Category: Business

Corona weighing on export prices, but domestic impact limited

Posted on by Caitlin Dearden

Concerns over the Coronavirus spread has softened beef export prices in recent weeks, but tight supply and favourable rainfall has limited the impact on cattle prices at a domestic level. Australian beef exports for January were healthy, but an inability to get Corona under control could see export flows impacted in the coming months.

Just yesterday we saw a surge in reported Coronavirus outbreaks in China due to a change to the way they assessed the infection. Currently, there are 60,000 reported cases according to the Johns Hopkins University live mapping website.

US beef industry consultants Steiner are suggesting that the uncertainty around China’s ability to contain the spread of the Coronavirus is leading to a softening of the 90CL beef export price as Chinese beef demand slows with travel bans in China causing import congestion at Chinese ports. Supply chain bottlenecks in China are seemingly the cause of the 3% easing of the 90CL to close at 723¢/kg CIF.

Thankfully on a domestic level, the impact of Corona on cattle markets has been negligible. Yesterday Mecardo reported that there has been no sign of a negative impact on beef export volumes for January.

Additionally, the tight season expected in cattle markets for 2020 and the favourable rainfall patterns in recent weeks has continued to see cattle prices benefit. The Eastern Young Cattle Indicator (EYCI) gaining 6% this week to close at 662¢/kg cwt and narrowing the gap between it and the 90CL further – Figure 1.

East coast weekly cattle yarding figures have been averaging volumes nearly 20% lower than the five-year trend since the start of the 2020 season, trekking along the lower boundary of what would be considered normal for this time in the year and highlighting the expectation of the tight season ahead – Figure 2.

Next week

With the forecast of 15-50 mm of rainfall along the entire eastern seaboard in the coming week (Figure 3) it is unlikely we will see cattle supply expand any time soon. The continuation of the rain will likely see further restocker interest for store cattle and breeding stock.

Expect the EYCI to continue to probe higher in the short term, even if Coronavirus remains unchecked and export prices soften further, as the domestic situation of low supply and rain is providing good support.

The Russians are coming (again)

Posted on by Caitlin Dearden

With inspiring rainfall dropping on large tracts of the eastern states, confidence is increased in the capability of producing a 2020 crop. If the potential continues to improve then exports will be important. Our biggest export competitor (Russia) is on track to produce a very large crop, which could cause problems.

The futures market has ended the week on a downer, with value in Australian dollars down A$8 since last Thursday. At the same time, the Australian dollar has remained low as a result of economic concerns related to the Coronavirus in China.

The market, however, is still providing attractive levels (historically) for hedging. In my experience dealing with farmers there used to be a psychological sell level of A$300. At present, the December Chicago contract remains above A$305. It is important to note that when using futures, basis has to be included on top. Historically Australian basis has been positive, although in theory could turn negative if we have extremely strong yields.

During December, there were concerns that the black sea region was in strife. This is a story that we’ve heard year after year and my thoughts were that it was too early to write off our competitors. In the past week, new forecasts for Russian production have been released, with a consensus from a number of organizations showing 82mmt.

Figure 2 puts an 82mmt crop in perspective, showing the top 5 productive seasons since the fall of the Soviet Union. An 82mmt crop would be the 2nd largest, narrowly behind the monster 2017 season.

Interestingly, the top five production years have all been in the last five years. It is inevitable that Russia will have a hiccup at some point in time, and when it does, the markets will see substantial rises due to the importance of Russia as an exporter.

It is still worthwhile to note that a lot can happen between now and the Russian harvest, so any forecasts of the crop will need to be taken with a grain of salt. They do however have the potential for a very large crop.

If Australian crop conditions continue to improve then exports will increase back to normal levels, a large Russian crop will be competing with us.

Next week

The east coast of Australia is forecast to receive additional rain over the next week. If this eventuates, confidence in the crop will be much improved.

The west coast, however, has limited rainfall on the forecast, and could really do with an increase in soil moisture.

Rain on the plain sees cattle price gain

Posted on by Caitlin Dearden

Cattle markets have been waiting for a rain event, and it keeps coming.  Average January rainfall has been followed by more rain in Queensland this week, and more is forecast for the east coast this week.  If the drought hasn’t broken, price action suggests it is not far away.

The Eastern Young Cattle Indicator (EYCI) this week tore through 600¢ and finished Thursday at 623¢/kg cwt.  Restockers continued to drive values higher, averaging over 350¢ for steers in NSW and Queensland.  Feeders joined in this week, paying over 340¢/kg lwt for steers, 21¢ higher for the National Indicator.

Figure 1 shows the EYCI hasn’t been this strong since mid-2017, and it hasn’t seen a better than 100¢ increase in a month ever, as far as we can tell.

While Trade Cattle remained stubbornly steady at 300¢, Heavy Steer and Cows joined in the rally, the National Indicators sitting at 319 and 258¢ respectively this week.

Over the Hooks prices have also started to move, on average they were up 20¢ cwt at the start of the week and given they are still behind saleyard values, they might have to lift a bit further to get many bookings.

Export prices have continued to yo-yo this week, with the 90CL Frozen Cow Indicator easing 25¢ back to 744¢/kg swt. The price still leaves room for cattle prices to rise (figure 2), but the rally might start to slow.  That’s not to say it will stop, with 700¢ for the EYCI a realistic target.

Next Week

Meat and Livestock Australia’s cattle industry projections were released this week, so next, we’ll be looking at some long term forecasts.  Needless to say, things look very positive for cattle prices, with cheaper feed finally on its away and restocking on the minds of many in NSW and Queensland.

Are we independent?

Posted on by Caitlin Dearden

Is the Australian grain industry a lone continent removed from the vagaries of overseas pricing? Are we independent of the rest of the world? In this article, we take a look over the past few months to see the driver of pricing.

Derivatives play an important part in pricing grain, even if you do not use them to manage your risk – the derivatives market will impact the price that you receive. In recent weeks we have heard from many that futures aren’t important because our pricing is disconnected from the rest of the world.

In figure 1 the change in price (as a %) is shown for four ports in Australia and the CBOT price. As we can see the price movements onshore and offshore are following one another quite closely.

These ports show a strong correlation between CBOT (in A$/mt) and the local port price. The correlation since the start of harvest is shown below, with 0 being no correlation and 1 being a perfect correlation.

  • Adelaide 0.95
  • Geelong 0.91
  • Kwinana 0.95
  • Port Kembla 0.91

The basis levels in Australia have traded within quite a narrow range since the Christmas break. The pricing levels in Australia have moved higher through January and with a relatively unchanged basis, we could argue that much of that has come from the rise in futures.

What does it mean/next week?:

The correlation between overseas futures, in this case, Chicago, are strong. This means that if prices move in CBOT, then the local price will likely follow.

The importance of futures cannot be stressed enough therefore it is worthwhile including them in your risk management strategy.

Bunch of pluviophiles

Posted on by Caitlin Dearden

The rain has fallen dramatically over the past week providing much-needed rainfall to large swathes of New South Wales and Queensland. This will provide some positivity to many after suffering through 2 or more years of drought.

CBOT December wheat futures have declined rapidly from their recent (and contract high) of A$318/mt on the 21st of January. At present, the December contract is trading at A$309/mt (figure 1). The contract price in A$ terms has been protected somewhat by a declining A$, however, even with a close to A$10 fall, it remains at strong levels compared to recent years.

At present, the futures price offers producers a favourable starting point for marketing next years crop.

Tentatively we can say that the drought has broken in many parts of the eastern states. After receiving scant rain over the past 2 (or more) years, the past month has provided saturating drenches.

These rainfall events start to provide some confidence of the coming crop and some surety of producing something. Albeit we need to remain level headed as we have seen promising rains in the past with no follow-up.

It’s important to remember that basis levels which have been extremely strong in recent times will cause our ‘premium’ over overseas values to decline. This may be experienced with increased vigour in relation to new crop pricing.

In figure 2, the basis level as a percentage of the overall physical price in Australia. In recent months the overall importance of basis has diminished. As a percentage of the overall price received in Australia, the basis is actually now close to the historical long term average.

What does it mean/next week?:

Next Tuesday the WASDE report will be released by the USDA. The USDA has commented ahead of the report that the Phase 1 trade deal details will not be included as part of this report.

The phase 1 deal was always going to be a tough target for China to achieve. The team of analysts at Mecardo do not believe that China will be able to meet this target, especially in light of continuing economic concerns related to coronavirus.

Premiums return to young cattle

Posted on by Caitlin Dearden

Widespread and significant rainfall in Queensland has seen cattle markets extend their gains this week aided by a rebound in offshore beef export prices. The added buyer enthusiasm for store and younger stock has seen the Eastern Young Cattle Indicator (EYCI) return to a premium to Eastern Heavy Steers for the first time in a while.

Figure 1 highlights the rainfall for the week to 30th January with falls as high as 300mm noted in the far north of Queensland and up to 100mm in south western Queensland. A reasonable chunk of north east NSW benefitting from 25mm to 50mm falls too.

Meat and Livestock Australia’s (MLA) handy summary of cattle market moves shows 20-40¢/kg liveweight price gains on the week for most yearling categories across the east coast. Most medium to heavier stock are lifting too, albeit to a lesser magnitude. Queensland Heavy Steers are bucking the trend somewhat with a 5¢ drop to close at 316.7¢/kg lwt. Although, at this level, they are still the highest priced finished cattle across the country reported on the summary so you could cut them some slack for the slight easing.

A comparison of the EYCI to average east coast Heavy Steer prices shows the improved seasonal conditions have seen young cattle prices return to a premium above finished stock for the first time in more than a year – Figure 2. The EYCI closing 6% higher this week to end just shy of 580¢/kg cwt, while east coast Heavy Steers topping out at 562¢/kg cwt.

It wasn’t just the rain providing support to young cattle prices this week with a resurgent 90CL frozen cow indicator proving that beef export markets in the US can add to the positive sentiment impacting cattle markets locally. The 90CL gaining 8.6% to close at 769.4¢/kg CIF – Figure 3.

Next week

The rainfall forecast for next week shows southern regions getting some reprieve from the dry that their northern counterparts have been enjoying. Large areas of central South Australia can expect 25-50mm, along with western Victoria, Tasmania and north east NSW.

With the summer rain in the south and improved offshore beef, export pricing cattle market should continue to be well supported into the coming week.

Coronavirus – impact on grain?

Posted on by Caitlin Dearden

Coronavirus is spreading around the world at a rate of knots. In the last week, we have been asked about the potential impact on demand for agricultural commodities due to this illness. In this report we look at the question – is coronavirus impacting on demand?

The Coronavirus has spread from Wuhan, China to 18 countries in a very short period of time. This has caused a great deal of consternation around the globe as countries enact quarantine protocols. Does this impact on markets?

I thought it was useful to give a few pieces of disease trivia:

  • Spanish flu (1918-1920) is estimated to have killed up to 100m people or approximately 5% of the population.
  • The black death killed up to 60% of the population of Europe, and it took 200 years to recover the population to pre-outbreak levels.
  • SARS (2002-2003) infected 8098 people with 774 deaths.

As the number of disease cases increases the number of deaths follows. The daily increase in cases has averaged 60% since the outbreak started.

The mortality rate from coronavirus has averaged 2.6%. To put this in perspective 2019 was considered an exceptional influenza season, and the mortality rate was 0.19%.

In figure 1, we have modelled the potential death toll from Coronavirus using an infection rate of 60% per day and a mortality of 2.6%*. This chart shows the actual and the modelled death toll. The model when back tested has closely matched the data originating from China.

If the outbreak continues to follow the trend, then 2000 people will have died by early next week.

In recent days there has been lots of talk about reduced demand due to this outbreak. In figure 2, the grain consumption per capita for China since 1960 is displayed. In this decade the average consumption within the nation (all uses) has averaged 354kg/hd, which is above the global average of 335kg/hd.

At this level, if 10m people were to perish due to coronavirus, demand would drop by 3.9mmt. Global trade flows are more likely to impacted by supply issues, as an example the average production of grain (wheat, barley & sorghum) in Australia this decade was 34mmt, last year we produced 24mmt.

*As the outbreak progresses we are likely to see infection rates and mortality dropping.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

The real drive down in price is most likely due to a risk off attitude, in conjunction with concerns related to the overall economic situation in China.

The real fundamental demand hasn’t at present changed. If we get to the level where deaths cause demand disruption, we will likely have more pressing concerns than the grain price.

US China trade deal – abridged

Posted on by Caitlin Dearden

Mid-January saw China and the USA sign off on phase one of a new trade deal, using pre-trade war volumes from 2017 as a benchmark for expansion in trade volumes. While it is still early days in the negotiation a key aim of the Trump administration is to get China to import more US agricultural products, with US beef and pig farmers excited by this prospect.

As part of the broader deal, China has agreed to increase purchases of US agricultural products with an aim to hit $US43 billion in trade value by 2021. In 2017 China imported less than $US25 billion of US agricultural products – the bulk of which was soybean to feed their huge pig inventory.

In terms of meat imports into China from the US the beef industry never really gained a foothold, with the US holding less than 1% of the market share of Chinese beef imports in 2017. US pork producers had a far better penetration with 12% of Chinese pork imports in 2017.

A comparison of meat imports into China (of all types of meat except fish/seafood) during the 2017-2018 period shows that US market share declined significantly compared to other key trading nations from 12.5% to 4.9%, due to the increase of tariffs imposed by China and growing trade hostilities – Figure 1.

The US market share of Chinese meat imports dropped by 60%. In contrast, Argentina captured nearly 60% more market share, while Brazil, Australia, and NZ all saw their market share increase by over 20% during the 2017 to 2018 period – Figure 2.

To hit the $US43 billion target in two years’ time there would need to be a significant shift in trade flows into China, with a clear preference for US product. In terms of pork and sheepmeat, this isn’t a huge direct competition for Australian producers as Australia doesn’t export significant volumes of pork to China and the US don’t really have a sheep/lamb export presence on an international level.

Historically, there have been a few barriers to entry into China for US beef producers, namely the lack of traceability and concerns around the use of hormone growth promotants. However, part of the trade negotiations agreed to this month was seeking to address these barriers and open a clearer path for US beef into China.

Remember to look out for our upcoming podcast delving further into this topic, including an assessment of the impact across a variety of Australian agricultural sectors – Figure 3. It is still in the recording studio at present, but you will be able to find the podcast by clicking the link to “Commodity Conversations” after Australia day.

What does it mean/next week?

Matters of trade are highly complex situations with many moving parts. Addressing the implications for the Australian agricultural sector of this new trade deal between the US and China is a topic too broad for a standard Mecardo analysis piece, but we will be discussing it at length in our podcast series entitled “Commodity Conversations”.

The abridged summary of our thoughts in relation to the impact on Australian sheepmeat and pork producers is that it is limited. In terms of the impact on our beef sector, the jury is out when assessing over the longer term. But in the short term, we don’t see any immediate risk to Australian beef flows into China from the US during 2020.

Cows the star but EYCI at 22 month highs

Posted on by Caitlin Dearden

We haven’t seen an early January price rise for a few years, largely due to a lack of summer rain. This year we’ve seen store and cow markets lift in early sales as rain tightens supply and bolsters demand.

It is no secret that female cattle will be in hot demand if the rain seen over the last week continues.  Export beef prices have eased but they are still well above this time last year, and when processors have to compete with restockers, markets rally.

Figure 1 shows NSW and Queensland Cows have moved back towards November highs this week.  Cows are the star performers, gaining over 30% from the December close. Victoria is lagging behind a bit, at 408¢ this week, but they will no doubt join other states in the coming weeks.

The Eastern Young Cattle Indicator (EYCI) has also rallied strongly, gaining 13%, but importantly hitting its highest price since March 2018 (figure 2).  It is also the first time the EYCI has been higher than the five year average since early 2018.  The rain is making cattle bought at the southern weaner sales look cheap at the moment.

The 90CL Frozen Cow export beef price continued to ease this week, now sitting at 708¢/kg cwt.  It will be interesting to see of the 90CL can continue to fall, especially if cow prices keep rising and margin pressure comes on processors.

Over in the West, the Western Young Cattle Indicator (WYCI) has moved below the EYCI, a rare thing in recent years.  The wet weather in WA should see the WYCI find some support around the current 526¢/kg cwt level

Next Week:

For most of last year, we were looking at no rain for the week just gone, and none coming up.  This week the widespread rain is forecast to be repeated over the coming eight days, providing more impetus for markets.

At some stage, heavy cattle prices should start to follow young cattle, as fewer cattle make their way to processors.

Are you on ICE?

Posted on by Caitlin Dearden

The canola market has seen a surge in pricing levels since harvest commence. This has been beneficial to producers who generally wait until harvest before selling their canola. In this update, we take a look at the basis between ICE canola futures and local pricing.

There are two main canola futures contracts ICE (Canadian canola) and Matif (French rapeseed), in this update we will be taking a look at the basis between ICE and Australian pricing levels.

Canada is an important canola producer, with the country producing on average 28% of the world’s canola crop over the past five years. Most of the canola grown in Canada is genetically modified, whereas the majority of the Australian canola crop is non-gm.

In a typical year Australia will export the majority of the Canola produced, which aligns itself well with the logic behind using ICE futures as Canada follows a similar trade flow.

In figure 1, the seasonality is shown for ICE futures (converted in A$/MT). In these seasonality charts, rather than use a min/max for the seasonality banding (green shaded area), we use a 70% range (or 1 standard deviation). The 70% banding is used to remove the extremes in the marketplace, which we believe gives a better indication of the seasonality, as opposed to a min/max which can be extremely volatile. In these charts, we also overlay the average for the timeframe and the recent seasons.

During mid-year of 2019 ICE canola futures traded at the bottom end of the range, however, they have drifted higher throughout the year albeit are only now trading at the average for the past decade. If we follow the seasonality, we tend to see the largest rises in the middle of the year. This corresponds with the northern hemisphere weather risk period, and a similar pattern is evident in wheat.

In figure 2, the basis between ICE and local canola prices is displayed. As we can see the local price has increased versus the rest of the world to record levels (Port Kembla). At present basis, levels are extremely strong. The strength in basis levels is due to scarcity of supply, and we shouldn’t expect to see these levels repeated in 2020/21 unless we see further supply shocks locally.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

The Australian market is currently trading at very strong premiums to Canadian canola futures. It is highly probable that these basis levels will decline next harvest (if we have an average crop).

At present, I recommend using physical sales of canola, whilst the market remains strong.