Month: August 2018

It doesn’t rain grass but there might be some upside.

With a little bit of precipitation on the forecast, there is also a bit of positivity around the young cattle price. While it doesn’t rain grass, or demand, a forecast of rain will often halt supply. It seems we have seen the beginning this week.

The talk around the footy sheds last night was around buying cattle before rain tightens supply. This was in South West Victoria where normal winter rain has fallen, so the flush of grass is just around the corner and backgrounders are looking to load up.

It hasn’t rained yet, but the forecasts are promising. As usual, the Bureau of Meteorology (BOM) are the most conservative (Figure 1), but two inches over a large part of Northern NSW would obviously be a start.

We’re not sure if it’s the spectre of rain, but the Eastern Young Cattle Indicator yardings hit a new full week low of just 10,730 head (Figure 2). This was 26% lower than the previous week and 35% lower than this time last year.

It may have been the low prices which pulled back supply, and this was somewhat corrected this week, with a 10.5¢ rise in the Eastern Young Cattle Indicator (EYCI) to 461¢/kg cwt on Thursday (Figure 3).

The weaker Aussie dollar gave export prices a bit of a boost this week. The 90CL Frozen Cow managed to gain 5¢ to hit 580¢/kg swt despite a small decline in US values.

Finished cattle markets have managed to maintain their ground at a solid premium to store cattle prices. Even export feeder cattle are still around 300¢, well above their domestic counterparts at 259¢/kg lwt.

What does it mean/next week?:

There are only so many cattle that can be soaked up by wet parts of Victoria and South East SA, but they will offer some demand for the next month or so if it keeps raining.  The rain in Northern NSW should see some tightening in supply, as growers wait to see if it’s going to be followed up. There should be a little bit of price upside, with the limit likely to be 500¢ for now. More widespread rain would obviously change this.

No questions on leadership of the Ovine nation.

While there is plenty of conjecture in Canberra today as to who is leading the country, at least it’s clear in the livestock market. This week the leader remained the same, Heavy Lambs.  In NSW in particular, where buyers paid over 900¢. 

That’s right, NSW Heavy Lambs this week averaged 910¢/kg cwt! With this price being the average, obviously half the Heavy Lambs in NSW made more than this. The National Heavy Lamb Indicator (Figure 1) is an extraordinary 271¢ higher than this time last year. And the price back then was pretty good too.

The good news is that the weakening Aussie dollar continues to take the sting out of price rises in US and export market terms. Figure 2 shows the ESTLI in US¢ just tipping over 600¢. Still not as high as in 2011, and ‘only’ 27% above the same time last year.

All sheep markets managed to gain ground this week. There is a bit of rain on the forecast, and spring is just around the corner in areas that have had rain. Perhaps demand for restocker lambs is on the improve. This week the east coast restocker lamb rallied 37¢ to 696¢/kg cwt.

Mutton prices also had a marginal improvement, gaining 13¢ in the east, to 443¢. In the west, mutton eased 22¢ to 418¢/kg cwt.

As noted last week, lamb prices in the west are well behind their east coast counterparts. Heavy lambs were up 50¢ and making 726¢/kg cwt. Not 900¢, but a very good price nonetheless.

What does it mean/next week?:

The forecast rainfall won’t see finished lamb supply increase in the short term. If it’s not followed up, it won’t see finished lamb supply increase at all. We are still at least 8 weeks away from sucker lambs from wetter areas hitting the market, so it’s hard to see lamb prices falling far in the short term. The forecast rain and some follow up, would make interesting times for mutton markets. It’s hard to see where the slaughter sheep would come from.

Wool market not so happy this week.

After the extraordinary price moves of last week, the wool market seemed to be in a grumpy mood with across the board retreats in prices at the 2-day Melbourne and Sydney sales.

The Eastern Market Indicator (EMI) fell back from the start and never recovered, losing 48 cents for the week, to settle at 2068 cents Au$ (Figure 1).

The Au$ played a part in the falls by improving almost 1 cent for the week to 73.4 cents, causing the EMI to fall to a lesser degree in US$ terms, closing at 1519 US cents, down 18 cents on the week.

Sellers reacted strongly to the price pull-back, passing in 10.8% of the offered bales resulting in a clearance to the trade of 26,499 bales. This is the lowest clearance of bales since June, with the season weekly average now sitting at 36,600 bales, down from the last season average of 39,200.

This resulted in a dollar value for the week of $63.5 million, with a combined value of $415.66 million so far this season.

Again, this week in a softer environment buyers were selective. Last week small faults were ignored as buyers sought to secure quantity, but this week they were again discounted, at times severely.

Skirtings and Crossbred wool also tracked downward according to AWEX, giving back much of last week’s gains.

Merino Cardings bucked the trend to post modest improvement on limited offerings, however, Melbourne was quoted down 24 cents.

This week is the annual Wool Week conference in Melbourne (hence the Tuesday/Wednesday sale), where all participants come together. No doubt there will be a lot to discuss concerning demand, supply and price. While this week was somewhat sobering after the strong lift last week, in the context of long-term prices these levels are still at the very top.

Concerns regarding supply are coming through from processors, the drought and the sell down last year of virtually all wool held in stores, has led to a forecast of reduced supply in the coming season.

Next week Fremantle returns to the roster, with all centres selling on Wednesday and Thursday. The Sydney sales are designated Australian Superfine Sales. An increased offering of 34,960 bales is rostered, and the following week, a lift again to 37,280 bales.

Beef and Lamb spreads – saleyard to retail.

Surging saleyard lamb prices in the Eastern states have seen the spread between the Eastern Young Cattle Indicator (EYCI) and the Eastern States Trade Lamb Indicator (ESTLI) widen toward historical extreme levels in recent weeks. This analysis piece looks at the historic behaviour of the EYCI to ESTLI spread and what it can tell us about beef and lamb prices at a retail level.

The ESTLI has reached beyond the 830¢/kg cwt level recently, while the EYCI continues to languish, staging a drift towards a three year low of 444¢/kg cwt. The contrasting behaviour of these saleyard lamb and cattle price indicators has pushed the percentage spread differential between the EYCI and the ESTLI to a 45.7% discount. That is, at the saleyard, young cattle on the East coast are currently trading 46% below trade lamb on a carcass weight basis (Figure 1).

The historical trend in the percentage spread between the EYCI and the ESTLI highlights that it is not uncommon to see young cattle prices run at a discount to trade lamb at the saleyard. Indeed, analysis of the trend in the weekly spread since 2001 shows that the long-term average EYCI to ESTLI spread sits at a discount of 10.5% (Figure 2). That’s not to say that there aren’t times when young cattle prices achieve a premium to trade lamb. Indeed, as the 70% range area highlights, since 2001 the EYCI to ESTLI spread has spent 70% of the time fluctuating between a discount of 29% to a premium of 8%.

Analysis of the current EYCI to ESTLI percentage spread shows that the 45.7% discount is nearing historically low levels, with the most recent widening of the discount spread at 46.2% occurring during March of 2014 (which was the widest discount spread achieved so far). According to the historic statistical measurement of the spread behaviour, movements below a discount of 47% or above a premium of 26% would be considered extreme, as identified by the 95% range boundaries.

Interestingly, the percentage spread analysis of the average quarterly retail price of lamb and beef as reported by the Australian Bureau of Statistics demonstrates that since 2001 beef commands a spread premium over lamb and has never traded at a spread discount (Figure 3). At a retail level, the beef to lamb percentage spread has averaged a 30% premium over the 2011 to 2018 period.

The narrowest the retail beef to lamb spread has been was a 4% premium that occurred during the June quarter of 2011. At this time saleyard young cattle prices were running at a 31% discount to trade lamb. During March of 2014 when the saleyard discount between beef and lamb prices were at their widest point, at a 46.2% spread, the retail spread of beef to lamb was at a comfortable 24% premium. Similarly, as the EYCI to ESTLI spread widened significantly towards an extreme 46% discount at the saleyard in recent times, the retail spread of beef to lamb has remained firm at a 30% premium.

What does it mean?  

At a retail level at least, this reinforces how much we love our beef. Despite times when cattle prices at the saleyard are trading at a significant discount to lamb, the discount never translates to cheaper beef than lamb (across the average price of cuts) for the consumer.

During the 2017 season, Australians consumed 26.4 kg of beef compared to 8.6 kg of lamb on a per capita basis. Domestic demand for beef is three times that of lamb and is the likely reason why retailers can continue to demand a premium for beef over lamb, despite paying more for lamb than beef at the saleyard.

Key points:

  • Saleyard spreads between the EYCI and ESTLI have widened to historic extremes with the EYCI currently trading at a 45.7% discount to the ESTLI.
  • Historically, since 2001 the EYCI has averaged a discount spread to the ESTLI of 10.5% and has fluctuated between a 29% discount and an 8% premium spread for 70% of the time.
  • The discount spread between cattle and lamb at the saleyard doesn’t translate to a discount in the average beef and lamb price across all cuts at a retail level.

More fake news and a spill in wheat

The week that was in wheat. There is always something interesting happening in the wheat market and when there isn’t, the industry can just make things up. In this week’s market comment, we provide some insights into fake news, futures pricing, local basis & the drop in barley pricing in WA.

The futures market lost its leadership this week when futures prices fell, albeit only to late July levels (Figure 1). The recent fall is largely attributed to the increasing corn yields in the US and the expected reduced feed consumption of wheat. I wrote about this potential issue in early July, as the wheat to corn ratio started to rise (see here).

There were rumours towards the end of last week of Russia enacting an export ban, which pushed up prices, at least momentarily. This was, however, another example of ‘fake news’, in a similar fashion to the rise in early August as a result of misinterpreted social media postings by a Ukrainian minister (see here).

A Russian export ban is not going to be legislated this year, it is important to keep perspective on the fact that Russia is still on track to produce its 3rd largest wheat crop. If Russia takes action to limit exports, it will be in the form of export tariffs.

These fake news incidents further highlight the importance of high quality information in the agricultural sphere. it is extremely important to ensure that you are getting information that is of high calibre, timely (but not at the expense of accuracy) and free from bias & interference.

The local market lost some fire over the week, with basis level across all zones falling (Figure 2). The smallest fall was in Port Kembla (-1%), which makes sense due to the norths dire need for feed. All other zones fell by 2-5%. There is rainfall on the horizon in NNSW, which has pressured the ASX contract. There are some anonymous commentators (see here) calling now for a rise in wheat production up 25mmt.

My view from discussions with farmers and agronomists in the region is that it is a case of being too late to make any substantive change. It will however, provide some valuable soil moisture for the coming summer crop.

The barley market in WA has been interesting this week, with prices dropping considerably. The kwinana zone has seen F1 feed prices drop by $25/mt or 7% since last Friday (Figure 3). It has to be noted that although the price has fallen considerably, it would still be considered a very strong price from a historical perspective.

What does it mean/next week?:

It will be interesting to see what happens to wheat during the next week. The market has fallen sharply, but aside from lower feed usage the picture is still pointing towards a bullish pricing scenario.

The Russian crop is going to win the war of exports over the next six months, however we are likely to see a switch back to the US in the early part of 2019.

Drop in throughput not enough to shore up EYCI.

Declining saleyard cattle volumes this week were not able to provide a floor to price movements for younger cattle with the Eastern Young Cattle Indicator (EYCI) extending its losses another 2.5% to close yesterday at 450.5¢/kg cwt.  

Surging feed grain prices are also taking the sting out of feedlot buyer appetites to see Feeder Steer prices ease 2.2% across Eastern saleyards to 260.4¢/kg live weight. Trade steers and medium cows were relatively unchanged on the week but healthy processor margins and a dearth of heavier stock saw finished lines well supported, with Heavy Steers up 6.8% to close at 281.8¢/kg lwt (Table 1.)

Across the Eastern seaboard, cattle yarding levels eased 16% to dip back under 50,000 head and creep below the seasonal weekly average for the first time in five weeks (Figure 2.) The retraction in supply at the saleyard was not enough to inspire price gains for all reported categories of cattle.

This suggests a distinct lack of appetite from restocker and feedlot buyers at the moment. This is unsurprising given the updated BOM outlook for a much drier than normal Spring and the prospect of an El Nino forming later this season which has increased to a 70% chance – according to the US-based National Oceanic and Atmospheric Administration (NOAA).

In offshore markets, the 90CL frozen cow indicator continues to trend sideways, sitting at around the 575¢/kg CIF region. Historically, grinding beef prices in the US tend to soften as they move away from their grilling season, so the 90CL may hit a few headwinds as we move into September (Figure 3).

What does it mean/next week?

A softening of the 90CL could open up more downside in the EYCI in the coming weeks, particularly if the BOM forecast for limited September rain across the East coast comes to fruition. Certainly, its Groundhog Day for the nations rain forecast out to next week. Falls in excess of 5-10mm are limited to the coastal fringe of Victoria and southern WA, yet again.

Lamb bounces back to set another record

After finding some solid resistance at 800¢ earlier in August, it looked like lambs stellar run was finished.  This week the market came back to life, with new highs set in heavy and trade lamb markets.

Figure 1 shows the Eastern States Trade Lamb Indicator (ESTLI) posting a 52¢ rally to hit a new record high of 813¢/kg cwt.  With the ESTLI sitting a massive 219¢, or 36% above the same time last year grower who can supply finished lambs are being very well rewarded.

Trade lambs have broken through 800¢, but heavy lambs are remarkably closing on 900¢.  The eastern Heavy Lamb Indicator is just shy of 300¢ higher than last year, at a crazy 876¢/kg cwt.  It’s no surprise that Wagga set a new record this week, with a pen of lambs selling for $305 per head.

This week’s price rally was due to further tightening in supply.  Figure 2 show east coast lamb slaughter hitting a two year low for a full week, slipping under 300,000 head.  We can see in figure 2 that lamb slaughter usually starts to ramp up this time of year.  The dry weather is playing havoc with normal seasonal trends.

Despite, or perhaps because of, the better seasonal conditions in the West, the WA Trade Lamb price lost 29¢ to sit 663¢/kg.  Still a great price, but just 150¢ behind east coast values.

Mutton prices continue to languish as heavy supplies of sheep come to the market.  It’s good to see ‘drought’ sheep prices at 430¢/kg cwt.  It’s not that long ago that sheep were making less than $4 per head during drought.

What does it mean/next week?:

The Bureau of Meteorology (BOM) yesterday released their 3 month outlook (figure 3).  Again it’s a bit depressing, but it’s now forecasting dry weather for the southern areas which are currently experiencing normal seasons.

A dry spring in key southern lamb areas would be likely to add to the supply of store lambs, and continue to limit the supply of finished lambs.  If it is indeed dry, hopefully some rain in NSW might offset some of the supply issues.

Perfect storm for wool market.

A fall in the Au$, alongside a reduced offering and the prospect of a further reduction in the offerings into the future, conspired to create an almost frenzied wool market this week.

The Eastern Market Indicator (EMI) rose strongly from the start and never looked back, gaining 126 cents for the week, to settle at 2116 cents AU$ (Figure 1).

On the first day of selling, the EMI set a new record for the largest daily rise, increasing 99 cents. This lifted the EMI above the previous record high of 2,073 set in June this year.

The EMI was stronger but slightly more subdued in US$ terms, closing at 1,537 US cents, up 56 cents on the week.

AWEX reported that the main drivers of the rally were the reduced offering, concerns about future supply and the benefit of a lower Au$. This is in line with the general explanation of the very good market levels, however, there is also the cyclical effect on the wool market (we are in a super-cycle), as well as a growing appetite for wool from activewear and luxury products. Whatever the reasons, wool producers are in for another good wool cheque for their next wool clip.

Sellers embraced the rally, passing in only 1.5% of the offered bales resulting in a clearance to the trade of 35,759 bales. Of note is that this clearance is 13k bales less than last week, and next week the roster is 6.5k bales fewer again.

This resulted in dollar value for the week of $87.3 million, with a combined value of $352.1 million so far this season.

Previously we have reported that better style wool has been more keenly sought and lower styles sometimes overlooked, this week small faults were ignored as buyers sought to secure quantity.

Skirtings and Crossbred wool didn’t miss out. After struggling to find support last week, Crossbred types increased across the board of 60 to 90 cents, recovering all of last week’s falls.

Merino Cardings also improved on a limited offering with all centres closing higher and above the previously unheard of 1500 cent level.

The week ahead

Next week only Melbourne and Sydney are listed to sell.

A look ahead shows that roster offerings are declining, with 29,800 bales listed for next week and 34,400 for the following week when Fremantle resumes.

As one analyst said when asked what the market will do next; “who knows, we are in unprecedented supply and price conditions”.

For what it is worth, we think that in the absence of further currency falls the market will steady next week and could in fact ease albeit slightly.

US to take the task.

We are starting to get through the northern hemisphere weather window and the crop condition is now largely known. European Union and Black Sea exports are going to decline and locally we can be sure that Australia won’t export. The task now returns to the US. In this weekly comment, we give a short overview of the market.   

Chicago wheat futures spent most of the week in the red, however overnight regained some ground. Overall, in Au$ the Dec’18 contract is $2 more than last week and Dec’19 is unchanged (Figure 1). The big surprise was the increase in export sales out of the US, at 803kmt it was a week on week increase of a whopping 153%.

The sales were to a wide range of destinations, including the Philippines, Nigeria, Mexico and Iran. This could point to further tightening of the global exportable balance sheet. The drought conditions in Europe, Australia and parts of the Black sea will eventually result in export volume switching to the US.

Although Australia will not be an attractive export origin this year due to the drought basis, the Australian dollar has taken a dive this week falling back to the lowest level since January 2017 (Figure 2). The fall is attributed to a combination of low wage growth and wider geopolitical concerns emanating from the trump tariffs with China and Turkey.

At a local level, the market seems to have stabilized this week, with most markets relatively unchanged since the end of last week. At present it doesn’t really matter what bid the market makes, growers are unwilling to sell due to lack of clarity on production and higher pricing expectations.

On the rainfall front, there is rain headed to the southern cropping regions, however, NSW and QLD are set to by and large miss-out. At this point, we can largely write off the NNSW and QLD crop, with the focus shifting to whether they can get enough moisture to plant a summer crop.

What does it mean/next week?:

Turkey remains an interesting conundrum as Trump looks set to enact tariffs against the nation. In the past month, the Turkish lira has depreciated by 20%. This has resulted in them cancelling their wheat import tariffs to make it more competitive to import.

The export data from the US in coming weeks will give an insight into whether this weeks export sales were an outlier, or whether this is a start of a trend of exports moving back to the US.

A reversal of fortune for WA producers.

The first quarter of 2018 was characterised by above normal price behaviour for many categories of lamb and sheep in Western Australia when compared to the Eastern markets. However, uncertainty surrounding the live sheep export trade has seen the situation reverse since April, placing WA producers at a distinct price disadvantage to their Eastern neighbours.

In early April disastrous footage of a live sheep export vessel from 2017 aired on commercial TV prompting a government review of the trade, undertaken by Dr Michael McCarthy, that was delivered in May. After the McCarthy review, some recommendation were put in place immediately and others have been scheduled for further investigation.

In June, the exporter identified in the footage had their license suspended and another exporter announced they would temporarily cease exporting from Australia after considering the new export requirements put in place from the McCarthy review. These two companies are recognized as the top two exporters of live sheep from Australia and the result of their exit left sheep stranded in transit in WA and producers in a bind.

Analysis of the price relationship between categories of WA lamb and sheep compared to their Eastern state counterparts shows that after experiencing above average prices for much of the first quarter of 2018 the spreads have been in steady decline since April. WA Trade Lamb dropped from a 50ֶ¢ premium to the ESTLI in April to a 125¢ discount by the end of July (Figure 1).

The reversal in spread behaviour for WA categories for lamb and sheep wasn’t confined to trade lambs. WA Restocker Lambs have dropped from a 50¢ discount spread in April to a 300¢ discount spread, WA Light Lambs declining from a 25¢ premium spread to a 170¢ discount and WA Heavy Lambs from a 50¢ premium spread in April to nearly a 150¢ spread discount during July (Figure 2).

WA mutton also experienced a significant turnaround in spread behaviour across the April to July timeframe with a widening in the discount spread by over 200¢ (Figure 3). Indeed, for nearly all categories of WA lamb and sheep, the spread has transitioned from trending above the normal seasonal range to languishing below the normal range as the situation for live export sheep out of WA became more uncertain.

*In recent weeks the team at Mecardo have become aware of suggestions that our live sheep export analysis and reporting has been funded by live exporters and is therefore biased. This is incorrect. Our analysis is backed by data from trusted sources, like MLA, ABS, ABARES, etc, and Mecardo website publications are not funded by anyone other than our subscribers. 

In late April Mecardo were commissioned by WA Farmers (WAFF), with the support of Sheep Producers Australia, to produce a short report on the live sheep export trade. The report was clearly labelled as to whom funded the project and is available on the WAFF website.  For the record Mecardo has not received any payment from live export companies, nor their representatives, for any live sheep export related analysis or report produced.

What does it mean/next week?:

The reversal of fortune for WA sheep and lamb producers certainly coincides with the timing of all the uncertainty around the live export trade. In terms of annual offtake in WA live sheep exports contribute around 30% of the available outlet for turnoff and the disruption to the trade, with the two biggest exporters not currently participating, seems to be having an impact on prices and spreads.

Key points:

  • WA markets for lamb and sheep have seen price spreads between Western and Eastern markets turn unfavourable for WA producers since the start of the live sheep export issues in April 2018.
  • MLA reported categories of WA lamb and sheep have seen saleyard price spreads move adversely for WA producers by an average magnitude of over 200¢ from April to July.