Category: canola

The Russians are coming (again)

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.

Are you on ICE?

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.

A great start to your 2020 grain marketing

The price received in Australia is composed of futures & basis*. It is possible to lock in the futures component through using derivatives (swap/futures etc).

In figure 1 the forward curve is displayed in A$/mt. The forward curve shows the futures price for forward contract months.

The December 2020 contract which aligns with the Australian harvest is currently trading at A$316/mt. This is the highest level in five years, and provides a strong starting point for marketing grain.

As mentioned before the futures price is one component albeit one which makes up the majority of price (even in drought years – see here).

If using swaps/futures, the final price you receive will effectively be your futures price (A$316) plus basis at the point of physical sale.

In figure 2 the weekly average basis is displayed since 2010. As we can see the past year and a half is probably not a reliable indicator due to the drought led basis. However, the average across the country is:

  • Adelaide A$28
  • Geelong A$37
  • Kwinana A$49
  • Port Kembla A$51
  • Port Lincoln A$24

On the law of averages locking in futures and selling on average basis would return between A$340 & A$366. A price that is historically attractive.

*For the purpose of this analysis we are not including FX, and basing on a converted futures price.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

The futures market is currently offering strong levels for December 2020. A large proportion of the rise in recent weeks has been due to geopolitical factors – which could lead to volatility.

At present these are high levels compared to the last five years. If you lock in a little at these levels, and it turns out to be the worst trade you do – it is still likely to be profitable.

Little and often wins the day.

It’s a deal, it’s a steal, it’s the sale of the century

A welcome sound not heard for a long time is being heard throughout large parts of NSW & QLD. The noise of raindrops hitting roofs. This week we cover a few factors from overseas impacting on markets including Egyptian purchases, Russian intervention, and the phase 1 deal.

In recent months weather forecasts have consistently tantalized without providing much (see map). Last week strong rainfall was forecast for large parts of the country, and like the boy who cried wolf – I didn’t believe the forecasts. As time flowed this one seemed to be coming to fruition, but I had been tricked into a false sense of security before.

To my delight, this one has delivered for many. Although this rainfall event would have been more welcome four weeks ago for the summer crop, it has provided a good dump of rain throughout the drought-ridden east coast. Let’s not get too cocky though, we’ll need a little more rain to guarantee a good 2020 crop.

Let’s start with the global market. At the end of last week, the Chicago futures market rallied as Egypt bought 300kmt of wheat, at the highest price since February. This volume was unsurprisingly black sea origin however provided a bullish sentiment for overall pricing.

Russia also assisted with the price rise by intervening in their markets. A new export quota limiting grain exports to 20mmt for the first half of the year was enacted. This caused some concern as interventions by what is now the world’s most important grain exporter could have ramifications for trade flows.

Relations between China and the US seemed to be thawing this week, as both countries agreed to a phase 1 trade deal. This deal is a starting point in improving trade between the two super powers, including the agreement to purchase an increased value in agricultural produce over the next two years.

In the agreement China are set to purchase $36.5bn (A$52bn) in 2020, and $43.5bn(A$63bn) in 2021. To put the scale of the increase in perspective during 2017 China purchased $24bn (A$35bn) in agricultural produce from the US (figure 2).

There is a lot of conjecture at present related to which commodities China will purchase in order to increase their value purchased.

The trade wasn’t overly impressed by the deal as it didn’t contain much detail in regards to products purchased, and included a market value clause:

‘The Parties acknowledge that purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year.’

The big concern for me is that in order to meet these purchase requirements is that the trade flows may prioritise US as an origin for many agricultural commodities.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

The rain is set to continue through many parts which will provide some confidence for the coming crop. This must be tempered by the reality of it being four months until seeding and nine months from harvest.

The price of GM crops

The South Australian government is debating a bill to end the moratorium on GM crop cultivation. I received information from a contact related to claims from anti-gm activists. I thought it was time to dispel some of the activist’s misunderstandings.

The Mecardo team produced a report on behalf of Grain Producers South Australia (GPSA) and the Agricultural Biotechnology Council of Australia (ABCA). This report was instrumental in removing some of the inaccuracies present in the debate when it comes to pricing.

The information we received was that farmers were avoiding GM crops in Western Australia due to the high premium (up to $100/mt). The reality is that in Western Australia >28% of the Canola crop has been GM in recent years, a considerable volume when you consider that GM is generally used as an agronomic tool for cleaning up paddocks.

In figure 1, the weekly average spread for GM to Non-GM in Kwinana is displayed. As we can see the claim of A$100 discount for GM is a bit of a reach. It has averaged close to A$100 at points during this year. However, it hasn’t stayed there for a particularly wrong period. The average discount for GM canola is A$31.

Co-existence is possible between GM and Non-GM. If it were not, we would be seeing very strong premiums in South Australia against Kwinana due to its GM-free status. However, we do not see this happening (figure 2).

The market never lies. If there was a substantive premium for canola produced in South Australia due to its GM-free status we would see it in the price.

What does it mean for next week?

It is important to understand that GM crops are part of a toolkit for farmers. The discount for GM canola is variable and market-driven.

It is true that there have been large discounts at times, however, it has been close to parity with Non-GM at numerous points over recent years. It is up to farmers to decide whether the agronomic benefits outweigh the discount.

It is important to note that many activists use the GM spread erroneously, depicting that introducing GM canola would result in all canola dropping in price. This is incorrect, it is important to compare apples for apples with Non-GM canola in states to determine if the GM-free status provides a premium for producers. It clearly doesn’t provide a premium.