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Turnaround Thursday (at least partially)

Posted on by Caitlin Dearden

There has been a slight turnaround in the market, but overall prices are substantially more attractive than they have been in the post-harvest period. In this week’s commentary, we examine the potential impact of crude oil on Australian wheat, and why we should be aware of it.

There has been a welcome (for sellers) rally in the wheat futures over the past fortnight (figure 1), as a result of weather woes in the US. Overnight however the market performed a partial flip and dropped around 2%. The trade will be watching the weather with close eyes, especially as Russian crops look to again be in good condition. This factor, combined with a depreciating rouble (more on that later), is likely be putting some caps on futures for the next few days.

At a local level, there are still major concerns about the coming harvest which has led to a substantial rise in pricing. This has especially been seen with continuing strengthening in basis in Adelaide & Port Lincoln (figure 2).

In addition to supply concerns for the coming season, the growers are not surprisingly reluctant sellers. This has led to the market paying up to acquire some cover, however we need to be aware that if the concerns start to be alleviated, then the interest from the trade may diminish. There is still a long way to go until harvest, and we shouldn’t write off the crop at the end of June.

As we all know, foreign exchange plays a factor in commodity trading. The Russian economy is largely dependent on oil revenues, and is also a major competitor for Australian wheat. In figure 3, we have charted the Rouble against the US$, and the price of crude oil since early 2014. This period has seen a reduction in crude oil prices, which has led to a weakening of the Rouble, the correlation between the two is almost perfect at -0.96.

The oil price in recent weeks has started to slide again, and the market remains bearish which has resulted in a further deterioration in the Rouble. If the fall in oil continues, then by proxy Russian wheat will become more competitive on the market.

Next Week

Like a broken record, the trade will largely be concerned with weather events in the northern hemisphere. As the days flow, any weather risk premium in the market will lessen unless we see some major production failures.

We still have to keep into account that even when excluding Chinese wheat stocks, the world still has considerable supplies.

Queensland outshines NSW

Posted on by Caitlin Dearden

A good recovery staged by Queensland across the board, while NSW disappoints… no I’m not talking about the State of Origin – although the phrase fits there too! Actually, it’s the cattle market this week. Despite the national market indicators posting largely flat results, with weekly moves of less than 2% either way some state based indicators saw more substantial action.

The headline Eastern Young Cattle Indicator (EYCI) mirroring the national saleyard indicators with a minor retracement of 1.3% to close at 633.25¢/kg cwt, yardings of EYCI cattle up 22% on last week a potential reason for the softer prices. In contrast, young cattle price in WA recording an impressive 4.5% gain to close at 615¢/kg cwt and the key export indicator, the 90CL frozen cow relatively flat on the week, dropping just 1¢ to 646.8¢/kg CIF – figure 1.

Big winners in Queensland (other than the Cane toads) were Trade Steers, with a 13% lift to 336¢/kg lwt. The remaining QLD indicators up too (0.5-4.5% increases) with the exception of Medium Cows at 214¢/kg lwt, a fall of 1.6%. NSW saleyard indicators all softer this week, with falls ranging from 1-3%. NSW Medium Steers showing the biggest live weight percentage price drops, down 2.8% to 298¢/kg. A bit of a mixed bag for Victoria, with Feeder Steers down 3% to 325¢/kg lwt and Medium Steers up 5.7% to 315¢/kg.

Increased weekly throughput a potential reason for the broad price falls in NSW with yardings up 76% on last week and 29% above the long-term average for this time of year to see over 23,000 head change hands – figure 2. Perhaps the extended dry spell is starting to have an impact on supply and effecting the normal seasonal winter price rally. In case you missed it, Thursdays analysis piece on Mecardo takes a look at the potential impact of continued dry weather event and is worth a read.

The week ahead

The rainfall forecast for the week ahead showing some much-needed moisture to SA and lighter falls to the much of the South, but most of the decent stuff concentrated in the Tasman Sea. It is unlikely these falls are going to put a rocket up cattle prices this week but might be enough to continue to encourage consolidation at current levels. Although I’m Melbourne born maroon blood flows through my veins so eyes focused on the final State of Origin in just over a fortnight to see if the Toads can stage another upset.

What to expect if it stays dry

Posted on by Caitlin Dearden

Whether or not you believe the Bureau of Meteorology (BOM) three month forecast, there is always the chance the current dry spell could continue. Dry winter’s and springs are not great for cattle prices, but given the current historically strong values, how bad could it get?

The usual impacts of a dry winter and spring are relatively predictable. Cattle producers usually hold out on selling cattle until past the point of no return, while grain prices inevitably rise. Come mid spring there is a rush to offload stock, while demand has weakened, leaving prices in freefall.

To work out where prices might end up, we can take a look historical slaughter during dry times, and associated prices. Obviously fundamental price levels have changed somewhat since the most recent dry spring, but we can try and account for this and come up with a base level for cattle prices.

The 2005 and 2006 seasons are a reasonable template for the market to follow. In 2005 cattle markets reached record highs on the back of strong demand, and a herd rebuild restricting supply. The following year saw cattle supply track in much the same way, before diverging in mid-August (figure 1).

For the last five months of 2006, slaughter was up 16.5% on 2005 levels. The impact on price was dramatic. The Eastern Young Cattle Indicator (EYCI) peaked in mid-August, and as the dry set in, subsequently fell 25.1% to bottom out twice, in October and December.

We can’t really use a 25% fall as the benchmark for price declines in a dry winter or spring. But we can use the 90CL price, and the discount the EYCI reaches, to estimate how low prices might go. Figure 3 shows the long term EYCI spread to the 90CL Frozen Cow Indicator. Before the massive discounts of 2013-2016, the biggest the EYCI got to the 90CL was 20%.

Key points:

  • There are some concerns emerging on around dry weather which could possibly continue.
  • Historically a dry winter and spring has resulted in a strong increase in cattle supply.
  • If the EYCI moves to a historical dry winter/spring discount, values could fall by 130-150¢.

What does this mean?

Figure 3 shows a few dry winter/spring periods when the EYCI has fallen relative to the 90CL indicator. Currently the EYCI is basically at parity with the 90CL price, and a 20% fall would shave 130¢ off the current value. Based on the current 90CL price of 648¢/kg, a 20% discount would give an EYCI of 518¢/kg cwt.

If the EYCI falls into the low 500¢ it would be the weakest price in two years. There is also a chance the 90CL could fall, which would obviously mean cattle prices could weaken further.

It could rain, and cattle prices could hold on to current strong values, but if the rain holds off cattle prices will fall significantly. This could be good enough reason for some to take the money on offer at the moment.

Other comments:

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Lengthening days trigger weaker restocker demand

Posted on by Caitlin Dearden

In general lamb prices were largely steady this week, but trends were mixed depending on category and state. With supply remaining relatively strong as we pass the winter solstice, and new season lamb supply fast approaching, the question is whether we have seen the peak.

After spending the best part of six months tracking well above last year’s prices, the Eastern States Trade Lamb Indicator (ESTLI) this week eased back to within 17¢ of the late June-16 value, at 650¢/kg cwt (figure 1).

We are yet to get hold of any supply figures for the last week, but anecdotally are hearing that there are plenty of heavy trade, and heavy lambs hitting the market at the moment. This is at a time when some major processors are winding down for winter shutdowns, thereby reducing demand.

Light and Merino lambs also fell this week, losing 16 and 25¢ respectively on the east coast. But it was Restocker lambs which were the major movers, falling 54¢ to 661¢/kg cwt. Figure 2 shows this is the cheapest restocker lambs have been since February.

It’s not unusual for restocker demand to ease at this time of year, as any lambs purchased could have to be marketed against new season lambs, and price declines can get ugly in the spring.

Mutton markets eased in line with trade lambs, losing 17¢ to move back to 504¢/kg cwt. Still a good price, and just 22¢ off the peak.

the week ahead

There shouldn’t be many old season lambs left out there, but they seem to keep coming. With only about six weeks until new season suckers come to the market, time is running out for the ESTLI to have a crack at 700¢. Forward contracts are still available for trade and heavy lambs at around 660¢ for August, so there is some concern around supply at that time of year. Given the price resistance being found at 700¢, it’s hard to see prices being much higher than this come August.

 

Demand up on limited supply plumetts

Posted on by Caitlin Dearden

Again, the occasional, yet extreme demand for wool with good measurements (low mid breaks & good tensile strength) contributed to a mixed message out of this week’s wool market. The better types pushed the overall market to new levels while lower style wool battled to keep pace.

This week only Melbourne & Sydney were selling resulting in the smallest offering for the year at just over 22,000 bales. Buyers were active and purchased 21,104 bales although 5.4% was still passed in. The EMI improved A$0.27 for the week while the easing A$ resulted in a more modest US$0.12 lift.

Week–on–week comparisons showed that all categories (except 32 MPG) posted gains. However, in percentage terms it was again the medium Merino types that ended the week with the biggest lifts.

AWEX reported that the week just past was the lowest offering of Merino fleece types in over 8 years. This is reflecting the demise of Merino flocks over the recent time. As Mecardo has previously outlined, this is a concern for the long-term sustainability of the Australian wool industry as continued lower supply must translate into reduced processing capacity. Over time this will see wool continue to lose its position in the fibre market on volume. The challenge then will be to position wool as an even more niche product.

Impacting on the declining supply is the strong demand for sheepmeat resulting in lamb prices at record levels. As reported by Mecardo, with the big economies in Asia positioned to continue their appetite for Australian sheep & lamb encouraging sheep producers to continue their focus on meat this demand is likely to continue. Of course, a modern Merino flock is also taking good advantage of the high meat prices, so for those who have stayed the course with Merino sheep these are indeed good times.

The week ahead

Next week Fremantle returns to the selling roster and a larger offering of 37,000 bales is rostered – figure 2. It is with some confidence that wool growers should approach wool sales as a softening A$ and tight supply is encouraging wool processors to compete strongly.

May you live in tranquil times.

Posted on by Caitlin Dearden

There is an old Chinese curse, “May you live in interesting times”, used ironically to suggest that uninteresting times are more life enhancing than interesting ones. It seems our friend Donald, would like to consign us to a lifetime of interesting times.

After experiencing strong momentum in March, it seems that gravity has exerted its force on the wheat futures market, with a return to pre-rally levels (figure 1). In recent days much needed rainfall has fallen in US growing regions. It was not unreasonable to expect this fall in the market, especially as the US falls in importance on the international wheat market.

In the Black Sea nations, conditions continue to be promising for the coming season, with winter kill below average. Although the crop will be unlikely to match last year, it will still dominate the export market. Interestingly a Russian government official commented that fertilizer and seed purchases had increased 30% this season.

In figure 2, the basis levels around Australia as a percentage of the overall price has been displayed. During this harvest, basis increased dramatically, becoming a third of the pricing complex in some states. Although since weakened, basis levels remain strong, and protect us from falls in the futures market.

In recent weeks, Trump has been rattling the tariff saber with China. During the Trump election campaign, he ran on a platform of reforms to trade. In his defence, Trump has certainly gone all in, however only time will tell whether this will be to the betterment or detriment to the voters.

In figure 3,4, & 5 (animated), we can see the futures prices of a number of commodities (pork, soya, soya meal), which all have strong links with China. As we can see these markets have experienced strong falls in recent weeks, as discussions become more heated.

On a regular basis China turns around vessels of soya and corn from the US; perhaps we will see an upsurge of cargo rejections in retaliation.

What is assured, is that we are unlikely to be living in tranquil times for the foreseeable future, and black swans are likely to be a regular occurrence.

What does it mean/next week?:

The ‘tariff war’ is going to place Australia in a difficult diplomatic position, between an important customer and a traditional ally.

However, if handled well by our government could provide a favourable result for Australian industries.

A relatively sedate week

Posted on by Caitlin Dearden

After weeks of ‘excitement’ in the grain trade, it’s a relief to see a relatively sedate week. In this week’s comment, we look globally and locally. We also revisit the forward curve, and the opportunities for locking in forward swaps.


Let’s start globally, by taking a look at futures. In figure 1, I have plotted the spot futures. The market closed at a low of 402¢/bu this week, however overnight has regained some composure to close at 409¢, however ultimately is down 5¢ on the week. This is a fall of around A$2/mt which in the overall scheme of the previous weeks falls is miniscule. The market is treading water whilst we await more data, however with the northern hemisphere weather risk market close to an end the signs are not good, and growers need to make sure their strategy reflects this.

Yesterday I examined the proposition ‘Can basis save us?’, ultimately it cannot save us, but it can insulate us at times from the rest of the world. In figure 2, the basis levels are displayed, In recent weeks basis levels have traded in a narrow range, however maintaining at strong levels. At present grower selling is low and sporadic, therefore the question remains of what will happen when harvest arrives and growers start to sell.

In early July we recommended the use of a Dec’18 Chicago swap in our article ‘Should we lock a far forward swap?.’ In figure 3, we have compared the wheat forward curve for yesterday and the 3rd July, when the prior article was written. In that time the Dec’18 wheat futures have fallen A$42/mt stripping away the opportunity which was present.

What does this mean?

The focus firmly remains on the Northern Hemisphere. There are a few questions still remaining; How close have USDA estimates been to reality on both the wheat and corn crop?, how is the quality profile stacking up in France and Germany?, What will the Canadian spring wheat perform?

We have always advocated having an appropriate risk management strategy, to ensure that you are able to weather the storms as they develop.

The futures prices seen in July, are unlikely to be seen again this year, and we have to prepare for that.