Tag: Commodity

Knife-edge market

Posted on by Caitlin Dearden

The midyear fall that has been a striking pattern in recent years has reoccurred during 2019. The middle of the year is always full of little surprises which can drive the market strongly but quite often the bearish fundamentals come back to bite.

The Chicago wheat futures market has fallen rapidly from recent highs in early June. The current December contract is now only 20¢ off the contract lows. This is concerning for farmers, however, the rise did provide growers with good opportunities to hedge at healthy levels.

There is a strong correlation between wheat and corn futures (see here), which means that when corn falls – wheat will follow. The market rallied due to excess water concerns and the reduced ability to plant the US corn crop.

The USDA, however, has released report after report showing that planting and yields were strong. A sentiment which surprised many industry participants. Crop tours of the major corn belt regions have shown results which are variable but better than expected overall. This, in connection with benign weather which will help crop development, has led to a further bearish undertone.

Locally, the ASX contract has seen falls, with the harvest contract declining to A$327. The contract has stayed stubbornly strong despite falls in overseas levels, which has meant that basis has risen strongly. The east coast Australian crop is still on a very, very sharp knife-edge. The forthcoming critical growing period needs to provide rain for the regions that still have potential.

The trading range for ASX over the past six months has been extremely wide, with a low of A$296 to a high of A$359.50. These are levels which have provided attractive opportunities for both producers and consumers.

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Next week?:
The trade participants will be digesting the insights from the US crop tours. If the weather across the corn belt continues to be conducive to the growth of the corn crop, I wouldn’t be surprised to see pricing fall to May-contract lows.

Locally in Australia, it is a very tense time where all eyes continue to be on rain radars!

Weekly Wool Forwards for week ending 23rd August 2019

Posted on by Caitlin Dearden

It seems no coincidence that when the auction market began freefalling, no forwards were traded. This week, interest in forwards has begun to pique again, albeit centralized around the most popular MPGs.

In 19 Micron wool, four trades were deal this week. For September, one trade agreed at 1,680¢. For October, one trade agreed at 1,665¢ while for November one trade agreed at 1,680¢. One trade was dealt for February of next year and agreed at 1,750¢.

In 20 Micron wool, one trade was dealt and agreed at 1,645¢ for October.

In 21 Micron wool, five trades were dealt, four of these in September agreeing between 1,660¢ and 1,680¢. One trade was dealt for November and agreed at 1,650¢.

As with the auction market, sentiment seems mixed, but there does seem to be some confidence in slightly lower prices in the short term, with some hope for a rally heading into 2020.

Maybe now it can only go up?

Posted on by Caitlin Dearden

Dive, crash and plunge are the headlines strapped to this weeks wool market which saw the largest correction in percentage terms in the last eight years. In absolute price terms, it was the largest in the last 16 years. That being said, with the Eastern Market Indicator currently at 1,513 cents, prices are still higher than the previous two peaks.

The EMI lost 112 cents on the opening day and a further 52 cents on Thursday, for a total 163 cent drop. The Western Market Indicator (WMI) didn’t escape the deluge, giving up 162 cents across the two days of selling to close at 1,598 cents. The AUD actually lifted which sheltered some of the loss in US terms to put the EMI at 1,026 US cents.

All microns and categories felt the fall. 19.5 to 21 micron lost around 200 to 210 cents on the week in all selling centres. Merino cardings were the least scathed of all categories, dropping between 10 and 50 cents.

Since the market started to turn from its peak last year, the EMI has dropped 26%. Although the speed of this fall has been significant, we have seen larger corrections before. In 2011 the market fell 33% in just over a year, and before that, the largest correction was from 2003 to the end of 2005 where it fell 47%, but in absolute prices that was just 569 cents.

When looking at the 19.5 and 21 micron in USD terms, this downward cycle has been very similar to the fall in 2011-2012. During that period the market found a base in the second half of August after strong sell-offs.

37,379 bales were offered at Sydney, Melbourne & Fremantle. As could be expected growers weren’t happy with the falling market and passed in a huge 35.8% of the offering. According to AWEX, this was the highest pass in rate since 2003. This meant that just 23,993 bales were cleared to the trade, 5,648 fewer than last week.

The dollar value for the week was just $39.63 million, for a combined value so far this season of $203.85 billion.

No forwards contracts traded this week.

The week ahead

The uncertainty in global trade has well and truly filtered through to uncertainty in the wool game. Market dynamics become less predictable, with normal supply and price behaviour often lost in the process.

However, the speed and scale of this correction have moved the market towards levels that would be considered good value in foreign terms. This should see some support return to the market.

Next week 33,969 bales are rostered for sale in just Sydney and Melbourne. 34,705 and 37,465 bales are currently forecast for the subsequent weeks.

Data brings certainty or uncertainty?

Posted on by Caitlin Dearden

The USDA report surprised most stakeholders within the industry this week. It wasn’t a welcome surprise with prices declining across the board. In this update we take a look at the impact on pricing, and how Australian pricing is remaining strong.

This time last week there was a lot of anticipation by market participants of the forthcoming USDA reports. After false start 19/20 reports in July, the August reports were going to provide some much-needed clarity on the corn crop. It would give some certainty to how many corn acres had been abandoned. The reality was that the report had acreage and yield higher than most analyst expectations.

The result of such a bearish report on corn was as could be expected, falls in prices across the board. In A$ terms December futures retreated 5% or A$13.5/mt. This is a substantial fall and places December wheat futures back at the same level as mid may removing all the value of the June rally.

At a local level the ASX contract fell from A$342 last week to A$326, but has since rebounded to A$331 (figure 1). The basis between ASX and CBOT increased dramatically during July as CBOT declined and ASX remained stubbornly in a narrow trading range. This basis is since although conditions are reasonable (touch wood) in Vic/SA both NSW/QLD are in dire straits.

In figure 2, the basis levels between CBOT & new crop pricing around the country are displayed. As we can see all areas have increased. The biggest increase is in the Port Kembla zone which is a region unlikely to provide much to the Australian wheat balance sheet this season. This season will see continued movements from the south to the north to meet demand, this flow will likely to continue unless there is a strong sorghum crop.

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What does it mean/next week?:

The 8 day forecast shows good falls for much of the southern cropping regions. As has been the case throughout this season (and the last two) the north is missing out.

If the USDA data is correct and is maintained through future updates, it is likely that globally we will maintain a low pricing environment. In Australia however basis will remain strong on the east coast whilst local demand remains strong and supply is short.

Brown is my least favourite colour

Posted on by Caitlin Dearden

The first sneak peek at the spring rainfall outlook issued by the Bureau of Meteorology (BOM) yesterday paints a grim picture for cattle producers and you could say it’s a crappy forecast on account of all the brown patches spread across the country.

An elevated chance of a drier than average September through to November is slated for much of the country except for the western WA and Tasmania – Figure 1. Although this is the Bureau’s first glance at the spring outlook, with a more detailed picture to follow at the end of August, it is unlikely to change substantially as their accuracy for spring forecasts is usually moderate to high.

National cattle sale yard indicators responded accordingly this week to the gloomy rainfall forecast with most NLRS reported categories of cattle easing – Figure 2. Heavy steers the only group to buck the trend significantly with the national indicator climbing 4.5% to close at 318¢/kg lwt.

The national heavy steer indicator given a solid boost by NSW heavy steer which managed a 9% lift on the week to finish at 325¢/kg. Although NSW heavy steers aren’t the dearest in the country with the winter rain across much of Victoria helping support heavy steer prices there to see them top the table at 337¢/kg lwt, despite only gaining 1% on the week.

Dry conditions in the northern regions across the east coast continue to have weekly cattle yarding numbers running at elevated levels, above average and outside the upper boundary of the “normal range” for this time in the season – Figure 3.

Higher than average Queensland and NSW cattle yardings are the main drivers of the elevated east coast throughput. Over the last month Queensland sale yards have seen throughput running 34% higher than the five-year trend and NSW are 19% higher.  In contrast, Victorian cattle throughput numbers are sitting 8% below the five-year trend.

Next week

Despite the brown rainfall forecast for the three-month outlook there is some rain scheduled in the coming week for Victoria, Tasmania and the south west coastal tip of WA. Unfortunately, the rain subsides as you cross the Murray, so it won’t really be enough to get the cattle market too inspired. Expect further sideways price movements in the short term

It’s not as bad as wool

Posted on by Caitlin Dearden

The lamb market continued to decline this week, and mutton managed to maintain its strength.  Wool producers can take some solace from this, in a week when wool prices have been tanking, at least their stock are still worth very good money. 

This time last year lamb producers were cock-a-hoop, with lamb prices busting through 800¢ and heading for new highs.  With prices this week at the same level, there is much less excitement.  This is especially the case for those with Merino’s.

The fall in prices slowed this week, with the Eastern States Trade Lamb Indicator (ESTLI) losing 22¢ to hit a three month low of 834¢/kg cwt.  Figure 1 shows the ESTLI is at almost exactly the same level as last year, although the price trend is in the opposite direction.

Lamb slaughter did lift last week (figure 2), but remains close to last year’s lows.  It will be interesting to see if lambs can keep coming, the historical trend is for rising slaughter from here, but anecdotal evidence suggests it should stay around current levels.

Mutton prices eased marginally this week, they remain over 100¢ above last year’s levels on the east coast. Sheep supply is tight, although falling wool prices might see a few more come to market in the spring.  It’s still worth shearing them, with skin values not matching the wool value.

In the west lamb and mutton markets did mimic wool, falling heavily.  The WA Trade Lamb Indicator (WATLI) lost 15% and mutton lost 16% (figure 3) with improving supply seeing prices fall back to first quarter levels.

What does it mean/next week?:

We might have seen the end of lamb slaughter lower than last year, as the difference has been large since May.  From here things might track at similar levels, although the dearth of sheep should support both mutton and lamb markets.

The Bureau of Meteorology released their three month outlook yesterday, and the depressing picture remains (figure 4).  There is little promise of drought breaking rainfall in NSW, with way too much brown on the map.  The question is whether there are enough sheep out there for another supply flush to push prices lower.

Will falling wool prices be the end of the wether

Posted on by Caitlin Dearden

Wool prices are crashing, and while still historically strong, yesterday hitting one and a half and two and a half year lows for the 19 and 21MPG’s respectively. The wether flock was already falling, here we take a look at how lower wool and strong sheepmeat prices might see further declines in wether flocks.

The Australian Bureau of Statistics (ABS) flock numbers report total adult sheep numbers and the number of breeding ewes. By deducting the number of breeding ewes from total sheep we get ‘Sheep other than Ewes’. While this includes Rams, most of them are wethers.

Figure 1 shows the decline in ‘Sheep other than Ewes’, with the new low hit in June 2018 of 8.7 million head. It’s not just a function of the declining flock, with the proportion of adult sheep falling from 22% to 18% over the last five years.

Strong wool prices were threatening to see the wether flock steady or grow when seasonal conditions allowed. But the latest fall in wool prices, combined with strong sheepmeat prices, might see wether numbers continue to decline.

We have a basic gross margin per dry sheep equivalent (DSE) calculation for Merino Ewes and Wethers, and it shows the spread is growing. The assumptions are a 1 DSE wether cutting 5kgs of 19 micron wool. The ewe gross margin is more complicated, 4.5kgs of 19 micron wool, producing 0.7 lambs at 12.6kgs cwt.  The ewe averages 1.5 DSE over a year.

Figure 2 shows that the latest move in the wool market has wiped $20 per head off the gross margin for wethers since the start of the year and this time last year. The Merino Ewe gross margin per DSE is down $10 on this time last year, and very close to that of the start of the year.

Composite ewes are another alternative to Merino Wethers, and Ewes for that matter.  We can run a gross margin per DSE calculation for them too. Production assumptions are 4kgs of 32 micron wool, 1.25 lambs at 15.4kgs cwt (35kg lwt) and a DSE rating of 2.

The latest fall in wool prices and strong lamb prices has composite ewes, back at the top of the table, but only marginally, making $3 more per DSE.

What does this mean?

Despite a lower cost of production, it’s hard to see the wether flock growing with such a divide in the value of outputs. Wether gross margins per DSE are now further behind Merino and Composite Ewes than they have been at any time over the last ten years.

With strong sheepmeat prices unlikely to go away and plenty of uncertainty in wool markets, there might be more wethers headed to the market once they are shorn this year. We can expect a new low for ‘Sheep other than Ewes’ in the coming year, both in absolute numbers and as a proportion of the flock.

Key Points

  • The wether and ram flock hit a new low in June 2018, but strong wool prices might have propped the flock up.
  • Expect further declines in wether flocks, as returns are at 10 year lows in relative terms.

We’re not in Kansas anymore.

Posted on by Caitlin Dearden

Wheat is not just wheat. There are multiple varieties bred for different purposes from durum to noodle wheat. There are also multiple futures contracts which can be used based on quality and geography. In this article we will be looking at Kansas and Chicago futures.

In order to start, its worth defining the two contracts. The Kansas contract or hard red winter wheat (HRW).  The HRW wheat crop is grown in Texas, Nebraska, and Kansas. The HRW is mid protein (min 11%) and is therefore perfect for producing bread. As a winter wheat, it is planted straight after harvest (August/September) with harvest occurring during the following summer (late May/August).

In Australia most commentators refer to the Chicago contract, as it is the most heavily traded wheat contract in the world. Chicago contract is soft red winter wheat (SRW). The SRW contract is low protein, with a typical profile of 9.5%. This crop has a similar planting and harvest window to HRW and is used for pasta, animal feed and biscuits.

In recent years the basis between Chicago and Kansas has shown a 28¢/bu discount for Chicago wheat futures. This makes sense as Kansas wheat is a higher quality product, however in the past year we have seen Kansas futures moving to a strong discount to Chicago. This discount is currently 70¢/bu (figure 1).

In figure 2, the forward curve is shown for both contracts (in A$/mt). It is always important to examine the curve as it can provide a strong insight into hedging opportunities. As we can see the Kansas contract is at a strong discount to Chicago at present, however it does start to converge further down the horizon.

The question at present is whether the Chicago futures will decline to meet Kansas or whether Kansas will rise to meet Chicago.

What does it mean/next week?:

At present the separate US futures contracts both provide differing opportunities for both growers and buyers.

Grain growers: The Chicago contract offers a price of A$288 for December 2020 (harvest). As an Australian producer we would then include basis – which typically would be positive. However, the ASX Jan 2021 may offer better value than using overseas futures at present.

Grain buyers: There is an opportunity to buy Kansas for September at A$263. This would give protection from rallies in the US market through next year’s volatile period. Through buying the September contract, it would provide ample opportunity to lock in basis prior to harvest or use any hedge revenue against the prior year’s requirements.

Yardings stronger but demand holding up

Posted on by Caitlin Dearden

The yearly peak for the Eastern Young Cattle Indicator (EYCI) has drawn out more young cattle, but demand was up to the challenge. With young cattle yardings reaching a four month high, the EYCI managed to hold its strength.

It is unusual for young cattle yardings to hit a high at this time of year but the continued dry and the highest prices for the year, seem to be drawing more to the market. Figure 1 shows EYCI yardings moving just over 20,000 head which is only the second time it has breached this level in August. The last occurrence was in 2015.

The higher yardings failed to dampen prices, with the EYCI remaining at 532¢/kg cwt. Figure 1 shows the EYCI is now 70¢ above the same time last year. Although, it was August when prices bottomed out in 2018.

Southern areas continue to drive the young cattle market but it’s creeping further north. CTLX Carcaor had an average price of 594¢ this week, matching Wagga.

The lower Aussie dollar will no doubt offer some support for cattle prices. Sitting close to a 10 year low, it has pushed the 90CL export price to 710¢/kg swt. This is another four year high for the 90CL, and it looks like it has helped drag the WA Young Cattle Indicator higher.

Figure 3 shows the WYCI has made a move higher but lost some ground this week. Both the EYCI and WYCI have a long way to go to meet the export value.

Next week:

There is more winter rain coming for southern areas with this week’s cold snap. This will help to maintain tight supply and strong demand in those zones. Still no rain for the north, so the flow of cattle out of those areas is likely to continue.

Finished cattle should find support from the lower Aussie dollar and subsequent strong export values. Given the season it’s hard to see too much downside for finished cattle until well into spring. 

100¢ lower in just over a fortnight

Posted on by Caitlin Dearden

Just over two weeks ago the Eastern States Trade Lamb Indicator (ESTLI) was peaking at 951¢/kg cwt and yesterday it closed at 851¢ – how quickly sale yard sentiment can change as we approach the spring flush.

We aren’t in the depths of the spring flush yet, although Meat and Livestock Australia (MLA) reported this week of some early signs of new season lambs starting to show up in NSW. Meanwhile east coast lamb slaughter made a new seasonal low last week with under 248,000 head processed – Figure 1.

The reduced processor activity showing up at sale yard prices this week across the country with all national lamb and sheep indicators reported by MLA posting declines between 9-31¢ on a cwt basis. The National Trade Lamb Indicator (NTLI) easing by the greatest magnitude with a 3.6% drop to 842¢/kg.

The National Mutton Indicator (NMI) not far behind, reporting a 3.3% fall to rest at 559¢. The NMI feeling the impact of softer mutton price in the West, with WA Mutton off 85¢ to close at 484¢. Mutton prices on the east coast managing to remain at reasonably good historic levels between 565¢-605¢

Restocker Lambs the least impacted, only 1.1% lower to finish at 801¢/kg cwt, boosted by strong gains to Victorian Restocker Lambs which were up 48¢ on the week.

Producers responding to easing lamb prices over the last fortnight by pulling back throughput with the east coast yarding levels easing 29% from the week prior to sit fractionally below the five-year seasonal average levels for this time in the year – Figure 2.

East coast producers seemingly happy with the current mutton prices nearer to the $6 region as mutton throughput continues to trek along the upper boundary of the normal seasonal range averaging over 63,000 head per week over the last month, which is 20% above the five-year trend -Figure 3.

Next week

The magnitude of the recent fall in the ESTLI seems a bit of an over-reaction given we are yet to see any significant numbers presenting at the sale yard. Some good rain again to the southern regions this week will also help stabilise the market so I would anticipate a consolidation of prices at current levels in the short term and the chance of a small rally before we head lower again.

Although, don’t expect to see the ESTLI back near 950¢ this season as I think we have seen peak a few weeks back.