Month: December 2018

Timely rains for weaner vendors

While wiener vendors at a sausage festival are unlikely to enjoy the heavy rain we saw at the end of last week, weaner vendors in Western Victoria would have rejoiced at the blue, yellow and even purple on the radar.  Prices for weaners have been at four year lows in December, but things may change by January.   

Since last January we’ve seen pasture conditions deteriorate and grain prices rise, neither of which are good for young cattle prices.  Over the last week we’ve seen rain ranging from light to flooding across the east coast.  Despite the rain many key cattle areas in northern NSW and southern Queensland still need another 25-100mm to reach their December average (figure 1).  The drought has not broken yet.

Readers who have been with us for a few years will know we have a couple of measures of value in young cattle markets.  Looking at the absolute price is obviously what vendors are interested in, as it drives their bottom line.  For buyers the values is determined by how much money can be made out of backgrounding or growing out cattle.

The margin in backgrounding fits well with looking value in terms of price of weaners relative to the Eastern Young Cattle Indicator (EYCI).  This spread gives a good idea of restocker demand relative to the young cattle market as a whole, or compared to feeder and processor demand.

Figure 2 shows the average price of weaners at the January sales and the EYCI over the past 18 years.  For 2019 we have estimated a price based on recent store sales, with weaner steers coming in at around 310¢/kg lwt.

If markets are steady in January, a 9.5% weaner steer premium over the EYCI will make them the cheapest weaners in 3 years, and around the average premium.

Returns from backgrouding or growing steers out to Heavy Steers could be described as good to very good based on a conservative price projection.  There was a time when $200 was an acceptable gross margin for backgrounders, and this should be achieved under a worst case scenario.

What does it mean/next week?:

It seems lotfeeders and backgrounders have become quite comfortable with export feeder prices around 300¢/kg lwt.  If weaners sell for 310¢, there is a historically good gross margin in growing them out and selling at 300¢. Figure 4 shows the projected margin (red line) is similar to last year, and right on the 18 year average.

There is plenty of room for upside in the margin, and downside seems limited.  This means weaner price could feasibly be 10% higher, and those with a positive outlook on feeder values could still justify purchasing.  If we see more rain over the coming fortnight this scenario might play out, boosting vendors coffers.

Key Points

  • Recent rain should boost confidence in northern cattle areas, but more needs to come.
  • December weaner steer price seems to be around average value relative to the EYCI and potential gross margins.
  • There is room for weaner prices to rise 10% if more rain falls and demand improves.

Surety in sorghum?

When it rains, it pours. It’s been a dry year, and to end the month the east coast has received a deluge, with many areas receiving more rainfall over the past week, than they had received for the entire year. What does this mean for sorghum?

The rainfall in Queensland and Northern New South Wales was welcomed by summer croppers, with reports of 100-300mm. This rainfall will provide surety to the sorghum crop, as there should now be sufficient moisture to get the crop through to harvest.

The Sorghum price has been very strong in recent months due to a combination of drought and record numbers of cattle on feed. The peak of the year was reached in September, however has fallen 15% since this time (Figure 1). This peak was at similar levels to the previous record held in the drought year of 2007/08. Nonetheless, even with the sharp fall in pricing levels, Sorghum is still priced well above average.

The question now remains, what size will this crop be? The crop production is made up of two factors; acreage & yield.

The December ABARES report forecast the total sorghum crop acreage at 570kmt, shy of the decade average of 615kmt (Figure 2). However, these forecasts were produced before the December rains, and there is still ample time for producers to seed recently moistened paddocks. I would expect acreage to increase in following updates to levels above average.

The bumper sorghum crop in 2007/08 was due to a combination of both yield (figure 3) and acreage. This resulted in a sorghum crop of 3.7mmt. At present we would like to consider that yields will be at or above average for the coming crop due to the recent deluge. This would place the crop at approximately 1.8mmt, based on the ABARES most recent acreage forecasts. However, with acreage likely to be increased above their forecasts, a 2mmt (or above) production year is not unfeasible.

What does it mean/next week?:

The ABARES forecasts are likely to be ratcheted up as both yield and acreage projections are revised.

The bigger the sorghum crop becomes, the larger the impact will be on pricing of both Sorghum and other feed crops. This will be a relief for grain consumers up and down the east coast as the flow on effect reduces input prices.

However, with record cattle on feed and a poor northern winter crop the pricing scenarios are still expected to attractive for producers.

As always it is a good idea to consider selling in small chunks, especially as production becomes more assured. This will help average up pricing if the market does fall.

Key Points

  • The recent rainfall in NNSW and QLD will provide an element of surety to the sorghum crop.
  • The sorghum market has fallen 15% since its peak in September, however remains at historically attractive levels (for producers).
  • The acreage & yield for sorghum will increase due to positive moisture levels.

Live export buyers underpin WA prices.

An expanded cross bench in Federal parliament has placed the ban on live sheep exports back on the agenda. Mecardo thought it an opportune time to reaffirm how important the live sheep trade is for WA farmers, particularly in terms of prices they receive at the sale yard compared to their east coast counterparts for lamb and mutton, when live export buyers are active.

Price spread discounts for WA Trade Lamb and WA Mutton continue to narrow as live export buyers re-enter the market, bringing prices in the West Australian sale yards back in line with East coast prices.

The WA Trade Lamb spread pattern to the Eastern States Trade Lamb Indicator (ESTLI) shows that reduced live export volumes through the winter period saw WA producers earning 230¢ less per kilogram carcass weight than East coast producers – Figure 1. However, since the re-entry of live export buyers into the final quarter of the season the spread discount has narrowed significantly for WA Trade Lamb, sitting just below what is normal for this time in the season at a 22¢ discount to the East coast.

In a similar manner, WA mutton spreads to the ESTLI widened to a discount of 450¢ during late Winter as live export flows of sheep ground to a halt, well below what would be considered normal seasonal variation as identified by the grey shaded 70% range boundary – Figure 2. Increased activity of live exporters into the final quarter of 2018 have seen WA mutton spreads improve moving back into the normal range in recent weeks for the first time since July 2018.

Comparing the average monthly spreads for WA Trade Lamb and WA mutton to monthly live sheep flows we can see a relatively clear deterioration in prices being achieved by WA producers, compared to the East coast markets as live sheep export volumes declined from May through to August – Figure 3.

The relationship between live sheep export volumes and WA price spreads can be further demonstrated by the monthly correlation pattern between spreads and live trade volumes– Figure 4. Higher trade volumes clearly coincide with improved spreads for WA producers with WA mutton demonstrating a slightly stronger correlation coefficient (R2) of 0.6846 compared to WA Trade Lamb with a coefficient of 0.6164.

Our previous two articles on WA lamb and mutton spreads can be found on the links below

What a difference a shipment makes.

A reversal of fortune for WA producers.

What does it mean/next week?

It is pleasing to see price spreads in WA markets normalize in recent weeks with the reintroduction of more sale yard competition in the form of live export buyers. Hopefully, as Federal members deliberate the bill seeking to phase out the live sheep trade they will pause to reflect upon how important the trade is to WA farmers and the industries that support them, such as transport, fodder suppliers, merchandise stores, etc.

If those seeking to ban live sheep exports are successful it is likely just a matter of time before their target will shift toward the live cattle trade. What will be their next target if they achieve success here too? Banning intensive animal farming practices in the beef feedlot, pork, chicken and egg industries, banning long haul animal transport over land and/or any shipments of live animals overseas? It’s a slippery slope and for a member of parliament like Andrew Wilkie, representing the Tasmanian electorate of Denison, I wonder if his support for the banning of live export sheep overseas extends to the shipment of Tasmanian live sheep (and cattle) over the sea to the mainland?

Key points:

  • WA price spreads for Trade Lamb and Mutton have improved significantly since the re-emergence of live export buying competition in the last quarter of 2018.
  • A strong relationship exists between live sheep export trade volumes and WA price spreads to East coast markets for Trade Lamb and Mutton.

How lamb price perspectives can change in a year.

Perspective is a funny thing, especially when it comes to commodity prices. This time last year the Eastern States Trade Lamb Indicator (ESTLI) hit a new record high of 661¢/kg cwt and lamb producers went into Christmas a very happy bunch. This year the price is the same, but the mood is not as buoyant.

Lambs are the same price, but many producers are not seeing great prices, they are counting the missed opportunity of locking in prices at over 100¢ better than current values (Figure 1). Prices over 800¢ are also a recent memory, which adds to the perceived loss.

We know, however, that prices over 600¢ are highly profitable for those lamb businesses which haven’t been in drought, and hence the flow of lambs this November and December has been strong.

There will be some interesting supply and demand functions over the coming month. The rain falling this week should encourage retention of lambs. However, anecdotal reports suggest many Victorian processors are fully booked for January.

We may see light lamb prices rally and finished prices steady, that is unless the dearth of supply in NSW worsens and drags all prices higher.

Sheep is another story.  It’s very hard to see sheep slaughter maintaining current levels with crucial northern sheep regions getting a good downpour. We haven’t seen mutton indicators above 500¢ for any extended period of time since the middle of 2017. Next year could be a record breaker for mutton.

What does it mean/next week?:

There will be some sales early next week, but things will be quiet after that. Many of the lambs which will be killed between now and early January will have already been booked, so sending lambs to the saleyards might be a raffle.

Strong finish to a momentous year.

Exporters would be pleased with the final selling week; a solid finish before the break provides opportunity to write new orders for the re-start in 2019.

The market rose on each of the selling days, providing a sense of stability to an otherwise volatile ride for the wool market in 2018.

The Eastern Market Indicator (EMI) rose, ending the week at 1,862 cents. The Au$ was slightly stronger, closing at 0.723 US cents. That put the EMI in US$ terms at 1,346 cents, a gain of 10 cents (Table 1).

In the west, the Western Market Indicator (WMI) also rose over the week to end at 2031 cents.

Compared to the original roster posted last week, 46,003 of the 48,700 bales intended for sale this week came to the market. The stronger market meant growers only passed in 7.6% of bales offered. This resulted in a clearance to the trade for the week of 42,529 bales (Figure 2). In the auction weeks since the winter recess, 618,752 bales have been cleared to the trade. For the period up to the Christmas break, on average almost 9,500 per week or 181,400 fewer bales have been cleared to the trade compared to the same period last year.

The dollar value for the week was $83.88 million, for a combined value of $1.56 billion so far this season.

The large crossbred offering again resulted in a mixed result, with early sales for the weak softer before improving by the end of the week.

The oddments market again fell between 30 and 50 cents with Fremantle most affected.

The week ahead

This is the last sale for 2018, with a three-week recess.

The strong finish in the auction to 2018 bodes well for next year, although there are mutterings from exporters that buying orders are spasmodic and on a “just – in – time” basis.

Of note is that the forward market activity is pointing to a solid start to 2019 also.

Owen brings an early Xmas gift.

Rainfall to vast areas of the Eastern seaboard at the latter end of the week, compliments of ex-tropical cyclone Owen, has seen up to 50-100 mm recorded across Queensland, NSW and Victoria. The deluge has given a lift to cattle prices and provided some early Christmas cheer to producers.  

The Eastern Young Cattle Indicator (EYCI) managed a 2% gain on the week to close at 526.5¢/kg cwt on the back of the widespread rain event (Figure 1). Young cattle prices in WA held firm at the 550¢ level while declining levels of imported NZ grinding beef in the US has seen the 90CL frozen cow continue to climb toward 580¢/kg CIF.

The rainfall appears to be inspiring those looking for young cattle as the EYCI was one of the few NLRS reported categories in the East to post a price gain this week. East coast Feeder, Trade, Medium and Heavy Steers are all registering falls over the week between a 3-17¢ magnitude on a live weight basis. The increase in young cattle prices comes on the heels of elevated supply across the East coast, as higher cattle yarding and slaughter levels in Queensland in recent weeks has supported throughput and cull volumes across the Eastern seaboard.

The most recent Queensland cattle throughput figures show a 34% jump in saleyard numbers week on week to see over 27,000 head presented. The elevated northern volumes are underpinning a lift in East coast yardings to see numbers reach toward the upper end of the normal seasonal variation at 72,000 head, a 20% gain on the week prior (Figure 2).

East coast slaughter figures were also given a boost from Queensland with week on week numbers showing an 18% rise in slaughter in the sunshine state leading to a 9% gain in slaughter levels across the eastern states. This places weekly East coast slaughter numbers at the highest level recorded in six months at 147,531 head (Figure 3).

Next week

The increase in yardings and slaughter is likely to be the final hurrah for cattle supply this season as saleyards and meat works wind down for the Christmas period. Considering the rainfall levels seen recently, this will also give producers the chance to throw an extra few kilograms onto their cattle as we head into 2019.

Anticipate a robust finish for cattle prices for any remaining sales into next week. The current rainfall should set the cattle market up for a decent start off the blocks as we start the new year. This is the last comment for the season from Mecardo as we close shop until mid-January. Have a safe and merry festive season.

Why does it always rain on me?

The sound of rain can be heard on roofs throughout the east coast. This will be welcome to some and a hindrance to others. In this update we take a look at futures for next year, and the last two days deluge.

It is always important to look towards the horizon when creating a strategy for grain marketing. This is especially true this year, as producers in Australia are all likely to receive a historically high price due to the local drought conditions. There isn’t much strategy really required in a year like this.

We don’t however know what the outcome will be for next year, will we have a big or small crop? Therefore, it is important to start considering forward sales.  Since the start of the month the December 2019 CBOT wheat contract has increased by 4%, from A$275/mt to A$287/mt (Figure 1). As we move forward into the northern hemisphere risk market, opportunities may present themselves.

Locally the east coast of Australia has received a deluge of rainfall with reports of over 200mm in 24 hours. Technically that will leave many with above average rainfall for the season. Unfortunately, it didn’t arrive at the right time for many.

The rainfall will cause more delays to harvesting, and likely downgrading to quality in Victoria. On a positive note, it will provide some subsoil moisture for next season and place a floor in sorghum production.

The delay in harvest may provide a lift in prices between now and Christmas for prompt delivery, as consumers attempt to gain access to feed.

What does it mean/next week?

There is a meeting in Russia next week to discuss the wheat export pace. The inevitable rumors of an export ban are back to the fore.

It is unlikely that an export ban will be put in place, a more likely result would be some form of curbs. However either action would result in a move back to US exports becoming competitive.

Throughput levels and price volatility.

South Australian mutton displays a higher degree of price volatility than their counterparts in NSW and Victorian markets. Indeed, over the 2018 season, SA mutton has experienced a range in price more than 300¢ compared to the 135¢ to 180¢ range displayed by NSW and Victorian mutton, respectively.

Analysis of the price behaviour of mutton in the southeastern mainland markets highlights the close relationship between mutton prices in Victoria and NSW. Since the beginning of 2018, the weekly mutton price in Victoria and NSW hasn’t been more than 40-50¢ apart and have followed each other relatively faithfully (Figure 1).

In contrast, while the broad trend for SA mutton has been following the pattern set by Victorian and NSW markets, there have been times in the season where SA prices have diverged wildly. There have been several occasions throughout the current year when SA mutton prices have moved beyond a 100¢ discount to Victorian/NSW prices and one time when the discount breached 220¢.

Measuring the relative weekly gain or decline in mutton prices for the three states from the beginning of the season in percentage terms helps to quantify the volatility inherent in SA mutton price movements (Figure 2).

SA mutton has seen price falls extend to nearly 30% during May and gains as high as 55% during this season. Victorian mutton prices have been as much as 26% below and 12% above the January opening price. NSW mutton has fared slightly better over the season, posting a 13% price decline and an 18% gain.

What does it mean/next week?

Analysis of weekly throughput levels this season shows that in NSW mutton numbers have averaged around 15,000 head. The higher volumes seem to help reduce price variability as individual lines of stock contribute a smaller proportion to the average prices reported in any given week. As a result, a poorer or better sales outcome doesn’t impact the average price across all sales.

This inverse relationship between price volatility and throughput volumes is also evident in the Victorian mutton data. There has been an average of around 7,000 head of mutton a week at Victorian saleyards this season, which is just under half the NSW average. The price volatility in Victoria has been slightly higher than in NSW.

Similarly, SA reports average weekly mutton throughput of around 1,200 head and the price variability between weeks is significantly higher than other two states (Figure 3). The thinner volumes mean that average prices are more susceptible to influence by poorer or better sales outcomes on a given week. Yards with higher volumes will attract more buyers, bringing greater competition which in turn means that prices can’t be manipulated by a single buyer or small group of buyers with market power.

Key points:

  • Weekly mutton prices for Victoria and NSW are rarely more than 40-50¢ apart and show a lower degree of volatility than SA mutton prices, week on week.
  • SA mutton prices have ranged over 300¢ in price during the 2018 season, compared to 135¢ NSW and 180¢ for Victoria.
  • Higher throughput volumes appear to be synonymous with greater price stability.

Volatile times ahead for feedlot utilisation

Feedlot utilisation levels are a key performance indicator of feedlot operations. Using saleyard data that indicates buyer behaviour of feeder cattle, we have created a forecast model for feedlot capacity utilisation as we head toward 2020.

Utilisation numbers as an indicator of feedlot performance are the preferred index relative to total numbers of cattle on feed, traditionally highlighted as an indicator of industry performance. By accounting for the number of cattle on feed as proportionate to total capacity, we are best able to visualise how feedlots are using the available resources and infrastructure that is available in the industry.

Historical movement in feedlot capacity and utilisation levels demonstrate that capacity increases do not always result in high utilisation of the existing feedlot infrastructure (Figure 1).

While the past two quarters have seen an increase in the number of cattle on feed to consecutive record-breaking numbers, it was not a sign of greater profitability. Utilisation for the past two years has remained volatile but relatively high, between 75-86% utilisation nationally.

The past quarter has seen its fair share of struggles in the feedlot industry. High grain prices, a poor harvest with limited roughage availability and fires in southern Queensland will all place significant difficulties on the feedlot margins going forward into this quarter.

Accounting for these recent developments, combined with weather forecasts, currency outlooks and emerging saleyard trends, we are looking to see Feedlot utilisation levels fall to their lowest point since September 2016 to around 72%.

Capacity changes are expected to have little to no impact on this forecast, with growth last quarter changing less than 1% nationally.

What does it mean?

The prospect of lower levels of feedlot utilisation, toward levels that we have not seen for a while, could reduce the demand for feed grain and other feedlot inputs going forward. Feedlot marketing’s of grain-fed cattle would likely follow the utilisation drop in early 2019; something else to look out for in the new year.

Into the second half of 2019 the model estimates that feedlots will be looking to restock as the utilisation levels are forecast to climb back toward the 85% area. This is potentially a good time for producers with feeder steers to bring them into the saleyard.

Key points:

  • A volatile 24 months has been seen in feedlot utilisation, bouncing between 75-86% utilisation.
  • Utilisation model forecasting tips feedlots to be at around 70% capacity for the coming quarter.
  • The second half of 2019 forecasts a recovery in feedlot utilisation numbers; a good time maybe to have feeder steers in the saleyards.

Flush nearing completion.

Victorian lamb numbers continue to swell, hitting levels similar to last year’s peak and pushing East coast lamb numbers to levels not seen since January 2018. Sheep numbers at the sale yard have also rebounded over the last few weeks and the result has been softer lamb and mutton prices across the board.

East coast sale yard prices for the commonly NLRS reported categories of lamb and mutton are outlined in Figure 1 and it shows that the increased throughput having an impact on all prices, although only minor falls registered for Merino Lamb and Mutton.

Restocker Lambs taking the biggest hit with an 8% drop to close at 654¢/kg cwt. The Eastern States Trade Lamb Indicator (ESTLI) posting a more modest 3% fall to finish the week at 663¢/kg cwt. Interestingly, we are now nearing the area we originally suggested the ESTLI was likely to bottom out once the Spring flush was competed.

Back in October we released an analysis piece suggesting the bottom would be found around the 630-650¢ level in late November. Granted, we are little late with the timing but its near enough now to call the bottom for the ESTLI given there can’t be too much more of the Spring flush to play out.

Victorian lamb yardings gaining 25% week on week to see 148,298 head recorded. This time last season the Victorian yardings peaked at 147,363 so it is fair to expect there can’t be much more lambs to come in the next few weeks. East coast lamb yardings boosted by the Victorian flow, registering just short of 300,000 head presented, to see the highest weekly total throughput since the start of the season – Figure 2.

A similar story for east coast mutton throughput too this week with a 15% gain in numbers week on week to see nearly 123,000 head yarded. A surprising number of sheep still being offered up, given the elevated yarding we have been seeing along the east coast since the middle of the year.

What does it mean/next week?:

The next week has some pretty good rainfall forecast for much of Victoria and Southern NSW, with up to 50mm expected across a broad area. This is likely to encourage any remaining stock to be held a little longer by producers so expect prices to stabilise and don’t be surprised to see a little kick higher as we head toward the Xmas break.