Month: May 2020

A sharper rebuild at cost of supply

Posted on by Caitlin Dearden

Key Points

  • MLA’s Cattle Industry Projections update shows even tighter supply in the coming years.
  • The herd rebuild is expected to be a bit quicker with better seasonal conditions.
  • Tight supply should support prices, but demand is highly uncertain.

Meat & Livestock Australia (MLA) have updated their cattle industry projections for April, with the key factor being going from hoping for a break in the drought, to actually receiving some rain. The updated outlook suggests a faster herd rebuild, but it’s going to cost in terms of cattle supply for the next.

The cattle herd is still expected to set an unwanted record on the 30th of June, but now the forecast is set to be slightly higher than previously thought. The updated Cattle Industry projections peg the herd mid-year at 24.8 million head.

Figure 1 shows the herd projection for this year is 100,000 head higher than the January projections. While this is minuscule in the scheme of things, it is a reflection of tighter slaughter in the first quarter of 2020.

Out to 2023, the improved seasonal conditions have seen herd levels revised from 1.8 to 2.5% higher. Despite the higher herd projections, we are still set for a 27 year low for the herd this year. It is also expected to take until 2022 to get back to herd levels of last year, and even in 2023 it won’t quite be back to 27 million head.

To achieve a faster rebuild of the herd, there have to be fewer cattle going to slaughter.  MLA’s have adjusted cattle slaughter down in all projection years except 2023. The biggest declines are expected this year and next, with projected slaughter down 4.2% (Figure 2).  This year cattle slaughter is expected to be 6.9 million head, a 24 year low. A new low water mark is forecast for 2023, with 6.8 million head the lowest since 1989.

Cattle slaughter is expected to remain relatively tight in 2022, still under 7.5 million head, and only returning to the ‘normal’ levels of most of the 2000-2010 period in 2023. Figure 2 clearly shows the boom and bust cycles for the last 10 years, with droughts and strong slaughter followed by wetter periods and very tight supply.

What does this mean?

It should be relatively comforting for cattle producers that while we are entering a period of uncertainty in regards to demand, tight supply will at least offer some support for cattle prices.  At what level is something we’ll look at next week.

There is even some time for demand to recover, and help values rise before supply will be back near what could be considered ‘average’ levels.

 

Barley investigation due soon

Posted on by Caitlin Dearden

Key Points

In this week’s market comment we take a look at the new-old crop spread, the discount for barley and the Chinese anti-dumping investigation.

At a local level, the new crop ASX lost A$1 during the past week, however, old crop suffered with the spot contract falling A$11 (Figure 1). In recent articles, we’ve discussed that the very strong premium for old crop would likely come under pressure.

The premium is in place due to the demand caused by diminished supplies in 2019/20, however, this will erode as we approach new crop. There may be times when the old crop pricing spikes up when large consumers attempt to cover requirements. It is important to realise that new and old crop are quite different beasts – do not base your expectations of price on the current year drought premium.

Barley has followed the rest of the market downwards in recent weeks. This has caused the spread between ASW and F1 to rise to high levels. As an example, the Geelong spread is A$79. This has caused more domestic consumers to increase their inclusion of barley in rations.

The barley market is likely to be quite interesting in the coming weeks. The long-awaited result of the Chinese allegations of barley dumping during 2016 is due by the 20th of May.

As many will remember, 2016 was a big production year and prices followed their expected course. If China does find Australia ‘guilty’ then it could lead to tariffs being put in place which would potentially make Australian barley uncompetitive versus other origins (or other grains).

At present, it is difficult to see which way the result will go. In light of recent diplomatic woes between the two nations (see here), it wouldn’t be a huge surprise to see this decision going against Australia. However, that is just speculation.

What does it mean/next week?:

Next week will see the WASDE report released. This will give some insights into the expectations for the coming crop.

We will likely see reduced demand at least for corn due to the lower ethanol production in the US.

The trend (down) continues

Posted on by Caitlin Dearden

It is difficult reporting weekly on the continuing demise of the wool market, with price decline now seemingly a weekly occurrence. AWEX noted that at least the market has been able to continue “with all industry stakeholders working together to ensure that wool auctions continue”.

While this is certainly a good effort, allowing producers to get wool to market and exporters to buy, it is small consolation. In the ten selling weeks since the beginning of March, the EMI has fallen 390¢.

The Eastern Market Indicator (EMI) fell by 55¢ for this week to close at 1,170¢, its lowest close since 2015. The Australian dollar was down for the week by 1.02¢ to US$0.643, which caused the EMI in US$ terms to come off 48 cents to 753¢. This puts the US$ EMI at its lowest point in almost 10 years. The Western Market Indicator was broadly in line with the east, falling 64¢ to close at 1,246¢.

Turnover this week was $24.83 million at $1,201 per bale, taking the year to date value to $1,804 million. For contrast, in the same week last year the 28,500 bales sold returned $58.3 million at an average of $2,039 per bale. The year on year comparison of sales value is down a massive $1.1 billion impacting not only on growers incomes but on all sectors of the industry.

Despite the weaker market, the pass-in rate was lower this week at 18.5%, resulting in 20,661 bales clearing, 3,643 more than last week. Again a large withdrawal was evident with 11.8% of the original offering withdrawn prior to sale. Season to date there has been on average 27,990 bales sold per selling week. This is well down on the 32,800 average for last season.

Again the falls were across the board, with Merino types losing 30 – 87¢ and Cardings down on average 27 to 44¢. The note from the X bred section was again that poorly prepared clips we difficult to find buyer support.

The week ahead

Next week’s national offering increases slightly to 25,660 bales. AWEX report that due to limited quantities Sydney and Fremantle both will have one-day sales, Sydney selling Tuesday and Fremantle selling Wednesday, this is a move designed to avoid Melbourne selling in isolation.

Cedar shutdown impacts mutton not lamb

Posted on by Caitlin Dearden

The big news in sheep and lamb markets this week was the two week shutdown of Cedar Meats, which has had an impact on sheep prices, if not lambs.  Support for prices has been robust, with restocker demand and tight supply continuing to provide support.

Cedar Meats have the capacity to slaughter 10,000 sheep, lambs, goats or calves per day, but it is unlikely they have been running at full capacity in recent times.  We will have to wait until Tuesday to see how slaughter has been impacted.

We did get an inkling from the data for the week ending the 1st May, with the Friday closure of Cedar helping east coast lamb and sheep slaughter decline 7% and 16% respectively (figure 1).

Weaker competition at saleyards didn’t impact lamb prices, which moved sideways, the CV-19 Indicators down just $3 to $199/head.  Mutton markets did feel the impact of weaker demand, falling $14 or 6%.  There was some hope late in the week, however, with Wagga reporting strong demand for sheep, as seen in recent weeks.

Domestic markets and restocker demand still seem to be propping up lamb markets.  In the export-focused WA market, over the hooks prices are quoted at 750¢, while on the east coast they are 790-810¢.  The National average of MLA’s Trade Lamb Over the hooks Indicators has been tracking sideways (figure 2).  It has been way behind saleyards, but they have come back closer now.

Export data for April was released this week, and as expected, Chinese lamb demand is bouncing back, while the US was down.  For mutton, almost all markets were down, but like lamb, the lack of supply means it has to be down.  More on exports next week

Next week.

There is plenty of space slaughter capacity in the system at the moment, so there shouldn’t be any backlog from the Cedar shutdown, and we might even see mutton bounce when they are back in the market.

It will be interesting to see if ovine slaughter can fall any further, we are at last year’s mid-winter levels now.  For producers, it’s a bit depressing to think where prices might be had COVID-19 not taken hold, but we can just be thankful we’re not in the position of US cattle and hog producers.

A positive result (and not for Covid19)

Posted on by Caitlin Dearden

Improved finished cattle prices were noted this week as supply metrics begin to normalize, particularly for east coast cattle slaughter. Department of Agriculture, Water and Environment beef trade statistics for April show Chinese demand for Aussie beef recovering strongly too as an added positive sign for producers.

East coast cattle yarding levels have held firm at around 45,000 head for the final week of April and the first week of May, indicating some stability is returning to the market after some wild swings pre-Easter (Figure 1).

Weekly throughput remains 20% below the five-year trend but is within the normal range for this time in the season, as represented by the grey shaded 70% range zone. In an interesting dynamic between state yarding levels, Queensland is running 25% above the five-year trend as of early May. However, NSW cattle yarding is well below normal at 53% under trend. This is contributing to the lower than average total east coast figures and is perhaps a sign of the appetite in NSW from producers to restock.

East coast cattle slaughter numbers have returned closer to the five-year trend, to sit just 5% below with around 135,000 head processed in the first week of May (Figure 2). Since the Easter lull, slaughter volumes have increased 27% and the return to relatively normal operations have seen demand pick up for finished cattle this week. The National Heavy Steer (CV19) indicator has lifted 4.5% since the end of April to close at 320¢/kg lwt (as at 6th May).

In further promising signs for beef producers, beef export flows were above the five year average pattern in April (Figure 3). While US flows remain very subdued, a strong increase in exports to China is a good sign that their economy is getting back on track post their COVID-19 shutdown. There will be more to come on this in the Mecardo analysis piece next week.

Next week?

Tight supply and a favourable rainfall forecast continue to favour cattle producers and provide underlying support to prices. While there are headwinds in the form of a disrupted US/global economy, low global cattle prices, and a strengthening Australian dollar, the sign of a re-emerging China should tip the balance towards a more optimistic outlook for prices, at least for the short term.

Good morning Vietnam.

Posted on by Caitlin Dearden

Key points:

  • The monthly flow of Australian live cattle exports for the first quarter of 2020 are running 28% above the average seasonal trend.
  • Flows to Indonesia during March dropped to nearly 10% below their normal seasonal levels, according to the five-year average trend.
  • Exports to Vietnam during the January to March period have averaged 189% ahead of the five-year trend, lifting market share of export volumes to Vietnam markedly in 2020.

Live cattle export flows have been strong for the first quarter of 2020, despite Covid-19 disruptions. Although there has been a noticeable shift in market share with Indonesia giving up ground while Vietnamese demand expands.

Figure 1 highlights the total flow of live export cattle for the start of the 2020 season compared to last season and the five-year trend. Average monthly flows for the first quarter of the year are running 28% above the seasonal trend with volumes near the upper end of what is considered “normal” for this time in the year (as outlined by the grey shaded 70% range).

After a strong result for February at 96,174 head volumes have eased 14% in March to record 82,468 cattle sent with flows to Indonesia nearly 10% below their normal seasonal levels, according to the five-year average trend for March.

However, total flow volumes were boosted by stronger than average exports to both China and Vietnam. Over the first quarter of 2020 live cattle exports from Australia to China have averaged 73% ahead of the five-year seasonal pattern.

However, the real growth has come from Vietnam as flows over the January to March period have averaged 189% ahead of the five-year trend – Figure 2. Indeed, the growth in the Australian live cattle trade to Vietnam has been robust enough to see a significant lift in market share this season.

During the 2015 to 2019 seasons Vietnamese market share averaged 20%. This has lifted to 34.5% during the first quarter of 2020 and has come at the expense of flows to Indonesia, currently in the grips of a Covid-19 pandemic – Figure 3. Indonesian market share has averaged 53% over the 2015 to 2019 seasons and has dipped to 39% for the first quarter of 2020.

What does it mean?

At Mecardo we have regularly commented upon the fine work Meat and Livestock Australia have achieved in our red meat export space for chilled and frozen product helping to diversify the reach of the sector and creating high value markets for Australian producers across a range of offshore destinations.

Diversification of a customer base is a useful way to bring increased stability to an industry with less reliance on one key destination. It is comforting to see the volume of exports of live cattle continuing to expand in Vietnam, particularly at a time of significant global uncertainty.

The important role of wet markets has been discussed in the rural press recently. They perform a crucial role in food security and access to meat protein for developing countries where access to cold store in home and reliable electricity isn’t like we enjoy in the first world.

Growing diversity in the live export sector continues to support food security and wet markets in our key trading partner’s countries and is a valuable segment of the broader Australian red meat sector.

 

The numbers deteriorate

Posted on by Caitlin Dearden

It is now almost a weekly theme for the wool market to post lower prices, with high pass-in rates and pre-sale seller withdrawals contributing to low volumes purchased by exporters. Much of the blame this week can be sheeted home to the strong Au$ however this was no consolation for growers who again witnessed a tough market to sell in.

For April only 140,386 bales were offered with just 77,703 bales sold after 18.6% of the offering was withdrawn before sale and a further 19.0% passed in. For April the EMI averaged 1273 cents. Over the same period last year 143,000 bales were sold to the trade with the EMI averaging 1946 cents.

As a result of the depressed market there is a growing stock of wool in broker stores as reported by Andrew Woods on Mecardo, this is estimated to now be up to 11% of annual production.

The Eastern Market Indicator (EMI) gave up 47 cents for the week to close at 1,225 cents. The Australian dollar was quite strong rising by 2.26 cents to US$0.663, which supported the EMI in US$ terms, down just 2 cents to 800 cents. The Western Market Indicator also came back 48 cents to close at 1,310 cents.

Turnover this week was $21.92 million at $1,288 per bale, taking the year to date value to $1,778 million.

The pass-in rate was higher at 25.7% nationally with 17,018 bales cleared to the trade. 10.3% of the original offering was withdrawn prior to sale with Sydney & Fremantle selling only 3,606 & 3,775 bales respectively. Season to date there have been on average 7,023 bales fewer sold per selling week compared to last season.

AWEX reported that the falls were across the board, with Merino types losing 39 – 89 cents and Cardings down on average 24 cents. The 32 MPG fell to 271 cents, hitting its lowest point since AWEX reporting began in 1997/98.

The week ahead

Next week a national total of 26,924 bales will be offered with Fremantle selling only on Tuesday, Sydney Wednesday only and Melbourne on both days.

As if we needed any reminder, these are highly uncertain times and definitely not providing any levels of confidence to the wool market.

Cattle off highs but far from disaster

Posted on by Caitlin Dearden

Key points:

After battling with drought for over two years Australian cattle producers are currently the envy of global cattle producers.  In the US most notably, but also in South America and Europe cattle prices are tanking, while ours remain in the upper echelon.

Earlier in the week, we looked at US cattle values, with bottlenecks depressing prices now, and likely for most of the year as supply backlogs are cleared.  In South America, uncertainty and falling kill rates have also impacted price, but not the extent of the US yet.

Here cattle markets have remained relatively resilient.  No doubt the post-drought tight supplies, and strong demand from restockers has helped on the east coast, but in WA prices remain similarly strong.  In fact, the MSA Yearling is at 590¢/kg cwt, over the hooks, which is a few cents higher than NSW.

Supply hasn’t improved after the Easter break, last week languishing well below average on the east coast (figure 1).  There are no surprises here, with tight supply being exacerbated by a shift to online selling.

With supply down, demand has eased somewhat to match it.  After the initial fall, saleyard prices have steadied (figure 2).  Historically cattle prices are still very good, with the National Heavy Steer Indicator at the 89th percentile, Feeders at the 88th and Cows at the 83rd over 15 years.  Prices have been a lot better in recent times, but historically prices this strong are a rare occurrence.

Meat and Livestock Australia (MLA) released their cattle projections this week, and it seems cattle supplies are going to stay tight.  Next week we’ll have more on what this means for price.

Next week.

If the southern autumn break hadn’t arrived, it did this week.  Figure 3 shows widespread rains in all key southern cattle areas this week, and this is likely to ensure supply remains tight.

Young cattle demand is unlikely to weaken, but store prices can only hang on as long as finished cattle prices stay at solid levels.  The finished market test will come when US slaughter ramps up again, and we see some real price competition in Japan and Korean markets.

 

Moist southern regions

Posted on by Caitlin Dearden

Key Points

Sentiment around the country is improving as seeding commences into moist ground across large parts of the nations cropping belt. This weekly comment looks at rain, the ASX new crop – old crop spread and International Grains Council forecasts.

The rainfall during April has been almost perfect through most of the east coast (see map) and has gone a long way to set up the crop through SA/NSW & Victoria. After talking to several farmers, the sentiment is very positive in these regions. In many parts, an average crop is almost assured.

There are still concerns for WA and QLD, however, there is still time.

At a local level, ASX wheat futures has posted losses in recent weeks (Figure 1). After reaching a weekly average of A$406 on the spot contract four weeks ago, the spot contract has declined to A$384.

At present, the market continues to trade old crop at a substantial premium to new crop. As we move closer to new crop, the premium for old crop is likely to converge with new crop. As confidence in new crop improves it is more likely that old crop will converge downwards instead of new crop rising to meet old crop numbers. It would be risky to hold onto old crop beyond July.

At a global level, pricing levels have softened. There was however some updated news overnight from the International Grains Council. The global wheat crop forecast has been reduced by 4mmt to 762mmt.

The reduction was as a result of deteriorating expectations in Europe and black sea nations. It has to be noted that 762mmt remains a record production level. This is at a time when ethanol demand has been destroyed, which will reduce overall grain demand dramatically.

Next week?:

More rain is expected in the next week. This will provide further confidence.

Wet, wet, wet (even in NSW)

Posted on by Caitlin Dearden

Throughput returns to normal, but slaughter levels remain low with processors watching export market activity as a higher A$ and Covid-19 disruptions continue to cause concern. Restocker lamb prices are probing higher as soil moisture indicators suggest pasture will be plentiful, particularly in NSW.

Throughput figures are in now post the Easter lull in market activity and they show that east coast sheep and lamb numbers are back to normal. Last week east coast sale yards recorded nearly 185,000 head of sheep and lamb, 4% ahead of the five-year pattern for this time in the season – Figure 1.

Unfortunately, the same cannot be said for slaughter volumes with levels still trending at the lower end of the usual range. Figure 2 outlines the trend for 2020 which shows slaughter volumes sitting 15% under the average pattern at a fraction over 360,000 head on the east coast.

Seemingly, concerns around global economic growth declines in the face of Covid19 troubles impacting offshore sheepmeat demand and a higher Australian dollar (up a cent this week to trade at 65.30US¢ today) keeping processors somewhat subdued.

The MLA CV19 indicator for processor lambs stuck in a sideways pattern for much of the week at just over $200/head and unable to test back toward the recent highs seen in early March of close to $240.

Although, it’s a different picture for restocker lambs. Since the start of April restocker lamb prices are up nearly 20% to close at $165 yesterday. Indeed, they are only a few dollars short of making new highs this season and compared to the previous market peak in early March are currently sitting 3% higher.

A glance at the root zone soil moisture on Figure 3 gives an indication as to why restockers are optimistic about the prospect of good pasture with very much above average figures displayed for much of the east coast sheep country.

What does it mean/next week?:

The southern states are getting a wintery blast this week and it is set to continue into next week. Good rainfall prospects and tight supply continue to favour producers and support prices, particularly for breeding ewes and restocker lambs.

However, the strengthening A$ and an uncertain picture for offshore sheepmeat demand is acting as a bit of a headwind on the usual autumn/winter seasonal price lift.