The United States Department of Agriculture (USDA) released their monthly World Agricultural Supply and Demand Estimates (WASDE) last night. While there was little action in wheat markets, some rather large upgrades to production in soybeans and corn battered some prices.
It’s a bit unusual to get large shifts in supply or demand in the WASDE report at this end of the growing season. Most world crops are all but in the bin, with just South American summer crops, corn and soybeans still to be harvested.
It was South America, and more precisely, Brazil, where the action was. The USDA increased Brazil’s soybean production by 4mmt, and while the market was expecting a 2mmt rise, the size of the increase still gave it a jolt. Brazil is now expected to produce 110.81mmt of soybeans this year, up nearly 11mmt on last year. To put this in perspective Australian Canola production this year is expected to be 4.1mmt, so Brazil has added an Australian Oilseed crop in the last month.
Table 1 shows the lift in Brazilian production managed to shift world oilseed ending stocks nearly 3% higher (figure 2). Increasing consumption means the stocks to use ratio is 17.2%, marginally higher than last year’s 16.9%.
The USDA also lifted Brazilian corn production, increasing 5mmt, and Argentina by 1mmt. This increased world ending stocks by 1.4% thanks to some increases in consumption. This sees the global stocks to use ratio still marginally lower than last year, which should provide some price support.
The week ahead
Not surprisingly grain prices fell across the board on the WASDE report, with soybeans down 1.5%, corn down 1.3% and wheat down marginally to sit at $215/t in our terms this morning. ICE canola managed to hold it’s ground.
In local markets there was strong demand for wheat again this week, with the strong export program providing support despite the small decline in international wheat values.
East Coast cattle yardings fell to 6 week lows this week, as lower prices deterred growers from sending cattle to the yards. Figure 1 shows that yardings this week were down 10% for the week, and 23% on the same time last year. With the public holiday next week in Victoria, yardings are likely to be lower again.
In the West the rain and dearth of supply has the market sitting well above the east coast. While there were no quotes from saleyards, over the hooks yearling cattle remain in the 580-630¢ range.
All going well, and with the rain landing in the right places at the right time, Australia can be expected to have a bumper canola crop. This is a story likely to be repeated across the rest of the world with the fall in cereal prices.
When the Matif contract is examined a different picture emerges. The price during the Australian harvest has been lower only 10 times out of the past 22 seasons, with an average positive change of 5%. However, if we preclude the large changes in 2007 and 2010 the average drops to a meagre 1%.
Figure 1 highlights the recent pattern of east coast lamb throughput showing a much more subdued pattern this week, in contrast to the seesaw of the weeks prior. Yarding figures hardly budging with a meagre 1.4% rise to sneak above 181,000 head. The Eastern States Trade Lamb Indicator (ESTLI) responding to the stable throughput settling exactly where is closed this time last week at 611¢/kg cwt. Stability in price the order of the day for most categories of lamb in the national indicators too with 0-1% gains in all classes of lamb, except national restocker lambs, down 3% to $96 per head.
In contrast, WA mutton experiencing a stellar performance with an 11% price rise to 478¢/kg cwt. Spurred on by much softer supply (as shown in figure 2) with WA mutton throughput down 39.6%. The impressive performance this season not limited to mutton in the west with the Western Australian Trade Lamb Indicator (WATLI) continuing to press higher this week to close at 629¢ – figure 3. The tighter season and firm export demand helping support WATLI and WA mutton, 31% and 78% higher than this time last year – respectively.
Forecast rainfall between 5-15 mm to much of the sheep bearing regions of the nation next week will give slight relief to the recent dry spell to much of SA and Western Victoria during the last fortnight. This is likely to encourage further price consolidation to continue for the next few weeks for lamb and sheep markets.
Again, fine wool was the outstanding performer but the underpinning of the medium wool price (21 MPG) is providing support and optimism for the ongoing strong market outlook.
Cardings again were dearer, with all selling centres reporting the Carding indicator comfortably above 1200 cents. The average price for Merino wool is currently boosted by the prices for the lessor lines, all contributing to the best cash flows seem for wool producers for many a year.
The ongoing strong auction is providing good opportunities in the forward market with 
There were rumours this week that there might be some form of ‘Executive Order’ regarding the amount of Ethanol to be produced in the US. Without boring you with the details, the market took the view that Trump was going to increase the demand for ethanol, which means more corn and oilseeds will be required in the US to make it.
The grim weather outlook released last week might add a bit of strength to grain prices. From now on many grower will take the view that grain in store is a good drought hedge, with prices likely to have a lift if the autumn break is late, or worst case, non-existent.
Just as spring price peaks lasted a lot longer in 2016, the autumn price decline appears to be coming early in 2017. While finished cattle prices were relatively steady this week, waning restocker demand appears to be seeing young cattle prices continue easing.
Young cattle still have some way to fall before they are back in line with ‘normal’ discounts to the EYCI. Figure 2 shows that despite the fall in the EYCI, Heavy steers remain at a 15% discount to the EYCI, while Cows are at a 25% discount. Heavy slaughter cattle discounts have narrowed marginally from two and five year lows, but are still a long way from their long term averages.
Frequent readers of Mecardo will not find it surprising that long-term annual average local cattle prices have a strong correlation to annual average US prices. This analysis takes a look at the US cattle cycle patterns since 1920 to get a perspective of what the normal cycle looks like, where we are currently in the cycle and the usual price activity during herd growth and herd decline.
Given the average cycle lasts ten years and the near 50/50 split between herd rebuild to herd decline during the cycle we took a look at annual price percentage changes during the first five years of each cycle (the herd rebuild) and the final five years of each cycle (the herd decline). Figure 2 shows the annual price change pattern for the first five years of the cycle. Interestingly, the data since 1920 demonstrates that the average price gain pattern for the first five years is reasonably smooth and tends toward 0% price movement, yet can fluctuate plus or minus 15% throughout the period. It suggests that there is a reasonably even chance of price gains or falls of a 15% magnitude during the herd rebuild phase of the US cycle – almost like a toss of a coin.
Given where we sit in the current cycle there is the potential for another 2-3 years of further gains to US herd size, albeit at a diminishing rate. Herd decline is expected to start around the end of decade and is likely to see cattle price supported in the US from 2020 onwards.
SA and WA mutton both faring well this week up 11.8% and 13.1%, respectively. NSW and Vic mutton on marginally softer with falls of 0.7% and 2.1%. Figure 2 showing the weekly decline in East coast mutton throughput not as severe as that for East coast lamb, down only 12.2% to just under 80,000 head.
The broad-based demand evident in the higher EMI in both local and US$ terms, gaining 51A¢ and 33US¢, respectively. The EMI not the only indicator to crack $15 this week with the WMI posting a 65A¢ rise, or 44¢ in US$ terms – Figure 1.
Some exporter reports of just not having access to enough wool to sell at the moment really fuelling the surge. A total of 40,626 bales offered this week with 39,461 sold on the red-hot demand kept the pass in rate contained to 2.9% – Figure 2.