Tag: Commodity

Local futures down

Posted on by Caitlin Dearden

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.

Strong supply meets rampant demand

Posted on by Caitlin Dearden

Cattle supply has shown no signs of slowing in recent weeks, with slaughter still running hot, but prices continued to rise.  As outlined earlier in the week, supply is outstripping demand at the moment, forcing counter-seasonal price rises.

Cattle slaughter has been steadily rising over the last month, and last week hit a four month high (figure 1).  It was no surprise to see NSW driving slaughter, recording its second highest week since 2015.

Despite the stronger slaughter, the market keeps on rising.   Even the Eastern Young Cattle Indicator (EYCI) has been rising, without any real rain.  Processors might move into the young cattle space to get beef to supply export markets.  Yesterday the EYCI moved to 517¢/kg cwt, the highest level since August.

The headline cattle indicator this week was the Medium Cow, which on the east coast made a 3 year high of 251¢/kg lwt.  A very tidy 23.5% increase on the same time last year.

It was export beef prices driving cattle prices again this week.  A further 21¢ rise in the 90CL took it to 840¢/kg cwt.  It’s not just lean trim which has found some strength.  The 75CL price has gained 28% on the same time last year.  In the coming week, we’ll see if we can find some prices for higher value beef cuts.

In the West young cattle are priced better, with the WYCI at 547¢/kg cwt, but cows are well behind at 197¢/kg lwt.  Supply is usually good at this time of year, but when it tightens cow values in the west should at least match those in the east.

Next week.

There is no rain on the short term forecast, and a largely dry outlook for the summer (figure 3), so further price rises are dependent on processor and feeder demand.  This week’s processor margin article showed there is still some room for cattle prices to move higher, but while supply continues to flow upside will be limited.

Wool preparation categories

Posted on by Caitlin Dearden

It has been a decade since the Sheep’s Back to Mill was updated. The Sheep’s Back to Mill publication is a record of the cost of harvesting, testing selling and shipping greasy wool in Australia to overseas mills. One of the components of this publication is the proportion of the wool clip which passes through rehandles/bulk class facilities. This article takes a look at wool preparation in the clip, which in turn determines how much wool passes through rehandling facilities.

The latest Sheep’s Back to Mill (for 2009-2010) is available here. Traditionally this publication develops the cost of rehandle (‘bulk class’) by using the AWTA fee applied to the proportion of the clip sold in this manner. This method underestimates the cost of putting wool through a rehandle.

There is often a mismatch between the grower being paid out on rehandle wool and when the rehandle wool (which is aggregated with like wool from other growers) is sold. For this reason and the extra work involved, the broker will make a margin on the rehandle wool. It is a grey area that is not transparent and rehandles are profit centres in the broking business, so the less wool put through rehandles the better for growers. The counter-argument is that farmers can end up with parcels of wool (bags and butts) which are not large enough to make up a sale lot. Such small lots are legitimately aggregated into sale lots in good rehandles.

At Australian auction sales, wool is offered with an IWTO approved test certificate which shows the wool preparation standard for the lot (commonly known as the ‘cert type’). Table 1 shows the proportion of wool sold (clean basis) at auction during the past eight seasons by ‘cert type’. P certificate wool is a classed grower lot that meets the AWEX Code of Practice (COP) standard while the D certificate is a grower lot that does not meet the AWEX COP. I stands for Interlot wool. The Q and B suffix denote wool which has gone through a rehandle. Q certificate wool meets the AWEX Code of Practice while B certificate wool does not. Table 1 shows that between 10% and 11% of the Australian clip sold at auction passes through rehandles.

Figure 1 provides a breakup of wool sold at auction in 2018-19 by breed on a clean basis. Merino (and superfine) accounted for 78% of wool sold while crossbred accounted for 21%. Downs, carpet and other categories (such as runs with) accounted for 1% of the sales volume.

Table 2 breaks each breed up by wool preparation category. Some 7.6% of Merino wool (nearly 8 bales in one hundred) was processed through rehandles, with 17% of crossbred wool handled through rehandles. Note also the low level of P wool preparation standard for crossbred (45%) which reflects the decline in the standard of crossbred wool preparation in recent years.

What does this mean?

Some eight bales in one hundred of the Merino clip are processed by rehandles, which as an average seems high. Rehandles are not a charity – they have a cost. Marketing begins on the farm with judicious packaging of wool for sale, which meets the AWEX Code of Practice, not in Paris or Milan.

Important news from Ukraine and China

Posted on by Caitlin Dearden

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 19th 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.

Sheep prices defy volumes

Posted on by Caitlin Dearden

Mixed signals for the lamb market this week as the spring flush appears underway in South Australia, but Victorian volumes still sheepish. Speaking of sheep, mutton prices are holding up resolutely in the face of elevated volumes at the saleyard and at processors.

East coast lamb prices reported by Meat and Livestock NLRS shows a 12¢ lift for the Restocker Lamb indicator to see it close at 820¢/kg cwt, underpinned by a big lift in SA Restocker prices which posted a 75¢ gain to 952¢. East coast Trade and Heavy lambs easing 15¢, with softer moves reported in Victoria and NSW for these two categories, to see them finish at 744¢ and 739¢ respectively.

Lamb prices in SA holding up reasonably well across categories this week with Heavy and Merino Lamb the only types to register a negative, and a small one at that, down 1¢ and 2¢. A good result for SA lamb producers considering the recent trend in yarding numbers show that they are amid their spring flush – Figure 1.

The wet week in Victoria seemingly taking some of the steam out of lamb yarding numbers there though, with weekly sale yard volumes easing back toward 50,000 head recently. Lower Victorian lamb numbers pushing the broader east coast lamb yarding levels to 175,000 head, 18% under the seasonal average for this time in the year.

East coast sheep yardings have softened during early November but they are coming off very high historic levels so they remain above the upper end of the normal seasonal range that could be expected for this time in the year and 30% over the five-year average trend– Figure 2.

East coast sheep slaughter remaining at elevated levels too at the top end of their normal seasonal range and running 16% over the five-year seasonal trend – Figure 3. Despite the high sheep supply east coast mutton prices are holding firm, posting a 9¢ lift to close yesterday at 590¢/kg cwt.

Next week

Limited rain is on the horizon in the coming week, even for Victoria which has been quite blessed in the lead up to summer. Late November/early December usually sees a significant lift in lamb volumes at the saleyard as the spring flush hits full throttle so there is likely some further pressure to be applied to lamb prices in the short term.

East and West straighten up

Posted on by Caitlin Dearden

Fremantle’s market sat at the top of the table for many individual MPG’s last week with a strong final day of sale. However, the glory was short-lived with the momentum carrying into the new week and Eastern market prices quickly moving higher. With prices wavering on the second day of sale, AWEX reported all three selling centres moved back into alignment.

The Eastern Market Indicator (EMI) gained 19 cents over the week to close at 1,574 cents. Currency markets took another hit. The AU$ dropped 0.6 cents to US $0.679, falling below the $0.68 threshold that it’s been hovering over for the last month. This meant the EMI in US$ hardly felt the rising market, with just a 2 cent increase on the week to 1,070 cents.

In Western Australia, the market had a solid jump on day one, with Fremantle MPG’s rising 25 to 39 cents. The softer market on day two saw the Western Market Indicator (WMI) 15 cents higher on the week to close at 1677 cents.

Growers were clearly happy to sell into the rising market. The pass-in rate dropped down to 7% for the week. The national offering of 36,110 bales was a small lift to last week’s volumes. The larger move was the bales sold, at 33,584 this was 5,472 bales higher than last weeks total. This season’s supply continues to lag well behind 2018 at a difference of 103,787 bales. The average weekly bales volume is currently 6,105 behind last year.

The dollar value for the week was $59.83 million, with the average bale value sitting at $1,781. The combined value so far this season is $786.73 million.

The crossbred sector saw mixed interest but kept within a +/-10 cent range from last weeks’ levels. The skirtings market followed the lead of Merino fleece closely, rising one day and falling the next.

The week ahead

Reports from brokers suggest volumes in store are starting to stock up with growers content with passing in their wool if prices don’t meet their mark. Many might be holding hope that the market will experience its usual kick in the New Year. Of course, this movement is far from guaranteed and caution needs to be taken. If this approach is widespread, the extra supply might take the shine off New Year’s prices.

A stronger offering is scheduled for next week’s sales with 40,726 bales currently on the roster across the three selling centres.

Think before locking in physical sales

Posted on by Caitlin Dearden

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.

Mutton still finding support

Posted on by Caitlin Dearden

There was no real impact from the rain this week in sheep and lamb markets, with a cautious approach seemingly being taken. There was also the issue of the three month outlook and continued strong supplies.

Figure 1 shows sheep supplies in saleyards have been running well ahead of last year’s levels, and the five year average. Sheep yardings are rarely above 100,000 head but it hasn’t really dampened the price at all.

The National Mutton Indicator (NMI) managed a small lift this week, despite the strong supplies.  Figure 2 shows the NMI is a touch under 550¢, largely being propped up by Victoria where mutton is making 594¢/kg cwt.

Lamb markets were also steady on the east coast, as the spring flush of lambs stalled. NSW remains at a solid premium to other east coast markets, at 777¢ vs 735¢/kg cwt in Victoria and SA.  On the west coast, lambs are a long way behind the east coast.

Figure 3 puts the Western Trade Lamb Indicator (WATLI) at 632¢/kg cwt as lamb supplies continue to flow. The WATLI is, however, at a historically strong price for this time of year, and has plenty of upside.

Restocker lamb prices continued to fall this week, with the rain having little impact on the expected trend. As we draw closer to summer, declining feed reserves will continue to put pressure on restocker values. That is, of course, if rainfall doesn’t see feed reserves improve in a hurry.

Next Week.

The three month rainfall outlook isn’t great for most areas, and given the length of the drought, no one is ready to jump in just yet. Lamb supplies should continue to edge higher, but sheep supplies could easily contract, whether it rains or not. There might be a little further downside for lambs, but it looks like support for sheep is here to stay, and that should put a floor under lamb values.

May I have some more please?

Posted on by Caitlin Dearden

Isn’t it great to see rain falling to parts of NSW and Queensland that have been missing out for some time? Certainly, cattle markets have responded kindly, but we really need to see more rainfall to get the confidence of restockers to re-engage with the market in a meaningful way.

Figure 1 shows the distribution of rain over the last week across the country with falls up to 100 mm noted for parts of western NSW. East coast cattle markets are benefiting from the wet, with younger store cattle and breeding stock posting price gains.

Meat and Livestock Australia are reporting weekly price lifts for east coast feeder steers, up 2% to 296¢ and east coast yearling steers gaining 1.5% to finish at 283¢. Stronger price movements were noted for east coast medium cow with a 3% increase to 242¢/kg cwt.

The benchmark Eastern Young Cattle Indicator (EYCI) mirrored the positive tone with a 2% rally on the week to close at 521.75¢/kg cwt. The EYCI has been climbing steadily, having risen over 11% since late September. The last three seasons we have seen the EYCI climb through spring, so it is not an uncommon scenario, but the recent rain is helping to underpin young cattle prices – Figure 2. The EYCI is currently sitting just 3¢ above where it was this time last season.

An additional factor underpinning cattle prices more broadly across Australia has been the ongoing surge in demand for beef coming out of China. The October release of trade data from the Department of Agriculture shows average monthly beef flows from Australia to China are running 122% above the five-year average trend. This is due to Chinese consumers needing to attempt to fill some of the void created by the crisis impacting their pork sector presently.

Indeed, China is closing in on Japan as Australia’s top beef export destination with current market share proportions showing China at 22.9% compared to Japan’s 24% – Figure 3. Remarkable, considering China finished the 2018 season at 14.5% of the market share of Australian beef exports and was sitting at just 10.8% in 2017.

Next week

Unfortunately, the forecast for next week shows the rain absent from much of mainland Australia, with falls between 25-50mm limited to eastern Victoria and coastal sections of western Victoria.

Several more weeks of rain like what we have experienced this week is required in NSW and Queensland before we can confidently expect restockers to get active. However, the Bureau of Meteorology three-month outlook released yesterday signals a low chance of any significant follow up rain during November for NSW and Queensland.

This lack of follow up rain is sending me “around the Twist” and suggests further cattle price gains will be limited for young cattle, but offshore demand should keep finished cattle prices buoyed.

Sellers unimpressed

Posted on by Caitlin Dearden

As reported last week, sellers have been prepared to step out of the market when demand is weak, and this week the high pass-in rate told the story of the wool market performance.

There is no doubt that demand is not great right now, however, if the supply was not lightened by the high pass-in rates in the weeks where the market retreat, we could well be seeing bigger falls and greater fluctuation. It is hard to quantify the effect this grower response is having, but it must be supportive for the market.

This week the Eastern Market Indicator (EMI) lost 39 cents (after rising 77 cents over the last 2 weeks), to close at 1555 cents. The Au$ fell over 0.5 cents to US $0.686, causing the EMI in US$ to also fall 36 cents to 1,068 cents. The WMI also fell, albeit with a stronger finish in Fremantle (with a gain of 10 cents on Thursday), however for the week the loss was 25 cents for a WMI close of 1662 cents.

As the three-week run of improving markets came to an end, so too did the single-digit pass-in rates, – sellers again deciding to hold wool back on a falling market. This week the PI rate was 17.5% nationally. As a side note, almost 25% of Merino Fleece wool nationally was passed in on Thursday; in the West almost 26% of the offering was passed.

Sydney seemed to struggle to find a footing all week, with a specialty fine wool sale unable to inspire, although buyers selectively bid on wool with good measurements. Melbourne and Fremantle reported a positive tone towards the end of selling on Thursday, no doubt supported by firm grower reserves limiting sales.

There was a slightly smaller offering of 34,084 bales, just over 4,000 bales fewer compared to last week’s volumes. The high pass-in rate meant that there was also a big drop in in the number of bales sold, over 6,000 fewer compared to last week at 28,112 bales. The supply shortfall continues, with 105,884 fewer bales sold compared to the same period last year. This equates to an average weekly gap of 6,617 bales since July.

The dollar value for the week was $48.84 million, with a bale average value of $1,737, down $87 per bale on last week. The combined value so far this season is $726.90 million.

AWEX reported that the Crossbred and Cardings sections were not spared and gave up significant ground, however, a mild recovery in the Cardings in Fremantle was in line with the generally positive close to the week.

The week ahead

Next week an increased offering is listed, with 38,500 bales across the three centres.

We have been taking the lead for the upcoming week based on the closing sentiment in Fremantle, so we have a cautiously positive outlook for next week.