Category: Cattle

Exports soaking up extra lambs

Last week we spent a couple of articles looking at the interesting price phenomenon that we are currently seeing in lamb markets.  Strong prices continued last week, in the face of strong supplies, so today we take a look at the export data to see where the extra lamb is going.

Meat & Livestock Australia seem to be having some issues getting slaughter data out of some NSW and Queensland plants, and as such we are currently being denied total weekly slaughter data.  We do know, however, from what we can see in Victoria and SA, and saleyard yardings, is that supply remains stronger than last year.

Prices remain around 600¢ for lambs, which is similar to last year, but it was this week in 2016 that prices started their seasonal dive.

Figure 1 shows that the extra lamb supply we have seen hit the market since June is being soaked up by export markets.  The increase has been diminishing, with September exports sitting 13.4% above last year.  The three month total increase for July to September is 25%.  Interestingly lamb exports for the last three months are not a record, falling just 0.75% behind the levels of 2014.

A simple indication of increased demand is the fact that in 2014 the Eastern States Trade Lamb Indicator (ESTLI) averaged 459¢/kg cwt from July to October.  This year the ESTLI has averaged 604¢/kg, 31% higher.

Pinpointing the source of increased demand is a little difficult.  Lamb exports for July to September were up 38% to the US, 21% to the Middle East and 36% to Asia.  These three destinations have accounted for 83% of lamb exports for the year to date (figure 2), so it’s safe to say demand is up in all our major markets.

It’s also not exchange rates driving stronger demand from export markets.  Figure 3 shows the ESTLI in US dollar terms, and while it’s not at record highs, it hasn’t been this strong at this time of year since the very tight supply of 2011.

We are left with the fact that all our major lamb markets are buying more lamb, and seemingly paying more for it.  This is the key indication of stronger demand.

What does this mean?

We have in the past seen significant jumps in lamb demand from exports markets, and we might now be seeing early indications of the next one.  Significantly larger export volumes, coinciding with similar or stronger prices suggests that consumers in the US, Middle East and Asia have become comfortable with the higher lamb prices seen over the past nine months.

This bodes well for future lamb prices, as increasing supplies are unlikely to push the market as low as it got last year, with a 550¢ floor a possibility.

Cattle rally continues

There was a significant jump in yardings this week, but this failed to dampen cattle prices, which continued to rally.  In fact, it seems to be rain that is doing the opposite of dampening prices, with prices finding strength, almost across the board.

Figure 1 shows a 61% lift in east coast cattle yardings, but this still remains below the very strong levels of September.  In fact, the lift in yardings is likely to be more due to the public holiday in the previous week, with a bit of a backlog of cattle hitting the market now. Yardings this week of 40,044 head on the east coast were however well below the five year average.

This suggests that producers are holding back cattle in response to recent rain.  For October so far, rainfall has ranged from ‘a start’ to very useful across the east coast.  It will be interesting to see if yardings remain low, figure 1 shows that on average, and last year, yardings tend to jump in the third week of October.

The Eastern Young Cattle Indicator (EYCI) continued to rally, but the pace slowed.  The EYCI gained 8¢ this week, to lift it to the levels of five weeks ago, at 541.25¢/kg cwt (Figure 2).

Heavy Steer prices managed to break back through 500¢ in NSW (507) and Victoria (518), but somehow managed to slip below those levels in Queensland (492¢).  Perhaps there are still a few of the record numbers of grainfed cattle coming to the market.

The weakening Australian dollar managed to give beef export prices a small lift.  The 90CL Frozen Cow gained 3¢ to 594¢/kg cwt which just moves our target prices a little higher if the rain continues.

The week ahead

There has been widespread rain over the last 12 days, with parts of Queensland by far outstripping the monthly average.  The forecast says there is more to come for at least half of Queensland (figure 3), and this suggests that there is only one way for cattle prices to go next week, especially young cattle prices.

Rain, supply and export prices provide a boost.

The Mecardo team have been suggesting a price bounce was imminent for the last few weeks given the rainfall forecast, recovery in export prices and falling supply at the saleyards. But as the old trading adage goes, “even a broken clock gets it right twice a day” so we won’t puff out our chests too much on this one.

Figure 1 shows the rainfall for the week with much of Southern Queensland getting some reasonable action. This, along with the forecast of some further falls expected for NSW into October (according to the most recent BOM outlook), has given a bit of a boost to optimism here for producers and both NSW and Queensland responded this week with significant decreases to yardings.

Queensland cattle yardings were down 50% on the week, while NSW saw a 58% decline in numbers at the saleyard. This reduction in supply helping to push the weekly East coast yarding figure to the lowest it has been all season at just 24,818 head recorded – figure 2. This throughput measure is well below the normal range and sits 53% below the five-year average for this time of the season.

The decreased supply also evident in young cattle numbers with EYCI yardings also registering its lowest average weekly figures since September 2016 at just 9,537 head. Indeed, EYCI cattle throughput has fallen 50% over the last month and the reduced supply has given some support to prices this week. The EYCI recovering 5.4% to close at 533¢/kg cwt. The young cattle price boost was not limited to the East coast alone with the WYCI up a similar magnitude, staging a 5.8% increase to 558¢ – figure 3.

The week ahead

The recovery in the 90CL beef export price over the last few weeks signalled that young cattle prices were getting a bit undervalued; and all it took was a bit of rain and tightening supply to see the market find a base. The 90CL now sits at 589¢/kg CIF and reports out of the US indicate that both domestic and export demand is strong and feeding into higher grinding prices.

The prospect of steady to firmer export prices in the coming weeks and a better weather outlook for much of NSW should see cattle prices continue to be supported locally.

Put it all on October rain

It was only in mid-July that the Eastern Young Cattle Indicator (EYCI) broke through 600¢.  The downward spiral now has the EYCI looking down the barrel of a number with a four in the front.  There has finally been some positive news on the climatic front, however, which could and should provide some support, if it eventuates.

It has only taken ten weeks for the EYCI to lose 100¢.  Figure 1 shows what looks like an inevitable slide towards the 400s, with the EYCI this week sitting precariously at 505.5¢/kg cwt.  The slippery slope has been lubricated by relentless dry weather through most of NSW and Southern Queensland, but the Bureau of Meteorology (BOM) suggests this might be about to change.

Figure 2 shows that the BOM are putting a 50-60% chance of much of the east coast receiving better than median rainfall from October to December.  For October the chances of exceeding median rainfall is even better.  There is a better than 55% chance of much of the east coast higher rainfall zones receiving 50mm or more.

It was feeder steers which managed to defy the trend this week, gaining 8 and 7¢ in NSW and Victoria respectively, to move back to 286 and 283¢/kg lwt.  It was trade steers that drove the EYCI lower.

More positive news was a solid rally in the 90CL Frozen Cow price, it gained 14¢ to hit a two month high of 580¢/kg swt.  Figure 3 shows the EYCI now at a 3 year low in terms of its discount to the 90CL, which used to be about as low as it would go.  From 2013-2015 that changed obviously.

The week ahead

There is hope of cattle prices finding some support, given that the discount to beef export values is starting to get extreme.  If the BOM’s forecast comes to fruition you could almost guarantee a 10-20% bounce in cattle prices.  But we have to see the actual rain first.  A betting grower would be buying cattle and putting it all on October rain, as it will provide a good payoff.

 

Futures a friend, basis a buddy and currency a companion

The country sits on tender hooks, as we come to the end of September. The forecasts for the crop from ABARES and USDA seem to be wholly optimistic, and will see severe downward revisions after a terrible month for much of the growing regions.

The futures market had a strong rally mid-week, rising A$8/mt (figure 1) from last week, before shedding A$4 overnight. The market is largely directionless with a lack of fresh information. This evening the USDA will release their September stocks report, which the trade awaiting this to find new grounding.

The poor September on the east coast, has seen the market rally considerably. In figure 2, the flat price of APW1 in Geelong, Port Kembla and Kwinana has been plotted. As we can see Kwinana pricing has remained somewhat flat, and Geelong/Port Kembla has risen in line with one another due to the domestic demand in the north. Albeit still with a substantial premium of $40-45p/t in Port Kembla over Geelong.

The A$, although still high compared to the last year has dropped back below 79¢, helping the local price. In the past month we have seen iron ore futures (figure 3), start to slip which put pressure on the A$. As China drops demand after an intensive import program over the past few months will we see a further slide back down to 75¢

What does this mean?

This week we have basis, futures and currency all doing their bit to help returns for farmers.

The question remains how long these premiums will remain in the market. At present basis in Port Kembla is at +A$118, however the grower is largely holding back from selling. There will still be ample supply in the coming months to meet domestic demand, and this could result in a paring back of basis premiums albeit prices locally are expected to remain strong.

 

Still softer, but a promising end to the week

The headline Eastern Young Cattle Indicator (EYCI) finished softer again this week, but not before staging a slight gain off the mid-week low of 513.50¢/kg cwt as saleyard throughput numbers decline in the face of the lower prices.

Figure 1 highlights the East coast yarding figures for the week, showing a 14.8% drop as throughput in Queensland, NSW and Victoria all come in lower as producers respond to softer pricing across most types of cattle in these regions. Queensland cattle prices showed fairly flat movement on the week, while NSW saw losses between the 1.5% to 3% range. Victorian prices were the heaviest, with falls between 3% to 5% on the week.

Meanwhile, East coast slaughter figures continue to trend broadly sideways, although the trend has remained above last season’s figures since early Winter – figure 2. As Angus, noted in his analysis piece this week the higher slaughter has now been weighing on prices, but this suggests price support will be evident later in the season – particularly if the MLA slaughter estimate is achieved come year end.

Figure 3 shows the price pattern for the EYCI, WYCI and 90CL. The volatility continues in the West for young cattle with a 9% drop to 536¢ while the EYCI finished the week at 515.75¢, a fall of 1.6%. In a promising sign, the 90CL beef export price back above 560¢ in six weeks with a close of 562.6¢/kg CIF noted.

The week ahead

The lift in the 90CL, lower throughput and the prospect of reasonable rain for the first time across most of NSW this week points to the chance of some support creeping into cattle prices for the near term. Particularly as the rain forecast includes some heavier falls expected in WA and the East of Victoria.

 

 

It seems it was a dead cat bounce

Cattle supply continues to track higher in saleyards, and price lower.  After a bit of a bounce two weeks ago, dry weather and more numbers resumed the slide, with the EYCI this week hitting a 26 month low.

A couple of weeks ago we wrote in this column that the Eastern Young Cattle Indicator (EYCI), and cattle prices in general, might have found a floor.  Turns out we were wrong.  Figure 1 shows the EYCI falling below the spring lows of 2015, and heading towards 500¢.

While weakening demand has been playing its part in lower prices, this week supply was the culprit.  Figure 2 shows EYCI yardings hit an 18 week high, and were, in fact the strongest September yardings on record.

Rainfall and grain prices are not helping demand.  Since late August ASX East Coast Wheat Futures have gained $25, with feed values rising in sympathy.  This is obviously continuing to pressure lotfeeders.

There wasn’t a lot of joy for any cattle types this week.  All state domestic feeder steer indicators have fallen back under 300¢, except in South Australia. Heavy Steers are just above 500¢ in Victoria and SA, but look destined to break this support level as well.

Over in WA the Western Young Cattle Indicator (WYCI) has also weakened, but only eased 6¢ to 589¢/kg cwt.  Unlike the EYCI, which is sitting 26% below this time last year, the WYCI is just 4.7% lower, so things aren’t too bad for WA producers.

The week ahead

Once again there is no rain on the forecast for major cattle areas, so we don’t expect prices to rise any time soon.  There is some good news though, the longer cattle prices continue to fall, and the more cattle are liquidated, the better prices will be in the medium term if it ever rains again.

No joy for lotfeeders, or their suppliers

Grainfed cattle prices have fallen in line with the rest of the market, with the consistent decline putting pressure on lotfeeder margins.  With pressure on lotfeeder margins comes lower feeder cattle prices, although, on a relative scale, they are performing ok.

The Queensland Over the Hooks 100 day Grainfed Cattle indicator continued to ease last week.  Grainfed cattle prices are now at two year lows, sitting at 513¢/kg cwt.  This is the culmination of a 10% decline since mid-June, with the indicator now sitting at a 14% discount to the same time last year.

Figure 1 shows that grainfed cattle input costs, being feeder cattle and grain prices, have also been on the decline over the last two months.  Input costs are not, however, sitting at a two year low, in fact they are not sitting far from the Grainfed cattle price, at 507¢/kg cwt.

Obviously this means lotfeeder margins are on the squeeze, as input costs approach selling costs.  Figure 2 shows that feeder steers bought last week, and contracted at the current price, will return just $20 in both northern and southern regions.  After overheads most lotfeeders are likely to be making a loss, but things are not as bad as during the high grain price days of 2009-2011.

The situation is a bit different now, compared to 2009-2011.  Back then cattle on feed numbers were low, with cattle going through feedlots at break-even to keep the doors open.  Currently there are plenty of cattle on feed, and we have seen over the past couple of years that weak margins don’t last long.

Having record numbers of cattle on feed is part of the problem, as strong numbers exiting feedlots is partly responsible for pushing the price of finished cattle down.

Interestingly input costs are basically the same in northern and southern markets, but feeder and grain prices differ.  In the north sorghum and feed cereals are priced in the $280-300/t range, while in the south feed barley is at $210-230/t.  By contrast, feeder cattle in the south are cheaper, with the Medium-fed paddock feeder at 330¢/kg lwt, while the short fed feeder, more common in the north, is costing 309¢/kg lwt.

Key points:

  • Grainfed cattle prices have been on the decline, losing 10% over the last two months.
  • Lotfeeder margins are currently low, and likely to result in fewer cattle on feed this quarter.
  • When feeder cattle supply improves in the spring, prices could fall a further 20¢/kg lwt.

What does this mean?

It’s not unusual to see tight feeder cattle supply causing low lotfeeder margins at this time of year.  The question is what happen when supply improves in September and October.  Under current grainfed cattle and grain prices, feeder prices will have to fall 20¢/kg lwt for lotfeeder margins to improve back to $100/head.  Figure 2 shows that $100/head is more in line with recent history.

Alternatively the grainfed cattle price could rise 25¢/kg cwt, which would also restore margins to $100/head at current feeder cattle values.  This is not out of the question if the number of cattle on feed has declined.

OYCI to EYCI spread narrows over August

This weekly comment marks the first in our planned fortnightly Online Young Cattle Indicator (OYCI) updates as well as a general summary of the broader cattle market over the last week. Interestingly, the spread of the OYCI to the EYCI has narrowed over the month of August.

Figure 1 shows the seasonal OYCI pattern with the 10.2% decline over August bringing the indicator to 578.80 ¢/kg cwt as of the start of September. In contrast, the EYCI staged a decline of only 5.2% over the same period with the EYCI closing this week at 541.75¢/kg cwt. Since mid-August the spread of the weekly OYCI over the EYCI has narrowed from 14.9% to 5.6%, as at the start of September.

The EYCI staging only a mild, 2% decline on the week, as the 90CL beef export price continued to trek sideways staging a close of 557¢/kg CIF – figure 2. Young cattle in the West continuing it’s bounce around between 550-600¢ with an 8% gain this week to 595¢/kg cwt.

A 42% surge noted in NSW cattle throughput over the week (figure 3) appearing to put some pressure on Trade Steers there with a 4% drop noted to 308¢/kg lwt, with the continued dry having an impact. Feeder and Heavy Steers in NSW also slightly weaker – down 1.2% (297¢/kg lwt) and 1.3% (274¢/kg lwt), respectively. Feeder Steers in QLD and Victoria also dragging the chain a bit, down 2.4% (298¢/kg lwt) and 4.2% (289¢/kg lwt) between them.

The week ahead

The rainfall forecast for the week ahead a bit of a mirror of the last month with moisture limited to the southern regions. Cattle prices are broadly anticipated to continue to consolidate at current levels with the chance for some gains noted in the South, while the drier Northern regions may still see some further slight declines.

Saleyard buyer types – volume comparison.

Key points:

  • Current average monthly restocker purchases of EYCI cattle at the saleyard are at 5,500 head per week and is sitting 24% below the seasonal weekly average of 7,250 head.
  • Current average monthly lot feeder purchases are at 5,700 head per week and is placed 18% below the seasonal weekly average of 7,000 head.
  • Current average monthly processor purchase volumes are at 2,800 head per week and is 10% above the weekly average of 2,550 head recorded so far this season.

Since the start of Winter there has been a changing dynamic at the saleyard for young cattle purchases. Declines in average volumes have been noted for restockers and lot feeders, on the back of reduced pasture availability and higher feed costs. However, processor purchases have bucked the trend as their margins are stubbornly clinging on to positive territory.

 Analysis of saleyard average weekly volumes from the underlying EYCI data shows that over the last three months both restockers and feed lots have been reducing their buying activity, despite the price of young cattle declining 16% since the start of June. Figure 1 shows the weekly purchase volumes by buyer types averaged over each month since the start of the season. The recent decline in purchases of EYCI style cattle by restockers and lot feeders is clearly evident, with restocker volumes currently 24% below the seasonal average and lot feeders are 18% under. Interestingly, over the same time frame processors have increased their activity at the saleyard, such that current processor volumes are sitting 10% above the seasonal average.

Over the season so far, restocker purchases have been averaging around 7,250 head of EYCI cattle per week. However, average purchases for the last month have reduced to 5,500 head as unseasonal dry conditions, highlighted by the rainfall deciles from June to August (figure 2), sap some of the optimism out of restocker demand.

Similarly, feed lots had been averaging purchase volumes of around 7,000 head per week since the start of the season, but in the last month this has reduced to an average of 5,700 head. A spike in global grain prices saw feeder margins squeezed in early Winter. This was followed by higher basis levels for grain, particularly in the Northern NSW and Southern Queensland regions, as the persistent dry and frost events begin to impact upon expected yields in these areas.  Read more about current feeder margins here.

An updated Mecardo processor margin model (figure 3) shows August remains in the black, with an average per head profit of $17.50 recorded for the month. Indeed, the processor margin has been positive since May and this probably accounts for why the current processor purchase activity of around 2,800 head per week is sitting above the average recorded since the 2,550 head at the start of the season.

What does this mean?

The updated Bureau of Meteorology three-month weather outlook indicates a move to a more neutral condition for much of the country. The BOM expect rainfall to be below average in southwest Australia, above average in parts of southeast Queensland, and has a 50/50 chance of being above or below average elsewhere.

The prospect of higher than average rainfall to parts of southern Queensland and Northern NSW may see a revival in restocker activity here, providing some support to young cattle prices in these areas. Although, it may be too little too late to provide some relief for lot feeders in the form of a narrowing basis, particularly if forecast frosts into September continues to weigh on expected yields in these regions.