Month: February 2017

Lamb supply and price yo yo continues

Lamb price goes up, more lambs come to the market, lamb price goes down. It’s a pretty simple equation but the trend remains up. For now. All sheep and lamb indicators felt the impact of stronger supply, except Merino lambs.

Just when we thought lamb supply was surely starting to wane, this week saw east coast yardings jump to their second highest level for the year. Figure 1 shows east coast lamb yardings, which were 55% stronger than the same time week last year.
Lamb slaughter remains weak, with yardings reportedly getting higher numbers of light and store lambs, which are hitting the market due to record prices.

The impact of the 30% weekly jump in yardings was a relatively gentle fall in price. The Eastern States Trade Lamb Indicator (ESTLI) eased 24¢ this week on the back of stronger yardings. Figure 2 shows some basic trendlines for the ESTLI, with the current price sitting right on the very steep upward trend from the end of December, but still above the January upward trend.

Merino lambs avoided the fall this week, as they haven’t quite had the same rally as trade lambs. Interestingly Merino lambs in Victoria and NSW are just above 600¢, while in South Australia, Merino lambs fell 25¢ to 535¢/kg cwt. It was worth making the trip to SA to buy Merino lambs this week.

In WA lamb prices defied the larger yardings, rising 18¢ to 576¢/kg cwt. The WATLI is showing an impressive upward trend, and has hit a 2.5 year high (figure 3).

The week ahead

The good thing about rising prices in WA is that shows that export demand seems to be strong. Supply is tight on the east coast, but not that much tighter than last year that you expect prices to be 100¢ higher. This also suggests that lamb demand is robust. Given the price of the main competing red meat, beef, it’s should come as no surprise that lamb prices have risen relative to last year.


No change to recent stronger trend

AWEX report a market this week that “responded with another week of solid rises”; fine wool continues to be the leader but it was hard to find a category that missed out with an across the board lift in prices. The gap between 18 & 19 microns in Melbourne is now out to 194 cents, this time last year it was +43 cents.

The EMI was up A$0.09, while in US$ terms it improved 3 cents with the Au$ quoted slightly lower for the week. Cardings continue to out-perform, with all 3 selling centres reporting strong increases and the relative Cardings indicators all nudging 1200 cents. (Fig 1.) Note that before 2011 the Cardings indicator rarely bobbed above 600 cents.

Again, this week 45,000 bales were offered with an increase week-on-week of 1,000 bales sold. Cleared to the trade were 42,500 resulting in a reduced Pass In rate of 4.7%.

Two points regarding clip preparation are worth noting as the wool market dynamics continue to evolve. These points are at the extreme ends of the micron spectrum with change noted in the fine & superfine market as well as the X Bred market.

Over recent years while the fine wool premium has hovered at record low levels, there has been little incentive to class out finer lines in the woolshed. These gaps are now starting to open up and classers now should be honing their skills to separate out the finer types aiming to participate in the growing premiums available. (Fig 3).

This week Mecardo noted that the trend to offer unskirted fleece lots had tempered. As the X Bred market has retreated in price the discount for poorly prepared or unskirted wool has increased. This increased concern about preparation is a normal response in a falling market. Both of these opportunities emphasise the need to get good advice from your wool broker when deciding on preparing wool to meet market conditions.

This week Riemann traded solid volumes, with a spread of trades across the 18.5, 19 and 21 MPG types, and for settlements from March 2017 out to July 2018. Price levels were seen as attractive to growers looking to capture some of the market momentum for future clips.

The week ahead

Next week Melbourne reverts to a 2-day sale along with Fremantle and Sydney. The roster is starting to tighten with 42,320 bales listed (42,500 sold this week out of a 45,000-bale offering), and the subsequent weeks have 42 & 40,000 bales listed.
Supply is contracting and demand looks solid so it’s difficult to see any reason for this market to retrace – good times for wool producers ……… about time I can hear some say!

Boats float the price

Soft wheat and feed barley prices have continued their move higher this week. Exporters are chasing these lower grades as they have become very cheap. Chicago Board of Trade also found some extra strength, until last night, which has been adding support locally, and providing some opportunity for new crop.

Most of the talk this week has been around ASW, especially in Victoria. With the Shipping Stems showing multiple boats are coming into Melbourne, Geelong and Portland over the coming month, looking for wheat, buyers are having to lift prices to secure supplies.

Plenty of ASW has been bought on CLEAR Grain Exchange, and direct through brokers at around $200/t Port in Geelong and Portland. Port Adelaide has seen action on ASW between $190 and $200/t. In the Melbourne Port Zone ASW had been up to $205/t.

The improving prices for ASW have been due to both increasing CBOT values, and rising basis. Geelong ASW basis has bounced off a four year low of -$27, to sit at a more respectable -$14 yesterday (figure 1). Additionally CBOT wheat has held onto most of its gains from recent weeks, sitting at $215/t in our terms. The result is ASW up around $20 from its lows. While the absolute price doesn’t sound great, a more than 10% increase should be welcome.

Feed Barley has also made gains, but more moderate, up $10 from the lows to sit at around $165/t at Port. Again, absolute prices are not great, but the increase has at least provided some payoff from storing.

The week ahead
CBOT tried to break out of its five year downtrend last night, but came crashing back thanks to the sheer volume of wheat in the world. December-17 and March-18 CBOT wheat is priced around $250/t, and at better than full carry to the current market. This equates to a local APW price of $240-260/t under current basis levels, which looks pretty attractive given the state of the market at present (figure 2).

That sort of increase in supply will do that

Strong cattle prices have seen more cattle drawn out. With Meat and Livestock Australia’s (MLA’s) weekly slaughter data for last week showing a 2017 high. It seems things settled a bit this week, but rising export meat prices are at least supporting cattle prices.

In last week’s cattle commentary Matt noted the strong yarding’s in Queensland, which resulted in the Eastern Young Cattle Indicator (EYCI) losing 19¢. MLA’s slaughter figures for last week, released on Monday show that the increased supply in the yards was also reflected at processors works.

Cattle slaughter on the East Coast for the week was up 11% (figure 1), and just 6% below the same week last year. In Queensland slaughter was up 22% on the previous week, and 10% on last year. Dragging the chain was Victoria and SA, and to a lesser extent, NSW, which were down 29, 27 and 6% on last year respectively.

It remains a bit confounding that the supply dearth is concentrated in the southern states, given that the herd liquidation, and subsequent rebuild, should be concentrated in the north.
There is some good news on the export front. Frozen Cow 90CL export prices managed to gain some ground this week, hitting a six month high of 591¢/kg swt, (figure 2) despite a rising exchange rate. The EYCI premium to the 90CL has hit an 8 month low of 44¢. Strong support for the EYCI is only 50¢ away.

The week ahead
Key cattle areas in Queensland and Northern NSW are expected to get good rain over the coming week. This should reduce yarding’s and provide some support for young cattle prices in the short term.

Finished cattle prices usually rise at this time of year as supply wanes. This usually lasts until mid-April, when prices ease. This will be the first test of the market, but strong export prices will limit downside.

Export prices to Japan finding support for now

Prices for beef exported to Japan has been easing of late, which is a bit of a concern, given Japan is our major high value export market. With Japanese beef export prices sitting on a key support level, we take a look at what might happen to markets if prices break lower.

In 2016 just under 26% of Australia’s beef exports went to Japan, totalling 264,325 tonnes. Figure 1 shows that Australia’s beef export to Japan have been on the decline for the last 10 years. Declining export volumes to Japan have been largely due to the US increasing market share after being locked out of Japan from 2004 to 2006.
Not surprisingly there has been more grainfed beef displaced in Japan, than grassfed beef. The US export exclusively grainfed beef to Japan, and as such Australia is still the main source for grassfed beef.

Australian beef has also found markets other than Japan, where the value is similar. The ‘other’ markets, mainly South East Asian Countries, and China, have increased their share of Australian beef exports to 31% in 2016, up from 12% in 2007 (figure 2).
Regardless of the shift in export destinations, Japan still remains a very important market for Australian beef, and changing prices there will impact cattle prices in Australia, eventually.

Figure 3 shows the price of Grassfed Fullsets exported to Japan, along with the 90CL Frozen Cow exported to the US, and the monthly average National Heavy Steer Indicator. Since November the Grassfed Fullset has fallen nearly 9%.

A majority of the price fall occurred in December, as US beef imports increased 9% on November, and a massive 31% on the previous December. Australian beef supply was also larger in December, up 3% on November, and 17% on December 2015.

The Grassfed Fullset price currently sits at 834¢/kg swt, which as shown in figure 3, is still 27% stronger than 2014, and 48% above the 2010-2013 average. Despite the fall in US cattle prices, and further shrinking of our market in Japan, beef export prices to that destination are finding solid support at 800¢/kg cwt.

Key points:

  • Australian Beef exports to Japan have been shrinking, with grassfed beef gaining a larger proportion.
  • Beef export prices to Japan have eased in recent month, now sitting on key support levels.
  • Tight supply of grassfed beef should continue to support prices in the short term, but there is medium term downside.

What does this mean?
Heavy steer prices fell in line with export values in late 2016, and currently sit in the 540-550¢/kg cwt range. If export prices can hold at current levels, heavy steers should find support at 500¢/kg cwt if and when supply increases in the autumn.

Over the medium terms the risk is that increases in cattle and beef supply, both on a global and national scale, pushes Grassfed beef export prices to Japan back to around the 700¢ level. This would be more in line with where the 90CL Indicator is currently sitting.
A move of this sort would see Heavy Steers making more like 400-450¢/kg cwt, than the 500-600¢ we have seen in recent times.


Strong recovery highlights underlying tight supply

A firm recovery in price across all east coast categories of lamb and mutton reflecting the underlying tight supply anticipated this season to see the Eastern States Trade Lamb Indicator (ESTLI) surge to fresh highs, closing at 664¢/kg cwt yesterday – a gain on the week of 7.4%.

The stellar performance of the ESTLI so far this year reflected in the seasonality percentage price gain chart displayed in figure 1, showing the gains since the start of the season extending beyond the “normal” range (as represented by the green band showing where seasonal price gains have fluctuated 70% of the time over the last decade). Strong weekly gains not limited to trade lambs with the east coast heavy lamb up 7.3% to 671¢, Merino lamb up 5.6% to 596¢ and restocker lamb up 13.4% to 754¢/kg cwt.

East coast mutton also enjoying some upward momentum on the week, reflective of the trade and heavy lamb gains, to see it rise 7.5% to 441¢/kg cwt. Figure 2 showing the seasonal percentage gains for mutton so far this year respectably tracking along the ten-year average pattern. Although the price pattern for mutton not as robust when compared to the ESTLI performance and the pattern set by mutton during the 2016 season.

Figure 3 highlighting the underlying tighter supplies of lamb and sheep this season with the combined east coast lamb and mutton slaughter levels continuing to trend below the 2016 pattern and under the five-year average for this time of the year.

To read more about the expected tight supply during 2017 and our ESTLI forecast released in December 2016 click here.

The week ahead
Autumn generally heralds a period of price consolidation for the ESTLI as shown by the sideways movement of the ten-year average seasonal percentage price gain pattern – figure 1. This would suggest that the ESTLI will find it difficult to continue to post the impressive gains recorded since the start of the season and will likely trend along the top of the green band until the next price surge as we head into the usual winter peak.

Interestingly, projecting a percentage price gain mirroring the top of the green band during winter 2017 of around 35% on the starting price this season of 549¢ would place the winter peak for the ESTLI at around 740¢ – not far off our ESTLI forecast released in mid-December 2016 calling for a winter peak of 750-755¢ (see link above).

Steady as she goes for wool

AWEX report a “good solid market over three selling days”; again it was the fine wool leading higher while the rest of the market held firm. Crossbreds also finally found some support and reversed their long downward spiral to see the 28 MPG improve by 19 cents.

The EMI was up A$0.03, while in US$ terms it improved 16 cents on the back of the Au$ increasing by almost US$0.01 over the week.

While 47,000 bales were originally listed, only 45,400 bales were eventually offered with 41,500 sold into a market resulting in a 7.6% Passed In rate. The PI rate was skewed somewhat with growers in Fremantle passing 13.5%.
The question around at the moment is can fine wool continue to rally; will we see an increase in the premium (Basis) for fine wool over medium wool as the clip shifts broader as a result of the improved seasonal conditions? What is the nett effect of recent decisions by Merino sheep producers to re-focus on meat production alongside their traditional wool focus? Historically a push to bigger sheep and more lambs meant a broader micron from these sheep; but has the advances in breeding for wool quality evident over the past 20 years negated this usual outcome?

As Mecardo reported, 21 MPG types were up 34% in volume for the 3 month period, continuing the trend of moving wool across the micron spectrum. The bottom line is that increases in the 20 – 22 micron types are at the direct expense of volume in the 17 – 19 micron categories. Even if the Autumn break is poor, cheap grain prices should mean that sheep are maintained in peak condition again maximising performance but also continuing the pressure on the clip to move broader.
While we can speculate that the long-awaited rally for fine wool will be the saviour of the industry and reverse the trend away from Merino sheep, the reality is that the market will need some time to adjust after a long period of relatively cheap fine wool. Countering this though is the fact that the world wool processing industry has as a result of cheaper fine wool prices become accustomed to using the finer types; cheap basis and plenty of volume over the past 4-5 years has encouraged greater demand.
We also know that fine wool rallies can become price spikes; the problem is that price spikes in the past have been short-lived. Figure 2 shows that the spikes in September 1994, June 2001 and March 2011 were followed by severe corrections. Could this time be different?

This week Riemann traded solid volumes, however most of the action was in the 19 MPG tenor, a big change from volume traded over the past 4 – 5 years which has been 21 MPG focused. This is reflecting where buyers now have their concern; so perhaps it would be prudent for wool growers to take a contrarian approach and focus on 21 MPG contracts to protect future production. This is a good time to discuss with either your broker or Mecardo the type and tenor of forward contracts; high prices and potential further upside for fine wool making an interesting case for trading Basis, something the good grain traders regularly exploit to advantage and worth considering for the next wool clip.

The week ahead
Next week Melbourne is selling over three days with Fremantle and Sydney on Wednesday & Thursday. The strong market has again enticed 47,500 bales to be listed for next week, however forward projections for the following weeks trail off to 40,000 and 43,000.

Wheat gets a boost from the WASDE

Normally World Agricultural Supply and Demand (WASDE) reports released early in the year are relatively benign. The old crop is largely known, with only minor changes in exports to move the market. Not this month however, with wheat getting a boost thanks to some surprises.

Picture1World wheat production was cut by 4.4mmt this month, largely thanks to a downgrade in India. The United States Department of Agriculture (USDA) are still saying 2016-17 will be the biggest crop on record. However, a small increase in consumption (Table 1) and a decrease in ending stocks saw the stocks to use ratio decline from 34.2% to 33.5%. Sounds small, but as shown in figure 2, the stock to use for 16/17 is now smaller than last year.

Picture2In theory, a smaller stocks to use ratio should mean higher prices than last year. This had funds jumping out of wheat last night, pushing the CBOT spot contract to a 7 month high of 442¢/bu (figure 3). Still a long way from the 500¢ of February 2016.

Picture3In our terms the stronger AUD sees prices just below the 7 month highs hit in January, with the spot contract at $213/t, up $5 for the week, and Dec-17 at $238/t, shown by the red line on figure 3. There is full carry into Dec-17, and those concerned about prices ticking along at current levels for another year might be tempted to sell a bit at these levels.
Soybeans took a bit of a hit on an upgrade in US stocks, but oilseeds in general were stronger. ICE Canola has moved back to its recent high of $CA527/t which in our terms is exactly the same, thanks to the currencies being at parity.

The week ahead
Old crop wheat has found a little bit of strength in the last week as a stronger CBOT, and buying for export shipments has added $5-10 to APW and ASW prices. The latest jump in CBOT might add another few dollars today.

The latest WASDE shows we are entering a traditionally volatile period for grain prices on international markets, and there might be opportunities to take some derivative cover for next year, or even on physical sales to be made later in 2017.

Increased northern throughput takes a toll

Picture1Surging weekly Queensland throughput and above average NSW throughput weighed on cattle prices in these regions dragging down the east coast figures this week with the Eastern Young Cattle Indicator (EYCI) dropping to levels not seen since the start of the season.

Figure 1 highlights the yarding pattern so far this year in Queensland with the large jump in throughput evident for this week compared to the 2016 trend and the five-year average pattern. The 19,246 head recorded a 57.8% increase on the average for this time of year. Queensland the only state to see price falls in all NLRS reported saleyard categories of cattle with QLD Feeder Steers leading the decline posting a 4% drop to 353¢/kg lwt.

Picture2NSW experiencing price declines in all NLRS saleyard categories, apart from Medium and Heavy Steers, with Trade Steers headlining with the biggest percentage decrease, down 6% to 332¢/kg lwt with elevated NSW throughput appearing to contributing to the price pressure – figure 2.

The EYCI dropping 3% on the week to close at 636.5¢/kg cwt despite beef export prices managing to hold onto the recent gains with the 90CL frozen cow tracking sideways to finish the session off at 585.5¢/kg CIF – figure 3. Softening US cattle futures creating some headwinds for the 90CL and providing a barrier to local cattle prices extending their gains achieved since the start of the season.

Picture3Register here for the MLA/Mecardo Cattle Market Webinar scheduled for the 16th February at 1pm AEST. Registered participants will be able to view a copy of the webinar at a time that suits them if unable to view it live.

The week ahead
While it is not uncommon to see weekly throughput in Queensland test toward the low 20,000 head vicinity during March/April the surge reported this week comes a little earlier than anticipated. Perhaps brought forward by the attractive price levels and the prospect of a drier than normal February – April period as forecast by the Bureau.
If you haven’t already done so, please consider signing up for the cattle market webinar we are running in conjunction with MLA on the 16th February – see link above for further details.

Global cattle in A$ terms

Key Points 

  • Diverging price trends between the US and Australia during much of 2016 saw the usual EYCI discount spread to US Feeder Steers move into extreme positive spread territory.
  • A lift in US cattle prices in the last quarter of 2016 saw the spread return to a discount.
  • Current US Feeder Steer prices at 122US¢/lb translates to around 351A¢/kg lwt while the EYCI is trading at around 342A¢/kg lwt

Picture1Often at Mecardo we look at local and global cattle price relationships in US$ terms as the US cattle market is one of the key drivers of Australian cattle prices over the longer term. However, in this analysis we flip the magnifying glass to take a look at global prices in our terms.

Figure 1 shows a handful of global cattle prices compared to the Eastern Young Cattle Indicator (EYCI) expressed in A$ terms on a live weight basis. Clearly, we can see for much of the period between 2010 to 2013 US Feeder Steers held a reasonable premium to comparable cattle prices in Brazil, NZ and Australia. However, during 2013 to 2015 the US market took off and the prices there doubled from 300¢ to over 600¢/kg lwt. During much of the 2013 to 2015 period prices in Australia remained subdued due the very high drought induced turnoff and Brazilian prices were kept under wraps due to a rapidly devaluing currency, while prices in NZ showed some modest gains.

Australian cattle prices started to rally into 2015 as seasonal conditions improved and for much of the 2015/16 seasons continued to probe higher as restocker demand buoyed the market and an optimistic outlook encouraged the beginning of a herd rebuild. In contrast, being further along the rebuild phase, US cattle prices began to ease during this time frame as production here increased.

The divergence between US and Australian prices can be seen by the sharp narrowing of the percentage discount spread between the EYCI and US Feeder cattle as highlighted in figure 2. Indeed, the spread narrowed so much that it went to positive territory for much of the 2016 season. Overlaid on the chart for figure 2 is the green band showing where the spread has fluctuated for 70% of the time, the 95% range as indicated by the two red dotted lines and the long-term average spread, which sits at a 43% discount of the EYCI to US Feeder Steers, when comparing priced expressed in A$ terms.

Picture2Taking a look at the correlation between US Feeder Steers and the EYCI we can see a moderately strong relationship between the two series when looking at annual average prices expressed in A$ terms – figure 3. Although, as previous Mecardo analysis has shown, the correlations between Australian and US prices are stronger when comparing annual average prices in US¢/kg.

Click on the links above and below to read past analysis on correlations between US and local prices in US$ terms.

EYCI and 90CL beef export price
US Live cattle futures and National Heavy Steers

What does this mean?
Picture3The lift in US prices since October has taken some of the downward pressure off local prices. Although from a longer term historical perspective local prices remain in overvalued territory and have not been helped by a stronger A$ during January.
A continuation of the downtrend in US prices or a significantly higher A$ (above 85US¢) would see some pressure return on local prices. However, on the flipside, tight local supply, a continuation of the herd rebuild and the remnants of a very favourable weather pattern during 2016 should be enough to see local cattle price remain buoyant for the first half of the year.