Month: April 2018

Global wheat stocks set to ‘crash’.

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The world has been awash with wheat over the past six seasons. The adoption of modern farming practices and favorable weather around the world has created a situation where we have produced too much. We take a look at some new projections, and what has driven prices up in the past week.

I’ll admit, that it is a bit of an exaggeration to say that wheat stocks are crashing. Overnight the International Grains Council (IGC) have lowered their expectations for the 2018/19 global crop, with production falling 16.9mmt year on year, and end stocks down 3.4mmt. As we can see in figure 1, this is the first year since 2012/13 that end stocks are predicted to fall.

Although the world will still be left with abundant stocks at the end of the season, it will only take further downgrades in this season and 2019/20 to start placing pressure on supplies. Although it’s not nice to say, we need farmers in other territories to have a bad time.

The wheat market gave a solid attempt at a rally throughout the middle of the week, with futures up A$14/mt from the end of last week on Thursday. However, as we regularly witness with wheat maintaining a rally is a struggle, and A$3-4/mt were lost overnight (figure 2). It is expected that a large proportion of the fall overnight was spec driven, yet the fundamentals are still in play for a volatile futures market and we may yet see further advances due to US weather concerns.

As all farmers in Australia know, Anzac day is the traditional point when the planting of the crop goes into full swing. In our conversations with growers around the country, it is clear that a lot of the crop is going into the ground dry, with the hope of some starting rains in the coming weeks. At present the soil moisture profile (see map) remains poor across the bulk of the Australian wheat belt.

What does it mean/next week?:

Producers: The focus will continue to be on planting the crop and performing rain dances. The buyers are likely to continue paying strong basis levels whilst major crop concerns persist. This will allow Australian producers to maintain a strong premium above international levels.

Consumers: There is a long way to go before harvest, and the rain could come and produce a bountiful crop, however it is worthwhile enacting a risk management plan to ensure that you are not exposed to worst case scenarios.

Strike whilst the iron is hot.

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The wheat market has regained some of its strength on the back of fundamentals. This is great timing as we start to plant the crop for the coming season. In this week’s comment, we look at the SRW/HRW spread and the iron ore market.

The wheat futures market has improved over the past two sessions, to return to the levels from mid-Thursday last week (figure 1). The trade continues to be concerned about weather conditions in the US, both with the winter crop, and potential issues with spring crop planting.

In Texas, Oklahoma and Kansa, drought ratings remain severe (see map). The continued drought conditions have started to place a premium on the HRW grown in these areas (figure 2). The spread between HRW and SRW has been very narrow in recent years but have now started to branch from one another. Many will remember the same happening last year with MGEX futures, heading to a massive premium over SRW/HRW.

The Australian dollar has continued to remain strong at a range between 76¢ and 78¢, for the past two months. In the past week, an upsurge in crude oil prices, has flowed onto the iron ore market, with an expectation of increased demand. In figure 3, Singapore iron ore futures are illustrated alongside the A$. We can see a relationship between the two, which points towards a strengthening of the A$ if the iron ore rally is sustained.

A rise in the A$ will make our export products less attractive, however on the flipside will in theory make our imported products cheaper (fertilizer/chemicals/machinery).

What does it mean/next week?:

The situation in the US is poor, and the further we get through the year with sustained drought conditions the less likely they will have a reversal of fortunes. The question still remains, with huge global stocks, how far can the market go?

A sea of red as EYCI dips under 500¢.

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A glance at the weekly cattle price changes are an uncomfortable sight both domestically and in key offshore markets. Local prices are under pressure from the weight of throughput, particularly out of NSW and Queensland, while the 90CL beef export price to the US succumbed to concerns of high supply.

Table 1 highlights the weekly movement of East coast domestic cattle prices along with a measure of the movement from last season’s price levels. The Eastern Young Cattle Indicator (EYCI) is off 3.7% to 495.7¢/kg cwt, as a lacklustre start to the Autumn break forces producers to bring forward stock to market.

The EYCI moves were mirrored in all other cattle categories, although Trade and Heavy Steers are holding up reasonably well in comparison to other classes with declines of only 1.3% (281¢/kg lwt) and 2.6% (260¢/kg lwt), respectively.  Medium cow, the worst effected on the week, had a 12.7% drop to finish at 173¢/kg lwt.

The Western Young Cattle Indicator(WYCI) is also matching the trend with a 2.4% fall to close at 562¢/kg cwt. In offshore markets, the 90CL frozen cow appears to be reacting to concerns over anticipated high fed cattle slaughter levels in the US over April driving it to drop 3.2% to 566.5¢/kg CIF – Figure 1.

Increased cattle throughput was noted across all states this week. The big increases were particularly evident in NSW and Queensland when compared to their respective five-year seasonal average levels. Current NSW throughput is 73% higher than the seasonal pattern, QLD is at 67% higher and WA is sitting 43% above. In contrast, Victoria and South Australian cattle throughput only marginally over their five-year seasonal pattern at 1.4% and 1.2%, respectively.

The impact of the high NSW and Queensland throughput is evident in the broader East coast yarding levels with the 84,395 head sitting 50% higher than the seasonal five-year pattern for this time in the year – Figure 3.

What does it mean/next week?’

Apart from the coastal extremities of NSW and Southern Queensland, there is not much rainfall on the horizon for the week ahead for much of the nation. Cattle prices are likely to remain under pressure while the Autumn break in the South remains elusive.

The 90CL is approaching key support at the 550¢ region so may fortify local young cattle prices if it can hold this level. a .

Wool market striding forward.

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This week according to AWEX the wool market was “striding forward without retreat’. Despite the obvious military connotations, it’s not a bad description. Not only were buyers bidding higher for the “better spec’s” wool types, the strong demand was observed across the board.

After last week clearing more than 50k bales, this week only 38,275 bales were cleared to the trade from a total offering of 39,605 bales, resulting in a pass-in rate of just 3.4%. To compare, the average weekly pass-in rate this season is 6.1%.

The issue of the variability in weekly offerings is a factor on the market, with a variation of over 10,000 bales in the past two weeks. There is an argument that some effort in managing sale offerings to avoid these large discrepancies is warranted, mainly to assist exporters in managing orders; the question though is who should be responsible. Perhaps it’s an issue for the National Council of Wool Selling Brokers to develop guidelines and policy?

The impact of the reduced supply on the market was significant, with the Eastern Market Indicator (EMI) lifting by 29 cents on the first selling day and a further 20 cents on Thursday to see it close for the week at 1825 cents, while in US$ terms the EMI found an additional 49 cents to settle at 1425 cents (Figure 1).

This places the EMI just 8 cents shy of the previous recent record level set in February.

The AU$ rallied 0.5 cents over the week to US$0.78, while the Western Market Indicator (WMI) gained 50-cents to 1934 cents.

As the season progresses, the amount of low yielding wool increases, AWEX reporting that more than half this week’s offering was measured at less than 65% yield. This places increased pressure on buyers sourcing the better style and higher yielding types.

Crossbred types joined the rally, posting better levels daily to finish the week strongly. As an indicator, the 28 MPG in Melbourne added 38 cents for the week. A standout quote was the 25 MPG in Melbourne that was quoted up a staggering 130 cents, almost 10% gained for the week. Stronger microns didn’t miss out with the 30 MPG adding a massive 50 cents for the week.

Merino skirtings posted improved levels each day and closed the week on a very solid note.

Merino Cardings had another good week. The stand out was in Fremantle where the Cardings indicator recorded a huge 72 cent lift for the week.

The week ahead

Next week, just under 44,000 bales are offered which is a slight increase on this week’s sales. The following weeks are currently rostered to offer less than 40,000 bales per week.

The large clearance in the first week after Easter provided an insight into the current demand, and this week the buyers surprised with the margin of the price rally. It seems a fair bet that next week the February EMI high point will be broached.

It’s a restockers market.

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Lamb markets had their usual reaction when prices fall heavily, supply contracted as producers looked for alternatives to selling. Not all prices steadied though, with restocker lambs taking a hit and now looking very cheap.

Finished lamb supply tightened, but it seems unfinished lambs kept coming. Figure 1 shows the National Restocker Indicator took a heavy hit this week, moving to a low not seen since August 2016. The difference in seasons this year and last is stark. Restocker lamb prices being 200¢ lower this year is a pretty good reflection of the lack of feed available for lambs.

Figure 2 shows NSW restocker lambs at a 60¢ discount to the Eastern States Trade Lamb Indicator (ESTLI). Even if we expected the ESTLI to stay around the 580¢ mark, we’d say restocker lambs were cheap. At 520¢ a 16kg lamb will cost $85-90. If the ESTLI gets back to 650¢/kg cwt, which it should when it rains, a 20kg lamb will make $135-140 per head. It’s a good margin.

Mutton hasn’t been so caught up in the lamb price fall. Figure 3 shows the National Mutton Indicator has lost 23¢ in the last few weeks, and is 80¢ below the same time last year.

In the West, mutton is around the same price, but WA has the most expensive lambs in the country. The Western Trade Lamb Indicator is at 614¢/kg cwt, down 18¢ on last year but still priced pretty well. There is not a lot of rain forecast for WA, so prices may start to track down towards east coast values.

The week ahead

There is not much rain forecast for anywhere over the next eight days, so it’s hard to see much upside for sheep or lamb prices in general. Don’t be surprised to see restocker prices bounce though, as figure 2 shows, they don’t stay this cheap relative to finished lambs for long.

No news is good news.

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At a time when the live sheep export trade is making headlines for all the wrong reasons the big brother of the industry is quietly getting on with the job. Live cattle exports make up the lion’s share of the total trade out of Australia, with the combined beef and dairy trade representing 1.5 billion of the 1.8 billion annual farm gate returns. This piece takes a quick look at how the key markets are faring so far this season.

A look at the current seasonal pattern shows that total live cattle exports for the first quarter of 2018 have pretty much been on the five-year average trend after a slow start in January – Figure 1. Average monthly trade volumes across the first quarter of 2018 sit just 5% below the five-year first quarter average, but is 14% higher than the average monthly volumes set during the first quarter of 2017.

The trade to Indonesia dominates the market share and it is currently sitting at 50% of the 2018 total live export volumes. This is despite the first quarter of the season averaging 3% below the five-year seasonal pattern at around 36,000 head per month – Figure 2.

The flow of live cattle to China has been more erratic than the Indonesian experience so far this year. After an average start to 2018, February saw nothing delivered and then March followed up with the biggest monthly figure reported since the middle of 2015 at just under 16,000 head – Figure 3. Indeed, this is the largest March flow on record from Australia to China and represents a 175% increase on the five-year average pattern for March.

Average monthly consignments to China for the first quarter of 2018 are running 19% above the seasonal five-year trend and sit 3.5% higher than during 2017, a good sign of continued growth in the demand from China – which currently comprises about 9% of the market share of the trade out of Australia.

Vietnam holds the second spot in terms of market share of Australian live cattle exports, with the percentage of the trade so far this season sitting at around 18% of total flows. The first quarter of 2018 has begun in a reasonably solid fashion with average monthly volumes over the period sitting 61% above the five-year seasonal pattern monthly average levels – Figure 3.

What does it mean?  

Seasonal movements of total live cattle flows show that during April and December there is often a peak in trade volumes as consignments to Indonesia commonly increase during this time.  Domestic cattle prices are broadly softer and the Australian dollar has been trending lower since the January 2018 peak above 81US¢, which should assist the competitiveness of live cattle into the peak part of the season.

Combined with the strong start to the year out of Vietnam and China, it is something positive to look forward to for live export participants enduring a bit of a delicate time at the moment.

Post Easter sale success.

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Sales resumed following the Easter break with the largest offering for the season requiring Melbourne to sell over three days. 54,409 bales were offered with 51,066 sold, well above the weekly average of 41,000 bales sold for this season.

Despite the increased offering, the Eastern Market Indicator (EMI) lifted 4 cents to 1776 cents, while in US$ terms the EMI found an additional 12 cents to settle at 1376 cents (Figure 1).

The AU$ didn’t provide the wool market with any favours. It’s held steady over the past couple of weeks at US$0.77 or better, which was represented by the solid result of the EMI in US$ terms. Fremantle sales also fared better, the Western Market Indicator (WMI) gained 13-cents to 1884 cents.

Despite the solid performance, sellers in W.A. were underwhelmed and still passed in over 9% on Thursday & 7.8% for the week; while nationally 6.1% was passed-in.

This week, the fourth largest weekly $ value of wool was traded since AWEX commenced reporting on auctions in 1996, with $97.4 million flowing back to wool producers for an average bale value of $1,907.

It was noted that burry or high VM lots found support, especially towards the end of the week. Our reports over the past few months have regularly noted that secondary lines were often struggling to find buyer support, so this change in sentiment is welcome news. As the higher VM volumes ease we usually see the severe discounts also ease; the next couple of weeks will tell the story if this is the start of the improvement or a one-week wonder.

Crossbred types again had a mixed result, with finer types (28 – 30 MPG) finding good support and lifting 20 to 40 cents. However, stronger microns were irregular and tended cheaper.

Merino skirtings followed the direction of the fleece types, although generally slightly more modest price increases were noted over the week.

Merino Cardings had another good week, posting another 27-cent improvement average across the three cardings indicators.

The week ahead

Next week just under 41,000 bales are offered, a significant reduction on this week’s sales.

This was another week of larger clearances than the previous sale, with the market finishing in a solid state after a slightly soft opening. It feels that the short to medium outlook is positive based on the current market levels and clearance rates.

On top of the solid performance in the current market, AWEX report that volumes are predicted to decline after this sale, with the forecast dropping below 40,000 bales in the coming weeks.

Friday the 13th, unlucky for some?

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For those of a superstitious bent, Friday the 13th is considered to be unlucky. In this week’s comment, we take a look at futures pricing & the USDA update to global wheat supply and demand, in order to determine whether we are lucky or not.

The futures market rallied during has rallied strongly since the beginning of April, however in recent days prices have fallen as a result of bearish data in the WASDE (more on that later), and the increasingly tense stand off between US & Syria/Russia. However, prices remain 3% higher than the close last Thursday, and 8% up on the start of the month (figure 1).  So in this case we are definitely lucky, to have much higher prices than the start of the month.

The April WASDE report was bearish for wheat, with production estimates for the current season raised by 962kmt, which mainly came from a month on month increase in production estimates of 13.47% in Morocco. Raising global production to 759mmt, the highest global production on record (figure 2).

Due to the rapid export pace in Russia, their ending stocks were reduced by 1.1mmt, which is a bullish factor. However, lower feed usage in Iran offset much of this with an increase in end stocks of 2.3mmt. Overall, global end stocks are forecast to end at 258mmt, 14mmt higher than last season and also an all-time record (figure 2).

The WASDE paints a concerning picture, with world production and stocks for 2017/18 at record highs, it reduces the potential for the market to provide sustained strong rallies. The world needs a very large drop in production in one of the major northern hemisphere to provide a drive in the market to benefit Australian producers.

I recommend you read Tuesdays article “How do you eat an elephant?”, in order to get some ideas on hedging strategies for the 2019 crop.

What does it mean/next week?:

At a local level, we need to keep a close eye on Australian weather, many cropping regions are yet to receive meaningful rain. It is however very early in the season, and there is still everything to play for.

You might notice a bit of a pattern of involvement here, but in coming weeks posturing between Trump/Russia, Trump/China and Trump/TPP countries will have an impact on global markets both for commodities and equities.

Delayed Autumn break shakes out some more supply.

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Persistent dry conditions, hitting NSW particularly hard, and a delay to the Autumn rains have forced higher than average seasonal yarding levels this week. Lamb and sheep prices are reacting to the higher saleyard numbers accordingly, with declines across all Eastern mainland state categories reported by Meat and Livestock Australia.

Figure 1 highlights the weekly and historic yearly price moves across the East Coast saleyards this week, and it’s a sea of red ink. Falls were recorded, ranging in magnitude from 3.5% to 17%, with Restocker Lamb taking the biggest hit, off a dollar on the week and 26.7% softer than this time last season. The Eastern States Trade Lamb Indicator (ESTLI) is mirroring the broader market decline with a 4.6% fall to close at 572¢/kg cwt.

There’s a different picture in the West with prices broadly holding their ground as lamb and sheep throughput levels are comparable to the volumes registered this time last season. WA Mutton is the laggard, off 1% on the week to sit just above 400¢ and WA Merino Lamb the star performer, registering a 5% gain to test back above 630¢/kg cwt.

Among the South Eastern regions, NSW and SA categories of lamb are leading the price declines with falls recorded in the 5%-15% magnitude, while Victorian lamb categories are not off as much, posting declines between 3%-10%.

Saleyard throughput across the East coast is reflecting the delayed start to the Autumn break with weekly numbers for both lamb and sheep above the five-year average levels. NSW is the key driver for the additional throughput as the dry conditions have been impacting producers there and having a notable effect on sheep yardings in recent weeks.

Figure 2 shows the 50% gain in throughput for NSW lamb this week and numbers spiked back toward 113,000 head, a level 22% higher than the seasonal average and 122% more than this time last year. NSW sheep yardings are showing a more definitive deviation from last seasons pattern than NSW lamb, with average weekly yarding levels for the last month sitting 46% higher than for the same timeframe last season and 39% above the longer term seasonal trend pattern – Figure 3.

What does it mean/next week?:

The rainfall forecast for the week ahead shows 5-10mm expected for most of NSW and up to 25mm for parts of Victoria, but little elsewhere is anticipated in the sheep rearing zones across the nation. It may be enough to ease the magnitude of the price declines witnessed this week, but not enough to put a solid floor under the market at this stage, nor to get prices moving higher in any significant way.

It’s a buy opportunity if you’ve got feed.

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The Eastern Young Cattle Indicator’s (EYCI) decline continued this week. We’re not seeing finished cattle prices being dragged lower, especially not in the south, as the supply of slaughter ready cattle is weakening due to the dry. It’s not great for young cattle producers, but good news for traders.

The EYCI eased another 25¢ this week, heading back through support at the 514.50¢/kg cwt level. No doubt the fact that there has been no real rain in April, in addition to the usual increase in young cattle supply in Northern NSW, is helping drive the EYCI lower.

Heavy cattle prices remain relatively strong however. The NSW Heavy Steer Indicator (figure 1) is actually sitting close to a nine-month high, at 512¢/kg cwt. The 2¢ discount for the Heavy Steer is as close as it’s been to the EYCI since spring 2015.

A relatively small spread between finished cattle and young cattle is not unusual for this time of year, but it’s not something we’ve seen during the herd rebuild. It suggests the young cattle supply is approaching normal, but the tight spread is obviously partly driven by the dry summer in NSW, Victoria and South Australia.

The bad news for cattle producers is that seasonality suggests that continued dry conditions are likely to see young cattle prices continue to fall. Figure 3 shows that the fall usually runs until at least May, and this could see the EYCI below 500¢ for the first time since the first half of 2015.

The week ahead

There’s not a lot of precipitation on the forecast, so we might see young cattle prices continue to ease next week.

There is opportunity for restockers to buy at close to 3 year low prices, and the fact that heavy cattle values are holding strong gives an indication that the finished cattle market might find support, making a good trade.