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Rain could lead to short term gain

Posted on 05/12/2017 by Caitlin Dearden

Unseasonal rain will have an impact on sheep markets. This week it had an impact even before it fell, with the Eastern States Trade Lamb Indicator rallying back to 613¢/kg cwt this week. The unpredictable weather might see more surprises yet.

The supply, demand and price equation is still not adding up relative to last year. Figure 1 shows that to the end of last week east coast lamb slaughter hit its 2017 high, just shy 400,000 head. Lamb slaughter was 3% higher than the same week last year, yet the ESTLI remained 17% higher. We keep talking about it, but lamb demand is very strong.

For sheep the equation is similar, but the lift in demand is more dramatic. Last week 18% more sheep were slaughtered than this time last year, yet prices were 14% higher. Total sheep and lamb slaughter for last week was 6%higher than this time last year, and just shy of a two year record (figure 3).

Interestingly however, total sheep and lamb slaughter is right on the five year average. This tells us there is slaughter space available, it just needs to come back online, and at current prices, export demand needs to be strong enough.

In the west lamb prices maintained their strength. At 578¢/kg cwt, the WATLI is 100¢ stronger than this time last year, and not far of the ESTLI. Restocker lambs remain cheap however, at 508¢/kg cwt, compared to east coast at 680¢/kg cwt, and this is encouraging the shipping east. Lambs from WA can be landed in eastern Victoria around $10 cheaper than the local price.

The week ahead

The forecast for the coming days is for plenty of rain. This is the time of year when lamb yardings peak, and processors rely more heavily saleyard supplies than usual. Disruption to saleyard supply due to rain will be hard to replace with direct consignments. This means we could see a short term spike in lamb prices next week as processor battle it out for supply.

Russian wheat crop- growing or glowing?

Posted on 01/12/201727/11/2017 by Caitlin Dearden

The Chicago futures market was closed for the thanksgiving holiday, causing the market to be quiet. In this update we take a look at pricing, and radioactive issues in Russia. We know the Russian crop is growing, but is it also glowing?

The markets were quiet this week, as they celebrate thanksgiving in America. In figure 1, we can see that the futures market continues to trade in a narrow range of around 10¢/bu (A$5/mt). The lack of fresh news is likely to continue trading this range for the rest of this year, with the worlds production now largely locked in.

The one piece of potentially bullish news, is the BOM prediction of a La Nina event over the summer. They are predicting that this event will be weak, and likely to lead to heatwaves in eastern Australia as opposed to the usual La Nina effect of wetter conditions. Typically, a La Nina event can cause dry conditions in the US cropping belt (see map), however is unlikely to have a significant impact unless it continues through into our Autumn.

The local harvest is not without its issues, we have seen hail in Esperance & rain in SA/VIC challenging farmers patience. The pricing around the country has flatlined, with little in the way of movement since the beginning of November (figure 2). Interestingly, the major frost event in the western districts of Victoria has had little in the way of impact on the Geelong price. The question will be whether there is enough grain to avoid a price rise, or is the trade underestimating the impact?

The Russian crop continues to place pressure on the wheat market, with black sea origin wheat winning nearly every tender since September. In figure 3, the wheat production from Ukraine, Russia and Australia are plotted since 1988. It is clear that the advancements in the Russian crop through a combination of opening new land, agronomy and technology have led to a stratospheric rise in production.

It is growing, but is it also glowing? It was revealed that a radioactive substance ‘Ruthenium 106’ had been detective in the Ural Mountains at 1000 times higher than normal levels. This indicates the likelihood of an incident at a Russian nuclear facility. It is expected that although high levels, that it is not at the degree to impact lives. There were rumours of traders covering short positions, as this news developed. However, it is unlikely that this event will cause a huge impact to the Russian grain machine.

Here’s a joke for the weekend:

What did the nuclear physicist have for lunch?

Fission chips

I don’t envisage the market reacting to the Russian radiation story, so I wouldn’t be hoping for a price rise based on this.

The futures market is likely to continue treading water next week, as there are limited drivers in the market. At a local level basis levels remain small, but there could be potential for price rises in Geelong as a result of the realisation of the extent of the frost damage in the Western Districts.

What goes up, must come down

Posted on 30/11/201727/11/2017 by Caitlin Dearden

After weeks of a glowing market that seemed to keep on rising with record on record, the peak was finally reached and the market edged over the other side. Nearly all categories and microns across the country retracted on the week, however it wasn’t enough to cause too much concern.

The Eastern Market Indicator (EMI) dropped 14 cents on the week to 1,669¢. The weakening Australian dollar has meant the retraction was not quite as strong in US dollar terms, with just a 9 cent drop to 1,270¢. The Western Market Indicator fell just 8 cents on the week to 1,717¢.

The bale offering this week was substantial at a total of 48,409 bales. With the consistently high trade offering over the last few weeks AWEX reported that it has reached the point where buyers were able to be more selective with their purchases. The word on the ground from exporters suggests that the softening market this week is being led by offshore clients pulling back slightly due to tightening credit. The responding retraction in prices saw a bump in the percentage of wool passed-in this week. It rose 3.2% from last week to 6.4% of bales passed-in.

The finer micron wools still appear to be reacting most to any change in the market. The largest price correction was for 18.5 micron, which dropped 35 to 50 cents in the East over the week. Medium fibre wools (19.5 to 22 micron) lost on average 10 to 30 cents, while crossbred wool again demonstrated its volatility in a wide range of results. The finer crossbreds held slightly, to a loss of 10 to 20 cents, but 28 and 30 micron prices suffered on average 40 to 60 cents drops.

Skirtings followed the movements of the Merino market showing reductions ranging between 20 and 40 cents. The cardings indicator managed to retain some stability in the East on the week, and even posted a gain of 15 cents in the West.

The week ahead

Next week a huge offering of 51,982 bales is tipped across the three selling centres. Significant volumes are expected for Sydney and Fremantle which are providing most of the boost in next week’s offering. Sydney will be holding a designated Australian Superfine Sale on Wednesday and Thursday.

Resilient market defies flush

Posted on 29/11/201727/11/2017 by Caitlin Dearden

The Eastern States Trade Lamb Indicator (ESTLI) continues to hold its ground in the face of strong lamb throughout figures being recorded in South Australia and Victoria, closing yesterday just 1¢ softer at 610¢. East coast mutton was even more defiant in the face of above average saleyard numbers to see an 8¢ gain to 461¢/kg cwt.

The East coast lamb throughput posted a 22.5% increase on last week and is sitting 28.4% above the five-year average for this time in the season – figure 1. NSW lamb yardings trekked sideways on the week but remain 22% above the seasonal average level. Although the big boost to East coast yardings is coming from SA and Victoria.

Figure 2 highlights the surge in SA lamb throughput at 52,251 head; the highest weekly lamb yarding recorded since 2008 to see throughput levels soar 60% over the five-year average for this time in the season.

Victoria is adding to the East coast glut of lambs with over 120,000 head recorded at the saleyards this week. Victorian lamb throughput was also higher than the five-year average this week, sitting 23.5% above the seasonal level. The increased numbers are currently dragging down each states respective Trade Lamb saleyard indicator, with Victorian Trade Lambs posting a 3.4% decline (600¢/kg cwt) and SA off 6.1% (574¢/kg cwt), based off the MLA mid-week saleyard report.

Stronger than average East coast mutton throughput levels were recorded too. This was aided by higher NSW figures, to see an 8.6% increase in saleyard numbers and the trend continuing to trek along the upper band of the normal range – figure 3. NSW mutton yardings were up 15.7% on the week, pressuring NSW mutton at the saleyard to see them ease 4¢ to 400¢/kg. Softer Victorian and SA mutton throughput is providing some support to prices there with Victorian mutton up 20¢ to 420¢ and SA gaining 8¢ to 410¢/kg cwt.

The week ahead

Price support is likely to remain from continued rainfall forecast across much of Victoria and NSW next week, with much to these two states expecting between 25-50mm. Although, increased Victorian yardings are likely as the Spring flush continues, so that will act to help counterbalance the recent and forecast rains.

On balance, the ESTLI is likely to ease into the week ahead to test sub 600¢, but don’t expect a huge drop.

Weaker supply and higher export prices mean what?

Posted on 28/11/201727/11/2017 by Caitlin Dearden

Meat and Livestock Australia (MLA) seem to have sorted out the differences with processors who were holding back data slaughter data. For the last couple of week’s slaughter data has confirmed what we thought, cattle supply has been tight.

Figure 1 shows east coast cattle slaughter jumping higher in the week ending the 17^th November. This was largely thanks to Queensland, but slaughter rates moved higher in Victoria and NSW as well. East coast cattle slaughter last week sat just 3% below the same time last year (figure 1).

Slaughter cattle prices remained relatively steady this week, maybe due to the sharp jump higher in 90CL export prices. The 90CL Frozen Cow gained 18¢ to hit a five month high of 618¢/kg swt (figure 2). Driving export prices higher has been limited supplies from Australia and New Zealand, along with a weakening Aussie dollar.

The 90CL export prices is now nearly 7% higher than this time last year. So if export prices are higher than last year, and cattle slaughter lower, prices should be higher, right? Well no, figure 3 shows the Queensland Heavy Steer Indicator has improved, but it’s near the same price as last year.

As we noted earlier in the week, cattle supplies out of feedlots appears to be keeping a lid on cattle price rises, although the latest jump in export prices could see prices creep a bit higher.

In the west young cattle prices are basically the same as those in the east. Normally WA cattle prices start to head towards lows at this time of year, but limited supplies continues to support values.

The week ahead

The good wet season is set to continue for Northern NSW cattle producers, with 50-100mm forecast for next week. This bodes well for young cattle prices to at least hold current levels, and possibly improve. Finished cattle could see some benefit as well, but processors will have to want to push slaughter above last year’s levels. The weakening Aussie dollar should help on this front.

In search of the elusive SA premiums

Posted on 27/11/201727/11/2017 by Caitlin Dearden

The South Australian Greens have extended the moratorium on GM in their state and over the past few weeks the mob at Mecardo have been investigating the claim made by the Greens that the GM ban, and their clean, environmentally sustainable image, provides a price premium benefit to SA producers. There has not been any sign of a premium on Canola, nor in mutton and lamb. This time we try to find it in cattle.

In order to determine if a premium exists for SA producers we need to be able to compare markets that are interdependent and share a degree of correlation in price movement to ensure that we are measuring like for like. We have run a series of correlation analysis over historic cattle price movements contrasting SA to other states and a variety of cattle categories and have selected to compare SA to Victorian Trade Steers.

On an annual basis, the returns correlation between SA and Vic Trade Steers shows a very strong interdependence scoring an r² of 0.9405 – Figure 1. This means that nearly all of the time the annual price movement in SA Trade Steers and Victorian Trade Steers follow each other.

Figure 2 highlights the average monthly price achieved by SA and Victorian Trade Steer producers at the saleyard according to the weekly MLA reported statistics. A cursory glance at the chart illustrates two fairly obvious characteristics of the two price patterns; namely, that the prices of SA and Vic Trade Steers share a close interdependence and that SA prices usually run at a discount to Victorian prices.

An overview of the historic percentage spread between SA and Victorian Trade Steer monthly average prices from 1998 to 2017, as outlined in Figure 3, demonstrates how few times SA producers have enjoyed a premium over their Victorian counterparts. Indeed, there have only been four brief periods over the last two decades when SA Trade Steers achieved a premium over Victorian Trade Steers on a monthly basis – as identified by the blue circles.

Analysis of the monthly spread data shows that Victorian Trade Steers have posted a long run average premium of 8.3% over SA Trade Steers (black dotted line) and the orange spread trendline shows that over the last two decades the premium spread in favour of Victoria has actually been expanding, as denoted by the upward slope to the trendline.

A cut in China livestock tariffs a big deal…or not

Posted on 24/11/201723/11/2017 by Caitlin Dearden

According the Australian Livestock Exporters Council (ALEC) it was agreed last week that China are going to cut the 10% tariff on live feeder and slaughter sheep and cattle imports by January 2019. Is this a big deal, or not?

Breeding cattle dominate the Australian live export trade with China. Last year Australia had its second biggest year on record for breeder cattle exports, with 94,341 head shipping out (figure 1). There has been no tariff on breeder cattle exports for some time.

The latest announcement refers to the cutting of the tariff on slaughter and feeder cattle. This is a market which has only just started to move. For the year to October, feeder and slaughter cattle exports to China have totalled just 1,195 head. This is 2.3% of total export to China.

The abolishment of the 10% tariff on feeder and slaughter cattle exports to China will make cattle 10% cheaper for Chinese importers, while Australian sellers will receive the same price. In reality, when tariffs are removed (or applied), the benefit is split between seller and buyer, so there should be some price rise at the exporter end as well, which will no doubt benefit growers.

So where will these cattle come from? There is competition for China in the feeder and slaughter cattle market. The main player is obviously Indonesia, while Vietnam has grown in the last five years to be easily the second largest importer of Australian live cattle.

Figure 2 shows just how large the Indonesian and Vietnam markets are compared to China. As such it would take a very large push to see Chinese live export demand start to impact prices in Indonesia and Vietnam.

The feeder and slaughter cattle which have been exported to China were actually sent out of Portland earlier this year. This is where many of the breeder cattle which are sent to China come from, and increasing live exports could add support to feeder and slaughter cattle prices in the south when a boat is going.

The 10% tariff was also lifted on sheep, but sheep exports to China don’t even rate a mention in the data. They are lumped in with ‘other’.

Key points:

China have lifted the 10% tariff on live feeder and slaughter cattle and sheep imports from Australia.
The current trade with China in live feeders and slaughter cattle is very small, but could grow with opening of the trade.
Over time increasing demand for beef in China is likely to see the market grow and support prices.

What does this mean?

The lifting of the tariff from China is not going to see a rapid jump in prices tomorrow. It is an indication, however, that China are serious about taking more live cattle from Australia to bolster beef supplies. While the market is currently very small, any opening up of trade is good for cattle producers, as boats create competition and support prices.

Figure 1 shows that breeder cattle exports have grown rapidly in some years, so don’t be surprised if you start hearing more and more about boats going to China.

Lift in QLD throughput brings East coast back to average

Posted on 24/11/201723/11/2017 by Caitlin Dearden

Robust northern cattle prices are attracting stock to the saleyards again this week in Queensland. Although, East coast throughput is sitting at fairly average levels for this time of the season as higher than average northern states yardings are offset by below average levels in the southern states.

Figure 1 shows the steady rise in Queensland cattle yardings since mid-October and based off last week’s figures we saw another 27% gain in cattle at the saleyards this week. Queensland Restocker, Feeder, Vealer, Medium and Heavy Steers all fetching the strongest prices for their categories across the country this week, so it is probably no surprise that we are seeing producers bring forward supply in the Sunshine State.

Queensland yardings sitting 28% above the five-year average for this time of the season and the above average throughput in Queensland and NSW, which has this week’s throughput 7.5% higher than average, has been offset by lower than average throughput in Victoria and South Australia, at 46% and 40% below their respective average levels. This combination of East Coast yarding levels offsetting each other, saw broader throughput at just 3% below the five-year average for this week in the season – figure 2.

National saleyard cattle prices were relatively subdued this week, with most indicators not varying beyond a plus or minus 2% swing. The Eastern Young Cattle Indicator (EYCI) is virtually unchanged on the week at 578.5¢/kg cwt, while the softest national category was the Heavy Steer Indicator, off 2.3% to 279¢/kg lwt. National Trade Steers were the best performers, closing up 1.8% to 304¢/kg lwt.

In the West, young cattle fared a little better with a 3.6% rally to nearly match the EYCI level, to rest at 575¢/kg cwt. The benchmark beef export indicator, the 90CL frozen cow, finished the week back above 600¢ for the first time in seventeen weeks.

The week ahead

Some very good falls were noted through SA, NT and Western Victoria noted this week (figure 3) and the forecast for next week is for further rain to cover much of Queensland, NSW and Eastern Victoria with levels noted between 50-100 mm in many places.

Good coverage like this and solid export price levels will mean it’s unlikely to see cattle prices soften too much across the nations for the short term.

A time for inward reflection

Posted on 22/11/201723/11/2017 by Caitlin Dearden

The market continues to trade with a lack of strong fresh information. The real focus now is on what is happening locally. We continue to sit at strong local levels, but how long will it last?

On the global stage, Chicago wheat futures took a tumble this week (figure 1), returning to levels from the beginning of the month. The market continues to trade on the large global stocks, and eyes will be on export numbers to determine how quickly end-stocks will be depleted in the major exporters. As it currently stands without increased weather woes in the northern hemisphere there is likely to be little in the way of upward momentum.

At a local level, prices have been trending downwards to flat (figure 2) during November. However, across the board, APW1 prices have fallen substantially since the beginning of October.

Port Kembla -$39
Geelong -$30
Adelaide -$18
Port Lincoln -$20
Kwinana $-14

On the first weekend of November, an unseasonal frost event impacted Victoria. Our discussions with numerous consultants point to major losses to cereals. This is yet to be reflected in pricing with Geelong trading lower than the beginning of the month.

During October strong rainfall events have added some confidence to the summer sorghum crop, which reduced the concerns that domestic feed consumers had. This has led to a fall in basis levels (figure 3), especially in the areas which are within a potential drawing arc of NNSW/SQLD. We have highlighted the risk in pricing levels falling as we advance into harvest, these are worth re-reading.

Lock in premiums, keep exposure to the market

Wheat seasonality: Imitation is the sincerest form of flattery

Let’s look back at historical basis

What does this mean?

The key concern we see, is the status of the crop in Victoria. It has been two weeks since the major frost event, which is considered a 1 in 20-year event. The crop was looking fantastic in the Western Districts, and to see it fail so close to harvest, is completely heartbreaking and devastating. The full extent of the damage will be only be realised when the header goes into the crop.

Go west, where the lambs are cheap

Posted on 21/11/201723/11/2017 by Caitlin Dearden

It could be the beginning of the spring flush, or it could be another blip in what has been an exceptional spring for prices. The rainfall this week might also have something to say about lamb prices in the east, but in the west they look like good buying.

There is an interesting east/west paradox going on in the lamb market. In the east restocker lambs are trading at a 50-90¢/kg cwt premium to trade lambs. In the west, trade lambs are priced at 542¢/kg cwt, and restocker lambs at 489¢.

If we work on a 16kg cwt restocker lamb, it makes east coast lambs $122/head with a $5 skin. In the west, the same lamb is worth $83. Historically this is a decent price, but it brings shipping sheep from west to east into play.

Despite yardings falling this week, prices have eased. The Eastern States Trade Lamb Indicator (ESTLI) lost 16¢ to 611¢/kg cwt in the week to Tuesday, but as shown in figure 1, remains well above last year’s levels.

Mutton markets defied the downward movement, with Victorian and NSW remaining solid at 466 and 450¢ respectively. Vic and NSW mutton values have rallied 25% in the last month with demand seemingly the driver (figure 2). Figure 2 also shows that in South Australia mutton is only 330¢, which makes them cheap, and worth shipping to Victoria.

The week ahead

Major lamb districts in Victoria and South Australia have seen exceptional rainfall in the last few days. The rain is likely to see lambs held back, especially if the market eases as Western Victoria and South-East SA are likely to be green until Christmas.

Slaughter figures will tell the tale of lamb supply, and give some pointers to what might happen in the New Year. But don’t be surprised if after this rain the spring flush of lambs is lighter than normal.

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