Category: StockCo News

Wool market not immune

Posted on by Caitlin Dearden

Despite the resilience shown over previous weeks by the wool market in the face of the global impact and then the week shut-down of sales due to the cyberattack on the Talman system, this week it succumbed. The accumulated effect of increased volume as a result of the shut-down and the global uncertainty caused the market to record losses across the board.

The Eastern Market Indicator (EMI) lost 41 cents to close at 1,521 cents. The Australian dollar remained under pressure falling 1.6 cents to sit at its lowest level since early 2003 at the close of sales on Thursday at US$0.646. This pulled the EMI in US terms down 52 cents to 982 cents.

Apart from a two week period in September last year, this is the lowest the EMI has been in US$ terms since November 2016.

The Western Market Indicator was in line with the East, giving up 46 cents on the week to close at 1,616 cents, with W.A. brokers passing in 29.9% of the 11,511 bales offered..

There was an unwillingness by growers to sell, with AWEX reporting that while 43,500 bales were offered nationally, this was after 6.2% was withdrawn prior to sale. In the end, 32,466 bales were sold resulting in 25.5% being passed in.

Year to date 126,700 bales fewer have been offered, and 189,700 bales less sold to the trade. There have been 904,828 bales sold however, for a total value of $1,542 million, delivering an average per bale return to growers of $1,704 per bale across all types.

This week the total sales value was $49.93 million, or $1,538 per bale.

Crossbred types showed the only positive moves with modest gains in the 30 & 32 MPG’s; with a note that poorly prepared types found little support. The Cardings indicators again eased in all centres giving up 27 – 40 cents over the week.

 

 

 

 

 

 

The week ahead

Again the roster for next week is large with 50,237 bales rostered, with Melbourne selling over three days to accommodate the larger catalogue and all centres selling on Wednesday & Thursday.

It is unlikely that this volume will come to auction, as growers elect to hold wool out while the uncertainty persists.

Since the sales closed this week, the Au$ has weakened further, quoted at below US$0.63. despite a lack of confidence in predicting anything at the moment, the weaker Au$ and reluctant grower selling will be generally supportive, the question is will that be enough to stem the market decline?

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.

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.

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.

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.