Year: 2018

It’s a buy opportunity if you’ve got feed.

Posted on by Caitlin Dearden

The Eastern Young Cattle Indicator’s (EYCI) decline continued this week. We’re not seeing finished cattle prices being dragged lower, especially not in the south, as the supply of slaughter ready cattle is weakening due to the dry. It’s not great for young cattle producers, but good news for traders.

The EYCI eased another 25¢ this week, heading back through support at the 514.50¢/kg cwt level. No doubt the fact that there has been no real rain in April, in addition to the usual increase in young cattle supply in Northern NSW, is helping drive the EYCI lower.

Heavy cattle prices remain relatively strong however. The NSW Heavy Steer Indicator (figure 1) is actually sitting close to a nine-month high, at 512¢/kg cwt. The 2¢ discount for the Heavy Steer is as close as it’s been to the EYCI since spring 2015.

A relatively small spread between finished cattle and young cattle is not unusual for this time of year, but it’s not something we’ve seen during the herd rebuild. It suggests the young cattle supply is approaching normal, but the tight spread is obviously partly driven by the dry summer in NSW, Victoria and South Australia.

The bad news for cattle producers is that seasonality suggests that continued dry conditions are likely to see young cattle prices continue to fall. Figure 3 shows that the fall usually runs until at least May, and this could see the EYCI below 500¢ for the first time since the first half of 2015.

The week ahead

There’s not a lot of precipitation on the forecast, so we might see young cattle prices continue to ease next week.

There is opportunity for restockers to buy at close to 3 year low prices, and the fact that heavy cattle values are holding strong gives an indication that the finished cattle market might find support, making a good trade.

Low supply pressure continues for merino wool.

Posted on by Caitlin Dearden

Supply in Australia continues to underperform for the broad merino categories, at a time when other greasy wool exporting countries are at a low point in their seasonal supply patterns. This article looks at the latest AWTA core test volume data, which allows a breakup of supply by micron category.

Figure 1 shows the year on year change for March 2018 AWTA core test volumes by micron category, running from 15 micron and less on the left through to greater than 30 micron, then cardings and finally total volume on the right. The 20 through 23 micron categories, effectively the merino production on the broad side of the average fibre diameter of 19 micron, stand out as having the largest fall in March. 21 to 23 micron volumes are down by 35-40%, which is a large fall, complicated by the continued high level of vegetable fault in eastern Australia.

As a check on single month variations in volume, Figure 2 shows the year on year change in volumes for the January to March period. It shows a slightly different view. However the 21 to 23 micron volumes are still down by 20-30% for the March quarter compared to a year ago which is still a large fall in supply. On the three month view, 17 to 19 micron volumes are up, as are the major crossbred micron categories. Overall the total wool volume for the March quarter is down by 2.5% compared to 2017, which does not tell what is going on for the different micron categories.

So, what is happening? In March 2017 some 59% of 21 micron wool sold at auction came from four regions; the Great Southern in Western Australia (24%), the Midlands in Western Australia (9%), northern South Australia (16%) and southern South Australia (10%). While the auction and AWTA data are not directly comparable, the drop in 21 micron volumes in these four regions accounts for some 25% of the 39% drop seen in March AWTA volumes. In other words these four regions account for about two thirds of the change seen in 21 micron volumes.

The four regions accounted for 58% of 21 micron sales in April 2017, before dropping back to around 40-44% by mid-2017. The seasonal conditions in these regions which has caused the current fall will not turn around quickly and given their continued importance to 21 micron supply in Australia, it seems likely the supply of broad merino wool will remain well below year earlier levels for the balance of this season.

Key points:

  • AWTA total core test volume fell by13% in March, and is down by a smaller 2.5% for the March quarter.
  • Changes in total volume, however, mask some quite varied changes in volume between the different micron categories.
  • In terms of micron categories, the broad merino micron categories have fallen significantly this year.
  • 17-19 micron volumes are up as are the main crossbred micron category volumes.

What does this mean?

The supply of broad merino micron wool is down by 20-30% for the three months to March and by more in March. Two thirds of this fall is coming from the Great Southern and Midlands in Western Australia and South Australia. These regions are likely to continue driving the supply of broad merino wool well below year earlier levels for the balance of the wool selling season, which should help support broad merino prices which in turn will help support medium merino prices.

 

Fundamentals and black swans

Posted on by Caitlin Dearden

The market has been knocked around this week, by both fundamental factors driving pricing and the black swan event in the form of President Trump. Although volatile, the market can provide pricing opportunities for Australian producers.

This week has seen a huge degree of uncertainty across all markets. The talk has moved away from the fundamentals, and onto the spectre of a volatile trade war between the worlds two largest economies. The futures market took a dive immediately after the announcement of tariffs by China, in response to comments by Trump. Overnight however, the market recovered, taking us to two-week highs (figure 1).

At a local level, cash APW1 prices have traded in a narrow range since the fall of the market in mid-march (figure 2). This week however, prices have shown some upside, with between A$2 & A$6 rises across the country.

Although the tariff wars provide some interesting news, the fundamentals continue to be a strong driver of markets. Many areas of the US continue to experience drought conditions (see map), leading to reduced expectations for the winter crop. At present, only 32% of all winter wheat acreage in the US is considered to be good-excellent. This is an extremely low figure, and places it at the lowest level since 2002. In order to recover decent rainfall will be required in the next fortnight, without rain further downgrades are expected.

In the coming weeks we may experience some upside in pricing as markets take into account drought conditions in the US.

What does it mean/next week?:

The market is going to continue to be extremely volatile. At present, Trump has already pointed towards a further $100bn in additional trade tariffs, which will likely be met by retaliation by China. The story is far from over, and is likely to continue to be a cause for concern, although potentially offer opportunities for Australia.

All eyes need to be on the weather, with poor forecasts throughout many areas of Australia’s grain growing regions.

Easter lull hits supply.

Posted on by Caitlin Dearden

A short week due to the Easter break has taken its toll on cattle supply with yarding levels and slaughter reflecting the holiday break. Saleyards reported some higher steer prices on the back of the reduced supply, but most other cattle categories trekked sideways in the reduced trade environment.

Table 1 outlines some price movements on the week for key categories of cattle at East coast sale yards. The benchmark EYCI was only marginally lower, closing at 539.50¢/kg cwt yesterday. Trade (298¢), Medium (274¢) and Heavy Steers (279¢) all managed 10-15¢ gains on live weight prices, while Feeder Steers lost a little ground off 2¢ to close at 289.8¢/kg lwt.

Figure 1 shows that East coast cattle throughput is back within the normal seasonal range, after posting elevated levels over the past fortnight and is now trending slightly below average at around 33,000 head. The recent volatility noted in East coast yarding levels have been mainly QLD centric with northern producers responding to monsoonal climate variability.

The East coast slaughter pattern is also reflecting the Easter inspired lull in activity and is demonstrating a similar pattern to yarding levels with a higher than 2017 pre-Easter slaughter now back under the 2017 levels this week. A 109,000-head cull was reported for the week ending 30th March – Figure 2.

In off shore markets, the 90CL frozen cow indicator continues to consolidate around 600¢/kg CIF and has been holding firm at this level for the last two months. The usual seasonal pattern for 90CL is for an increase in prices as we head toward the US grilling season with a few more burgers flipped onto the BBQ.

What does it mean/next week?’

The April Bureau of Meteorology forecast suggests average rainfall across the eastern seaboard for the month, although not much is anticipated to fall in the coming week in the South as a blocking high pressure system is keeping it clear and sunny.

Dry rainfall deciles for March across much of NSW and SA demonstrate just how some parts of the country are in need of the Autumn break and the dry conditions have been keeping prices subdued in some areas – Figure 3.

Prices are likely to keep in a consolidation phase in the coming week, with a slight downside bias as the delayed start to the break applies some pressure – all eyes are on the sky for some rainfall and some price support as we head towards Winter.

No post Easter price spike

Posted on by Caitlin Dearden

There was no post Easter price spike this week, with processors seeming to have their supplies booked up well in advance. Saleyards were well supplied, and the good news, again, is that prices remain relatively strong despite plenty of lambs and sheep being on offer. 

Lamb prices eased marginally this week, and mutton prices were up a bit. The result has the National Mutton Indicator (NMI) sitting close to an 8 month high in relative terms. Figure 1 shows the NMI is now at a 38% discount to the Eastern States Trade Lamb Indicator (ESTLI), which is just below the mark set in December.

The NMI discount might be strong relative to the last 8 months, however strong supplies see it still sitting 8 percentage points below this time last year.

It’s interesting given the low sheep offtake shown in this week’s analysis article  that this year mutton has been more discounted than during the flock liquidation of 2014-15.  Obviously, lamb prices are a lot higher and this appears to be putting some pressure on the mutton discount, despite being in the midst of a flock rebuild.

The Aussie dollar has weakened recently (figure 2), this should be providing support for export lamb values in our biggest markets. The ESTLI in US dollar terms is now looking not that expensive. Figure 3 shows USD prices were higher last year, and in 10/11 and 14/15.

This is another indication that perhaps there is room on the demand side for lamb prices to push higher, that is if supplies do start to wane over the coming month or two.

The week ahead

The lamb market is in reasonable shape. There will be upside if or when it rains, but the trade was shaping between the US and China has added in some uncertainty. There will be no direct impact on Australian lamb, but China’s tariffs on US beef and pork are likely to have some indirect impacts on our meat values.  Which way our prices get pushed requires a bit more analysis.

Easter slows sheep slaughter but it’s still strong.

Posted on by Caitlin Dearden

Last week was a day short of a full one, thanks to Good Friday. The short week saw a predictable drop in both sheep and lamb slaughter, but supplies remained much stronger than Easter last year.  Prices are starting to fall behind last year levels, so this week we thought it timely to take a look at what price and supply tells us about demand.

Figure 1 shows Good Friday dragged weekly east coast slaughter back to its lowest level for the year to date.  Easter 2017 is clearly shown, with the added week of Anzac day seeing three weeks of low slaughter. Last week lamb slaughter was 2.5% higher than Good Friday week last year.

Sheep slaughter was much stronger. This year Good Friday week sheep slaughter was an extraordinary 26% stronger than last year. Combined sheep and lamb slaughter was 7% higher than last year.

The last week took total year to date sheep and lamb slaughter to 4.6% higher than last year.  The extra 250,000 sheep and lambs slaughtered for the year so far equates to around 3 days of sheep supplies. It’s interesting that this is the case, even despite 50,000 head of weekly kill space being taken out by the January fire at Thomas Foods.  NSW and Victorian processors have more than picked up the slack, seemingly driven by good demand and margins.

Figure 3 shows it was this time last year that the Eastern States Trade Lamb Indicator (ESTLI) really took off. Not surprisingly, the rally towards 700¢ coincided with a solid autumn break across the Eastern States, which no doubt tightened supply.

We’ve identified that demand for lamb and sheep has been stronger than last year for much of the 2017/18 season to date. This is evidenced by prices being similar or stronger, despite supply being stronger.

Last year’s strong prices from this point may have been driven by stronger demand, as lamb supply remained relatively steady. Restockers would have contributed to increased demand, but this time last year might have been the start of the current strong demand period.

What does it mean/next week?:

While strong lamb and sheep supply does mean weaker prices now, at least weaker than the peaks and this time last year, it does bode well for those looking to sell lambs and sheep over the coming months.

May is usually one of the stronger slaughter months for the year, but with strong numbers coming through to date, it might be the month for the winter price rally.

Key Points

  • Lamb and sheep slaughter was lower for Easter, but still well above last year.
  • Prices are falling behind last year’s levels, but demand remains similar.
  • Continued strong supplies of lamb and sheep should see tighter supply, and stronger prices over the coming months.

1, 2, 3, 4, I declare trade war

Posted on by Caitlin Dearden

Trump. The president who sticks to his promises. Overnight the trade scuffle, turned into a trade war with China increasing the number of imports which would attract tariffs after increased rhetoric from the US president. Although not wholly unexpected, this trade war can have huge ramifications for global trade.

The Chinese government were never going to stand back, whilst Trump continued to sabre rattle and threaten increased tariffs. The new list is extensive and could impact up to $50bn of trade. The products include soybeans, wheat, corn, sorghum & whisky*.

Through reading the list of products likely to be hit by tariffs (here), it could be construed as a savvy political act, as many of the products/commodities will impact the pockets of voters in Trump strongholds.

The impact of the tariff has been quite stark, overnight the Chicago soybean futures contract traded in a 58¢/bu range (figure 1). The introduction of tariffs specifically on US exports has instantly made US soybeans uncompetitive into China and will make it easier for alternate origins to compete i.e. Argentina and Brazil.

The tariffs however, leave a number of questions around the capability of China to continue with trade restrictions. In figure 2, the imports/exports and production of soybeans is displayed. Over the past ten years China has on average imported 62% of the worlds export soybeans, this places a huge strain on China’s ability to find alternate origins, especially in light of the US providing 40% of the worlds exports.

In order to satisfy the demand into China, without paying tariffs, close to 100% of the global trade in soybeans (ex USA) will have to go into China. This will have flow on impacts into other soybean destinations, which will likely change origin to USA.

Interestingly, China has not declared when tariffs will be in place, and there is some speculation around the fact that Chinese purchases tend to be reduced at this point of the year.

*Only real whisky comes from Scotland anyway.

What does it mean/next week?:

It is not wholly surprising that this trade war has commenced. The Trump campaign was largely based on curtailing the advance of China, and regardless of opinions on him, he tends to do as he promises. The real test will be whether there is a further escalation in tariffs.

The good fortune we have seen with barley and sorghum imports into China is likely to continue, as US exports will be uncompetitive.

Key Points

  • China over the past ten years imported on average 62% of the worlds global trade in soybeans
  • The US contributes 40% of the worlds global trade in soybeans on average.

Buy the rumour, sell the pulse.

Posted on by Caitlin Dearden

The agricultural trade is always full of interesting moments. As a staple food product, political decisions around the world can have a big impact. In this week’s market comment, we take a look at the conditions in the US, and rumours emanating out of India with potentially severe impacts on Australian pulse prices.

The weekly market comments are being published a day early, due to the Easter break.

The wheat market has continued to decline, with three sessions in a row the market has accumulated a fall of 3% since the close on Friday last week (figure 1), placing the futures market at 2-month lows. The trade continues to digest the improving weather conditions in the US, and lower than expected exports (leading to higher end stocks).

Conditions are improving in the US, albeit only marginally. In figure 2, we can see that the crop expected to be fair – excellent is at 51% (up 6%). Although it needs to be noted these conditions are considerably worse than any time for the past decade.

In the past weeks, we have been hearing rumours of an additional increase in tariffs for pulses imported into India. The India government have legislated these tariffs to protect the prices offered to farmers. The cynic in me considers that this is interesting timing with the coming election.

It however gets worse, there has even been speculation in recent days that a complete ban on imports would be enacted. In the past two days, chickpea prices in India have performed well (figure 3), is this a case of traders buying the rumour?

What does it mean/next week?:

Overnight the USDA will release the US planting intentions & the quarterly stocks. This report has moved the market in the past, but will it be enough in a market with such burdensome stocks?

At a local level, conditions across much of Australia currently seem poor for the approaching seeding period. There is still ‘some water to go under the bridge’, and hopefully we get some much-needed downpours prior to the commencement of planting.

Surge in NSW throughput but prices hold.

Posted on by Caitlin Dearden

Anecdotal reports of the lack of rain boosting throughput levels along the East coast, particularly in NSW, are being supported by the yarding numbers this week with a spike in both sheep and lamb throughput noted. Despite the higher offering, prices have remained fairly stable with the Eastern States Trade Lamb Indicator (ESTLI) only 3¢ lower at 612¢/kg cwt and National Mutton managing to gain 2.6% to close at 437¢.

Figure 1 highlights the combined sheep and lamb throughput pattern for NSW with the jump in yarding levels on the week quite evident, coming in at 190,195 head – 54% higher than this time last season and 89% above the seasonal five-year average pattern. The high NSW yarding of lamb and sheep is a result of the lack of rain to much of the Western regions of the state.

February rainfall deciles from the Bureau of Meteorology show much of the state suffering from below average to very much below average rainfall conditions. Figure 2 and the animation of daily rainfall levels during March, emphasize the dry start to Autumn.

Elevated NSW throughput numbers for lamb and sheep have underpinned higher East coast figures on the week, with a 41% jump to over 303,000 head – figure 3. Indeed, the combined East coast lamb and sheep yarding is now sitting 54% higher than the average seasonal level for this time of the year according to the data over last five years.

Despite the additional supply at the sale yard, lamb prices across the Eastern states are holding up reasonably well. Restocker lambs are back above 600¢ in Victoria (625¢), NSW (637¢) and South Australia (600¢) with Trade and Heavy Lambs across these three states mostly unchanged on the week. Victorian mutton rebounded over 6% to see it back above 450¢, while SA mutton took a bit of a dive, down 9% to 365¢. In the West Trade Lambs went sideways, closing above 630¢ while WA Mutton bounced over 9% to get back above 410¢.

What does it mean/next week?:

There isn’t much rain on the horizon for most of the nation, although the northern tropics will get some into next week, but it’s unlikely to shake out further sheep and lamb supply as the Easter break will cause some disruption to sale yard flows.

It’s probably fair to say producers with concerns about the recent lack of rain and access to pasture have brought forward their supply, adding to this weeks elevated throughput. The prospect of tighter supply in the weeks following the return post Easter, should lend some support to prices, especially if we start to get some Autumn rain.

 

Wool market bouncing along.

Posted on by Caitlin Dearden

The pattern of the wool market rising one week and falling the next continued. This week saw the market continue the weak finish to last week’s sales and post a week of price corrections.

The Eastern Market Indicator (EMI) gave up 6 cents to 1772 cents, while in US$ terms the EMI lost 3 cents to 1364 (Figure 1).

This US$ level for the EMI is the lowest the market has traded for this year, an indication that unlimited demand and price rallies are no more the case now than they were ever. It now appears that the market may have found a top (in technical or charting terms) in January, and with reports of tightening Chinese credit terms we could be lining up for weaker demand and lower prices in 2018.

The AU$ played its part and lost favour during the week, easing again by 0.5 cents to US$0.77, which softened the fall in the general market indicators. The West fared better, due to the later selling last week the market had already pulled back, in fact the Western Market Indicator (WMI) gained 2-cents to 1869 cents.

There was an interesting spectrum to the market this week; the crossbred section posted another week of increases, and due to the greater volume of crossbred wool in the Melbourne catalogue the Southern Indicator held steady.

Crossbred types for the second week in a row rallied between 10 and 20 cents. Merino skirtings performed stronger than the fleece types although generally slightly lower for the week.

Merino Cardings had another good week, posting around a 24-cent improvement across the three cardings indicators.

The past three weeks has seen the Pass-in rate fluctuate with 9%, 4.0% and this week 7.8% passed by growers as they react to the variable market week-on-week. Generally this rate has fluctuated in line with market movements week on week.

There was an increased clearance this week of 41,334 bales, almost 5,000 bales more than last week.

The week ahead

Next week is the Easter break, with sales resuming the week beginning 9th April.

On resumption, almost 49,000 bales are offered, which will test the resilience of the market. AWEX report that volumes are predicted to decline after this sale.