Tag: Grain

In our analysis last Thursday, the three main components of pricing were briefly discussed. One of the important factors is the basis. In this analysis, I look at whether basis is the most important factor and whether we are disconnected from overseas markets.

The basis level is largely driven by domestic factors. When we have a large crop the basis level drops, conversely a small crop leads to higher basis levels. It is important to be monitoring basis levels as they provide an indicator of when it is best to sell.

During this drought, we have seen basis level rise to extraordinary levels, with the highest levels clearly being in the areas where the supply was diminished, and demand remained strong (figure 1). At points during the drought basis levels in Port Kembla achieved +A$215 over spot futures.

This has made many believe both producers and consumers that there is no need to consider the overseas price. This is not the case, in order to protect from adverse price risk, the futures market needs to continue to be considered.

In figure 2 basis is displayed as a percentage of the overall price. At the height of the drought pricing basis levels approached on average 40% on the east coast, however, they have since declined. In recent times, for instance, Geelong, Adelaide, and Kwinana have reverted close to their long term averages.

At present, the overwhelming majority of the price is comprised of the futures pricing component, which can be easily hedged on long horizons.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

Basis is an important factor when pricing grain. As a producer, when the basis is high it is better to sell basis and maintain exposure to futures.

As a country that typically exports wheat, overseas futures are the biggest driver of prices in Australia. Although drought can cause large swings in pricing at a local level, it is important to still consider overseas futures in your marketing strategy.

This week’s grain market update includes a look at ‘cheap’ offers of fertilizer in Australia & the slowness of the Victorian harvest.

Recently I wrote an analysis article on the performance of the global fertilizer market (read here) and had a follow-up podcast with Chris Lawson of CRU (listen here). In these reports, we discussed the fact that Urea had fallen A$64/mt since September (figure 1) and DAP was down a massive A$196/mt since the start of the year (figure 2).

There is a lack of transparency in the fertilizer market. There is no open and publicly available pricing for fertilizer in the same way that we see for grain, wool and livestock prices. This means that largely pricing intelligence on local fertilizer tends to be anecdotal in nature.

Nonetheless, we have received reports from several readers who have informed us of offers that are substantially below recent years levels. As an example, there are offers of A$530/mt for MAP in VIC & SA. These same readers informed me that they paid >A$700 this time last year for supplies.

There are questions remaining about whether it is time to purchase, or whether there will be more cheaper parcels on the way due to the lower overseas prices. Whether it drops further or not, this year is likely to have a lower fertilizer cost than last.

On the grain front, the ASX contract has risen this week by A$7/mt to hit an average of A$345 for the week. This remains at a substantial discount to last year’s strong drought premiums at A$428 for the same week (figure 3). For producers looking forward to next year, there have been attractive trades for January 2021 at around A$340.

Harvest remains slow in Victoria due to uncooperative weather, however, is likely to move ahead with gusto in the next fortnight. There are many consumers who have been ‘hand to mouth’ buyers during November and December. There were many hoping for an early harvest that hasn’t transpired resulting in continued strong premiums for old crop grain.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?

The big question remaining on everyone’s lips is what comes of the Victorian harvest. The ABARES report earlier this week confirmed that Victoria is the jewel of the nation this year.

Will there be harvest pressure in the coming weeks?

American markets have closed for the Thanksgiving holiday. Whilst they relax eating pumpkin pie and turkey the rest of the world carries on. In this week’s comment, we take a look at barley pricing.

The barley market has been under immense pressure over the past year. The past six months have seen a strong decline in pricing however the past fortnight has seen prices largely stabilise.

Since June barley pricing has declined by the following levels:
• Adelaide -19%
• Geelong -24%
• Kwinana -14%
The premium for wheat has increased dramatically since August, when (in Geelong) the premium started the month at A$10/mt. The premium has since increased to A$52/mt (figure 2), which is closer to long term average premiums.
The change in pricing levels has made barley far more attractive for feeding. During the past season, many consumers opted to reduce barley and utilize a higher level of wheat in feed rations. The consumers are now switching back to barley at these levels, however, will be keeping a close eye on changes to the spread.
The ASX wheat contract received some attention this week, with 53kmt trading on the exchange. The market has averaged A$338.25/mt for the week, which is up A$1 from last week. From a seasonal perspective, the harvest contract is down A$89/mt from the same week last year.

What does it mean next week?
As we move into December, we will see harvest moving further south into Victoria. Yesterday, I visited some crops in the Western Districts and they looked very good. As the wheat goes into the bins we may see some harvest pressure due to the heavily unsold positions by producers.

This year sees the opening of the T-Ports facility on the Eyre Peninsula. This facility brings additional export capacity and with that the potential for extra competition. In this update, we examine the historical spreads between Adelaide and Port Lincoln.

In recent days there has been commentary that the spread between Port Lincoln and Adelaide had narrowed as a result of the introduction of the T-Ports facility. We thought it was worthwhile to examine the historical spreads between the two-port zones.

The T-Ports facility is based at Lucky Bay and utilizes a different loading method from any other grain export port in Australia. Up until now, grain in Australia was loaded onto vessels in Australia direct from a berth, T-Ports will use a transshipment vessel.

The transshipment vessel ‘Lucky Eyre’ will load grain at Lucky Bay, which will then sail to deep water vessels to transfer the grain onboard. This is a relatively common way of loading vessels in regions where vessel drafts are an issue.

In figure 1, the historical prices for APW1 are shown for Adelaide and Port Lincoln. Typically, Adelaide and Port Lincoln have traded at similar levels for much of the past decade. There have, however, been periods when Adelaide has traded at a strong premium, especially during the past 18 months.

This spread is clearly displayed in figure 2. This chart represents the premium or discount between Port Lincoln and Adelaide. Last year saw the discount at its largest level versus the rest of the decade. However, recent months have seen the spread narrow.

There is some speculation that this narrowing of the spread is due to the extra competition encouraging buyers. However, at present, it is hard to confirm whether competition is the cause.

We do know, however, that last year Adelaide was pricing into the eastern state domestic homes, rather than the export market. As the market has come off the boil, Adelaide pricing has fallen dramatically. It is more than likely that the larger discount at Port Lincoln last year was a result of the cost of logistics to the domestic market.

What does it mean?

The T-Ports facility is a fantastic addition to the Australian grain export market. This model is one that can be rolled out in further regions, at a potentially lower cost than traditional berth-based discharging.

Grain growers on the Eyre Peninsula now have additional options for delivering their grain, which will in many areas reduce their freight costs.

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.

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 19^th 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.