Month: April 2017

Canola find some strength still waiting for wheat

Another week, and another week of relatively flat prices for wheat.  There was some upside for canola in international markets, which is providing some opportunity.  There has been some talk around regarding CBOT wheat being primed for a spike, and there might be something in it.

Earlier this week we took a look at some of the production data US wheat markets take note of, and there is also some data which shows how traders react.  The CFTC Traders Summary tells us what type of trader holds long or short positions in CBOT wheat.

The most interesting data in the Traders Summary report comes from the Managed Money positions, where they report how many are long and how many are short.  Figure 1 shows the Managed Money short positions have been climbing stronger, and sit close to an 18 month high.  The Net Short, that is the number of short positions minus long positions, also sits close to a high.

This basically means that speculators are punting on wheat prices falling, as they are heavily sold.  While this is the general feeling in the market, it does bring opportunity.  If something does go wrong with production somewhere, there are a lot of sold positions which will need to be bought back in a hurry, which can add impetus to any price rally.

Canola has found some strength in Canada this week as wet weather delays sowing.  The spot ICE contract rallied over $30 to $520/t, while Jan-18 gained $15 to sit at $497/t today.  With the weather forecast not looking favourable for sowing, there could be some more upside for Canola.

The week ahead

With Anzac Day, and rain falling last week, conditions for sowing are almost ideal.  Any grain growers who haven’t started yet will be well and truly underway next week, and old crop selling into delivered markets might slow.  This could see some improvement in local basis, but I’m not sure I’d want to be a seller in 6 weeks’ time when growers look to quit some stocks.

NSW throughput bounce stalls trade lamb rally

A rebound in East coast yardings post the Easter break, particularly out of NSW, sees the Eastern States Trade Lamb Indicator (ESTLI) take a breather this week. The ESTLI posting a 2.9% drop to 667¢/kg cwt. Not so for National Mutton, bucking the trend with a 1.9% gain to 495¢ – dragged higher by gains to Western Australian sheep.

Figure 1 shows the lift in East coast lamb throughput, a 49.8% gain from the figures from the previous week to see over 162,000 head reported at the saleyard. The East coast numbers given a huge lift by the 74.3% rise in lamb yardings seen across NSW – figure 2.

Despite the higher supply, restocker lambs in NSW and Victoria gaining some ground up 10.4% and 6.6%, respectively. NSW restockers now fetching $119 per head, while Victorian restockers are enjoying a $126 per head level. The higher NSW yardings having most impact on Heavy and Trade lambs in that state down 4.2% (641¢/kg) and 1.4% (656¢/kg), correspondingly. The two softest categories of Victorian lamb for the week were Merino, falling 5.2% to 616¢, and Light lambs, down 3.5% to 660¢. Trade lambs the star performer in SA, the only category of sheep in that state to post a gain this week, up 4.2% to 614¢.

The week ahead

Another short week ahead with the ANZAC break and some decent rainfall to much of the sheep regions of the nation (figure 3) should see prices hold, or perhaps firm slightly. As outlined in the sheep/lamb analysis piece this week longer term fundamentals will continue to support any price dips seen in sheep and lamb markets for much of the current season.

A closer look at short merino fleece supplies

Last August Mecardo reviewed the supply of short wool in the clip and drew the conclusion that overall the proportion, while varying, did not have a definable trend. This time around we look at much shorter term data and drill down by micron category to see what changes are present in the current market.

In the earlier analysis (Is there more short wool in the clip August 2016) the focus was on the overall proportion of short wool within the Australian merino clip. The current market has a raft of changes in supply going on, which vary markedly between micron categories. This is a function of different seasonal conditions between regions, with wool from the various regions having quite different characteristics. The article from last week (Where is all the broad merino wool coming from) was based on this principle.

Figure 1 shows the proportion of short (50 to 69 mm staple length) merino fleece wool sold during the March quarter this year and in 2016. The volumes are broken up by micron category. These categories are set roughly to match the old Chinese wool types, with a total merino fleece proportion shown on the right hand side. Generally the proportion of short fleece wool early in the calendar years has been around 15-20% for 17.5-18.5 micron, 10% for 19.5-21 micron and higher for the broader merino categories. Overall around 13-14% of merino fleece sold is in the 50-69 mm staple length category.

Figure 2 is where the data becomes interesting. This shows the year on year change in volume for 50-69 mm length merino fleece wool by the micron ranges, for the January to March period. The changes vary widely. There has been a lot broader short staple fleece wool sold in 2017. This fits with the analysis from last week of the broader merino micron volumes. It points to plenty of downward pressure developing in the market as it struggles to absorb increases in the range of 40% to 100% of broad short staple fleece wool. This explains some of the low quotes coming out of the market for wool in these categories.

Once again we are reminded that the analysis of wool supply needs to drill down to levels at which the supply chain operates. Mills do not source merino wool as such, but merino wool of certain characteristics. When the supply of wool of the characteristics changes relative prices in the market will adjust. The conclusion in August that there was no discernible trend in the supply of short staple merino wool, while correct, neglected to look at changes at a lower level. Figure 3 shows a similar analysis to Figure 1, except it is a snapshot from a decade earlier. The proportions of short staple wool are markedly different between the micron categories. They are a lot higher for fine wool and much lower for broad merino wool.

Key points:

  • The proportion of short staple merino fleece in the clip varies between micron categories.
  • The proportion is higher for broad merino categories.
  • Broad merino short staple wool supplies are up by 40-100% in 2017 so far.
  • A decade ago fine merino categories had the highest proportion of short staple fleece.

What does this mean?

The supply of short staple fleece has increased in broad merino wool during the past decade, and has picked up markedly compared to year ago levels. Price relativities will react to the increased supply by discounting the shorter staple wool, which may have implications for farmers planning shearing at shorter staple lengths.

Short weeks an analyst nightmare

Three short weeks in a row will play havoc with any market.   In livestock it seems to be even worse.  Some saleyards are closed, others selling two weeks’ worth of stock and processors need fewer cattle.  Prices are similarly disrupted, but we’ve only a week to wait for a return to normality.


This week saw what could be described as a mixed bag in cattle markets.  The Eastern Young Cattle Indicator (EYCI) fell 9.5¢ to a three week low of 651¢/kg cwt (figure 1).  It appears the decline in prices was largely due to restocker and feeder demand waning marginally.

Trade Steers gained ground in eastern states, particularly in Queensland, where prices were up 64¢, over 10%, to 636¢/kg cwt.  In NSW Trade Steer prices were even higher, at 679¢, while they ‘languished’ in Victoria at 633¢.

Feeder steers were lower, losing ground in Victoria and Queensland, but they were at a solid premium to Trade Steers so perhaps it’s just a correction, given that finished cattle become hard to find at this time of year.

For the first time in a month the Western Young Cattle Indicator (WYCI) has been reported, and it’s come in higher than its east coast counterpart, at 693¢/kg cwt (figure 2).  The WYCI is at a 72¢ premium to this time last year as good seasonal conditions stifle cattle supply.

Figure 2 also shows the 90CL export beef indicator holding onto a price around 20 month highs.  This week the 90CL sits at 614¢/kg swt, supported by tight supply from Australia and New Zealand.

 The week ahead

Another disrupted week means we’ll have to wait for another week for a genuine price indication from saleyards.  Over the hooks prices have largely been maintained however, which suggests supply remains tight.

Both MLA’s forecasts, and our EYCI forecasts, suggests the good times in cattle markets will continue to roll, until about AFL Finals come around.  If you’re a Richmond supporter, and a cattle producer, best to take the strong prices in August to avoid double disappointment.

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Where is all the broad merino wool coming from

Recent sales volumes and AWTA data have shown strong increases in the supply of broad merino wool in Australia. While the supply was expected to pick up on the back of improved seasonal conditions in 2016, the rise has been faster than anticipated. This article takes a look at where the wool is coming from.

Figure 1 shows the year on year change in auction volumes for merino wool from 15 through to 25 micron, in the January to March period for this year. The stand out change is the big (30-50%) rise in the 21 micron and broader merino categories. Fine wool volumes have also been ahead of year earlier levels but the small increases in the face of massive prices rises indicates there is not a lot of spare supply of fine merino wool in Australia.

The question is where is the extra broad merino wool coming from? As Mecardo showed in an article a couple of weeks ago (Merino means different things) around half of the broad merino production comes out of pastoral regions with the balance coming from cropping regions. Figure 1 shows the year on year change in the supply of 21-27 micron merino wool for the past three months by region, around Australia. One region stands out as contributing extra 21-27 micron wool in the March quarter. This region was the Great Southern from Western Australia. In recent years this region has been the dominant supplier of greasy wool to sale in the January through April period, accounting for 15-18% of sales by volume. This year the fibre diameter of wool coming out of the Great Southern has swung broader, so it has supplied nearly half of the extra 21-27 micron wool sold during the past three months. The Midlands, also from Western Australia, has helped as has northern South Australia and the pastoral regions running northern and east from South Australia.

As a check on this change, Figure 3 shows the year on year change in the volume of 12-18 micron wool sold by each region in the March quarter. The big swing to broader wool in the Great Southern region is matched by a big drop in 12-18 micron volumes. Notice the higher rainfall NSW regions have had increased fine wool sales this year, along with south-west Victoria (which was coming off a drought induced low base). The expected decrease in supply of fine wool from NSW has not eventuated, except for the western Riverina. Good seasonal conditions in 2017 (which has started in the Monaro) will be required to pull the micron broader in the regions, in order to lower the supply of fine merino wool.

Key points:

  • Broad merino sales volumes have been some 30-50% higher in the March quarter.
  • AWTA volumes correlate with the sales volumes.
  • Half of the increase has come from Western Australia.
  • Fine merino volumes have been maintained in the higher rainfall regions of NSW.

What does this mean?

The extra volume of broad merino wool (in the order of 30-50%) will continue to put downward pressure on broad merino prices.  Seasonal conditions in Western Australia (where half of the increase has come from) are shaping up in 2017 to support this increased supply. The chance of the 21 MPG breaking the 1500 cents barrier looks to have well and truly slipped away. NSW has maintained its volume of fine wool production in recent months, above expectations. The expected boost to fine wool prices from a drop in supply looks as though it will be weaker than expected.

 

 

A lot of talk little movement

The Chicago wheat market found a bit of strength this week on the back of some less than ideal sowing weather.  This sees spring crop going in late, and the spectre of some areas not getting in at all.  All this despite another relatively bearish WASDE report.

In reality, price movements were small in international markets this week.  But after months of tracking sideways at low levels, commentators need something to talk about.  CBOT wheat gained 9¢ over a few sessions, to hit a two week high of 432¢/bu.  In our terms this puts spot wheat at $212/t (figure 1), and December 17 at $235.

In oilseeds the usually benign April WASDE report threw up a few surprises.  The USDA increased Brazilian soybean production by nearly 3mmt, which had the flow on effect of increasing global ending stocks by 5.6% (figure 2).  This was well beyond expectations and saw soybeans fall around 10¢, before recovering to actually post a gain for the week.

ICE Canola followed soybeans lower, but changes were marginal with Jan 18 sitting at $481/t.  With the AUD/CAD currently at parity it’s not hard to work out what the price is in our terms.

Locally there is little going on in markets.  Wheat, barley and canola prices continue to track sideways as growers and buyers continue the standoff.  Growers say they need higher prices, buyers know there is heaps of wheat out there which has to be sold at some stage.

The week ahead

The coming month sees the USDA release their first estimate for the 2017/18 growing season, and this can often bring volatility to the market.  There is no doubt US wheat production is going to be lower, but whether this can move the market remains to be seen.

In the short term selling opportunities continue to revolve around export deadlines and delivered markets.

 

Sideways slaughter and price

A short week due to the Easter holidays and young cattle prices took a small breather as east coast slaughter figures trek sideways. The Eastern Young Cattle Indicator, marginally softer to close yesterday at 660.75¢/kg cwt, 6¢ softer than this time last week.

Figure 1 shows the pattern for East coast slaughter, with marginal week on week change as just over 112,000 head processed. The Easter dip in slaughter levels seeing numbers processed that were not too dissimilar to this time last season. Although for most of this season slaughter figures have been trending around 10% below the 2016 levels.

Young cattle prices holding above 660¢ for the last week, encouraging an increase in supply with daily yardings creeping up over the last few days to see a 25% increase in daily throughput for EYCI cattle from this time last week with just over 18,000 head reported at east coast saleyards. The first time daily numbers of EYCI cattle have been above 18,000 head since late February. The increased yardings resulting in a slightly softer EYCI this week – figure 2.

The week ahead

A very dry week ahead to much of Queensland and parts of northern NSW will allow for more supply to start to flow once sales begin after the Easter break – figure 3.
Young cattle prices likely to consolidate near current levels with a slightly softer bias in the coming few weeks post Easter. Have a safe and enjoyable break, be sensible on the roads if you are out and about.

A price pattern for all seasons

Key points:

  • Analysis of annual rainfall deciles over the last century shows that the chance of back to back wet seasons lasting longer than two years is uncommon
  • The most recent transition from a wetter than normal to a drier than normal period was over the 2011/12 seasons
  • The current season is showing some price movement and slaughter pattern similarities to the 2011 and 2012 seasons

The 2016 season was without doubt the wettest for the nation since the 2010/11 deluge and has been the underlying cause of optimism among restockers, encouraging a rebuild of the herd and supporting young cattle prices to record highs. The recent rains have provided a boost to cattle prices over March – but could the prospect of a dry second quarter in 2017 and 50/50 chance of El Nino developing later in the season signal the beginning of the end for further increasing cattle prices?

Analysis of annual rainfall deciles across the nation since 1900 shows that the chance of back to back wetter than average years going beyond a two-year period is fairly rare, with a much drier than normal season often following up within the next two years. Indeed, over the last decade the much wetter 2010/11 seasons were followed up with a rainfall deficient 2013, 2014 and 2015 to much of the east coast, prompting a significant cattle turnoff during that time.

Figures 1 and 2 highlight the price and slaughter patterns comparing the current season to the 2011 and 2012 years. Interestingly, all three seasons have seen price increases for the Eastern Young Cattle Indicator (EYCI) over February/March. While the 2017 rally looks impressive, in percentage terms it is not too dissimilar to the gains recorded during 2011. The EYCI rose 8.2% over February/March 2011 compared to the 8.6% gain seen this year, albeit over a shorter timeframe. In terms of the weekly slaughter pattern there was a bit more volatility in the series during the first half of the year in 2011, although the 2012 pattern has been a reasonably good template for the current season, so far.

The second and third quarter of the 2011 and 2012 season saw young cattle prices ease from their peak in late March, bucking the common seasonal trend towards higher cattle prices during Winter. During the final quarter of 2011 and 2012 the EYCI diverged as the forecast of a very dry 2013 saw cattle slaughter in the final months of the year continue to climb, pressuring prices lower toward the year end.

Figure 3 focuses on data from the last two transitions from a wet to dry period and how the percentage price movement of the EYCI responded over the season. Overlaid on the chart is the percentage price patterns for 2017, 2011, 2012, an average of the 2011 and 2012 pattern and a potential seasonal range (calculated from the most recent five seasons that experienced a shift from wet to dry conditions).

What does this mean?

The analysis suggest that it will be unlikely to see the EYCI peak beyond 10-12% from the season opening price of 635¢’kg cwt, which would place the potential peak this year at 700-715¢. At this stage, the peak is still anticipated during Winter, with prices staging a decline in the final quarter of the year as the prospect of a return to drier conditions prevail. The magnitude of the correction lower for the EYCI is anticipated to be in the 10-15% range scheduled for late 2017 or early 2018, towards the 550-570¢ level.

Due to the Easter break this is the last analysis piece to be released this week. The usual Friday market comments will be released on Thursday – have a safe and happy long weekend.

Perhaps this isn’t the peak

There is a theory around that the upcoming public holidays and subsequent disruptions to sales and lamb supply has been pushing processors to buy up in markets to secure supply.  However, if Meat and Livestock Australia’s most recent projections are to be believed there might be more upside to come.

The pace of the rally in the Eastern States Trade Lamb Indicator (ESTLI) slowed this week, but it still went up.  The ESTLI finished Wednesday at 687¢/kg cwt (figure 1).  While the stronger prices of the last month might have something to do with a demand spike, it’s more likely to be underlying tight supply supporting values.

Figure 2 shows lamb slaughter still tracking well below non holiday weeks last year.  It seems that there is 20,000-30,000 fewer lambs available each week, and processors are competing hard for these lambs.  It was about this time last year that lamb prices started to rise, and there is some suggestion there might be more upside.

All the news in recent days has been MLA’s sheep projections, with the headline figure being a 6.3% fall in lamb slaughter this year on the 2016 record.  According to MLA’s weekly slaughter numbers, so far in 2017 just 1.5% fewer lambs have been processed.

This simply means that if MLA are to be correct, lambs slaughter needs to become a lot tighter relative to 2016 for the rest of the year.

Driving MLA’s figures were results from the February MLA/AWI survey with the key figures being 34% of producers intending to increase flocks, and 59% intending to maintain.  Of those intending to increase the flock, 56% are going to retain more replacement ewes.  This basically means that of the fewer lambs born in 2016 and 2017, fewer are going to be available for slaughter.

The week ahead

We’ll have more on the survey results and MLA projections in our analysis next week, but the initial reading looks encouraging for lamb prices for the rest of the year.  The result should be interpreted with caution, however, as grower intentions in February are one thing, what they actually do given whatever the season delivers is another altogether.

The short weeks coming up are likely to see a bit of volatility in saleyards, but over the hooks prices are remaining strong which might be a better option for the risk averse.

Easter presents for the wool market

This week the wool market carried on with the positive upward move identified towards the end of last week. Tuesday had across the board rises of 40 to 80 cents, while a further 30 to 60 cents was posted on Wednesday.

The EMI closed up a whopping 53 cents in A$ terms at 1512¢ while in Fremantle, the strong finish to the last week continued with a A$0.73 rise, the west closing at 1532 – Fig 1.

In US$ terms the EMI ended the week at 1134¢, plus 33¢ while the WMI closed at 1149, up 49 cents.

While the market in general benefited, it was the 21 MPG that was the stand out, with the market in Melbourne actually closing at a higher level than before the correction. This is quite remarkable given the increased supply of medium wool coming forward post the drought conditions of the past couple of years. Fig 2.

As reported on Mecardo, the increase for the first quarter of medium wool production is 30 – 50% higher compared to the same period last year. To see this section of the market rally is very positive for the future.

Wool growers responded over the previous two weeks of falling prices by passing in circa 20% as well as withdrawing wool from sale. This clearly supported the market and as a result buyers received orders to fill and as a result the market found support. This week the response was to sell into a rising market with only 5.7% Passed In.

Growers are in the driving seat (not often this is the case!!), as the shortage of any buffer stocks means sellers can confidently withdraw wool from the market and have little risk that better prices won’t appear later.  When combined with record income from any sheep or lamb sales (Mutton hits record) growers will continue to “play” the market; selling when the market rallies and holding out on any corrections.

The week ahead

The drama of prices in freefall over the previous two weeks was largely ignored this week as the reality of tight supplies across the pipeline overtook any thoughts of an overheated market.

With a general feeling that post Easter the market generally has a lift, it is a somewhat optimistic outlook for the wool market when sales resume.

Next week the market is in recess, while we have reports of around 50,000 bales listed for sale in the week beginning 24th April over two days (Wednesday and Thursday).