Tag: Grain

It’s been a tough month for grain producers both locally and globally, with prices falling dramatically. In this weeks update, we take a look at the December futures contract, basis and potential issues with barley into China.

The futures market has another tough week, with spot futures falling 6% since last Friday to end the month down 13%. In A$ terms wheat futures have retreated A$30/mt. The December wheat contract which coincides with our harvest has fallen to A$254 (figure 1), the lowest since early February last year.

The highest price since the contract commenced was achieved in August at A$311, this would have provided a strong base for marketing the coming crop, with basis yet to be added to your overall price. The current market structure is starting to provide improved opportunities for consumers to hedge their requirements for the coming year.

At present basis is largely unchanged since the start of the month, which has meant that most port prices have followed the futures fall by A$30. The exception seems to be in South Australia, with basis falling A$24 in Adelaide and A$19 in Port Lincoln. This has resulted in price falls across the board (figure 2), obviously exacerbated in South Australia due to substantial difference in basis.

The barley market is in a precarious situation at present, with prices falling (figure 3) due to risk concerns related to China. It is likely that the conclusion of the anti-competitive dumping investigation will be released imminently.

Through conversations with a number of industry contacts, the general consensus is that it will be negative towards Australia.  The expectations are that a deposit of 55-60% of the value of any vessel importing barley ex Australia into China. The Chinese government will review the import and then return the deposit, provided there are no issues.

At present this is merely rumors and the result could feasibly go the other way, however at present the risk in selling barley into China is high, which limits the appetite of exporters.

As a side note, it was reported that China has bought eight cargoes of barley ex Ukraine in the past week. Is this a portent of things to come, with them buying barley ahead of an announcement?

What does it mean/next week?:

The wheat market has fallen substantially in the past month, will we see short speculator start to profit take? The commitment of traders report is only just starting to get back up to date and it will be interesting to see how far short the market is.

China is going to be the big story over the next few days, not just for Australia but also the long-awaited results of discussions re US trade tariffs.

The grain market is not only steered by agricultural factors, many of the driving forces behind price movements are out with the industry. In this weeks grain comment we look at how sausages, coal and interest rates can have an impact on our industry.

In yesterday’s grain analysis “Don’t get caught in the basis bubble”, I discussed the issues around overseas values plummeting. Overnight there was a small correction, albeit remaining very close to contract lows.

In figure 1, the APW1/CBOT basis is displayed from 2016 to present. As we can see our premium over Chicago increased dramatically during the second half of last year as drought bit hard. These level smashed all prior records.

As we can see, the basis level has dropped dramatically in the post-harvest period. If we get an average harvest the basis level will converge back with new crop pricing; at a level closer to historical ranges. The basis has saved our pricing, but there is limited chance of these levels being around during harvest (unless we have a drought).

Nationals senator Barry O’Sullivan, caused uproar in China with comments related to biosecurity:

“there’s a bigger chance of us having a biosecurity breach by some bloody old Chinaman who brings in his favourite sausage down the front of his undies”

It’s clearly not a great idea to insult the countries most important trading partner. There are rumors that this comment and festering tensions could lead to barley being impacted with an anti-dumping tariff in the coming month.

It is reported that the port of Dalian has banned imports of Australian coal which could be a symptom of deteriorating trade relations. The A$ dollar was under some pressure as the market digested the information. At present Dalian only receives <2% of Australian coal exports, however coal exports remain Australia’s most valuable export, and contagion to other ports would have a dramatic negative impact on the economy.

In 2018 it was widely expected that rate rises would commence in 2019. There are now forecasts of not one but two interest rate cuts in 2019. These two cuts (predicted at 0.25%) will reduce interest rates to 1%. The current record low rate of 1.5% has been held since August 2016 (figure 2).

A reduction in interest rates will lead to a fall in the A$ which will benefit exports but will increase the cost of our import requirements. If the rates are passed on, it will provide cheap money for investment purposes.

What does it mean/next week?:

The world looks towards the northern hemisphere weather. At present conditions are good, and in places excellent.

However there is still ample time for disasters to occur.

Shocking production brings sensational prices. During the past six months grain producers have been dejected by production or elated by prices. As we move into seeding it is important to understand that Australian prices are held up by a bubble of basis. Will the bubble burst?

Australian wheat prices in all zones are at very attractive levels. It is important not to be too distracted by these prices as we move into the new growing season. Our prices in a typical year are dominated by the export market, this year domestic deficits ruled the state of play.

The most important factor to remember in marketing in grain is basis. This is not a complicated term, it is merely the difference (premium or discount) between two pricing points. In most discussions around wheat we refence basis between the physical and Chicago futures price. However, it could just as easily be the basis between our price and London feed wheat futures.

The reason I used the term bubble in this article, is that the basis levels currently experienced will only be maintained if we see major production issues in the coming season. If we receive an average to above average crop, our prices will again be weighted towards exports.

Therefore, it is extremely important to look at both local and overseas levels, especially as we move closer into the planting window.

The futures market has received a beating during the past week with spot futures back 8% since the start of the month. This equates to A$19, a considerable fall in anyone’s books (figure 1). At a seasonal point of view the market is largely following the expected trend albeit more sharply than normal (figure 2).

In figure 3, the average February price for the following December is displayed, along with the current price (green bar). At present the current average for February is highest since 2014, however with another week to go, we could see this slip further.

So why are global prices falling?

• Demand from North Africa is declining
• US wheat is uncompetitive versus other origins (Argentina & Russia)
• Initial reports are positive for the coming crop in a number of origins

What does it mean/next week?:

It’s not all doom and gloom yet, there is still a long way to go between now and harvest. However, it is vitally important to understand the risk in the market.

Currently Australian producers can extract very strong prices as a virtue of our domestic deficit on the east coast.

These premiums over international values will not be sustained if we have a reasonable crop next season. Therefore, our prices will have to reduce to meet international demand, if we see global values fall, our levels will come in line.

At present producers on the east coast are able to access the ASX Jan 2020 contract at A$335, a basis level of A$72.

Key Points

• Basis levels in Australia are at historically high levels.
• Overseas values are under pressure.
• The basis levels experienced in Australia at present will not persist unless there is a 2^nd disastrous year.

In this week’s grain market update we take a look at the new crop contracts overseas now that we’re approaching the northern hemisphere harvest.

The Chicago wheat futures show some small gains at the start of the week, however overnight lost all of the weeks gains (and then some). The contract ended the week down 2%, or A$5 (Figure 1). This was due to US wheat exports for early January being lower than expected.

As we get close to the northern hemisphere harvest, the reliance on old crop starts to diminish as exports will start from the new pile.

This can be seen in the forward curve for Matif which is currently in backwardation (Figure 2). In a market experiencing backwardation, the forward future months will be priced at a discount to the spot futures market. A market in backwardation suggests that supplies are currently short, and buyers want the commodity now as opposed to the future. In essence this encourages sellers with stocks to sell now rather than hold, as the commodity is discounted in forward contract period.

It is still early but European and North American weather looks favourable to the crop, therefore the trade expects to see better production for the coming crop. This means there is less requirement (at present) to pay large premiums.

What does it mean?:

The BOM have released their 3 month climate outlook (Mar-May) with the majority of Australian growing regions forecast to receive median rainfall. Although long range forecasts need to be taken with a pinch of salt, it is positive compared to prior predications.

The grain trade awaits the release of backlogged data from the USDA which will be broadcast this evening (8th February 2019)

The spot Chicago futures contract after posting gains in the post superbowl trading days, has been hit with an almighty hammer overnight. The future contract declined by A$6 overnight (Figure 1).

The fall in prices was due to a combination of factors (as tends to always be the case), the main ones being the expectation that XI-Trump trade talks are not as jovial as previously anticipated.

Another reason in the sharp overnight correction is due to the imminent release of backlogged data by the USDA.  The data released tonight will be the first information from the USDA since mid-December. Will this create fireworks or will it fizzle out?

The RBA have changed their tune on interest rates. In the past year the commentary was of a likely interest rate rise, however this week they are pointing towards potential interest rate falls. The impact of these statements was felt in the currency market with the AUD falling to 71¢ (Figure 2).

This is the second major crash in the AUD since the start of the year. After the last crash the market recovered shortly afterwards, the question will be – is the AUD down for the count or like Tyson Fury will it regain its legs?

A reduced local currency will help with exports. On the flipside however it will increase the cost of imported products such as fuel and fertilizer.

Due to an unexpected error, the Mecardo website has lost some functionality. We are currently working day and night to resolve the issue.

What does it mean/next week?:

The market will be chewing through the data releases from the USDA overnight, which will give the market its direction over the coming week.

Australia is a net exporter of grains, most of which will make its way out of the continent on bulk vessels. Grains are undifferentiated commodities with largely no difference between origins, therefore the cost of logistics becomes a primary driver of competitiveness. In this article we dive into the Baltic Dry Index and its impact on markets.

So what is the Baltic Dry Index (BDI)? The BDI is an index which tracks the cost of bulk shipping around the world. The index is calculated on a daily basis and covers twenty typical routes using three vessel types (Capesize, Panamax and Supramax.) This gives an indication of the trend in price movement, and provides an insight into how much it will cost to transport bulk commodities i.e. a lower BDI would indicate reduced freight costs.

This is important for Australian producers as we typically export the majority of our grain and oilseed production. A low freight rate therefore reduces the benefit of geographical advantage.

The BDI has a secondary function. It is considered by many to be a leading economic indicator. The cargoes typically transported by bulk vessels are commodities requiring further processing (iron ore, coal, grains etc) to create a product. This gives a potential indication of future economic growth, as the demand for raw commodities such as iron ore will increase as economies grow.

So why are we talking about it? The BDI has submerged (pardon the pun) in recent weeks. In figure 1, the daily change in the BDI is displayed since the start of December. The last positive move was on the 8^th of January. This has resulted in a 50.5% fall in the index since the start of January.

It is not however wholly unexpected to see a fall in the BDI, as seasonal trends do tend to show a dip in the first two months of the year (figure 2). The index currently sits at 634, which is a low level albeit within the range which has been experienced during this decade.

So why has it fallen? There are several theories as to why the BDI has capsized, and a combination of all are likely to have had an impact:

• The Vale dam collapse in Brazil which has led to the loss of 134 lives has resulted in up to forty million tonnes of iron ore being removed from the market, as Vale decommissions similar facilities.
• The Chinese economy looks to be taking a turn for the worse with the Caixin manufacturing purchasing managers index falling below expectations signaling a deterioration in the manufacturing sector.
• Seasonal slow down ahead of the Chinese lunar new year.
• Continued overcapacity of bulk vessels and mismatches of vessel sizes.

What does it mean/next week?:

If the sharp decline in the BDI endures, this does not bode well for global economies – especially China. The Australian economy is heavily reliant upon China as a trading partner, and any fall in their buying power will have an impact on many of our commodities and food products.

The fall in the index along with poor economic data emerging in China may spur a quick resolution by the Chinese delegation in the Trump tariff talks.

The fall in the BDI does not mean that grain prices will fall, however it does mean that traditional trade flows become less important as shipping costs fall.

Key Points

• The BDI is an indicator of the cost of bulk shipping rates, but also holds a secondary function as a primary economic indicator.
• The BDI has keeled over, sinking to the depths of 634 from 1282 at the start of January.
• The sudden fall could point towards a coming slowdown in the global economy.

In this update I take a look at the most recent BOM three month climate outlook. What does it mean for the 2019/20 crop? In other news there could be some excitement on the market as the USDA start releasing data after a >1 month hiatus, and the Chinese-US negotiations comes to a head.

The bureau of meteorology has released its three month climate outlook. It doesn’t look good for Queensland and the West. After a fantastic year where WA produced a 17.5mmt crop, pre season rainfall has a limited chance of exceeding the median. This will put a dampener on expectations for the coming season. However, I have a few thoughts when it comes to this projection:

1. Weather projections can be highly volatile, and this may not be realized.

2. Although subsoil moisture prior to planting is very welcome, it doesn’t make the crop.

There are a range of factors that will determine the development of the 2019/20 crop, however on the 1^st of February it is far to early to judge the end result. It is always best to ‘plan for the worst, hope for the best’.

The futures market lost ground this week with spot futures back A$5 (figure 1). The market has remained subdued whilst awaiting fresh data releases by the USDA. I covered the lack of volatility and volume in late last week (see here) and on the reaction to USDA releases (see here). The release of new data after such a long hiatus could lead to increased levels of volatility, if there are any major surprises that private forecasters had not expected.

The big news to watch over the next week will be whether Trump and Xi can reach a middle ground to reduce the tensions between the two giants of trade. There looks to be some thawing of the relationship as China has agreed to purchase 5mmt of Soybeans. If you have been paying attention to my updates over the past year that soybeans have been at the centre of the trade tariffs which have resulted in US soybeans falling (and Brazilian sources rising).

As the two nations commenced negotiations the market has been quietly confident of a amicable solution being found. This has seen the market start to gain ground (figure 2), as the market opens with news of a 5mmt will we see a sharp upward trajectory?

What does it mean/next week?:
We could be in for a wild ride over the next week as the market reacts to the release of USDA data and US-China trade negotiations.

The markets have been quite quiet in recent days. In this weeks comment we are looking overseas at bearish wheat planting numbers, and the impact of heat on electricity demand.

In lieu of data from the USDA, private forecasts become more important. Farm Futures in the US have conducted a survey of producers in order to gain an insight into planting expectations. It is anticipated that corn will rise by 1.3% year on year. There will however be major downward revisions to tariff impacted soybeans and sorghum with a substantial 5.5% and 12.1% reduction.

Wheat continues to lose popularity in the US, with planting levels for all wheat (spring, winter & durum) are at 46.6 million acres. This is the second lowest level in the past century (figure 1), the lowest being two years ago in 2017. Although technology has meant that yields are drastically improved from the past, this does place the US in a poor position if the weather turns poor in the growing season.

Yesterday South Australia sweltered through record temperatures, and Victoria is going to be hit with hot temperatures (and some strong winds in places). As temperatures increase demand (figure 2) on power infrastructure increases due to the number of people (myself included) sitting in air-conditioned rooms.

The weather is also starting to impact heavily upon the sorghum crop. The beneficial rainfall in December in NNSW and QLD has been followed up with dry weather, which has diminished the potential of the summer sorghum crop.

It’s important to be aware of the risk of heat stress in these hot days, so ensure that you remain fully hydrated – and slip, slap, slop.

What does it mean/next week?:

The reduction in acreage in the US starts to point toward a market balancing further and further towards a bullish sentiment. It will only take a production issue in North America or the black sea region to see a strong upward movement.