The grain market is one of the most interesting to be involved in. There is always ups and downs, always something interesting happening to change the direction of prices. This week is no exception with some big moves both internationally and locally.
At global level, we have seen further deterioration of Chicago wheat futures, with the spot market falling to as low as 474¢/bu, from a high at the end of June of 539¢/bu (figure 1). The market has lost 3/4 of its gains in ¢/bu since the rally in the end of June. The fall in SRW wheat is not unexpected as weather issues around the world are more a quality than quantity issue at present, and with beneficial rains being received throughout the US, risk to this crop has reduced and priced into the market.
When we however look at the futures converted to A$/mt, the losses have fallen well below the pre-rally period to $220 for spot and $230 for the December contract. This is due to the rise in the A$ which has been a surprise to many. The majority of analysts have been calling the A$ overvalued for the past 18 months, however it never fails to surprise. In the past week, we have seen the dollar rise due to continuing negative sentiment from the US, however, continued firming in the wider commodity market (iron ore etc) has seen support levels firm.
At a local level, there has been good news, with many in the cropping belts receiving much needed rainfall and forecasted falls due in the coming days. Let’s hope the BOM are correct, as there are a lot of expectations resting on these forecasts.
As the concerns continue with the Australian crop, basis levels have continued to stay strong (figure 3), providing good flat price opportunities for growers. As volume is likely to remain depressed this season, basis levels would be expected to continue to remain on the higher end of the range.
Next Week
The focus will be on the weather. What will the results be of the crop in the northern hemisphere, and as we go into August will we maintain the current crop potential?
The forecast is for drier conditions for the next three months, will we see further downward revisions?
The last of the strong prices for 2017 seems to have drawn out the last of the old season lambs this week. Figure 1 shows a sharp jump in lamb yardings this over the last two weeks, with nearly 172,000 head yarded this week. Given the lower slaughter space on offer at the moment, it was enough to send prices sharply lower.
We have been hearing plenty of anecdotal evidence of increasing lamb supplies coming out of NSW, but also that lambs are struggling to put weight on due to a lack of feed. In theory slower weight gains should see increased supply of store lambs, and weaker supply of finished lambs.
It would likely take a couple of dry years in a row to see restocker lamb prices fall to a discount to the ESTLI. The more likely scenario would be restockers paying a similar premium to that seen during 2014 and 2015. Those years both had ordinary spring and summer rain, and much stronger grain prices than last season.
The first story states that US herd expansion is continuing. The latest numbers on the US cattle herd from the United States Department of Agriculture (USDA) put the herd at 102.6 million head. This is a 6 year high, and up 7 million head from the 2014 low. The US have added the equivalent of 25% of the Australian herd in just 3 years.
Finally, we come to the fifth story, which is more of the same on the weather forecasting front (Figure 2). While key cattle areas of Queensland and Northern NSW are back at a 50:50 chance of getting more than the median rainfall, the dry is forecast to continue for southern NSW and much of Victoria.
Considering the finale is always the main event, we’ve focused this market review on the last week of the season (July 10th 2017). Table 1 compares the average market price for the last week of the 2016-17 year for Northern, Southern and Western market regions to that of the previous year. The closing market clearly favoured the fine microns this year with a price jump at an average of 34% across the 16.5 to 19 micron range for the Eastern markets and 24% for the West.
By comparison, the mid and coarse fibre market on the West Coast remained fairly stagnant, landing nearly right back where it ended 12 months ago. The market price was on average just 10c higher than last year for fibres above 19.5 micron.
CBOT wheat prices managed to track sideways this week as the market digested the World Agricultural Supply and Demand (WASDE) report and weather outlooks improved. While the spot and Dec-17 CBOT wheat have fallen 50¢ from the peak, the Dec-18 contract is down 35¢. Dec-17 currently sits at 529¢/bu, with Dec-18 at 585¢ and full carry back in the market.
After also falling heavily last week, ICE Canola for Jan-18 has steadied at the $515CAD/t level. The Canadian dollar has matched the AUD increases, with the two currencies locked at parity, so swap prices remain around the $515/t value. With local port prices at $530-535/t, the basis value doesn’t look to be there, so swaps would be the way to go at the moment.
The 90CL frozen cow beef export indicator continued to slide this week, dragged down by a reduction in boxed beef forward sales in the US over the last few weeks. US meatworks report an 18% drop in forward bookings so have realigned their pricing to lower levels in order to attract additional forward sales interest. The 90CL settling 3.1% softer to close at 615¢/kg CIF – Figure 1.
Despite the fall in the 90CL this week the indicator remains above the EYCI, combined with the steady decline in cattle yardings, this should start to add some support to cattle prices at the current level. Although, the rain forecast for next week shows limited falls to the southern tip of the nation so it’s unlikely that prices will get too much of a kick up. Consolidation at current levels seems the order of the day.
When we set out to write this article, we thought it was going to be about how restocker demand was on the wane, and one of the reasons the cattle market was falling. While restockers are paying less, they are still buying plenty of cattle.
This is somewhat confirmed by the smaller fall in the price paid by feeders for EYCI cattle over the last six weeks. Figure 3 shows that feeders are paying 7% less than at the start of June, while restockers are down 10% and processors price have weakened 8%.
Stronger supply of light store cattle is not the only reason for the weaker EYCI, but it is contributing. For those lucky enough to have feed on hand, the fact the restocker cattle are now more in line with historical premiums to the EYCI means they are reasonable buying.
The lamb price bounce continued this week despite a bit of a lift in yardings. The direct to works supply appears to have weakened, with plenty of competition back at the saleyards. All this despite the stronger Aussie dollar which is not doing great things for our export competitiveness.
