Category: Market Analysis

EYCI closing in on a record

Posted on by Caitlin Dearden

The rain keeps coming, and there is more on the forecast, this time for areas which have missed out to date. The positive price response moved into its sixth week and is showing few signs of slowing.

The Eastern Young Cattle Indicator (EYCI) pushed above $7 this week to close yesterday at 701.75¢/kg cwt, over 250¢ higher than this time last season.  Figure 1 shows the EYCI is now just 24¢ off the all-time high set in October 2016.  And we’re not even in the traditional tight supply period.

Queensland is leading the charge, with restocker, feeder and trade steer indicators all within 15¢ of 400¢/kg lwt.  Over the hooks values for steers in Queensland are between 620 and 640¢, except for Cows which are at 526¢.  Only six weeks ago young cattle were making under 500¢.

NSW and Victoria are lagging somewhat in the price stakes, but are both on the rise.  With finished cattle supplies likely to tighten in the autumn, it is safe to expect most cattle indicators will move through 600¢ in the coming month.

Supply is back. Figure 2 shows cattle slaughter was last week down 8.5% on year earlier levels but was similar to 2018 levels. The much stronger prices that we are seeing now are a result of stronger export demand and booming restocker demand.

Early 2020 is the first time in over a year that east coast prices have been stronger than those in WA.  The Western Young Cattle Indicator (WYCI) rallied 24¢ this week but is well below the EYCI at 581¢/kg cwt.

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Next Week

Figure 3 shows the rain is expected to ease in NSW, but large parts of inland Queensland are forecast for a drenching.  Demand for young cattle isn’t going to ease, and it is not the time of year for supply to improve, so we can expect further upside for the EYCI.

Finished cattle supplies are less variable, with record numbers in feedlots, but with female slaughter tightening sharply, processors will have to maintain strong prices to compete for supply.

Cheap Russian wheat & China protects its fertiliser

Posted on by Caitlin Dearden

In this grain market comment, we provide a short summary of Russian wheat pricing, ASX levels and fertiliser/chemical blockages in China.

In yesterday’s analysis article ‘It’s relatively relevant’, we briefly discussed the rapid rise in wheat futures this week. This has had a limited impact upon Australian wheat prices, resulting in basis levels declining. What about our competitor, Russia?

Pricing levels in Russia have been increasing steadily during the last quarter of 2019. There were questions during this time relating to export pace and, in December, around weather concerns. However, once the local analysts started to dig into the potential the market has seen downward pressure. In A$/mt terms Russian pricing has dropped from A$344 to A$327 during February (Figure 1).

The ASX contract for January 2021 traded up throughout the week with the contract rising from A$328 to A$336 (Figure 2). This places the basis between CBOT (Dec) and ASX (Jan) for next harvest at A$19/mt.

The Coronavirus has far-reaching impacts beyond health. The long hiatus of work in the superpower has led to issues related to agricultural inputs, namely chemicals and fertiliser. The Chinese government has mandated that fertiliser (Phosphate) supplies be domestically prioritized at all levels to ensure no impacts on their local spring planting. In relation to chemicals, logistics chains are backed up which could disrupt the supply of agricultural chemicals in the lead up to seeding.

Remember to listen to the  Commodity Conversation podcast by Mecardo

Next week:

It will be interesting to see whether the current rally in US futures will be sustained or whether it is a speculative driven rally. If this is the case, fundamentals tend to return and eventually take control.

EYCI nearing price resistance with supply dearth still to bite

Posted on by Caitlin Dearden

Cattle supply is expected to wane, and prices are already on the rise.  It is still worth having a look at how the tighter cattle supply is likely to play out on a seasonal basis, and what this might mean for prices.

Last week we took a look at Meat & Livestock Australia’s (MLA) Cattle Industry projections on a broad basis, and this week we delve into what this will mean for prices. While the sheep and lamb prices are tightly tied to supply, cattle are a bit more complicated. The global nature of the cattle market means our prices are strongly impacted by supplies from other exporting countries.

As such, we’ve found cattle prices here are a result of export prices and supply.  Figure 1 demonstrates how the level of cattle slaughter governs the discount or premium of the Eastern Young Cattle Indicator (EYCI) to the 90CL Frozen Cow price, exported to the US.

We can see that in 2019, despite strong slaughter, the EYCI discount to the 90CL deviated significantly from the trend line. This was likely a factor of strong export prices and very weak restocker demand from the drought.

So far in 2020, the EYCI discount to the 90CL has narrowed, last week it was at 53¢, with the 90CL at 715¢/kg swt. This week, the discount is likely to narrow further, with the EYCI at 692¢ on Wednesday.

There is no guarantee the volatile export prices will stay at 700¢. Assuming it does, and the EYCI moves to a 20¢ premium, it gives the EYCI another 40-50¢ upside before it gets historically ‘expensive’ relative to export prices.

There will always be seasonality in livestock prices, and variations in supply generally govern how prices range around the average. Figure 2 shows how the MLA forecast slaughter of 7.2 million head will hit the market if five-year seasonality holds.

Cattle slaughter is expected to be over 10% lower than last year in all months.  October to December, which were strong slaughter months in 2019, are expected to take the biggest hit, with 17-20% fewer cattle expected to be slaughtered.

What does this mean?

Cattle prices have rallied so strongly they have nearly made up all the ground we would expect them to, relative to export prices. There could still be a further upside, but once the EYCI moves past export values, price resistance starts to mount.

The seasons have been far from normal recently, but rainfall might signal some sort of return. Once prices level out there could be a return to normal seasonality, with winter peaks and summer declines. The peak EYCI could be as high as 800¢, while the low shouldn’t be much less than current prices, providing the rain keeps coming.

Supply screws continue to tighten

Posted on by Caitlin Dearden

Weekly yarding levels continue to contract and processors are responding to higher lamb and sheep prices with reduced slaughter volumes. High prices this early in the season are putting meatworks on notice that the seasonal winter peaks in lamb and sheep prices could reach historic records but the autumn break in the southern regions needs to be in a cooperative mood.

For the first time this season, weekly east coast sheep yarding levels have moved below the five-year average pattern, reflecting the tightening ovine market. Sheep yardings for the week ending 14th February dipped 1% below the seasonal average trend to come in under 86,000 head (Figure 1).

Weekly lamb yarding levels across the east coast dropped nearly 20% through the first two weeks of February. At this level, yardings were 12% below the five-year average seasonal pattern at nearly 160,000 head.

Patrick Hutchinson, CEO of the Australian Meat Industry Council (AMIC), came out earlier in the week expressing his concern over the impact of a livestock drought on processors once the rains arrived and by the looks of the combined lamb and sheep weekly slaughter volumes, meatworks is already starting to feel the pinch. Slaughter volumes across the east coast have been averaging weekly levels of 8% under the five-year trend for the past month (Figure 2).

We are not even out of summer yet and the Eastern States Trade Lamb Indicator (ESTLI) is comfortably above $9 a kilo on a carcass weight basis and probing levels we didn’t see until mid-winter in 2019. The National Mutton Indicator (NMI) is hovering around price levels that the ESTLI was fetching at this time last season. Indeed, the NMI closed last week at 663¢/kg cwt, 20¢ higher than where the ESTLI was on the same date in 2019.

The Bureau of Meteorology (BOM) updated its three-month outlook yesterday and it shows for the autumn break that there is a chance for a slightly drier result in western NSW. However, the bulk of the southern regions can expect a 50/50 chance of a wetter or drier outcome (Figure 3). While it isn’t the best result producers can expect, it is a much-improved prospect than they were facing this time last season.

Next week

At least over the short-term horizon, the rain is still coming, and with the summer temperatures, there is enough warmth to continue to encourage grass growth. The BOM is expecting 5-25 mm of rain to fall across eastern NSW and eastern Victoria in the coming week. Falls of less than 5 mm are expected for parts of western NSW and western Victoria. Unfortunately, SA misses out, but southern WA can expect 10-15mm.

Despite the unlucky SA producers’ prospects for rain this week there should be enough about to keep supply tightening and to provide continued support to lamb and sheep prices into next week. I’m heading to the Weekly Times Coles 2019 Farmer of the Year Awards in Melbourne tonight so any Mecardo subscribers come and say g’day. Good luck to all the contenders.

Remember to listen to the Commodity Conversation podcast by Mecardo

Wool market stays cool, calm and collected

Posted on by Caitlin Dearden

Another week gone and another relatively steady wool market, considering the environment of our major buyer. The industry is still chattering with worry about factory and bank closures, and supply chain disruptions In China yet we’re not seeing these disturbances sift through to buying activity.

The Eastern Market Indicator (EMI) improved 13 cents on the week to close at 1,581 cents, recouping last weeks fall of 9 cents. The Australian dollar reached an 11 year low on Thursday finishing at 0.665 cents. This pulled the EMI in US terms down just 3 cents to 1,052 cents.

In the West, competition proved strong on both days of sale. The Western Market Indicator rose 43 cents on the week to 1,710 cents.

Higher yielding, better style wools were keenly sought in all centres and attracted gains of 40 to 100 cents. It was noted that lesser style low yielding wools didn’t receive as much interest, however, any discounts were lower than the week prior.

40,891 bales were offered to the trade this week. The positive buying sentiment and price improvements saw the national pass-in rate drop from last weeks 22% to 11.3% this week. This meant 36,287 bales were cleared to the trade.

The dollar value for the week was $62.26 million, for a combined value so far this season of $1.411 billion. The average bale value was $1,715.

Crossbred types saw mixed results across types and selling centres on a limited selection. 26 micron wool gained 30 cents in the North, while the south lost 15 cents. The Cardings indicators saw little movement on the week with just a 3 cent fall in the east and 10 cent gain in the west.

After a few weeks of inactivity, a number of trades dealt on the forwards market this week, in what is another positive sign for the wool market.

The week ahead

After the initial flinch in response to the COVID-19 outbreak, the wool market is proving stable in a quivering trade environment. Unlike many other sectors, the wool supply chain has security in a non-perishable product with greater flexibility to handle delays and disruptions.

A strong finish to this week’s sales in Western Australia is typically a good sign for the coming week, and brokers are quietly confident. Next week 44,091 bales are rostered for sale across the three centres, with a designated superfine sale in Sydney. 34,933 and 35,955 bales are currently expected for the weeks following.

Beer and beef – seem to be a good pairing

Posted on by Caitlin Dearden

Earlier in the week, we covered off on sheepmeat export flows for January which showed a limited impact to trade flows on the back of the Coronavirus outbreak in China. This analysis focuses on Australian beef exports and shows that the picture for red meat export remains solid for the moment.

Catch up on the sheepmeat export flows for January here.

Total January beef export figures have opened the 2020 season strongly. Australian beef consignments recorded the highest January result on record at 79,221 tonnes swt and well outside the normal range that could be expected for January, as shown by the grey shaded 70% boundary (Figure 1). This result is 30% above the five-year average for January and bests the previous record high from January 2014 of 69,511 tonnes by 14%.

The outbreak of Coronavirus in Wuhan province leading into the Chinese Lunar New Year, caused some concern for Australian exporters exposed to China. Fears of a downturn in demand hit some markets, notably the rock lobster industry which saw export orders grind to a halt. Concern also began to spread among red meat producers that the impact of Corona would hit markets like sheepmeat and beef.

However, the strong January export flows for Australian beef exports demonstrate that the impact has been negligible so far. Indeed, the strongest growth in beef export demand for Australia’s key beef trade destinations for January came from China. As highlighted by Figure 2, Chinese demand for Aussie beef for the first month of 2020 hit a new January record of 21,026 tonnes swt. This represents a 201% lift on the five-year average for January and a solid 73% gain on the previous record high achieved in January 2019 of 12,155 tonnes swt.

Based on the strong January performance of beef flows to China the market share of China (the top destination for Australian beef) has lifted again on a percentage basis. The January flows show China represents 26.5% of the Australian beef trade, compared to 24.4% during 2019. Japan is in second place at 23.1%, down from 23.4% in 2019 (Figure 3). Bearing in mind that it is still early in the season and the tight supply of beef expected as we head further into 2020 may see flows and market share adjust accordingly.

What does it mean?

There has been some producer/subscriber query to Mecardo in recent weeks asking if the Coronavirus will impact domestic Australian cattle prices. Certainly, the January trade flows highlight that there hasn’t been any sign of disruption. However, this may come in the next few months if the situation in China deteriorates further impacting economic growth, red meat protein demand, and consumer confidence.

In our view, the only way Coronavirus would start to play a significant part in impacting beef export flows is if it creates a global economic slowdown reminiscent of the GFC or Asian debt crisis, and in this event, it would still take some time for a  global cattle price decline to flow through to Australian prices. In the short to medium term, local Australian prices are going to be dominated by the expected tight season and the improving climatic outlook which will encourage restockers.

Restocker demand booms

Posted on by Caitlin Dearden

Sheep and lamb markets continued to boom this week, with supply tight and demand apparently remaining strong. There is serious support from restockers, who appear to be driving the rise, as grass grows and mouths are sought.

Figure 1 shows in part what is driving the remarkable rally that we are currently seeing. In the first full week after the Australia Day holiday, total sheep and lamb slaughter could only recover to 470,354 head. This figure was 9% lower than the same time last year. It took until June for supply to tighten this much in 2019.

It shouldn’t come as too much of a surprise though. Heavy rains in key sheep regions in NSW will see very few stock from those areas hitting the market. Additionally, demand for restocker lambs has exploded and is creeping into light and trade lamb sectors, helping push prices higher.

On Thursday night the Eastern States Trade Lamb Indicator had hit 905¢/kg cwt, up 76¢ for the week, and just 40¢ shy of the all-time high hit last July (Figure 2).

Restocker lambs have hit a record. In NSW this week, the average price for restocker lambs was 1,023¢/kg cwt (Figure 3).  This is the first time any indicator has been through the $10 mark, and shows the extent of restocker demand. Restocker lamb prices have risen 30% this year.

Mutton also hit a record, with the east coast indicator at 683¢ on Thursday. Previous highs for mutton, from last July, were around 620¢/kg cwt. Obviously, we are way past that.

Amid all this, Trade Lambs in WA are making just 648¢ and mutton 439¢.  At these levels, there is lots of incentive for lambs and sheep to make their way east.  A 20kg cwt lamb is worth $180 in the east, and $124 in the west. There is plenty of fat after freight, especially for restocker lambs.

Next Week

It is so early in the season to have extreme prices. All the charts look rather unsustainable.  Lamb producers can point to trade lambs maintaining prices around 900¢ for three months in the winter, which may have seen export markets get somewhat used to high values.

It is hard to see demand for restocker lambs waning, and supply has no chance of increasing until the spring. It would be extraordinary to see restocker prices maintain levels above $10, but it has been 100 years since there were this few sheep in the country and grass supply is booming.

Corona weighing on export prices, but domestic impact limited

Posted on by Caitlin Dearden

Concerns over the Coronavirus spread has softened beef export prices in recent weeks, but tight supply and favourable rainfall has limited the impact on cattle prices at a domestic level. Australian beef exports for January were healthy, but an inability to get Corona under control could see export flows impacted in the coming months.

Just yesterday we saw a surge in reported Coronavirus outbreaks in China due to a change to the way they assessed the infection. Currently, there are 60,000 reported cases according to the Johns Hopkins University live mapping website.

US beef industry consultants Steiner are suggesting that the uncertainty around China’s ability to contain the spread of the Coronavirus is leading to a softening of the 90CL beef export price as Chinese beef demand slows with travel bans in China causing import congestion at Chinese ports. Supply chain bottlenecks in China are seemingly the cause of the 3% easing of the 90CL to close at 723¢/kg CIF.

Thankfully on a domestic level, the impact of Corona on cattle markets has been negligible. Yesterday Mecardo reported that there has been no sign of a negative impact on beef export volumes for January.

Additionally, the tight season expected in cattle markets for 2020 and the favourable rainfall patterns in recent weeks has continued to see cattle prices benefit. The Eastern Young Cattle Indicator (EYCI) gaining 6% this week to close at 662¢/kg cwt and narrowing the gap between it and the 90CL further – Figure 1.

East coast weekly cattle yarding figures have been averaging volumes nearly 20% lower than the five-year trend since the start of the 2020 season, trekking along the lower boundary of what would be considered normal for this time in the year and highlighting the expectation of the tight season ahead – Figure 2.

Next week

With the forecast of 15-50 mm of rainfall along the entire eastern seaboard in the coming week (Figure 3) it is unlikely we will see cattle supply expand any time soon. The continuation of the rain will likely see further restocker interest for store cattle and breeding stock.

Expect the EYCI to continue to probe higher in the short term, even if Coronavirus remains unchecked and export prices soften further, as the domestic situation of low supply and rain is providing good support.

Wool market just hanging on

Posted on by Caitlin Dearden

The wool market is navigating a succession of head winds at the moment. Coronavirus (now named Covid-19) and increased tariffs by the US on Chinese garments are two major negatives that have emerged in the past 6 months.

The explanation for the underpinning of the wool market at these levels is the supply situation; anything like the supply volume of past years and the market would have well and truly buckled under these pressures.

A reduced flock, growers willing to withhold or pass-in wool at auction and the reported low stock position at mills is the counter-weight keeping the market levels in relative equilibrium during these uncertain times.

The Eastern Market Indicator (EMI) eased slightly this week, giving up 9 cents closing at 1,568 cents. The AU$ was also slightly lower to close at .672 cents. In US terms, the EMI fell 11 cents to 1,054 cents.

The Melbourne market offered a designated Tasmanian sale, with the trade keenly bidding on the selection of very good style lots. Also of note in Melbourne & Sydney was the Crossbred section that improved 15 to 56 cents. The Fremantle catalogue being without these positives lost ground, the Western Market Indicator (WMI) dropping 42 cents to close at 1,667 cents.

Supply should remain tight into the rest of 2020. Wool producers are relatively “cashed-up” after 2 to 3 years of strong prices, and coupled with record lamb and mutton markets are emboldened to take a bullish approach to selling;  any perceived weakness is met with reduced clearance to processors. Producers are happy to ride the market and bet on a reduced future supply supporting prices in the future.

An increased national offering of 40,176 bales came forward, however, growers were reluctant sellers causing a pass-in rate of 22.0% nationally for the week. This resulted in 31,326 bales clearing to the trade. To date this season we have sold 138,724 fewer bales than last season (5,100 per sale).

The dollar value for the week was $53.39 million, for a combined value so far this season of $1.348 billion.

Crossbred types bucked the general market trend to post good gains, however, cardings were cheaper in all centres. Again poorly prepared Crossbred lots at times found little support.

The Russians are coming (again)

Posted on by Caitlin Dearden

With inspiring rainfall dropping on large tracts of the eastern states, confidence is increased in the capability of producing a 2020 crop. If the potential continues to improve then exports will be important. Our biggest export competitor (Russia) is on track to produce a very large crop, which could cause problems.

The futures market has ended the week on a downer, with value in Australian dollars down A$8 since last Thursday. At the same time, the Australian dollar has remained low as a result of economic concerns related to the Coronavirus in China.

The market, however, is still providing attractive levels (historically) for hedging. In my experience dealing with farmers there used to be a psychological sell level of A$300. At present, the December Chicago contract remains above A$305. It is important to note that when using futures, basis has to be included on top. Historically Australian basis has been positive, although in theory could turn negative if we have extremely strong yields.

During December, there were concerns that the black sea region was in strife. This is a story that we’ve heard year after year and my thoughts were that it was too early to write off our competitors. In the past week, new forecasts for Russian production have been released, with a consensus from a number of organizations showing 82mmt.

Figure 2 puts an 82mmt crop in perspective, showing the top 5 productive seasons since the fall of the Soviet Union. An 82mmt crop would be the 2nd largest, narrowly behind the monster 2017 season.

Interestingly, the top five production years have all been in the last five years. It is inevitable that Russia will have a hiccup at some point in time, and when it does, the markets will see substantial rises due to the importance of Russia as an exporter.

It is still worthwhile to note that a lot can happen between now and the Russian harvest, so any forecasts of the crop will need to be taken with a grain of salt. They do however have the potential for a very large crop.

If Australian crop conditions continue to improve then exports will increase back to normal levels, a large Russian crop will be competing with us.

Next week

The east coast of Australia is forecast to receive additional rain over the next week. If this eventuates, confidence in the crop will be much improved.

The west coast, however, has limited rainfall on the forecast, and could really do with an increase in soil moisture.