November 2017 - StockCo Australia

What goes up, must come down

Posted on 30/11/201727/11/2017 by StockCo

After weeks of a glowing market that seemed to keep on rising with record on record, the peak was finally reached and the market edged over the other side. Nearly all categories and microns across the country retracted on the week, however it wasn’t enough to cause too much concern.

The Eastern Market Indicator (EMI) dropped 14 cents on the week to 1,669¢. The weakening Australian dollar has meant the retraction was not quite as strong in US dollar terms, with just a 9 cent drop to 1,270¢. The Western Market Indicator fell just 8 cents on the week to 1,717¢.

The bale offering this week was substantial at a total of 48,409 bales. With the consistently high trade offering over the last few weeks AWEX reported that it has reached the point where buyers were able to be more selective with their purchases. The word on the ground from exporters suggests that the softening market this week is being led by offshore clients pulling back slightly due to tightening credit. The responding retraction in prices saw a bump in the percentage of wool passed-in this week. It rose 3.2% from last week to 6.4% of bales passed-in.

The finer micron wools still appear to be reacting most to any change in the market. The largest price correction was for 18.5 micron, which dropped 35 to 50 cents in the East over the week. Medium fibre wools (19.5 to 22 micron) lost on average 10 to 30 cents, while crossbred wool again demonstrated its volatility in a wide range of results. The finer crossbreds held slightly, to a loss of 10 to 20 cents, but 28 and 30 micron prices suffered on average 40 to 60 cents drops.

Skirtings followed the movements of the Merino market showing reductions ranging between 20 and 40 cents. The cardings indicator managed to retain some stability in the East on the week, and even posted a gain of 15 cents in the West.

The week ahead

Next week a huge offering of 51,982 bales is tipped across the three selling centres. Significant volumes are expected for Sydney and Fremantle which are providing most of the boost in next week’s offering. Sydney will be holding a designated Australian Superfine Sale on Wednesday and Thursday.

Resilient market defies flush

Posted on 29/11/201727/11/2017 by StockCo

The Eastern States Trade Lamb Indicator (ESTLI) continues to hold its ground in the face of strong lamb throughout figures being recorded in South Australia and Victoria, closing yesterday just 1¢ softer at 610¢. East coast mutton was even more defiant in the face of above average saleyard numbers to see an 8¢ gain to 461¢/kg cwt.

The East coast lamb throughput posted a 22.5% increase on last week and is sitting 28.4% above the five-year average for this time in the season – figure 1. NSW lamb yardings trekked sideways on the week but remain 22% above the seasonal average level. Although the big boost to East coast yardings is coming from SA and Victoria.

Figure 2 highlights the surge in SA lamb throughput at 52,251 head; the highest weekly lamb yarding recorded since 2008 to see throughput levels soar 60% over the five-year average for this time in the season.

Victoria is adding to the East coast glut of lambs with over 120,000 head recorded at the saleyards this week. Victorian lamb throughput was also higher than the five-year average this week, sitting 23.5% above the seasonal level. The increased numbers are currently dragging down each states respective Trade Lamb saleyard indicator, with Victorian Trade Lambs posting a 3.4% decline (600¢/kg cwt) and SA off 6.1% (574¢/kg cwt), based off the MLA mid-week saleyard report.

Stronger than average East coast mutton throughput levels were recorded too. This was aided by higher NSW figures, to see an 8.6% increase in saleyard numbers and the trend continuing to trek along the upper band of the normal range – figure 3. NSW mutton yardings were up 15.7% on the week, pressuring NSW mutton at the saleyard to see them ease 4¢ to 400¢/kg. Softer Victorian and SA mutton throughput is providing some support to prices there with Victorian mutton up 20¢ to 420¢ and SA gaining 8¢ to 410¢/kg cwt.

The week ahead

Price support is likely to remain from continued rainfall forecast across much of Victoria and NSW next week, with much to these two states expecting between 25-50mm. Although, increased Victorian yardings are likely as the Spring flush continues, so that will act to help counterbalance the recent and forecast rains.

On balance, the ESTLI is likely to ease into the week ahead to test sub 600¢, but don’t expect a huge drop.

Weaker supply and higher export prices mean what?

Posted on 28/11/201727/11/2017 by StockCo

Meat and Livestock Australia (MLA) seem to have sorted out the differences with processors who were holding back data slaughter data. For the last couple of week’s slaughter data has confirmed what we thought, cattle supply has been tight.

Figure 1 shows east coast cattle slaughter jumping higher in the week ending the 17^th November. This was largely thanks to Queensland, but slaughter rates moved higher in Victoria and NSW as well. East coast cattle slaughter last week sat just 3% below the same time last year (figure 1).

Slaughter cattle prices remained relatively steady this week, maybe due to the sharp jump higher in 90CL export prices. The 90CL Frozen Cow gained 18¢ to hit a five month high of 618¢/kg swt (figure 2). Driving export prices higher has been limited supplies from Australia and New Zealand, along with a weakening Aussie dollar.

The 90CL export prices is now nearly 7% higher than this time last year. So if export prices are higher than last year, and cattle slaughter lower, prices should be higher, right? Well no, figure 3 shows the Queensland Heavy Steer Indicator has improved, but it’s near the same price as last year.

As we noted earlier in the week, cattle supplies out of feedlots appears to be keeping a lid on cattle price rises, although the latest jump in export prices could see prices creep a bit higher.

In the west young cattle prices are basically the same as those in the east. Normally WA cattle prices start to head towards lows at this time of year, but limited supplies continues to support values.

The week ahead

The good wet season is set to continue for Northern NSW cattle producers, with 50-100mm forecast for next week. This bodes well for young cattle prices to at least hold current levels, and possibly improve. Finished cattle could see some benefit as well, but processors will have to want to push slaughter above last year’s levels. The weakening Aussie dollar should help on this front.

In search of the elusive SA premiums

Posted on 27/11/201727/11/2017 by StockCo

The South Australian Greens have extended the moratorium on GM in their state and over the past few weeks the mob at Mecardo have been investigating the claim made by the Greens that the GM ban, and their clean, environmentally sustainable image, provides a price premium benefit to SA producers. There has not been any sign of a premium on Canola, nor in mutton and lamb. This time we try to find it in cattle.

In order to determine if a premium exists for SA producers we need to be able to compare markets that are interdependent and share a degree of correlation in price movement to ensure that we are measuring like for like. We have run a series of correlation analysis over historic cattle price movements contrasting SA to other states and a variety of cattle categories and have selected to compare SA to Victorian Trade Steers.

On an annual basis, the returns correlation between SA and Vic Trade Steers shows a very strong interdependence scoring an r² of 0.9405 – Figure 1. This means that nearly all of the time the annual price movement in SA Trade Steers and Victorian Trade Steers follow each other.

Figure 2 highlights the average monthly price achieved by SA and Victorian Trade Steer producers at the saleyard according to the weekly MLA reported statistics. A cursory glance at the chart illustrates two fairly obvious characteristics of the two price patterns; namely, that the prices of SA and Vic Trade Steers share a close interdependence and that SA prices usually run at a discount to Victorian prices.

An overview of the historic percentage spread between SA and Victorian Trade Steer monthly average prices from 1998 to 2017, as outlined in Figure 3, demonstrates how few times SA producers have enjoyed a premium over their Victorian counterparts. Indeed, there have only been four brief periods over the last two decades when SA Trade Steers achieved a premium over Victorian Trade Steers on a monthly basis – as identified by the blue circles.

Analysis of the monthly spread data shows that Victorian Trade Steers have posted a long run average premium of 8.3% over SA Trade Steers (black dotted line) and the orange spread trendline shows that over the last two decades the premium spread in favour of Victoria has actually been expanding, as denoted by the upward slope to the trendline.

A cut in China livestock tariffs a big deal…or not

Posted on 24/11/201723/11/2017 by StockCo

According the Australian Livestock Exporters Council (ALEC) it was agreed last week that China are going to cut the 10% tariff on live feeder and slaughter sheep and cattle imports by January 2019. Is this a big deal, or not?

Breeding cattle dominate the Australian live export trade with China. Last year Australia had its second biggest year on record for breeder cattle exports, with 94,341 head shipping out (figure 1). There has been no tariff on breeder cattle exports for some time.

The latest announcement refers to the cutting of the tariff on slaughter and feeder cattle. This is a market which has only just started to move. For the year to October, feeder and slaughter cattle exports to China have totalled just 1,195 head. This is 2.3% of total export to China.

The abolishment of the 10% tariff on feeder and slaughter cattle exports to China will make cattle 10% cheaper for Chinese importers, while Australian sellers will receive the same price. In reality, when tariffs are removed (or applied), the benefit is split between seller and buyer, so there should be some price rise at the exporter end as well, which will no doubt benefit growers.

So where will these cattle come from? There is competition for China in the feeder and slaughter cattle market. The main player is obviously Indonesia, while Vietnam has grown in the last five years to be easily the second largest importer of Australian live cattle.

Figure 2 shows just how large the Indonesian and Vietnam markets are compared to China. As such it would take a very large push to see Chinese live export demand start to impact prices in Indonesia and Vietnam.

The feeder and slaughter cattle which have been exported to China were actually sent out of Portland earlier this year. This is where many of the breeder cattle which are sent to China come from, and increasing live exports could add support to feeder and slaughter cattle prices in the south when a boat is going.

The 10% tariff was also lifted on sheep, but sheep exports to China don’t even rate a mention in the data. They are lumped in with ‘other’.

Key points:

China have lifted the 10% tariff on live feeder and slaughter cattle and sheep imports from Australia.
The current trade with China in live feeders and slaughter cattle is very small, but could grow with opening of the trade.
Over time increasing demand for beef in China is likely to see the market grow and support prices.

What does this mean?

The lifting of the tariff from China is not going to see a rapid jump in prices tomorrow. It is an indication, however, that China are serious about taking more live cattle from Australia to bolster beef supplies. While the market is currently very small, any opening up of trade is good for cattle producers, as boats create competition and support prices.

Figure 1 shows that breeder cattle exports have grown rapidly in some years, so don’t be surprised if you start hearing more and more about boats going to China.

Lift in QLD throughput brings East coast back to average

Posted on 24/11/201723/11/2017 by StockCo

Robust northern cattle prices are attracting stock to the saleyards again this week in Queensland. Although, East coast throughput is sitting at fairly average levels for this time of the season as higher than average northern states yardings are offset by below average levels in the southern states.

Figure 1 shows the steady rise in Queensland cattle yardings since mid-October and based off last week’s figures we saw another 27% gain in cattle at the saleyards this week. Queensland Restocker, Feeder, Vealer, Medium and Heavy Steers all fetching the strongest prices for their categories across the country this week, so it is probably no surprise that we are seeing producers bring forward supply in the Sunshine State.

Queensland yardings sitting 28% above the five-year average for this time of the season and the above average throughput in Queensland and NSW, which has this week’s throughput 7.5% higher than average, has been offset by lower than average throughput in Victoria and South Australia, at 46% and 40% below their respective average levels. This combination of East Coast yarding levels offsetting each other, saw broader throughput at just 3% below the five-year average for this week in the season – figure 2.

National saleyard cattle prices were relatively subdued this week, with most indicators not varying beyond a plus or minus 2% swing. The Eastern Young Cattle Indicator (EYCI) is virtually unchanged on the week at 578.5¢/kg cwt, while the softest national category was the Heavy Steer Indicator, off 2.3% to 279¢/kg lwt. National Trade Steers were the best performers, closing up 1.8% to 304¢/kg lwt.

In the West, young cattle fared a little better with a 3.6% rally to nearly match the EYCI level, to rest at 575¢/kg cwt. The benchmark beef export indicator, the 90CL frozen cow, finished the week back above 600¢ for the first time in seventeen weeks.

The week ahead

Some very good falls were noted through SA, NT and Western Victoria noted this week (figure 3) and the forecast for next week is for further rain to cover much of Queensland, NSW and Eastern Victoria with levels noted between 50-100 mm in many places.

Good coverage like this and solid export price levels will mean it’s unlikely to see cattle prices soften too much across the nations for the short term.

A time for inward reflection

Posted on 22/11/201723/11/2017 by StockCo

The market continues to trade with a lack of strong fresh information. The real focus now is on what is happening locally. We continue to sit at strong local levels, but how long will it last?

On the global stage, Chicago wheat futures took a tumble this week (figure 1), returning to levels from the beginning of the month. The market continues to trade on the large global stocks, and eyes will be on export numbers to determine how quickly end-stocks will be depleted in the major exporters. As it currently stands without increased weather woes in the northern hemisphere there is likely to be little in the way of upward momentum.

At a local level, prices have been trending downwards to flat (figure 2) during November. However, across the board, APW1 prices have fallen substantially since the beginning of October.

Port Kembla -$39
Geelong -$30
Adelaide -$18
Port Lincoln -$20
Kwinana $-14

On the first weekend of November, an unseasonal frost event impacted Victoria. Our discussions with numerous consultants point to major losses to cereals. This is yet to be reflected in pricing with Geelong trading lower than the beginning of the month.

During October strong rainfall events have added some confidence to the summer sorghum crop, which reduced the concerns that domestic feed consumers had. This has led to a fall in basis levels (figure 3), especially in the areas which are within a potential drawing arc of NNSW/SQLD. We have highlighted the risk in pricing levels falling as we advance into harvest, these are worth re-reading.

Lock in premiums, keep exposure to the market

Wheat seasonality: Imitation is the sincerest form of flattery

Let’s look back at historical basis

What does this mean?

The key concern we see, is the status of the crop in Victoria. It has been two weeks since the major frost event, which is considered a 1 in 20-year event. The crop was looking fantastic in the Western Districts, and to see it fail so close to harvest, is completely heartbreaking and devastating. The full extent of the damage will be only be realised when the header goes into the crop.

Go west, where the lambs are cheap

Posted on 21/11/201723/11/2017 by StockCo

It could be the beginning of the spring flush, or it could be another blip in what has been an exceptional spring for prices. The rainfall this week might also have something to say about lamb prices in the east, but in the west they look like good buying.

There is an interesting east/west paradox going on in the lamb market. In the east restocker lambs are trading at a 50-90¢/kg cwt premium to trade lambs. In the west, trade lambs are priced at 542¢/kg cwt, and restocker lambs at 489¢.

If we work on a 16kg cwt restocker lamb, it makes east coast lambs $122/head with a $5 skin. In the west, the same lamb is worth $83. Historically this is a decent price, but it brings shipping sheep from west to east into play.

Despite yardings falling this week, prices have eased. The Eastern States Trade Lamb Indicator (ESTLI) lost 16¢ to 611¢/kg cwt in the week to Tuesday, but as shown in figure 1, remains well above last year’s levels.

Mutton markets defied the downward movement, with Victorian and NSW remaining solid at 466 and 450¢ respectively. Vic and NSW mutton values have rallied 25% in the last month with demand seemingly the driver (figure 2). Figure 2 also shows that in South Australia mutton is only 330¢, which makes them cheap, and worth shipping to Victoria.

The week ahead

Major lamb districts in Victoria and South Australia have seen exceptional rainfall in the last few days. The rain is likely to see lambs held back, especially if the market eases as Western Victoria and South-East SA are likely to be green until Christmas.

Slaughter figures will tell the tale of lamb supply, and give some pointers to what might happen in the New Year. But don’t be surprised if after this rain the spring flush of lambs is lighter than normal.

Another record for wool.

Posted on 20/11/201723/11/2017 by StockCo

AWEX identified an interesting statistic this week; the turnover of wool sold this week of $96 million was the largest since 2002. The kicker is that while this week it was generated by the sale of 49,000 bales, in 2002 it was on the back of an offering of 74,500 bales. So, a similar $ value heading back to rural Australia but 33% less bales produced.

It was a steadier week with the Eastern Market Indicator (EMI) finished the week at 1,683¢, gaining 2 cents and AWEX reporting this another new record high in Australian dollar terms. The Australian dollar was slightly lower over the week, with the EMI in US$ terms losing 13¢ to end the week at 1,279¢.

Again, a small pass-in rate this week of only 3.2% of the offered bales, resulting in 49,009 bales cleared to the trade. This is one of the largest weekly sale volumes for this selling season, with only the first week after the winter recess larger. Fig 3.

Some of the recent “heat” dissipated from the market this week with reports of “mixed results” where quality again was a factor; or more accurately lower quality wool at times struggled. This has been a pattern for the year however in recent weeks when the market rallied lower grades were supported.

Crossbred wool fell sharply losing as much as 50 cents reflecting the volatile nature of this sector. In contrast, Cardings continue to improve and set new records with all centres showing strong lifts across the week.

We have commented previously that the current market conditions are unique in our time of observation. Supply is moving through the system quickly; that is there are little stocks held either on farm, in broker stores or in mills. Sheep farmers are experiencing record income inflows; with not only wool prices good but so too are sheep and lamb prices. This will mean that any retracement in price in the future will be met with “cashed up” wool producers holding back wool from the market and reducing supply to processors.

As we said, these are unique times where it could be argued that the producer is able to influence the market by withholding supply. The qualifier is that any supply “squeeze” may have short term market influence but it is unlikely to be a long term positive factor on price. In the end, customers will adjust orders to meet supply and pay a price that works for their customers at retail level.

The question of “when or if” the market reaches a top is coming to mind now, we know markets don’t rally forever and that they don’t track sideways for long either. Mecardo had a look this week in the article What is the risk in the wool market at present

The week ahead

The big offering this week is to be followed by another 48,700 bales rostered for sale next week across the three selling centres (Figure 3). The roster then lists 44,000 for the following two weeks. Of note is the strong report from Fremantle this week, generally a solid market on Thursday in W.A. with the 3-hour time delay to the East Coast is a good lead for next week.

WASDE & Indian barriers

Posted on 17/11/201710/11/2017 by StockCo

The US Department of Agriculture released their World Agricultural Supply and Demand Estimates overnight. In this week’s comment, we will take a look at the impact on wheat, and report on new import barriers being erected in India.

In last week’s comment, I mentioned that this report would be released, and that there would be little in the way of surprises. This has largely been the case, with no major changes occurring. Unsurprisingly, the Russian crop was further increased by 1mmt, to a record wheat harvest of 83mmt. All in all, without beating around the bush, we are still in a world with a glut of wheat (fig 1). There are arguments that a large proportion of this stock is in China and not available to the export market, however the reality is that global prices are likely to stay depressed for some time.

The USDA have a relatively poor performance when it comes to forecasting Australia, and we tend to believe that the WASDE is usually around 2 months out of sync with reality. In table 1, the WASDE details for Australia are detailed. The items which stand out for future revision for me are:

Beginning stocks: These are likely too high, and after such a strong export program this is likely to be revised back close to 5-5.5mmt.
Production: USDA remain on the high end of the spectrum when it comes to Australian forecasts. A final production figure closer to 7mmt is more likely.
Exports: An export program of 17.5mmt is extremely ambitious for the coming year, and when production and beginning stocks are brought back to reality will be a hard task to complete.
Domestic consumption: The domestic consumption figure is sitting on the previous ten-year average, however this year there are a record number of cattle on feed.

So how did the WASDE report impact the markets? The answer is unfortunately for growers is minimally (figure 2). There was little in the way of surprises, and the report largely met trade expectations. After some short covering in the lead up to the report, the market regained it’s losses and is 5¢/bu or A$1 higher than this time last week.

A couple of weeks ago I flagged in the comment, “An Indian Summer”, that the Indian government was likely to implement a 20-25% import duty on wheat. In the past two days, the import duty on wheat was set to 20%. This is in place to discourage imports of wheat, and give positive price signals to local growers. In figure 3, Indian wheat futures on the NCDEX exchange are plotted, and we can see that yesterday the market started the day at A$345 shortly hitting A$353, and ending the day up A$3.

Although we don’t regularly examine pulse markets, a massive duty of 50% has been applied to peas. This is largely to disrupt the import from Canada, but for pea growers in Australia this will be felt.

What does this mean?

The November report is out of the way, and the December report is largely void of any worth. This means that by now and February the only influences on the global market from a fundamental point of view with any value will come from either Australia or South America.

We are going to have to wait until the northern hemisphere weather risk period to see any substantive rallies in the futures market. This does however provide opportunities for consumers to hedge values, or for growers to take out long swap positions.

Month: November 2017