Key points:
- Annual average price correlations between US Live Cattle and National Heavy Steers is showing that local prices are less overvalued than during 2016
- The continued rebound in US Live Cattle futures through March/April 2017 has meant that, on a monthly basis, average local Heavy Steer prices are nearing the upper end of the normal range.
- The Heavy Steer spread to US Live Cattle Futures is currently at a 21% discount, the longer-term average discount is nearer to 35%.
As a follow up to the recent analysis released on the rise in beef export prices providing support for the Eastern States Cattle Indicator (EYCI) we have taken a look at how the recovery in the US Live Cattle futures price has taken some of the pressure off domestic heavy steer prices.
Click here to recap on the beef export price/EYCI article.
Just as there is a reasonably strong correlation between the annual average EYCI price and the annual average 90CL beef export price, the same holds for annual average prices for US Live Cattle and National Heavy Steer prices. Indeed, as highlighted in figure 1, annual price data for both series converted into US¢/kg from 1998 to 2012 demonstrates a very close relationship. Clearly, the poor seasonal conditions and high turnoff locally for cattle during 2013-15 had an impact on local Heavy Steers prices, remaining in undervalued territory for much of the period (red dots below the line of best fit).
In contrast, the improved season since midway through 2015 saw local prices return to more normal levels and then drift towards overvalued territory as rainfall improved and the focus turned to the herd rebuild. 
This situation can be seen more clearly by taking a look at the monthly average price comparisons between US Live Cattle and Heavy Steers – figure 2. Interestingly, recent improvements in US Live Cattle prices during March/April 2017 have meant that local Heavy Steer prices are much more in line with what could be considered normal long term levels, as identified by the green dots for the 2017 season moving closer toward the line of best fit.
Looking at it another way, we can track the historic movement of the spread, in percentage terms, between National Heavy Steers to US Live Cattle futures – figure 3. As shown on the chart, the longer-term average spread since 1998 for this series has been around the 35% discount level, spending 70% of the time ranging between a 23-47% discount (green band). Clearly the 2013-15 turnoff saw the spread widen towards the lower end of the 95% range nearer to a 60% discount (red dotted lines) and the improved conditions/tight local supply scenario experienced through 2016 saw the spread spike briefly into premium territory, when US Live Cattle tested under 95US¢/lb during October 2016.
What does this mean?
Currently the rebound in US Live Cattle Futures has seen the discount spread return to just above the top of the “normal” range at around 21% discount. While still some way off from the longer-term average spread discount of 35%, it has taken some of the topside pressure off local Heavy Steer prices that would have been evident when the spread was sitting at a premium during late 2016.
If ever there was a year to have held onto sheep and lambs, this was it. We are only in May and Merino lambs have moved further into uncharted territory, the National Merino Lamb Indicator this week hitting 633¢/kg cwt (figure 1).
It looks like restocker demand is pushing mutton prices along, they are 40% stronger than this time last year. The ESTLI is ‘just’ 16% higher than last year.
If we do see drier than normal conditions, it should mean lighter lambs, sold earlier, and weaker prices. Rainfall could continue to defy the forecasts, but there is some significant downside price risk come late winter.
Largest magnitude falls were noted for the finer microns with price decreases between 50-100¢ noted. Medium fibres posting declines in the 10-40¢ range, while crossbred fleece just 5-10¢ softer. Southern 28-micron and Cardings in all centres the only categories to record slight gains.
The general view among growers appears to be that supply is tight and mills don’t have much stock in the pipeline so there seems to be a reluctance to chase a falling market. Clearly, in the short term the volume of bales on offer are expected to contract further. However, over the longer term an eye needs to be kept on the trend in demand, as the risk is always there that overseas buyers adjust down their purchasing requirements to reflect the anticipated lower supply.
This week the wheat market was largely quiet (figure 1) with a lack of fresh news, there are still continuing concerns in Kansas, however the worries have switched from snow to excess waterlogging. In the coming weeks, we will start to gain more clarity. At a local level basis levels were fairly static with the exception of small increases in Port Lincoln and Kwinana (figure 2). Particularly in Port Lincoln, where there are concerns about lack of moisture for seeding, and with it looking increasingly likely they will miss any falls this weekend.
The scandal has reached the top tier of the government with President Michel Temer being placed under investigation for alleged payments of to keep witnesses quiet. All in all, it’s a messy situation which has impacted the Real (figure 3) which plummeted against the US dollar a whopping 7%.
What does this mean?
Figure 1 shows that east coast cattle slaughter reached its strongest level since December in the week ending the 12th of May. It’s interesting that this is around the time cattle slaughter traditionally peaks, as cattle out of Queensland bolster stocks.
While it is difficult to envision the EYCI getting back to 700¢ this winter, the 90CL export price is doing the right thing, having rallied to 650¢/kg cwt. In fact, the EYCI and 90CL are back at level pegging for the first time since this around this last year.
There is plenty of talk about store sheep being expensive, but are they overpriced? It depends on your definition, but one way to look at it is to look at whether ewes bought now are going to be worth more in six months’ time, or worth less.
For those looking to buy or sell scanned in lamb sheep the question is whether the cost of running the sheep through to November is higher than the net result. For merinos all businesses would incur more than in costs in lambing down and marking lambs. For the first cross ewes cost or running may not outweigh the profit on the trade so they might be a better purchase.
All states, except Tasmania, saw a decline in lamb throughput this week evident in the yarding figures for the East coast (Figure 1) and in Western Australia (Figure 2). East coast lamb yarding down 12% to just under 156,000 head reported through the saleyards, while WA lamb throughput saw a decline of 13.8%.
East coast Mutton throughput impacted by soft NSW figures where an 11% fall in NSW flowed through to a price gain of 1.6% for sheep in that state and a broader drop in the East coast throughput for the week – figure 3. Not the case in WA and SA, where increased mutton yardings translated into double digit percentage price falls to see both state mutton prices back below 500¢.
A forecast of steady rain for the weekend and early part of next week to much of the sheep producing regions of the country and the prospect of tightening of supply, as the weather cools further, should continue to provide support to lamb and sheep prices.
We saw the effect of the Washington/Trump shenanigans which took the confidence out of US markets and resulted in a weaker US$, and by default a stronger A$. The effect on the market was for the EMI to rise in US$ terms (plus 8 cents), but fall in A$ terms (minus 12 cents). The Trump factor causing a 1.5% gain in the A$ over the week to see it finish yesterday at 74.6US¢.
At this time of the year we see increased levels of Vegetable Matter; it impacted most on the skirtings market this week with low V.M. wool tending dearer however high V.M. types were irregular and tending cheaper.
This tight supply should maintain the market levels, although as we have seen this week currency moves can impact.
Old crop canola prices have been frustratingly sticky, for those who are still holding onto inventory. The market is stuck around the $520-525 port level, or $540 delivered Melbourne. This is a slight discount on harvest, so not much has been gained or lost through holding Canola.
Since Anzac Day delivered wheat and barley prices have gained some ground. With growers busy on seeders, no one is driving the trucks so this market has tightened somewhat. SFW wheat has hit $218/t delivered Melbourne, while F1 Barley is up to $200. These prices are 10-20% better than harvest, and are worth considering.
In contrast to the declining throughput and price movements, weekly East coast slaughter for the period ending 5th May still managing an increase from the previous week’s numbers as processors increase activity post the shortened Easter and ANZAC holiday periods – Figure 1. Weekly cattle slaughter rising 14.5% to just over 125,000 head, not far off the peak slaughter levels experienced during March.
Indeed, the Western cattle markets were broadly stable, while only marginal declines cited in the East for young/store cattle. The EYCI down a mere 1.5% on the week to 634¢/kg cwt – figure 3. In national markets, trade steers less than 1% softer (345¢/kg lwt), feeder steers declined 1.8% (342¢/kg lwt), while medium cow shed a mere 2.1% (216¢/kg lwt). The more moderate falls reserved for the heavier end with medium steers leading the charge recording a 5% fall at 292¢/kg lwt, while heavy steers (not so heavy it seems) posting a 2.6% drop to 293¢/kg lwt.