Weekly Commentary Archives | Grain Brokers Australia

Recent insolvencies highlight the benefits of credit insurance …

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16th April, 2019

Farmers in Australia operate in a highly variable environment, and agriculture is considered the most volatile sector in the Australian economy. In fact, the volatility of the agricultural industry is nearly double that of any other industry in the country. With variability and volatility comes risk.

Unfortunately, in life, there is rarely a reward without taking a degree of risk. In farming, risk is an essential part of generating income. Managing risk is about making business decisions that exchange some level of tolerable risk for some degree of acceptable return. Decisions can be made to decrease risk, but that can often result in lower revenues.

To effectively manage risk in their business, grain producers need to understand both the downside and the upside of taking certain risks. In other words, they need to appreciate the potential harm, or cost, of taking a risk and the opportunities that taking that risk can offer.

Weather is commonly regarded as the foremost risk faced by Australia grain farmers. However, the list is long and includes, but is not limited to, production risk, price risk, geographical risk, political risk and credit risk. Diversification in crop type, enterprise mix and property location are three common strategies used to manage income volatility due to production, price and geographical risks.

The need for management of credit risk has been highlighted in recent months with the failure of two grain trading companies on the east coast of Australia in the first quarter of 2019. In each case, market participants are owed many millions of dollars, and grain growers are amongst the creditors.

It is estimated that the grain production sector in Australia has lost more than $50 million in recent years due to the insolvencies of a range of traders across the country. While this is small compared to the gross value of grain production over the same period, it has had an enormous impact on many individual farm businesses who have been forced to write off large sums of money due to the defaults.

Unfortunately, the incidence of insolvencies in the grains industry tends to increase following droughts due to higher grain values and increased price volatility. They also have a habit of occurring in multiples as trading companies are exposed to each other in trade strings and there can be a domino effect when one becomes insolvent and unable to pay their debts.

When a company is declared insolvent, there will be secured and unsecured creditors. A secured creditor is someone who has a security interest such as a mortgage or a charge, over some, or all, of the company’s assets, to secure a debt owed by the company.

Unsecured creditors rank lower in priority than secured creditors as they have no ‘security’ over company assets. In most cases, growers exposed to insolvency will appear on the list of unsecured creditors. Unsecured creditors are at the bottom of the pecking order when it comes to distribution of funds in the liquidation process.

In many instances, growers increase their credit risk by chasing the extra dollar. It is quite understandable that sellers want to maximise their return, but sometimes that extra dollar is just not worth the risk of default. For example, payment default on a 40 metric tonne (MT) b-double of grain at $300 equates to $12,000.

Say the seller’s total grain production is 6,000MT, that equates to $2/MT across total farm production. And that is only one load of grain. Quite often the exposure is multiple loads as contracts are often for many hundreds of tonnes.

So how should grain growers manage credit risk? Selling grain to multiple counterparties will help to spread the risk. Selling grain to the ‘big end of town’ is also likely to reduce risk. However, the best way for growers to mitigate counterparty risk in the Australian grain industry is to take out credit insurance when selling grain.

Credit insurance basically protects growers against insolvency and non-payment by the buyer. It provides the seller with peace of mind with regards to counterparty risk.

In most instances, such credit insurance policies guarantee the seller 90 per cent of the value of the grain being sold. That is an enormous reduction in financial risk exposure for a grain producer, especially when margins are continually being squeezed by increasing costs.

If we continue with the example above, the credit exposure on the b-double load of grain falls to just $1,200, or $0.20/MT across total farm production if credit insurance is in place. An extremely small price to pay for the certainty of receiving payment for 90 per cent of the value of the sale.

The most convenient and cost effective way for growers to access credit insurance is via their grain broker. For growers that don’t use a grain broker, or use one that doesn’t offer the insurance option, then now is the time to seek out a grain broker that does offer the credit insurance option.

In time, such insurance could well become a requirement of farm finance providers to manage their risk and exposure to the Australian agricultural sector. It could even have a cost of money benefit for the borrower.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs

Saudi appears for one last hurrah – updated

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Saudi appears for one last hurrah…
After an absence from the market of more than four months, Saudi Arabia’s state grain buyer (SAGO) finally announced a tender to purchase 720,000 metric tonnes (MT) of feed barley for arrival in May and June 2019. There are seeking offers for delivery of 12 panamax cargoes (60,000 MT) over the two month period.
Saudi Arabia is the world’s largest importer of barley, and they have been absent from the market since early November 2018. The reduced global demand has depressed feed barley prices as global trading houses sought alternative homes for exportable surpluses sitting in the European Union (EU), the Black Sea region, Australia and Argentina.
No doubt this market correction was part of the SAGO strategy as Saudi Arabian consumers utilised above average winter pastures and tapped into state reserves to satisfy domestic demand in the interim.
There has also been a shift in the demand profile for feed barley in Saudi Arabia with purchases of finished feed increasing at the expense of feed barley. These rations provide a more nutritional and balanced diet for the Bedouin livestock. This trend also accounts for the increase in corn imports into the kingdom in recent years.
This will most likely be SAGO’s final feed barley tender of the 2018/19 marketing year which concludes at the end of June. This means it will be the last opportunity for exporters to move substantial quantities of barley before new crop Black Sea exports start rolling in late June or early July.
In the end, SAGO booked 730,000MT for May and June arrival at an average price of US$211.86/MT cost and freight (C&F). The origins offered were Argentina, Australia, the United States (US), the EU and the Black Sea region with the successful seller having the option to choose the origin of the barley that they ultimately deliver.
The final tender price was almost US$55 less than what SAGO paid in their last tender. Argentinian export values have been quoted as low as US$185 free on board (FOB) in the last week and that looks like the most likely origin, particularly for the May and early June deliveries. Both the EU and Australia would be too expensive based on recent FOB values.
The SAGO feed barley tenders have a generous delivery grace period. Basically, successful sellers have the option of taking an arrival date penalty of 1 per cent of the price for each week their vessel is delayed. The cumulative maximum penalty is 6 per cent which effectively means the maximum allowable delay under the contract terms is 6 weeks.
The Black Sea crop has been maturing without any issues and warmer than average weather in early March has favoured early maturity of winter crops. With new crop Black Sea quoted at around US$185 FOB, and the freight advantage over Argentina, barley from that region appears to be well in contention for the June arrivals as delivery could be as late as first half July and still be within contract terms.
The big news out of the US last week was the record flooding in the western Corn Belt, including Iowa and Nebraska which are two of the top three corn producers. This early flooding was caused by rapid snowmelt combined with heavy spring rain and late season snowfall in areas where soil moisture is high.
Some major rivers, particularly the Missouri River, have smashed previous flood records by as much as four feet. What’s more, many of the nation’s well-engineered levees have failed to contain the unprecedented floodwaters. In some areas, ice jams in the river system are exacerbating the flooding.
The flooding is causing all sorts of issues with logistics and grain handling infrastructure throughout the Midwest. Many roads and rail lines have been washed out in Iowa, Nebraska and several neighbouring states. The catastrophe has also destroyed grain being held in storage around the region. Some Midwest growers have been hoping to ride out the US-China trade war by holding their corn and soybeans on-farm in silo bags and on pads, and a significant proportion of those stocks have reportedly been destroyed.
The flooding is fuelling market concerns about late planting and reduced acreage, and there doesn’t appear to be any respite from the rain in the near future. The US National Oceanic and Atmospheric Administration have forecast the flooding to persist in the region through to the end of May.
Should this come to fruition it would leave little time to plant a corn crop within the ideal seeding window. In many regions, it is already being compared to the 2013 and 2015 season when 3.6 million acres and 2.4 million acres respectively were enrolled in the very generous prevent planting program.
Prevent plant crop insurance is purchased by US farmers, and subsidised by the federal government, to protect the potential income from acreage that cannot be planted because of flood, drought, or other natural disasters. On average, the federal government subsidises 62 per cent of the farmer premium.
Prevented planting is a failure to plant an insured crop with the proper equipment by the final planting date designated in the insurance policy, or during the late planting period, if applicable. Final planting dates and late planting periods vary by crop and by area. They are set each season by the Risk Management Agency which is part of the United States Department of Agriculture (USDA).
It is still early days, and modern machinery and planting technology enable grain growers to plant their crop quickly and efficiently when small windows present. Whilst the situation certainly requires scrutiny, it is far too early to write down the corn crop, or write up soybean plantings, at this stage of the season.
Corn plantings in the US are forecast at 92 million acres according to the latest USDA estimate. This is a year-on-year increase of 2.9 million acres but still 5.3 million acres lower than the record of 97.3 million acres set in 2012. The USDA has forecast 2019/20 corn ending stocks at 1.75 billion bushels (44.5MMT) and a stocks-to-use ratio of 11.7 per cent.
The ending stocks number is predicated on a resolution to Don’s Party (the US-China trade war) and a significant lift in corn sales in the last quarter of the marketing year. That said, if ending stocks do get down to that number it would mean the tightest US corn balance sheet since the 2013/14 season.
You can always count on a good weather event somewhere at this time of the year to keep the market on its toes!

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Strap in for the Annual Volatility Rollercoaster

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Strap in for the annual volatility rollercoaster…
After an extremely dry summer, grain growers in Queensland and parts of northern New South Wales, received some very welcome rainfall over the weekend. This was the first significant rain event for 2019 and hopefully signals a change to the abnormally dry weather pattern experienced over the summer.
Many of the regions summer crops have already been harvested or are so close to harvest that the rain will not provide any meaningful benefit. However, there are significant areas of sorghum and cotton that were sown after storms just prior to Christmas and those crops will undoubtedly be feeling much happier after receiving their first drink since being planted.
March temperatures have been well above average across most of the summer cropping region, and the late crops were certainly feeling the pinch. Many growers were looking at spraying out their crops because yield prospects were poor, and they were looking to conserve what moisture was still there for a possible winter crop program.
Whilst the falls were nowhere near enough to guarantee a plant, they will definitely provide a massive boost to winter crop prospects in the districts fortunate enough to be under the storms. No doubt there will be some early crops planted, but the main planting window is still at least 4 weeks away, and much more rain will be required to ensure all of the intended winter crop area is sown into moisture.
Despite the top up in Queensland and northern New South Wales over the weekend, soil moisture levels across almost all of Australia’s grain growing districts remain below average, or well below average for this time of the year. There are many districts where soil moisture levels are at or close to the lowest on record.
This will make it extremely difficult to achieve anything more than average production in Australia this season unless there is a significant move to a wetter than average bias for the remainder of the year.
The latest climate outlook from the Bureau of Meteorology suggests that the tropical Pacific is likely to warm to El Niño levels during the Australian autumn. The key here will be if that pattern continues into the winter as its drying influence, particularly over eastern Australia, is stronger in winter than in autumn.
Prospects are obviously much better on the other side of the Pacific where wheat plantings in Argentina are forecast to rise for the fourth consecutive season. Forecasters are suggesting that the area planted to wheat could reach 6.9 million hectares this season, a rise of almost 10 per cent from the 6.3 million hectares sown in the 2018/19 season.
Argentina produced a record 19.5 million metric tonnes (MMT) of wheat last season and have been a significant exporter into some of Australia’s traditional Asian customers in the last six months. However, Australian exporters have been finding some Asian love in recent weeks with a number of sales reported, including to traditional destinations such as the Philippines, Indonesia and South Korea.
United States (US) wheat export sales continue to disappoint the market and time is quickly running out to make sizeable sales before new crop Black Sea stocks will be available at a significant discount to old crop. Much of the hope and expectation has been around China and their requirements once an agreement is signed to end the trade war. Alas, no deal has been signed as yet.
On the other hand, French wheat exports have picked up significantly in the last month. French farming agency FranceAgriMer has increased forecast for French soft wheat exports outside the European Union in the current marketing year from 8.85MMT to 9.5mmt. It said that there was also the potential for more upgrades as competitively priced French wheat draws late-season demand from importers.
The huge South American summer crop harvest continues without too much interruption. The official Brazilian agency Conab has reduced their summer corn crop forecast slightly to 26.2MMT, but the Safrinha (second) corn crop has been increased to 66.6MMT. That makes the total corn crop 92.8MMT, up from 91.6MMT last month and up 15 per cent on the 80.7MMT produced last year.
Conab’s soybean production estimate has been reduced to 113.5MMT, down from 115.3MMT in February. Last year’s soybean crop was 119.3MMT, so year-on-year production is now down 5.8MMT, or almost 5 per cent. The Brazilians will have to wait another year to steal the mantle as the largest global producer of soybeans from the US
In Argentina, the Rosario Grain Exchange is calling the Argentine corn crop 47.3MMT. This is an increase of 800,000 tonnes compared to their last estimate. The big mover was soybeans where the Rosario Grain Exchange called the crop 54MMT, up a whopping 2MMT from their previous estimate in February.
The South American summer crop is the final piece of the 2018/19 crop year puzzle. While final production is not locked in just yet, global markets are becoming increasingly comfortable with the levels of production and the harvest prospects.
The focus is now turning to the 2019/20 crop. The northern hemisphere winter crop is the first cab off the rank, and it is entering a very critical phase of development. It is now spring and depending on location the crop has emerged, or it is emerging from dormancy, and it is very susceptible to weather damage. Any sudden change in the weather pattern that exposes the crop to an extreme cold spell can damage or even kill off the plant.
The other big swinger at this time of the year is the summer crop planting intentions, particularly in the US. A little bit of cold and rainy weather and very quickly there will be talk that farmers won’t be able to plant corn, and there will be a swing to soybeans. The reality is the US farmer has consistently shown that they have no problem seeding corn in tight windows.
The new crop uncertainty is ultimately reflected in global futures markets. As a result, they tend to be quite volatile at this time of the year. Last week was a classic example with the recent downtrend in wheat broken with a couple of big rallies. That volatility will most likely continue as there is a lot of northern hemisphere weather risk in the coming months. This could provide some juicy new crop pricing opportunities here in Australia once the rain arrives and production certainty increases.
Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Strong demand continues in the midst of production uncertainty…

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12th March, 2019
Strong demand continues in the midst of production uncertainty…
The Australian cattle market has been in retreat in recent weeks as the continued dry on the east coast forces cattle producers to sell down their herd. There is little or no pasture across most of New South Wales and southern Queensland, water supplies are drying up on many farms, and the cost of supplementary feeding is exceptionally high.
Traditional livestock selling centres such as Dubbo, Wagga Wagga, Casino and Tamworth in New South Wales and Dalby, Roma and Emerald in Queensland have all seen a substantial increase in yardings over the past few weeks. Some of these cattle will go direct to slaughter, but those that are suitable will make their way into the feedlot sector.
Meanwhile, the number of cattle on feed in Australia fell modestly in the final quarter of 2018, according to the latest Australian Lot Feeders Association (ALFA) and Meat and Livestock Australia (MLA) quarterly feedlot survey. The numbers, released last week, revealed that 2018 closed with just over 1.11 million head in feedlots across the country, a fall of just 1.4 per cent from the previous quarter’s record.
The result means that 2018 is the first year in history where there have been over one million head of cattle in the Australian feedlot system for the entire year. The unrelenting drought in the eastern states has been a significant contributing factor, with primary producers forced to offload their stock earlier than usual and in higher numbers.
The overwhelming sentiment is that feedlot numbers will remain strong in the first quarter of 2019. Export demand for Australian beef, particularly from China, remains strong, and the falling Aussie dollar has been assisting the cause. February shipments of Australian beef increased 11 per cent compared to the same month last year.
The state of Queensland dominates the Australian feedlot sector with just over 631 thousand head, or 56.7 per cent of the total number of cattle on feed. New South Wales has the second biggest herd, with around 326 thousand head, or 29.5 per cent of the total. Collectively, these two eastern states make up 86.2 per cent of cattle on feed in the country.
It is this dominance and concentration of demand that has been the overriding driver of feed grain movements from west to east over the last fifteen months. Poor grain production in northern New South Wales and Queensland for the previous two winters and three summers (including this summer) has led to a huge deficit.
If you add demand from the pig and poultry sectors, and from the specialised milling wheat and malting barley consumers, total wheat and barley movements into the ports of Brisbane, Newcastle and Port Kembla will most likely exceed 4 million metric tonnes (MMT) by the end of the third quarter in 2019.
On the international front, yet another month has passed, and yet another World Agricultural Supply and Demand Estimates (WASDE) report has been released by the United States Department of Agriculture (USDA). On the whole, it was quite benign, and futures markets reacted accordingly.
World wheat production for the 2018/19 marketing year is forecast to fall by 1.7MMT to 733MMT compared to the February estimate. Kazakhstan was the big mover with production down 1MMT, Argentina was down 0.3MMT, and Australia was up 0.3MMT to 17.3MMT.
Global wheat demand has been lowered by 5.1MMT to 742MMT compared to last month. The big mover here was India where demand was reduced by 3MMT, but their ending stocks were increased by 3MMT. The USDA have to balance the books somehow! US ending stocks were up 1.2MMT which is more than 1MMT below last year’s carry out, and the US wheat plantings are the lowest in more than a hundred years.
World barley production was increased by a meagre 0.1MMT compared to the February forecast. However, Australian production was increased by 1MMT to 8.3MMT and is now broadly in line with trade consensus in Australia. Global demand was decreased by 0.4MMT, but within that number was a decrease in China by 0.5MMT and an increase in Australia of, you guessed it, 1MMT.
Speaking of barley, there was a significant turnaround in market sentiment last week with old crop grower bids firming in both South Australia (up around $10) and Western Australia (up around $20). The renewed interest came from the big end of town, so it is most likely export driven.
Market rumours suggest that there may have been a delay to the imposition of Chinese import restrictions stemming from the current anti-dumping investigation. The Australian government and exporters have been expecting a decision for the last two weeks.
China has reportedly realised that they will need more Australian barley, particularly malting barley, before new crop Black Sea stocks become available in July. Sources suggest that Beijing may have deferred a decision until May. Maybe just a rumour or maybe it has some substance. Only time, and the Chinese, will tell.
In the meantime, grain consumers in northern New South Wales and southern Queensland are getting increasingly concerned about the continued dry and its impact on winter crop production in their back yard. New crop stocks would generally be available to the consumer when harvest ramps up early in the fourth quarter of the year.
However, several big end users are believed to have taken some risk off the table by locking away a proportion of their wheat and barley requirements through to the end of the year, and even into the first half of 2020. Soil moisture levels across the entire region are well below average for this time of the year and the wet season is winding down, so the chances of an above average crop are very low, and the chances of a below average crop are quite high at the moment.
The carry-in stocks will be zero, and any production will be keenly sought so it would seem quite prudent to take some cover at this juncture. If it is the highest price that these consumers pay for their 2019/20 requirements, then happy days!
Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Over the thirsty paddocks…

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Grain Brokers Australia Weekly Market Report
5th March, 2019
Over the thirsty paddocks…

On Thursday of last week, the Bureau of Meteorology (BOM) provided an insight into the weather experienced across the country in the previous three months and released their latest three-month outlook. It has certainly been a summer of extremes with heatwaves, dust storms and bushfires experienced across much of the continent, particularly the eastern states, and then, for parts of northwestern Queensland, unprecedented floods in February.
The temperature summary for the December to February period revealed that Australia endured its hottest ever summer, breaking the previous record set in 2012/13. The mean summer temperature was at least 2ºC above the 27.5ºC benchmark that the BOM considers normal, based on the 30 years from 1961 to 1990.
Early last month the BOM confirmed that January was the hottest month ever recorded in Australia. The mean temperature across the country of 30.8ºC was 2.9ºC above the 1961 to 1990 average. Maximum and minimum temperature records were broken across the country, and the Queensland town of Cloncurry endured 43 days in a row in excess of 40ºC.
In terms of rainfall, a massive part of southern and central Queensland and northern New South Wales experienced their lowest registrations on record. Those districts that didn’t post a record were very much below average. The shrinking Australia sorghum crop is undoubtedly a reflection of these statistics.
Whilst the rest of the Australian winter crop belt traditionally has a winter dominant rainfall pattern, some summer rainfall is quite normal. That has not been the case for the South Australia grain grower this summer where the entire state, save for a small pocket in the lower south-east, recorded below average or very much below average rainfall. The story in Western Australia was much the same.
The hot, dry trend is set to continue for much of the continent according to the BOM’s latest three-month outlook. All districts east of a line from Darwin to Port Lincoln on South Australia’s Eyre Peninsula are expected to have a drier than average autumn (March to May). The Western Australian grain belt is likely to receive average rainfall for the same period.
The BOM suggests that warmer than average autumn days and nights are very likely for almost all of the Australian landmass. They also predict that there is more than an 80 per cent chance of being warmer than the median for both days and nights for most of the country.
Time is running out fast for the winter cropping regions of Queensland and northern New South Wales. These regions have a summer dominant rainfall pattern, and grain growers in these regions rely on the summer wet season to replenish the soil moisture profile ahead of the traditional winter drought. This moisture is critical for the winter crop ahead.
Most districts have now had three consecutive summers where rainfall registrations have been significantly below average. Rainfall, in the two winters sandwiched in between those summers, has also been well below average.
The amount of rain required to fill the soil profile varies depending on the success, or otherwise, of last season’s cropping program. A considerable part of the region in question failed to plant a crop last winter. Some of these areas may only require 100mm of rainfall to join up with the moisture which may be as close as 30 centimetres from the soil surface.
Those who planted a crop, and it managed to struggle into the spring, and even to harvest, will require much more rain as the subsoil moisture level will be much lower down the profile, and therefore more precipitation will be required to join up with the existing deep soil moisture.
The required summer rains could still come, albeit a little late. It has happened many times in the past. Nonetheless, the further we go into autumn the lower the chance. The soils are parched, and there is little or no ground cover, so the first rains need to be slow and steady. However, with unseasonable and extreme weather events now the norm, the biggest fear is that the long dry spell will finish with a big wet.
It is far too early to make a call on the impact of the dry summer on New South Wales and Queensland winter crop production forecasts. Australian farmers are a resilient bunch, none more so than the north western New South Wales grower, many of whom have only had one crop in the last five years. If sufficient rain arrives, the crop will be planted.
Meanwhile, domestic wheat and barley values continued the recent downward trend last week. This appears to have been led by falling United States futures values and trade longs here in Australia desperately looking for export homes. New crop Black Sea harvest is fast approaching.
Open demand ahead of their harvest is diminishing, and the market inverse will make it extremely difficult for Australia to compete in the third quarter of the year without a lot of financial pain. Asian millers have reportedly turned to Argentina for wheat, and there still hasn’t been a Saudi Arabian feed barley tender since November last year.
Western Australian ASW wheat bids fell around $15 across the week, and the northern feed market mirrored that move, down $15 and trading at just under a spread of $100. Feed barley bids in the west fell by about $11 week-on-week. The delivered Darling Downs price closed the week down $15 and is trading at a spread of $106 over the west.
On the other hand, delivered Darling Downs sorghum values were relatively unchanged. The discount to feed barley is now into $20, and the wheat spread closed the week at $50. Again, the diminishing spreads are a reflection of lower sorghum production as a result of the parched summer. However, the resultant increase in demand for Western Australian grain will only absorb a small portion of the long positions currently sitting in the hands of the domestic trade.
Call Grain Brokers Australia on 1300 946 544 to discuss your grain marketing needs.

Will the deal be Don or will pigs fly?

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Will the deal be Don or will pigs fly?

No matter what news source you read, watch or listen to at the moment, China seems to be dominating the daily news cycle, particularly in the rural commodity sphere.

All the talk in agriculture circles late last week was around progress in the China-United States (US) trade deal. Last week’s negotiations went so well that they have been extended across the weekend and work has reportedly commenced on a draft memorandum of understanding (MoU) that will finally put an end to Don’s Party (China-US trade war).

The US and China have been desperate to finalise a deal before March 1, when additional US tariffs are scheduled to be introduced. US President Donald Trump announced on Monday of this week that “As a result of these very productive talks, I will be delaying the US increase in tariffs now scheduled for March 1”. He went on to say that “assuming both sides make additional progress, we will be planning a summit for President Xi and myself to conclude an agreement”.

China is reportedly proposing to buy an “additional” US$30 billion worth of US agricultural produce per year. These purchases would be on top of pre-trade war levels and would continue for the period covered by the MoU. The major bulk export commodities such as soybeans, corn and wheat would be included.

To put this in perspective, in 2017 Chinese agricultural imports totalled US$125 billion. Imports of US farm products in the same year were more than US$24 billion, or 19 per cent of the total. Bulk commodities made up almost US$15 billion, with soybeans accounting for just under US$12.5 billion. Wheat, corn and sorghum made up most of the balance. In 2018, the value of US farm produce exports to China fell by a third, to US$16 billion, as a result of the trade conflict.

Using last Friday’s futures close, the current value of projected US ending stocks for soybeans, corn and wheat were US$8 billion, US$6 billion and US$5 billion respectively. In other words, China could buy the sum total of US ending stocks for these three commodities and still have US$11 billion left over to splurge on other US agricultural produce such as meat, cotton, dried distiller’s grains (DDGs), ethanol, seafood and sorghum.

The MoU under discussion is also believed to cover areas such as intellectual property, non-tariff barriers, technology transfer, telecommunications and services. However, the verification and enforcement mechanisms remain unclear. If past actions are any indication of future behaviour, I have no doubt that President Trump would be threatening to reimpose tariffs if the conditions of the MoU are not met.

The potential impact of such a deal on the US farm sector and US agricultural markets could be huge, as long as the agreement also includes measures to stabilise currency values. US negotiators have been seeking China’s agreement to decrease manipulation of the value of the yuan to gain a trade advantage.

If China does agree to purchase an additional US$30 billion of US agricultural products each year, this is much more than the year-on-year increase in demand. There will almost certainly be collateral damage as a result, most likely the Chinese farmer and other agricultural commodity trading partners, Australia key amongst them.

Early last week the Chinese government outlined its latest rural policy. At its heart are three primary goals: improving rural incomes, improving rural living standards and supporting domestic agricultural production. But agricultural production systems in China are relatively inefficient, primarily due to scale and the tyranny of distance.

In a scenario familiar to many farmers across the globe, Chinese farm incomes have been under threat from rising input costs, rising labour costs, rising freight costs, large inventories and competition for cheaper imports.

The rural policy outlined plans to increase soybean production while stabilising wheat and corn production. In other words, they are aiming to increase total farm productivity. If imports of US soybeans increase in conjunction with rising domestic production, then imports from other global trade partners such as Brazil and Argentina will have to decrease. Ironically, Brazil has been one of the biggest beneficiaries of the recent trade war.

China has long been a traditional market for Australian cereal grains such as barley, wheat and sorghum. While not in the same volumes as soybeans, any decrease in demand for Australian agricultural produce from mainland China will undoubtedly have an impact on competition for Australian exports, and potentially on farm gate returns.

The ongoing barley anti-dumping investigation by China is a complicating factor. Australian barley exporters are waiting in trepidation of a Chinese government ruling that may close the gate on Australia’s biggest barley market. Rumours were circulating late last week that an announcement would be made sometime this week and that it would be quite prohibitive.

Market sources suggest that any trade restriction will take the form of a deposit paid to Chinese authorities to allow the cargoes to enter the country. This deposit will be returned to the remitter if the governmental investigations do not implement prosecutions against Australian barley exporters. A comparable deposit scheme on US sorghum imports last year effectively closed the door to US sellers and foreshadowed an official tariff.

There are a number of Australian barley cargoes currently discharging at Chinese ports, more shipments on the water and the export stem still has barley vessels yet to load with China as the nominated destination. I suspect that the respective exporters will be having a few sleepless nights ahead of the announcement, whenever it may be.

Peter McMeekin is a consultant to Grain Brokers Australia. Call 1300 946 544 to discuss your grain marketing needs.

Barley Market Strategy Update

Barley the Big Winner

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From the Grain Industry Association of WA:

BARLEY was the big winner in Western Australia’s grain harvest with an increased production of just over 5.1 million tonnes, up 35.1 per cent on 2017.

In releasing its final crop report for the 2018 harvest last Friday, the Grain Industry Association of Western Australia (GIWA) said WA’s final grain yield for the 2018 season was 17.9mt.

This includes the 16.4mt delivered through the CBH network plus on-farm seed and feed requirements and grain traded outside of CBH.

GIWA confirmed that it was WA’s second biggest harvest ever and the most valuable at just under $7 billion.

The end result is somewhat a surprise for the State.

Earlier predictions of 14mt following the dry spring and several severe frost events were eclipsed by a nearly 4mt turnaround over most parts of WA, due to the late soft finish and mild temperatures during grain fill prior to harvest.

Total tonnage for the Kwinana port zone was up 2.2mt from 2017 and Geraldton port zone was 2mt up from 2017.

The Esperance and Albany port zones were both down from 2017 with a decrease of 0.5mt for Esperance port zone and 0.2mt for the Albany port zones, reflecting the poor growing season in the western and northern areas of the Esperance port zone and the east Albany port zone.

According to the GIWA report, the standout crop in 2018 was barley with an average grain yield of 3.19 tonnes per hectare, well above recent averages.

“The percentage of barley making Malt grades was up by nearly 10pc on historical averages, with a record total tonnage produced of just over 5mt,” it said.

Wheat production was an interesting one to come out of the breakdown with only 54pc of the crop area in WA planted to wheat in 2018, which was the lowest on record.

Despite the low plantings, it was also only the fourth time WA has produced 10mt or more of wheat, with three of those years in the past seven years, including a trend over that time of declining area.

Grain weight was high in most regions of WA, a function of the soft slow finish to the season.

Screenings were generally low except for some very high yielding barley varieties such as Planet when grown on the eastern fringes of the medium rainfall regions.

GIWA said in the southern regions of the State there were reasonable tonnages of Malt grade barley downgraded to feed from germ end stain due to rain and humidity during grainfill and prior to harvest.

Wheat grain protein was lower than in recent years, influenced mainly by the dilution from higher than expected yields.

A noticeable recent trend is that wheat grain protein is more likely to hold up on ameliorated soils where crops are more able to use the available soil moisture “bucket”.

This gives growers more confidence in fertilising for maximum potential.

About 40pc of all barley deliveries made Malt grade which is about 10pc more than normal.

The percentage of Malt grade deliveries were nearly 50pc in the Albany port zone, although this was biased by a greater percentage of feed barley production acquired privately in the zone than other regions of the State.

The late start impacted the amount of canola planted, with programs revised and barley went in to replace canola as the break to the season was delayed.

This meant the canola production of 1.45mt was down 23.7pc from what was produced in the previous year.

Canola oil quality was down slightly from recent years and generally lower than expected by growers considering the soft cool finish to the season.

Most oil percentages were in the mid 40s rather than the high 40s.

Canola grain yields were very erratic in 2018 with no single factor influencing the final result and this may have contributed to average oil percentages being lower than recent years.

Lupin area continues to climb on the back of the more determinate rather than indeterminate growth habit types recently released.

GIWA said “new varieties have more suitable adaptation in the southern areas and whilst producing less growth, are very good yielders for grain”.

The only downside is the prevalence of more split seed in the harvest sample, which appears somewhat to be due to variety, and possibly to higher yields requiring more manganese.

Milling oat demand continues to increase and WA’s reputation for producing a premium product was again enhanced with most milling grade oats delivered or privately acquired of very high grain quality.

Field peas continue to be grown in small quantities in the State’s southern regions.

Many crops were hit by frost and produced low grain yields, although in the absence of frost, grain yields were good.

The smaller areas of lentil, faba bean and chickpea are growing, although GIWA said they were still too small to report on.

In terms of the grain pricing, AgFarm WA regional manager Reid Seaby said the market was pretty lacklustre at the moment.

“The market has been very quiet of late,” Mr Seaby said.

“I think given where cash prices were over the harvest period, most guys would be relatively well sold at this point in time.

“WA pricing has eased slightly and new crop prices have fallen away.

“Wheat supplies globally are starting to run out, which might see export demand shift to Australian and US supplies.

“The government shut down in the US has limited USDA reporting recently, but we should start to get a little more clarity on global trends in the next couple of weeks.

“ASW should be well supported, driven by demand to the Philippines and obviously there is still demand coming from the east coast, so the lower grades will be supported by those two factors I would imagine.

“WA is still competitive globally in terms of barley, but there is no resolution to the China situation in sight, so that is hurting export demand.”

Looking forward Mr Seaby said growers were still assessing programs and waiting for an indication of how the season may play out.

“In terms of forward selling, you look at new crop values compared to old crop and growers were getting $400 a tonne for ANW, if you forward sell at $300 it doesn’t seem that attractive right now,” he said.

“But if you look at historical values, $300/t was the magical figure that everyone tries to start their marketing campaign at, with $400 fresh in their minds, however, $300 looks a little bit soft at the moment.

“I would say consultants would be advising growers to take the emotion out of it and focus on their budget and if $300 works for their figures then the advice may be to start there.”

Desperately Seeking Saudi

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Desperately seeking Saudi…

Global barley values have been in decline for much of this year as the lack of demand from key importers continues to weigh heavily on international markets. This is despite the latest World Agricultural Supply and Demand Estimates (WASDE) having demand outstripping supply in the 2018/19 marketing year (July 2018 to June 2019).

Droughts in Australia and parts of the European Union in 2018 underpinned global values early last year. World supplies were forecast to drop to a 35 year low. However, it appears that the higher prices last year led to a decrease in demand as consumers turned to cheaper alternatives such as corn.

The downturn in demand is being reflected by the absence of both Saudi Arabia and China in recent months. The Saudi Arabian Grain Organisation (SAGO) has purchased 5.4 million metric tonnes (MMT) since the marketing year began. This is approximately 17 per cent higher than at the same time last year.

But SAGO has not issued a barley import tender since early November 2018, when it booked just over 1MMT for January and February delivery. Most of the barley imported into Saudi Arabia goes to domestic farmers to feed their sheep, goats and camels. Pasture has reportedly been abundant over the winter as a result of above average rainfall, and this is forecast to continue for at least another two months.

The washup here is that Saudi Arabian demand could fall by up to 800,000 metric tonnes (MT) to around 7.7MMT in the current marketing year. This would lead to a reduction in SAGO imports, possibly to as low as 7.5MMT. This is a decrease of 500,000MT compared to the 2017/18 trade year.

This is also a full 1MMT lower than the latest official USDA forecast of 8.5MMT, released in the WASDE report earlier this month. If Saudi Arabian imports do end up at 7.5MMT this season, this will naturally decrease world demand, add to global ending stocks and take a little bit of pressure off the very tight barley stocks to use ratio of 12.6 per cent.

According to trade sources, barley prices in the EU have fallen by more than US$20 in the last five weeks. Long holders, particularly of French barley, have reportedly folded to market pressure and liquidated their positions in the last few weeks, pushing prices dramatically lower. French feed barley closed last week offered at US$203 free on board (FOB). German and Baltic offers are holding up a little better, closing last week at a US$10 premium to French values.

Black Sea exporters appear to be out of the old crop game at the moment, being quoted at US$230FOB. But the new crop is a different story. Conditions across Europe and the Black Sea region have been quite favourable for the maturing barley crop. As a result, new crop Black Sea values are sub-US$ 200FOB and exports will be available in July. As the availability of new crop stock gets closer, this inverse will have serious implications for old crop demand and global values.

The other major barley supply and demand change in the February WASDE report was a decrease in Chinese demand of 1MMT. This was the major contributor to the forecast increase in global ending stocks of almost 500,000MT. Small increases were also made to Argentinian and Saudi Arabian ending stocks and the EU number was decreased slightly.

Australia is traditionally the leading supplier of feed and malting barley into China. However, the current anti-dumping investigation by China has had a dramatic impact on forward demand, and the Australian barley market is starting to feel the pinch.

Exporters have been frantically executing most of the China business that was on their books when the anti-dumping action was announced back in late November, and a significant proportion of barley currently on the export stem for the last half of February and for March is believed to be destined for China. It is demand beyond that point that is the issue.

Both the trade and the government have submitted the required paperwork and delegations have met with Chinese officials in recent weeks. It is basically a waiting game at the moment, with an interim measure announcement expected from the Chinese in the next few weeks.

Domestic corn is currently filling much of the demand void in China but there is an expectation within the trade that they will need to buy some Australian barley before the new crop Black Sea is available. Only time will tell.

Australian barley production from the last harvest ended up at around 8.5MMT. This was much bigger than expected leading into harvest, with Western Australian production surpassing 5MMT for the first time ever. While not a record year, the South Australian barley harvest also pleased to the upside compared to preharvest expectations.

Both the South Australian and Western Australian grower has sold around 90 per cent of their barley production and, as a consequence, the long now sits with the domestic trade. With China out of the market and uncertainty around Saudi Arabian intentions, exporters are anxious to exit their positions ahead of the new crop inverse.

This has placed significant downward pressure on domestic prices and has flowed onto export values which have decreased to around US$220FOB Western Australian ports. At this level, Australia is well placed to pick up Saudi Arabian demand when they eventually tender.

This decrease is also being reflected on the east coast. Late last week feed barley was trading at around $380 delivered Darling Downs, a fall of about $20 this month. Wheat values delivered Darling Downs have also decreased over the same period but not to the same degree. As a result, feed barley is now trading at about a $55 discount to wheat.

The sorghum crop is getting smaller by the day and the market closed last week at $360 delivered Darling Downs. This is only $20 under feed barley. At these spreads, the feed barley inclusion rate in stockfeed rations will be maximised at the expense of wheat and sorghum. This, in turn, will mean increased domestic demand for Western Australian feed barley, but it will certainly not be enough to soak up the bigger than expected exportable surplus.

The global barley market is on the back foot due to the ongoing absence of Saudi Arabia. With China not buying, Saudi Arabia is the only other volume home for Australia’s exportable surplus. The sharp fall in global prices bought Tunisia to the table last week. If it doesn’t draw out a SAGO tender in the next few weeks, the Aussie trade will get increasingly anxious and will be forced to have a serious look at overall Saudi Arabian demand for the last quarter of the current marketing year.

Peter McMeekin is a consultant to Grain Brokers Australia. Call 1300 946 544 to discuss your grain marketing needs.

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