Category: Financial

Weekly Wool Forwards for week ending 20th September 2019

Posted on by Caitlin Dearden

Futures contracts have been chugging along with eleven trades this week.

We saw one trade for 18 Micron wool, agreeing at 1,800¢ for March 2020.

For 19 Micron wool, five trades dealt. One trade was agreed at 1,755¢ for October and for November, one trade agreed at 1,720¢. Two trades were dealt for December, agreeing between 1,710¢ and 1,720¢.

For 21 Micron wool, four trades dealt, one for October at 1,620¢. One trade was dealt for January, May and June 2020 and these agreed at 1,630¢, 1,580¢ and 1,600¢ respectively.

One trade was dealt on 28 micron wool, agreeing at 900¢ for October.

Confidence continues to be evident in the forward market, even while the auction market volatility is still on the mind. Prices and interest could change in a heartbeat as the future really is uncertain.

Wool market rises from the ashes

Posted on by Caitlin Dearden

It’s been a week of major come backs. While the wool market lift might not be the most celebrated national victory of the week, records were hit for six to make a spectacular recovery.

Goodwill discussions between China and the US on trade appear to have significantly boosted buyer confidence and resurged competition.

The Eastern Market Indicator (EMI) lifted 170 cents or 12% on the week, to finish at 1,535 cents. This correction was an all time record for the highest weekly increase of the EMI and has pushed the EMI back where it was a month ago. The Aus$ also lifted to US $0.687. This saw the EMI in US$ increase 125 cents to end the week at 1,056 cents.

Western Australia made the most staggering recovery. The Western Market Indicator rose by 242 cents to close at 1,625 cents (Figure 1). The daily gain of 198 cents was the largest increase in a day since records began according to AWEX.

All microns and types saw strong price rises but broader Merinos were most keenly saught after. 19.5 to 21 MPGS rose 175 to 305 cents across the three selling centres. Crossbreds saw further gains on last week in the order of 65 to 115 cents. The Merino Cardings Indicators also took a slice of the action, rising 90 to 185 cents on the week.

21,839 bales were offered to sale and just 6.2% passed in. This saw 20,488 bales cleared to the trade (Figure 2). There has been 94,403 fewer bales sold this season compared to the same period last year. This is a average weekly gap of 11,800 bales.

The dollar value for the week was $34.2 million, for a combined value so far this season of $330.69 million.

The week ahead

With China waiving some tariffs on US goods and the US postponing implementation of their tariff increase, both nations appear to be testing the waters ahead of face to face negotiations in October. These are positive signs for all in the wool supply chain.

This week has restored some confidence in sellers and as a result next weeks roster has increased to 31,107 bales. All three selling centres have sales on Wednesday and Thursday. The following weeks have also seen an increase in rostered offerings of 28,510 and 33,980.

Support for young cattle drying up

Posted on by Caitlin Dearden

The young cattle price slide continued this week as the lack of rain saw price support dry up further. There were no falls for finished cattle however, as demand continues to respond to rising export cattle prices.

The cattle prices, as represented by the Eastern Young Cattle Indicator (EYCI), spent their fifth week on the slide and hit a new thirteen week low. The EYCI finished Thursday at 477.25¢/kg cwt, having lost 22¢ for the week. Another stat, shown in figure 1, has the EYCI lower than last year’s level for the first time in seven weeks.

Finished cattle prices have maintained their strength. Heavy steers on the east coast are above 540¢ in all states and averaged 573¢, thanks largely to prices being over 600¢ in Victoria.

The east coast trade steer indicator averaged 570¢, while feeders are also strong, at 280¢/kg lwt.  Even on the young cattle front, it is only restocker types which are suffering the discount.

Export beef prices continued to creep higher. This week it was thanks to rising values in the US, which hit 223.5US¢/kg swt. It’s not quite a new high, but it has only been half a cent stronger back in April, over the past two years.

Steiner’s weekly report on the North American imported beef market was blaming weaker beef imports from New Zealand for strong 90CL values in the US. Guess where NZ’s beef is going?  If you guessed China, you would be right.

Next week?:

Demand for export beef has the 90CL in our terms just 18¢ off an all-time high. It’s little wonder processors are maintaining prices to attract cattle. Cattle markets are now very much a tale of store versus finished. A failing spring is likely to see this continue, as we now look for northern summer rain to kick start the store market again.

Weekly Wool Forwards for week ending 13th Sept 2019

Posted on by Caitlin Dearden

Interest in futures seems to be bouncing back, with 21 trades last week and 15 this week. Crossbreds have garnered some of that attention this week.

For 19 Micron wool, five trades dealt. One trade was agreed at 1,650¢ for November. Four trades were dealt for April 2020 and agreed between 1,600¢ to 1,670¢.

For 21 Micron wool, six trades dealt, one for September at 1,650¢ and three for November with agreements between 1,520¢ and 1,535¢. One trade was dealt for both January and April 2020 at 1,600¢ and 1,630¢ respectively.

Four trades dealt on 28 micron wool, two for both November and December agreeing between 835¢ and 850¢.

It’s good to see confidence returning in the forward market. That this has come when the auction market seems to have hit its base and indeed is bouncing back seems of little coincidence.

Lamb and mutton forecasts to 2022

Posted on by Caitlin Dearden

Last week we updated the forecast model for annual young cattle prices to 2022 and this week it is the sheep producers turn to get an insight as to what the Mecardo model for the Eastern States Trade Lamb Indicator (ESTLI) and National Mutton Indicator (NMI) indicates for price projections over the next few years.

Predictor inputs to the lamb and mutton pricing models include an annual average A$ forecast, annual slaughter volumes (as outlined by MLA sheep industry projections), an annual climate factor, per capita, GDP levels of key importing nations and sheepmeat export volumes to key destinations.

The Mecardo ESTLI model predicts lamb prices to remain above 800¢ for the next few seasons as growth in offshore demand continues to outweigh increasing lamb slaughter and production levels (Figure 1). The 2020 season is anticipated to see an annual average ESTLI of 874¢, with a potential range of 740¢ to 1000¢ during the usual seasonal spring trough and winter peak. Annual forecasts for the ESTLI for 2021 and 2022 remain robust at 852¢ and 866¢/kg cwt, respectively.

National Mutton Indicator modelling shows similarly strong predictions for the next four years with the forecast tool indicating an annual average NMI remaining above 500¢ for the 2020 to 2022 period (Figure 2). The 2020 season is expected to see an annual NMI of 525¢, with a potential range of 405¢ to 640¢ from the seasonal trough to peak during the year. The NMI for 2021 is expected to average 531¢, easing to 510¢ for the 2022 season.

What does this mean?

A key driver for the robust pricing scenarios presented in both the ESTLI and NMI forecast models is the expected continued steady growth in demand for sheepmeat, particularly from China. Current modelling does not consider a potential surge in sheepmeat demand in the coming seasons, as Chinese consumers attempt to fill the widening protein vacuum caused by the ongoing African Swine Fever epidemic impacting the Chinese pork sector. A scenario of dramatically increased demand for sheepmeat from China would see forecast price levels elevated further.

Alternatively, ongoing trade tensions between the USA and China could see GDP growth forecasts downgraded. Significantly lower per capita GDP growth levels in China and the USA as a result of trade hostilities could hamper sheepmeat demand and see softer than forecast prices, wiping 100¢-150¢ off the annual average forecast prices to 2022.

Oodles of overseas wheat

Posted on by Caitlin Dearden

The WASDE report was released overnight by the US Dept of Agriculture and it points to a continued global glut of wheat. Current conditions in Australia mean that what happens overseas will have little downward pressure on local pricing.

December CBOT wheat futures have risen A$10 to A$258 during the past week but are far cry from their recent highs in June of A$297. This is another great example of the seasonal volatility which can provide opportunities for producers. A grower selling back in June would be able to add A$39/mt to their overall wheat price return and still be participating in the strong basis levels being experienced.

The reality, however, is that what is happening in the rest of the world has very little impact upon our local pricing this year. The wholly expected downgrade to Australian wheat production by ABARES and poor weather forecast have raised concerns. At present, due to production risks, growers are unwilling to sell physical grain in decent volumes, causing consumers to switch to ASX contracts. This has seen ASX-CBOT basis rise to A$106 for the Dec/Jan contract.

The August WASDE report was released last night, which had little in the way of surprises. The USDA did follow ABARES by reducing the Australian wheat crop to 19mmt, and Kazakhstan to 11.5mmt. The reductions, however, were offset by the larger starting stocks and reduced consumptive demand. At present global wheat stocks at the end of this season are forecast at 286mmt (or 15 Australian crops).

The forecasters at the USDA continue to stand firm on the condition of the US corn crop, with acreage remaining unchanged and a slight reduction in yield. The reality will be known in a few weeks when the lie detectors get into the crop.

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Next week?:

It is important to remember that when it comes to prices in Australia, we are in a bubble. We are insulated from the rest of the world. At some point the break will come and we will produce a decent crop, and we will go back to an export dominated pricing environment.

It is important to consider the current high prices and think about price risk management for the times when prices are not inflated by strong domestic basis.

StockCo announces ground-breaking facility

Posted on by Caitlin Dearden

Australia’s leading livestock funder StockCo announces a ground breaking securitisation transaction for the Australian market.

StockCo has settled with Goldman Sachs a new warehouse facility backed by a diversified portfolio of financing receivables primarily secured by livestock. The facility will be available for 3 years and will be able initially to accommodate up to $150m of livestock receivables subject to pre-agreed eligibility criteria, and will replace a substantial portion of StockCo’s existing senior debt club facilities, with a view to providing a pathway to funding further growth in StockCo’s business. StockCo expects the facility to increase in the short to medium term as StockCo continues to grow its livestock funding business in the Australian market.

StockCo Group managing director Marcus Kight said “We are delighted to establish this facility with Goldman Sachs. We see their decision to come on board as our major funder as an acknowledgment of the important role we play in financing Australia’s livestock industries.”

StockCo Australia CEO Richard Brimblecombe confirmed the rapid growth of StockCo’s business over the past few years. “At a group level a decision was taken to pivot our focus to the Australian opportunity in 2014, resulting in the establishment of the Australian business in a formal sense in 2015. Since that time we have funded the purchase of over $1.4 billion of cattle and sheep by 1,500 customers all over Australia. Drought conditions have impacted our rate of growth in the past 12 months, however we continue to acquire new customers on a daily basis and we are very excited about the growth opportunities that will arise as seasonal conditions improve.”

“The fundamentals for Australia’s livestock industries are very positive. Our national cattle herd and sheep flock are down due to tough seasonal conditions over the past 12 months in Victoria and NSW and longer in parts of Qld. At the same time demand for high quality Australian meat and wool continues to grow. This will be supportive for prices in the foreseeable future and with a return to more positive seasonal conditions StockCo has a major role to play in helping Australia’s livestock producers access the capital they need to maximise returns from their agricultural assets.”

The Goldman Sachs facility is the first securitisation warehouse transaction in Australia consisting of financing receivables primarily secured by livestock. The completion of the transaction marks an important step for innovation for the agricultural financing sector.

For information contact:

StockCo CEO Richard Brimblecombe: 0408 081 465

 

StockCo, me & my bank.

Posted on by Caitlin Dearden

StockCo assists producers to really maximize the capacity utilization of their existing agricultural asset base, and this really drives growth opportunities. We do this by working very closely with the customer and their bank with the view of having some really mutual beneficial outcomes. StockCo does not compete with banks for business or their customers. Stock only provides livestock funding. We only fund sheep and cattle. So, we don’t do term lending. We don’t do equipment finance. We don’t provide transactional facilities. Our core business is simply livestock funding.

StockCo’s goal is to create value for our customers. We look to enhance the relationship they have with their current financier. This is ultimately providing them with a new pathway to increase livestock revenues. And ultimately this will help them deliver on an improved financial performance. StockCo’s facilities do not disrupt or interfere with an existing bank in terms of their security arrangements.

 

Prediction is very difficult, especially if it’s about the future.

Posted on by Caitlin Dearden

The rainfall and production prospects for the coming year are an unknown, will it be colossal or dreadful? The reality is that no-one really predict weather out 12 months with any degree of accuracy – not even astrologists. In this article we look at the ASX contract and whether it provides an opportunity for the coming season considering the drought premiums in the market at present.

The January ASX contract typically receives the highest level of attention, this is due to it aligning with the east coast harvest. The ASX contract could be a potentially fantastic risk management tool for producers and consumers, however liquidity has been an issue.

The January 2019 contract expired last month at a very attractive (for producers) A$434 due to the sustained drought through the past year. Since the contract expired, the open interest in January 2020 has increased dramatically (figure 1).

There have been many consumers who have experienced historically high procurement costs who are seeing the current pricing levels for next year as being high; but lower than last year.

In September, I pointed towards selling ASX for Jan 2020 as being a solid strategy (see here). The market at that point was in the A$369-374 range. The market then fell to A$330, which would have provided an on paper profit of A$39-44/mt. At the time we advised this is an opportunity for growers to hedge their 2020 crop and for consumers to recoup some of the losses of this season.

The market has started to creep up as consumers attempt to gain some cover for the coming year and concerns related to soil moisture as we head into seeding. Since the start of February the contract has traded at an average of A$343 (figure 2).

In figure 3, the December basis between ASX and CBOT is displayed for the January contract. This chart represents both the old NSW contract and the east coast contract as they are analogous. It is clear the basis level received during harvest this season was an outlier. The premium over CBOT was A$172/mt, versus a decade average of A$26. At present the Jan 2020 contract is at A$63 over, which would be considered ‘mild’ drought pricing.

What does it mean/next week?:

As mentioned in the preamble to this article, no one knows what will happen over the rest of this year. We could receive a bountiful supply of rain and grow a record crop, conversely, we could have a season worse than the last.

The current pricing levels for Jan 2020 would be considered very strong (if you remove 2018). It is my view that marketing plans should be conducted in chunks and if >A$340 is the worst price you receive for the coming season – that’s not a bad end result.

Key Points

  • The ASX has struggled with liquidity in recent years, however consumers are more readily accepting it as a risk management tool.
  • Historically attractive prices are on offer for the 2019/20 harvest.