Month: July 2018

Lamb has been more expensive in US terms.

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Earlier in the week, we looked at lamb prices in deflated terms, and they are indeed near record highs. We know that export markets are helping drive lamb prices, so it’s worth assessing whether lamb importers are also forking out record dollars for lamb.

When I started researching this article, I was sure that at some stage in the recent past there was an outlandish claim somewhere amongst the articles stating that lamb prices could get to $8. It took a while to find, but it was there (Read here).  The forecast was, admittedly, not made with a lot of conviction, but the thinking behind it was basically the price of lamb in US dollar terms.

Even with the Eastern States Trade Lamb Indicator (ESTLI) sitting just shy of 800¢, in US terms the ESTLI still isn’t at a record (Figure 1).  Back in 2011 when the Aussie dollar was at or around parity with the US dollar, the ESTLI in US terms was at 670¢/kg cwt. This week the ESTLI remains below this, at 588¢/kg. Lamb prices are not cheap in US terms, but they have been more expensive, albeit only for three months.

The peak of lamb prices in US terms is still 14% away in nominal terms, and obviously further in real terms. If the exchange rate stays steady, and the ESTLI reaches 670¢ in US terms, it puts the ESTLI in AUD at 905¢/kg cwt. Those who study Meat and Livestock Australia’s (MLA) saleyard reports will have seen plenty of lambs making more than 900¢, so it’s possible the indicator could get there, although unlikely.

For mutton, the upside seems to be stronger. Figure 2 shows the National Mutton Indicator (NMI) in US terms on a financial year on year basis. The current close to record mutton values are still 23% behind the record price in US terms set in autumn 2011.

While the dry weather has seen lamb supply tighten, it is still seeing sheep coming to market and keeping a lid on mutton values, to an extent.

What does it mean/next week?:

Looking at lamb prices in US terms helps go some way to explain how strong prices can be at the moment. While lambs prices are extraordinary in our terms, they are ‘only’ 20% above the levels seen for most of 2017 for importers. This might be sustainable for the short term and the good news is that it makes prices of 600¢ seem cheap.

There is still plenty of upside for mutton, especially when it rains. Strong lamb and wool prices are likely to see a real squeeze on the supply of older sheep over the coming years.

Key Points

  • Lamb prices in US terms are strong but have been higher back in 2011.
  • There is still a 10% upside for lamb to reach the 2011 records in US terms.
  • There is more upside for mutton prices than lamb, as it was 20% stronger in 2011 in US terms.

Cow flush from across the ditch finished

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There was a lot of talk back at the end of May around the slaughter of 150,000 New Zealand Dairy Cows, and how it might impact manufacturing beef markets.  With NZ’s seasonal cow slaughter peak now behind us, we take a look at whether how slaughter rates reacted, and if we might expect the impact to last.

In an effort to wipe out a bacterium that causes a range of infections and diseases in Dairy Cows it was announced at the end of May that 150,000 cow would need to slaughtered from around 200 farms.  While cattle were able to be slaughtered for beef production, it hasn’t seen slaughter increase by as much as might be expected.

For the period from May to late June has seen total NZ cow slaughter up by just 12,575 head, as shown in figure 1.  There have been a few week when NZ cow slaughter has outstripped last year significantly, with the last two reported weeks in June being 43% higher.  Perhaps the cull is keeping slaughter rates stronger for longer.

The culled cows will have to be replaced by farmer to maintain milk production.  The fact that we haven’t seen a large lift in cow slaughter rates might be attributed to cows which might have been culled leading up to winter, are being held to replace the affected cows.

Retaining cows which might have been culled will have an impact on milk production, with poorer performing cows remaining in the herd.  However, for many farmers, keeping or buying older cows will be better than waiting to breed up numbers.

Almost all of New Zealand’s manufacturing beef is exported, so any increase in cow slaughter has an impact on international beef markets.  At its peak in April and May NZ cow slaughter breaks even or outstrips Australian cow slaughter levels.

The latest Australian slaughter numbers from the Bureau of Statistics (ABS) show May was a massive month for female slaughter (figure 2).  Combined with the increase in supply from New Zealand it was good for cattle producers to see 90CL Frozen Cow export prices holding their ground, as shown in figure 3.

What does it mean/next week?:

Figure 3 also shows the 90CL in US terms, and prices have declined 10% for imported.  Obviously the weaker Aussie dollar has helped offset some of the supply driven price declines.  And prices haven’t really fallen very far given the lift in supply in recent months.

Looking forward the end of the cull in New Zealand should see a slight tightening in supply for the autumn flush next year, while it has been well documented that some widespread rainfall will see Australian cow supply tighten significantly.  This points towards some strong potential for upside in manufacturing export prices, which will feed through to cattle markets.

Key Points

  • The NZ Cow cull has had a relatively minor impact on NZ Cow slaughter rates in recent months.
  • The lift in Australian cow slaughter in May coinciding with the NZ peak saw strong supplies on the market.
  • Manufacturing beef prices have held relatively well, and have upside with tighter supply.

Prices hold up well despite increased throughput.

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A surge in cattle yardings in Queensland this week encouraged the broader East coast yarding levels higher. However, the increased supply at the sale yard is doing little to dampen buyer interest as all categories of East coast cattle indicators, other than the EYCI, managed a firmer result.

Figure 1 outlines the summary of sale yard price movements this week. The Eastern Young Cattle Indicator was the only one to soften, with a 1.2% decline to slip back under the 500¢ level. Interestingly, Heavy Steers continue to find buyer support, lifting 4% to climb back above the 300¢ barrier on a live weight measure.

A contrast of the yearly price performance of young cattle to the finished product is demonstrating the impact of the dry conditions and the tight supply of heavy stock. This is due to the relatively low herd numbers with the EYCI 16.5% lower than this time last year, while heavy steers remain 4% higher.

Figure 2 shows the surge in cattle numbers presented at sale yards in Queensland this week. A 103% gain on last week’s throughput was recorded. The impact of the higher northern supply is pushing the East coast yarding figures to sit 20% above the seasonal five-year average level for this time of the year to just over 59,000 head.

Western young cattle markets are mirroring the East coast this week to see the WYCI dip 4% to 517¢/kg cwt. In offshore markets, the 90CL frozen cow indicator gained 1.1% to close at 573.2¢/kg CIF (Figure 3). The benchmark US grinding beef import indicator is seemingly unaffected so far by reports of the US-China trade war negatively impacting US pork prices and dragging US cattle prices lower.

What does it mean/next week?

No significant rain forecast for the nation beyond the coastal fringe of WA and Victoria isn’t going to provide much support to young cattle prices in the coming week. Although healthy processor margins being recorded at the moment (according to the Mecardo cut out model highlighted in this week’s analysis) should see them active at the sale yard, buying on any price dips and keeping prices from sliding too far. It seems like consolidation of prices is the likely order of the day for the short term.

Europe is looking dicey.

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In this week’s comment, we take a look at the decline of the European crop and the impact on pricing. At a local level, we provide observations on the Australian crop from some of our travels around the nation.

The futures market has largely traded sideways during the past week. The December 2018 contract is currently trading at A$254.5, up A$1 week on week (Figure 1). In the past week, there has been a lack of fresh information to fuel a substantive move in either direction.

The major emerging concern is the European crop. France may have won the world cup, but they won’t win any trophy for their wheat crop. Germany, France and UK are experiencing a very poor growing season. There were mixed opinions from local analysts in recent weeks regarding the condition of the crop. The general consensus is now that it’s in dire straits. Recent weeks have seen European futures rise, with matif (French wheat) at the highest level since November 2015 (Figure 2).

I have spent the last few days in Western Australia and it is chalk and cheese. In the central and northern parts of the wheat belt, the crop is in great condition with further rainfall en route. The south however, especially through the great southern and Esperance, are suffering and unfortunately are going to miss out on the forecast rainfall over the next eight days (see map).

The biggest concern remains the NNSW and QLD regions. These regions are now set for a below average yield regardless of any rainfall, of which there is none on the horizon anyway. This region is home to a colossal feed requirement and will require continued movements of grain from the south to meet demand. This will likely lead to continued high east coast basis.

What does it mean/next week?:

The market will start to look more closely at Europe over the next week, which could result in improved futures levels.

Next week we will look into a range of different futures contracts and whether they are a worthwhile endeavour at present for hedging, such as matif and the new black sea futures.

Heavy lambs closing on 800¢.

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This time last year lamb prices were great, sitting north of 600¢ at record highs. Who would believe prices a year later could be more than 100¢ higher? It seems unbelievable, and still, we have slaughter higher than this time last year.

Lamb prices have continued to rise and in the last fortnight, it has been Heavy Lambs which have taken the lead (Figure 1). Heavy lambs gained another 50¢ this week, to within striking distance of 800¢, sitting just below at 793¢/kg cwt. The Eastern States Trade Lamb Indicator (ESTLI) is ‘languishing’ at 758¢ after having gained 34¢ this week.

Supply is not as expected, with lamb slaughter to the week ending the 13th of June actually 3% higher than this time last year (Figure 2).  We won’t be able to confirm until more data is available, but slaughter weights must be on the wane. Prices started from light and Merino lambs at 680 and 675¢/kg cwt respectively, with trade and heavy lamb’s streaks ahead.

The strong prices have drawn out a lot of lambs to the market, with very few left to fill the heavy lamb space, which explains the extreme values. Lighter lambs are being sold as soon as they make slaughter weights and as such prices are lower but still at historical records.

Mutton values have stalled just above 500¢, but they too are well ahead of this time last year (Figure 3).  Mutton will continue to come to market while the rain stays away, which means prices might not move too much higher until there is some precipitation.

What does it mean/next week?:

How many producers would have the guts to forgo a trade lamb price of 750¢ in order to put another couple of kilos on and get 790¢? Not many it would seem, but it has paid off over the last month.

Southern WA, SA and Victoria are in for some follow up rain this week, which is unlikely to help lift sheep and lamb supply. Nothing is on the forecast for NSW, so the sheep will continue to flow while prices are good. The question now is, where are the sheep going to come from when it finally does rain?  The sheep/lamb spread could get very narrow.

Is it viable to feed lambs yet?

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We’ve fielded some queries this week as to when sucker lambs might hit the market. One option is to lot-feed lambs to get them finished quickly. This week we crunch the numbers on feeding lambs and see if there is money in it, or if there might be under a few different scenarios.

Last week, we analysed the NSW restocker lamb market relative to the Eastern States Trade Lamb Indicator (ESTLI) and the last week has seen it hit new lows. The NSW restocker spread to the ESTLI fell to negative 166¢/kg cwt (Figure 1). This not quite at the level of 2008, but the rise in the ESTLI to 744¢ and the fall or the NSW restocker to 578¢/kg cwt has the spread at a five year low.

The lack of grass and rising grain prices are driving the relatively weak restocker lamb prices. But are we now at a level which makes feeding lambs viable?  The answer is yes, but as always, a lot depends on the sell price.

Figure 2 shows the gross margins and the margins after feed or lotfeeding 32 kgs lambs to 46kg liveweight for the trade market. The cost of feed is based on a grain ration costing $450/t, with lambs eating 6kgs to gain 1kg liveweight.

At a buy price of around $82/head and a sell price of 550¢/kg cwt, or $116/head, feeding lambs will produce a small loss, and a bigger one if labour and other costs are included. If we factor in a fall in the trade lamb price to 650¢ the margin after feed is profitable, while a lamb price of 700¢ will see good margins after feed of $27 per head.

There is a reasonable chance that feeding lambs in NSW will turn a profit. However, the fact that prices basically need to stay in the territory which was uncharted prior to 2018, would make producers looking at feeding nervous about adding extra costs in an already tough year.

Additionally, getting lambs up to feedlot entry weights may not be that easy, and will require more feed and effort. This makes the simple option of selling more attractive.

What does it mean/next week?:

The fact that there is likely some profit in feeding lambs means we might start to see lambs appear on the market 6 weeks later than normal, but the numbers will be nothing like the traditional sucker supply.

In Victoria, restocker lamb prices are still relatively expensive, coming in $14/head higher than NSW for 32kg lambs. This limits the viability of grain feeding in the south, which might slow the supply of southern lambs.

Again we are left with the supply gap which is currently seeing the lamb market at record highs continuing on for at least another month to six weeks yet.

Key Points

  • The NSW restocker lamb price reached new five year lows relative to the ESTLI this week.
  • Cheap restocker lambs make feeding lambs viable if finished lamb values can maintain strength.
  • Lamb feeding is unlikely to close the supply gap of late suckers completely, with support for prices to stay for another month to six weeks.

Dry times a processors friend

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Processor margins have increased dramatically in this last quarter, sitting significantly higher that historical averages. The large margins have been linked with the low rainfall patterns that have occurred this year. Similar conditions were seen 2013 and if that is anything to go on the Mecardo theoretical cut-out model is projecting firmer processor annual margins, like that which were seen during 2013-15.

The Figure 1 animated graphic illustrates the similar rainfall patterns that occurred in 2012-13 and 2017-18, according to the Bureau of Meteorology (BOM). From this we can see that severe dry conditions have occurred all around the eastern end of Australia. 2012-13 saw these severe conditions affect the entire eastern region whilst 2017-18 seems to be greatly affecting the central eastern and south-eastern regions.

With the combination of dry conditions and the “grilling season” underway in the US, it is quite likely the coming quarters should remain strong for processor margins. The January margin in 2018 began at $45/head and throughout the quarter has never exceeded past $65, 2013 values also began low with margins ranging from $28-39. After the initial slow start both 2013 and 2018 margins rose dramatically hitting quarterly highs in May at $203 and $263 respectively.

From figure 2 we can see that the seasonal margins for 2013 and 2018 follow a similar trend, they are both started near the average and dramatically increased April onwards. It is likely that this year with the combination of dry conditions and the increased rate of herd liquidation (as noted in an earlier Mecardo piece with the increase in the female slaughter ratio) that processor margins will remain robust. This trend has occurred before during the cattle turnoff in 2013-2015 where processor margins were significantly higher than average, 2014 being the strongest year with $298.83/head.

The shortage of rainfall has also increased the culling rate of females, as we have now entered a herd liquidation phase. As projected in previously should the following quarter remain dry we could see any even larger increase in the slaughter ratio of females.

N.B – Input data to the Mecardo cutout model, such as beef export prices/cutout values and co-product prices, can be revised post reporting each month. These amendments to can sometimes see the previous monthly margin figures revised to factor in the input revisions.

What does it mean?

Drier conditions result in lower feasibility for grazing leading to increased slaughter rates. From figure 3 we can see that the high female slaughter ratio is correlated to the high margins that processors are currently experiencing.

We can also see that during the 2016-17 processors saw negative margin periods due to wetter conditions generating a herd rebuilding phase. Whilst the 2013-15 periods saw robust profits due to dry conditions creating a herd liquation phase, like what we are experiencing right now. The dry forecast leading into Spring issued by the BOM should continue to support firm processor margins into the second half of this year.

Key points:

  • The rainfall trends for 2013 and 2018 are similar indicating the processing margins will also be similar
  • Monthly data indicates that processor margins will remain robust in the coming quarters
  • Female slaughter data indicates we have entered the herd liquidation phase which often means improved processor margins

Dry weather, merinos and store vs prime.

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  • The restocker lamb discount in NSW has reached new lows in recent weeks.
  • Store lambs are likely to remain relatively cheap if it doesn’t rain, finished lamb prices should remain strong.
  • A good rain will boost store lamb prices in the short term, and weaken finished lamb prices later.

Earlier this week we took a look at the usual supply of new season lambs out of NSW, and how this might change this year. Since then we’ve had a related query on how the expected increased supply of store lambs out of NSW might impact prices and whether Merinos normally soldas store lambs might be better off finished and on the hook. The answer, as always, is it depends on rainfall, but we’ll run some possible scenarios.

There is plenty of concern surrounding what will happen with NSW lambs which are not going to be finished at the usual time. NSW producers will have a couple of options. These lambs can be sold as stores in the spring. If it rains in the next month or six weeks, lambs are more likely to be grown out and sold later as finished lambs.

The question we had was from a grower who normally sells one-year-old merinos off shears as woolgrower wether lambs. The concern is that the price of store wether lambs might enter a market where buyers might be more attracted to cheap store crossbred lambs, rather than merino wethers.  The other option is to fatten the merino wethers to sell over the hooks.

In essence, we are taking a look at how the store market might be priced in the spring and how long merino slaughter prices might hold strong.

NSW store lamb prices haven’t taken a hit in recent weeks, they just haven’t recovered like the prime lamb market. The NSW Restocker Indicator has been trading between 550 and 600¢/kg cwt over the last month (Figure 1). It’s discount to the Eastern States Trade Lamb Indicator (ESTLI) has never been larger (Figure 2).

It’s not unusual for restocker lambs to become cheap at this time of year, but given the season in NSW, it’s hard to see restocker lambs bouncing back relative to the ESTLI. The worst case scenario is restocker lambs staying at around a 100¢ discount to finished lambs.

The ESTLI seems unlikely to fall below 650¢ in the medium term and given the expected finished lamb supply it should hold through into early spring, so we can peg restocker lamb values at 550¢, or $92 for a 40kg liveweight lamb.

Meanwhile, slaughter Merino lamb prices are holding strong. The National Merino Lamb Indicator is at 650¢/kg cwt (Figure 3), which is probably the best case price for the spring, as prices might fall as low at 580¢.  For an 18kg cwt slaughter merino lamb it gives us a $105 to $117 per head plus skin, which is a good premium to the expected store lamb price.

The Week Ahead:

This basic analysis gives a good indication that finishing lambs for slaughter in the spring is going to be a better option than trying to sell as stores in a dry season. If it rains it will open up options for lamb producers, as increasing feed supplies will see the store/finished lamb spread narrow.

We know that lambs need to be set on course for slaughter soon with preferential treatment or supplementary feeding, and if it rains this effort might be wasted. But it’s worth remembering finished lambs from NSW are still going to be a while coming, even if it does rain soon.

It seems 500 is the key level.

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Last week it was young cattle prices on the rise, this week its supply. Young cattle yardings jumped higher as growers took the opportunity provided by higher prices to offload more cattle.

We think it was the higher prices, or perhaps the fact that there has been no real follow-up rain to the bit received a fortnight ago, but young cattle flooded into Eastern Young Cattle Indicator (EYCI) saleyards this week.

This week’s EYCI yarding hitting a 14 month high and is sitting just 170 head shy of a two and a half year peak (Figure 1).  Roma contributed 34% of EYCI cattle this week with a big yardings, while Dalby chipped in with 7%. NSW was also strong, Dubbo, Gunnedah and Wagga contributed a further 25%, with those five yards making up 66% of the EYCI this week.

Some demand must have shown up as the price of the EYCI didn’t actually fall too far. Compared to last week, the EYCI lost just 3¢ to hold at 509¢/kg cwt on Thursday (Figure 2).

Cow prices managed to rally back above the 200¢/kg lwt in Victoria and NSW, gaining 13 and 16¢ respectively, while Queensland also gained 9¢, but sits at 194¢.

In the West, the Western Young Cattle Indicator extended its premium over its east coast counterpart. The WYCI was up to 543¢/kg cwt, which sits just shy of the MSA Steer Over the Hooks price. This is a sign that the season is ok in the west, contrasting the east where the EYCI is at a discount to trade steer values.

What does it mean/next week?:

The Bureau of Meteorology map shows the latest awful three-month forecast for much of NSW and Victoria. The chances of receiving better than median rainfall over the next three months in minimal. This is obviously bad news for store cattle markets, and it is a real worry for the supply of finished cattle.

Lamb prices move further off the chart.

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Lamb and sheep markets have hit some solid resistance at the 730¢ and 520¢ mark respectively. There are plenty of reports of processors cutting shifts and slowing production rather than competing harder for lambs. The latest three month forecast doesn’t suggest the supply of finished stock is going increase soon.

You may have noticed that we have had to change the Y-axis on our Eastern States Trade Lamb Indicator (ESTLI) charts. In fact, when we rolled into the new financial year, the ESTLI was literally off the chart. The top of the ESTLI charts are now 750¢, but the rally has slowed and it might not get there in short term. However heavy lambs are not far off, hitting 743¢ this week.

We’ve seen a new record high for the ESTLI, this week gaining 11¢ to reach 724¢/kg cwt (Figure 1).  The WA Trade Lamb Indicator is ‘languishing’ at what used to be a very good price of 632¢/kg cwt.

The cheapest lambs in Australia are restocker lambs in WA, with the indicator at 514¢/kg cwt. In SA the restocker lamb Indicator was at 740¢, which makes the trip across the Nullabor viable. We’re not sure where the demand in SA is coming from, but suggest the indicator comes from a small number of lambs.

We heard an anecdote today about store sucker lambs coming from areas north of Adelaide with 1000 on a B-double. This is a lot of light lambs. We have been on about the increased supply of store lambs this week and this sounds like the beginnings.

What does it mean/next week?:

The weather forecast tells us the finished lamb shortage might last a while. There is a 65-80% chance that rainfall will be lower than the median across almost all of Victoria and NSW. There are some key lamb growing areas which are currently going ok, but most with new season lambs hitting the ground now are unlikely to be able to soak up extra supply from the north. It might be time to start thinking about how to finish lambs this year, even if they haven’t been born yet.