Month: January 2017

Tight supply maintains the strong prices

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Meat and Livestock Australia (MLA) slaughter figures
confirmed that January lamb supply has been tighter
than usual. The result has been very strong summer
lamb prices, at a time when the market has tracked
sideways in recent years.

Figure 1 shows east coast lamb slaughter for the week
ending the 20th of January was well below last year.
The 18% reduction in numbers seems to have been due
to the good spring, which saw many lambs finish early
and hit the market in December, leaving a dearth of
numbers in January.

The result has been the best January lamb prices since
2011, with the Eastern States Trade Lamb Indicator
(ESTLI) managing to spend its third week above 600¢.

The ESTLI did ease slightly this week, but only 2¢ to
finish at 602¢/kg cwt. Mutton values took more of a hit,
losing 12¢ to hit 395¢/kg cwt as supply improved.

The question now for lamb markets is whether they can
maintain the strong levels. The five year average would
suggest they can, but figure 2 shows that in the last two
years February has seen the ESTLI ease. Lower prices in
February are likely due to domestic demand waning after
Australia Day and supply improving as shorn lambs start
to come back to the market.

As always the price trend will depend on how many lambs
are actually out there, and as indicated by survey results,
it could be fewer this year, so lamb prices could find some
solid support in the 560-580¢/kg cwt range.

The Week Ahead

We expect prices to ease over the coming weeks, but not
by much. Lamb producers not likely to be forced to sell in
the short terms, so may hold out for stronger prices if we
see any correction.

Mutton values should recover from this week’s correction,
it’s hard to see more supply coming forward given the feed
situation and the wool price.

 

Reality check has timely lessons

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Last week we had wool at all-time highs, and the
usual response is to look forward to see how much
higher it could go. This week the wool market provided
a reality check, prices on the opening day (Tuesday)
were down 20 to 40 cents compared to the close of last week.
It was the mid-point of Merino microns that suffered,
with 19 to 21 MPG feeling the brunt of the retracement
while fine wool was least effected.
The good news was that after the “correction” on
Tuesday, the market was remarkably resilient on
Wednesday; in fact, by the end of the week the 17 & 18
MPG’S had closed above last week’s level in Melbourne.

To retain some perspective; the EMI is still well above
the closing December markets, whether measured in A$
or US$ terms – figure 1.

The trend of improving fine wool premiums continued
this week; the 18 Basis premium over 21 MPG has
doubled since October last year. Fine wool producers
have seen this premium rally from 123 cents this time
last year to now sit at 443. This will provide an incentive
to hold the line with fine wool sheep, although it is
concerning processors how far the micron will broaden
this year given the excellent seasonal conditions currently in play.

Growers response to the easing wool market was to pass-in 13.3% of the offering, or almost 6,000 bales. To break this down a bit more, of the 30,657 bales of Merino fleece and skirtings offered, 3,500 bales or 11.4% were passed-in by brokers. Normally this would be seen
as a “brave” decision when the market is at record levels; the change in supply as well as the very limited wool either in the pipeline or in brokers stores makes this decision a little more understandable.

As we said last week, high prices provide an opportunity in
the wool market to forward sell, this week’s retracement
is a timely reminder that often high prices are the
antidote for high prices.Table 1

This week we have had a lot of feedback about our blog
article, “Let’s make merino great again!”. We are looking
for innovations and ideas we can publicise to showcase the
great things that are happening in the merino/wool industry.

The Week Ahead

The offering of next week is 42,584 bales in all three centres
over two days. Based on the recovery to the Tuesday correction
and the reduced offering we should see the market at least hold.
The test will be if the processors remain buoyant about the
market outlook or were they “spooked” by this week’s roller
coaster and decide to sit back and see how this plays out.
As usual, interesting times for wool.

 

Demand driving cattle prices higher

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Cattle markets have opened 2017 with a bit of a bang,
with extraordinary restocker demand, and very good
feeder demand driving prices higher. Cattle supply in
saleyards has been similar to last year, so it would
seem demand is the driver.

The Eastern Young Cattle Indicator (EYCI) has
rallied back above 650¢/kg cwt this week, hitting a
six week high (figure 1). With the dearth of quotes for
the cattle market last week, it’s hard to pinpoint who
is driving the stronger prices. However, with the east
coast trade steer sitting at 632¢, and feeder cattle
around 10¢ higher, it would seem restockers are
dragging the EYCI higher.

East Coast cattle yardings rallied higher this week,
which is not unusual as normal sales resume. Usually
the pent up supply from the break sees prices move
sideways in January, but it appears it is pent up
demand pushing prices higher.

Some recent rain in Queensland has no doubt helped
push demand in the north, but large parts of
southern Queensland and NSW are still 25-100mm
below the January average.

After opening up much stronger, heavy steers eased
marginally this week (figure 3) as the strong price
drew out supply, while cows were also a little lower.
Despite the wide spread between finished and store
cattle prices, the numbers seem to still be working for
those purchasing expensive young cattle.

The Week Ahead

There has been a few positives for the cattle market of late,
and this has resulted in higher prices early this year.
Add to this the widespread rain which is forecast
for the next week and we could see a little more
upside for prices in the short term.

However, unless we see a strong rally in export values,
it’s hard to see cattle getting back to the levels of last
spring, with 5% upside probably the limit.

 

Input update: Fertilizer and Fuel (Jan 2017)

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Key Points

  • The August-November average diesel price at port was $106/l
    versus $116 for the past month.
  • There is a global glut of fertilizers on the market which is unlikely to rectify anytime soon.

The harvest is all but done, now is the time to start looking towards next year. There will be changes in planting, a little more of this and a little less of that. However, regardless of what you plant you will be burning diesel and spreading fertilizer. In this report, we look at these two important inputs.

In the last two months’ millions of litres of diesel
will have been burnt across the grain growing regions
of Australia, and in reality, we are only a few months
away from starting all over again with seeding and
the diesel bills will start flowing in. In figure 1,
the average port diesel price for Australia is
displayed since the start of 2015. Assuming that
most farmers purchased their fuel well in advance
of harvest as recommended by Mecardo early in 2016,
the input costs for fuel for the 2016/17 harvest
will be considerably lower than current levels.

The average diesel price for Aug/Nov was A$106/l,
versus A$116/l for the past month. Although diesel is
creeping back up diesel prices have spent a lot of the
last ten years above current levels (figure 2). In late
December OPEC agreed for the first time in eight
years to cut oil production, which alongside improving
economic conditions has led to an increase in crude
oil prices and therefore diesel. The market for oil is
hard to predict and in coming months it is important
to keep a close eye on the market with a view to
locking in fuel for the coming season either through
swaps or fuel contracts.

The picture is rosier when it comes to fertilizer. In
figure 3, we can see that both DAP and Urea are both
pricing at good levels since the start of the decade.
Although Urea has seen an uptick in past months, the
outlook for fertilizer supply still points to a surplus for
at least the next two to three years. The supply issue
aside the real risk is a fall in the A$ increasing the
cost of imports.

What does it mean?

The fertilizer market remains at low levels; however,
the market outlook remains bearish to neutral reducing
the impetus to go out straight away and stock up.

In terms of fuel the outlook is less certain, and looking in
a proportion of fuel requirements in advance could be an
advisable risk management strategy.

 

ESTLI holds firm despite strong throughput and currency

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The Eastern States Trade Lamb Indicator (ESTLI)
held onto the strong gains since the start of the
year remaining above 600¢/kg cwt this week
in the face of solid lamb throughput figures,
particularly from NSW, and a resurgent A$ –
boosted by a Trump impacted weaker US$.

Figure 1 shows the east coast lamb yarding
figures for this week opening the year at
229,495 head, some 21.6% above the yarding
figures for this time last season and 34.7%
higher than the five-year average. Overall east
coast lamb yardings given a boost from NSW
throughput, which came in 26.4% above figures
recorded for this week in 2016 and 58.9% higher
than the five-year average for this time of year.

After a stronger start to the season slaughter figures
have returned to levels consistent with the 2016
pattern – figure 2. East coast lamb slaughter for the
week ending 13th January reported at 382,865 head,
a mere 2.3% below the slaughter figures for the same
week in 2016 and 8.9% above the five-year average
for this time in the season.

The ESTLI closing yesterday at 609¢/kg cwt, a
10¢ gain on last week. Not as impressive as the
previous week’s rally but a gain nevertheless.
Combined with an A$ 5% higher than where is
finished 2016 this places the ESTLI in US$
terms the highest it has been since September
2016 – figure 3. Despite the recent A$ strength
the currency currently trading at 75.5US¢ is still
below the two-decade average of 76.25US¢.

The Week Ahead

The A$ recovery over the last month has been on
the back of broad US$ weakness with financial
market nervousness setting in as we draw closer
to a President Trump inauguration. Expect regular
currency volatility as the new leader settles in and
his unpredictable style of communication via Twitter
running of the country continues to unnerve the
market. Any significant impact on export demand
for Australian sheep and lamb product unlikely
unless a prolonged period of US$ weakness pushes
the A$ above 85-90US¢.

 

Is it a record? Maybe yes, maybe no.

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The first week of sales for the new year last week
opened with a bang, the EMI smashed through
1400 cents, while the WMI reached almost 1500
cents. (WMI has little influence from X Bred prices).
This week the good times continued, prompting
AWI to announce the wool market was at an
all-time record. This statement needs a little more
detail to confirm; the wool market across the board
is not all at record levels.

While not wanting to dampen down the enthusiasm,
the wool market covers a wide range of types, not all
are trading at highs. It also needs to consider the
timeframe; the high this week of the EMI still hasn’t
overtaken the April 1988 high of 1523. As Mecardo
followers will know, we also look at the price the
processors are paying to determine how strong is
demand; so, when looking at prices do you consider
the price from the buyer’s perspective or the seller’s
perspective? We think that while the price the grower
receives is important from an Australian viewpoint,
the cost to the buyers is a truer reflection of demand.

In Au$ terms the June/July period of 2011 was the
previous recent high for the EMI – 1426 cents.
At this time the A$ was trading at US$1.07, causing
the processors to shell out US$ 1500 cents. Note
that this week the EMI in US$ terms is still below
1100 cents. (Fig 1.)

The positives to the above analysis is that in this
scenario everyone is happy. Buyers receive regular
orders when the market is rising; processors don’t
want to miss out and a strong market resonates
confidence all the way up the wool pipeline. The
lower A$ (compared to peak levels when it traded
around parity) is keeping prices for the ultimate
end customers below previous peaks. Happy sellers,
happy buyers – the true definition of a “win-win!”.

On a cautionary note, the EMI high reached in the
winter of 2011 was then followed by the recent history
low point of 946 in September 2012. The market then
wobbled along with the EMI oscillating between
1000 + 1140 until early 2015 before the beginning of
this current positive run. Out take on this rear view is
that markets are continuously moving; so at “record”
levels locking in some of the future clip needs to be
considered. As one grower said, this is the time to
“kick the can as far down the road as we can!”

The trend of improving fine wool premiums continued
this week, we are now seeing the highest “basis” levels
since January 2012, however as Fig 2 shows, we have a
long way to run to get back to the heady days of 2011.
It is great to see that the 18 – 21 MPG basis has doubled
to 400 cents since October last year, fine wool producers
should begin to feel that their product is again on the up.

A challenge for the industry if, as is expected, the market
remains strong but supply stays static, is that the wool
trade may become frustrated that higher prices are not
encouraging increased production. As Andrew Woods
reported, sheep numbers in these bumper times are
only forecast to rise by 1.4% next year.

The Week Ahead

The offering of next week is below 50,000 bales so after a
couple of big offerings supply is easing, and based on reports
from traders the market is going to continue to remain active.
It would be unusual to see the market continue to rise at the
same rate as the last 2 week’s (not unprecedented though!),
so on balance a steady week ahead with a continuance of
strong demand for selected lots of the better-quality fine types.

 

Make grain great again

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This week Obama is out, and Trump is officially in.
The world will be watching as the new ‘leader of the
free world’ takes office, and whether he will still be
moving the markets through his twitter account.
The market is looking forward to the 2017/18 harvest,
and wondering how the global wheat crop will look
for next year. Will plantings be down?

The futures market had a strong rally since the USDA
set their forecasts for the US winter wheat planting
at the lowest level since 1909, however the reality
has crept back into the market that global end stocks
are still record high. Although US plantings of wheat
are expected to be reduced, it is expected by the
International Grain Council (IGC) that the rest of
the world will largely be unchanged. The IGC point
to favourable conditions in the northern hemisphere
resulting in a predicted 17/18 crop of around 735mmt,
and the third largest on record. We have to remind
that forecasts at this time of year are open to large
margins of error, yet the market has responded with
falls overnight (figure 1).

At a local level it will not be a surprise to anyone
reading Mecardo updates over the past year that the
size of the harvest is pressuring basis. In table 1,
we have shown basis levels across a number of ports.
The general trend is that basis is slipping across all
ports, the most exceptional is Port Lincoln which
has steadily fallen into negative territory. In
Kwinana basis is still strong, however looking back
at December levels were greater than $50.

All eyes in the coming weeks will be on President-elect Trump,
with a wide degree of volatility expected.
This has already been seen with traders dumping the
US$ (figure 2) despite comments from federal reserve
pointing towards interest rate rises in the coming
weeks. Overnight Trump appointed George Perdue
as the secretary for agriculture. Perdue is the first
agriculture secretary since 1994 from out with the
Midwest, but has a wide range of experience within
the grain and livestock industries.

The Week Ahead

The inauguration will be held at 3am east Australian
time on Saturday morning, I will probably be up at
that time watching it thanks to a sleepless newborn.
There are a lot of contrary views when it comes to
Trump and regardless of your view of him his election
has produced a lot of energy. In the coming months,
we will get a strong view of whether candidate Trump
is the same as President Trump. One of the risks in
markets which is always extremely difficult to predict
is political, and we could see black swan events in the
coming months, and that is before we look at the
coming EU elections.

The world continues to be awash with wheat, and barring
any major weather event in the next 6-8 months, prices
will remain low. In the last four seasons the global crop
has largely made it through without any major hiccups –
can we get a “five-peat”?

China wades back in despite higher A$

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Increased demand this week from exporters noted as Chinese buyers resume their activity, undeterred in the face of a higher A$. The EMI creeping back above 1500¢, up 28¢ to 1506¢ and gaining 31US¢ to 1146US¢. The Western markets resumed auctions this week and activity participated in the rally, making up for lost time with a 63¢ rise to see the WMI at 1567¢, up 58¢ in US terms to 1192US¢.

Price gains for most categories of wool noted, although the medium fibres leading the charge higher with gains of 50-65¢ noted for microns between 20 to 23 mpg in the East and 90-110¢ gains for similar wool in the West. The rally in finer wool limited to a 15-50¢ range in all three centres.

Interestingly, the medium fibres displaying a more robust price movement this time around with the 21 micron reaching levels in AUD terms not seen since the middle 1988. Indeed, in May 2016 when the 21-micron hit 1535¢ in the South the 17 mpg was trading above $23 and the 19 mpg was above $19.5. This week with 21 mpg at 1549¢ the 17-micron unable to climb above $22 and 19-micron can’t crack the $19 level.

Some whispers around the traps that if the Chinese step away again the fine end could be in for a quick correction. Although, the prospect of higher US interest rates later this year could continue to play into wool grower’s favour. This week the US Federal Reserve lifted rates and because this was highly anticipated it had limited impact on the A$. However, any sign that the US will move to a more tightening bias or indications of more frequent potential future rate rises in the US could see the A$ come under reasonable pressure again, pushing it back toward the 70US¢ level. A relatively softer A$ now compared to back in 2011/12 helping to keep wool prices competitive overseas, despite the high local prices – figure 3.

The 7th poll & speculators

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A great week for farmers on the grain markets. The speculators whom many like to chastise for being involved in the grain markets, in combination with worsening weather, have helped put a little fire under the wheat market.

The futures markets have provided a welcome rally in the past week (figure 1) for grain growers. The market has largely been moved by poor weather conditions in the US & Europe. The speculators being very short in the market has led to ‘short covering’, which has magnified moves. So in future, when people complain about speculators in the market, remind them that it works both ways.

East coast basis levels have conserved their gains from last week, and continue to be in positive territory across all zones which we regularly monitor (figure 2). Although basis and futures have both risen, unfortunately for growers the A$ has also risen to 75.2¢ which has reduced some of the benefits but still overall positive for pricing.

The Poms went back to the polls last night for the general election to decide on the government for the next 4/5 years. This will be the 7th major vote the UK has had since 2014, if they were spread evenly they would have went to the polls once every 159 days! The first exit polls have been released pointing towards a hung parliament, but we have to take them with a pinch of salt. The result however of the exit poll, has been a fall in the pound (Figure 3), as a hung parliament will put the government in a weak position for Brexit talks.

Next Week

The USDA will release the June WASDE overnight. Will there be any surprises in this month’s report? We have seen issues in Europe, and it wouldn’t be a surprise to see some production downgrades.

On Wednesday ABARES will release their quarterly Australian crop forecast. The dry experienced in WA/SA will result in lower yields for the coming season. This is traditionally a volatile time, and if positive reports emerge we can easily see much of these gains lost.

Conflict Grains

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The last week has been quite quiet in the grain markets, with little in the way of new information. The lack of fresh data has had traders clutching at straws. In this week’s comment, we will take a general look at a potential source of volatility.
Figure 1
One of the pieces of information which traders have been keeping a close eye on is the situation in Ukraine. The eastern districts of Ukraine have been a flashpoint over the last couple of years with continuing violence between Russian backed rebels and the Ukrainian government. In recent weeks fighting, has escalated.

In recent years this violence has produced a number of black swan event which have driven prices, however the markets soon corrected as the flow of grain was largely unaffected. In figure 1, we can see that although violence has erupted, the Russian grain market has largely been unaffected.

Although it is always important to keep an open mind to these type of events, I am confident that unless wide scale warfare breaks out that the Russian/Ukrainian situation will have a minimal impact on pricing.

Figure2At a local level, we continue to see basis come under pressure. In figure 2, we can see that Geelong has now joined Port Lincoln in the negative basis club, with likely Adelaide to follow soon. The weight of harvest could likely keep basis levels depressed for sometime.

 

 

 

 

 

 

Next week

All eyes continue to be on the northern hemisphere weather, and the condition of the crop. At the moment there are no real major emergencies, and the market is quietly confident about the condition for 17/18.

The USDA world agricultural supply and demand estimates are released on Thursday, and we will update on them in next Fridays update.