Tag: Analysis

Warning: This isn’t the new level.

Posted on by Caitlin Dearden

It’s a dog of a year. There was some hope that September would bring some rain to at least keep the crop stable. Unfortunately, September has brought frost and continued dry weather. As a result, wheat pricing has stepped up a gear. In this article I look at the structure of the market and why it is important to remember that this price is not the ‘new, new’.

At present, the local market is the most important driving factor for pricing, with basis levels trading at post-deregulation records. As an example, basis (Port Kembla) now comprises approximately 45% of the overall flat price, against an average of 13%. Nonetheless, the futures market and overseas pricing should not be ignored.

The futures market has lost ground since its late July/Early August rally and is tracking the 2015 season reasonably closely (Figure 1). US futures have lost strength due to lower than expected exports with commitments at 38% of projections. This is a substantial drop from the typical 57% for this period of the year. The futures pricing, however, does indicate that globally concerns for wheat availability is not yet critical.

In this analysis we have chosen to analyse pricing in Geelong, however, a very similar picture is apparent in all port zones within Australia. In Figure 2, the seasonality of Geelong APW is shown. The stratospheric ascent. The market is currently pricing at $430-445, with limited grower selling. This is clearly an abnormal year for pricing and shows the impact of a drought.

The basis level has clearly been the main driver (Figure 3), with the premium in Geelong over Chicago at +$160. This is a remarkably strong level and as we can see is well above what would be considered the normal range.

At present pricing levels are unlikely to see a substantive fall this harvest and risk management for growers at this point is largely not required. However, it is important to remember that these prices are caused by a drought premium and as figure 2 & 3 display, this is an abnormal year.

What does it mean?:

It is important to understand that these prices are not the ‘new, new’. If we have an average or above year in 2019, the premiums currently in the market will erode very quickly. The market will move back to a pricing point based on the export market and will align with international values.

At present no-one knows how the weather will treat us in the next year. If anyone tells you that they do; they are guessing. It therefore makes sense to investigate the forward market either through physical or futures to commence a structured sales plan for the 2019/20. At present 2019/20 Australian markets have a drought premium already priced in.

Key Points

  • The basis component of pricing in Australia typically contributes around 13% to the overall flat price. This year basis is at a post-deregulation high in all port zones, with Port Kembla at 45%
  • Chicago futures have fallen during August & September, whilst local prices have risen. This has led to very strong premiums.

The pricing levels as present are due to local drought. It is important to understand that these prices will not be around for the 2019/20 harvest if we see an average or above average crop.

Some people feel the rain. Others just get wet.

Posted on by Caitlin Dearden

The drought continues to be the main talking point, with this September being officially the driest on record. The areas that were in reasonable condition at the start of the month (Vic, SA & WA) have all seen downgrades to their potential production. However, it’s not all doom and gloom with welcome rainfall in NSW.

The ASX futures saw strong volume this week, however, is currently marginally lower than the end of last week (Figure 1). Interestingly there was increased interest in delivery periods further on the horizon with trades at $370 for Jan 2020 and $360 for Jan 2021. I wrote on Tuesday about the importance of looking beyond the current harvest (Warning: This isn’t the new level.).

This has been a tough year, however, it is fantastic to see some reports of substantive rainfall in NSW and QLD (see map). It is much too late for many crops, but it will fill some dams and assist with the moisture profile for the coming summer planting. Most of all, it improves everyone’s wellbeing.

The CSIRO has released crop updates based on their Yield Gap model. They currently predict an overall yield of 0.62mt/ha, this equates to 6.8mmt. In comparison, in the last ABARES update a yield of 1.45mt/ha or 16mmt was forecast. This is a bold call from CSIRO, however as we all know a ‘small crop only gets smaller’.

This forecast would place the crop at the lowest level since 1972/3 (Figure 2). They may indeed be correct, but I think that market forecasts of between 12-16mmt are more realistic.

What does it mean/next week?:

In the next week, we will see the WASDE report released, I don’t expect many big surprises in this report as most crops are now a known entity.

There are many in the industry examining the possibility of importing wheat or by-products for feeding purposes, as many consuming industries are unable to remain profitable at these levels.

Soaring yarding level raining on prices.

Posted on by Caitlin Dearden

Elevated sheep and lamb yarding levels are soaring like an eagle at the moment and creating a stormy price conditions for ovine markets this week. The Eastern States Trade Lamb Indicator (ESTLI) shedding 55 cents to close at 725¢/kg cwt and East coast Mutton peeling off 79 cents on the week to sit at 423¢/kg cwt on the mid-week close. 

Table 1 highlights the sale yard price behavior for the week, and year, for key lamb and sheep categories across the Eastern seaboard with red ink on the weekly movement shared across all stock types. Heavy lambs suffering the smallest decline with a drop of 47 cents, perhaps anecdotal reports of a dearth of heavy lambs due to the dry conditions insulating somewhat against the broader market falls.

Indeed, with the year on year price change for heavy lambs still reflecting that this season is 140¢ higher than last year and East coast heavy lambs topping the price table at 739¢/kg cwt this week suggests that heavy lamb supply could be a bit thin on the ground in some regions.

In contrast, broader East coast supply statistics for lamb weekly throughput shows that the Spring flush continues to ramp up, probably with much lighter weight lambs. Throughput levels are now sitting back at the upper end of the normal seasonal range for this time of the season as Victorian lamb throughput lifts 27% on the week signifying the flush is gaining momentum – Figure 1.

East coast sheep throughput is lower on the week, but as Figure 2 highlights remains at uncharacteristically high seasonal levels. Considering the volume of sheep still being presented at the sale yard mutton prices are managing to hold above levels seen this time last season, with East coast mutton 35 cents higher than in 2017.

Please note sale yard prices reflect Wednesday market close as this piece was prepared Thursday due to the AFL holiday in Victoria on Friday.

What does it mean/next week?:

A combination of low rainfall, 10-15 mm likely for Southern Australia, next week and a continuation of lambs coming forward as the Spring flush extends is probably going to make it difficult for the ESTLI to gain too much traction in the short term.

No crowing nor singing for cattle markets.

Posted on by Caitlin Dearden

Perhaps a bad omen for last weekend’s football finals but the cattle markets have provided little to crow or sing about with higher supply weighing on cattle prices across the Eastern States this week.

Table 1 outlines the major cattle price movements as of the close of trade mid-week with falls noted across all categories except Medium Steers. The Eastern Young Cattle Indicator (EYCI) dropping 12.5 cents on the week to close at 490 ¢/kg cwt.

East coast cattle slaughter has lifted above the seasonal weekly average for the first time in over twenty-two weeks for the week ending the 21st September registering nearly 146,000 head processed – Figure 1.

Slaughter figures not the only elevated supply statistic putting pressure on price this week with the East coast yarding levels 13% higher to see 52,452 head of cattle change hands at the sale yard.  Throughput levels in Queensland and Victoria contributing most to the lift in yarding with these two states the only regions to see a weekly figure recorded above the five-year seasonal average, with Queensland the stand out state for throughput sitting 47% above the weekly seasonal average for this time of the year at nearly 20,000 head reported.

The lift in East coast yarding levels enough to push the trend back into the upper band of the normal range, with higher yarding as we head toward October a potential outcome if the average seasonal pattern is to be replicated this season – Figure 2.

Please note sale yard prices reflect Wednesday market close as this piece was prepared Thursday due to the AFL holiday in Victoria on Friday.

Next week

Some light rainfall is forecast for much of Southern Australia next week, but at maximum falls between 10-15mm it is probably not sufficient to get cattle prices kicking higher in any significant manner.

As outlined earlier, regarding yarding levels likely to rise as we head to October, the more probable scenario is for a flat to slightly softer EYCI in the coming weeks. If your team is in the finals, good luck. If not, enjoy the extended weekend.

Wool market kicks against the wind in Grand Final week.

Posted on by Caitlin Dearden

Again, this week saw the wool market give up ground, easing on Tuesday when only Melbourne was selling and this trend continued when Sydney and Fremantle joined in. AWEX reported that it was the better style wool early in the week that met subdued demand, although buyers returned to look for bargains by weeks end.

The Eastern Market Indicator (EMI) fell 54 cents for the week, coming on top of last week’s 27 cents loss, to end the week at 2,013 cents in AU$. The EMI in US$ terms gave up 39 cents to end the week at 1,461 US cents (Table 1).

In Fremantle, the big “correction” came on Wednesday, where the WMI lost 74 cents but posted a more settled result on Thursday, losing another 7 cents to end the week at 2141 cents.

This week the Pass-in rate escalated in response to the market movement, with 14.1% of the total offering passed. A special mention goes to Fremantle, where on the first day 47.4% of wool offered was passed with a more modest 18.0% on the final day. This resulted in a clearance to the trade for the week of 28,324 bales, with 4,643 bales passed. This again produced a reduced dollar value compared to last week of $69.6 million, with a combined value of $830.1 million so far this season.

In the eight auction weeks since the winter recess, 277,214 bales have been cleared to the trade, 37,592 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 3,880 bales per week fewer (Figure 2).

The elevated Pass-in rates indicated that growers were not pleased with the softer market. With future supply looking tighter growers are prepared to punt on a recovery in the future.

A comment from the Rodwells team outlines the thinking going forward, – “Often the peak supply comes through around this time, if the 42K bales rostered for next week is the peak then supply is going to be lean for the rest of the season!”.

While falls were across the board, Crossbreds were not as severely punished, however, there were very small offerings to quote.

Cardings were particularly hard hit this week, Melbourne reported the Cardings indicator down 80 cents, while Sydney and Fremantle lost over 100 cents.

The week ahead

The offering next week is rostered at 42,500 bales, which is most unlikely to get to the auction as growers digest this week’s market correction.

The final day was much steadier than the early part of the selling week, so a return from some processors can be expected to support these levels.

Prices are soaring like an eagle.

Posted on by Caitlin Dearden

It’s another week of increased pricing. In this week’s comment we look at wheat pricing, the new action in canola and increased to global wheat production. 

The continued poor conditions and lack of grower selling has led to further increases in pricing in the past week. All zones have shown strong rises, with the lowest being in the Port Kembla zone, at a meagre 1% (figure 1). The reality being that in NSW and QLD, there isn’t much value in increasing prices because it just isn’t available to buy.

Two weeks ago I wrote about the relative inaction in the canola market (see link). At this point the canola market has only risen 10% since the beginning of widespread drought panic whereas wheat had increased an impressive 27%. A combination of the high price of hay alongside dry/frosted conditions in the east coast has led to substantial cutting for hay.

It seems that this is now starting to filter to the buyers. In the past two days prices have markedly advanced, with Port Kembla and Geelong rising 4-6% week on week (figure 2). The spread between Port Kembla and Geelong has decreased from its season high in early September, as buyers chase areas of potential production.

The International grains council has increased its forecast for this year’s wheat crop to 717mmt after improved prospects in Russia. This provides some limited breathing room for importers, but, for Australian producers the only real concern is the local situation.

What does it mean/next week?:

The market really is soaring like an eagle in Australia, but it is bittersweet. The reality is that this drought is no good for anyone on the east coast. The consumers of grain are paying prices which will massively impact upon their profitability. Grain producers will find that the higher price will nowhere near offset the reduced yield.

The great fuel robbery of 2018

Posted on by Caitlin Dearden

Fuel prices have seen a dramatic rise in recent days. Talkback radio has been airing calls to boycott the petrol stations. I thought it was therefore worthwhile revisiting fuel prices within Australia – are we being screwed over?

We start our journey in Singapore, where the bulk of our fuel is imported from. In Figure 1, the Singapore and the average Australian petrol price (at terminal) is displayed since the turn of the decade. There is an extremely high degree of correlation between (0.9615), with 1 being a perfect correlation and 0 being no correlation. In effect, this shows that when Singapore prices increase, our prices will also rise.

In Figure 2, the spread between Singapore and the average Australian price has been plotted, with the 7-day moving average to smooth out the data. This will give an indication of whether we are paying a higher premium, and therefore being gouged. However, the current spread is quite close (4¢) to the average compared to the start of the decade (61¢), but in recent years the trend has seen a rising premium in Australia.

The fuel premium in Australia over Singapore can be attributed to logistics and excise duties on fuel. However, the relatively narrow range that the basis trades within can allow us to effectively use Singapore fuel pricing to determine our price (or even hedge).

The major machinery items on-farm use diesel, and whilst we were looking at spreads, it is worthwhile to examine the spread between diesel and petrol prices. In Figure 3, we have plotted the spread, again using the 7-day moving average. At present diesel is currently pricing at a premium over 2.97¢ over petrol. This is above the average of 0.82¢ above petrol since the turn of the decade.

Interestingly however, since the start of 2015, the spread has been a lot lower, with diesel being discounted at 1.6¢ below petrol.

What does this mean?

In reality, this isn’t the great robbery, more a result of market forces.

The cost of my 600km a week commute has increased substantially. As much as it would be nice to blame the fuel companies, the price is a result of the market. It is important to remember that a large chunk of our local fuel price is fuel excise and we will be unlikely to see a government reduce taxes on fuel.

By looking at the numbers, it means that petrol and diesel prices are largely following the international market. There doesn’t seem to be any evidence of gouging, as spreads between Singapore and Australia have remained within the narrow band that we have historically experienced.

To those calling for a one-day boycott of fuel stations. It really won’t make a difference. Those who use a car have a relatively inelastic demand for fuel, if we don’t purchase on one day, we will buy it on another day. The impact on fuel companies will be infinitesimally small.

Key points

  • The bulk of fuel in Australia is imported from Singapore
  • The correlation between Singapore prices and Australian is 0.98, almost perfect.
  • The spread between Singapore and Australia has risen strongly above the decade average.

Wool drifts lower

Posted on by Caitlin Dearden

The beginning of the selling week saw the Au$ firm and the wool market ease as a consequence, however on Thursday, it was a different tale as buyers abandoned the poorer quality types but retained focus on well measured good yielding wool.

The Eastern Market Indicator (EMI) fell, losing 27 cents for the week to finish at 2067 cents in AU$. This market move was influenced by a stronger AU$, the EMI in US$ terms only gave up 3 cents to end the week at 1,500 US cents (Table 1).

The recent market level has been encouraging sales, and wool producers were selling almost all the wool offered with Pass-in rates at record low levels. This week at auctions growers reacted strongly to the easing market passing in 9.8%, well up on last week’s 2.7%. This resulted in a clearance to the trade of 32,129 bales, with 3,500 bales passed. This again produced a reduced dollar value compared to last week of $80.73 million, with a combined value of $760.5 million so far this season.

In the seven auction weeks since the winter recess, 248,890 bales have been cleared to the trade, 26,259 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 3,751 bales per week fewer. (Figure 2).

A continuation of this trend will see wool volume offered continue well below last season, and also the lowest for the past three seasons.

The comparison with this time last year provides context for just how much this wool market has improved, with the EMI up 542 cents or 26% compared to the same sale in 2017. This is partly explained by a lower Au$, with the EMI in US$ up 280 cents or 19%.

Another good measure of the market level is the average gross value per bale of wool sold. In early 2018 it reached $2000, up from $1500 in May 2017, which was extraordinary.

For September the average bale value is averaging $2,525, helped by the strong market in fine merino wool at a time of the season when the clip fines up.

A comment from the Roberts team in the auction room probably best explained the week, – “Buyers were starting some of the lots at 400 cents below value and were bidding slowly and conservatively up to values not dissimilar from last week; but the focus was clearly on the better style wool”.

The only section to end stronger for the week was the Broad X Bred types in Melbourne, skirtings and cardings fell in line with other types.

The week ahead

The offering this week was 1,000 bales fewer than last week, next week a slightly smaller offering is rostered of 34,800 bales with all centres selling.

An early call on lamb supply

Posted on by Caitlin Dearden

Spring is well and truly here, but the spring lambs are not quite. We usually start to see lamb slaughter show weekly increases from mid-July through to mid-October. This year all we have seen is slaughter declines.  August and September are likely to post their weakest slaughter rates since at least 2009. The question is, how is this going to impact supplies for the rest of the year?

The latest Australian Bureau of Statistics (ABS) slaughter data released in early September showed a strong 9.6% increase in lambs slaughter in July compared to year-earlier levels. Higher prices and dry weather encouraged turnoff of the last of old season lambs. It’s also likely that the 158,700 extra head was made up of Merino wethers and both Merino and maternal meat breed ewe lambs which were previously destined to boost flocks.

We know from Meat and Livestock Australia’s (MLA) weekly slaughter statistics that lambs slaughter has taken a serious hit since the end of July as the new season supply failed to materialize. Figure 1 shows our estimate of where the official slaughter numbers might sit for August and September.

August lamb slaughter is likely to be down 20% on 2017, and September is currently running 30% lower. We haven’t seen August and September lamb slaughter this low since at least 2009 and could be the lowest since 2005. Figure 2 shows that in 2009-10 and 2005-06 lambs slaughter levels finished up at 20.4 and 17.3 million head respectively.

In a normal season, we assume that low slaughter early in the season will mean more lambs will come to market later. This is based on steady or rising annual slaughter rates. The Australian Bureau of Agricultural and Resources Economics and Sciences (ABARES) forecast 2018-19 lamb slaughter at 23.5 million back in June.

It’s becoming clear that lamb slaughter is not going to reach the levels seen in 2017-18, with marking rates well back. We really are in the dark as to how many lambs are out there, but we can use historical slaughter rates at a guide. Figure 2 shows where we expect financial year slaughter to sit at with high (ABARES forecast), medium (21 million head) and low (19 million head) levels.

It indicates how the forecast slaughter levels will play out if we deduct what has already been slaughtered and if annual seasonality is applied to the remaining nine months.

What does it mean?:

If we somehow manage to find 23.5 million head of lambs to slaughter in 2018-19 supply will be well above last year for the remaining months. The medium and low scenarios show a significant monthly supply gap despite the slaughter declines we’ve already seen.

In terms of price, the medium and low slaughter forecast levels take prices to new records. Figure 3 shows our demand curve and extends it to slaughter of 19 and 21 million head. Under the demand equation we’ve seen in recent years it gives average prices of 1059 and 800¢/kg cwt. We don’t expect prices to move through $10 this year, but lower slaughter paints a positive picture for prices.

Strap on: We are in for a ride

Posted on by Caitlin Dearden

‘A big crop gets bigger and a small crop gets smaller’. This seems to be an apt statement to apply to this year’s Australian production. Continued concerns in the east coast & now in WA have led to more positive price action in the past week.

The ASX wheat contract in the past has been quite illiquid, recent months has seen reasonable volumes move into the contract. The lack of grower forward selling due to drought (& frost) concerns. The contract is deliverable; therefore it provides an opportunity for consumers to have cover to meet requirements.

After a rapid rise through July and mid-August to $400-410, the market fell to $385. This dip was short lived, and in September continued dryness and frost in both sides of the continent have led to impressive gains. In the past week the price has risen $25/mt or 6% (figure 1).

At a physical pricing level the new crop multi-grade APW contract has seen a corresponding rise, however selling has been at low. Interestingly the market in Port Kembla, has seen a more sluggish (figure 2) rise than other east coast areas (Adelaide & Geelong).

What does it mean/next week?:

At present there are a high number of growers cutting grain and canola for hay. This leaves an interesting conundrum – will this increase in hay due to drought and frost lead to a downturn in hay prices?

One thing is for sure though, it’s time to strap on our helmets as its going to be a bumpy ride.