Month: May 2017

Some futures cheer for our Heavy Steer

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.

Merinos and mutton hit new records

We still haven’t hit winter, but lamb and sheep prices are doing a good job of maintaining a winter peak.  This week Merino lambs hit a new record, trade lambs continued to rise, and mutton continued to surge upwards.

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).

In Victoria Merino lambs were just 4¢ weaker than the Trade Lamb prices.  On a national level Merino lambs are at a 5% discount to the ESTLI (figure 2).  Merino lambs have been closer to the ESTLI twice in the last eight years, but it is usually fleeting.  Strong wool prices and a restocking push are no doubt seeing good demand for Merino lambs.

Mutton prices hit a new record this week as well.  The National Mutton Indicator reached 523¢, while in Victoria the mutton was at 550¢/kg cwt. Interestingly sheep yardings and slaughter has been stronger than the same time last year, so processors seem to be getting enough.

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.

Over in the West lamb prices are nearing their eastern states counterparts, the WATLI at 657¢/kg cwt.  WA Mutton is languishing however, sitting at 417¢, which is 133¢ behind the national indicator.

The week ahead

The Bureau of Meteorology (BOM) have been forecasting drier than normal conditions for much of the country for a few months now.  This has been followed by good rainfall on the east coast at least, so many will take figure 3 with a grain of salt.

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.

A slight woolly shocker this week

A softer result across the board this week for all categories in all three centres as buyers take advantage of increased VM to discount heavily. The EMI dipping back under 1500¢/kg clean after shedding 27¢, although out West price falls were of a lesser magnitude and the WMI managed to hold above 1500¢, closing 15¢ softer on the week to 1520¢/kg clean.

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.

Growers responding to the falling prices by lifting pass in rates, particularly in Fremantle where 23.1% was passed in. Nationally 29,091 bales were sold, out of a possible 34,270, resulting in a pass in rate of 15.1% and suggesting that growers are comfortable to bide their time for better prices.

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.

The week ahead

Next week will see all three centres in operation on Wednesday and Thursday with just over 30,000 bales rostered for sale. The week following bales on offer are expected to be the lowest scheduled so far this season at 25,820 (potentially a clue to why growers are comfortable riding out the price decline).

It’s Un-Real

In this week’s comment we look at a surprise corruption investigation into the Brazilian president, which has caused shockwaves throughout the country, devaluing the Brazilian Real and impacting agricultural commodities.

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.

They just can’t get a break in Brazil, with a high number of politicians involved with bribes including with large-scale meat packer JBS. 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%.

Currency plays a part in determining which countries are more attractive for exports. Brazil is a major exporter of soybeans and cattle, and exports will shift to Brazil. It is always important to keep an eye on the other major exporters as we have seen major volatility in the past due to political uncertainty.

Due to the falling currency, there is now increased demand for Brazilian soybeans which has led to US soybean futures falling (figure 4) with exports likely to switch origin. Over-night they fell a dramatic US$11/mt, wiping out all gains in the past month.

What does this mean?

Overnight the commitment of traders report will be released, which will give an insight into whether the speculators are bullish or bearish on the market.

Locally interest will be towards the rainfall expected across much of the country, to determine how beneficial it has been.

How far the winter peak?

Cattle prices received a welcome bounce this week as yardings declined from their post short week lows.  This is following a week when slaughter reached a 2017 high.  It looks like we might have seen the May low, with a question of how far is the winter peak?

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.

This week it was a case of tightening supply, with east coast cattle yardings falling 20% as lower prices saw growers hold stock back.  Yardings were, however, still stronger they have been for much of Autumn.

The Eastern Young Cattle Indicator had a rally on the back of tighter supply.  The EYCI gained 16¢ for the week, getting back up to 650¢/kg cwt.  Figure 3 shows us that while we had to put the ten year average on a different axis, the EYCI does traditionally rise from this week through to the end of August.

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.

The week ahead

If the Autumn low was 634¢ it bodes pretty well for cattle producers over the next three months.  A standard 10% winter rally will take the EYCI through 700¢.  The forecast rain for the next few days might see the rally come sooner rather than later.

Cashing in the flock

The talk of the town at the Wycheproof store sheep sale last week centred on the line of first cross ewes making $322/head, and merino ewes reaching $260/head.  While many sheep producers are enjoying a good season, some might be thinking it’s a good time to cash in a portion of the flock, go on holidays and buy back in the spring.  Today we look at how this might play out.

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.

We have to put a few assumptions in place to come up with an answer.  We’re assuming ewes will not be shorn between now and November, and the first cross ewes will produce 130% lambs, and Merinos 90%.  All lambs will be terminals.  Lambs will be sold as trade suckers in November, and ewes will be valued as stores.  We use an interest rate of 4%.

Table 1 shows the result of the trade, if lambs and ewes are priced at similar levels to November last year.  If buying first cross ewes now for $300/head the grower receive $147 in lamb value, and have a ewe worth $180 in November.  This gives a net gain of $21.29/head after interest is taken into account.

For Merinos the net result has the buyer of Merino ewes at $250/head running at a loss, with the net result being negative $13.56.  Wool growth is hard to account for, but we have tried to build this into price of the ewe in November.  Those buying Merino scanned in lamb ewes are banking on a good wool cheque to bolster profits on the trade.

Obviously higher lamb prices will make the result look better for the buyer of ewes, while lower prices will make it look worse.  Figure 2 shows a rough estimate of the profit on the trade at different lamb price levels.

Key points:

  • Scanned in lamb ewes are making very good money at store sales.
  • There appears to be some money in buying first cross ewes, while merinos are marginal.
  • It’s hard to see sellers of SIL ewes losing out at current prices, unless the sheep and lamb market maintains very strong values into the spring.

What does this mean?

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.

We haven’t accounted for the possible alternative uses of grass in this analysis, with agistment an option, which could pay a similar return to the first cross ewe.  However, without owning stock, growers have no access to price upside.  Given the current state of the sheep market, we suspect there is more downside than upside, so this might not be a problem.  As such those looking for less work this winter can sell some sheep without too much fear of losing out.

Supply softens and prices respond

A textbook case of the economics of supply and demand in sheep and lamb markets this week as reduced throughput in most states provides support to prices. The Eastern States Trade Lamb Indicator (ESTLI) up 1.6% to close at 651¢/kg cwt. National Mutton a bit firmer still with a 2.6% gain to 515¢/kg cwt and even WA Trade Lambs getting in on the action with a 6.9% surge to finish the week at 635¢/kg cwt.

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%.

Saleyard price action responding accordingly to the reduced supply with NSW and Victorian restocker lambs up 7.2% ($115 per head) and 8.8% ($122 per head), respectively. Good gains also noted for NSW Trade Lambs, up 4.2% to 651¢, and NSW Heavy Lambs recording an increase of 3.7% to 640¢/kg cwt. Victorian Trade Lambs, still the dearest in the nation (with the exception of Restockers), registering a mere 1¢ decline to 668¢.

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¢.

The week ahead

A classic example this week of prices responding to supply movements in accordance with the economic theory sets the tone for lamb and sheep markets as we head into the traditionally tighter winter season. 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.

Trump’s not helping

It was a tale of “three” markets – the Sydney sales were relatively stable, Melbourne was weakest while W.A. was mixed to stronger depending on the micron. The EMI closing the week at 1522¢, a fall of 12¢, however the WMI rallied on the back of an offering dominated by 20 MPG and broader wool to rise by 8¢ to close at 1535¢.

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.

Concerns are emerging about future supply, with brokers reporting that in some regions it has all but dried up. This is making exporters and processors nervous, especially those looking to secure fine wool with good specifications.

The week ahead

Looking ahead we have three successive weeks of sales with bales on offer below 38,000. Next week 37,348 bales are scheduled and all three centres are in operation on Wednesday and Thursday. Subsequent weeks see 33,697 bales rostered on week 48, dropping to 26,150 for week 49.

This tight supply should maintain the market levels, although as we have seen this week currency moves can impact.

Canola where the action is

This week’s new season World Agricultural Supply and Demand Estimates (WASDE) were somewhat of a letdown, in terms of impact in prices.  We have however seen some movement in local markets, notably for new crop canola and old crop wheat.

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.

Figure 1 shows that new crop Canola has had a nice little rally in recent weeks. Concerns surrounding sowing weather in Canada has given ICE Canola a lift.  The AUD has lost 5.5% relative to the Euro in the last month, which along with a small rise in MATIF Rapeseed, has seen the European contract add $40/t in our terms.

Local Canola prices for 17/18 have lifted in line with futures, with bids this week around the $530/t port level.  Interestingly, basis on these forwards to both ICE and MATIF are currently much stronger than at the last harvest.  However, they remain below the levels of the three years previous.

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.

The week ahead

The WASDE report this week was largely in line with expectations, but it did predict a decline in world oilseed stocks this year, which might provide impetus for Canola markets if there are some production problems.

For local delivered markets this might be a sweet spot for selling.  There is likely to be a bit of supply come on once sowing is finished, and especially in the new financial year, so locking some pricing in now might be a good idea.

Throughput eases as cattle prices soften

Weekly east coast cattle slaughter draws closer to this seasons peaks and throughput eases as producers respond to lower cattle prices with all national cattle indicators and the Eastern Young Cattle Indicator (EYCI) all registering declines this week.

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.

After the spike in throughput along East coast saleyards last week producers respond to the softer price pattern with an 13.5% fall in yardings noted to see 60,332 head change hands. Despite the decline yardings reported this week still the second highest weekly figure so far this season and at the higher end of the normal seasonal range for this time of the year, suggesting that demand remains relatively firm as the price declines haven’t been excessive – figure 2.

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.

The week ahead

As figure 3 outlines, a firmer 90CL beef export price as the US market demand begins to fire up should lend some support to cattle prices into next week. The 90CL another 2% higher to close at 637.6¢/kg CIF should start to provide some enthusiasm to processors. The 90CL posting a fourth successive week on week gain and has lifted 3.9% since mid-April.