The first week in August. This month is one of the most important in the cropping year, as we will have increased certainty on the rest of the world’s crop, and start to gain greater clarity on how good (or bad) Australia is going to be come December. It is the knife edge time of year.
The global markets over the past week have continued to decline (figure 1). In straight futures, the market is now down to levels below the June/July rally, in the past week in A$ the fall has been $10.
In figure 2, we have shown the three US futures contracts, converted into A$. We can see that all futures have fallen considerably. The premium between SRW/HRW and HRS continues to trade at a strong level, this is as expected due to the poor growing season which corresponds with the hard red spring contract. The issues around the world when it comes to wheat are largely around quality, particularly the lack of high protein wheats. At present low protein wheats are still in strong supply.
At a local level flat price around the country have fallen since a peak on the 11th of July (figure 3). During the first week of July all port zones were able to achieve historically competitive prices, however few growers have taken advantage of the prices available. Since the 11th, across all ports in figure 3, the price has dropped by $32 per mt.
At present the ‘Garden of eden’ prize in Australia currently resides with Victoria, with crops progressing well and receiving beneficial rain in recent days. However, other areas of the country are not in such great shape. If conditions deteriorate around the country, we would expect basis levels to bolster.
Next Week
The next couple of weeks will be instrumental in developing the Australian crop, and at this point in time the range of possibilities is as wide (15-21.5mmt). What falls from the heavens will determine where we end the year.
Figure 1 highlights the chance of rainfall exceeding the median levels for this time of year, and it looks particularly unfriendly to southern NSW. Despite much of Queensland enjoying a rosier picture, cattle prices here were among the softest this week with QLD Heavy and Feeder steers bearing the brunt of the negative sentiment – off 6.6% (260¢/kg lwt) and 6.2% (308¢/kg lwt) respectively. Meanwhile, Victorian saleyards registered Feeder steers and Trade steers as their weakest two categories, down 6.2% (301¢/kg lwt) and 4.2% (302¢/kg lwt) between them. In defiance of the BOM outlook the NSW markets were reasonably flat on the week, apart from Medium Cows, marked down 4.3% to 208¢/kg lwt.
Some reasonable rainfall is noted for much of WA and Victoria next week, but much of the rest of the country is expected to miss out again. A key factor for the EYCI to find a bit of a base in the next few weeks will be the movement in the 90CL and the A$.
According to the US Meat Export Federation (USMEF), who have produced an excellent fact sheet, a vast majority of US frozen beef exports to Japan are grainfed brisket and short plate cuts. These cuts are used in gyudon beef bowl chain restaurants.
While mutton markets have participated in the decline in ovine markets since mid-June, unlike lamb markets, mutton values have managed to remain strong relative to last year’s levels. Figure 1 shows the National Mutton Indicator (NMI), which last week fell to a six month low of 395¢/kg cwt.
In 2016 the mutton market eased a little, but found solid support at 350¢ as the good season and flock rebuild supported prices. From 2012-2015 the NMI averaged 230¢/kg cwt in October, so it’s the exception for mutton to be valued at better than 300¢ in the spring.
Obviously there is no guarantee that Australian sheep areas will have a dry spring. The BOM have been in pretty good form this year, and their latest forecast doesn’t paint a rosy picture (figure 3). Simply based on historical mutton prices during strong supply, we would put the NMI in the 200-250¢/kg cwt range.
Figure 1 shows the rapid increase in sheep slaughter over the past month. This is a sure sign of moisture stress for sheep growers. Lambs can’t be offloaded as they are not ready, so it is sheep which are hitting the market, most likely wethers. Sheep slaughter for the week ending the 28th July was the more than double the same week in 2016, and the highest level since 2013, but only marginally beating 2014.
At global level, we have seen further deterioration of Chicago wheat futures, with the spot market falling to as low as 474¢/bu, from a high at the end of June of 539¢/bu (figure 1). The market has lost 3/4 of its gains in ¢/bu since the rally in the end of June. The fall in SRW wheat is not unexpected as weather issues around the world are more a quality than quantity issue at present, and with beneficial rains being received throughout the US, risk to this crop has reduced and priced into the market.
The last of the strong prices for 2017 seems to have drawn out the last of the old season lambs this week. Figure 1 shows a sharp jump in lamb yardings this over the last two weeks, with nearly 172,000 head yarded this week. Given the lower slaughter space on offer at the moment, it was enough to send prices sharply lower.
We have been hearing plenty of anecdotal evidence of increasing lamb supplies coming out of NSW, but also that lambs are struggling to put weight on due to a lack of feed. In theory slower weight gains should see increased supply of store lambs, and weaker supply of finished lambs.
It would likely take a couple of dry years in a row to see restocker lamb prices fall to a discount to the ESTLI. The more likely scenario would be restockers paying a similar premium to that seen during 2014 and 2015. Those years both had ordinary spring and summer rain, and much stronger grain prices than last season.
The first story states that US herd expansion is continuing. The latest numbers on the US cattle herd from the United States Department of Agriculture (USDA) put the herd at 102.6 million head. This is a 6 year high, and up 7 million head from the 2014 low. The US have added the equivalent of 25% of the Australian herd in just 3 years.
Finally, we come to the fifth story, which is more of the same on the weather forecasting front (Figure 2). While key cattle areas of Queensland and Northern NSW are back at a 50:50 chance of getting more than the median rainfall, the dry is forecast to continue for southern NSW and much of Victoria.
Considering the finale is always the main event, we’ve focused this market review on the last week of the season (July 10th 2017). Table 1 compares the average market price for the last week of the 2016-17 year for Northern, Southern and Western market regions to that of the previous year. The closing market clearly favoured the fine microns this year with a price jump at an average of 34% across the 16.5 to 19 micron range for the Eastern markets and 24% for the West.
By comparison, the mid and coarse fibre market on the West Coast remained fairly stagnant, landing nearly right back where it ended 12 months ago. The market price was on average just 10c higher than last year for fibres above 19.5 micron.