Month: October 2019

It’s a rollicking ride for wool

It concerns me that we are starting to get accustomed to the “roller-coaster” ride that has become the wool market. The wild fluctuations are causing sellers a headache, deciding whether to sell, pass lots in, withdraw or wait.

We can only guess what this is doing to the exporters and processors, as they manage supply requirements alongside the unpredictable price movements of recent months. It is hard to imagine anyone is pleased with the recent volatility and it must be damaging the wool markets reputation internationally.

The Eastern Market Indicator (EMI) rose 32 cents or 2.1% (after losing 97 cents or 6% last week), to close at 1543 cents. The Au$ also rose to US $0.675. This saw the EMI in US$ also improve 26 cents to end the week at 1041 cents.

The Fremantle sales also fared well, with the Western Market Indicator recovering 43 cents of the  92 cents loss of last week to close at 1,653 cents. Again a small offering selling just 6,245 bales with a PI rate of 13.1%, modest compared to last weeks 40.8%.

Sellers reacted in what has become their normal response by “selling” into the rising market. The National Pass-in (PI) rate was 7.6%, compared to 33.4% of last week. AWEX reported that in response to last weeks big falls, growers withdrew large volumes prior to sale. For the week 4,620  bales were withdrawn.

A decreased offering of 28,149 bales came forward, with 26,015 bales cleared to the trade (Figure 2). There have been 116,533 fewer bales sold this season compared to the same period last year. This is an average weekly gap of 9711 bales.

As reported this week by Andrew Woods on Mecardo (view here), fine Merino prices have been under pressure from increased supply during the past 12-18 months, which has resulted in premiums shrinking to very low levels. As the fibre diameter approaches year earlier levels and then starts to increase, the supply of fine wool will steady and then begin to fall. This will reduce downward pressure on fine wool premiums. The reverse process, to a certain extent, will apply to broad Merino wool.

The dollar value for the week was $45.83 million, for a combined value so far this season of $512.71 million, and a bale average value $1,730.

While last week the Cardings indicators held against the tide, this week they were cheaper across the board, averaging a fall of 20 cents. The news from the Crossbreds types was that the 26-28 MPG’s improved, except for poorly prepared clips which were cheaper or were passed-in.

Next week an offering of 40,056 bales are rostered.

To continue to predict the market movements in this climate is a bit like following the formline of “The Wallabies”, you don’t know what you will get until the day. The long decline in wool export volumes should begin to play on processor inventories (assuming sales are continuing), so we will go for the market to continue on an improving trend for next week.

Delayed planting leads to delayed harvest.

It’s roughly four weeks until harvest starts in earnest. We will then truly get a good indication of how much the crop has fallen since the ABARES report in September due to frost and continued dryness. In the US, delays to harvest are causing concerns with Jack Frost on his way to their northern crops.

Over the past week, the ASX market has traded marginally higher (+A$1.5). The trading range has been narrower than the Moffat Star hotel (see link), with a range of A$356.50 to A$358.50.  We are only four weeks away from the bulk of harvesting commencing, and volatility is likely to return when the crop starts to get reaped.

Whilst ASX has largely flatlined, the December wheat contract has gained some ground. Week on week the contract is up A$6.

A plethora of trade analysts are expecting both the corn and wheat balance sheet to be trimmed in the overnight WASDE* report. This has resulted in gains this week, which are welcome news for producers. It must be noted that trade analysts also predicted bearish reports in July, August & September.

Another factor contributing to the improving pricing scenario for US futures (Corn, wheat and beans) is forecasts of poor weather (see map). Our regular readers will be aware of the poor planting conditions which lead to delays. The delayed planting is leading to delayed reaping, which with cold weather on the way is at risk of being damaged by frost (and snow).

*This week’s weekly comment was written prior to the release of the WASDE. My thoughts on the report will be included in the Commodity Conversation podcast.

Next week:

We expect that Australian production will be revised down from 19mmt to 18mmt, to reflect the poorer conditions since the start of September.

It will be interesting to see if there is any damage caused by this cold snap in the northern states, as this could provide the impetus for a further increase in overseas futures.

Do we need a long moratorium?

The Department of Agriculture is taking submissions until October 28th that will help determine the future regulation of the live sheep export trade, including the proposed moratorium during the northern hemisphere summer. 

Analysis of seasonal live sheep mortality rates is presented in Figure 1. It shows the average monthly trend in mortality, the normal range (grey shaded zone) and an extreme boundary (upper and lower red dotted lines).

Traditionally the northern summer period (July to September) can see mortality peak. However, during the 2018 season the trade was suspended during this time resulting in no recorded mortalities from July to October. Interestingly, changes to shipping practices, such as reduced stocking densities, have seen much lower than average mortality rates outside the moratorium period for the later stages of 2018 and the first half of 2019.

Given that the usual peak in mortality occurs during the July to September period we assessed the impact on historic mortality rates for the 2005-2017 period if a moratorium had existed during these seasons.

Figure 2 highlights the rolling 12-month trend in mortality rates which shows the actual historic trend with the trade operating all year, unhindered (green line). Overlaid on the chart is the trend with July to September mortality rates excluded (orange line). Clearly, there is a reduction in mortality rates when the three-month moratorium exists. However, this moratorium comes at a cost to the viability of the industry, the supply chain and regional communities that rely on the trade.

To quantify the magnitude of the reduced mortality rates under the proposed moratorium, and to assess the potential impact of shorter moratorium periods we analysed the average long-term mortality figures based on a range of scenarios – Figure 3.

If you want to have your say on the impact of the moratorium make sure to submit a response to the Department of Agriculture discussion paper on the live sheep export trade here, before the 28th of October deadline.

What does it mean?

During the 2005 to 2017 period when the live sheep export trade operated without a moratorium the long-term average mortality rate was 0.80%, which equates to 400 sheep per shipment of 50,000 head.

Placing a moratorium only during August saw the long-term mortality rate decline to 0.75%, or 375 sheep out of a total of 50,000. A two-month moratorium, during July to August or August to September resulted in a 0.73% mortality rate, or 365 sheep. A three-month moratorium from July to September shows the mortality rate drop to 0.71%, which is the equivalent of 355 sheep out of a shipment of 50,000 head.

In terms of sheep survival, the difference between a one-month moratorium and a three-month moratorium is 20 sheep. The big question for our legislators is what is the cost of a three-month moratorium across the supply chain when you consider shearing teams of ten staff without work for a quarter of the year, small family business transport operators with 25% less work or feed suppliers with 30-40% less revenue?

Key points:

  • Changes to shipping practices during the 2018 season have seen live sheep export mortality rates reduce significantly, even accounting for the moratorium periods.
  • Long term average sheep mortality rates for the 2005-2017 period when no moratorium was in place were recorded at 0.80%, or 400 sheep out of a shipment of 50,000.
  • In terms of sheep survival, the difference between a one-month moratorium and a three-month moratorium is estimated at 20 sheep per 50,000 sent.

A new record for the 90CL

Cattle markets continued to track sideways this week, with very little in the way of major movements in most indicators.  We did see the Bureau of Meteorology (BOM) update their three month outlook yesterday, which is a little more promising, but not much, while the record for 90CL to the US was finally broken.

The 90CL indicator has been creeping towards a new record high over recent months, and it finally broke through last week.  In Aussie dollar terms the 90CL hit 750¢/kg swt, moving higher than the September 2015 high (figure 1).

The driver was values in US terms, with US buyers apparently unable to get product from New Zealand.  This put Australian processors in the driving seat, and able to negotiate values higher.

East Coast cattle slaughter didn’t seem to take a breather for either the AFL or NRL public holidays.  Cattle slaughter did fall slightly from the second last week in September, but it remains above most weeks since mid-June.  Cattle slaughter is well above this time last year, and looks like it will remain there.

Heavy slaughter continues to be counterbalanced by strong export demand.  Figure 2 shows the Eastern Young Cattle Indicator (EYCI) continues to move sideways, defying dry weather and plenty of cattle on the market.

It was this week last year the EYCI took off with some rainfall improving conditions.  It is hard to see a similar rally at this stage, with little rainfall on the short term forecast.

Next Week.

Record export beef prices are no doubt supportive of cattle prices, but it will take rain to see a significant rally.  Figure 3 shows the BOM 3 month outlook released yesterday.  There is a lot less brown than the last forecast, but key cattle areas are forecast to remain drier than normal.  But on the positive side, a 30% chance of above median rainfall means there is a 30% chance of a solid price rise in the next 3 months.

The market giveth, and the market taketh

The concerns we expressed last week about the weak finish to sales in Fremantle came to fruition, with the Melbourne and Sydney markets quickly adjusting down on the opening day.

This proved a catalyst for a loss of confidence and the market tracked lower wiping out last week’s gains and then some.

The Eastern Market Indicator (EMI) fell 97 cents or 6% (after lifting 67 cents or 4.2% last week), to close at 1,511 cents. The Au$ also eased fell slightly to US $0.672. This saw the EMI in US$ give up “only” 72 cents to end the week at 1,015 cents.

Western Australia had a tough selling week, selling just 4,300 out of 7,300 bales offered, (a PI rate of 40.8%) with the Western Market Indicator dropping by 92 cents to close at 1,610 cents.

Sellers reacted to the sharp sell-off with the National Pass-in (PI) rate increasing for the week to 33.4%, up by a massive 26% on last week. Again W.A. was a major influence, with almost 50% of fleece wool not selling, for a combined W.A. Pass-in rate of 40.8%.

An increased offering of 37,021 bales came forward, with 24,600 bales cleared to the trade (Figure 2). There have been 112,839 fewer bales sold this season compared to the same period last year. This is an average weekly gap of 10,258 bales.

The decline in Australian wool delivered to the world’s processors is alarming, looking at the same periods (July to current) for 2017, 2018 & this year we see 442k bales sold in 2017, followed by 383k last year & 270k this year to date. This is roughly a 40% decline over three years in bales sold to the trade. There is little doubt that demand for wool has suffered, with a myriad of possible reasons to explain this decline.

The dollar value for the week was $42.07 million, for a combined value so far this season of $466.88 million, and a bale average value $1,707.

Trying to find any shining lights this week is difficult, with the Cardings indicators up by an average of 4 cents, however, Crossbreds types were not spared and fell by 50 to 90 cents.

The week ahead

Next week a much-reduced offering of 34,174 bales are rostered.

AWEX notes that the volatile market has left “sellers uncertain”, I think it is fair to say the exporters are also feeling the concerns. The massive movements almost on a weekly basis are unprecedented; this will be making life difficult for exporters advising and negotiating buying orders.

Swine fever forces China sheepmeat demand lift

In the last month, African Swine Fever (ASF) has extended its reach to the Philippines, Korea and most disturbingly to Australian borders at Timor Leste. Additionally, official Chinese acknowledgment has surfaced regarding the scale of the impact on the Chinese pork industry. After the seasonal winter lull, sheepmeat exports from Australia to China have surged again as consumers scramble to fill a growing protein gap.

The first five months of 2019 saw significant growth in lamb consignments from Australia to China, peaking at 7,414 tonne swt in May. High prices for lamb and the winter lull in supply saw Chinese demand ease somewhat, although levels remained well above the normal seasonal range (Figure 1).

September saw a renewed surge in lamb export flows which took the monthly total to 6,141 tonnes swt. Year to date, the average monthly flow of lamb from Australia to China is trending 63% higher than the five-year average.

The jump in mutton flows from Australia to China were even more impressive over the September period, lifting 208% from the seasonal low posted for July (Figure 2). Year to date average monthly mutton exports are running 108% above the five-year average.

Combined, the flow of mutton and lamb to China this season is nearly at 100,000 tonne swt and represents 30% of our total export flows of sheepmeat this season (Figure 3). However, if we remain on current trajectories could see it reach to around 145,000 – 150,000 tonnes by the end of 2019.

What does it mean?

China has recently acknowledged that ASF has impacted their breeding herd with numbers down by around 35% this year. If their current infection and cull rate remains in place, they could see up to 200 million head of pigs taken out of their production system by the end of 2019. This would equate to a 40% loss in annual production, creating a protein deficit of up to 20 million tonne cwt.

Just for perspective, Australia’s annual production of beef is 2 million tonnes and our combined sheepmeat production is around 0.7 million tonnes, on a carcass weight basis. With no vaccine, ASF isn’t going to go away in a hurry from the Asian region. The disease will impact the global demand for protein for years to come.

For more information on ASF and the impact on the Australian agricultural environment contact us at [email protected] as we have detailed information available across multiple commodities and market sectors.

A tale of two yardings

It was the best of yardings, it was the worst of yardings… well not quite (and excuse the Dickens pun), but in recent weeks we have seen cattle yarding levels diverging between the East and West coast with the differing supply levels flowing through to the respective cattle price sentiment across most cattle types this week in each state.

East coast yarding levels have been easing in recent weeks, slipping 30% since mid-September to see it back below seasonal average levels for this time in the year – Figure 1. Cattle price across the eastern states has responded in kind to the lower volumes at the sale yard with most NLRS reported categories posting price gains this week, although the magnitude of the gains wasn’t excessive.

Feeder steers were one of the better performers with the east coast indicator lifting 6¢ on the week to close at 284¢/kg lwt. Feeder steer prices lifted across all states except for Victoria where prices took a bit of a tumble, down 20¢ to close at 254¢/kg lwt.

Across in the West cattle yardings have been demonstrating the opposite trend to the eastern states with throughput up 26% since mid-September and trend at the upper boundary of what is normal for this time in the season and 21% above the average seasonal trend – Figure 2.

The higher cattle volumes in WA is putting pressure on prices there this week with declines of 5¢-40¢ noted across most reported categories, except for WA Feeder Steers. The WA Light Bull indicator easing the most to see a 39¢ decline to 215¢/kg lwt. WA Feeder Steers the standout performer with a 26¢ gain to hit 325¢/kg lwt and placing it at the highest Feeder Steer indicator across all states.

In offshore markets, the 90CL frozen cow indicator continues to surge pushing above 740¢/kg CIF and just 4¢ shy of the record high achieved during September 2015 – Figure 3. Underpinning the elevated 90CL in the US is limited imported supplies as product from NZ and Australia continue to be diverted to China to satisfy the growing protein void associated with the spread of ASF and the impact on Chinese pork production.

Next week

Strong export prices and healthy beef processor margins should continue to support cattle prices domestically into the coming weeks. Short term rainfall forecasts show falls limited to eastern coastal regions in southern Queensland, eastern NSW and southern Victoria but won’t be enough to push cattle prices higher in any significant manner. Sideways price consolidation is expected for the near term.

No time like the future

The local market has risen in the last week, presenting strong prices for those who are fortunate enough to produce grain this year. In this week’s market comment, we look at ASX for 2021 and an opportunity for a Kansas-Chicago spread trade.

At a local level the ASX wheat futures market for Jan 2020 has risen by A$12 since last week. The volume traded however has declined with 17980mt versus 59200mt in the week prior. The continual poor outlook for the coming harvest is placing consumers on edge.

It is unlikely that prices will rise to the same levels as last year, as even though grain production is down the east coast is still likely to produce more than last year. On a year by year comparison the harvest contract for last year was trading at A$441 during the first week of October, this week it has traded at an average of A$365.

Whilst January 2020 has risen, so has red crop. The 2021 is now trading at A$336.50. Although this is at a discount to 2020, it is important to remember that this is a price for next harvest and although we have had a 2nd poor season, next year could (hopefully) be a good crop and this price may be a good starting point for marketing.

If we look globally the spread between Kansas and Chicago remains of interest. The Kansas contract typically trades close to or at a premium to Chicago. At present Kansas is trading at a 21% discount, since the turn of the decade Kansas has been trading at a 3% premium on average.

This may present an interesting opportunity to take out a spread trade with the view of the Kansas spread returning to more normal levels. This trade would be selling Chicago and buying Kansas for one of the forward months i.e. September 2020. Those taking this trade would only be exposed to the spread between the two commodities.

What does it mean/next week?:

In the next week the WASDE report will be released by the USDA. There have been private analysts releasing estimates for corn which are very strong. It will be interesting to see whether these are reflected in the WASDE.

Mutton back in favour

October has started out pretty well for sheep and lamb markets, with lambs finding solid support and mutton back on the rise. October is traditionally a time of strengthening supply, so we might be seeing another lift in demand.

The National Mutton Indicator (NMI) rise last week wasn’t a dead cat bounce, unless it’s one that has lasted two weeks. The NMI gained a further 24¢ this week to move back to 556¢/kg cwt (Figure 1). NSW and Victoria are leading the way, at 588¢ and 598¢/kg cwt respectively, while WA is dragging the chain, at 467¢.

In lamb markets, the Eastern States Trade Lamb Indicator (ESTLI) has spent a seventh week sitting on support at 800¢ (Figure 2). This week the ESTLI closed at 803¢/kg cwt, with NSW at a premium and other states in the 740-760¢ range. Again, WA is the cheapest lamb state, at just 630¢, a significant discount to the east coast.

Traditionally sheep and lamb supply rise sharply at this time of year. After a couple of weeks interrupted with public holidays, figure 3 shows we should see at least a 10% increase in combined sheep and lamb slaughter. We’ve seen this on the five year average, and in each of the last two years.

Theory says for lamb and mutton prices to remain at current levels demand will have to strengthen, and with the commentary on the African Swine Fever ramping up, there is every chance exporters will be able to pay current prices for more stock.

Next Week.

Still no rain on the forecast, so we can expect supplies to at least follow seasonal trends, and maybe increase faster than normal. This could see prices start heading towards seasonal lows, but there is plenty of kill space to fill, and demand seems to be strong at current prices.

Weekly Wool Forwards for week ending 4th October 2019

Back to hushed tones and whispers in the forwards market this week, as only two trades agreed.

One trade was dealt for 21 Micron wool and agreed at 1,680¢ for later this month. One trade was dealt for 28 Micron wool and agreed at 920¢ for November.

With the auction spot-price yoyo bouncing so frequently and significantly, it’s difficult to know at what level things will settle, though, looking over the longer term, at least some sideways movement is evident. With a slim auction market, a good picture of average agreed trading price in any MPG becomes difficult. In addition to that, the more producers open themselves to risk by not posting their price, the broader the average gap between post and settle, due to the uncertainty that comes with slim pickings.