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Rising Aussie dollar dampening our grain values

Posted on by Caitlin Dearden

After falling heavily last Thursday night Chicago Soft Red Wheat (CBOT) Futures largely held their ground this week.  The real issue for local values came from the Australian dollar, which this week hit a two year high and is dampening the value of our grain.

CBOT wheat prices managed to track sideways this week as the market digested the World Agricultural Supply and Demand (WASDE) report and weather outlooks improved.  While the spot and Dec-17 CBOT wheat have fallen 50¢ from the peak, the Dec-18 contract is down 35¢.  Dec-17 currently sits at 529¢/bu, with Dec-18 at 585¢ and full carry back in the market.

The rise and rise of the Australian dollar has wiped some more value off swap prices.  This morning Dec-17 is priced at $242/t and Dec-18 at $268/t.  Good employment data yesterday pushed the AUD to 80US¢.  The 5¢ rise in AUD since the start of June has wiped $16/t off the value of CBOT wheat futures in our terms.

Locally new crop ASX East Coast Jan-18 Wheat futures have also fallen, but basis is strengthening.  The Jan-18 ASX contract settled at $290/t yesterday, which at $48 basis is historically pretty strong, but not yet ‘drought’ basis as seen last in 2007 (Figure 2).

After also falling heavily last week, ICE Canola for Jan-18 has steadied at the $515CAD/t level.  The Canadian dollar has matched the AUD increases, with the two currencies locked at parity, so swap prices remain around the $515/t value.  With local port prices at $530-535/t, the basis value doesn’t look to be there, so swaps would be the way to go at the moment.

The week ahead

The forecast shows another 8 days without rain for anywhere but South West WA and parts of Victoria.  The weather is still cool but the need for rain on the East coast is increasing, and basis should continue to climb, for both wheat and canola.

The US market seems to have found a level it’s comfortable with for the time being, but as we move towards the corn and soybean harvest the risk of downside will increase.

All recovered on the Western front

Posted on by Caitlin Dearden

As noted in the commentary from last week the extreme drop in the Western Young Cattle Indicator (WYCI) righted itself somewhat this week, staging an 11% recovery to close at 595¢/kg cwt. The Eastern Young Cattle Indicator (EYCI) largely trekked sideways with a slightly softer bias, down only 0.5% to match the WYCI at 595¢/kg cwt.

The 90CL frozen cow beef export indicator continued to slide this week, dragged down by a reduction in boxed beef forward sales in the US over the last few weeks. US meatworks report an 18% drop in forward bookings so have realigned their pricing to lower levels in order to attract additional forward sales interest. The 90CL settling 3.1% softer to close at 615¢/kg CIF – Figure 1.

National cattle indicators were largely supported by gains in Queensland this week with most categories broadly unchanged. National Medium Steers the standout performer, up .2% to 293¢/kg lwt. National Feeder Steers, the laggard this week as the lift in grain prices continue to bite, staging a 1.5% fall to 318¢/kg lwt.

East coast producers responding to the recent price declines with a further pullback in yardings noted this week to see just short of 45,000 head reported through the saleyards– Figure 2. Weekly throughput is now sitting 10.9% below the five-year average for this time of the season.

The week ahead

Despite the fall in the 90CL this week the indicator remains above the EYCI, combined with the steady decline in cattle yardings, this should start to add some support to cattle prices at the current level. Although, the rain forecast for next week shows limited falls to the southern tip of the nation so it’s unlikely that prices will get too much of a kick up. Consolidation at current levels seems the order of the day.

Restockers still in the game

Posted on by Caitlin Dearden

When we set out to write this article, we thought it was going to be about how restocker demand was on the wane, and one of the reasons the cattle market was falling.  While restockers are paying less, they are still buying plenty of cattle.

With the dry weather being experienced across much of the east coast, we expected to find restocker demand had been weaker.  Figure 1 shows the spread of the price paid by restockers for EYCI cattle, compared to the EYCI itself.

Restockers are not paying as much of a premium as they were, but it has only fallen back to average.  Last spring and summer restockers were paying 4-6% more than the EYCI.  As the restocker premium eased in March, as did the EYCI.  When restocker demand ramped up again, the EYCI rallied, and subsequently fell again, seemingly on the back of the restocker premium falling from 4% to 2%.

With the weakening in the restocker premium, figure 2 shows that restockers are not buying any smaller proportion of cattle.  Over the last 9 weeks restockers have bought 49% of EYCI cattle, compared to just 38% over the same period last year.  It would seem the falling premium being paid by restockers is more due to increased supplies of suitable cattle.

This is somewhat confirmed by the smaller fall in the price paid by feeders for EYCI cattle over the last six weeks.  Figure 3 shows that feeders are paying 7% less than at the start of June, while restockers are down 10% and processors price have weakened 8%.

It does stand to reason that during dry times more light cattle, suitable for restockers, will come to market.  This also means that fewer heavier store cattle suitable feeders will be available, while the supply of finished cattle, for processors will be even weaker.

We are still some way from the drought spreads of 2014-15, when restockers, feeders and processors were all paying the same price.

Key points:

  • Dry weather has pushed the EYCI lower, with the restocker premium falling back to average levels.
  • Restockers are still buying plenty of EYCI cattle, which suggests supplies of restockers types are higher.
  • Widespread rain would see a turnaround in light cattle supply and restocker demand.

What does this mean?

Stronger supply of light store cattle is not the only reason for the weaker EYCI, but it is contributing.  For those lucky enough to have feed on hand, the fact the restocker cattle are now more in line with historical premiums to the EYCI means they are reasonable buying.

Widespread rainfall on the east coast would see a rapid turnaround in young cattle supply and prices, but there isn’t much encouragement on the forecast.  Further dry weather is likely to see the EYCI continue to ease, and the restocker premium fall back to zero.

 

A bounce or a rally in lamb prices

Posted on by Caitlin Dearden

The lamb price bounce continued this week despite a bit of a lift in yardings.  The direct to works supply appears to have weakened, with plenty of competition back at the saleyards.  All this despite the stronger Aussie dollar which is not doing great things for our export competitiveness.

Figure 1 shows the significant bounce in the Eastern States Trade Lamb Indicator (ESTLI) with the indicator hitting 628¢/kg cwt, a 20¢ rise for the week.  This week’s lamb prices were at a four week high, but still lag the exceptional values of April to June.

Price increases were general across the states, and in mutton as well.  But one that caught our eye was an 88¢ increase in light lambs in SA, with prices back at 627¢.  A solid 99¢ premium to SA trade lambs, which doesn’t make a lot of sense.  Buyers could get a 16kg lamb for $100 plus skin, or a 20kg lamb for $105 plus skin.

Figure 1 shows the forward contracts which were available back in May and June. If growers who took contracts have been able to get suckers up, they will enjoy a solid premium to the spot market, at least in the first couple of weeks of August.

The rising Aussie dollar has been the bane of grain growers over the last few weeks; it’s now up to 79¢.  This puts the ESTLI in US dollar term back at 500¢, around 20¢ below the April high, but getting expensive none-the-less.

The week ahead

There is no rain on the horizon, which could send the market either way.  Last year a good winter and spring saw prices hold on while growers put more weight on lambs.  This year finished lambs might be hard to come by as a lack of winter feed could have curtailed growth rates.  On face value this would suggest cheaper store lambs, and relatively expensive trade and heavy lambs as we move through August

Weekly Wool Forwards – week ending 21/07/2017

Posted on by Caitlin Dearden

First week into the recess, the wool forward market hasn’t moved much. Only a couple of trades, one in fine wool and another in medium wool.

19 micron wool traded at 1775¢ for August 2017. And September 2017 saw a trade at 1450¢ for 21 micron wool. There was a subtle shift lower in the wool forward curve this week as the higher A$ impacted upon foreign export demand – figure 1.

There were no minimum price contracts traded this week. See table below for the current minimum price indicative prices for 19 and 21 micron wool.

Growers put a floor in the lamb price

Posted on by Caitlin Dearden

It’s nice to be right sometimes, even if it is only for a week. The weekly comment last week suggested the slide in lamb prices was about to halt, and halt it did. The market even bounced back above 600¢ as lamb and sheep yardings recorded another weak week.

Figure 1 shows what lamb producers think of the saleyard values on offer over the last couple of weeks. East Coast lamb yardings spent their second week in a row close to the lowest levels seen in 2017. It’s been over 12 years since lamb yardings were this low in the first two weeks of July, and it seems to have started to bite on the supply of lambs to works.

The Eastern States Trade Lamb Indicator (ESTLI) bounced this week (figure 2), gaining 27¢ to move back to 605¢/kg cwt. NSW and Victoria both had strong rallies, while in South Australia the trade lamb indicator inexplicably 37¢ to sit in the doldrums at 495¢/kg cwt. SA price are 110¢ behind the ESTLI, and we would expect them to climb back up next week.

In the West trade lambs are keeping pace with their eastern cousins, sitting at 610¢/kg cwt. WA Mutton fell through 400¢ this week, setting an 8 week low of 374¢/kg cwt. East coast mutton values also eased, but remain better than the west, averaging 434¢ in Victoria and NSW. SA has the cheapest mutton as well, sitting at 340¢, and this was up 39¢ for the week.

The week ahead

So was the rise in the ESTLI a dead cat bounce, or a sign of the market steadying. Supply would have to pick up from here to send lamb prices lower, and at this time of year it’s usually hard to find many prime lambs. We might see lamb prices above 600¢ for the rest of July, at least until new season lambs start to hit the market.

Mutton supply is less predictable, as there are always sheep out there is seasonal conditions push them to market. A good rain will see sheep prices rally, but there doesn’t appear to be too much on the forecast.

Forecast says more cattle coming

Posted on by Caitlin Dearden

As we move past the half way mark of the year we can start to get an idea of how cattle supply is faring relative to industry forecasts. Those looking to sell cattle in the second half of the year will not only be hoping the weather does the right thing, but also that Meat and Livestock Australia’s (MLA) total cattle slaughter forecasts are an overestimate.

MLA’s latest cattle projection forecasts, released in April, pegged 2017 national cattle slaughter at 7.1 million head. According to the Australian Bureau of Statistics (ABS) the first five months of 2017 saw 2.84 million head of cattle go over the hooks. According to MLA’s weekly slaughter figures June cattle slaughter was around 2% behind 2016.

Figure 1 shows that using the ABS figures, and MLA’s numbers for June, has 2017 slaughter trading well behind 2016. Our estimate puts cattle slaughter for the first half of 2017 at 3.45 million head, 9.4% lower than 2016. More importantly, the total number of cattle slaughtered to the end of June is just 48.6% of MLA’s annual forecast.

For July to December we have applied average seasonality to the number of cattle which still need to be slaughtered to reach 7.1 million head. For the July to December period cattle slaughter will have to lift 5% on last year’s levels.

July 2016 was a very low slaughter month, as were September and October, when compared to the five year average. This is why figure 1 has most of the increased slaughter for the second half of the year in those months.

Figure 2 shows that the herd rebuild in the first five months saw the year on year decline in female slaughter outstrip their male counterparts. Up until May female cattle slaughter was down 16%, while male slaughter was down just 6%. Male slaughter was actually higher than last year in May.

On face value we can say that if supply is to pick up in the second half of the year, were more likely to see an increase in cows and heifers, than steers or bullocks.

Key points:

  • Cattle slaughter for the first half of 2017 has been 9.4% lower than 2016, and not on track to meet forecasts.
  • If Australian cattle slaughter is to meet forecasts, it will have to be 5% higher than last year.
  • An increase in cattle supply is likely to see prices remain below 2016 over the coming months.

What does this mean?

Simple economic theory says that higher supply, and steady demand, will result in lower prices. We are already seeing lower prices than last year in cattle markets, but the question is, how much lower can prices go? Given where export beef markets are sitting, and the fact we should be hitting the seasonal low point for cattle supply, it’s hard to see too much further downside in the short term.

However, if it remains dry we head into September, the increased supply could push the EYCI back towards the low 500¢ level. Downside is likely to be stronger for cows, while heavy slaughter steers are likely to fare better, as supplies haven’t been held back as hard in the first half of the year.

Futures and FX going against us

Posted on by Caitlin Dearden

This week we saw the USDA release their July World Agricultural Supply and Demand estimates, the market has reacted to this news. In this update, we take a short look at Chicago futures & the dollar.

The last two sessions in the wheat market have been in the red (figure 1). The market has been on a skyward journey over the past two weeks, however it came to an end when the USDA report came out. The WASDE report was bearish with world stocks up 1.62mmt.

This bearish report, alongside welcome rains in the US has spooked the speculators in the market. However, the SRW futures falling should not be much of a surprise, as the world issues are largely around quality not quantity. It must be noted that we typically expect any falls in production to have a 2-month lag before appearing in the WASDE report. Therefore, the August report might provide some fireworks.

To add insult to injury, the AUD has reached four-month highs (figure 2), barrelling above 77¢. This makes our wheat more expensive to export. The AUD has gained value after better than expected Chinese trade data, and remarks from the US Fed Reserve that interest rates in the US may not be as soon or as frequent as expected.

Next Week/ What does it mean?

The commitment of trader’s report will give an indication into how the speculators in the market are positioned, and we would expect them to have reduced their long positions.

There will be another weekly crop report released, and we would expect the spring crop ratings to be reduced. Although at this time of year, a large degree of quality risk will already be priced in.

Down in the east tanking in the west

Posted on by Caitlin Dearden

The Eastern Young Cattle Indicator (EYCI) fell for the sixth straight week, and took most other indicators with it. In the West prices tanked, but it might be an outlier. The story remains the same, with dry weather and relatively high prices encouraging offloading of stock.

Even the 90CL Frozen Cow Indicator got in on the falls this week, it tanked, losing 18¢, or nearly 3%, to 641¢/kg swt. Increased slaughter here is reportedly starting to impact supply, on the positive side, here.

Figure 1 shows that while the 90CL was lower, it’s still well above the EYCI, and this is one of the measures we use to judge cattle value. For the first time in nearly two years the EYCI seems undervalued.

Most other cattle categories drifted lower this week, to the tune of 10-20¢/kg cwt. The exceptions were cows, which managed to gain 5-10¢ in Queensland and Victoria.

Higher grain prices looking to be starting to bite feedlots. While still historically very strong, feeder prices this week fell 5-15¢ to range from 318¢ for Domestic feeder heifers, to 363¢/kg lwt for long-fed export steers. With grain prices now around $100/t higher than harvest, feedlots are obviously going to try and either increase grainfed cattle prices, or decrease feeders.

We suspect it may have been on small numbers, but the Western Young Cattle Indicator (WYCI) fell heavily this week, losing a massive 91¢ to hit a 22 month low of 536¢/kg cwt. Given that over the hooks quotes for yearlings in WA remain in the 580 (Grassfed)-630¢ (MSA) range we’d expect to see a bounce in the WYCI.

The week ahead

The movement in the EYCI this year is really like no other year. It is almost a mirror image of 2016, and cattle producers will be hoping this doesn’t continue. If it does we’ll be headed for sub 550¢ levels. It takes a very short memory if you think 550¢ isn’t an acceptable price. A good general rain will fix the ‘low’ price problem, there just isn’t one on the horizon.

 

Good demand on larger offering

Posted on by Caitlin Dearden

It seems wool growers are selling as soon as the wool is shorn, with another large offering coming forward. Despite this, the market performed well despite receiving no help from a rising A$. AWEX report that W.A.’s unseasonaly dry weather has seen growers bringing forward shearing causing the increase in supply this week.

The increase in the Fremantle offering resulted in 46,400 bales offered, with 42,900 sold and 7.7% passed in.

The market was strong, although the finer than 17.5 MPG and the 21 MPG and broader were the leaders. In other categories, crossbred types experienced good price rises of 10 to 20 cents, however the Cardings indicator fell in all centres by 10 to 25 cents.

While the EMI lost 2 cents in the auction, the stronger levels of A$ quoted yesterday at US$0.77 meant that the EMI actually rallied US$0.15.

The sale result this week is a perfect result leading into the recess. Buyers were able to secure plenty of wool and buyers paid higher US$ prices. This sets the scene for exporters to visit customers over the recess and secure orders for the resumption of sales in a climate of optimism; always a much better position that when sales end on a downturn prior to a break.

A note about the crossbred rally this week; while all types experienced price increases it was the better prepared lots that were most keenly sought out. It pays to now spend some time on preparing crossbred wool in the woolshed, as this will either improve the price compared to poorly prepared lots or at the least increase competition.

The week ahead

The market now enters a three-week recess, with sales resuming on the week beginning 7th August in Fremantle, Melbourne & Sydney.

Based on this weeks competition the market should open well in three weeks time, especially if the A$ can lose a little ground.