Month: April 2019

Records for sheep and it’s only March

We knew it was going to happen, but the extent of this week’s move in mutton prices has been rather extraordinary. The indicators haven’t reflected the full move yet but we can get some ideas from today’s sale at Wagga.

Sheep prices have gone bananas this week. Figure 1 shows the National Mutton Indicator (NMI) hitting a six month high of 473¢/kg cwt yesterday. Prices did rally as the week went on. At Wagga yesterday, Meat and Livestock Australia (MLA) reported sheep making over 600¢/kg cwt. Just last week, there were heavy lambs making less than 600¢.

Wagga saw new records in terms of heavy wethers making over $200 per head, while restockers competed with processors for ewes.  Many ewes made over $150 per head, with some better than $200.

We’ll have to wait until next week for full supply data but Wagga mutton supply dropped 30%. Thanks to a bit of rain, and the threat of more, producers kept what sheep they have left at home.

Unlike sheep, lambs get to a point where they have to be sold before they turn into sheep.  Lamb supply was still strong enough this week, but prices did get some lift from the mutton market. The Eastern States Trade Lamb Indicator (ESTLI) hit a 2019 high of 683¢/kg cwt, having gained 36¢ for the week.

WA saw the biggest jump in their mutton indicator and also had the most expensive mutton in the country. The WA Mutton Indicator gained 72¢ to post a 20 month high of 477¢/kg cwt. In fact, WA mutton prices have only ever been higher briefly in June 2017 (Figure 3).

What does it mean?

Sharply higher prices usually bring out more stock. A lack of supply is fixed by higher prices. During droughts, or when there is a sniff of a break, this sometimes doesn’t work. There may not be any more sheep that producers are prepared to part with, as they are required for future income. The coming week will tell the story but the record mutton indicator is 550¢ and it looks like we are headed in that direction.

Hat eating ceremony postponed.

A fortnight ago the Eastern Young Cattle Indicator (EYCI) was trading under 400¢ and I made the bold statement that I’d eat my hat if it kept going lower. Thankfully, some significant rain to Queensland in the last week has seen cattle prices rebound. Although, according to the Bureau of Meteorology (BOM) we are not out of the woods yet.

Further to my hat eating comment, Mecardo released analysis in late February suggesting that the EYCI would find some significant support near the 400-420¢ level based on some key technical indicators. Granted, we dipped briefly to 385¢. However, the strength of the rebound in price from the low 400s has been resounding. Yesterday the EYCI closed at 494¢/kg cwt.

Rainfall of 100-200mm has been noted for significant areas of south western Queensland, thanks to the remnant activity of tropical cyclone Trevor helping to boost optimism amongst cattle producers. The updated three-month rainfall outlook released yesterday paints a pretty good picture with almost all the country expected to see a 50/50 chance of an average Autumn break, in terms of rainfall – Figure 1.

There was a caveat included in the forecast and a warning. The BOM noted that the El Nino Southern Oscillation (ENSO) indicator had moved from watch to alert, which means the prospect of an El Nino forming in 2019 is now a 70% chance which is three times the normal likelihood. The BOM warned a move to El Nino could have significant negative impact on the current rainfall outlook.

Nevertheless, cattle prices across the board mirrored the recovery in the EYCI with all NLRS reported categories along the east coast posting gains between 2-13% on the week (Figure 2). In the West young cattle prices softened, albeit slightly, with the WYCI down 3¢ on the week. Offshore, the 90CL frozen cow indicator remains firm with a gain of 2.4¢ to close at 655.5¢/kg CIF – Figure 3.

Next week

The eastern halves of Queensland, NSW and Victoria are set to receive between 10-50mm in the coming week which should continue to provide broad support for cattle prices. Although, given the strength of the rally in the EYCI in the last week I wouldn’t be surprised to see the magnitude of the price increase ease and settle into a consolidation phase for the next few weeks.

Buyers selective

The recent pattern of buyers chasing after the small offering of quality wool, while at the same time finding an over supply of drought effected types continued.

While this pattern of supply is broadly following a well-worn seasonal path, the situation is at the current elevated levels because of the drought. It will take some time for this to flow through with wool shorn over the next 6 months at least also drought effected.

Auction volumes to the end of March make interesting reading, especially when broken down by category. AWEX figures show that comparing year on year the overall volume of wool offered for auction is 11.5% lower. However, as an example, the 16 MPG is 20.4% higher, with the 19 MPG 5.6% lower. However, as a result of the dry conditions, the big mover is the medium microns. The 21 MPG is down a massive 47.8% compared to last year; this helps understand some of the reasons for the current market dynamic.

To re-enforce the drought effect, AWEX noted that 30% of Merino fleece this week was yielding less than 60%.

The Eastern Market Indicator (EMI) again fell 16 cents to 1,947 cents. The Au$ fell back below the US $0.71 mark, with the EMI in US$ terms also losing 21 cents to end the week at 1,382 US cents (Table 1).

In Fremantle, the Western Market Indicator (WMI) declined by 5 cents to finish at 2,099 cents.

37,405 bales were offered for sale this week, 5,724 less than last week with the trade clearing 32,979. This is 5,722 fewer bales than last week, with the pass-in rate remaining in double digit figures at 11.8%.

In the auction weeks since the winter recess, 1,092,065 bales have been cleared to the trade, 199,596 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 6,438 bales per week fewer.

The dollar value for the week was $67.22 million for a combined value of $2.555 billion so far this season. A simple calculation of $ value divided by bales sold gives us $2,038 per bale across all types.

Crossbreds again were the only category to see improvements this week, lifting 10 to 20 cents, however the Cardings sector continued to decline losing 30 to 40 cents.

The week ahead

The roster for next week predicts an offering of 38,212 bales followed by 35,945 and 41,055 in the weeks proceeding.

Red Alert for the season?

The Bureau of Meteorology (BOM) has put the country on alert. Last week they updated the El Niño tracker to ‘alert’ status. Their view is that there is a 70% chance of an El Niño forming in Autumn. We thought this was an opportune time to look at both El Niño & La Niña, and what it means for the nation’s wheat production.

According to the BOM, ‘El Niño’s often lead to drier conditions over large parts of Australia, while La Niña’s tend to enhance rainfall over much of the continent’. However, it must be noted that not every drought is associated with El Niño nor every wet year with La Niña.

In this analysis we examine the El Niño and La Niña events which have been considered moderate to strong from 1960 to determine what impact these events have on grain production. The analysis will examine the year on year change in wheat production.

In figure 1, we see the year-on-year impact of El Niño split into east coast and west coast. In the period 1960-2015, 7 of 11 El Niño years have recorded a reduction in wheat production, with 6 of these years recording a > 20% reduction. In Western Australia the impact of El Niño has been less negative, with 6 out 11 event years recording an increase. However, only two of these years record > 20% increase. In addition, during the years of production decline, 3 of these years recorded large production falls of > 20%.

The year-on-year impact of La Niña is displayed on both the east and west coasts as highlighted in figure 2. In the period 1960-2015, there have been 8 La Niña events. The east coast during these La Niña events experienced 6 years where production has been higher, with 4 being >15% and 2 events where production reduced by >20%. The impact of La Niña in WA has caused 4 out of 8 years to have a production contraction, with 3 of those years having a >20% decline. The La Niña years with an increase in production in WA have resulted in smaller increases than the east coast with the exception of 1988.

In both figure 1 & 2, it is evident that since the mid 1980’s in Australia El Niño events have overall been negative for crop production and La Niña events have been positive, with the exception of 2010 in WA.

In figure 3, the year-on-year impact of La Niña & El Niño is detailed at a global level. During an El Niño year we can determine that production was reduced in 6 years out of 11, and increased in 5 years with no changes of more than 10% on a global level. During La Niña years, global production has increased in 3 out of 8 years, whilst production has decreased in 5 years.

Key points:

  • El Niño events tend to have a larger negative impact on east coast Australian production, with 6 out of 11 moderate to strong El Niño years recording >20% decrease.
  • La Niña events tend to result in increased production on the east coast, especially in events since the mid 1970’s which may be due to more efficient water use.
  • La Niña years in Western Australia tend to be more subdued with lower production gains, and a higher chance of reduced production.

What does this mean?
The reality is that El Niño is a factor which can influence Australian weather patterns, however it’s not necessarily an indicator of whether a drought will form.

A good example is the past season which has neither El Niño or La Niña and the country has experienced a horrific drought.

The BOM haven’t yet announced El Niño as being in effect, so it’s all speculation at the moment. There is still a long way to go between now and harvest, and with such a volatile climate anything can and will happen.

Weekly Wool Forwards for week ending 29th March 2019

Last week, we had no wool trades but saw a couple of rare cotton forward agreements. This week, wool trades came back, with six agreements, most of these in the medium wool category. Looking back at forwards for this month, there was just 18 agreed trades, the lowest number since December and the lowest March total since 2016.

In the fine wool category, one trade was dealt for 19 Micron in April for 2,290¢. In the medium wool category, five trades were dealt for 21 Micron with two agreed at 2,250¢ in June, and three at 2,095¢ in October.

Looking at the Aussie Dollar trend since the start of March, we see a single small downward movement at the start of the month followed by a relatively stable curve, with a couple of forays above 71¢. In fact, today we’re nearly exactly at the same price as at the start of the month. Over the month we’ve seen a gradual overall cooling of physical auction prices that can be traced back to lower quality wools presenting more frequently.