Month: June 2017

Turnaround Thursday (at least partially)

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There has been a slight turnaround in the market, but overall prices are substantially more attractive than they have been in the post-harvest period. In this week’s commentary, we examine the potential impact of crude oil on Australian wheat, and why we should be aware of it.

There has been a welcome (for sellers) rally in the wheat futures over the past fortnight (figure 1), as a result of weather woes in the US. Overnight however the market performed a partial flip and dropped around 2%. The trade will be watching the weather with close eyes, especially as Russian crops look to again be in good condition. This factor, combined with a depreciating rouble (more on that later), is likely be putting some caps on futures for the next few days.

At a local level, there are still major concerns about the coming harvest which has led to a substantial rise in pricing. This has especially been seen with continuing strengthening in basis in Adelaide & Port Lincoln (figure 2).

In addition to supply concerns for the coming season, the growers are not surprisingly reluctant sellers. This has led to the market paying up to acquire some cover, however we need to be aware that if the concerns start to be alleviated, then the interest from the trade may diminish. There is still a long way to go until harvest, and we shouldn’t write off the crop at the end of June.

As we all know, foreign exchange plays a factor in commodity trading. The Russian economy is largely dependent on oil revenues, and is also a major competitor for Australian wheat. In figure 3, we have charted the Rouble against the US$, and the price of crude oil since early 2014. This period has seen a reduction in crude oil prices, which has led to a weakening of the Rouble, the correlation between the two is almost perfect at -0.96.

The oil price in recent weeks has started to slide again, and the market remains bearish which has resulted in a further deterioration in the Rouble. If the fall in oil continues, then by proxy Russian wheat will become more competitive on the market.

Next Week

Like a broken record, the trade will largely be concerned with weather events in the northern hemisphere. As the days flow, any weather risk premium in the market will lessen unless we see some major production failures.

We still have to keep into account that even when excluding Chinese wheat stocks, the world still has considerable supplies.

Queensland outshines NSW

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A good recovery staged by Queensland across the board, while NSW disappoints… no I’m not talking about the State of Origin – although the phrase fits there too! Actually, it’s the cattle market this week. Despite the national market indicators posting largely flat results, with weekly moves of less than 2% either way some state based indicators saw more substantial action.

The headline Eastern Young Cattle Indicator (EYCI) mirroring the national saleyard indicators with a minor retracement of 1.3% to close at 633.25¢/kg cwt, yardings of EYCI cattle up 22% on last week a potential reason for the softer prices. In contrast, young cattle price in WA recording an impressive 4.5% gain to close at 615¢/kg cwt and the key export indicator, the 90CL frozen cow relatively flat on the week, dropping just 1¢ to 646.8¢/kg CIF – figure 1.

Big winners in Queensland (other than the Cane toads) were Trade Steers, with a 13% lift to 336¢/kg lwt. The remaining QLD indicators up too (0.5-4.5% increases) with the exception of Medium Cows at 214¢/kg lwt, a fall of 1.6%. NSW saleyard indicators all softer this week, with falls ranging from 1-3%. NSW Medium Steers showing the biggest live weight percentage price drops, down 2.8% to 298¢/kg. A bit of a mixed bag for Victoria, with Feeder Steers down 3% to 325¢/kg lwt and Medium Steers up 5.7% to 315¢/kg.

Increased weekly throughput a potential reason for the broad price falls in NSW with yardings up 76% on last week and 29% above the long-term average for this time of year to see over 23,000 head change hands – figure 2. Perhaps the extended dry spell is starting to have an impact on supply and effecting the normal seasonal winter price rally. In case you missed it, Thursdays analysis piece on Mecardo takes a look at the potential impact of continued dry weather event and is worth a read.

The week ahead

The rainfall forecast for the week ahead showing some much-needed moisture to SA and lighter falls to the much of the South, but most of the decent stuff concentrated in the Tasman Sea. It is unlikely these falls are going to put a rocket up cattle prices this week but might be enough to continue to encourage consolidation at current levels. Although I’m Melbourne born maroon blood flows through my veins so eyes focused on the final State of Origin in just over a fortnight to see if the Toads can stage another upset.

Five Questions with Caitlin Pearlman

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There’s no doubt that combining passion, hard work and hands on experience, whilst putting the customer first bodes well when establishing a career in Agrifinance. That’s exactly what Stockco’s Business Manager, Caitlin Pearlman has done and brings a wealth of experience from working in some of Australia’s largest banks and the Agribusiness Banking Sector for the last nine years. Focused on the future, Caitlin has been appointed to continue the growth of Stockco’s business in Australia by bringing technology and innovative processes to assist grazier and feedlot operations access Stockco’s fast and simple livestock finance products.

Your background has been in Agribusiness Banking, what has been some of your career highlights?

There’s been quite a few, but being involved in building an Agribusiness brand and team from the ground up at a regional Australian Bank that didn’t have a specialised, dedicated Agri banking sector. It proved that you don’t have to have all the latest bells and whistles to have satisfied clients. You just need to put the client at the centre of everything you do. Be available, capable and understand their business.

What prompted you to make the move from Agribusiness Banking to StockCo?

Having worked in the Agribusiness Banking sector since 2009 with both the Commonwealth Bank of Australia and Bank of Queensland (with a two year stint in London in between to get the travel bug out of my system) I wanted a change from banking, but didn’t want to leave the agricultural aspect of my work behind. My family run a dry land grain and beef operation in North West NSW and it’s always had an influence on my life and the choices I make.

Having gained insight into StockCo’s business through their relationship with BOQ, I felt their values and business model were the perfect fit and I am very excited to become a part of the StockCo team. I’ve previously worked with StockCo’s CEO Richard Brimblecombe and COO Tim Pryor and knew I was joining an experienced team who have a huge amount of enthusiasm for StockCo.

What do you hope to achieve in your role as Business Manager for StockCo?

It’s a multifaceted role and I’m sure it will evolve as I settle into the position. I’m hoping to cast a fresh eye over current procedures and compliance practices to see if there’s anything that we can streamline or any valuable data we can extract. Development of an online portal StockCo’s customers can log onto is also high on my agenda. I’ll be working with Tim, Richard and our distribution partners to help take StockCo to a level where every grazier and feedlot operation in Australia associates the StockCo brand with a fast and simple livestock finance product. They will know we can work alongside their existing bank to free up working capital to help them to concentrate on building equity or perhaps expand, whatever their plans may be.

It’s an exciting time for Australia’s livestock industries, what do you see as the biggest opportunities and challenges?

The entrance of the next generation into the livestock industry is a complex challenge. With land ownership structures changing and corporations seeing value in agriculture the barriers to entry are high. Traditional banking finance is struggling to evolve with the more economical option to lease land instead of owning it. That’s where I see StockCo coming into play, helping the younger generation get a foot in the door with livestock finance.

In terms of opportunities, technology is the buzz word of the agricultural industry. The use of drones to measure pasture biomass, NLIS, real time tracking of weights, movements, grazing habits along with software packages that analyse this data alongside the business accounts. When used effectively they allow livestock producers to maximise their productivity and returns.

What advice would you have for a university graduate who is passionate about Australian Agriculture and is looking to establish a career in agribusiness?

If you’re already passionate, then half the work is done. Show people in the industry your passion. Start networking. Polish up your LinkedIn profile. Start connecting with people in the industry. Don’t know what area of agriculture you want to be in? Apply for a variety of graduate and entry positions. Don’t be fussy. Going through the application process is valuable experience. If you are offered a position you really don’t think is suitable, you can always say no. Banking graduate positions are a very good stepping stone as they not only expose you to a myriad of different agricultural industries (aquaculture, horticulture, cropping and livestock to name a few) but you also get exposure to the different areas within the Bank.

Can’t land that coveted graduate position? Get a year’s hands on experience on a property or look for seasonal positions within your Government’s Department of Agriculture. I had a job during the summer break collecting heliothis moth eggs in cotton crops, another summer I was working for an agronomist. Volunteer your time, do extra jobs on the side. You’ll stand out in the next round of interviews by showing your entrepreneurial side and that you’re willing to put in the extra effort to land the position.

Learn more about the StockCo team here. 

What to expect if it stays dry

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Whether or not you believe the Bureau of Meteorology (BOM) three month forecast, there is always the chance the current dry spell could continue. Dry winter’s and springs are not great for cattle prices, but given the current historically strong values, how bad could it get?

The usual impacts of a dry winter and spring are relatively predictable. Cattle producers usually hold out on selling cattle until past the point of no return, while grain prices inevitably rise. Come mid spring there is a rush to offload stock, while demand has weakened, leaving prices in freefall.

To work out where prices might end up, we can take a look historical slaughter during dry times, and associated prices. Obviously fundamental price levels have changed somewhat since the most recent dry spring, but we can try and account for this and come up with a base level for cattle prices.

The 2005 and 2006 seasons are a reasonable template for the market to follow. In 2005 cattle markets reached record highs on the back of strong demand, and a herd rebuild restricting supply. The following year saw cattle supply track in much the same way, before diverging in mid-August (figure 1).

For the last five months of 2006, slaughter was up 16.5% on 2005 levels. The impact on price was dramatic. The Eastern Young Cattle Indicator (EYCI) peaked in mid-August, and as the dry set in, subsequently fell 25.1% to bottom out twice, in October and December.

We can’t really use a 25% fall as the benchmark for price declines in a dry winter or spring. But we can use the 90CL price, and the discount the EYCI reaches, to estimate how low prices might go. Figure 3 shows the long term EYCI spread to the 90CL Frozen Cow Indicator. Before the massive discounts of 2013-2016, the biggest the EYCI got to the 90CL was 20%.

Key points:

  • There are some concerns emerging on around dry weather which could possibly continue.
  • Historically a dry winter and spring has resulted in a strong increase in cattle supply.
  • If the EYCI moves to a historical dry winter/spring discount, values could fall by 130-150¢.

What does this mean?

Figure 3 shows a few dry winter/spring periods when the EYCI has fallen relative to the 90CL indicator. Currently the EYCI is basically at parity with the 90CL price, and a 20% fall would shave 130¢ off the current value. Based on the current 90CL price of 648¢/kg, a 20% discount would give an EYCI of 518¢/kg cwt.

If the EYCI falls into the low 500¢ it would be the weakest price in two years. There is also a chance the 90CL could fall, which would obviously mean cattle prices could weaken further.

It could rain, and cattle prices could hold on to current strong values, but if the rain holds off cattle prices will fall significantly. This could be good enough reason for some to take the money on offer at the moment.

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Lengthening days trigger weaker restocker demand

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In general lamb prices were largely steady this week, but trends were mixed depending on category and state. With supply remaining relatively strong as we pass the winter solstice, and new season lamb supply fast approaching, the question is whether we have seen the peak.

After spending the best part of six months tracking well above last year’s prices, the Eastern States Trade Lamb Indicator (ESTLI) this week eased back to within 17¢ of the late June-16 value, at 650¢/kg cwt (figure 1).

We are yet to get hold of any supply figures for the last week, but anecdotally are hearing that there are plenty of heavy trade, and heavy lambs hitting the market at the moment. This is at a time when some major processors are winding down for winter shutdowns, thereby reducing demand.

Light and Merino lambs also fell this week, losing 16 and 25¢ respectively on the east coast. But it was Restocker lambs which were the major movers, falling 54¢ to 661¢/kg cwt. Figure 2 shows this is the cheapest restocker lambs have been since February.

It’s not unusual for restocker demand to ease at this time of year, as any lambs purchased could have to be marketed against new season lambs, and price declines can get ugly in the spring.

Mutton markets eased in line with trade lambs, losing 17¢ to move back to 504¢/kg cwt. Still a good price, and just 22¢ off the peak.

the week ahead

There shouldn’t be many old season lambs left out there, but they seem to keep coming. With only about six weeks until new season suckers come to the market, time is running out for the ESTLI to have a crack at 700¢. Forward contracts are still available for trade and heavy lambs at around 660¢ for August, so there is some concern around supply at that time of year. Given the price resistance being found at 700¢, it’s hard to see prices being much higher than this come August.

 

Demand up on limited supply plumetts

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Again, the occasional, yet extreme demand for wool with good measurements (low mid breaks & good tensile strength) contributed to a mixed message out of this week’s wool market. The better types pushed the overall market to new levels while lower style wool battled to keep pace.

This week only Melbourne & Sydney were selling resulting in the smallest offering for the year at just over 22,000 bales. Buyers were active and purchased 21,104 bales although 5.4% was still passed in. The EMI improved A$0.27 for the week while the easing A$ resulted in a more modest US$0.12 lift.

Week–on–week comparisons showed that all categories (except 32 MPG) posted gains. However, in percentage terms it was again the medium Merino types that ended the week with the biggest lifts.

AWEX reported that the week just past was the lowest offering of Merino fleece types in over 8 years. This is reflecting the demise of Merino flocks over the recent time. As Mecardo has previously outlined, this is a concern for the long-term sustainability of the Australian wool industry as continued lower supply must translate into reduced processing capacity. Over time this will see wool continue to lose its position in the fibre market on volume. The challenge then will be to position wool as an even more niche product.

Impacting on the declining supply is the strong demand for sheepmeat resulting in lamb prices at record levels. As reported by Mecardo, with the big economies in Asia positioned to continue their appetite for Australian sheep & lamb encouraging sheep producers to continue their focus on meat this demand is likely to continue. Of course, a modern Merino flock is also taking good advantage of the high meat prices, so for those who have stayed the course with Merino sheep these are indeed good times.

The week ahead

Next week Fremantle returns to the selling roster and a larger offering of 37,000 bales is rostered – figure 2. It is with some confidence that wool growers should approach wool sales as a softening A$ and tight supply is encouraging wool processors to compete strongly.

Knife edge market

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This time of year, has typically been one of great volatility as the northern hemisphere commences harvest. This can easily be seen in the current market, where the weather is the major driver. The market stays on a knife edge, where every new piece of information is propelling the market.

The past week has been quite exciting in the grain market. The USDA release weekly crop condition reports, which has shown the lowest good/excellent condition since 2006 at 45%. This in combination with continued poor weather across the US has led to all futures contracts experiencing strong rallies of around 2-4% (figure 1).

The fear in the marketplace is largely centred around high protein wheats, due to deteriorating crop condition of spring wheat. This can be seen clearly in the ascent of the spread between the CME soft red winter wheat (SRW) and MGEX hard red winter wheat (HRW). The HRW contract is high protein with protein specs of 13%. In the past two months, the spread has increased dramatically (figure 2) to 180¢/bu on the spot contract. If there is a shortage of protein around the world, this could be some stronger local premiums for export protein.

In the past week, the WASDE and ABARES crop reports were released, however had little in the way of surprises. They do however each contain positive insights, and are discussed in more details on the following links:

Global wheat stocks have fallen and risen
The average ABARES

At a local level, the dry weather continues to paint a bleak picture for much of the country especially SA/WA. This has resulted in continued strength of APW basis levels in Adelaide & Port Lincoln (figure 3), which since harvest have remained quite stagnant.

Next Week

The US crop condition report is released this weekend. I wouldn’t be surprised to see spring crop conditions deteriorate further.

The recent rally has provided some good pricing opportunities to capture some strong basis around the country. It is worthwhile to consider your marketing options, one of which could be the sale of physical and the purchase of call options to continue to have exposure to the futures market.

Retail beef has found a peak

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It doesn’t matter how tight cattle supply is, beef still lies on a demand curve, where consumers will eat less beef as prices rise. While Australian beef prices are largely governed by export markets, the domestic consumer is still our largest single market for beef. This week we take a look at the latest retail meat values, and what this might mean for cattle prices.

The Australian Bureau of Statistics (ABS) recently released their retail meat price indices, which Meat and Livestock Australia (MLA) convert to average retail values for the quarter. Figure 1 shows the latest retail meat prices, which shows beef and lamb prices easing marginally.

Retail beef prices peaked in the December quarter, hitting 1939¢/kg retail weight, but eased 1% in the March quarter, to sit at 1920¢ (figure 1). Compared to its major substitute, lamb, beef remains at a strong, but not unusual premium. For the last 18 months beef has ranged between a 22 and 25% premium to lamb at a retail level, which is the highest level in 9 years.

There is precedent for beef to move to a stronger premium to lamb, which has been as high as 38% back in 2000. Similarly, we have recently seen beef at just a 4% premium to lamb, back in 2011 when lamb prices has a serious rally.

Retail chicken prices gained 1% in the March quarter, but remains exceptionally cheap compared to beef, and to a less extent lamb. In the September 16 quarter, beef was at a 265% premium to chicken, and this has eased marginally to 257% in the March quarter. Chicken continues to take market share from the more expensive meats, but it’s promising to see retail beef prices managing to maintain high premiums.

Figure 3 shows that easing saleyard prices in the March quarter might have helped retail prices ease a little. However, looking at indices of the retail and saleyard prices, we can see that saleyard prices remain expensive relative to retail values over the long term.

Key points:

  • Retail beef prices eased marginally in the March quarter, but remain historically high relative to other meats.
  • Saleyard cattle prices have fallen further than retail values, which may provide a little support.
  • There is still a lot of room for saleyard price to fall without retail values moving, so there may not be much relief for consumers.

What does this mean?

Beef prices remain expensive relative to other meats at a retail level. Cattle prices remain expensive relative to retail values. This means cattle prices have plenty of room to fall. If saleyard price move back to 25% of the retail price, it puts the trade steer indicator at 480¢/kg cwt.

It seems unlikely retail beef prices will fall in a hurry. Even during the very cheap cattle prices of 2012-13 beef prices only edged lower, so hopefully, for producers, the 450-500¢ level might be the bottom of the range of beef prices over the coming years. Consumers are not likely to get much relief at the checkout however, and export markets will have to soak up any extra supply that comes through.

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Cattle prices worse than last year, but who’s complaining?

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It hasn’t happened to the Eastern Young Cattle Indicator (EYCI) yet, but we have a few slaughter categories which have moved below year ago levels. It’s been a while since producers were getting less money than the year before, in fact it’s been three years, but is anyone complaining?

It’s been nearly two months of cattle prices tracking sideways, as just as the market seemed to avoid the usual autumn decline, the winter rally is taking it’s time to appear.

Figure 1 shows the Victorian Heavy Steer Indicator, which is a pretty good proxy for slaughter cattle on the east coast. Since 2015 there hasn’t been a week when the Vic Heavy Steer was lower than the previous year. In fact, we had to go back to February and March 2014 to find a time when the Vic heavy steer was lower than the year earlier. At that time the Indictor was at 310-320¢/kg cwt, just 5-10¢ below 2013 values. This week’s price was 557¢/kg cwt.

So is anyone complaining about prices? We can see from figure 1 that producers with heavy steer might be disappointed they didn’t sell a month ago, with the Vic Heavy Steer down 30¢ in that time. This equates to around $105/hd on a 350kg cwt steer, which hurts a bit.

In terms of the trade, if these steers were bought back 18 months ago, the EYCI was 600¢/kg cwt. Convert to live weight and add a bit of basis, and they might have cost around $1,000/hd at 300kg lwt. Selling this week as heavy steers they would have returned $1,950/hd. We’re not sure anyone is complaining about a $950/hd gross margin.

the week ahead

Seasonality suggests cattle prices are due to rally, and Matt’s analysis earlier this week on processor margins suggests there is room for slaughter cattle to begin their winter appreciation. Young cattle prices remain strong, as restocker and feeder demand is still robust enough (figure 2). We might see slaughter cattle rise without young cattle for a start. Although the very dry weather outlook for the next 8 days suggests we might be waiting a bit longer yet.

Buyers take a breather

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A reduction in lamb yarding this week along the East coast was met with broadly softer saleyard prices suggesting that buyers took a bit of a spell. The Eastern States Trade Lamb Indicator off a fraction, down 4¢ (or 0.6% lower) to 666¢/kg cwt. National Mutton a little softer, with sheep throughput holding firm, to see a fall of 11¢ (a 2.1% decline) to close at 511¢.

East coast lamb throughput dropping 15.9% on the week to register just over 157,000 head at the saleyard. Although yarding levels remain above levels recorded at this time last season and well clear of the five-year average so with that in mind prices remain at fairly good levels – figure 1.

Marginally softer moves for mutton in SA, Victoria and NSW as both sheep throughput and slaughter along the East coast trekked sideways – figure 2. In contrast WA mutton dragging down the national figures with a 10.2% fall to close at 441¢/kg cwt. Interestingly, Victorian lamb slaughter remaining persistently high for this time in the season (figure 3) suggesting Southern processors are getting their fill despite the relatively high prices.

The week ahead

A fairly dry forecast for the week ahead will limit price moves to the topside, while the looming winter tightening in supply and firm export demand should keep prices supported on any dips. The most likely scenario in the coming week is for continued price consolidation at these levels.