Month: April 2020

Offshore cattle rollercoaster causes concern

Posted on by Caitlin Dearden

Key Points

Key supply metrics in the domestic cattle markets appear to be returning to more normal levels and this helped cattle prices stabilize somewhat this week. However, the volatile nature of global cattle markets, particularly in the USA is some cause for concern over the longer term.

East coast cattle market yarding levels have continued to pull back toward the seasonal average pattern with throughput reported at 47,298 head, down from over 70,000 head the week prior. Yardings are now trending just 14% above the five-year average for early April – Figure 1.

East coast slaughter has returned to above-average levels, demonstrating that processors responded to retailer’s demand for product to cover off on the panic buying that was evident in supermarkets during March. Weekly slaughter has stabilized just above 140,000 head into early April, although the shorter trading weeks heading into the Easter break could see these figures drop in the near term – Figure 2.

The more normalized supply has seen cattle market prices stabilize this week. National Feeder Steers easing just 2¢ to close at 356¢/kg lwt. National Heavy Steer dipped 7¢ to 585¢/kg cwt while Medium Cow managed an 8¢ gain to 452¢/kg cwt – Figure 3.

While domestic markets showed more stability the same cannot be said of offshore markets. A key long-term lead indicator for Australian cattle prices is what is transpiring in the USA. The US Live Cattle Futures have been sold aggressively over the last fortnight to see them hit lows unseen in over a decade with the June 2020 contract hitting 76.60US¢/lb midweek. At the middle of January, it was trading at 120.00US¢/lb so the fall from grace on Covid19 concerns has been significant.

What does it mean/next week?

US beef prices have been downgraded on the back of growing concerns that Covid19 will impact heavily upon the US economy and flow through to significant declines in global economic growth.

While the tight season for supply domestically, improved climatic conditions and lower Australian dollar will provide a buffer for Australian beef producers in the short term a significantly reduced global beef price will act as a significant headwind into the medium to longer-term horizon.

 

It will start with mutton

Posted on by Caitlin Dearden

With no saleyard indicators available tracking lamb and mutton markets becomes a bit difficult.  Meat and Livestock Australia are reporting a Processors Lamb (CV-19) Indicator, and the trend is believable if the actual pricing is not.  Other evidence is supporting the idea we may have seen the bottom for a little while.

The indicators being produced in the CV-19 era lack available historical data, but you can find the pricing and charts here.  To the week ending Tuesday, the Processor Lamb (CV-19) was quoted at 943¢/kg cwt.  Anecdotal evidence and over-the-hooks prices suggest this is a great price.

The quote is very high due to the calculation of the indicator.  It is an average of the dollar per head value of all lambs sold in MLA saleyards to processors, divided by the five year average weight for the month.   The national average carcase weight for April is a bit over 19kgs.  This appears to be a bit light for lambs currently being sold to processors.  It is probably closer to 21 or 22kgs, giving an average price of 820-850¢/kg cwt.

The trend of prices is supported by moves in over the hooks prices this week.  Anecdotally we hear export processors have lifted rates from 750-780¢ up to 800¢, while supermarkets are in the mid-800¢ range.

Price movements this week could be due to markets closing for the Easter break, and processors chasing lambs for next week’s kill.  However, the panic sell may have also washed through the market, leaving supplies to drift back towards winter lows, but earlier than normal

Next Week.

If anything is going to benefit from China emerging from a COVID19 shutdown it will be mutton.  You can’t panic sell something you don’t have, and figure 1 shows how little the rush to sell lamb has translated into mutton. In fact, for the last couple of weeks sheep slaughter has been half last year’s levels.

Mutton exports to China also rallied in March (figure 2), and we can expect demand to continue to grow, although there simply won’t be enough to satisfy demand, and this is good for all ovine pricing.

Industry working together produces confidence

Posted on by Caitlin Dearden

The wool market is showing similar resilience to the stock market; despite the obvious unprecedented challenges it keeps going. Like the ASX, it has bad weeks and good weeks, in the context of the global uncertainty this was a good week.

The positive response by all in the industry to reducing the size of the offering, and the openness to review the selling system was a sign of all things good for wool, at times of adversity the industry can rise up.

Of the original roster of about 44,000 bales, 24.7% was withdrawn prior to sale by growers, this produced a reduced offering of 29,495 bales. The pass-in rate fell to 13.3% nationally leaving just 25,581 bales cleared to the trade. This was almost 5,000 more than last week.

The efforts by brokers was significant in ensuring that only genuine sellers put wool to market. This had the double whammy effect of reducing the offering and therefore increasing the demand on the lots in sale, as well as increasing buyer confidence as they realised that the wool on sale was more likely to be sold.

The other significant event was the inaugural Online Open-Cry (OOC) auction. In an initiative of the industry CV-19 working group to have in place contingency options, Zoom video conferencing was trialled with great success. This will provide an industry accepted option should CV-19 restrictions escalate to the point where auctions are cancelled.

The Eastern Market Indicator (EMI) improved 14 cents for the week to close at 1,301 cents. The Australian dollar remained stable at US$0.613, with the EMI in US terms was up 8 cents to 797 cents. The Western Market Indicator also had a positive week rising 31 cents to close at 1,384 cents.

The lift was across all Merino types with rises of 4 to 70 cents, with Cardings generally unchanged except in Melbourne where a 33 cent lift was observed.

Crossbred types failed to follow the general uplift losing 12 – 26 cents across the 26 – 30 MPGs on Melbourne, while a small offering in Sydney reported as slightly dearer.

The week ahead

The sale next week is the additional sale rostered in what is normally the Easter recess. This was scheduled to assist processors get wool into their pipelines and to provide another opportunity for growers to sell.

There is only 21,523 bales offered nationally with selling in all centres on Wednesday only.

We have an offal lot to talk about

Posted on by Caitlin Dearden

Key Points

  • Tallow and Meat & Bone meal (MBM) are by products of the slaughtering process.
  • MBM follows a similar pattern to Soybean meal, and tallow with palm and soy oil.
  • The correlations have been reducing in recent years, especially with MBM.
  • There may be a lag effect between MBM and soymeal.

Without sounding like the stereotypical Scotsman, I am a big fan of offal. It’s nutritious and is a good form of recycling. In this analysis, I examine two offal products from the livestock industry – tallow and meat & bone meal. This will provide some insights for livestock producers and those intensive livestock industries.

Let’s start with some definitions.

Tallow is rendered beef/sheep fat, which is solid at room temperature and can be stored for lengthy timeframes without decomposing. Tallow has a wide range of purposes including shop, candles and deep-frying.

Meat and bone meal (MBM) is produced from abattoir waste products which are not suitable for human consumption. The MBM is extensively used in animal feed, with around 650kmt of rendered meal produced in Australia.

Why are we talking about offal? Well, two reasons.

  1. The livestock price within Australia is part of a complex of different components which all add up to buyers capacity to pay. Offal is one of the many components.
  2. Many Mecardo subscribers are users of MBM or tallow.

There is a high degree of interchangeability between agricultural products, as in many cases they are replaceable with one another. For instance, I can buy a beef sausage or if unavailable I can replace with pork.

It is, therefore, a valuable exercise to examine which products are potential replacements for MBM or tallow, as they may provide opportunities to hedge price risk.

MBM and soymeal make an obvious bedfellow, as both are used as protein meals in animal feed. In figure 1 the monthly average price for MBM and soymeal is displayed in A$/mt. The two commodities tend to follow a similar pattern.

Tallow is rendered fat, and plant-based oils are a possible replacement. In figure 2, the monthly average price for tallow, soy oil and palm oil are displayed in A$/mt. All three commodities tend to follow a very similar trend. The closest relationship however seems to be between palm oil and tallow.

In my initial analysis, one of the first things that I noticed was that the correlations seem to be reducing over time.  During the period 2005-2010 the correlations between MBM/soymeal and tallow/palm-soy were extremely high (table 1).

Whilst tallow still correlates at a reasonable level, MBM has lost its correlation. An initial inspection of the data points towards a potential lag between a movement in soymeal flowing through to local MBM pricing.

It may be that further data analysis may yield promising results to improve the ability to use alternate products for price risk management purposes.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

MBM and Tallow are important co-products in the livestock industry, and equally so to intensive livestock producers.

It must be noted that the data used for MBM was monthly data supplied by MLA. If analysis daily pricing data, it may yield a different response.

For those users of Tallow/MBM, there may be options for hedging price risk using alternate futures contracts such as Soymeal or Palm/soyoil.

The main takeaway however is that both tallow and MBM tend to follow what is happening overseas with their respective ‘partner’ commodities.

 

Feeders pressuring restockers supporting

Posted on by Caitlin Dearden

Livestock producers are not flying blind, with price information still available, but it is a bit harder to get a snapshot of the market.  With cattle sold at ¢/kg rates in many markets, there are still averages available, which Meat and Livestock Australia (MLA) are calling the CV19 Indicators.

Cattle markets in general appeared to find some support this week.  With export values bouncing higher, and some good rain forecast for New South Wales and Victoria growers might have found some confidence to hold onto cattle.

Feeder cattle prices continued to slide this week, but as reported in last week’s analysis, this was driven by squeezing lotfeeder margins.  Still, looking at figure 1, cattle producers could be forgiven for continuing to sell.  At 350¢/kg lwt there have only been some rare occasions when feeder prices have been higher. The problem is the record was set just a month ago, and is still pretty fresh.

Restocker cattle prices remain strong, despite rising grain values.  A quick scroll through Auctionsplus showed light 200-250kg steers still making over 400¢/kg lwt.  We are back to more normal spreads, with ¢/kg rates fall as cattle get heavier, but there were plenty of sales between 350 and 400¢.

Cow values eased marginally this week, but have only given up 8.5% from the peak. Figure 2 shows that Cow prices are still better than most other times in the past 3 years.  Autumn normally sees cow supply improve, but it should be tighter this year than last.

Next week.

The rain forecast for the coming week should see cattle prices find support, but pressure will continue to come from tight processor and lotfeeder margins.  Grass finishers will continue to drive young cattle prices, with margins still good if feed is cheap.

There was some positive news on the export market front, but its manufacturing beef which usually does well in an economic downturn.  It is the higher value end of the market which is of concern.

Disease keeping wheat prices strong.

Posted on by Caitlin Dearden

Key Points

The market has been assisted in recent weeks by the high levels of uncertainty. This week the wheat price has fallen, albeit remains strong.

Let’s start this weeks’ commentary on a global level. The price of a December CBOT wheat contract has fallen dramatically in the past week. On the 25th March the contract was trading at A$352, it has now fallen to A$334. A fall of A$18 is considerable, however it has to be noted that it had risen A$51 during the preceding ten trading days (figure 1).

In Australian dollar terms the futures have lost some ground as our dollar increased from 55¢ to 60-62¢. A higher dollar reduces the price on an Australian denominated swap.

Fundamentally the wheat market is relatively bearish, however, the uncertainty caused by COVID-19 and the associated government interventions can add a huge amount of volatility. Here are a few reasons for movements lower in wheat:

  • There are deepening concerns related to the global economy. As unemployment rates around the developed world skyrocket there will be a slowdown.
  • Eqypt, traditionally the worlds’ largest wheat importer started a tender process then suddenly pulled the tender.
  • There has been speculation that Russia will introduce an export ban. At present this is proposed as a 7mmt export limit between April and June. In reality no more than 7mmt would likely be exported in this time frame.
  • Corn prices continue to edge lower as ethanol drops to record low levels in the US.
  • The FAO expect near record wheat production in 2020.

In reality, the market has bearish tones, and if it were not for COVID-19 the pricing levels would likely be substantially lower than they are at present.

Market plummets

Posted on by Caitlin Dearden

The stable market reported last week vanished quickly in sales this week as buyer confidence evaporated. Border closures in India & Italy, along with difficulties obtaining finance during this difficult time caused buyers to dramatically reduce buying limits. By weeks’ end, the EMI recorded its largest fall in percentage terms since May 2003.

Last week buyers reacted to concerns about supply and the risk that sales would be closed, this now appears a premature move. This week it was the concerns about consumer confidence and the lack of orders from retailers for next northern hemisphere winter coming forward.

The Eastern Market Indicator (EMI) lost 97 cents on the first day of selling, with a further 58 cents on the final day to close at 1,287 cents, a loss for the week of 155 cents. The Australian dollar contributed to the carnage, rising 2.09 US cents to be quoted on Thursday at US$0.613. This cushioned buyers to some degree, with the EMI in US terms down 65 cents to 789 cents.

The Western Market Indicator followed suit, retreating 159 cents to close at 1,353 cents.

Of the original roster, 16.6% was withdrawn prior to sale by growers, this produced a reduced offering compared to last week of 37,713 bales. The pass-in rate surged to 44.9% nationally leaving just 20,780 bales cleared to the trade. This was 16,000 fewer than last week.

Sales are running 200,000 bales behind the same period last season, or just shy of 6,000 bales per week fewer.

This week the total sales value was $28.33 million (down $27 Million on last week) or $1,363 per bale also down $140 per bale compared to last week.

Crossbred types were not spared, losing 100 cents plus across all indicators, despite growers passing-in more than 50% after significant volume was withdrawn pre-sale.

The strong crossbred types were friendless, with the 32 MPG slumping 109 cents to 300 cents, the lowest level since 2008. Cardings lost 88, 152 & 74 cents in Sydney, Melbourne and Fremantle respectively.

The week ahead

Sellers remain keen to get wool to sale with 44,216 bales listed for next week and all centres again selling on Tuesday & Wednesday only.

What happens next week in the market is anyone’s guess, confidence is shot from the buyer perspective, however, it is assured that the 44,000 bales currently rostered won’t all be sold.

Down cycle extended by pandemic

Posted on by Caitlin Dearden

After trending lower for 18 months, wool prices would normally start to look for reasons to stabilise. That appeared to be the case in late 2019, but the occurrence of a pandemic (COVID-19) has added a further leg to the existing cyclical downturn in wool prices. This article takes a look at the latest step down in price.

It is helpful, if somewhat occasionally confusing, to look at wool prices in both Australian and USD dollar terms. Usually, they tell the same story in terms of trends and cycles. In the current market the views vary in terms of value, with the US dollar value (percentile if you like) a lot lower than we see in Australian dollar terms.

With the price falls this week in place, wool prices in US dollar terms are plumbing five year lows. 2015 was the last major down cycle. Figure 1 shows the 17 MPG in Australian and US dollar terms from early 1997 to this week. The US dollar value is very close to its five year lows while the Australian dollar value for the 17 MPG is close to its 35th percentile for the past five years – still higher than for 35% of the past five years. For the 17 MPG we watch to see if new business comes into the market to hold it at or above US1000 cents. If not the next set of lows, reached in 20008 and the early part of the 2000s, around US 850 cents becomes the target.

Figure 2 repeats the exercise for the eastern 20 MPG. Note how the 20 MPG price in both currencies is remains well above the general price levels prior to 2011. In US dollar terms the 20 MPG is back to 2015 low levels. As with the 17 MPG, if support for the 20 MPG does not appear around US900 cents then the lows reached before 2011 become the next target.

Finally Figure 3 shows a similar analysis for the 28 MPG. In US dollar terms the 28 MPG looks particularly weak, as it has fallen below levels traded at during the past decade, and looks to be headed back down to levels last traded at in mid-2010. That implies further prices falls in the order o 8-10% to get the 28 MPG down to around US400 cents, before support turns up.

The unprecedented (at least in peace time) issue in this market is the lockdown of the supply chain at the retail level which is shrinking (quickly) the demand for greasy wool. We have the situation of a greasy wool market delivering wool for which demand has been slashed for an unknown period of time.

Key points:

  • In US dollar terms the market now looks for support for merino prices in US dollar terms around current levels which line up with 2015 lows.
  • The 28 MPG looks to have further downside to go, before finding support in US dollar terms.
  • The price falls since January can be seen as an extension of the pre-existing down cycle, stimulated by the pandemic.
  • It will take time for the next rising price cycle to develop, it will not be a quick process.

What does this mean?

The supply chain needs some wool but not the supply coming onto the market at present. It is unknown for how long this situation will persist. In the interim some parts of the supply chain will require wool so supply needs to be maintained but at lower volumes. While normal volumes are offered for sale, prices will continue to be under downward pressure.

Rush to offload eases amid supply chain uncertainty

Posted on by Caitlin Dearden

In an environment of limited price data and scant access to sheep/lamb indicators we are used to there is still the ability to see what is going on with throughput volume and slaughter. Producers respond to lower prices with a reduced offering at sale yards and meat works reluctant to increase their appetite as supply chains slow and export markets pause for Covid19.

East coast lamb and sheep yarding levels have eased in recent weeks as the rush to offload stock amidst the Covid19 uncertainty abates and prices continue to drift lower. Weekly lamb yarding dropped nearly 30%, while mutton yarding dipped 15% to see combined throughput finish just under 240,000 head.

Compared to the week prior the lamb and sheep is off 25% to rest 7% above the five-year trend for this time in the season – Figure 1. The Easter break often sees ovine throughput reach a seasonal trough during April so the downward trajectory in sale yard volumes is to be expected.

After a short blip up in east coast lamb and sheep slaughter volumes during mid-March weekly levels returned back to the lower end of the seasonal range with the combined lamb/sheep slaughter figures dropping 9% to finish near 380,000 head – Figure 2.

Lamb exporters have been finding it difficult to find cargo space on passenger flights heading overseas as airline traffic grounds to a halt and the supply chain backlog suggests processors are hesitant to increase slaughter activity.

MLA reported just over 20% of chilled lamb exports made its way overseas as air freight in 2019 (measured on a value basis) so it is not an insignificant amount that needs to be transported. Hopefully, the federal government’s announcement of a $170 million rescue package for delivery of export produce to our key export markets will provide the capacity to get sheep meat exports moving again.

What does it mean/next week?:

The continued uncertainty over export demand and supply chain issues saw OTH indicators replicate the sale yards this week as OTH trade lamb prices softened 3% to close at 788¢/kg cwt. OTH Heavy lamb followed the weakening trend too, shedding 2% to rest at 797¢/kg cwt – Figure 3.

It is hard to see lamb and sheep prices bucking the trend for a downward bias in the week leading up to the Easter break, particularly while the spectre of Covid19 looms over offshore sheepmeat demand and continues to play havoc with the export supply chain.

Kansas/Chicago – A spread trade strategy.

Posted on by Caitlin Dearden

Key Points

Kansas typically trades at a premium to Chicago. However, since 2018 Chicago has been running at a strong premium. In September we put forward a strategy for a spread trade to benefit from a mean reversal in values.

The two wheat contracts in the US are the Chicago soft red winter (SRW) wheat contract and the Kansas hard red winter (HRW) wheat contract. These are two distinct contracts with differing specifications, the SRW is low protein (9.5%) whereas the HRW is mid protein (11%).

Typically, Kansas would trade at a premium to Chicago wheat. However, the spread has changed to a strong Chicago premium over Kansas during 2018. During September the spreads reached highs of 28% over Kansas, and an average for the month of 22%. The market has since fallen to 15% (figure 1).

Those who followed this spread trade strategy have a return of 13%, not a bad return on investment in the current climate. However, the spread remains at 15% – still well above the long term average of -3%.

As China starts to ramp up purchases as part of their Phase 1 obligations and extra demand for milling wheat due to panic buying – there is still an opportunity for this spread to return to normal levels.

So as a refresher, here are some strategies on how to do this:

What simple trades can we do?

Long Kansas: It is possible to take out a straight futures contract for Kansas. In this scenario, we would purchase the Kansas futures contract for a forward period. In this scenario, we would be buying with the expectation of Kansas futures rising to meet Chicago.

There is however a risk that the Chicago contract could fall to meet Kansas, or worse that Kansas falls further.

Spread trade: If we only want exposure to the spread between the two contracts, we can trade both Chicago and Kanas.

Whilst buying Kansas, we would take an opposing contract by selling Chicago. If this trade was executed, there would be no interest in the underlying price, only the spread between the two contracts.

Here are few hypothetical scenarios of the end results (table 1):

  1. The spread increases: The trade will result in a loss.
  2. The spread returns to normal levels: The trade will result in a profit.
  3. The Spread remains the same: The trade will be neutral.

 

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

This provides an opportunity to participate in further potential falls in the spread between Kansas and Chicago.

As with all strategies, there are risks involved. It is worthwhile getting advice from your risk management consultant.