Month: October 2018

Support emerges for the wool market.

Posted on by Caitlin Dearden

It seems that Fremantle was the “canary in the mine” last week. We reported that the market appeared to find support in WA late on Thursday and this translated into a stronger market this week.

The Eastern Market Indicator (EMI) picked up 31 cents for the week, settling back above 2,000 cents again, to end the week at 2,023 cents in Au$. The EMI in US$ terms was not quite a strong with the market receiving some benefit from Au$ movements, posting a 20 cents improvement to finish at 1,430 US cents (Table 1).

Last Thursday, Fremantle provided the confidence into this week. It also continued this trend to see the WMI gain a further 38 cents to end the week at 2,170 cents.

With a resurgent market, the Pass-in rate dropped below double-digit figures, with 7.4% of the total offering passed. This resulted in a clearance to the trade for the week of 29,709 bales, with 2,363 bales passed. There was a reduced dollar value for the week of $68.74 million and a combined value of $982.58 million so far this season.

In the nine auction weeks since the winter recess, 341,922 bales have been cleared to the trade, 46,600 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 4,660 bales per week (Figure 2).

Strongest demand this week came for 18.5 and broader types, with 21 & 22 MPG in Melbourne lifting almost 100 cents. There was a large offering of fine tender wool which struggled to attract sufficient demand and weighed down the fine wool market.

As noted in the Mecardo article, Fine wool volumes rising, the drought will increase this sector of the market and at the same time reduce the volume of broader types. We are seeing this play out in the market now, impacting & driving price movements.

An increase in fine Merino volumes has been anticipated due to the dry conditions in eastern sheep regions. This is starting to happen in earnest now, as the production from the higher rainfall regions in eastern Australia (which is finer to begin with), shows the effect of drought. This trend in supply will persist through to at least mid-2019, therefore the downward trend on fine wool premiums will persist for the same time.

Crossbreds prices remained firm, but it was noted that the better-prepared wools performed well while poorly prepared clips struggled with a much higher pass-in rate.

Cardings produced a mixed bag, cheaper in Melbourne, dearer in Fremantle and no change in Sydney.

The week ahead

Next week a slightly larger offering of 37,644 bales is rostered, and with Fremantle again providing a solid finish to the market we should see some level of support for the market.

The next 3 weeks have rostered 37k bales, and while the spring shearing is causing a slight increase week on week, it will be down around 20k on the same period last year.

 

WASDE & rain

Posted on by Caitlin Dearden

The rain has arrived in the east, but it’s still too early to call the drought broken. Nonetheless, the sound of rain on the roof is great therapy. In this weekly comment, we take a brief look at the WASDE report and how the market has reacted to the downpours.

The futures market is down 2% week on week (Figure 1). The market has largely been treading water over the past fortnight with the lack of substantive data. At this point of the year, the world production is largely set with only the southern hemisphere being a relative unknown. The big issue is where we go to in 2019, as globally we are on the tipping point.

The WASDE was released overnight (Table 1).  The report didn’t provide enough fire to really move the market, however global wheat production was reduced overall by 2mmt, with falls in Australia (-1.5mmt) and Russia (1mmt).

The USDA has lowered Australian wheat exports to 13mmt, however, at this point this is overly optimistic. While the east coast suffers through a deficit, the WA crop will find it’s way around the Bight. In the coming months, this figure will be downgraded substantially and impact the availability of global exports.

It was expected that the USDA would drop their projection to 17 or 18mmt, however they were conservative with 18.5mmt. This fall will not be a surprise to anyone in the Australian grain trade and will have little impact on pricing locally as most are working on a sub <18mmt national production figure.

The east coast has seen some very welcome rainfall at the beginning of the week, with more forecast over the next fortnight. This led to a 4% decline in ASX futures, with the contract falling from $441 to $424. However, the market regained all its losses and settled on Thursday at $441. The reality of the rain is that it is too late for the majority of the crop, and the only hope for consumers is the outcome of the summer crop.

What does it mean/next week?:

Harvest is starting to get underway in WA. Over the next month, it will be interesting to see how the frost impacted the crop. All expectations are still for a reasonable crop and sufficient stocks to feed the east coast domestic demand.

In the east coast, many will be watching the moisture profile to make the decision on whether summer planting of sorghum is worthwhile. At present, there are a lot of acres to be planted, with moisture being the only barrier.

Lighter Merino wethers looking profitable – if you’ve got feed.

Posted on by Caitlin Dearden

It’s the time of year when Merino lambs from the Riverina and Western NSW start to hit the market. To date, these lambs have been selling well, given the seasonal conditions. We may see the market kick in the coming weeks and as such it’s worth looking at probable and possible margins on buying, growing, shearing and selling these lambs.

The best place to get an idea of Merino wether lamb prices is on AuctionsPlus. While there are store sales throughout the Riverina, AuctionsPlus (AP) gives us a weekly prices series as well as weight and descriptions which we can compare to finished lamb prices reported by Meat and Livestock Australia.

Figure 1 shows that there is plenty of variability in the AP price. Given most lambs on AuctionsPlus are sold on property, the location of the sale can have a bearing on the price, as can the weight of lambs. The data used here included lambs from 19 to 55 kgs liveweight.

The last month has seen the Merino wether lamb price lift strongly. The average price has gone from 250¢ to over 300¢, an increase of over 20%. Wether lamb prices aren’t quite at the highs seen in January this year, or May 2017, but given the seasonal conditions, they are pretty good.

Part of the reason for the lift in the ¢/kg rate is a fall in the average weight. The dry year has seen average lamb weights on AP fall to 27kgs, from 32kgs in 2017 and 37kgs in 2016. Buyers are getting lambs at much cheaper dollar per head rates and as such, are prepared to pay more in ¢/kg.

So is there any money in buying Merino lambs?  Surely with the wool price in the 99th percentile we can turn a buck on buying Merino lambs. The gross margins look good, but costs this year could be high (Figure 3).

Wool prices for 19 micron can be locked in at 2200¢ /kg clean for December/January and with a cut of 2.5kgs, this should return close to $40/head. Finished Merino lamb prices should be good in the New Year, with even the weak price of 600¢ delivering a gross margin of $76 per head.  The recently released forward contract prices, above 700¢, offer very good margins on growing out Merino lambs.

What does it mean:

We’ve had a look at gross margins, but of course, costs need to be factored in, with feed, freight, mortality and shearing costs all cutting into the gross margin. A quick calculation of a full ration at $500/t to put on 18kgs liveweight will cost $50-70 per head. The worst-case price scenario still looks pretty good (Figure 3).  The strong price, which can be locked in for February in some areas, might encourage stronger demand for Merino lambs in the short term.

If you have green feed on hand and are lucky enough to score some of the forecast rain for the coming week, feed costs will be lower, and Merino lambs will be a very good investment.

Key Points

  • Merino lambs are not cheap in ¢/kg but weights are well down, making them buyable in $/head.
  • Gross margins on growing out and shearing Merino wether lambs are good, but feed costs will make a large dent in profits.
  • If green feed is available in the medium term, wether lambs should be a profitable trade.

Mixed supply signals as EYCI retreats.

Posted on by Caitlin Dearden

East coast cattle yardings continued to climb this week, spurred on by Victorian producers bringing stock forward. However, a breakdown of the throughput figures indicates that young cattle producers have begun to shy away from offering stock as the Eastern Young Cattle Indicator (EYCI) eased 6.25¢ to close at 480.75¢/kg cwt.  

Victorian cattle yarding levels lifted 15% as Southern producers take advantage of relatively firm prices for Trade, Medium and Heavy Steers. All three categories of Victorian Steer prices are marginally ahead of levels set this time last year and with the prospect of pasture decline as the weather warms it seemed enough to get producers to begin presenting cattle for sale.

The increased Victorian numbers underpinned a 7% lift in broader East coast throughput levels to see it move toward the upper end of the normal seasonal range in yarding levels for this time of the year with just over 56,000 head changing hands (Figure 1).

The higher volumes across the Eastern seaboard saw most categories of East coast cattle stage a price decline on the week, albeit marginally with falls of 2-5¢ noted. Indeed, Medium cow was the only East coast category to post a lift this week to close at 210¢/kg lwt (Table 1).

Curiously, young cattle yardings bucked the trend of the broader East coast cattle yarding level with the throughput for EYCI eligible cattle declining sharply to see average weekly numbers back below 10,000 head and trending along the bottom end of the normal range (Figure 2).

Year on year price changes was a likely reason for the pullback in young cattle offerings from producers. The EYCI is sitting 10% below levels set this time last season, while most other categories of cattle across the East coast are on par with 2017 levels.

The weaker EYCI isn’t finding support from offshore markets either with the 90CL frozen cow indicator shedding 5% to close at 555.5¢/kg CIF. Relatively firm US beef inventories and the prospect of additional supply out of New Zealand in the coming months is weighing on prices.

Next week

The Eastern coastal regions of NSW, Victoria and Southern Queensland are due for a 25-50mm soaking this week but not much is going to make its way into the middle nor western part of these states.

Adequate rainfall in some areas and the reduction in young cattle yarding numbers may offer some prospect of price support in the short term for the EYCI. However, broader seasonal trends in throughput suggest that cattle prices will continue to face headwinds. A softening 90CL won’t allow the EYCI to gain any real upside momentum either. It seems more likely a case of continued consolidation at current levels with a slight bias to the downside for the short-term outlook.

After the falls, could we be finding support?

Posted on by Caitlin Dearden

The wool market continued to retrace this week with most of the falls coming at the beginning of the selling before stabilising towards the end.

The Eastern Market Indicator (EMI) fell 21 cents for the week, settling below 2,000 cents for the first time since early August, to end the week at 1,992 cents in AU$. The EMI in US$ terms produced a bigger correction, falling 51 cents to finish at 1,410 US cents (Table 1).

A softer Au$ helped the market, by the end of sales it was quoted at US$0.708. This is the lowest it has been on close since January 2016.

In Fremantle, the market lost ground on Wednesday where the WMI fell 26 cents but posted a more positive result on Thursday, gaining 17 cents to end the week at 2132 cents.

The Pass-in rate again stayed in double-digit figures, with 10.9% of the total offering passed. This resulted in a clearance to the trade for the week of 34,999 bales, with 4,262 bales passed. This produced an increased dollar value for the week of $84.02 million, with a combined value of $113.84 million so far this season.

In the nine auction weeks since the winter recess, 312,213 bales have been cleared to the trade, 39,451 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 4,386 bales per week fewer (Figure 2).

We often look to Fremantle as a guide to next week due to the later finish to sales, and this week it is providing a positive view. After consecutively falling days by the end of the week buyers were showing support, with AWEX noting that all types including skirtings found support.

Crossbreds were also impacted by the falls with the exception of 32 micron which was slightly stronger.

Cardings continued there slide south with a further 35-50 cents lost across the selling centres this week.

The week ahead

A further reduced offering of 34,467 bales should provide some level of support for the market.

The final day was much steadier than the early part of the selling week, so a return from some processors can be expected to support these levels.

The bottom for lamb or a dead cat bounce?

Posted on by Caitlin Dearden

The lamb market was following the trend of the last few weeks, until rain and an out of the blue bounce upset the market yesterday. The Thursday rally was felt across the categories, but was it just a dead cat bounce?

The market was moving along predictably enough. On Wednesday the Eastern States Trade Lamb Indicator (ESTLI) was down 57¢, hitting a 3 month low to 676¢/kg cwt.

Yesterday at Wagga the market changed direction. New season Trade Lambs averaged around 800¢/kg cwt, well above last week and the closing ESTLI of 682¢ (Figure 1).

There has been some rain about and the lower prices of the previous week added to supply resistance. Wagga lamb yardings were down 26%, while sheep yardings plummeted 44%.

There wasn’t a lot of rain around Wagga, but further north some good falls should see the NSW sheep market tighten significantly. Lamb might be a different story, with good prices still likely to draw out lambs which are finished, but it depends on what producers now see as good prices.

The crash in mutton was also halted on Thursday, as it sits just above the same time last year (Figure 2). The rain should be enough to see sheep slaughter continue to fall from recent highs and prices should steady.

Lamb and mutton prices also recently experienced a crash, but they too steadied this week.  No doubt rain in the west is adding support, along with the fact that with much cheaper lambs in the West should be seeing product moving quickly into export markets.

Next week?:

As noted earlier, the coming week should see prices steady. Despite the increase in lamb slaughter, it still sits well below full capacity. If we are close to the peak of supply, expect very good prices this spring.

An interesting stat to finish off. The East Coast Restocker Indicator finished Thursday at exactly the same price as this time last year. Higher finished lamb prices are being offset by higher feed costs.

Warning: This isn’t the new level.

Posted on by Caitlin Dearden

It’s a dog of a year. There was some hope that September would bring some rain to at least keep the crop stable. Unfortunately, September has brought frost and continued dry weather. As a result, wheat pricing has stepped up a gear. In this article I look at the structure of the market and why it is important to remember that this price is not the ‘new, new’.

At present, the local market is the most important driving factor for pricing, with basis levels trading at post-deregulation records. As an example, basis (Port Kembla) now comprises approximately 45% of the overall flat price, against an average of 13%. Nonetheless, the futures market and overseas pricing should not be ignored.

The futures market has lost ground since its late July/Early August rally and is tracking the 2015 season reasonably closely (Figure 1). US futures have lost strength due to lower than expected exports with commitments at 38% of projections. This is a substantial drop from the typical 57% for this period of the year. The futures pricing, however, does indicate that globally concerns for wheat availability is not yet critical.

In this analysis we have chosen to analyse pricing in Geelong, however, a very similar picture is apparent in all port zones within Australia. In Figure 2, the seasonality of Geelong APW is shown. The stratospheric ascent. The market is currently pricing at $430-445, with limited grower selling. This is clearly an abnormal year for pricing and shows the impact of a drought.

The basis level has clearly been the main driver (Figure 3), with the premium in Geelong over Chicago at +$160. This is a remarkably strong level and as we can see is well above what would be considered the normal range.

At present pricing levels are unlikely to see a substantive fall this harvest and risk management for growers at this point is largely not required. However, it is important to remember that these prices are caused by a drought premium and as figure 2 & 3 display, this is an abnormal year.

What does it mean?:

It is important to understand that these prices are not the ‘new, new’. If we have an average or above year in 2019, the premiums currently in the market will erode very quickly. The market will move back to a pricing point based on the export market and will align with international values.

At present no-one knows how the weather will treat us in the next year. If anyone tells you that they do; they are guessing. It therefore makes sense to investigate the forward market either through physical or futures to commence a structured sales plan for the 2019/20. At present 2019/20 Australian markets have a drought premium already priced in.

Key Points

  • The basis component of pricing in Australia typically contributes around 13% to the overall flat price. This year basis is at a post-deregulation high in all port zones, with Port Kembla at 45%
  • Chicago futures have fallen during August & September, whilst local prices have risen. This has led to very strong premiums.

The pricing levels as present are due to local drought. It is important to understand that these prices will not be around for the 2019/20 harvest if we see an average or above average crop.

Some people feel the rain. Others just get wet.

Posted on by Caitlin Dearden

The drought continues to be the main talking point, with this September being officially the driest on record. The areas that were in reasonable condition at the start of the month (Vic, SA & WA) have all seen downgrades to their potential production. However, it’s not all doom and gloom with welcome rainfall in NSW.

The ASX futures saw strong volume this week, however, is currently marginally lower than the end of last week (Figure 1). Interestingly there was increased interest in delivery periods further on the horizon with trades at $370 for Jan 2020 and $360 for Jan 2021. I wrote on Tuesday about the importance of looking beyond the current harvest (Warning: This isn’t the new level.).

This has been a tough year, however, it is fantastic to see some reports of substantive rainfall in NSW and QLD (see map). It is much too late for many crops, but it will fill some dams and assist with the moisture profile for the coming summer planting. Most of all, it improves everyone’s wellbeing.

The CSIRO has released crop updates based on their Yield Gap model. They currently predict an overall yield of 0.62mt/ha, this equates to 6.8mmt. In comparison, in the last ABARES update a yield of 1.45mt/ha or 16mmt was forecast. This is a bold call from CSIRO, however as we all know a ‘small crop only gets smaller’.

This forecast would place the crop at the lowest level since 1972/3 (Figure 2). They may indeed be correct, but I think that market forecasts of between 12-16mmt are more realistic.

What does it mean/next week?:

In the next week, we will see the WASDE report released, I don’t expect many big surprises in this report as most crops are now a known entity.

There are many in the industry examining the possibility of importing wheat or by-products for feeding purposes, as many consuming industries are unable to remain profitable at these levels.

BeefEx

Posted on by Caitlin Dearden

StockCo were proud to be named a Diamond sponsor of the BeefEx Conference held by the Australian Lot Feeders’ Association this week at the Brisbane Showgrounds. As the peak national body for the Australian cattle feedlot industry, ALFA hold this biennial event as a way of bringing together the agricultural community to form better connections and to discuss major topics such as consumer trends, markets, economics, production, finance and leadership. It’s also a great opportunity for us to recognise and award leaders in the industry for things such as Young Lot Feeder of the Year Award, Excellence in Feedlot Education Medal, Top Gun, Innovation Award and the Communicate Your Research Competition.

StockCo proudly supports the Feedlot sector through development of a range of specialised agrifinance cash flow and capital management solutions. Chat with us to learn more about how we can assist you.

Soaring yarding level raining on prices.

Posted on by Caitlin Dearden

Elevated sheep and lamb yarding levels are soaring like an eagle at the moment and creating a stormy price conditions for ovine markets this week. The Eastern States Trade Lamb Indicator (ESTLI) shedding 55 cents to close at 725¢/kg cwt and East coast Mutton peeling off 79 cents on the week to sit at 423¢/kg cwt on the mid-week close. 

Table 1 highlights the sale yard price behavior for the week, and year, for key lamb and sheep categories across the Eastern seaboard with red ink on the weekly movement shared across all stock types. Heavy lambs suffering the smallest decline with a drop of 47 cents, perhaps anecdotal reports of a dearth of heavy lambs due to the dry conditions insulating somewhat against the broader market falls.

Indeed, with the year on year price change for heavy lambs still reflecting that this season is 140¢ higher than last year and East coast heavy lambs topping the price table at 739¢/kg cwt this week suggests that heavy lamb supply could be a bit thin on the ground in some regions.

In contrast, broader East coast supply statistics for lamb weekly throughput shows that the Spring flush continues to ramp up, probably with much lighter weight lambs. Throughput levels are now sitting back at the upper end of the normal seasonal range for this time of the season as Victorian lamb throughput lifts 27% on the week signifying the flush is gaining momentum – Figure 1.

East coast sheep throughput is lower on the week, but as Figure 2 highlights remains at uncharacteristically high seasonal levels. Considering the volume of sheep still being presented at the sale yard mutton prices are managing to hold above levels seen this time last season, with East coast mutton 35 cents higher than in 2017.

Please note sale yard prices reflect Wednesday market close as this piece was prepared Thursday due to the AFL holiday in Victoria on Friday.

What does it mean/next week?:

A combination of low rainfall, 10-15 mm likely for Southern Australia, next week and a continuation of lambs coming forward as the Spring flush extends is probably going to make it difficult for the ESTLI to gain too much traction in the short term.