Category: Grain

This week’s grain market update includes a look at ‘cheap’ offers of fertilizer in Australia & the slowness of the Victorian harvest.

Recently I wrote an analysis article on the performance of the global fertilizer market (read here) and had a follow-up podcast with Chris Lawson of CRU (listen here). In these reports, we discussed the fact that Urea had fallen A$64/mt since September (figure 1) and DAP was down a massive A$196/mt since the start of the year (figure 2).

There is a lack of transparency in the fertilizer market. There is no open and publicly available pricing for fertilizer in the same way that we see for grain, wool and livestock prices. This means that largely pricing intelligence on local fertilizer tends to be anecdotal in nature.

Nonetheless, we have received reports from several readers who have informed us of offers that are substantially below recent years levels. As an example, there are offers of A$530/mt for MAP in VIC & SA. These same readers informed me that they paid >A$700 this time last year for supplies.

There are questions remaining about whether it is time to purchase, or whether there will be more cheaper parcels on the way due to the lower overseas prices. Whether it drops further or not, this year is likely to have a lower fertilizer cost than last.

On the grain front, the ASX contract has risen this week by A$7/mt to hit an average of A$345 for the week. This remains at a substantial discount to last year’s strong drought premiums at A$428 for the same week (figure 3). For producers looking forward to next year, there have been attractive trades for January 2021 at around A$340.

Harvest remains slow in Victoria due to uncooperative weather, however, is likely to move ahead with gusto in the next fortnight. There are many consumers who have been ‘hand to mouth’ buyers during November and December. There were many hoping for an early harvest that hasn’t transpired resulting in continued strong premiums for old crop grain.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?

The big question remaining on everyone’s lips is what comes of the Victorian harvest. The ABARES report earlier this week confirmed that Victoria is the jewel of the nation this year.

Will there be harvest pressure in the coming weeks?

American markets have closed for the Thanksgiving holiday. Whilst they relax eating pumpkin pie and turkey the rest of the world carries on. In this week’s comment, we take a look at barley pricing.

The barley market has been under immense pressure over the past year. The past six months have seen a strong decline in pricing however the past fortnight has seen prices largely stabilise.

Since June barley pricing has declined by the following levels:
• Adelaide -19%
• Geelong -24%
• Kwinana -14%
The premium for wheat has increased dramatically since August, when (in Geelong) the premium started the month at A$10/mt. The premium has since increased to A$52/mt (figure 2), which is closer to long term average premiums.
The change in pricing levels has made barley far more attractive for feeding. During the past season, many consumers opted to reduce barley and utilize a higher level of wheat in feed rations. The consumers are now switching back to barley at these levels, however, will be keeping a close eye on changes to the spread.
The ASX wheat contract received some attention this week, with 53kmt trading on the exchange. The market has averaged A$338.25/mt for the week, which is up A$1 from last week. From a seasonal perspective, the harvest contract is down A$89/mt from the same week last year.

What does it mean next week?
As we move into December, we will see harvest moving further south into Victoria. Yesterday, I visited some crops in the Western Districts and they looked very good. As the wheat goes into the bins we may see some harvest pressure due to the heavily unsold positions by producers.

This year sees the opening of the T-Ports facility on the Eyre Peninsula. This facility brings additional export capacity and with that the potential for extra competition. In this update, we examine the historical spreads between Adelaide and Port Lincoln.

In recent days there has been commentary that the spread between Port Lincoln and Adelaide had narrowed as a result of the introduction of the T-Ports facility. We thought it was worthwhile to examine the historical spreads between the two-port zones.

The T-Ports facility is based at Lucky Bay and utilizes a different loading method from any other grain export port in Australia. Up until now, grain in Australia was loaded onto vessels in Australia direct from a berth, T-Ports will use a transshipment vessel.

The transshipment vessel ‘Lucky Eyre’ will load grain at Lucky Bay, which will then sail to deep water vessels to transfer the grain onboard. This is a relatively common way of loading vessels in regions where vessel drafts are an issue.

In figure 1, the historical prices for APW1 are shown for Adelaide and Port Lincoln. Typically, Adelaide and Port Lincoln have traded at similar levels for much of the past decade. There have, however, been periods when Adelaide has traded at a strong premium, especially during the past 18 months.

This spread is clearly displayed in figure 2. This chart represents the premium or discount between Port Lincoln and Adelaide. Last year saw the discount at its largest level versus the rest of the decade. However, recent months have seen the spread narrow.

There is some speculation that this narrowing of the spread is due to the extra competition encouraging buyers. However, at present, it is hard to confirm whether competition is the cause.

We do know, however, that last year Adelaide was pricing into the eastern state domestic homes, rather than the export market. As the market has come off the boil, Adelaide pricing has fallen dramatically. It is more than likely that the larger discount at Port Lincoln last year was a result of the cost of logistics to the domestic market.

What does it mean?

The T-Ports facility is a fantastic addition to the Australian grain export market. This model is one that can be rolled out in further regions, at a potentially lower cost than traditional berth-based discharging.

Grain growers on the Eyre Peninsula now have additional options for delivering their grain, which will in many areas reduce their freight costs.

As we move into this harvest the local ASX futures decline further, in this update we look at the seasonality. We also update on some of the 20/21 global projections and the fate of the Argentine crop.

The ASX wheat contract has lost further steam this week with the weekly average settlement down A$4.6/mt. Interestingly, the contract has followed a very similar seasonal pattern from around week 39 to present. Last year we did see a rally back in the weeks leading to expiry (Figure 1).

In recent weeks, we have seen a rally in old crop pricing as consumers have had their hopes for an early Victorian harvest dashed. There were many who were hand to mouth and have now had to purchase old crop grain to keep them going until the harvest starts. This dry spell has kept the majority of headers in Victoria parked up, however, they are likely to continue with earnest over the next week.

On a global level, Chicago wheat futures for December fell A$3 overnight, with the contract trading in a narrow range of A$270 to A$278 this month (figure 2). There was some news released last night which influenced the market:

The Argentine Ministry of Agriculture has estimated their wheat crop at 19mmt, a large drop from early expectations of 21mmt. A production figure of 19mmt still places the wheat crop well above the five-year average (see here)

The International Grain council updated their forecasts for global production:

• 20/21 Wheat acreage up 1%
• 20/21 Rapeseed/canola acreage up 3%

The week ahead

Harvest will be kicking up a notch in Victoria. This may provide some harvest pressure on pricing levels, and those holding onto old crop are liable in the coming weeks to see the current strong premium decline.

In the past 24 hours there has been two news items which are likely to have some impact on Australia. One in the mid to long term, and one in the short term. The uncertainty from China continues, and one of our major export competitors modernizes their practices.

The first piece of news, and most immediate to the Australian market is result of the Chinese anti-competitive dumping probe. This action was taken by China 12 months ago, and under world trade organization (WTO) rules, should have been completed on Monday.

In what is the least surprising news of the year, China has requested an extension. The WTO allow a six-month extension, which means the probing must be complete by the 19^th May.

Figure 1 depicts the barley price since over the past year. As we can see the market has largely been drifting lower. These levels are at export competitive levels. The market has largely priced in this extension and we are unlikely to see substantive falls from this point onwards.

The second piece of news is one which is likely to be a slow burner but is likely to impact upon Australia (eventually).

Ukraine has been a powerhouse during the past decade. Exports (especially corn & wheat) have drastically risen (figure 2). This is even though Ukrainian land legislation is quite archaic to many other major cropping nations.

The increase in cropping production which allows for large exports programs is due to the large number of foreign investors. However, these corporate investors are unable to own the land that they are farming. It is not unusual for corporate farms to be leasing land from 100’s of individual landholders.

The opening up of Ukraine to foreign buyers will lead to increases in investments from on-farm right through the supply chain. It is also expected that this will lead to an improved economy for Ukraine.

This doesn’t however bode all that well for Australia, as this has the potential to drastically increase the competitiveness of Ukrainian exports.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean?

Harvest of barley in Victoria is going to jump up a notch this week, which may see some harvest pressure on pricing.

At present the barley-wheat spread is attractive to consumers, with most focusing on accumulating as we move into harvest.

It’s the start of harvest, but bids for the 20/21 harvest are now being presented to growers. In this analysis, we look at whether these offer more value for the producer or the buyer.

It is extremely important to be examining the forward markets, as they can often provide strong opportunities to price grain at high prices. The strategy of performing risk management through some forward selling can be through derivatives or physical contracts.

In this analysis, we will look at the current bids for Kwinana and Adelaide.

• Kwinana: A$314
• Adelaide: A$300

At a basic examination, these bids look quite attractive, it provides the grower with a price above the psychological barrier of A$300. However, let’s break it down.

The forward curve for wheat futures (Chicago) is in contango, where the forward months are trading at a premium to spot. Today the Chicago contract (Dec’20), which corresponds with the 20/21 harvest, is trading at A$291. This places the contracts at a basis of +A$23 in Kwinana and +A$9 in Adelaide.

In order to determine whether the current bids provide a good price, let’s look at the historical basis. In figures 1 & 2, the average basis from harvest (specifically December) is displayed in green bars, with the orange line representing the basis on offer with the current 20/21 bids.

As we can see, in the bulk of years basis at harvest has tended to exceed the current basis on the offer of A$9 in Adelaide and A$23 in Kwinana. This was especially so during 2018 when drought had hit Australia and prices responded accordingly.

The buyer at these bids can lock in the basis at below-average levels, and then protect their risk from movements in futures. They will then likely be able to sell the basis on at higher levels at a future date.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean?

If we see a bumper crop in 2020/21, then basis could fall to minus levels. However, at present, we have no way of knowing whether that will be the case.

If we went on the law of averages it would be a better position for a producer to sell futures, and hold locking basis until harvest (or until a better bid is provided).

At present on a flat price basis, these bids are attractive, but by taking them, there is the potential for money to be left on the table.

If you are a premium subscriber and would like to discuss this in further detail – feel free to get in touch.

Usually the market is relatively busy at the start of harvest, however, at the start of November things are going off with a whimper. In this update we talk about the lack of bids & volume on ASX.

The ASX wheat contract has been relatively inactive this week. The contract for Jan 2020 has been settling in a very narrow range of A$337-339/mt for the past nine days. The spread between bid and offer has remained wide during this time, and traded volume is low.

In figure 1, the seasonality of ASX volume is displayed. Throughout most of this year, volume has followed the 2019 contract. This week however, volume has dropped to 75 contracts (or 1500mt). This volume is likely to increase into December as positions are closed.

The big talking point with consumers and growers is barley pricing. This week prices have declined marginally, however, they have been on a downward plunge since seeding. Due to this discount to wheat, barley is now far more attractive to feed consumers. Bids from buyers have dried up with consumers buying hand to mouth.

The big question at present is the result of the anti-dumping investigation by China. As the investigation was instigated last November, the results should be published this month. The World Trade Organisation stipulates that anti-dumping investigations must be completed within a year, although there is the possibility of a six-month extension.

This uncertainty has meant that exporters are unwilling to take a ‘punt’ on the resolution, especially after many trading businesses made large losses during the past financial year. This has removed a large proportion of demand, with domestic being the only available avenue open.

What does it mean next week?

The uncertainty around the barley anti-dumping probe is impacting trades capacity to purchase large volumes of barley. In addition, there is a question mark in relation to Chinese feed demand due to the African Swine Fever outbreak.

The WASDE report will be released overnight. At this point of the year, the report should provide some stable numbers for this season. This will give some clarity on carryout.

It’s six days after Halloween. A night of monsters and scares. However, for farmers the scariest matter this year has been the downward progression of crop yields. This has been a landmark harvest where production has been massively down, but prices have declined, however, the headers will give the industry its much needed clarity.

The crop forecasters are now suggesting a <16mmt wheat crop. Which is substantially lower than the ABARES estimate in September of 19.1mmt, and down on last years 17.3mmt. We have spoken at length about the difference in the two years as production shifts back to the east coast.

The market has lost steam in recent weeks as consumers have confidence in being able to accumulate their volumes.  As harvest advances, we will get some clarity on the accuracy of forecasts.

One of the few places in Australia hanging on has been Victoria. In recent weeks the Grain Industry Association of Victoria has performed a crop tour. The forecast wheat yield is 2.31mt/ha (wheat) and 3.32mt/ha (barley). Abandonment has also declined year on year, with 8% being cut for hay versus approx. 30% last year.

When we remove this abandonment from the ABARES September forecast, it is now forecast that Victoria will produce 3.4mmt of wheat and 2.6mmt of barley.

How are the markets reacting to the lower crop? Well there is a continued fall in prices in Australia. The ASX contract has fallen 3% week on week, or A$9 (figure 1). The gap between this year and last year has widened dramatically. At present the ASX contract is A$97/mt lower than this point in time last year.

This year due to the uncertainty most growers have sold less than normal ahead of harvest. This makes perfect sense as a strategy whilst crops have deteriorated. This however especially in Victoria could lead to a large volume of grain hitting the market all at the same time.

What does it mean / next week?:

Consumers are now examining their ability to increase their use of barley. Due to the wide spread to wheat, it is more attractive to feed. This will likely add some pressure to wheat prices, as demand technically drops by the maximum volume allowable as barley in a ration. However this may be short-lived.

This season is all about local elements. The overseas market can be forgotten for now. In this update we take a look at the factors holding prices down and why it’s worth keeping an eye on overseas futures for next year’s harvest.

It’s been a disappointing week for producers when it comes to pricing. As harvest starts to progress, the ASX wheat contract has experienced its third week of downward pricing. The ASX wheat contract has followed a very similar pattern to last year since the crop worsened albeit with a large discount year on year (Figure 1).

Last year the ASX continued to decline until the end of November, before rising towards the end of the year. So why is the grain price falling rather than rising?

• Growers are largely unsold coming into harvest. There is an increase in the number of offers from producers. The extra supply is in part pushing down pricing.
• The Australian crop may well be below 16mmt this season. However, the balance between supply and demand is pointing towards domestic demand either being met or limited transshipments being required.
• Overall demand in Australia is down year on year due to reduced feed demand after destocking. There is also the potential for imports into NSW to meet specific quality requirements, this may reduce a large proportion of domestic demand (approx. 500kmt.)

At Mecardo we think it is always important to look forward when marketing your grain. There are opportunities to be realized by having a forward-looking strategy. In Figure 2, the forward curve for the major grain bourses is displayed.

The market remains in contango. This is where the forward contract months are at a premium to the spot. This is a common occurrence in wheat and provides an opportunity to lock in high prices for future years.

Remember to listen to the  Commodity Conversation podcast by Mecardo

Next week:

It will be interesting to see whether this lower pricing point for ASX wheat brings consumers out of the woodwork.

There has been a hot blast drive through Victoria in the past three days. This could have hampered some crop development in the Wimmera and Mallee.

Many crop forecasters are calling the crop lower. It is therefore confusing for many why the price for cereals is dropping rather than rising. This time last year ASX wheat was A$444/mt, this week it is trading at A$353/mt. Why is that happening when the crop is in poor condition?

A small crop gets smaller is an adage that stands the test of time in Australia. The estimates for this year’s wheat crop are varied from 15.5mmt to 18mmt. I personally think the headline number is irrelevant. In a year like this (and last year), we need to be thinking of Australia as two countries – east and west.

I have mentioned a number of times in our weekly podcast and a number of articles (here, here & here) that the distribution of grain in the country would lead to lower prices than last year. The headline number is liable to be around similar levels to last year, but that doesn’t mean prices will be the same.

The ASX wheat contract rose during September, however, it has remained locked within a narrow trading range of A$350 to A$360 (Figure 1). In the past week, we have seen a softening of pricing with the average close this week at A$353. This is A$88 lower than the same week last year.

The ASX falling has come at a time when CBOT for a comparable period has been rising. This has resulted in basis falling to A$67. The high in recent months has been A$112.

Recent times have seen corn being the main driver, however, wheat led the charge in cereals overnight. This has resulted in December futures riding to a three month high. The market has been driven by wheat concerns around the world cold/snow (US & Canada) and dry (Australia & Argentina).

Early in the season, Argentina was on track to produce a record-breaking crop, with estimates up to 21mmt. However dry weather has resulted in a series of downgrades to 19.8mmt. This is 300km higher than last year and nearly 5mmt higher than the decade average (Figure 2). Although we may see production fall further, the impact on the record global balance sheet is likely to be minimal.

Next week:

The ASX market has fallen over the past week and is testing <A$350. If this occurs, we may see an uptick as consumers cover requirements at a lower level.

It is going to be a very volatile harvest as what grain that has been produced comes to market over the next two months.