Month: September 2019

Lamb and mutton forecasts to 2022

Last week we updated the forecast model for annual young cattle prices to 2022 and this week it is the sheep producers turn to get an insight as to what the Mecardo model for the Eastern States Trade Lamb Indicator (ESTLI) and National Mutton Indicator (NMI) indicates for price projections over the next few years.

Predictor inputs to the lamb and mutton pricing models include an annual average A$ forecast, annual slaughter volumes (as outlined by MLA sheep industry projections), an annual climate factor, per capita, GDP levels of key importing nations and sheepmeat export volumes to key destinations.

The Mecardo ESTLI model predicts lamb prices to remain above 800¢ for the next few seasons as growth in offshore demand continues to outweigh increasing lamb slaughter and production levels (Figure 1). The 2020 season is anticipated to see an annual average ESTLI of 874¢, with a potential range of 740¢ to 1000¢ during the usual seasonal spring trough and winter peak. Annual forecasts for the ESTLI for 2021 and 2022 remain robust at 852¢ and 866¢/kg cwt, respectively.

National Mutton Indicator modelling shows similarly strong predictions for the next four years with the forecast tool indicating an annual average NMI remaining above 500¢ for the 2020 to 2022 period (Figure 2). The 2020 season is expected to see an annual NMI of 525¢, with a potential range of 405¢ to 640¢ from the seasonal trough to peak during the year. The NMI for 2021 is expected to average 531¢, easing to 510¢ for the 2022 season.

What does this mean?

A key driver for the robust pricing scenarios presented in both the ESTLI and NMI forecast models is the expected continued steady growth in demand for sheepmeat, particularly from China. Current modelling does not consider a potential surge in sheepmeat demand in the coming seasons, as Chinese consumers attempt to fill the widening protein vacuum caused by the ongoing African Swine Fever epidemic impacting the Chinese pork sector. A scenario of dramatically increased demand for sheepmeat from China would see forecast price levels elevated further.

Alternatively, ongoing trade tensions between the USA and China could see GDP growth forecasts downgraded. Significantly lower per capita GDP growth levels in China and the USA as a result of trade hostilities could hamper sheepmeat demand and see softer than forecast prices, wiping 100¢-150¢ off the annual average forecast prices to 2022.

Unlucky mutton succumbs to Friday 13th

The Eastern States Trade Lamb Indicator (ESTLI) continues to hold above the 800¢ level as the Victorian flush shows no sign of getting underway yet. However, a jump in sheep yardings in recent weeks has seen the National Mutton Indicator (NMI) take a bit of a slide.

Victorian weekly lamb yarding numbers are running close to the five-year trend currently, just shy of 30,000 head, Figure 1. Last season a drier winter and spring saw numbers present earlier but this year the season has been relatively good for Victorian producers so there will be the opportunity to hold onto lambs to get the most out of their pasture.

The ESTLI seasonal spring decline has stalled in recent weeks as the east coast weekly lamb yarding numbers hover around the 150,000 head region. It is the surge in Victorian lambs we see during September to November that is usually the catalyst for the ESTLI to reach its seasonal low so the next leg lower in price isn’t likely to come until the Victorian throughput starts to swell.

Turning to markets with elevated throughput, East coast sheep yarding levels have been surging of late to see recent figures extend beyond the upper boundary of the normal seasonal range – Figure 2. Above average yarding levels in NSW a key driver of the high east coast figures with weekly sheep throughput over the last month averaging 36% above the five-year trend in this state.

NSW mutton prices reacting accordingly this week posting a 6.4% drop to close at 542¢/kg cwt and dragging the NMI lower too. The NMI finishing the week 4.8% softer at 536¢/kg cwt. In contrast, the ESTLI managed a slight gain, up 1% to rest at 811¢/kg cwt – Figure 3.

Next week

All eyes on Victorian lamb throughput levels in the next few weeks as that will be the clue to the timing of the next dip lower in the ESTLI. Our projections put the ESTLI trough this spring at around the 730¢/kg level in early November.

For the superstitious among us don’t do anything risky today – its Friday the 13th after all… and stay clear of black cats, just for good measure.


Oodles of overseas wheat

The WASDE report was released overnight by the US Dept of Agriculture and it points to a continued global glut of wheat. Current conditions in Australia mean that what happens overseas will have little downward pressure on local pricing.

December CBOT wheat futures have risen A$10 to A$258 during the past week but are far cry from their recent highs in June of A$297. This is another great example of the seasonal volatility which can provide opportunities for producers. A grower selling back in June would be able to add A$39/mt to their overall wheat price return and still be participating in the strong basis levels being experienced.

The reality, however, is that what is happening in the rest of the world has very little impact upon our local pricing this year. The wholly expected downgrade to Australian wheat production by ABARES and poor weather forecast have raised concerns. At present, due to production risks, growers are unwilling to sell physical grain in decent volumes, causing consumers to switch to ASX contracts. This has seen ASX-CBOT basis rise to A$106 for the Dec/Jan contract.

The August WASDE report was released last night, which had little in the way of surprises. The USDA did follow ABARES by reducing the Australian wheat crop to 19mmt, and Kazakhstan to 11.5mmt. The reductions, however, were offset by the larger starting stocks and reduced consumptive demand. At present global wheat stocks at the end of this season are forecast at 286mmt (or 15 Australian crops).

The forecasters at the USDA continue to stand firm on the condition of the US corn crop, with acreage remaining unchanged and a slight reduction in yield. The reality will be known in a few weeks when the lie detectors get into the crop.

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Next week?:

It is important to remember that when it comes to prices in Australia, we are in a bubble. We are insulated from the rest of the world. At some point the break will come and we will produce a decent crop, and we will go back to an export dominated pricing environment.

It is important to consider the current high prices and think about price risk management for the times when prices are not inflated by strong domestic basis.

Top twenty Merino price falls since 1947

The August drop in greasy wool prices was substantial, with drought conditions increasing the sensitivity of farmers to lower wool prices at a time of high feed costs and high sheepmeat prices. This article takes a look at the average Merino micron price during the past seven decades and ranks the August price drop.

Greasy wool, like other commodities, is subject to big cyclical upturns in price and big cyclical downturns. The late rising cycle, which peaked in 2018, was boosted by falling supply. That factor remains, and looks likely to intensify, but seems to have been overridden by a combination of weaker retail demand and a supply chain upset by a tariff war between the USA and China.

Figure 1 shows a composite indicator which represents the average Merino micron price, from 1947 to last month in Australian cents per clean kg. The average Merino micron (as opposed to the average flock micron which is currently 1.1 microns broader) is also shown in Figure 1. The price is shown in nominal terms but even so the peaks of 1951, 1973 and 1988 stand out along with the 2018 peak.

Using this price series, the top 20 monthly price falls since 1947 have been calculated. These are shown in Table 1. The winner in terms of largest monthly price fall is February 1991 when the auctions recommenced after the failure of the Reserve Price Scheme (a salient reminder to anyone suggesting we should attempt to manipulate supply in order to manipulate price – if it was that easy). The collapse of the RPS and its immediate aftermath, have another three places of the top twenty monthly price falls.

The next major set of price falls come in a year best remembered for its peak – 1951. Five of the top twenty monthly price falls come from 1951 alone, after the market peaked in March 1951. That is a big effort.

The 1973 peak takes out four spots with two in 1973 and two more in 1974.

Following the 2002 price cycle, which was a classic post stockpile liquidation cycle, prices fell by 17% in May 2003. This ranks as tenth on the ladder.

Amongst these price falls August 2019 ranks ninth in proportional terms. In nominal terms, it is the largest fall but for a valid comparison to the earlier periods prices need to be adjusted for inflation.

The history of price falls after major cyclical price peaks suggests we could experience some more months (not necessarily staring away) of significant price falls. It is possible that the low and falling supply will help mitigate further big monthly falls. In 1988, supply was at peak levels while in 1951 supply was rising. In 1973, the greasy wool supply had fallen from recent levels but was still relatively high. The 2002 cycle was different as supply had fallen significantly in the previous decade.

Key points:

  • The August fall in Merino price ranks ninth in proportional monthly price falls during the past 70 years.
  • Following previous major price peaks, where supply was rising or was already high, there were a number of large month falls in the subsequent 1-2 years.
  • Supply is different in this cycle as it is low and falling, which may help reduce the number of big monthly price falls.

What does this mean?

The August price fall in the greasy wool market was not unusual when previous down cycles from major peaks are considered. Low supply remains an issue in the Australian greasy wool market, and it may show up by limiting the number of big monthly drops in price we experience.

Did the dead cat bounce?

The wool market had a small reprieve from the exhaustive losses that began in June. We did see a similar pause a fortnight ago, although reports from the auction floor suggest that this time around it might be the point of recovery as glimpses of fierce competition were observed on day two.

The Eastern Market Indicator (EMI) fell 32 cents on the first day of sale but recovered 22 cents on Thursday to end the week at 1,365 cents. The Au$ rose to US $0.682 at the weeks close.  As a result, the EMI in US$ terms actually saw a 9 cent gain for the week to finish at 931 US cents (Table 1).

In USD terms the Merino market has basically given up all its gains made since 2015, in the space of 7 months.

It was in Fremantle that AWEX reported a “noticeable change in the room” in the last hour of selling, with strong competition lifting prices. There was an overall loss across all fibres and the Western Market Indicator lost 33 cents on the week to close at 1,383 cents.

Most Merino types saw losses in the range of 10 to 30 cents. Crossbreds and Cardings managed to source some interest. 28 to 30 micron wool recorded gains of 5 to 10 cents, while the Cardings Indicators rose 10 to 30 cents in all three centres.

A significant proportion of sellers withdrew their offering prior to sale. A total of 21,694 bales were offered, of which 11.5% were passed in. Just 19,194 bales were sold for the week. Incredibly, in the seven weeks of this season, 81,731 bales fewer sold than the same period last year and 2018 was already a season of low supply to compare to.

The dollar value for the week was $29.32 million, for a combined value so far this season of $296.49 million.

Prices on the wool forwards market are currently sitting above the spot market, in a rarely seen case of contango. This provides further confidence that the physical market will pick up momentum in the coming weeks.

The week ahead

Was this week a case of a dead cat bounce or have we found the base is the question on everyone’s mind. Positive news in the planned resumption of US-China trade talks may have been the pinch of confidence that buyers needed.

Next week 27,923 bales are rostered on offer across Sydney, Melbourne and Fremantle. The following weeks 33,465 bales and 28,654 bales are expected.

Climate outlook and supply weigh on prices

Increasing cattle slaughter and yarding levels heading into early spring have seen cattle prices continue to soften this week for most categories. Further weighing on the general sentiment was the updated three-month rainfall outlook from the Bureau of Meteorology which points to a long dry period ahead for much of the country.

In the last fortnight, east coast cattle slaughter has lifted above the average seasonal pattern to trend 5% over the average for this time in the year (Figure 1). While we aren’t culling as many cattle in absolute terms than we did during 2015, as a percentage of the herd we are slaughtering the most cattle since then.

In 2015 cattle slaughter represented 32.9% of the herd. In the period from 2016 to 2018 the ratio of slaughter to herd size remained below 30%. However, if we stay on target to reach MLA’s forecast slaughter of 8.1 million head by the end of 2019 this will equate to around 31.1% of the herd, the highest since 2015.

East coast cattle throughput has lifted too in recent weeks, to see it break back out above the normal seasonal range expected for this time in the season (Figure 2). Elevated yardings has been most noticeable in Queensland and NSW over the last month with throughput running 28% and 22% above trend in these regions, respectively.

The weight of increased supply sent cattle prices southward along the east coast. The Eastern Young Cattle Indicator (EYCI) eased 0.8% to rest back below 500¢/kg cwt. East Coast Heavy Steers are feeling the pressure too, taking off 3.6% to close at 311¢/kg lwt. The bigger fall was reserved for East Coast Medium Steer though, with a 7.8% drop noted, to finish the week at 280¢/kg lwt.

In offshore markets, the 90CL frozen cow indicator received a boost this week as disruptions to the supply chain, caused by a fire destroying a large meat processor plant in the USA, sent the price of manufactured meat higher. The 90CL reached its highest level since September 2015 to finish the week at 715¢/kg CIF (Figure 3).

Next week

The short-term picture for domestic cattle prices remains unchanged from last week’s summary. The combination of robust offshore demand for beef and the tight local supply of quality finished cattle will keep prices supported on the heavier end of the spectrum.

Risk is back on the table in Australia

The Northern hemisphere is largely complete, with little in the way of uncertainty to move the markets. The focus is now on what happens locally. The risk is definitely back on the table in Australia.

In the past week, Chicago wheat futures have declined by A$7. The market overseas has largely been driven by concerns related to the corn crop in recent months. The delay in planting was expected to cause concerns with slow growth, however, benign weather has assisted. There was some scepticism of the numbers released by USDA in recent months, private crop forecasters have released figures which concur with the government forecaster estimates.

The concerns right now are related to the local crop. Overall Australia is heading towards a similar year to last, with poor growing conditions permeating.

In NSW & QLD the crop is largely finished, with very little potential even if the rainfall did land in coming months. The risk now is that there is inadequate moisture and little forecast to make a summer cropping program viable.

Jack Frost has reared his head again. In the last week, there have been reports of frost events which have caused damage in SA, VIC and WA. Although its not yet known how much damage these have caused, it remains a risk factor for the next month.

The market has started to react with the ASX gaining ground week on week. Due to production concerns there is limited growers selling at present, which has meant that consumers are switching to ASX in order to gain some cover.

In figure 1, we have plotted both the Jan 2020 & 2021 ASX wheat contract. Keep a close eye on the 2021 contract, as these both follow one another. Although we are having a second bad year (three for some), we have no idea what next season will bring. If the market rallies further, it is worthwhile taking some cover for the following season.

What does it mean/next week?:

The USDA will release the September WASDE report next week. The key focus will be on any amendments to US corn.

There are many agronomists advising to cut crops for hay throughout Victoria. It is important to think this through carefully as hay prices may not be as high as last season.

Supply and demand find equilibrium

The main ovine indicators have found some sort of support in the last fortnight, with the Eastern States Trade Lamb Indicator (ESTLI) spending a second week just above 800¢.  Mutton has maintained its position in the 99th percentile.

Figure 1 shows the ESTLI remaining steady this week at 803¢/kg cwt. State trade lamb indicators were also relatively steady. Victoria remains cheap, at 750¢, while NSW is at the premium, at 815¢/kg cwt. The quality of trade lambs coming out of NSW is likely better, with bits and pieces of old season lambs are still depressing Victorian yards.

Lamb slaughter continues to creep higher (Figure 2). Mutton supply remains tight, but is still steady.  It appears more slaughter space is opening up to accommodate the slow increase in lamb supply.

Mutton prices have spent their fifteenth week above 575¢ in NSW, with similar prices across the east coast. Mutton slaughter was last week 42% below the same time last year, although it has been lower as recently as 2016. It’s hard to see mutton supply increasing, perhaps if the dry spring continues, we’ll see another wave of mutton.

WA prices have found a base, with WA Trade Lambs and Mutton relatively steady at 652 and 435¢/kg cwt respectively. Yardings in the West this week were less than half the same time last year, and it’s not surprising with WA over the hooks rates at 725¢ for lambs and 475¢ for mutton.

Next week

Often the trend with lamb prices is for a rapid fall from the peak, followed by a more gradual decline as we move through spring. The market is set up nicely for this sort of trend, with lamb supply likely to keep increasing as sucker supplies start to come from the south.

There are more showers forecast for areas already going ok this week, but the dry in NSW will continue to creep south. Store lamb prices are likely to be the first to head lower if it does remain

A floor has been found

The new key support level of 800¢ has held this week for the Eastern States Trade Lamb Indicator (ESTLI).  Prices steadied in all states, but it was the sucker lambs coming out of NSW which were priced the best.  

After dropping like a stone for five weeks the ESTLI found some support this week, right on the 800¢ mark.  The ESTLI had lost 150¢ over the previous five weeks, which equates to $30/head for a 20kg lamb.

There is plenty of speculation around as to the level at which processors can make money.  They might not be there yet, as lamb supply remains tight, but it is not far away.

In NSW lamb supply doesn’t seem so tight.  Figure 2 shows that at the end of last week (23/8) NSW lamb slaughter had returned to five year average levels, and sits 22.5% above the same time last year.

Prices are better in NSW, with trade lambs at 816¢ versus 748¢ in Victoria.  Much of this could be put down to a larger proportion of sucker lambs in NSW, and more old lambs in Victoria.  But it does seem demand for slaughter lambs is stronger in NSW.

National Mutton prices lost a little ground this week, down 11¢ to finish at 574¢/kg cwt.  Mutton is, however, the only ovine indicator which is stronger than last year’s levels, and a lot stronger, sitting 101¢ above the same week last year.

Low volumes in WA saleyards throw up some interesting moves.  This week restocker lambs in WA were down 128¢ to 481¢/kg cwt, while heavy lambs were up 122¢ to 687¢.  The heavy lamb price looks realistic, but restocker lambs look very cheap. There should be a bounce next week.

What does it mean/next week?:

The short and medium term rain forecasts are depressing.  South West WA is the only area which is expected to enjoy somewhere near normal conditions.  South East SA and South West Vic are forecast for a reasonable September, which should ensure some sort of spring (figure 3).  However October and November have a smaller chance of median rainfall.

For prices the basic take from this is store lambs will get cheaper in the east, in a relative sense, more expensive in the west, while slaughter lambs might be hard to produce after Christmas.

Tit for tariff stripping confidence

There was no sign of confidence in the wool market this week. Rostered bales were withdrawn left right and centre and much of those that made the sale were passed in. With another week of US-China tariff announcements and severe price declines, uncertainty is at an all-time high. 

The Eastern Market Indicator (EMI) fell 122 cents for the week to 1,375 cents. In the last four weeks the EMI has fallen 22% to reach levels not seen since December 2016. The Au$ dropped to US $0.673 at the weeks close. The EMI in US$ terms fell 90 cents to 925 cents (Table 1). A low not seen in over three years in foreign terms.

Fremantle had some catching up to do after a week of no sales. The Western Market Indicator (WMI) lost 182 cents to finish on 1,416 cents.

Auctions saw no sign of any real buyer interest across all types. Despite the magnitude of the falls we have seen over such a short time frame there has been no sense of a base. The timing of the current fall in prices continues to match up the downturn that occurred in 2011.

Most microns suffered losses in the range of 100 to 170 cents. Crossbred wools were the least affected, holding ground with minor falls of 5 cents for 30-32 micron wool and 10 to 30 cents. The Merino Cardings Indicators dropped 90 to 135 cents in the east and a whopping 200 cents, with room for it to fall further still to the 780 to 800 cent range.

A total of 26,420 bales were offered for sale for the week but  34.8% Passed In at auction. This meant just 17,221 bales cleared to the trade. For the season to date we’ve seen 64,408 fewer bales sold than the same period in 2018-19.

The dollar value for the week was only $26.12 million, for a combined value so far this season of $267 million.

The week ahead

It’s a concern when high pass in rates, limited supply and a softer Australian dollar still can’t draw out any significant buyer interest. Another announcement last week of increasing tariffs by the US on Chinese imports appears to have been the overriding driver. Further US-China trade negotiations are scheduled for September and will no doubt impact the confidence of Chinese processors moving forward.

Across the three selling centres, 29,061 bales are rostered for sale next week. 32,641 bales and 35,215 bales are scheduled for the weeks following.