Month: January 2017

Friday 13th not unlucky for national cattle prices

Posted on by Caitlin Dearden

A positive start for 2017 with gains across the board for national
cattle prices, despite the “Black Friday” finish to the first trading
week. The Eastern Young Cattle Indicator (EYCI) up 1% from last
year’s closing price to reach 640.5¢/kg cwt while the National
Medium Steer price, mirroring the percentage EYCI gain, also
1% higher to close at 296.8¢/kg lwt.

Feeder Steers posting the lightest of gains, up a mere 0.8% to
347.6¢/kg lwt. National Heavy Steers back above 300¢ with a
modest 3.4% increase from the 2016 finishing price to test
304¢/kg lwt. Trade Steers the best performers up 6%
to 345.2¢/kg lwt – figure 1.

The positive sentiment has flown through to the annual weaner
sales across the nation with heavier weaners (above 330 kg) fetching
between 350¢ to 400¢/kg lwt and lighter weaners (200-280kg)
going for over 390¢ to 440¢/kg lwt.

As outlined in our analysis piece this week a rebound in US cattle
futures prices (figure 2) have provided some flow through price
support for local cattle prices, relieving some of the downside price
pressure evident into the later months of 2016. Although BOM
three-month outlook to March 2017 suggests somewhat drier
conditions than normal for much of the eastern seaboard which 
may give restockers a reason not to chase prices for young cattle
too high into 2017, particularly if pasture growth begins to wane –
figure 3.

The Week Ahead

As we head into 2017 an anticipated tighter supply of available cattle and improved US cattle prices will continue to support local cattle prices.
On the flip side, a dryer start to the season for much of the eastern
seaboard and the prospect of a market correction into the later part
of 2017 or early/mid 2018 should act as a headwind on
prices outperforming the 2016 peaks.

 

Searching for some upside

Posted on by Caitlin Dearden

The wheat market is trying to have a rally, at least in international
markets, while locally the sheer volumes of wheat in store, and
seeping out into the market appears to be depressing basis.
Canola basis has improved, but unfortunately it’s been due to futures
falling, not physical rising.

You wouldn’t know it looking at cash prices, but CBOT wheat has
gained $18/t, or 9%, since the start of December. Figure 1 shows
that the spot contract, which is now March, is sitting at a 6 month
high in our terms, but it’s still just $209/t.

Locally some of the price increase was seen, with track APW moving
from around $212 to $223/t, although late this week it dropped
back to $215/t. APW Basis to CBOT is now just $5/t, and it’s safe
to say we are now sitting at export parity. The good news is that
basis is unlikely to weaken further, and price movement will be largely
dependent on what happens in the international market.

Canola prices have eased in the last week, now sitting at around $520/t
on a port level (figure 2). The fall has been due to easing ICE canola
prices, with local basis improving marginally (figure 3). It appears
there is still plenty of Canola finding its way into the market, hence
basis being $50 lower than in October. There remains some potential
for basis upside.

Barley prices are ok at Port terminals at $170/t, but up country values
have fallen to around $152/t on a Port equivalent. Feed Barley prices
are now likely to be below export parity, and as such there is no hurry
to sell at these levels.

The Week Ahead

With the decline in wheat basis, it is now only the H2 wheats and better which look like reasonable selling, everything else looks like a hold, as there is very little downside to be concerned about. Unless, of course,
the international market returns to December lows, but this is unlikely
at this time of year.

 

Wool’s market of to a flyer!

Posted on by Caitlin Dearden

At the end of sales for 2016, we noted that the wool market had
finished in line with its performance over the year, solid, firm and
resilient. There was generally a feeling of confidence, but the open
to 2017 was well above expectation. The market this week opened
strongly and then just got better.

The week started in Melbourne on Tuesday where the initial price
rises were led by the fine wool, and when Sydney joined in it had to
catch up with the early market quote reporting 18 MPG up 100 cents
compared to the last sale in Sydney of 2016.

This was a large offering, the 48,808 bales sold was 10,000 above
the average weekly clearance for 2016.

By the end of the week, the EMI had jumped 67 cents to be at its
highest level for 5 years and within 3 cents of its all-time high in
2011 (Fig 1). In A$ terms it sat at 1422, exactly 140 cents above the
level for the first sale in 2016. In US$ terms it’s at 1061, well above
the comparative year ago, level of 890. These are strong signals that
demand is improving. Percentiles are telling the story, with all types
except Crossbreds at the 95% level or better. (Table 1)

In the Mecardo report this week by Andrew Woods, Wool supply
update, the seasonal effect is starting to become obvious with the
good general spring conditions translating into the clip moving
broader. This is taking pressure off fine wool prices, in fact there
is now evidence of buyers
concern with this end of the market keenly sought out this week.

The micron movement of the clip will be most keenly felt in the sub 19
MPG which is reducing in volume, and the 20 microns and broader
which is increasing. This trend has further to run, even without further
rain for the next couple of months the path is set; the clip will continue
to move broader. As a result, the fine wool premium is likely to continue
to improve, resulting in higher fine wool prices providing that medium
wool categories can at least hold at these levels (Fig 2).

Crossbred types missed out on the general price rally and continued to
struggle, on the other hand the 30 – 40 cent lift in the Cardings indicator
pushed all 3 centres indicators to record levels.

The Week Ahead

Another big offering of 55,000 bales listed for next week, and based
on this week’s sales we expect that only crossbred producers will be
doubtful of turning up to sale. So, a big offering, however those we
have spoken to in the trade are not seeing this as a temporary spike,
and while not expecting to see the gains of this week repeated note
that the tight pipeline supply is keeping orders flowing at these levels.

The wool trade is also aware that listed bales for sale quickly drop
back to 40,000 per week.

 

Call it the Kekovich effect

Posted on by Caitlin Dearden

It’s been an extraordinary week in lamb markets. Lamb markets have Figure 1
reached high which are usually seen in winter in the second week of
January, a time when supplies are usually good. When prices rise it’s
due to falling supply or rising demand, we suspect it’s a combination,
helped by the ‘Kekovich Effect’.

Figure 1 shows that in the second and third week of January in the last
two years, and on average over the last five years, we have seen the
largest slaughter of the first half of the year. Normally heavy slaughter
equates to lower prices.

However, figure 2 shows that despite high slaughter rates, prices in Figure 2
January have been steady or higher. How do we explain higher supply
and steady or higher price? Call it the ‘Kekovich Effect’, driven by Meat
and Livestock Australia’s (MLA) Australia Day lamb marketing campaign.

Demand for lamb obviously increases before Australia Day, lamb processors need more lambs, and supply is usually compliant in early January.

This year it seems some processors have been caught short. This week’s
Wednesday and Thursday sales gave a taste of what processors are willing to pay, with many lambs selling for well over 600¢, and the Eastern Figure 3
States Trade Lamb Indicator finishing at 599¢/kg cwt.

Light lambs are doing even better, with restockers paying 661¢, and
light lambs selling for 607¢ on the east coast.

Mutton has also joined the party, with the National Mutton Indicator (figure 3)
rising 32¢ to hit a three month high of 407¢/kg cwt. Mutton demand is not
likely to have increased like lamb, but rising prices suggest small stock
processors can’t find enough lamb, and are turning to mutton.

The Week Ahead

As outlined earlier in the week, the heavy supply of December is
coming home to roost, with few shorn lambs ready, and sucker
lamb supply basically done. The Kekovich Effect has at least a
week to run, which suggests lamb prices might stay strong for
another week or so.

After that, don’t be surprised to see lamb prices ease back, as supply
improves, and demand weakens post the Australia Day demand peak.

 

US market and exchange rate showing some reason for optimism

Posted on by Caitlin Dearden

We have been talking about the spectre of a correction in the Australian
cattle market for some time. The main driver behind any fall in prices, apart from local climatic issues, will be the weakness in international cattle markets. There is some reason for optimism however, with US cattle futures making some sort of a comeback in November and December.

Regular readers will be well aware that while the boom in local young cattle prices is reaching fever pitch at the moment, on an international level it is well and truly over. The US is one of Australia’s major markets for manufacturing beef, as well as a competitor in high value markets of Japan and Korea. As such what happens in the US cattle markets will
generally have an impact on our markets at some stage.

Figure 1 shows how US Feeder cattle futures have tanked since
reaching a peak in July 2015. However, US Feeder do seem to have
found some sort of base, having bounced 12% since hitting a 3 year
low in November. We can also see in figure 1 that the US price rally,
along with a fall in the Eastern Young Cattle Indicator (EYCI) means
that after a brief period at a premium, our prices are back at a discount.
Believe it or not, this is a good thing, it means pressure on prices to move lower will ease.

Additionally the easing Aussie dollar has added further upside to US prices in our terms, Feeder cattle futures have gained 16%, adding support for local prices.

In finished cattle markets in the US the price improvement has been
even more marked. Figure 2 shows US Live Cattle Futures, which is
roughly equivalent to heavy grainfed cattle here, has gained 19.5% in
US terms and 23.5% in our terms. This equates to 100¢/kg cwt in our terms,
and basically means that US beef that competes with ours in Japan and
Korea is more expensive than it was two months ago.

Further encouragement for local prices can come from the fact that
Queensland Grainfed Cattle prices have historically spent long periods at or
around parity with US prices. Under a tight supply scenario, there is little
pressure on heavy grainfed cattle prices to fall.

Key points:

  • US Cattle prices have made a recovery from the 3 year lows seen in November.
  • The falling Aussie dollar has added more strength to the US equivalent prices in our terms.
  • If US cattle prices remain strong they should provide support for Australian values.

 

What does this mean?

Before the rally in US cattle prices at the end of 2016 we were concerned about downside for
heavy grainfed, and grassfed cattle. Eventually weaker heavy cattle prices would translate into
feeder and young cattle prices. However, the pressure on heavy cattle values has eased somewhat,
and while the market might struggle to move higher without help from the US, downside is limited
as long as US prices don’t tank again.

Continued strong heavy cattle prices will continue to support young cattle prices, as long as feed
remains abundant and cheap, which it should – at least in the short term.

 

A relatively sedate week

Posted on by Caitlin Dearden

After weeks of ‘excitement’ in the grain trade, it’s a relief to see a relatively sedate week. In this week’s comment, we look globally and locally. We also revisit the forward curve, and the opportunities for locking in forward swaps.


Let’s start globally, by taking a look at futures. In figure 1, I have plotted the spot futures. The market closed at a low of 402¢/bu this week, however overnight has regained some composure to close at 409¢, however ultimately is down 5¢ on the week. This is a fall of around A$2/mt which in the overall scheme of the previous weeks falls is miniscule. The market is treading water whilst we await more data, however with the northern hemisphere weather risk market close to an end the signs are not good, and growers need to make sure their strategy reflects this.

Yesterday I examined the proposition ‘Can basis save us?’, ultimately it cannot save us, but it can insulate us at times from the rest of the world. In figure 2, the basis levels are displayed, In recent weeks basis levels have traded in a narrow range, however maintaining at strong levels. At present grower selling is low and sporadic, therefore the question remains of what will happen when harvest arrives and growers start to sell.

In early July we recommended the use of a Dec’18 Chicago swap in our article ‘Should we lock a far forward swap?.’ In figure 3, we have compared the wheat forward curve for yesterday and the 3rd July, when the prior article was written. In that time the Dec’18 wheat futures have fallen A$42/mt stripping away the opportunity which was present.

What does this mean?

The focus firmly remains on the Northern Hemisphere. There are a few questions still remaining; How close have USDA estimates been to reality on both the wheat and corn crop?, how is the quality profile stacking up in France and Germany?, What will the Canadian spring wheat perform?

We have always advocated having an appropriate risk management strategy, to ensure that you are able to weather the storms as they develop.

The futures prices seen in July, are unlikely to be seen again this year, and we have to prepare for that.