Tag: Opportunities

The sound of rain can be heard on roofs throughout the east coast. This will be welcome to some and a hindrance to others. In this update we take a look at futures for next year, and the last two days deluge.

It is always important to look towards the horizon when creating a strategy for grain marketing. This is especially true this year, as producers in Australia are all likely to receive a historically high price due to the local drought conditions. There isn’t much strategy really required in a year like this.

We don’t however know what the outcome will be for next year, will we have a big or small crop? Therefore, it is important to start considering forward sales.  Since the start of the month the December 2019 CBOT wheat contract has increased by 4%, from A$275/mt to A$287/mt (Figure 1). As we move forward into the northern hemisphere risk market, opportunities may present themselves.

Locally the east coast of Australia has received a deluge of rainfall with reports of over 200mm in 24 hours. Technically that will leave many with above average rainfall for the season. Unfortunately, it didn’t arrive at the right time for many.

The rainfall will cause more delays to harvesting, and likely downgrading to quality in Victoria. On a positive note, it will provide some subsoil moisture for next season and place a floor in sorghum production.

The delay in harvest may provide a lift in prices between now and Christmas for prompt delivery, as consumers attempt to gain access to feed.

What does it mean/next week?

There is a meeting in Russia next week to discuss the wheat export pace. The inevitable rumors of an export ban are back to the fore.

It is unlikely that an export ban will be put in place, a more likely result would be some form of curbs. However either action would result in a move back to US exports becoming competitive.

Those who are lucky enough to be still harvesting are receiving an early Christmas present in the form of a reduced fuel bill. Diesel is one of the biggest costs on farm, so it’s worthwhile looking at this downward move.

In mid-September, I covered fuel in the sarcastically titled ‘The great fuel robbery of 2018’. During this time fuel prices in Australia had risen dramatically to the highest since 2014. This led to calls to boycott the fuel companies. My view, in this case, was that boycotting the fuel companies was an ineffective action as the price of fuel is based on factors largely out with the fuel stations control. It is a function of commodity pricing.

In early October crude oil futures reached a four-year peak (Figure 1). The market has fallen dramatically since then. Diesel is a derivative of crude oil therefore when crude falls, in theory so should diesel (and vice versa).

To show this, I examined the weekly change in price between crude oil and diesel over the past six months. In figure 2 the movement in price (as a %) is displayed, clearly showing a strong relationship. This chart uses a lag of one week, which signifies that there is a delay between the value in crude moving and diesel prices.

The correlation between the two commodities is displayed below, with 1 being a perfect correlation and 0 being no correlation.

• 0 lag : 0.33
• 1 week lag :78
• 2 week lag :66
• 3 week lag :41

The result of this downward movement in crude has been that diesel prices in Australia have started to reflect the fall (Figure 3). This means that any purchases at present should be considerably cheaper than pre-harvest which will be welcome to all.

What does it mean/next week?:

November was the weakest month for crude oil futures during the past decade. This is due to supply outstripping demand, with US stockpiles at record highs in recent months.

Prices are likely to stay weak until we see either an improvement in global economic growth or production curbs enacted by OPEC.

Key Points

• Diesel is a derivative of crude oil.
• There is a strong correlation for a 1 week lag in changes in crude oil being reflected in diesel prices in Australia.
• In November, crude oil had its worst month in ten years.

This weekend Russia and Ukraine edged closer to war. Many may recall the short conflict between Russian and Ukraine in 2014 which provided a short rally in pricing. In this analysis, we look at what the impact could be if this conflict was to escalate.

On Sunday a Russian naval vessel opened fire on three Ukrainian vessels, detaining them and causing injury to six sailors. The incident occurred in the Kerch Strait, which is a contested area between the Azov and Black sea (see map).

There is an agreement that both countries will have entry through this strait to access their respective ports on the Azov sea. However, in the past year, there have been concerns from both sides regarding inspections of vessels which have slowed down trade in this area.

In early 2014, Russian back separatists fought against Ukrainian forces which resulted in Crimea being annexed by Russia (see map). This has led to a tense environment with fighting continuing albeit largely forgotten about by the rest of the world, despite estimates of 10,000 being lost in the conflict in recent years.

During the initial period of the 2014 conflict, risk premiums emerged within the agricultural markets. However, when it was realized that supply chains would be largely unaffected the market fell back.

The main ports on the Ukrainian side of the Azov sea are Mariupol and Berdyansk. These ports are mainly used for the export of steel and grain. The drafts at these ports limit the volume which can be exported. The quarterly exports from both ports are shown in Figure 1, with annual exports at 1.1mmt.

It is important to note that that majority of Ukrainian exports are loaded on the black sea, which is not likely to be disrupted by the current tensions. On average the Azov ports load around 8% of Ukrainian wheat exports (Figure 2).

The risk is limited at present, whilst the tension is restricted to the Crimea and the Kerch Strait. However, if there is an escalation of hostilities, the disruption could spread to the black sea ports. It is important to remember how vital Russia and Ukraine are to global wheat exports. In this season it is expected that Russia and Ukraine combined will contribute 30% of the global export task (Figure 3).

What does it mean/next week?:

An escalation to a full-blown conflict is highly unlikely at present and not in the best interests of either country. However, all eyes will be on Putin and Poroshenko in the coming days and weeks.

The international community have expressed concerns with the Russian behaviour, however, it is unknown how much pressure the west can really exert.

In the event of major disruption to the black sea grain trade, there is likely be very strong premiums enter the market, especially considering the reducing global exportable surplus.

Key Points

• Russian naval vessels attacked and detained three Ukrainian vessels in the Kerch Strait.
• The ports likely to be impacted at in the Azov sea; Mariupol and Berdyansk.
• These ports load on average 8% of Ukrainian wheat exports.