Month: August 2017

China beef ban limited impact

Last week we wrote about how the increasing tariffs on US Beef entering Japan is expected to have a small positive impact on export beef, and cattle prices. Obviously the support hasn’t been strong enough to stop price falling, but is the China import ban causing the fall?

The China import ban is limited to six export beef plants, in Queensland, New South Wales and South Australia. While the reason for the bans seem rather trivial, the impact on individual plant is likely to be relatively severe. The bans were apparently due to mislabelling, with labels inside boxes not matching labels on the outside of the box.

Regardless of the reason for the ban, any limitation of export to a particular market will result in weaker demand for beef, and stronger supply into other markets. Figure 1 shows that China is Australia’s fourth largest market for beef exports. It accounted for 10.8% of our exports for the first half of 2017.

If we take Australian domestic consumption into account, China receives 7.7% of Australian beef. There are currently 46 meatworks which can export beef to China, so there are still 40 works which can still send beef.

In terms of the type of beef, figure 2 shows that in 2016 a vast majority, 70% of Australian beef exported to China, was Frozen Grassfed; while Frozen Grain made up 23%. In terms of cuts, a wide variety is sent to China. According to MLA figures, ‘other’ was the largest category in 2016, accounting for 35% of exports. Brisket was the second largest category, making up 23% of Chinese exports.

As a comparison, in 2016 Australia sent 21,689 tonnes of Brisket to China. Japan took 42,381 tonnes of brisket in 2016, being the second largest cut exported there. Given the Japan tariff hike on US beef is likely to increase demand for Australian frozen briskets, there is likely to be some substitution from Chinese to Japanese markets.

Key points:

  • The Chinese ban on six Australian meatworks is yet to be resolved.
  • The proportion of Australian beef production impacted by the ban is relatively small.
  • Chinese beef imports from Australia are largely made up of grassfed beef, any impact will be felt at this end.

What does this mean?

Given the amount of beef which is likely to impacted by the Chinese ban on six meatworks, the effect on price at saleyard level is unlikely to be noticeable. Figure 3 shows the price of Frozen Briskets exported to Japan, which hit a two and half year high in July. While there are plenty of other factors which come into play with export beef prices, this is the series most likely to show how export issues are impacting the market.

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Supply still all over the shop thanks to NSW

Some big moves again in East coast lamb and sheep yardings this week, heavily influenced by NSW flows, but for the most part prices around the country finished firmer. The headline, Eastern States Trade Lamb Indicator rising 1.3% to break back above 600¢ – although stronger gains were noted across other categories of lamb across the country.

Figure 1 highlights the sharp rebound in lamb throughput at East coast saleyards this week, with a gain of 74% to see just shy of 165,000 head of lamb exchanged. The rebound driven by a surge in lamb throughput in NSW which posted a whopping 108% increase in numbers on the week. It is reasonable to argue that the size of the NSW gain is a bit distorted as the previous week’s numbers were much lower than normal, however the 138,000 head of NSW lamb throughput this week is still 37% above the five-year average for this time of the year.

A similar, but opposite story for sheep yardings along the Eastern seaboard. Figure 2 demonstrates the 33% decline in sheep throughput on the week to see 41,000 head at the sale yard, to see it pretty much in line with longer term average levels. NSW again the driving force behind the lower sheep numbers with a 67% decline noted here this week, although the 33,000-odd head reported still 30% above the five-year average in NSW for this time of the season.

The volatile supply figures did little to dampen most lamb and sheep prices though, with national categories showing Restocker Lambs the only category to post a decline on the week – down 5.3% to $75 per head, dragged down by an 18% drop in WA Restockers. National Merino’s, this week’s winner with an 8.5% rise to 564¢/kg cwt – boosted by strong gains to Merino Lambs in Victoria and SA, up 20% and 16%, respectively. National mutton stronger this week too, up 5.4% to 431¢/kg cwt, as a rebound in Victorian and NSW mutton prices assist the national indicator.

The week ahead

A softer $A, now below 79US¢, flowing through to higher export demand a good sign for the weeks ahead as live export wether prices post a 10.8% gain on the week to close at $140 per head. In other weather news, forecast rainfall for the week ahead shows some good falls to lamb rearing regions of the nation, with NSW the only state to miss out on falls above 5mm. Despite the dry patches in NSW the rainfall to the rest of the country should continue to be broadly supportive of prices in the short term.

This was a good price in 2015

The slide in cattle prices continued this week, with more help from lower export prices, pushing the EYCI back to two year lows for this time of year. Rainfall across NSW and Victoria doesn’t seem to have helped the cause yet, as supply continues to outweigh demand.

After only recently falling below 2016 levels, the Eastern Young Cattle Indicator (EYCI) this week eased below 2015 levels. The two year low puts the EYCI a very large 134¢, or 19% below the levels of this time last year.

Obviously when the EYCI reached 560¢ back in July 2016, it was happy days for cattle producers. This year prices are still ok, but given they have fallen 14% in 12 weeks, at a time of year when they normally rise, has taken the market by surprise.

There was also some decent rainfall around this week, and for August to date (figure 2). This hasn’t at all translated into any demand, as young cattle prices continue to ease even though yardings haven’t been anything extraordinary.

The 90CL price continued to fall this week, losing a further 10¢ in AUD terms. This is no doubt helping to drag cattle prices lower, as it’s now also lost 14% in 12 weeks. Weakening demand for 90CL beef in the US is apparently the driver, with foodservice not doing so well.

Positives in the cattle market were hard to find this week. The National Heavy Steer Indicator gained 15¢ to move back to 521¢/kg cwt. This was despite the Queensland indicator sitting at 494¢, and there being no quote from any other state.

The week ahead

We are still waiting for cattle prices to find a floor after this very abnormal decline. It’s hard to know if the market will experience a normal spring decline from there, or whether there will be some rain and a subsequent price rise.

Despite the falls in the 90CL export price, there is a little room for upside, especially if the Aussie dollar does the right thing, and it rains.

Away we go, wool bounds out of the blocks

The three-week recess seemed to create pent up demand from the processors, with the larger offering and stronger A$ unable to dampen competition – the wool market had a good week. AWEX reported that buyers were bidding strongly from the outset to fill orders secured over the break.

As Mecardo reported in the last sale report prior to the market recess, demand is good and with growers seemingly selling as soon as wool hits the stores any improving demand will construe to create increased competition on the auction floor. This theme certainly continued this week.

The EMI rallied A$0.28, the WMI improved A$0.36 while in US$ terms the EMI increase of US$0.48 was significant.

While all MPG’s improved, it was the 19.5 MPG and broader that performed strongest including X Bred types. The 28 MPG is back above 800 cents for the first time in 12 months while it was September last year when the 30 MPG closed above the current 614 cents.

This strong auction market translated into strong bidding on the Wool Forward market with growers stepping in to secure good forward cover for the remainder of 2017, and trades secured into 2018.

With a larger offering (on top of a big offering pre-recess) and a season low pass-in rate of 3.9% (season average 6.3%), 50,300 bales were cleared to the trade. This is an outstanding result compared to recent sales patterns; the last time 50k bales were sold was in December 2016, and then you need to go back to January 2016 to see more than this number sold.

There was one negative in the market; the cardings indicators in all centres retreated against the general market trend to post. A small offering in Fremantle held the market steady, however in Sydney & Melbourne the Carding indicator lost 40 & 23 cents respectively.

The week ahead

The result this week gives confidence for the week ahead, and with the A$ seemingly having peaked we should see another strong result with all centres selling.

The smaller offering is a portent of things to come with less than 40k bales rostered per week over the next three weeks; this should assist the market to at least retain current levels.

It’s all still to play for

The first week in August. This month is one of the most important in the cropping year, as we will have increased certainty on the rest of the world’s crop, and start to gain greater clarity on how good (or bad) Australia is going to be come December. It is the knife edge time of year.

The global markets over the past week have continued to decline (figure 1). In straight futures, the market is now down to levels below the June/July rally, in the past week in A$ the fall has been $10.

In figure 2, we have shown the three US futures contracts, converted into A$. We can see that all futures have fallen considerably. The premium between SRW/HRW and HRS continues to trade at a strong level, this is as expected due to the poor growing season which corresponds with the hard red spring contract. The issues around the world when it comes to wheat are largely around quality, particularly the lack of high protein wheats. At present low protein wheats are still in strong supply.

At a local level flat price around the country have fallen since a peak on the 11th of July (figure 3). During the first week of July all port zones were able to achieve historically competitive prices, however few growers have taken advantage of the prices available. Since the 11th, across all ports in figure 3, the price has dropped by $32 per mt.

At present the ‘Garden of eden’ prize in Australia currently resides with Victoria, with crops progressing well and receiving beneficial rain in recent days. However, other areas of the country are not in such great shape. If conditions deteriorate around the country, we would expect basis levels to bolster.

Next Week

The next couple of weeks will be instrumental in developing the Australian crop, and at this point in time the range of possibilities is as wide (15-21.5mmt). What falls from the heavens will determine where we end the year.

Weather, A$ and grinding beef just not helping local market.

A combination of factors conspiring to see the Australian cattle market soften again this week with the headline Eastern Young Cattle Indicator (EYCI) off another 1.6% to close the week at 574¢/kg cwt. The Bureau of Meteorology (BOM) August rainfall outlook indicates the dry will persist for another month, while the resilient A$ and weaker 90CL continue to act as headwinds on local cattle prices.

Figure 1 highlights the chance of rainfall exceeding the median levels for this time of year, and it looks particularly unfriendly to southern NSW. Despite much of Queensland enjoying a rosier picture, cattle prices here were among the softest this week with QLD Heavy and Feeder steers bearing the brunt of the negative sentiment – off 6.6% (260¢/kg lwt) and 6.2% (308¢/kg lwt) respectively. Meanwhile, Victorian saleyards registered Feeder steers and Trade steers as their weakest two categories, down 6.2% (301¢/kg lwt) and 4.2% (302¢/kg lwt) between them. In defiance of the BOM outlook the NSW markets were reasonably flat on the week, apart from Medium Cows, marked down 4.3% to 208¢/kg lwt.

Western young cattle posted a slight rise to 559¢/kg cwt, a gain of 1.1% – figure 2. However, the star performer in WA saleyards were Feeder steers, posting a 9.3% lift to 294¢/kg lwt. Turning off shore, the 90CL frozen cow indicator dropped 4.1% to 566¢/kg CIF as US meat packers reduced their prices in an attempt to encourage an increase in forward orders.

The effect of the stronger A$ being felt too in the 90CL price when converted into local currency terms. Indeed, had the Aussie dollar been at the level it was two months ago, sitting below 75US¢, the 90CL in A$ terms would still be above 600¢ this week.

The week ahead

Some reasonable rainfall is noted for much of WA and Victoria next week, but much of the rest of the country is expected to miss out again. A key factor for the EYCI to find a bit of a base in the next few weeks will be the movement in the 90CL and the A$.

Taking into account the unfavourable August forecast for rainfall it is unlikely that there will be significant improvement in cattle prices due to seasonal conditions. Producers keep your fingers crossed for a softening in the A$ and/or a lift in the 90CL to stem the EYCI decline and perhaps provide some stimulus for firmer prices.

Japanese tariff hike supportive but not game changing

The last week has seen some interesting events in the international beef trade.  The good for Australia was the increasing of tariffs on US frozen beef exports to Japan.  The bad and the ugly was the Chinese temporary ban on beef and lamb exports from six Australian meat processing plants.  We’ll try and make some sense of how the Japanese tariffs might impact on cattle prices, China will have to wait until next week.

The background to the Japanese tariff increase for US frozen beef is a lot to read.  The gist of it is that the year on year increase in imports of US frozen beef for the April to June period was large enough to trigger Japan’s ‘safeguard’ mechanism, and send tariffs for that segment of the market from 38.5% to 50%.

According to the US Meat Export Federation (USMEF), who have produced an excellent fact sheet, a vast majority of US frozen beef exports to Japan are grainfed brisket and short plate cuts.  These cuts are used in gyudon beef bowl chain restaurants.

Australia’s frozen beef exports to Japan are made up primarily of grassfed trimmings, as shown in figure 1, with brisket/short plate cuts at just 26% of the US volume.  It’s not as simple as increasing prices of US beef shifting demand for that type of cut to Australia, as we simply don’t have that amount of beef available for export.

The likely result of the increase in US tariffs is stronger demand for brisket and short plate cuts from Australia, and higher prices, while US processors will receive lower prices, to account for the tariff increase.  Japanese consumers are likely to suffer as some of the increase is passed onto them.

The USMEF have also outlined the risk of a shift to chilled brisket and short plate imports, which could trigger the safeguard for US chilled beef.  Chilled beef makes up 55% of US exports to Japan, so to trigger the safeguard on this would be even more disastrous for US beef.

Key points:

  • Japan have triggered a safeguard increase in tariffs on US frozen beef imports.
  • Most of the frozen beef the US export to Japan is short plate or brisket, a smaller part of Australian exports.
  • The increase in US tariffs will be supportive of our beef export prices to Japan, but unlikely to have too much impact at saleyard level.

What does this mean?

The USMEF calculate that the tariff increase will equate to an effective 8% increase in the price of US frozen short plate/brisket.  The best case scenario for Australian beef exporters is an 8% increase in frozen brisket cuts.  Brisket cuts generally account for around 10kgs of beef in an export slaughter animal.  The latest quote from MLA for frozen brisket to Japan was 598¢/kg, an 8% increase would add 48¢.

The net result on a heavy steer would be $4.80 per head in increased value.  Not a huge benefit, accounting for just 1.5¢/kg cwt.  There is likely to be some spinoff benefits for other beef categories, as higher prices cause some demand shift towards chilled and other frozen cuts.

Heavy slaughter cattle should find some support from higher prices triggered by the increase in US tariffs, but it’s unlikely to outweigh too many of the headwinds the market is currently facing.

Dry to see mutton come cheap

In recent weeks we’ve covered what a dry winter and spring will do to lamb and cattle markets, but what about mutton?  While mutton price are still ok, continued dry weather will continue could see prices fall, but there remains conjecture about how far and for how long.

While mutton markets have participated in the decline in ovine markets since mid-June, unlike lamb markets, mutton values have managed to remain strong relative to last year’s levels.  Figure 1 shows the National Mutton Indicator (NMI), which last week fell to a six month low of 395¢/kg cwt.

The NMI is, however, still sitting at a 5.6% premium to the same week last year, and a very healthy 18% premium to the five year average.  Additionally, the NMI is still stronger than almost any other time between 2012 and 2017.  Mutton prices are not that cheap, despite having lost over 100¢ in the last six weeks.

Figure 1 shows that on average the NMI falls 28% from the start of August to the low, which is usually set at the end of October.  A 28% fall from the current value would put the NMI at 285¢/kg cwt, the lowest level since early 2016.  A mutton prices with a two in front is not unusual for the spring, it has been there in four of the last five years.

In 2016 the mutton market eased a little, but found solid support at 350¢ as the good season and flock rebuild supported prices.  From 2012-2015 the NMI averaged 230¢/kg cwt in October, so it’s the exception for mutton to be valued at better than 300¢ in the spring.

Continued dry weather is also likely to impact the NMI spread to the Eastern States Trade Lamb Indicator (ESTLI).  Figure 2 shows that the NMI is still at a relatively strong spread to the ESTLI, sitting at a 31% discount.  Despite being down from a 22% discount, the NMI is likely to ease further, with a 40% discount closer to the norm.

Key points:

  • Mutton prices remain relatively strong compared to historical levels and the ESTLI.
  • On average mutton prices fall 28% from the end of August to late October.
  • A dry spring could see mutton prices as low as 250¢, making current prices very attractive.

What does this mean?

Obviously there is no guarantee that Australian sheep areas will have a dry spring.  The BOM have been in pretty good form this year, and their latest forecast doesn’t paint a rosy picture (figure 3).  Simply based on historical mutton prices during strong supply, we would put the NMI in the 200-250¢/kg cwt range.

If we take our forecast for the ESTLI in a dry spring, of 450-500¢, and apply an average 40% discount for mutton, it gives an NMI of 270-320¢/kg cwt.  The worst the NMI discount has been in spring in the last five years is 50% discount, which would put it at 225-275¢/kg cwt.

If prices are headed to this level, it makes a solid argument to sell surplus sheep into the current market rather than hold to the spring.

Supply up and down and all over the place

Sheep and lamb markets were all over the place this week, with large price movements up and down depending on state and category.  Variable price trends were in part driven by supply fluctuations, of which sheep seems the most interesting.

Figure 1 shows the rapid increase in sheep slaughter over the past month.  This is a sure sign of moisture stress for sheep growers.  Lambs can’t be offloaded as they are not ready, so it is sheep which are hitting the market, most likely wethers.  Sheep slaughter for the week ending the 28th July was the more than double the same week in 2016, and the highest level since 2013, but only marginally beating 2014.

Another measure of supply, lamb yardings, moved in the opposite direction this week.  Figure 2 shows a dramatic fall in lamb yardings this week, with 45% fewer lambs yarded on the east coast.  It could have been last week’s drop in price seeing smaller yardings.  However there is likely to be a dearth of lamb supply in general, as old season supply ends, and suckers are yet to reach minimum weights.

The weaker supply saw a bounce in the ESTLI (figure 3), largely driven by NSW, to 596¢/kg cwt.  WA remains the price leader for lambs with the WATLI at 660¢, and has also achieved the highest price for mutton, at 418¢/kg cwt.

East Coast mutton values were up in SA and NSW, but lost ground in Victoria, with supply no doubt driving prices.

The week ahead

The rain over the last week, and that forecast for the next few days will provide some welcome relief for sheep producers.  It’s not likely to be enough to improve lamb growth rates, but could weaken the supply of sheep in the short term.  Either way there should be some support come for sheep and lamb values in the short term, but the medium term trend will continue to be down.

 

 

 

 

The good, the bad and the ugly

The grain market is one of the most interesting to be involved in. There is always ups and downs, always something interesting happening to change the direction of prices. This week is no exception with some big moves both internationally and locally.

At global level, we have seen further deterioration of Chicago wheat futures, with the spot market falling to as low as 474¢/bu, from a high at the end of June of 539¢/bu (figure 1). The market has lost 3/4 of its gains in ¢/bu since the rally in the end of June. The fall in SRW wheat is not unexpected as weather issues around the world are more a quality than quantity issue at present, and with beneficial rains being received throughout the US, risk to this crop has reduced and priced into the market.

When we however look at the futures converted to A$/mt, the losses have fallen well below the pre-rally period to $220 for spot and $230 for the December contract. This is due to the rise in the A$ which has been a surprise to many.  The majority of analysts have been calling the A$ overvalued for the past 18 months, however it never fails to surprise. In the past week, we have seen the dollar rise due to continuing negative sentiment from the US, however, continued firming in the wider commodity market (iron ore etc) has seen support levels firm.

At a local level, there has been good news, with many in the cropping belts receiving much needed rainfall and forecasted falls due in the coming days. Let’s hope the BOM are correct, as there are a lot of expectations resting on these forecasts.

As the concerns continue with the Australian crop, basis levels have continued to stay strong (figure 3), providing good flat price opportunities for growers. As volume is likely to remain depressed this season, basis levels would be expected to continue to remain on the higher end of the range.

Next Week

The focus will be on the weather. What will the results be of the crop in the northern hemisphere, and as we go into August will we maintain the current crop potential?
The forecast is for drier conditions for the next three months, will we see further downward revisions?