There is an enormous amount of agricultural commodity market information available. However, it's often difficult to know what really matters - what is driving the market, and what does this mean for business?
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The 2019 analysis of the global wheat crop and cattle insights report gives an overview of some of the themes influencing markets in Australia.
The current projections for the global crop are relatively positive. World production could be high this year, but we won't make the call too early, there is still a long way to go. In March global wheat stocks were at the second highest level in history. However, 52 per cent of the stocks are held within China.
China as a nation is a large producer and have huge stockpiles in its inventory, yet it very rarely sees the light of day in the export market. The average exports from China since the turn of the decade have been 917kmt. When Chinese stocks are excluded from the global situation, the world is sitting on similar levels of stocks to 2008/09 and 2012/13.
Agricultural markets work on a basis of supply and demand, however, at times, we forget the demand side of the picture. The major wheat importers in the world include Algeria, Bangladesh, Brazil, Egypt, Indonesia, Japan, South Korea, Mexico, Philippines and Turkey. These countries seem to have learned some hard lessons from the past. The beginning stocks for this season are sitting at comfortable levels. The combined stocks at the end of this season will be the second highest on record at 22.3mmt.
Effectively, import nations on a whole are better positioned for supply shocks, though a major disruption to supply would still result in price rises. While the first two months of 2019 saw almost continual price declines on Chicago wheat futures, volatility is now ramping up as the northern hemisphere growing period progresses.
Dry conditions across most of the country have seen cattle slaughter rates running high for much of the last ten months. Widespread destocking drove slaughter to increase by nine per cent in 2018, and of course, a drop in the cattle herd. Meat & Livestock Australia (MLA) reported a herd decline of 2.5pc in 2018 and project a further fall of 3.9pc to June this year. The consecutive falls, following so soon after the herd liquidation for 2014 and 2015, is expected to put the Australian cattle herd at a level not seen since 1997.
With years ahead of what will be lower supply while the herd rebuilds, the response in beef export markets will be interesting to watch given the impact of drought and growing demand in key markets. Beef exports began this year very strong as a result of a surge in demand for Australian beef from Japan and China.
A 6pc year on year decline in beef exports is forecast in 2019, to 1.06 mt shipped weight. With North West Queensland being a major source of live export cattle, the disastrous floods and significant herd losses in this region will place further strain on supply. On the plus side, it will add impetus to what were already going to be strong prices once the drought breaks.
We are likely to see Queensland as the major demand centre for slaughter, live export and breeding cattle in the short term. However, the higher prices will filter down to southern states, adding support for prices, as the urge to rebuild the herd is heightened in the short term and extended in the medium term.
It will come as no shock that it's not only the cattle herd predicted for a big cut in 2019. MLA's flock projections estimate that the national flock declined by over four million head, or 6.1 per cent, by mid-2018, with a further drop of 3.7 per cent forecast to June 2019. This would see the flock at 65.23 million head, a new 100 year low.
One would expect a record low flock would mean a record low sheep slaughter predicted, however, this isn't the case. The dry conditions that rolled into 2019 kept lamb and sheep slaughter at strong levels. Sheep slaughter this year is expected to be down 16pc on 2018. Lamb slaughter is also expected to fall but not quite as dramatically. With 21.2 million head of lamb forecast to be slaughtered this year, it will be a seven-year low if it comes to pass.
Considering slaughter has already been strong this year, there will have to be a big supply squeeze at some point. When this happens is a question of when it rains. Considering the limited availability to finish lambs on cheap feed this year and fewer lambs in general, it's likely not far away.
If demand stays in line with 2018 and MLA's slaughter forecast is correct, we could see prices average 839/kg cwt with the Eastern States Trade Lamb Indicator (ESTLI) in a range of 600 to 900 across the year. Western markets have been outperforming their respective counterparts from the Eastern States since the resumption of the live sheep trade in late 2018.
However, a ban of live sheep exports during the Northern hemisphere summer may see spreads deteriorate again for WA producers during the June to August period this season.
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