Month: June 2018

Restocker demand down but a base might have been found.

With drought conditions in much of New South Wales and parts of Queensland, it has been interesting to see the Eastern Young Cattle Indicator (EYCI) find somewhat of a base in the last couple of weeks. With further dry weather forecast, we attempt to ascertain whether this is a support that’ll track along for a while, or whether it’ll take another leg lower.

It was only a fortnight ago the Bureau of Meteorology (BOM) released a depressing looking three-month rainfall outlook formuch of the east coast. If you thought it couldn’t get any worse, think again, with the mid-month update released last Thursday trumping the previous one for depressing brown areas. Figure 1 shows most of NSW and Victoria have a low chance of exceeding median rainfall from July to September.

The latest three-month outlook comes just as the EYCI is starting to find a base. Having fallen consistently for two months, the EYCI hit 466¢/kg cwt a fortnight ago and has since rallied 14¢ to 488¢. It’s worth noting that prices remain very good considering the conditions. The last time we had a dry spell like this, the EYCI was much closer to 300¢ than 500¢.

Figure 2 shows weakening restocker demand has been assisting the EYCI lower. Restockers have gone from paying a 6% premium to the EYCI itself to a 4% discount. The restocker spread has never been this low for very long. During the height of the 2013-14 drought, restockers were getting their cattle for a 2% discount.

Part of the reason the restocker discount is larger than in 2013-14 is that lotfeeders are still paying strong prices. In EYCI saleyards, lotfeeders are paying a 3.5% premium to the EYCI despite grain prices at close to 10-year highs. This tells us that there are some good prices for finished cattle being offered down the track.

While it’s a little counter-intuitive, the dry weather looks to be raising serious concerns around the late winter and spring finished cattle supply. Additionally, the herd rebuild didn’t gain enough momentum to see processors swamped with unfinished cattle and cows. The supply and demand of slaughter cattle looks to have found an equilibrium of sorts.

What does it mean/next week?:

We know it will take rain for the EYCI to move higher, but based on export prices and supply it looks like prices might have found a base for now, and will track sideways for a while. If the winter and early spring remain exceptionally dry, supply could increase and push price lower, but for now, it looks like things might hold, with the five-year average (Figure 3) seemingly the most obvious path.

Key Points

  • The latest BOM forecast has pegged the probability of better than median rainfall is low.
  • Historically restocker demand hasn’t been weaker, processor and feeder demand is still strong.
  • Despite the dry forecast, young cattle prices might find support at current levels.

Uncertainly certain.

As we near the northern hemisphere harvest period, volatility comes into the market, further assisted (and at times hampered) by continued political posturing by the giants of the US & China. In this week’s comment, we look at weather concerns and pricing in the world’s largest wheat producer.

At the end of last week, the markets were rocked by the erection of tariffs firstly by the US, followed by retaliation by China. The worst impacted ag commodity was soybeans (see article), however, wheat didn’t fare all that better. The spot contract had lost 23¢/bu between Friday and Tuesday but has since regained its grounds returning to Friday levels (Figure 1).

The June/July period is typically the most volatile time of year due to the start of the northern hemisphere harvest. There are diverging opinions on the outlook for the black sea region, with some analysts dropping production estimates at the same time as other raising them. One thing we know with certainty is that that region has a high degree of uncertainty; surprises are common.

China is the world’s largest wheat-producing (and consuming) nation and they have had a hiccup this season. Poor weather has hampered the crop resulting in a fall in forecasts for the crop, with official Chinese government estimating a drop of 3mmt year on year. The crop concerns have resulted in local Chinese prices rising since the start of June, albeit from a multi-year low (Figure 2).

This may lead to an increase in imports which would likely originate from out with the US due to trade tariffs. We do have to be cognizant of the fact that China holds very high stocks of wheat (Figure 3), holding more than half the world’s wheat inventory.

What does it mean/next week?:

At a local level, there is welcome rainfall forecast for WA, NSW & QLD. The forecasts of rainfall for NSW and QLD in recent months have had a worrying tendency to fizzle out. Let’s hope that this rainfall comes to fruition.

It would not surprise me if we saw additional tariff announcements by the US this evening. If we do, China will ramp up its tariffs shortly afterwards.

Falling throughput offers price support.

Mutton and Restocker Lambs benefit most from a sharp decline in yarding levels this week across the East coast sale yards. Although, its Merino and Heavy Lambs that are currently top of the table when it comes to year on year price performance this Winter.

Figure 1 highlights the price moves this week at the East coast sale yards with most categories gaining 10-30¢. The Merino Lamb and the Eastern States Trade Lamb Indicator (ESTLI) were the only two categories to register a slight decline, finishing 0.5% lower at 651¢/kg cwt.

Don’t feel too bad for the Merino Lamb’s lacklustre performance this week as on a year on year basis prices are sitting 3.5% higher and a rampaging wool market are likely to keep Merinos in favour for much of this season.

The lack of Heavy Lambs in NSW and Victorian sale yards compared to this time last year is helping to keep prices supported. Heavy Lambs gained 12¢ this week to sit at 659¢/kg cwt, 3.7% higher than this time last season. Indeed, over the last month, yarding levels of Heavy Lambs at Victorian and NSW sale yards have been running around 10% below the seasonal average and 30% under what they were during 2017.

Lower throughput was a pattern repeated across the broader East coast lamb and mutton markets this week with a 28% decline in lamb numbers (Figure 2) and a 47% drop in sheep numbers (Figure 3), to see both weekly throughput measures back under their respective seasonal average levels for the first time in nearly two months.

Below average Trade Lamb yardings in the West over the past few weeks is helping to keep prices supported in WA too with the WATLI 1% higher on mid-week price quotes at 634¢/kg cwt. Although the big news in WA sheep circles this week was the worrying announcement by Livestock Shipping Services (the second largest live sheep exporter out of WA) that they are placing a temporary halt on their Australian operations and focusing on the South American live sheep trade.

What does it mean/next week?:

The rainfall forecast for the week ahead points to some moderate falls for Eastern NSW, South East Queensland and WA, but little elsewhere. It’s probably not enough to get prices surging but if the dwindling supply continues that should provide enough support to keep prices reasonably firm in the short term.

Small but powerful.

Sometimes good things come in small packages. Well at least was the case in the wool market this week. Fremantle was on recess again, leaving the East Coast to carry the weight and deliver the smallest national offering in nine years at just 20,904 bales. As a result of the lower supply, prices rallied to new heights.

The Eastern Market Indicator pushed a whopping 52 cents higher on the week to settle at 2,073 cents AU$ terms. This was 46 cents, or 2.3%, above the record reached at the end of May (Figure 1). This week saw the Australian dollar fall even further. At 0.73, its trading at 2.6% below levels seen this time last year and at a level we haven’t seen since December 2016. This kept the price of our wool from a foreign buyer’s perspective stable, which closed the week slightly softer at 1,526 US cents.

Those that had wool to sell had confidence in the strong market. The pass in rate was at 2% which meant 20,685 bales were cleared to the trade.

All categories of Merino fleece posted gains on the week. Fine fibres of 18 to 17 micron saw rises in the range of 20 to 80 cents. Medium fibres were the real winner, gaining 40 to 100 cents. The spread between 19 and 21 micron prices drifted wider, after last week we saw them settle in the same range.

The finer crossbred microns saw increases averaging 40 cents which have lifted the MPGs to all new highs. Broader crossbreds were relatively unchanged on last week.

Merino Skirtings gained 20 to 30 cents in the North but largely held to last week’s levels in the South. Merino Cardings also saw rises of 20 to 30 cents.

The week ahead

Next week is the final sale of the season and all 3 selling centres will be back in operation. A total of 32,528 bales are rostered for sale, significantly lower than the last sale of the 16/17 season. We don’t tend to see prices push higher in the last sale but that being said this season has been anything but typical.

Cow prices responding to margins.

Cattle markets continue to defy the dry weather, remaining steady for another week despite supply picking up. In general, prices were steady but there are signs of things turning around in the short term thanks to weakening supply.

With a bit of rain about through Victoria and parts of southern NSW and SA over the last 10 days, some producers look like they are taking a wait and see approach, and pulling back supply. It shouldn’t be too hard for supply to weaken either, as there are still not that many cattle out there.

Figure 1 shows the Eastern Young Cattle Indicator (EYCI) yardings rising after the Queen’s Birthday holiday, but remained below last year’s levels (Figure 1). Yesterday at Dubbo, one of the driest areas, 2240 head of young cattle sold for 525¢/kg cwt. This was 45¢ above the EYCI itself and shows that there is still some demand out there for young cattle. The EYCI was basically steady this week (Figure 2) as the market continues to take stock.

Amongst a lot of largely steady prices this week, the Cow indicators in Victoria, Queensland and NSW stood out. All three Medium Cow indicators gained ground. NSW the least, up 17¢, and Victoria the most, up 48¢. Matt’s article from earlier in the week outlines pretty clearly why Cow prices are up, processors can afford to bid up given current margins. Saleyard Cow prices merely returned to where over the hooks values are.

In WA prices rebounded back above 500¢ to make the WA average price the most expensive in the country. The Western Young Cattle Indicator sits at 517¢, still 80¢ below the same time last year.

The week ahead

There is some reasonable rain forecast for South East Queensland over the coming week. This should see further support arrive for cattle prices and young cattle in particular. The Roma Store sale averaged 465¢/kg cwt this week, and it was the biggest contributor to the EYCI. Rain in that area should see the EYCI rally.

Teetering on the edge

It was a big week in the grain markets with the release of crop forecasts from the US and Australia. The market teeters on the edge of a bull market causing a high degree of volatility. In this weeks market comment we take a look at the A$, futures and new crop basis.

The futures market has been volatile this week (Figure 1), with Chicago spot futures trading in a range of 501.5-534.5¢/bu. The market is currently at $5 below the close on the last Friday. The midweek rally was as a result of the generally bullish data in the WASDE report, especially the sudden fall in Russian production estimates. Gravity, however, had its impact on the market, with traders digesting the WASDE report with concerns related to high ending stocks and uncertainty in the Russian seeding numbers.

Our greatest concern at present for Australian wheat producers and consumers is the conditions locally, especially in NNSW & QLD. In these regions, the crop has gone into minimal soil moisture and received little in the way of meaningful rainfall. The domestic demand in these areas is high and the likely drop in production will be a primary driver of basis on the east coast.

In Figure 2, the new crop basis levels are displayed and we can see the strong increase in levels in the past month as conditions show little sign of improvement. A higher basis level indicates that we should be considering selling physical, however at this point in time, production risk is too high in most places to consider substantial volumes.

The A$ has taken a nose dive in the past day (Figure 3). This was a result of weak Chinese economic and neutral Australian employment data. A lower A$ makes our export commodities more attractive versus competing origins, on the other hand, it makes our inputs more expensive in local terms.

What does it mean/next week?:

The June/July period tends to have a high degree of volatility as the northern hemisphere heads for harvest. This year with supply and demand teetering on the edge of a neutral/bullish market, it will not be unexpected to see large swings in pricing on futures.

The big risk is to the Australian crop and with the BOM forecasting a drier than average 3 month period, we need to take this into account in our marketing plans.

Record highs for retail beef but may not fall soon

The latest retail meat prices quoted by Meat & Livestock Australia (MLA) pegged beef at a record high. The March quarter saw retail beef prices rise at a time when the price of cattle was weakening and hitting a 3 year low. Either retail beef prices are still catching up to cattle values, or retailers are making money again.

Figure 1 shows retail beef prices sneaking higher in the March quarter. The 1% increase in retail beef prices was modest compared to the rally in 2014 and 2015. Regardless, the 1951¢/kg retail weight price was a new record for beef prices.

As outlined in our lamb article a couple of weeks ago, beef prices are the most expensive of the major proteins, sitting at a 23% premium to lamb. Beef has been more expensive relative to lamb in recent times, and as such there shouldn’t be pressure coming on the retail prices from that quarter.

It’s interesting that the March quarter saw record retail prices, yet Figure 2 shows that the NSW Over the Hooks Trade Steers reached a two and a half year low. Retail prices did manage to ease a little when the fall in cattle prices started back at the end of 2016, but they have rallied slowly from there.

Figure 2 is a little deceiving, however. The fall in cattle prices still doesn’t have cattle prices back at the average proportion of the retail beef price. Figure 3 shows that the March quarter saw the NSW Trade Steer at around a 24% of the retail price.

The cattle price proportion of the retail price is a very rough proxy for retail margins. The higher the cattle price as a proportion of the retail price, the smaller the retail margin.

When the NSW Trade Steer was at 28-30% of the retail price, it’s safe to say retailers were struggling.  While the fall to 24% makes things a little easier for retailers, the cattle price proportion is still above the 21% average of the 15 years to 2015.

What does it mean? / Next week:

It seems the reason retail beef prices haven’t fallen back with cattle prices over the last two years is the fact that the cattle prices still haven’t fallen far enough to put retail margins back at historical levels. Additionally, lamb prices remain historically strong at the retail level so beef prices don’t necessarily have to fall to compete.

As outlined earlier this week, export beef demand is also very strong, and as such, there isn’t necessarily more beef on the domestic market which needs to be moved, and would encourage lower beef prices.

Elevated, but softening throughput supports prices

The shortened week due to the Queen’s Birthday holiday saw cattle throughput soften to the lowest weekly level in over a month and a half across the East coast which provided a floor to most categories of cattle. The Eastern States Young Cattle Indicator (EYCI) gained a meagre 0.5% to close at 479.25¢/kg cwt.

East coast cattle yarding levels were 17% softer week on week to see just over 51,000 head change hands at the sale yard (Figure 2). While this is the lowest cattle throughput in six weeks, it still represents a level that is 25% higher than the seasonal average for this week in the year.

East coast cattle throughput continues to remain elevated due to high numbers of cattle continuing to present themselves at sale yards in NSW.  Indeed, every east coast state recorded below average yardings this week except for NSW, which still has cattle throughput running at levels at around 70% above the seasonal average for the last month.

Across the East coast, most cattle price categories posted improvements ranging between 1% to 9%, with East Coast Trade Steers the only category to record a price decline, dropping 4% to 283.9¢/kg lwt (Table 1).

On a side note, our article last Friday made mention of South Australian Restocker Steers that caught our attention posting a 50¢/kg live weight price. The efficient and helpful staff at MLA kindly confirming that this was a valid statistic, albeit somewhat of an outlier as this was based off only a single sale of restocker steers that week in SA.

Further West, young cattle prices eased under the $5 level midweek to see it just 2.5% above the EYCI at 493¢/kg cwt and in offshore markets, the 90CL eased slightly to hold above 570¢/kg CIF (Figure 2).

What does it mean/next week?

With limited rain on the horizon outside of Victoria and coastal WA next week its unlikely to see cattle prices gain too aggressively in the short term. On the flip side, a 90CL beef export price above the 550¢ region and reduced cattle supply as we enter the depths of Winter will continue to provide price support on any dips. Perhaps sideways price consolidation is the order of the day for cattle markets over the coming few weeks.

ESTLI closing the gap on last year

The rain this week probably wasn’t as good as might have been expected. However, whether it’s the rain, or simply declining supply, good lamb prices are rallying and now sit just below the record levels of last year.

The Eastern States Trade Lamb Indicator (ESTLI) is finally making a run towards what could be called winter highs. The last three weeks have seen the ESTLI gain 54¢, or 9% to hit a five-month high of 654¢/kg cwt. Figure 1 shows the ESTLI sitting just below the same time last year, the first time in four months it has even been close.

As we would expect, it seems to be tight supply pushing the market higher. Lamb slaughter is trending down, as shown in Figure 2. This was helped last week by seasonal maintenance slowdowns in South Australia. The major slaughter states of NSW and Victoria have only seen slaughter rates decline marginally.

Mutton prices were steady this week, and unlike lamb values, are still 10% behind the levels of this time last year. This should really be no surprise given sheep slaughter is still running 37.5% above the same time last year. Sheep yardings are also still well ahead of last year’s levels.

In the West lamb and sheep prices were steady this week, both at levels behind the eastern states. WA values are still well behind last year’s levels, but there is still some upside with export demand running strong.

The week ahead

The bit of rain which has fallen isn’t going to be enough to finish autumn lambs, there will have to be some follow up. We might see the flow of female or merino wether lambs for a few weeks however, as growers take a wait and see approach. This leaves a nice supply gap over the coming weeks, and possibly rising prices if there aren’t too many more maintenance shutdowns.

A narrowing gap in mid microns

The wool market mended last week’s losses to see a general lift across medium and coarse fibres.  Buyer attentions were again diverted away from the finer microns, which saw the price differential between medium and broad microns narrow significantly.

The Eastern Market Indicator rose 10 cents on the week to 2,021 cents in AU$ terms.  This was reversed in US$ terms, dropping 10 cents to settle at 1,528 cents (Figure 1). Fremantle returned to sale this week and played its part in the strength of the market, with the Western Market Indicator pushing 21 cents higher to 2,188 cents.

With the West back into play, there were 28,029 bales on offer. The pass in rate was barely unchanged at 3.4%, meaning 27,076 bales cleared to the trade (Figure 2).

Fine fibres between 17 to 18.5 micron were subject to losses averaging 10 to 20 cents. It was clear from the outset of trading that buyer interest was on the broader categories. 19 to 22 micron fibres saw price rises of between 10 and 40 cents on the week. The spread between medium micron categories has been narrowing from the highs early in the season and this week by the end of the sale, the difference between 19 and 21 micron in the south was non-existant, both settling at 2295 cents (Figure 3). AWEX noted that in some cases, coarser lots were actually receiving better prices than similar wool with a finer micron.

Results for crossbred wools were mixed. 26 micron pushed up to 20 cents higher while broader categories saw falls down to 10 cents.

Merino Skirtings saw a similar outcome to fleece with finer microns seeing lower prices in the range of 20 to 40 cents while broader microns managed to find some support to rise 10 to 20 cents. Oddments were again in short supply which saw the cardings indicators rise on average 4 cents.

The week ahead

Fremantle is taking another break next week leaving just 21,326 bales rostered for the second last sale of this season in Sydney and Melbourne. The final week of sale currently forecasts 33,810 bales on offer.