Month: April 2020

Slaughter way back but prices steady

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Sheep and lamb markets are past the Easter break, but we’ll have to wait until next week to see how supply came through. The two Easter impacted weeks saw very low slaughter, and it will have picked up this week, with prices seemingly maintaining historically strong levels.

We can see in figure 1 that processors took the opportunity to cut back kills markedly over Easter.  In the week before Easter, there were 66,270 lambs killed per day (assuming a 5 day week).  The two weeks either side of Easter saw daily slaughter down to 36,046 head, that is 24% fewer lambs per day.

For mutton, the fall was even more marked, down 31% to just 10,306 head per day.  In winter last year we saw daily kills test these levels, but we haven’t seen things tighter at any other in recent memory.

Low slaughter rates are likely a combination of tight supply and weakening margins for export processors impacting demand. Usually, when supply tightens like this, prices rally strongly, but the last couple of weeks has seen the CV-19 Indicator sit at $214/head.

Restockers remain very active, with social media pictures illustrating the plentiful green grass in NSW.  Why wouldn’t you pay $158 (the CV-19 Indicator) for a store lamb, when grass is cheap and it can be turned out in July at $200+.

Mutton prices are benefitting from tight supply, and the weak slaughter is likely solely due to that.  At $175/head on average and over $200 for heavier sheep, there aren’t too many unproductive sheep which will survive the winter.

What does it mean/Next week

The tight supply is likely to continue which will support prices in the week ahead. There is still plenty of scope for re-stockers to build numbers on the available grass, and with the forecast for further rain, they are likely to be further encouraged.

Easy tiger – Grass Fever

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Key points:

After a few discussions this week with producers excited about the latest BOM rainfall forecast I thought it prudent to issue a bit of a cautionary note. As outlined in my comment last fortnight US beef markets are in a free fall and keen restockers need to take note of this offshore situation as grass fever now may cause a Corona inspired hangover next season.

Late last week the Bureau of Meteorology issued a great looking three-month rainfall outlook showing 60-75% chance of exceeding the median rainfall across much of the country thanks to warm waters in the Indian Ocean pushing moisture across the continent – Figure 1.

In the last week, I have talked to many keen producers with available feed they haven’t seen in a while considering what is the best cattle trade to put on. Despite offshore beef market uncertainty and the prospect of a deep global recession, it seems grass fever is beginning to take hold.

Since the start of January US Live cattle futures have declined 30% falling from 275 US¢/kg to trade under 190US¢/kg this week as processor shutdowns due to Coronavirus infection at a number of plants in the US have created a backlog of cattle. Lockdown restrictions have seen demand for beef ease significantly from the food service sector.

Despite the tight supply situation and improved seasonal outlook, the Australian cattle market can’t sit in its own isolation for long. The extreme selloff in US prices will create headwinds for Australian prices if the US market cannot rebound in the next few months.

Figure 2 highlights the annual price correlation between US Live cattle futures prices and the National Heavy Steer. Drought in Australia can cause the normal discount that exists between US and Aussie prices to widen, as it did in 2013-15 when we traded well below the line of best fit (dotted line on Figure 2). Similarly, wetter periods or tight domestic supply can see the discount narrow to par (like now) or even head into a premium, like in 2016-17.

However, over the longer-term cattle prices in Australia will revert towards the normal relationship to the US and gravitate back towards the line of best fit. The longer US Live cattle futures remain under 200US¢/kg the more likely the local price of Heavy Steers is going to ease. The most likely path in a scenario of continued weak US prices is to see the 2020-point drift to the left as outlined by the orange arrow in Figure 2.

What does it mean/next week?’

This means that if US prices stay depressed, we could see the National Heavy Steer move towards 175US¢/kg lwt (around 275AU¢/kg based on an Aussie dollar of 63.5US¢). Last month I presented on restocker markets for a Holmes & Sackett/MLA webinar where we released a grass-fed cattle trade matrix showing the theoretical payoff based on a 350kg purchase and a 550kg sale weight – Figure 3.

COVID-19 hadn’t impacted US beef prices fully at that stage and the A$ was being sold off aggressively which was insulating us from the weaker US cattle price moves. This meant that the annual average Heavy Steer forecast for 2021 was still sitting comfortably in the 325-350¢/kg lwt range and restockers could pay in excess of 420¢ lwt for cattle and still make a comfortable margin according to the matrix.

However,  the A$ has now rebounded and if US prices stay sub 200US¢/kg for an extended period this could see the forecast for Australian Heavy Steers in 2021 move closer to the 275¢ region which means that the margins restocker were hoping for could evaporate quickly – to the keen restockers out there… easy tiger!

 

Being negative is not always a bad thing

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Key Points

The extraordinary times continue with crude oil crash into negative territory. In this update, we look at wheat futures (overseas and locally) and a brief discussion on negative crude oil.

Wheat futures rose at the start of the week, as concerns mounted of dryness in Russia and concerns that they would curtail their exports. The market has since retreated, however, remains higher than last week. In Australian dollar terms, the December Chicago futures contract has traded between A$325 and A$319, with the market currently A$3 above last Friday.

At a local level, ASX futures have lost some ground since hitting its current year high two weeks ago (at a spot level). The spot market has rallied during March from A$348 to hit A$406 a fortnight ago, it has now fallen back to A$397.

The inverse between new crop and old crop remains high at A$67. As we move closer to new crop the spread between the two will converge, either new crop will rise to meet old crop or vice versa. As the crop develops and things become more assured, I’d put my money on old crop falling to meet new crop.

At present, the basis between ASX Jan 2021 and Chicago Dec 2020 futures is currently +A$10, which is incredibly low level compared to recent years.

The current environment makes for interesting developments. During this week, the crude oil market fell to -$37/barrel. This was always a theoretical possibility; however, I don’t think many actually thought they would see the day that you could be paid to receive oil.

This is a relatively common occurrence in some industries such as natural gas or electricity. In this instance, the oil ran into negative values, due to the expiry of the May contract. At this point, those who were long WTI futures did not want to take physical delivery. This meant those holding contracts were looking for buyers who were scant on the ground.

A market with more sellers than buyers and rapidly filling storages meant that the price fell into negative territory. This problem is likely to arise as we come to the expiry of the June contract and bodes well for continued low fuel pricing.

It has however meant that ethanol and ergo corn prices are under some pressure. As per our prior analysis, corn & wheat have a strong correlation. Nonetheless wheat has diverged somewhat over the past couple of months.

What does it mean/next week?:

What’s going to happen next week? In this environment who knows. Presently the wheat market is still supported at current levels, however, an uncertain environment brings uncertainty.

Apparel slowdown weighs on wool market

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It is now becoming clearer how the COVID-19 virus is impacting on the wool market. Bale clearance at auction is down with mills either not operating or at reduced capacity, finance of the wool pipeline more difficult, and retail demand uncertain or in lockdown impacting on garment orders.

There is an air of determination from the market, but an underlying nervousness pervades.

The market continued to contract this week with the Eastern Market Indicator (EMI) losing 20 cents for the week to close at 1,272 cents. The Australian dollar was weaker easing 1 cent to US$0.631, which pulled the EMI in US$ terms down 26 cents to 802 cents. The Western Market Indicator also came back 12 cents to close at 1,358 cents.

Turnover this week was $28.76 million at $1,357 per bale, taking the year to date value to $1,756 million.

The pass-in rate was lower at 15.2% nationally with 21,187 bales cleared to the trade. 17.5% of the original offering was withdrawn prior to sale easing the pressure on the market. Of note Sydney offered 4,696 bales selling just 4,067. This was the lowest Sydney offering since AWEX records began in1997/98 season. Season to date there have been on average 6,340 bales fewer sold per selling week compared to last season.

Coming in to the CV-19 crisis, retail sales of clothing in the major wool consuming countries were mixed.  As reported by NCWSBA, China consumption was the first to fall, down a massive 33% in January compared to year earlier figures. Apparelware is experiencing a worrying slowdown, with both online and offline sales for businesses the world over taking a major hit.

As consumers hold back on their spending, clothing brands of all shapes and sizes are forced to scale back production, and reimagine how they position themselves.

AWEX reported all Merino types were cheaper with the exception of the finest MPG’s and wool of better style and measurement which posted modest gains. The bulk of the Crossbred types were cheaper as were Cardings.

The week ahead

Next week a national total of 25,554 bales will be offered with Fremantle & Melbourne selling on Tuesday & Wednesday, while just 5,406 bales will be offered in Sydney on Wednesday only.

US turmoil creates a headwind for Aussie cattle

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Key points:

  • Since the start of the year, US Live Cattle futures have declined by 30% to trade below 200US¢/kg on a live weight basis this week.
  • The spread discount between Australian Heavy Steer prices and US Live Cattle futures has narrowed from a 28% discount in January to a 2% discount this month.
  • A recovering AUD has placed further pressure on domestic Heavy Steer prices and continued weakness in US cattle markets could see local prices ease toward 275¢/kg lwt in the coming months.

The Australian cattle market can march to its own drumbeat from time to time, particularly when local climatic factors and the domestic supply situation override offshore influences. However, there is only so far they can deviate and usually the aberrations from the global situation are short-lived.

Since January US Live Cattle futures have been sold off aggressively falling nearly 30% from 275US¢/kg to trade just under 195US¢/kg this week, on a live weight basis. During the early phase of the price collapse in US Live Cattle futures, the Australian dollar was also being sold off which acted as an insulator for Australian cattle producers.

The lower value of the Australian dollar meant that domestic cattle prices didn’t have to come under pressure to remain competitive. However, in the last month the AUD has regained some strength moving from the mid 50US¢ level to the mid 60US¢ level, placing pressure on domestic cattle prices as the US Live Futures market continues to head south.

Figure 1 highlights the relationship between US Live Cattle futures and the National Heavy Steer Indicator in US¢/kg terms and it shows that with the ongoing weakness in US cattle markets and a recovery in the A$ the normal discount that Australian cattle markets have to the US has come under significant pressure.

Indeed, on a monthly basis, the National Heavy Steer to US Live Cattle futures price spread has narrowed from a 28% discount in January to a 2% discount this month (Figure 2). Analysis of the historic spread behaviour shows that since 1998 the monthly average spread has been a 33% discount, with the spread trading between a 20% to 46% discount for 70% of the time. Furthermore, movements beyond a 7% to 59% discount range would be considered extreme.

Figure 3 demonstrates the annual average price correlation between US Live Cattle futures and the National Heavy Steer in US¢/kg terms. Dry climatic conditions in Australia can see local prices deviate from the normal relationship (as indicated by the line of best fit between the annual data points) such as that which occurred during the 2013-15 seasons.

Similarly, wetter conditions or times of tight supply in Australia can see the local prices move towards a narrow discount spread or sometimes even to a premium spread to the US prices for a short period of time. This occurred most recently during the 2016/17 seasons and is also present during the current season.

What does it mean?  

As of this week, US Live Cattle futures are trading below 200US¢/kg. However, as an annual average they are sitting at 245US¢/kg. If US Live Cattle futures remain sub 200US¢/kg for an extended period this will begin to see the annual average drift leftward (as per the path of the orange arrow (Figure 3).

Furthermore, if the AUD continues to probe higher this will add further pressure to domestic heavy steer prices. In USD terms the Australian National Heavy Steer is sitting at 192US¢/kg lwt. US Live Cattle futures remaining under 200US¢ could see it move closer to 175US¢, which equates to around 275¢/kg lwt in Aussie dollar terms based on an A$ at 64US¢.

 

Volatility and uncertainty but supply remains the driver.

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Easter usually leads to plenty of variation in saleyard indicators. With some sales not running due to the break and processors closing for some extra days, it is hard to get a handle on pricing. This week we saw some falls for slaughter cattle, but feeders found some support.

Figure 1 shows cattle slaughter took a dive last week and is likely to have spent this week at similar levels. Cattle slaughter is not as low as Easter last year but did see its lowest week for 2020.  It is probably not bad timing for processors, who are likely still seeing some pretty significant demand swings.

This week the improving Aussie dollar saw export prices in our terms weaken. The 90CL Frozen Cow Indicator was steady in US terms, but 16¢ lower in our terms at 748¢/kg swt.  Figure 2 shows the 90CL is still well above the lows hit back in March and apart from the spike late last year, it has never been better.

There are positive signs for export beef demand from the US.  According to The Steiner Consulting Group, cattle slaughter in the US has fallen heavily with a COVID-19 outbreak at two plants putting production on hold.  Closures are expected to be short term, but they will put pressure on beef supplies while seeing cattle prices fall.

Locally, feeder cattle prices rallied this week, with the National Indicator up 12¢ to 368¢/kg lwt.  Tight supply remains the driver of the store cattle market.

Heavy Steers and Cows were down, according to National Indicators, but this might have been due to intermittent sales. We will know more next week.

Next Week

There are plenty of reasons for cattle prices to fall, with shifting demand, a volatile currency and rising wheat prices all applying pressure. However, the main driver, for the time being, remains supply, which is unlikely to improve until the spring.

 

Smallest offering since 2009

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Originally this week was scheduled as the Easter recess, however, a decision was made to provide an additional selling opportunity for growers on the back of the malware attack earlier. After brokers encouraged clients only to offer if they were genuine sellers, 15.5% of the original roster was withdrawn resulting in just 18,097 bales making it to the auction.

While the early sales of the one day auction (Wednesday) were solid, by the end of the day the market had retreated, with Fremantle, as the last to sell, most affected. This resulted in just 3,113 bales of the 4,508 offered in W.A. selling, with a pass-in rate of 30.9%

The pass-in rate of 23% nationally meant that of the bales offered, just 13,917 bales cleared to the trade. This was the lowest offering since June 2009. Season to date there have been 228,000 bales fewer sold, down on average 6,340 per selling week compared to last season.

The Eastern Market Indicator (EMI) lost 9 cents for the week to close at 1,292 cents. The Australian dollar was strong, lifting almost 3 cents to US$0.641, which pushed the EMI in US$ terms up 31 cents to 828 cents. The Western Market Indicator also eased losing 14 cents to close at 1,370 cents. Turnover this week was $19.67 million at $1,413 per bale, taking the year to date value to $1,728 million.

Melbourne finer Merino types all posted rises, however, the EMI was dragged down by falls in the X Bred sections where falls of between 20 – 40 cents were observed. Cardings eased slightly except in Melbourne where a 30 cent fall gave back the improvement of last week.

The week ahead

Next week all centres are selling on Tuesday & Wednesday with 31,517 bales on offer. A stronger US/Aus$ rate is not helpful, but exporters appear to have sufficient orders to cope with the reduced offerings.

Easter supply lull unable to inspire price lift

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Lamb and sheep yarding and slaughter volumes entered into their Easter lull but the reduced supply was unable to provide support to prices. All MLA reported CV19 lamb and sheep indicators softened slightly, with the processor lamb category recording the biggest drop.

A reduced trading week either side of the Easter break has seen east coast sheep and lamb yarding levels decline to their usual seasonal trough dipping to 86,395 head – Figure 1. During the Easter lull in 2019 the combined lamb and sheep yarding levels were only marginally softer at 85,517 head but the distribution of lamb to sheep is quite different. Compared to last Easter the lamb yarding level this season is 8% softer while sheep yarding is 30% higher.

It is a similar picture of low supply for combined lamb and sheep slaughter too, which is unsurprising given the reduced shifts meat works are operating over the Easter holidays – Figure 2. Slaughter levels recorded 314,904 processed as a 2020 Easter trough compared to 314,242 in 2019.

However, slaughter volumes are well below the five-year average Easter pattern at around 420,000 head. Indeed, current levels are 25% below the mid-winter period when slaughter usually reaches its lowest point in the season, according to the five-year trend pattern. Given the subdued processor activity it is unsurprising to see that the CV19 processor lamb indicator eased the most this week falling 4% to close at $208 per head – Figure 3.

In some good news for producers this week the BOM released its three month climate outlook yesterday showing they are expecting a 60-75% chance of a wetter than average winter period for most of the country. Furthermore, some positive signs that the global sheepmeat export demand is recovering surfaced this week as news of an emergency shipment of 135 tonnes of sheepmeat from Victoria to the Middle East was reported.

What does it mean/next week?:

Covid19’s uncertain impact on global economic growth remains a threat to sheepmeat demand and will likely create ongoing headwinds for prices this season. However, on the plus side for producers the climate forecast is shaping up nicely for Winter and supply remains at record lows.

We probably won’t see the $9-10 per kilo carcass weight prices for trade lamb we had originally forecast for this season during Winter, but equally we are unlikely to see a price crash sub $5-6/kg cwt.

A lot can happen in one month.

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Key Points

A month is a long time in markets. A lot can happen, and opportunities can be lost or gained if you wait a month before making a decision. In this weekly update, we take a look at what has happened over the past month.

As discussed in yesterday’s analysis article volatility has increased in recent months to higher than average levels for this time of year (See: More months of uncertainty).

Chicago wheat futures have been in a steady decline since last Thursday, in US terms the market has fallen from US$209/mt to A$200/mt for the December contract. During the same period, the A$ has advanced to trading at a range of 63-64¢. This has resulted in December wheat futures falling from A$329/mt to A$316/mt in the same timeframe.

In the past month, we have seen a large fall in wheat futures levels in part due to a rising Aussie dollar and a depreciating CBOT. During the week commencing the 16th March, wheat futures rose from A$310 to A$348, and continued through the next week to reach a high of A$355 (figure 1).

The market has given back most of the gains since that point. There are many farmers who benefitted from this rally in pricing levels by taking out wheat swaps for next harvest.

It is important to develop a marketing strategy which will take the emotion out of selling decisions, this will help gain a higher overall price.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

Parts of Europe and the black sea nations have been dry. However, the next fortnight is expected to see improved rainfall.

Seeding has started in Australia, and will likely ramp up towards the traditional ANZAC day start. The majority of farmers are quietly confident of the conditions.

Easter bear?

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Key Points

The USDA released their April world supply and demand estimates report overnight. Although a bearish report, the market largely ignored the data and moved higher.

The USDA report was bearish, and normally that would have led to a fall in pricing however we live in different times. The headline numbers of the report show that global wheat production is set to hit record high levels at 764mmt, a rise of 33mt on last year. To put this in perspective, this is more than Australia’s record crop in 2016.

In addition, global consumption is reduced by 5mmt, leading to end stocks being increased to a record-breaking 293mmt. As discussed in previous updates on the USDA end stocks information greater than 50% of stocks are held in China and likely inaccessible to the wider market.

After two days of deteriorating CBOT values, the market gained US$2. In Australian dollar terms however, the market has lost ground, down A$11 since the end of last week. This is as a result of the Australian dollar regaining a lot of ground and currently trading at 63¢.

These next four weeks will provide some more clarity on the northern hemisphere crop, whether it will stay large or fall back. The one thing to be certain of is that historically the period late April to July has plenty of excitement.

Yesterday the Mecardo analysts produced a podcast discussing what is happening in the agricultural markets at present.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

Volatility will prevail. There is a high degree of uncertainty in the marketplace caused by COVID-19, however, the fundamentals always prevail.

At present Australia is on track to produce a good crop, the rest of the world is likely to follow. It is time to consider your risk management strategies.