The Rain Gauge | Newsletter

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Newsletter | Friday 5 March 2021

Rain Ag in Sydney!
The Rain Ag team (apart from Nat, someone has to stay behind and do all the work) visited Sydney last week to catch up with some of our key partners. This is a trip we make every year as we believe it's vital to build and strengthen the relationships we have throughout the supply chain.

Cruising the water on the way to the next meeting, with Growler complying with the COVID regulations.

Peter and Ian talking to AWH CEO Mark Denton about all things warehousing at Raw Cotton Australia's Yennora site

Out to dinner with our partners in Diesel - Refuelling Solutions, Cliff Kemmett and Simon Roycroft

Cotton Market - Tim Whan & Alex Lucero

Volatile is probably the best word to describe the current market. We have seen steep gains and also losses since the last publication.

There is no denying how strong the market has been in recent months, up nearly 35% over a period of just 3 months. This week, however, posted a different story - cotton has fallen nearly 3%, pressed down by weakness in the broader financial markets as well as the fact that Indian and African cotton exports may be cheaper than anticipated. Cotton supply chain managers seem under the impression that cotton has room to move even lower, especially after the weekly export sales data printed a 32% decline wk/wk, and a 21% decline from this same week last year.

One of the potential threats to keep in mind is the current spread between the July futures contract and the December. There is currently an inverse of around 500 points or around AUD$30 per bale. This means that merchants will be looking for delivery by July or they face a potential loss if they need to roll their hedge to December. Its probably a good idea to speak with your ginner about how long they will be running for as ginning in August or September may affect the price substantially.

Basis is certainly worth watching and although at this stage basis is adequately weak, I suspect that our cotton will be finding its way to China one way or another. It’s a difficult one to pick with most of the merchants happy to sit on the sidelines for now even at current basis levels. It appears to us that only 3 merchants are actually competing at the moment. See basis chart below which is tracking our basis since 2014 in Aussie dollars.

COTTON ICE FUTURES
US87.14c/lb (May 2021)

Range last 30 days
83.88 - 95.60

Current AUD/Bale price
2021 - $580
2022 - $565
2023 - $500

AUSTRALIAN DOLLAR
AUD - Current 77.00

Range last 7 days
76.94 - 78.63

With Australia's GDP numbers coming in at +3.1% from the previous quarter to the next, the AUDUSD is beginning to build a strong list of reasons that justify the strength we've recently been seeing.

With strong labour market data coupled with rising wages, the Aussie Dollar looks like it has a bright future ahead of it as economic forecasts begin to improve and vaccines begin rolling out. Local optimism is visibly rising as private spending data shows us that companies are, just now, beginning to grow, expand and invest more than they did last quarter for the first time in nearly 2 years - a sign that they are feeling good about the economy, which is providing another wind behind the AUD rally.

On top of economic and local data, hard commodity prices (such as iron and copper) have also had a hand in adding to optimism and has helped the AUDUSD reached levels not seen in 3 years. Add this to the fact that China, Australia's largest trading partner, is also on the road to a swift recovery.

With all of these variables coming into play we can begin to paint a picture of the current and perhaps future Aussie strength.

The Raw cotton Australia Warehouse system will ensure you have the opportunity to sell to all merchants, including the Chinese buyers if they are in the market. There are no issues with payment or title as growers can retain title and our payment terms are prior to transfer.

For more information on this option please see www.rawcotton.com.au

CHICKPEAS - dry weather continues in Pakistan

The last few days we have seen the chickpea market start to pick up in value again as Pakistani buyers come back in to cover more shorts. The dry conditions have continued in Pakistan over the last few months, where normally they would have received crop saving rains by now. This has sparked a nice rally in our export prices recently as Pakistani traders try to secure chickpeas to replace the potential crop losses. Pakistani buyers are usually restricted by cashflow when purchasing Aussie chickpeas, so when they buy in a normal season it is done for just-in-time shipments to cover any shortfall. The drought conditions in Pakistan have made buyers cover a bit further out this year which is a change to the norm which makes a few of the older heads in our market nervous, as these buyers are notorious for walking away from contracts when the price moves slightly against the contracted price. The lack of rain may save some of our traders losing money on defaults to the Pakistani traders as the feeling in the trade is that this potential crop failure is real and we will see supported prices thought the rest of this season.

USDA Drought Severity Monitor for 2-months

ABOVE IMAGE: I know this maybe hard to see, but Pakistan is on the north/west side of India, and the map above is showing most of the country in Moderate to Extreme drought. It also shows a large section of South Western Asia (Afghanistan, Iran and Pakistan) in Exceptional to Extreme drought (I suppose this map would have been showing the same colour for Australia early last year).

As a result of the extra demand from Pakistan we have also seen Bangladesh occasionally back in the market as they still have demand to cover later in the year. If you look at the Drought monitor map (above) closely it also shows dryer weather in the northern parts of India (maybe not as severe but also affecting the potential of this seasons crops). As a result we are starting to see the chickpea NCDEX Chana futures market start to rally. This could be encouraging signs for prices in the coming months.

Current Crop 20/21: #1 Delivered Downs Mar-21 $655/mt, Wee Waa $625/mt, Narrabri $630 /mt, Goondiwindi $635/mt, Narromine QUBE $590/mt

Chickpea M: Narrabri $530/mt, (most areas -$100/mt)

NCDEX March 21 Chana Futures Contract

WHEAT - why is our wheat price high still?

It is a bit of a complicated story but the reason wheat has held its price high in the last 4 or 5 months is not about a short supply of wheat globally, but a short supply of Soybeans and Corn combined with higher demand from China. The following are a few reasons the market has kept high:

China Floods: Last Northern Hemisphere summer the Chinese East Coast had one of the wettest seasons on record causing large amounts of summer crops like Corn and Soybeans to be destroyed. This loss of Chinese domestic production was the tipping point.
African Swine Fever rebuild: Around 2 years ago most of Asia had an out break of African Swine Fever (or ASF) which was estimated to kill up to 30% of the Chinese pig herd (approx. 100million head ). This sounds negative for demand but the rebuild in the herd has been quick and is close to the pre-ASF number already. Many of the pig feeders have also swung towards Corn and Soybean in rations.
US vs China Trade war over: Both Corn and Soybeans had been under price pressure in the last few years due to the trade war between China and the US. The Chinese reduced consumption of Ag products from the USA. The trade war was resolved and part of the resolution was for China to increase consumption of US Ag products including Corn and Soybeans.

These are some of the major driving forces around both the increase in demand and also lower supply in China of both Soybeans and Corn. It is predicted that China has increased its Corn imports from 7mmt to 24mmt from the US. Australia is also seeing spill over demand for feed products from China like Sorghum (which is trading above wheat values).

So we have tight supply and strong demand for Corn and Soybeans, what do the wheat numbers look like?

If you look at the Global wheat stocks/Use ration vs wheat futures, the supply of wheat in the world is as good as it has been for at least 20yrs but the average futures price is not reflecting that strong supply. In the late 90’s and early 2000’s supply was lower than now and the Futures market was lucky to get over $3.00/bu our market is well into the $6.00/bu with plentiful supply. How is this sustainable?

ABOVE IMAGE: Wheat Futures were lucky to go over $3.00/bu in the late 90’s and early 2000’s with stocks/use at mid to low 30%. Why is this years wheat market well into the $6.00/bu at 40% stocks/use?

Maybe the next two graphs can help us figure out why wheat is so out of line with price and supply. Below corn and soybean supply is on the way down and price is heading north. These 3 commodities are not perfectly interchangeable in each others demand profiles, but corn for instance will not stay long in a feedlot ration if wheat is much lower in price. You have to remember that if any of these commodities go too far out of line with each other they will quickly be corrected. At current world price levels of both corn and soybeans I would expect that planted acres in the northern hemisphere will go up as growers try to take advantage of good margins. Wheat will be fighting to keep planted acreage against them.

COTTONSEED - watch out for ginning pressure!

With harvest getting closer some in the ginning game may have forgotten that Cargill are no longer big buyers of gin-spread cottonseed. This maybe the first year we will see real pressure on the cottonseed market to move it from the gin in time. Last season was one of the smallest on record, and the one before that we had the biggest domestic demand on record during the ginning season due to the drought. This year there seems to be plenty of feed for drought relief and the feedlot numbers are questionable for the ginning season. If you do not have ready storage for your cottonseed this season you may want to have some sold before the gins start, as buyers may dry up quickly.

On the positive side if you do have storage, I believe prices will recover quickly after ginning as demand from the Chinese is still strong and feedlots will still have a lot to cover after ginning.

Prices Ex-Gin 20/21: Downs $380, Gwydir $360, Macquarie $350, MIA $350

I think the Chinese will take our cotton one way or the other. Potentially they have already found a way to buy our cotton at lower basis levels.

Allow about 3c to 6c for delivery depending on your proximity to the port.

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Once you have filled out email to admin@rainag.com.au and we will fast track the application for you.

2021

Rain Gauge Caps sporting the Rain Gauge's very own logo... the new prize for the Rain on the Road section! Keep guessing where the Rain Ag team members are for your chance to win!

If you are a previous winner, and didn't receive your original prize, let us know, and we'll get a cap out to you.

HORTO AROUND

The first person to correctly identify where Peter Horton is in the photo to the right (by return email) will receive a newly designed Rain Gauge Cap after their next business transaction with Rain Ag.

Unfortunately no one guessed where Growler was in our last Rain Gauge edition! Ian took a break to take a look at the Noondoo Silo's during his travels through SW QLD.

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