Market Analysis/Strategy

Transcription

1 Strategy Guidance 1. We advise active marketers in all port zones to sell up to 30% of Minimum Crop Estimate (MCE represents your absolute worst case). 2. To increase your net sold position up to 30%, forward contracts are one option, otherwise the 2018/19 Strategic Program is open on a case by case basis. Aside from usual benefits, the main benefits of contracting into the strategic pool versus selling a multigrade contract are: a. Selling a flexible delivery contract enables us to arbitrage our position and leaves upcountry premiums available. Eg up country site premiums may emerge at harvest. b. By having grain committed, it allows the MC team to re-establish the position if/when basis weakens. 3. The domestic market and port spreads have done some heavy lifting to price in the current situation, and upside potential is reliant largely on strength in the offshore market. 4. Over and above this forward sale level, consider put options to scale up cover. The pre-harvest program can facilitate this on a case-by-case basis. 5. Note for clients with put options or participants in pre-harvest program: a. Growers/participants will likely have protection at lower levels than the current market (some puts will $100/t lower than the current market). b. Puts have worked really well, as participants have effectively bought protection in a lower market for $20/t and now have participation at significantly higher prices. c. We have to sell forward in order to capitalise on higher prices. d. Within the Pre-Harvest Program we can sell forward against the puts on a case-by-case basis for up to 30% of MCE. e. Participants will then be scaled according to the current market and the % forward sold will be exposed to washout risk for undelivered tonnes. f. Please contact your adviser to discuss this strategy more and participate. Global Market Analysis The global wheat market is vastly different to 12 months ago as almost every major exporting country (Black Sea, EU, AUS & US) experienced varying levels of production problems over the past 6 months. This has dramatically decreased wheat stocks available to the export market, with the stocks-to-use of major exporters forecast to hit a record low as illustrated in the chart. This has set up a fairly constructive picture for global wheat prices going forward, especially as EU and Black Sea export programs wind down in the back end of this year. To be clear, the world is still well supplied with wheat and there is little reason for a large scale rally in the short term. What we do see is a higher base level for global wheat prices over the medium term as we curb demand to offset the shortfall in wheat supply.

2 This means that although pricing in Australia looks high, as always we must examine our pricing relative to other markets to help determine future price direction. East coast markets have all but shut off exports at current prices, however the effect that WA prices have on the east coast has never been more powerful, hence growers in these regions need to take note of this market and widen their view outside of their local demand centres. Queensland Market Analysis QLD has limited price upside relative to WA, relying on WA to rally for further upside. Queensland wheat production is forecast at around 450kt for the 18/19 season, down nearly 50% year-on-year and only 35% of the 5yr average. This will leave a sizeable deficit between supply and domestic demand which will need to be filled by a combination of NSW wheat trucking across the border and vessels being shipped around the coast from WA/SA. In order to ensure enough grain is supplied to QLD, prices have had to rally significantly versus other states to incentivise the market to execute accordingly. QLD (and more specifically the Darling Downs market) has to pay approx. $110/t over Kwinana port prices to attract transshipments. These trade flows, albeit unusual in a historic respect, have been happening throughout the 2017/18 season, with an estimated 400kt of WA/SA/VIC wheat & barley already being exported to QLD this season with more vessels on the way. Therefore, the outlook for pricing in QLD is two-fold; first we need to look at the price spread from QLD to WA/SA. If QLD prices aren t high enough to price WA/SA imports, an argument can be built for market upside. At time of writing, Darling Downs wheat/barley is trading $ /t over Kwinana track so the spreads between these markets are roughly covering the cost of executing cargoes, which suggests not too much upside in QLD prices relative to WA. However, it will take time for the QLD domestic market to consume what is produced locally, so we believe that the current spreads represent fair value. Second, considering the QLD price is so dependent on the spread it s trading to WA/SA, we must keep an eye on the outlook for these markets. New South Wales Market Analysis PKE/NCL has limited price upside relative to WA, relying on WA to rally for further upside. NSW is forecast to produce the smallest wheat crop in over 10 years this season (potentially lower than 06 and 07 droughts), further compounding the issues carried over from last season s below average crop. This year, as you can see from the chart, NSW will have the smallest surplus (supply over domestic demand) in modern times. Worth noting, being only the middle of August, production estimates (currently at 2.5Mt) have the potential to improve/ deteriorate depending on the finish. NSW also typically supplies wheat over the QLD and VIC borders, as NNSW & SNSW grain is more efficiently allocated to these markets. This year, for the first time on record,

3 NSW will need to receive more wheat from WA/SA/VIC than it trucks to QLD. Therefore, we must keep these markets in mind when we look at the price outlook as we approach harvest and into If we take out the unpredictable weather, NSW has two main price movers we need to watch. First is the Victorian market, which is normally the recipient of NSW wheat, taking a 5-year average of 1Mt. This year, we re estimating that Victoria will supply NSW with around 720kt this coming season. NSW is currently priced roughly $40-45/t over Portland/Geelong, a spread that incentivizes road freight to adequately supply the NSW market. Therefore PKE doesn t need to price much higher versus VIC. Therefore, the outlook for NSW pricing is more intrinsically linked to the prospects of the WA/SA crop, as NSW will likely also require interstate shipments from these states to bolster its supply. NSW is not quite pricing to import new crop wheat vessels. As it stands today, NSW is roughly $10-15/t away from importing vessels from WA/SA which in our view will be necessary at some point next year as the East Coast balance sheet tightens. Therefore, if we see the NSW crop continue to go backwards on poor weather conditions and more shipments will be necessary, NSW prices have $10-20/t upside relative to WA/SA. Therefore, as the spread from NSW to other states has limited upside, any rally higher from current levels will need to stem from WA/SA kicking, and NSW needing to maintain its premium. We discuss WA/SA in their respective sections which will provide more detail around price outlooks for these states. Victorian Market Analysis VIC/Riv has limited price upside relative to WA/SA, relying on WA/SA to rally for meaningful upside. Victoria is showing the most promise on the east coast in terms of production, with the potential for an average crop still alive. We re currently forecasting VIC wheat production at 2.7Mt, down ~600k from its 5 year average. This year will potentially be the first time going back 15 years that VIC produces more than NSW. Being the largest production centre on the east coast, NSW & QLD are both relying on Victorian supply (in addition to WA/SA) to fill their deficits and VIC will account for nearly all east coast exports. From a pricing point of view, much depends on spring weather, as our current estimate allows for 800k of wheat to head north via truck/vessel along with 600k of exports (lowest in 10 years). If we see spring come in hot and dry, the first function of the VIC market will

4 be to rally enough to eliminate offshore exports as much as possible. Then, depending on the extent of the damage, will be to restrict trucks heading north into NSW. Logically, you d expect that NSW would just rally further to keep the flow of grain continuing, however as highlighted in the NSW section, PKE/NEWC can only rally a further $10-$15/t before it starts taking in regular shipments from SA/WA. It s our view that upside in VIC is limited relative to WA/SA, as the spreads are stretched currently. A dry spring would only rally the market $15-$20/t vs WA before shipments from WA/SA would temper anymore upside. Like NSW/QLD, VIC is therefore reliant on these export states to rally to see meaningful upside from current levels. South Australia Market Analysis SA has limited upside relative to other states, relying on strength in offshore markets for further upside. South Australian production is looking precarious at this stage, with areas of great promise (YP and SE SA) being offset by drought conditions in the SA Mallee and on the central/northern EP. Promising rain recently on the EP will improve prospects, however follow up rain will be necessary to see this crop through to harvest. As illustrated in the chart, SA s balance sheet is among the tightest in Australia. The relentless draw on old crop ending stocks due to grain moving into NSW/QLD leaves SA with very little left over. The price outlook for SA is more complex going into next season than it has been in the past. SA has traditionally taken direction from the export market, as roughly 80% of production is shipped offshore. While this will remain a big component of price direction in 2018/19, the QLD/NSW market will also play a part in SA pricing going forward. As NSW/QLD continue to grapple with drought, SA is increasingly likely to be a major source of feed grain next season via trucks, rail and vessels. We are estimating interstate movements to total k in 18/19, depending on spring weather. SA FOB prices are currently $13-20/t higher than WA (depending on port), which means it isn t pricing offshore exports and the bulk of the interstate movements will come out of WA. This premium is not unwarranted, with SA s crop outlook being less favourable than WA. More importantly, a combination of grower washouts and a general lack of grower selling is keeping SA values elevated currently in our opinion. However, the risk remains that after receiving good falls in late July/early August, more rain is received and SA will need to move lower relative to other markets to price more business. On the flip side, if the crop fails to receive rainfall, SA will struggle to rally significantly relative to other ports as it s already expensive comparative to WA.

5 Western Australia Market Analysis WA will track along with the global market, which is constructive looking forward. WA is the saving grace of the Australian wheat crop this coming season, having enjoyed near perfect conditions to date (albeit after a late start). After a poor year in 2017/18, estimates for the coming season are centred around 10Mt, which would mean WA accounts for more than half of the national wheat crop, for the first time ever. Consequently WA will also do a record percentage of national exports, accounting for approx. 70% of our export program as illustrated in the chart below. Our national export program will likely be the smallest in over 10 years in 2018/19, so WA will be supplying the majority of our 10-11Mt inelastic export demand. Along with supplying most of our inelastic demand, WA will need to ship grain around to NSW/QLD throughout next year to help fill the void left from a well below average crop in these states. We re currently estimating that transhipments to the east coast will total around k, depending on spring weather conditions. Now, for the WA market outlook we must first look at export competitiveness compared to other nations, and also how WA prices compete into east coast markets. WA, being the major exporting state, needs to be the cheapest continual source of Aussie wheat in Australia, bar some smaller ports in SA. If we look at FOB (Free on Board) values at time of writing, WA is the cheapest offer in Australia by $10-12/t which is not unusual and will ensure export demand is focused on WA supplies. Now if we look at WA s export competitiveness versus other exporters, we can gauge the potential relative upside/downside in our prices. Russia remains our main export competitor, while South East Asia continues to be our largest customer (specifically Indonesia), so calculating our premium over Russian wheat into Indonesia is a good benchmark to gauge our prices relative to those offshore. Currently, we re pricing around US$20/t over Russian wheat for December shipment, which is pricing us out of most elastic demand for our wheat. However, considering our exportable surplus will be the lowest in over a decade, we don t need to be competing aggressively into export channels. It s our view that considering our limited export capacity, and the inelastic nature of the demand we have for this surplus, the spread only has approx. US$10/t downside. Therefore, Kwinana looks to be supported at these levels relative to other states in Australia and other exporters globally. WA prices will need to track along with Russian wheat in order to avoid shutting off too much export business, meaning downside is possible if we see Russian FOB values start to fall. Kwinana is sufficiently discounted to NSW/QLD for the time of the year, and when vessels need to be done, NSW/QLD prices will move higher to accommodate this, rather than Kwinana needing to move lower. A slow soft finish on the east coast will hamper prices, as will strong grower selling in WA, however looking past these short-term fluctuations, the market looks supported going forward. Please note that Market Check advice is general in nature and has been prepared without taking into account clients individual objectives, financial situations and needs. Before acting on this advice, you should consider the appropriateness of the advice with regard to your own objectives, financial situation and needs. Before acquiring any financial products mentioned herein, please obtain a Product Disclosure Statement and consider it before making any decision about whether to acquire the product.