Month: March 2017

Grain: Stock fears subdue market

At times, I feel jealous of my counterparts writing about the livestock and wool markets. They always seem to have something positive to comment on with markets driving higher. However, markets are cyclical and things can change quickly.

The futures market has subsided (figure 1) in the past week, as areas of dry concern receive forecasts of substantial rain in the US, and minimal bad news coming out of Europe. The reality is that the trade is concerned about USDA stock reports due next week. This asks the question, what if exports have not been high enough to deplete stocks?

The extent of the global stocks is applying pressure, which since the start of the year has seen the spot futures trade in a band of 20¢/bu from 420¢ to 440¢. When we look at the seasonality of the spot futures contract (figure 2 -animated) we can see that we are well below the average since 2010, yet looking back further to 2000 & 2005, we are closer to the average futures price.

However at a local level, we have seen basis increase across all port zones (figure 3) at an average increase week on week of $3.50/mt. This is using the public bid, and there are further opportunities out there for non-public sales.

We expect also that in coming weeks, we may see improving feed barley prices as buyers scramble to fill orders for the massive sales into Saudi Arabia. So, it’s not all bad!

Next week

All eyes on the northern hemisphere, every day that goes by without hiccup is a day with less risk. The major risk is huge carryout and an average to above average crop.

We will get an insight into inventory levels with next week’s USDA quarterly stock report.







May you live in tranquil times.

There is an old Chinese curse, “May you live in interesting times”, used ironically to suggest that uninteresting times are more life enhancing than interesting ones. It seems our friend Donald, would like to consign us to a lifetime of interesting times.

After experiencing strong momentum in March, it seems that gravity has exerted its force on the wheat futures market, with a return to pre-rally levels (figure 1). In recent days much needed rainfall has fallen in US growing regions. It was not unreasonable to expect this fall in the market, especially as the US falls in importance on the international wheat market.

In the Black Sea nations, conditions continue to be promising for the coming season, with winter kill below average. Although the crop will be unlikely to match last year, it will still dominate the export market. Interestingly a Russian government official commented that fertilizer and seed purchases had increased 30% this season.

In figure 2, the basis levels around Australia as a percentage of the overall price has been displayed. During this harvest, basis increased dramatically, becoming a third of the pricing complex in some states. Although since weakened, basis levels remain strong, and protect us from falls in the futures market.

In recent weeks, Trump has been rattling the tariff saber with China. During the Trump election campaign, he ran on a platform of reforms to trade. In his defence, Trump has certainly gone all in, however only time will tell whether this will be to the betterment or detriment to the voters.

In figure 3,4, & 5 (animated), we can see the futures prices of a number of commodities (pork, soya, soya meal), which all have strong links with China. As we can see these markets have experienced strong falls in recent weeks, as discussions become more heated.

On a regular basis China turns around vessels of soya and corn from the US; perhaps we will see an upsurge of cargo rejections in retaliation.

What is assured, is that we are unlikely to be living in tranquil times for the foreseeable future, and black swans are likely to be a regular occurrence.

What does it mean/next week?:

The ‘tariff war’ is going to place Australia in a difficult diplomatic position, between an important customer and a traditional ally.

However, if handled well by our government could provide a favourable result for Australian industries.

Nearly a record for mutton

The rainfall was better than expected, but the impact on price was about right.  This week east coast rainfall saw lamb prices move back to a one month high, while mutton jumped to what is very nearly a new record.  In the west prices corrected, but remain at the stronger end of the scale.

The main mover this week in sheep and lamb markets was mutton. The widespread rainfall across all east coast major price lamb areas saw supply fail to pick up, following a public holiday disruption last week.  Figure 1 shows mutton yardings on the east coast actually fell.

With producers holding onto sheep, mutton yardings their lowest full week level since November, and improving demand saw prices jump.  The National Mutton Indicator rally 38¢ to hit a new 6 year high of 450¢/kg cwt (figure 2), just 22¢ off the record reached in March 2011.

Lamb prices also rallied, but not by the same extent.  The Eastern States Trade Lamb Indicator (ESTLI) gained 10¢ to hit 632¢/kg cwt, a four week high.  Interestingly, this week was the third most expensive week for lambs this year (figure 3).

In the west trade lamb prices fell 26¢, to now sit below the ESTLI at 619¢.  Mutton prices in the west are, however, the most expensive in the country, at 469¢/kg cwt.  They were marginally more expensive two weeks ago, and for a week in 2011, but there has rarely been a better time to sell sheep in the west.

The week ahead

Tight supply continues to support sheep and lamb markets, and with rain this week, there is unlikely to be a lot of pressure to sell, with high prices the only thing that might keep supply flowing.

There could even be a rally towards 700¢ as we move towards winter, with everything lining up for sheep producers at the moment.

Will Brazil’s issues prove a boon for Aussie beef

If you read agricultural news websites, or even listen to the ABC’s country hour, you will be aware of the beef ‘scandal’, which has hit Brazil this week.  The reasons behind the scandal have been well documented, so we won’t repeat them here.  What we will do is look at what a suspension of Brazilian imports might mean for Australian beef exports.

The key outcome of the ‘Brazilian Beef Scandal’ thus far is China and Hong Kong suspending beef imports from Brazil. Figure 1 shows that Hong Kong and China were two of the three biggest markets for Brazilian beef in 2016, accounting for 29% of total exports.

The current suspension of the China/Brazil beef trade will obviously mean that a lot of Brazilian beef will have to find a new home.  But how much of a hole does it leave in China’s beef supply?  In 2016 Brazil was the largest source of China’s beef imports, accounting for 29%.

If the suspension continues for any significant amount of time, China will be looking to replace Brazilian beef from its other current beef sources, the main ones being Uruguay, Australia and New Zealand.

Assuming the Chinese suspension of Brazilian beef lasts a month, China and Hong Kong will have to import around 29,000 tonnes of beef from somewhere else, if it is to maintain supply.  If Australia provides a third of this tonnage, it will double our average beef exports to China (figure 2).

In reality, Uruguay and New Zealand are not really in a position to increase exports to China.  Figure 3 shows the Uruguay and New Zealand have much smaller export programs than Australia and Brazil.

India can fill some of the void through the ‘grey channel’, but Australia is in a good position to replace Brazilian beef in higher value markets.

Obviously if Australia was to in part fill the Chinese gap, it would have to be diverted from other markets, which would force them into a sort of bidding war with the Chinese, pushing up export prices.


Key points:

  • The Brazilian beef scandal has seen China suspend imports of beef from Brazil.
  • Australia is in a good position to replace some Brazilian beef in China, pushing up export prices.
  • If the suspension on Brazilian beef lasts some time, improved export demand should provide strong support for Australian slaughter cattle prices.

What does this mean?

For a country with such a large export program, being suspended from your biggest market is going to be disastrous for beef and cattle prices.  In Australia it would be similar to the US or Japan banning our beef, and we then either need to increase domestic consumption or find another market.  Prices would fall very, very quickly.

As with any trade restrictions, the bad news for Brazil could be good news for Australian cattle producers and processors.  Increased demand from China will push export prices higher, and given the continued tight supply of cattle, much of this would be passed onto producers.

However, China are not likely to want big increases in beef prices locally, and as such are likely to be working with Brazil to sort out issues.  As such there is no way of knowing how long the suspension will last.

Rain and Black Swan not related

There were good reasons for cattle prices to rise this week.  Demand was up, from restocking and processing sectors, while supply was down.  There were two main reasons, widespread rainfall, and the good old ‘black swan’, which flew in from Brazil.

In reality the widespread east coast rainfall would have been enough to halt the gradual slide in cattle markets.  Almost all major cattle areas in Victoria and NSW got between 25 and 50mm, while in Queensland it was the far west, and south east which missed out.

On the back of the rain, supply tightened.  Figure 1 shows that Eastern Young Cattle Indicator (EYCI) yardings were steady on last week.  However, it should be remembered that last week included a public holiday in Victoria, so supply could be said to be weaker.  Indeed, EYCI yardings haven’t been this low in a non-holiday week since 2013.

Young cattle prices rallied, but you might expect a bit more.  The EYCI gained 11¢ for the week to reach a five week high of 622¢/kg cwt.  NSW and Queensland were the main movers, with feeders and trade steers gaining ground, while in Victoria prices were steady.

Heavy Steers were the biggest movers in slaughter markets, with Qld gaining 31¢ to 524¢/kg cwt, and NSW 25¢ to 578¢kg cwt (figure 3).  There was little movement in Victoria, but prices were already in the 570-580¢ range.

It could be speculated that improving demand for grassfed export beef, the type produced by Brazil, has already started to filter through to cattle markets.

The week ahead

The better conditions are not going to go away soon. The improved demand for slaughter cattle could easily dissipate next week, but it’s very uncertain.  What we can expect is tempered downside in young cattle from here, as there will be some pressure over the coming months, but improved restocker demand should soak it up.

Signs of nervousness, but softer A$ helping out

A bit of a mixed market this week with the very fine end still surging forward but some beginning whispers of nervousness among exporters at the auctions this week starting to creep in, although this may begin to be eased by a softening A$.

The EMI closed flat on the week in A$ terms at 1546¢ and slightly softer in US$ terms at 1184¢, down 4¢. In the West the indicator was off slightly more at around a 20¢ decline in both A$ and US terms – figure 1. Reports from wool brokers this week suggest that for the first time in a few months’ exporters have begun to question how long the rally can be sustained.

Given the higher volumes on offer, the reaction of the market as a whole not too bad with the 20-22 micron categories taking the most heat. A total of 45,507 bales sold out of 49,214 on offer resulting in a slightly higher pass in rate of 7.5%

Taking a look at where the EMI is trading in A$ terms, when compared to US$ terms, relative prices being paid for Aussie wool by offshore buyers is still lower than the 2012 and 2011 peaks, suggesting that there may be some life left yet in the current rally – figure 2. The market potentially taking comfort next week in a further softening of the A$ overnight toward 76.3US¢, particularly if the currency can continue to drift off over the weekend. Most major Aussie banks still forecasting an A$ toward 70¢US by the year end which will provide medium term support to the wool market should they prove to be correct.

The week ahead

Next week we have just under 47,000 bales listed for sale with trading schedule two days. A drop in volumes on offer for week 40 and 41 toward the lower 40,000 region could see further gains in price in the coming week, particularly if the A$ can slide back towards 75¢US.



Call the feds. Australian dollar rises.

Another interesting week in the markets this week. The grain markets lost some ground, before regaining their losses. The US fed increased interest rates for the 2nd time in three months, however the impact on the A$ was not as expected due to less hawkish sentiment.

Early this week wheat futures fell on the back of lack of fresh data, and encouraging crop conditions in eastern Europe. The generally benign conditions and the large global surplus is keeping a dampener on large upside potential. The market fell around 15¢/bu ($5.7USD/mt), before regaining strength to hold currently 8¢/bu ($2.3USD/mt) above last Friday (figure 1).

At a local level we saw basis levels fall across the board (figure 2). The average change from early this week to yesterday was $8/mt, although the Eyre Peninsula was the poor cousin losing $10/mt in basis. In the chart it is quite clear that Port Lincoln since early December has struggle to gain any local strength.

This week the US fed jacked up their interest rates by 25 points, typically this would put pressure on the Australian dollar however this was not the case. The Australian dollar rose to above 77¢ (figure 3), and the AUD trade weighted index rose dramatically.

The fall in the US dollar was a result of the trade expecting, more bullish sentiment in the fed commentary, with the expectation of a more expedient increase in rates over the next 12 months. At a local level some analysts are projecting an Australian rate rise as being likely in the coming months. However, with inflation as low as it is at the moment its unlikely to see a local interest rate increase in the short term.

Next week

There are some concerns in the US related to dry weather, and eyes will be on weather forecasts pointing toward a deluge in the coming weeks. If this eventuates it will lead to an improvement in US crop potential.
As always at this time of year the focus is on the performance of the northern hemisphere, and each week which passes without incident will result in an eventual erosion of any weather premium in the market.

Lower throughput and higher export prices keep market steady

Broadly stable national markets evident this week for most categories of cattle as a combination of lower throughput and slightly higher beef export prices put a base under the market. National trade steers the leader, given a boost by the southern states to post a 4.1% gain to 340¢/kg lwt. In contrast, heavy steers the laggard to see it down 2% to 288¢/kg lwt on some softer Queensland prices.

Figure 1 shows the east coast throughput tracking lower again on the week, despite a lift in Queensland yarding numbers, as the southern states start to restrict supply. The 43,900 head reported marginally softer than last week, but quite a bit lower than the same time in 2016 when just over 64,000 head were going through the east coast sale yards.

State cattle indicators mostly flat to slightly softer, although medium cow in SA and Tasmania taking a reasonable hit to see 24.2% (172¢’kg lwt) and 8.6% (201¢/kg lwt) declines, respectively. Victorian trade steers the top performer at the saleyards this week, up 4.8% to 334¢/kg lwt.

Western prices softer across the board with pastoral cows mirroring the SA medium cow falls, down 25.5% to 168¢/kg, while the Western Young Cattle Indicator (WYCI) only marginally lower to 682¢/kg –  a 2.3% drop on the week. The Eastern Young Cattle Indicator (EYCI) reasonably stable, with only a 0.5% decline to close at 611¢, exactly where the 90CL beef export prices managed to finish the week – figure 2.

The week ahead

The 90CL on a par with the EYCI and the weekly rainfall forecast (Figure 3) showing some reasonable falls ranging between 10-50mm to much of the eastern seaboard should continue to underpin cattle prices. It may even encourage a further lift in the southern states as producers take solace from cooler temperatures as the Autumn starts to show its face.


How relevant is the ESTLI?

Regular readers will know that when we talk about lamb markets, we use the Eastern States Trade Lamb Indicator (ESTLI) as a base for our analysis.  The regular reporting and widespread coverage of the ESTLI make it a reliable gauge for the level and direction of the lamb market.  However, with the recent launch of MLA’s new market information website, we can now drill down to saleyard level and get some specific regional spreads to help guide buying or selling decisions.

The ESTLI is a broad indicator, taking in 18-22kg lambs sold at NLRS saleyards on the east coast.  MLA’s excellent new market information and pricing tool allows producers to look at individual saleyard lamb weekly prices for a range of weights and buyers.  It doesn’t matter what type of sheep or lamb is being sold, MLA’s tool allows you to look at last week’s price and a chart or table of up to 3 years or historical data. Additionally, the data can be exported into excel so it can be further analysed.

To give an example of how helpful this data can be, we have run some comparison of price for 20-22kg lambs, sold to processors, in Hamilton and CTLX.  To get a good data, we had to merge the young lamb and old lamb prices series, and this makes it obvious when young lambs arrive in these markets. This analysis will give us an idea of how reliable the ESTLI is as an indicator for these yards at different times of year.

Figure 1 shows weekly prices for the ESTLI, Hamilton and CTLX lambs over the past 3 years.  While prices do tend to move together, there are time when lambs Hamilton and CTLX are at significant discounts to the ESTLI.  If you are selling in these centres, these times are to be avoided.

Figure 2 gives a bit clearer picture of the premiums and discounts for lambs at Hamilton and CTLX.  Interestingly, both yards have an annual dip in prices relative to the ESTLI in the spring, with Hamilton seeing stronger discounts.

Looking at markets on an annual basis shows a clear strategy for trade lamb producers who use these saleyards.  At Hamilton, there is an annual heavy discount for trade lambs to the ESTLI, starting in September and not really correcting until November.  This is due to the dearth of lamb numbers, and specifically young lambs, with a critical mass not usually arriving until November, when prices generally run at a small discount to the ESTLI.

At CTLX (figure 4) the trend is similar, but discounts are not as heavy, while lambs command a premium to the ESTLI in late spring, when a bulk of the ESTLI supply is coming from Victoria.

Key points:

  • MLA’s new market information tool allows detailed analysis of individual saleyard prices relative to the ESTLI.
  • Both Hamilton and CTLX experience discounts to the ESTLI in early spring, before new season lambs arrive.
  • The ESTLI is a reliable price indicator for these yards except for the early spring, when alternative markets should be sought.

What does this mean?

The brief analysis tells us that for most of the year the ESTLI is a good indicator of prices at Hamilton and CTLX.  When lamb prices move to heavy discounts to the ESTLI is when there aren’t many lambs being sold.  This tells us that if we are going to sell lambs in early spring, these saleyards might not be the best option.

We can also see that strong premiums to the ESTLI don’t last long in either saleyard.  Either the rest of the market catches up, or yardings increase to see prices fall the following week.  Either way the market corrects.

This data is available for all NLRS reported markets, and can be a valuable took in looking at market trends, and timing sales.

Lamb prices go wild in the west

Lamb markets seem to have found some sort of level where buyers and sellers are happy, with prices largely steady this week in the east.  In the West the lambs were the most expensive in the country.

Supply was back this week on the east coast, as the public holiday in Victoria impacted numbers.  It was in NSW and SA where prices rallied however, with their respective trade lamb indicators gaining 10 and 17¢ to 622 (NSW) and 576¢/kg cwt (SA).

This lifted the Eastern States Trade Lamb Indicator (ESTLI) to 622¢/kg cwt, a three week high.  Figure 1 shows that it has deviated slightly from the trend seen in 2011, but still remains very strong.  Lamb producers are basically getting $20-25/head more for their lambs this year than last year, which is a pretty good result.

Figure 2 shows the stellar rise of lamb prices in WA, as they move to a premium to the ESTLI for the first time in 15 months.  Lamb prices in WA have rallied for four and a half months, and added 200¢, or 44%.  This weeks 16¢ rise to 645¢/kg cwt was in spite of a 40% increase in yardings.  The lift in yardings might be due to over the hooks quotes running almost 100¢ behind the saleyards.

Mutton values remain strong, with Victoria having an average price of 443¢/kg cwt this week, the highest in the country.  In the west mutton is slightly behind, having fallen 46¢ to 438¢/kg cwt this week.


The week ahead

The rain forecast in figure 3 should see solid support for lamb and sheep prices over the coming weeks.  It will encourage holding lambs, and sheep as it looks like an autumn break for at least some parts of the country.

Downside is likely limited in the short term, unless there is a backlog of lambs about to hit the market.  It’s hard to imagine they’ve been held this long with prices at these levels.