Month: March 2017

Glory days for wool growers

A review of prices and sentiment 12 months ago, helps explain the euphoria that wool growers are feeling at the moment. Back then fine wool was at all time low premiums to medium wool. Fast forward to now and the AWEX reports note that it’s the fine wool that is driving the market.

This was a big week for prices on top of a stellar run over the past few sales. The EMI lifted 24 cents, but with a stronger Au$ it was 43 cents higher in US$ terms. To pick a MPG category, 18.5 was quoted +80 cents in Melbourne, +95 cents in Sydney and +59 cents in Fremantle over the week.

These moves shifted the fine wool premium to the highest levels since 2011, over this period the low for 18/21 Basis was 30 cents three years ago, it now sits at 708 cents. (Fig 2.)

One way to put perspective on where prices are relative to the past is via Percentile Tables. Since 1996 only 18, 21 & 22 MPG have reached higher levels, that is for 100% of the time since 1996 the market has been lower than the current price for all other Merino micron types. No doubt a fitting reward for those that have stayed the course and are now selling wool at very exciting prices.

Like all markets, high prices don’t last forever. One theory is that “high prices are the antidote for high prices”; that is high prices encourage increased production which then causes prices to fall. Due to the low sheep numbers, and the competition from other farm activities (prime lambs are also very attractive), any increase in wool production will be slow at best.

Coupled with the virtual non-existence of any wool stocks either on farm, in brokers stores or in mills; then the outlook has little supply pressures ahead.

So, is this time different? Usually there is some analysis that says the current rally (note the sharp spike in 18 MPG Fig 1.) will be different from the past and not have a correction. At this stage I don’t think anyone really knows, but caution is the best way forward and fine wool should be sold as available and forward sales for future production progressively made.

The week ahead

The market in Fremantle closed a little softer for 20.5 and coarser wool so some caution for the 2 day sale next week. A increased offering of 51,200 bales is rostered for next week, over 10,000 up on this week’s clearance of 39,800. In subsequent weeks though, AWEX is forecasting back to 42,000 bales per week.

Brazil adds and Australia worth of oilseeds.

The United States Department of Agriculture (USDA) released their monthly World Agricultural Supply and Demand Estimates (WASDE) last night.  While there was little action in wheat markets, some rather large upgrades to production in soybeans and corn battered some prices.

It’s a bit unusual to get large shifts in supply or demand in the WASDE report at this end of the growing season.  Most world crops are all but in the bin, with just South American summer crops, corn and soybeans still to be harvested.

It was South America, and more precisely, Brazil, where the action was.  The USDA increased Brazil’s soybean production by 4mmt, and while the market was expecting a 2mmt rise, the size of the increase still gave it a jolt.  Brazil is now expected to produce 110.81mmt of soybeans this year, up nearly 11mmt on last year.  To put this in perspective Australian Canola production this year is expected to be 4.1mmt, so Brazil has added an Australian Oilseed crop in the last month.

Table 1 shows the lift in Brazilian production managed to shift world oilseed ending stocks nearly 3% higher (figure 2).  Increasing consumption means the stocks to use ratio is 17.2%, marginally higher than last year’s 16.9%.

The USDA also lifted Brazilian corn production, increasing 5mmt, and Argentina by 1mmt.  This increased world ending stocks by 1.4% thanks to some increases in consumption.  This sees the global stocks to use ratio still marginally lower than last year, which should provide some price support.

The week ahead

Not surprisingly grain prices fell across the board on the WASDE report, with soybeans down 1.5%, corn down 1.3% and wheat down marginally to sit at $215/t in our terms this morning.  ICE canola managed to hold it’s ground.

In local markets there was strong demand for wheat again this week, with the strong export program providing support despite the small decline in international wheat values.

On the slide in Queensland

Cattle markets found a little support this week, with the Eastern Young Cattle Indicator (EYCI) finishing relatively steady.  Weaker yardings and marginally stronger export prices provided some support.

East Coast cattle yardings fell to 6 week lows this week, as lower prices deterred growers from sending cattle to the yards.  Figure 1 shows that yardings this week were down 10% for the week, and 23% on the same time last year.  With the public holiday next week in Victoria, yardings are likely to be lower again.

Despite the steady EYCI, which this week sits at 614.25¢/kg cwt, there were some big market movements. In Queensland Trade Steers fell 70¢ to 490¢/kg cwt. In NSW Trade Steers were up 14¢ to 624¢/kg cwt.  We won’t see a 134¢ spread between cattle in NSW and Queensland for long, with the rest of the market suggesting the price should meet somewhere around 550-600¢ level.

Not helping the market at the moment is the sharp fall in Grainfed cattle prices.  Figure 2 shows the Queensland Over the Hooks 100 day Grainfed steer, and it’s not pretty.  Since the start of the year 100 day Grainfed cattle prices have fallen consistently, and have now lost 40¢, or 7%, to sit at a 10 month low of 530¢/kg cwt.

We’ll have more on how this might impact young cattle markets in our analysis next week.

In the West the rain and dearth of supply has the market sitting well above the east coast.  While there were no quotes from saleyards, over the hooks yearling cattle remain in the 580-630¢ range.

The week ahead

There is a bit of rain on the forecast for the coming week, especially for south east Queensland and northern NSW.  A bit of rain should support cattle prices for a little while, but there should be a strong supply of young cattle, and slaughter cattle, in April and May.  This usually pushes prices in the north lower, and given southern prices remain at a good premium, they should be dragged lower as well.


Canola – Seeding vs harvest

After having spoken with farmers across Australia and with agronomy companies it is all but certain that canola acreage will be dramatically increased for the 2017/18 season. In this analysis, we look back to the past to see whether historically having cover at seeding has been beneficial.

All going well, and with the rain landing in the right places at the right time, Australia can be expected to have a bumper canola crop. This is a story likely to be repeated across the rest of the world with the fall in cereal prices.

As is the case with wheat pricing, the local canola price is derived from a futures price. The futures used for pricing canola are either the ICE canola (Winnipeg) and Matif rapeseed (Paris) contracts.

In our discussions with growers and buyers the question often asked in recent weeks has been “How often are canola prices lower at harvest compared to seeding?”. It’s an important question to ask, as looking back at historical data can assist with decision making.

In this analysis, we have excluded basis and currency to focus on the futures component of our pricing, as this makes up the lion’s share of any movement. The methodology was to average the price of the November contract in April from 1995 to 2016, and look for the percentage change for each season between April and the average harvest spot futures.

In figure 1 the ICE contract is used, and it is quite glaring that in the 22 years charted, that only in 7 years has the contract been higher at harvest than at seeding. The average change from seeding to harvest is minus 9%.

When the Matif contract is examined a different picture emerges. The price during the Australian harvest has been lower only 10 times out of the past 22 seasons, with an average positive change of 5%. However, if we preclude the large changes in 2007 and 2010 the average drops to a meagre 1%.


Key points:

  • Canola acreage in Australia will be increased this year based on our conversations with growers and agronomists.
  • The average change between seeding and harvest for the ICE contract is -9%, and for Matif is +5%


What does this mean?

On a historical perspective the ICE November contract has, on average, fallen from its seeding level by 9%, whereas the Matif contract has risen by an average of 5%.

Although from a historical view it doesn’t look overly attractive to get cover during seeding, in the coming year with planting exceptionally high it would still be advisable to get some cover.

A simple risk management strategy is to have cover across a range of periods in order to spread pricing across multiple windows.

Market pauses after a volatile few weeks

After a couple of weeks of whippy price action and volatile movements in throughput lamb and sheep markets settled down a bit this week, broadly speaking. Although, some bigger moves were noted for mutton in South and Western Australia.

Figure 1 highlights the recent pattern of east coast lamb throughput showing a much more subdued pattern this week, in contrast to the seesaw of the weeks prior. Yarding figures hardly budging with a meagre 1.4% rise to sneak above 181,000 head. The Eastern States Trade Lamb Indicator (ESTLI) responding to the stable throughput settling exactly where is closed this time last week at 611¢/kg cwt. Stability in price the order of the day for most categories of lamb in the national indicators too with 0-1% gains in all classes of lamb, except national restocker lambs, down 3% to $96 per head.

Equally stable price movements for most of the state based categories of lamb with many posting a 0-3% gain. Victorian restocker lambs, SA light lambs and WA light lambs the exceptions – down 5% ($106 per head), up 11% (570¢/kg cwt) and down 5% (601¢/kg cwt), respectively. National mutton slightly softer on the week, down 2% to 412¢ – dragged lower by SA mutton which reported a 13% fall to 381¢.

In contrast, WA mutton experiencing a stellar performance with an 11% price rise to 478¢/kg cwt. Spurred on by much softer supply (as shown in figure 2) with WA mutton throughput down 39.6%. The impressive performance this season not limited to mutton in the west with the Western Australian Trade Lamb Indicator (WATLI) continuing to press higher this week to close at 629¢ – figure 3. The tighter season and firm export demand helping support WATLI and WA mutton, 31% and 78% higher than this time last year – respectively.

The week ahead

Forecast rainfall between 5-15 mm to much of the sheep bearing regions of the nation next week will give slight relief to the recent dry spell to much of SA and Western Victoria during the last fortnight. This is likely to encourage further price consolidation to continue for the next few weeks for lamb and sheep markets.

“Unrelenting” – a new describer for the wool market?


“Unrelenting” was the term used to describe the market by AWEX at this week’s wool sales, as fine wool continued to lead the upward movement. Recent terms to describe the wool market have been less flattering or positive, so either we are getting caught up in the hubris of finally seeing good prices, or “this time it’s different”?

Again, fine wool was the outstanding performer but the underpinning of the medium wool price (21 MPG) is providing support and optimism for the ongoing strong market outlook.

With the 21 MPG now 240 cents higher year on year and touching 1500 cents; the bigger story and the key confidence booster is the fine types. 18 MPG is now almost 700 cents above year ago levels; of interest is that in March 2015 the 18 MPG quote ranged between 1440 and 1470, this year the last 3 weeks has seen it move each week upwards, beginning at 1784 (Melbourne) and this week quoted at 1910.

Cardings again were dearer, with all selling centres reporting the Carding indicator comfortably above 1200 cents. The average price for Merino wool is currently boosted by the prices for the lessor lines, all contributing to the best cash flows seem for wool producers for many a year.

There are many in the industry forecasting this market to at least hold these levels, and perhaps also that the tighter supply in the winter will push to some extreme pricing. There is good support for this rationale, supply is tight at all stages of the supply line, with exporters also reporting that they too are now able to make margins on trades as processors step up to purchase. It is of note that although these are long term record prices for growers, it is still below the peaks of 2010 – 11 when the Au$ was at parity. (Fig 1.) This supports the prospect of the market may still have some steam left in it.

This “hand-to-mouth” situation will support demand, and with woolgrowers “cashed up” any minor retracement in the market will result in reduced offerings as growers step back. The tight supply situation may provide a rare opportunity for producers to influence a market in their favour.

The ongoing strong auction is providing good opportunities in the forward market with Riemann trading across a range of maturities from 18.5 to 21 MPG contracts.

The week ahead

While the EMI rallied a further 22 cents this week, in US$ terms it actually fell 3 cents on account of the Au$ down by over 1 cent.

A reduced offering of 43,700 bales is rostered for next week, down 2,200 on this week. In fact, clearance to the trade this week was also 43,700 bales, so a smaller offering along with the renewed positive sentiment should see the market hold or improve next week.

Trump, Mandates, Exports and a bigger South American crop

Markets showed some of their traditional (northern hemisphere) spring volatility this week.  Rumoured ethanol mandates in the US pushed all markets higher, before some of the sting came out of the rise thanks to increases in South American corn and soybean production forecasts.
There were rumours this week that there might be some form of ‘Executive Order’ regarding the amount of Ethanol to be produced in the US.  Without boring you with the details, the market took the view that Trump was going to increase the demand for ethanol, which means more corn and oilseeds will be required in the US to make it.

The market was looking for some news, and it jumped higher on Tuesday night.  Wheat gained 14¢, Corn 10¢ and Soybeans 16¢.  In Canada canola joined in, with the ICE Spot contract gaining $17 to hit a new 3 month high in Canadian terms.  In our terms ICE has been bouncing between $500 and $520/t since November, with physical prices in a similar, but slightly higher range (figure 1).  This week canola was close to its highest levels since November.

Despite the AUD sitting around 76US¢, CBOT in our terms reached a new 8 month high this week with the May contract hitting $217/t (figure 2).  Dec-16 is back above $240/t and looks reasonable selling value.  Especially compared to ASX Jan-18, which at $248 is showing weaker than normal basis, although we do have a big crop to carry through.
There was some export demand in markets this week, pushing wheat prices slightly higher.  Plenty of APW trades went through on CLEAR at levels $10-15 higher than published bids, but prices were still only in the $210-215 Port range.  This is close to parity with CBOT wheat.

The week ahead

The grim weather outlook released last week might add a bit of strength to grain prices.  From now on many grower will take the view that grain in store is a good drought hedge, with prices likely to have a lift if the autumn break is late, or worst case, non-existent.

The problem with this theory is that there is still a lot of grain out there, which will could flood the market at certain times.  As usual the key is to watch the basis, as this is a good indication of selling opportunity.



Young cattle prices falling, but have a way to go

Just as spring price peaks lasted a lot longer in 2016, the autumn price decline appears to be coming early in 2017.  While finished cattle prices were relatively steady this week, waning restocker demand appears to be seeing young cattle prices continue easing.

Cattle markets were mixed this week, very mixed.  The Eastern Young Cattle Indicator (EYCI) continued its slide, losing 7¢ to hit an 8 month low of 613.75¢/kg cwt.  Similarly east coast Heavy Steer and Eastern Cow prices also saw 8 month lows, with cow falling 10¢, but heavy steers only 3¢ to 533¢/kg cwt.

Prices were mixed across the states, with most of the declines in Queensland, while in Victoria prices were steady or slightly higher.  The Queensland Trade Steer fell to 308¢/kg lwt this week, and this is the category which is at the largest discount to other states.  In Victoria Trade Steers made 348¢, while in NSW it was 331¢.

This suggests that young cattle supply is starting to move in Queensland, whereas it is normally still tight in southern states at this time of year.

Young cattle still have some way to fall before they are back in line with ‘normal’ discounts to the EYCI.  Figure 2 shows that despite the fall in the EYCI, Heavy steers remain at a 15% discount to the EYCI, while Cows are at a 25% discount.  Heavy slaughter cattle discounts have narrowed marginally from two and five year lows, but are still a long way from their long term averages.

The  week ahead

If Heavy Steer prices remain steady, the EYCI will have to fall back to 560¢/kg cwt, 50¢ below this weeks close.  This tells us that there is still strong demand for young cattle, relative to where heavy slaughter cattle are.  The latest margin analysis shows that slaughter cattle prices are also overpriced, which leaves plenty of downside if rain is not forthcoming, and supply picks up.

On the trail of the US cattle cycle

Key points:

  • The US cattle cycle has another 2-3 years to run in the herd rebuild phase with annual growth in the herd anticipated to diminish as we head toward the end of the decade.
  • The likelihood of further large US cattle price falls in the coming few years is decreased with flat to mild price declines most likely.
  • A recovery in US cattle prices is anticipated from 2020 onwards as the cycle moves into the herd decline phase.

Frequent readers of Mecardo will not find it surprising that long-term annual average local cattle prices have a strong correlation to annual average US prices. This analysis takes a look at the US cattle cycle patterns since 1920 to get a perspective of what the normal cycle looks like, where we are currently in the cycle and the usual price activity during herd growth and herd decline.

To read more about the US-local cattle price correlations see these previously published articles – “Undervalued to overvalued in two seasons” and “Weak US cattle futures a concern for local heavy steer prices.”
Since 1920 there have been nine cycles in the US consisting of a period of herd rebuild followed by herd decline with the average cycle lasting ten years, the shortest cycle lasting eight years and the longest cycle lasting fourteen years. Figure 1 outlines the annual change to the herd size each year during the cycle showing the current tenth cycle is in its third year (orange line).

Overlaid on figure 1 is the previous two cycles, the average cycle pattern and the normal variation in the cycle pattern that can be expected over the period (as identified by the green 70% band, showing where the cycles have fluctuated for 70% of the time since 1920). Analysis of the cycle patterns shows that the duration of the herd rebuild to herd decline phase is nearly a 50/50 split, with the rebuild phase usually lasting a fraction longer.

Given the average cycle lasts ten years and the near 50/50 split between herd rebuild to herd decline during the cycle we took a look at annual price percentage changes during the first five years of each cycle (the herd rebuild) and the final five years of each cycle (the herd decline). Figure 2 shows the annual price change pattern for the first five years of the cycle. Interestingly, the data since 1920 demonstrates that the average price gain pattern for the first five years is reasonably smooth and tends toward 0% price movement, yet can fluctuate plus or minus 15% throughout the period. It suggests that there is a reasonably even chance of price gains or falls of a 15% magnitude during the herd rebuild phase of the US cycle – almost like a toss of a coin.

In contrast, the price action for the final five years of the cattle cycle (the herd decline phase) shows a fairly clear average trend for increasing prices as the supply of cattle reduces. Although, the green band (70% range) which highlights the measure of standard deviation in this series shows that the annual price change can be expected to fluctuate between a price fall of 5% to a price gain of 30% for 70% of the time.

What does this mean?

Given where we sit in the current cycle there is the potential for another 2-3 years of further gains to US herd size, albeit at a diminishing rate. Herd decline is expected to start around the end of decade and is likely to see cattle price supported in the US from 2020 onwards.

The 19% decline in cattle prices witnessed last season in the US suggests further big price declines is likely to be limited as we head to the end of the decade, as previous cattle cycles have shown that it is very uncommon to see successive years of significant price declines (over 15% declines) – particularly if the cycle has already had a year where prices declined in excess of 15%. The implication of relatively stable, to only mildly softer, US prices on local cattle prices over the longer term is for a greater chance of a soft landing when the cattle price correction comes – unless a significant drought event is the catalyst for a harder landing.

This lamb price seesaw is making me dizzy…

A 4.7% fall in the Eastern States Trade Lamb Indicator (ESTLI) this week to close at 611¢/kg corresponded with a decline in lamb throughput across the eastern seaboard, perhaps a case of supply being held back as the price retracts. Not the case with mutton, however, as prices held reasonably steady (1.2% firmer to 421¢/kg) and mutton throughput staged a lesser magnitude fall.

Figure 1 showing the 20.8% decline in lamb yarding numbers for the week nearing 179,000 head, although still above the 2016 pattern and 14.2% higher than the five-year average, indicating that prices still above 600¢ enough to keep some lambs coming forward.

A closer look at price movements within the state categories of lamb is a bit mixed. Victorian prices for most categories only slightly softer, except Trade and Heavy Lambs down 5% and 5.8%, respectively. NSW lamb saw falls in the 3-8% range, with Merino Lamb leading the way down posting a 7.8% drop. SA and WA a bit more erratic reporting a mixture of reasonable gains and losses across the board – SA Restocker Lambs leading the pack up 11.7%, while WA Restockers the laggards with a 20.9% decline.

SA and WA mutton both faring well this week up 11.8% and 13.1%, respectively. NSW and Vic mutton on marginally softer with falls of 0.7% and 2.1%. Figure 2 showing the weekly decline in East coast mutton throughput not as severe as that for East coast lamb, down only 12.2% to just under 80,000 head.

The week ahead

As suggested in the market commentary from mid-February, the big question is whether the broadly higher east coast lamb and sheep yarding levels are being fuelled by the reasonably good price levels and are there more to come, particularly if the price softens further.

Given the general tighter season anticipated there is probably a good chance producers will start to hold back if prices ease too far and we may be in for a bit of price consolidation.