large parts of the Australian wheat belt, including WA which had been missing out in recent weeks.

After two years of dire conditions, the wet weather has provided plenty of confidence. Producers are confident that they are set up well, and consumers are confident that they will not be chasing a drought crop to feed their needs.

The confidence in this market can be seen clearly in the January 2021 ASX wheat futures, which have seen a fall from December highs of A$360 to trading at A$323 on Thursday afternoon. This places forward basis at pre-drought levels.

Many of our subscribers have started hedging their 2021 crop, but despite the fall in levels, there are still historically attractive pricing levels available.

*report written on Thursday 28 Feb evening and does not reflect overnight moves

Next Week

We are well into black swan territory. The world has not seen such a potentially disastrous disease since the Spanish flu (1918-1919). This means that the market will likely remain very volatile as traders try to interpret the moves.

EYCI closing in on a record

Posted on by Caitlin Dearden

The rain keeps coming, and there is more on the forecast, this time for areas which have missed out to date. The positive price response moved into its sixth week and is showing few signs of slowing.

The Eastern Young Cattle Indicator (EYCI) pushed above $7 this week to close yesterday at 701.75¢/kg cwt, over 250¢ higher than this time last season.  Figure 1 shows the EYCI is now just 24¢ off the all-time high set in October 2016.  And we’re not even in the traditional tight supply period.

Queensland is leading the charge, with restocker, feeder and trade steer indicators all within 15¢ of 400¢/kg lwt.  Over the hooks values for steers in Queensland are between 620 and 640¢, except for Cows which are at 526¢.  Only six weeks ago young cattle were making under 500¢.

NSW and Victoria are lagging somewhat in the price stakes, but are both on the rise.  With finished cattle supplies likely to tighten in the autumn, it is safe to expect most cattle indicators will move through 600¢ in the coming month.

Supply is back. Figure 2 shows cattle slaughter was last week down 8.5% on year earlier levels but was similar to 2018 levels. The much stronger prices that we are seeing now are a result of stronger export demand and booming restocker demand.

Early 2020 is the first time in over a year that east coast prices have been stronger than those in WA.  The Western Young Cattle Indicator (WYCI) rallied 24¢ this week but is well below the EYCI at 581¢/kg cwt.

Remember to listen to the Commodity Conversation podcast by Mecardo

Next Week

Figure 3 shows the rain is expected to ease in NSW, but large parts of inland Queensland are forecast for a drenching.  Demand for young cattle isn’t going to ease, and it is not the time of year for supply to improve, so we can expect further upside for the EYCI.

Finished cattle supplies are less variable, with record numbers in feedlots, but with female slaughter tightening sharply, processors will have to maintain strong prices to compete for supply.

Cheap Russian wheat & China protects its fertiliser

Posted on by Caitlin Dearden

In this grain market comment, we provide a short summary of Russian wheat pricing, ASX levels and fertiliser/chemical blockages in China.

In yesterday’s analysis article ‘It’s relatively relevant’, we briefly discussed the rapid rise in wheat futures this week. This has had a limited impact upon Australian wheat prices, resulting in basis levels declining. What about our competitor, Russia?

Pricing levels in Russia have been increasing steadily during the last quarter of 2019. There were questions during this time relating to export pace and, in December, around weather concerns. However, once the local analysts started to dig into the potential the market has seen downward pressure. In A$/mt terms Russian pricing has dropped from A$344 to A$327 during February (Figure 1).

The ASX contract for January 2021 traded up throughout the week with the contract rising from A$328 to A$336 (Figure 2). This places the basis between CBOT (Dec) and ASX (Jan) for next harvest at A$19/mt.

The Coronavirus has far-reaching impacts beyond health. The long hiatus of work in the superpower has led to issues related to agricultural inputs, namely chemicals and fertiliser. The Chinese government has mandated that fertiliser (Phosphate) supplies be domestically prioritized at all levels to ensure no impacts on their local spring planting. In relation to chemicals, logistics chains are backed up which could disrupt the supply of agricultural chemicals in the lead up to seeding.

Remember to listen to the  Commodity Conversation podcast by Mecardo

Next week:

It will be interesting to see whether the current rally in US futures will be sustained or whether it is a speculative driven rally. If this is the case, fundamentals tend to return and eventually take control.

EYCI nearing price resistance with supply dearth still to bite

Posted on by Caitlin Dearden

Cattle supply is expected to wane, and prices are already on the rise.  It is still worth having a look at how the tighter cattle supply is likely to play out on a seasonal basis, and what this might mean for prices.

Last week we took a look at Meat & Livestock Australia’s (MLA) Cattle Industry projections on a broad basis, and this week we delve into what this will mean for prices. While the sheep and lamb prices are tightly tied to supply, cattle are a bit more complicated. The global nature of the cattle market means our prices are strongly impacted by supplies from other exporting countries.

As such, we’ve found cattle prices here are a result of export prices and supply.  Figure 1 demonstrates how the level of cattle slaughter governs the discount or premium of the Eastern Young Cattle Indicator (EYCI) to the 90CL Frozen Cow price, exported to the US.

We can see that in 2019, despite strong slaughter, the EYCI discount to the 90CL deviated significantly from the trend line. This was likely a factor of strong export prices and very weak restocker demand from the drought.

So far in 2020, the EYCI discount to the 90CL has narrowed, last week it was at 53¢, with the 90CL at 715¢/kg swt. This week, the discount is likely to narrow further, with the EYCI at 692¢ on Wednesday.

There is no guarantee the volatile export prices will stay at 700¢. Assuming it does, and the EYCI moves to a 20¢ premium, it gives the EYCI another 40-50¢ upside before it gets historically ‘expensive’ relative to export prices.

There will always be seasonality in livestock prices, and variations in supply generally govern how prices range around the average. Figure 2 shows how the MLA forecast slaughter of 7.2 million head will hit the market if five-year seasonality holds.

Cattle slaughter is expected to be over 10% lower than last year in all months.  October to December, which were strong slaughter months in 2019, are expected to take the biggest hit, with 17-20% fewer cattle expected to be slaughtered.

What does this mean?

Cattle prices have rallied so strongly they have nearly made up all the ground we would expect them to, relative to export prices. There could still be a further upside, but once the EYCI moves past export values, price resistance starts to mount.

The seasons have been far from normal recently, but rainfall might signal some sort of return. Once prices level out there could be a return to normal seasonality, with winter peaks and summer declines. The peak EYCI could be as high as 800¢, while the low shouldn’t be much less than current prices, providing the rain keeps coming.

Beer and beef – seem to be a good pairing

Posted on by Caitlin Dearden

Earlier in the week, we covered off on sheepmeat export flows for January which showed a limited impact to trade flows on the back of the Coronavirus outbreak in China. This analysis focuses on Australian beef exports and shows that the picture for red meat export remains solid for the moment.

Catch up on the sheepmeat export flows for January here.

Total January beef export figures have opened the 2020 season strongly. Australian beef consignments recorded the highest January result on record at 79,221 tonnes swt and well outside the normal range that could be expected for January, as shown by the grey shaded 70% boundary (Figure 1). This result is 30% above the five-year average for January and bests the previous record high from January 2014 of 69,511 tonnes by 14%.

The outbreak of Coronavirus in Wuhan province leading into the Chinese Lunar New Year, caused some concern for Australian exporters exposed to China. Fears of a downturn in demand hit some markets, notably the rock lobster industry which saw export orders grind to a halt. Concern also began to spread among red meat producers that the impact of Corona would hit markets like sheepmeat and beef.

However, the strong January export flows for Australian beef exports demonstrate that the impact has been negligible so far. Indeed, the strongest growth in beef export demand for Australia’s key beef trade destinations for January came from China. As highlighted by Figure 2, Chinese demand for Aussie beef for the first month of 2020 hit a new January record of 21,026 tonnes swt. This represents a 201% lift on the five-year average for January and a solid 73% gain on the previous record high achieved in January 2019 of 12,155 tonnes swt.

Based on the strong January performance of beef flows to China the market share of China (the top destination for Australian beef) has lifted again on a percentage basis. The January flows show China represents 26.5% of the Australian beef trade, compared to 24.4% during 2019. Japan is in second place at 23.1%, down from 23.4% in 2019 (Figure 3). Bearing in mind that it is still early in the season and the tight supply of beef expected as we head further into 2020 may see flows and market share adjust accordingly.

What does it mean?

There has been some producer/subscriber query to Mecardo in recent weeks asking if the Coronavirus will impact domestic Australian cattle prices. Certainly, the January trade flows highlight that there hasn’t been any sign of disruption. However, this may come in the next few months if the situation in China deteriorates further impacting economic growth, red meat protein demand, and consumer confidence.

In our view, the only way Coronavirus would start to play a significant part in impacting beef export flows is if it creates a global economic slowdown reminiscent of the GFC or Asian debt crisis, and in this event, it would still take some time for a  global cattle price decline to flow through to Australian prices. In the short to medium term, local Australian prices are going to be dominated by the expected tight season and the improving climatic outlook which will encourage restockers.