Tag: Articles

Rain on the plain sees cattle price gain

Posted on by Caitlin Dearden

Cattle markets have been waiting for a rain event, and it keeps coming.  Average January rainfall has been followed by more rain in Queensland this week, and more is forecast for the east coast this week.  If the drought hasn’t broken, price action suggests it is not far away.

The Eastern Young Cattle Indicator (EYCI) this week tore through 600¢ and finished Thursday at 623¢/kg cwt.  Restockers continued to drive values higher, averaging over 350¢ for steers in NSW and Queensland.  Feeders joined in this week, paying over 340¢/kg lwt for steers, 21¢ higher for the National Indicator.

Figure 1 shows the EYCI hasn’t been this strong since mid-2017, and it hasn’t seen a better than 100¢ increase in a month ever, as far as we can tell.

While Trade Cattle remained stubbornly steady at 300¢, Heavy Steer and Cows joined in the rally, the National Indicators sitting at 319 and 258¢ respectively this week.

Over the Hooks prices have also started to move, on average they were up 20¢ cwt at the start of the week and given they are still behind saleyard values, they might have to lift a bit further to get many bookings.

Export prices have continued to yo-yo this week, with the 90CL Frozen Cow Indicator easing 25¢ back to 744¢/kg swt. The price still leaves room for cattle prices to rise (figure 2), but the rally might start to slow.  That’s not to say it will stop, with 700¢ for the EYCI a realistic target.

Next Week

Meat and Livestock Australia’s cattle industry projections were released this week, so next, we’ll be looking at some long term forecasts.  Needless to say, things look very positive for cattle prices, with cheaper feed finally on its away and restocking on the minds of many in NSW and Queensland.

Are we independent?

Posted on by Caitlin Dearden

Is the Australian grain industry a lone continent removed from the vagaries of overseas pricing? Are we independent of the rest of the world? In this article, we take a look over the past few months to see the driver of pricing.

Derivatives play an important part in pricing grain, even if you do not use them to manage your risk – the derivatives market will impact the price that you receive. In recent weeks we have heard from many that futures aren’t important because our pricing is disconnected from the rest of the world.

In figure 1 the change in price (as a %) is shown for four ports in Australia and the CBOT price. As we can see the price movements onshore and offshore are following one another quite closely.

These ports show a strong correlation between CBOT (in A$/mt) and the local port price. The correlation since the start of harvest is shown below, with 0 being no correlation and 1 being a perfect correlation.

  • Adelaide 0.95
  • Geelong 0.91
  • Kwinana 0.95
  • Port Kembla 0.91

The basis levels in Australia have traded within quite a narrow range since the Christmas break. The pricing levels in Australia have moved higher through January and with a relatively unchanged basis, we could argue that much of that has come from the rise in futures.

What does it mean/next week?:

The correlation between overseas futures, in this case, Chicago, are strong. This means that if prices move in CBOT, then the local price will likely follow.

The importance of futures cannot be stressed enough therefore it is worthwhile including them in your risk management strategy.

Wool in balancing act

Posted on by Caitlin Dearden

This week the wool market operated under the shadow of the Novel Coronavirus, causing widely differing predictions as to the likely impact this would have on the market. With China the dominant force in the wool market by a long way, concerns were high as to the likely effect.

The reality was that the wool market improved in a week of global uncertainty, confounding many observers.

The Eastern Market Indicator (EMI) rose both selling days this week, to scrape back some of its recent losses, closing at 1,577 cents. The AU$ improved marginally to close at .675 cents. In US terms, the EMI rallied 22 cents to 1,065 cents.

The Western Market Indicator (WMI) also improved by 26 cents to close at 1,709 cents.

The wool market at this time is remarkably well balanced. In January the low stock holdings by processors became a concern, and buyers bid the market up with growers responding and selling 90,000 bales in the first two weeks of 2020.

With all the concerns of the global trade situation in recent times, demand has contracted and the effect has been that growers only cleared to the trade 50,000 bales in the past two weeks. The balance between supply & demand is currently being managed well with these supply adjustments assisting prices to remain solid in volatile times, unlike previous negative global trade events.

The national offering of 30,562 bales came forward, with a better market encouraging a reduced pass-in rate, settling at 14.8% nationally for the week. Just 26,027 bales were cleared to the trade.

The dollar value for the week was $43.35 million, for a combined value so far this season of $1.294 billion.

The crossbred types continued the trend of late last week to also lift, the only exception was the 26 MPG in Melbourne. It was noted that poorly prepared Crossbred lots made up most of the passed in lots in this section. Cardings indicators in all centres posted gains reflecting the generally stronger overall market.

The week ahead

The market demonstrated remarkable resilience this week, and with reports of low stocks held by processors any return to normality in China could well see demand and prices lift. The Chinese New Year usually causes a slow-down in business activity, and coupled with Coronavirus concerns factory activity has been almost at a standstill. This will have continued the decline in stocks on hand at the processor end.

The offering posted for next week is 42,900 bales and is a designated Tasmanian sale. The following weeks are posted at 36,381 and 37,485 bales.

Tight times for ovines

Posted on by Caitlin Dearden

The last fortnight in January saw both yarding and slaughter levels post a significant retracement for lamb and sheep markets across the east coast with the tight supply keeping prices well supported.

From its mid-January peak combined weekly lamb and sheep yarding levels along the east coast has shed 37% to test toward 210,000 head. Despite the sizeable drop in sale yard volumes the magnitude of the fall is in line with what would be expected by the five-year trend pattern – Figure 1.

A similar picture emerges for the combined weekly lamb and sheep slaughter numbers, posting a 24% drop from the January peak to finish just below 400,000 at the end of the month. Although the percentage magnitude of the fall in slaughter is smaller than that for yardings, the decline in slaughter sees it testing the lower boundary of the range that would be considered normal for this time in the season – Figure 2.

As the yarding and slaughter data has a week lag there is a chance that supply has remained low as we have headed into February with producers blessed with rainfall given some confidence to hold onto stock. Certainly, the lamb and sheep price movements this week suggest that sales remain tight, but we will have to wait for confirmation when the yarding data is released into next week.

The Eastern States Trade Lamb Indicator (ESTLI) responded kindly to the tight environment this week posting a 2.5% lift to close at 829¢/kg cwt. However, the National Mutton Indicator (NMI) managed a more robust performance, jumping 5.0% to finish a cent shy of 600¢/kg cwt – Figure 3.

The strong opening in mutton markets for 2020 really stands out when comparing back to 2019 levels for this time in the season. The NMI is a comfortable 61% higher than this week last season and the ESTLI isn’t looking too shabby either, with a 31% premium on it’s 2019 level. Remarkably, the NMI is just 34¢ below where the ESTLI was at this time last year.

Next week

All of the eastern seaboards are expected to get a bit of a drenching in the coming week. While much of the heavier falls are limited to the coastal zones there is still up to 50mm forecast to reach into central NSW and Victoria. An increase to sheep and lamb supply seems unlikely given the prognosis for rain in the short term so prices should continue to be supported into next week.

Bunch of pluviophiles

Posted on by Caitlin Dearden

The rain has fallen dramatically over the past week providing much-needed rainfall to large swathes of New South Wales and Queensland. This will provide some positivity to many after suffering through 2 or more years of drought.

CBOT December wheat futures have declined rapidly from their recent (and contract high) of A$318/mt on the 21st of January. At present, the December contract is trading at A$309/mt (figure 1). The contract price in A$ terms has been protected somewhat by a declining A$, however, even with a close to A$10 fall, it remains at strong levels compared to recent years.

At present, the futures price offers producers a favourable starting point for marketing next years crop.

Tentatively we can say that the drought has broken in many parts of the eastern states. After receiving scant rain over the past 2 (or more) years, the past month has provided saturating drenches.

These rainfall events start to provide some confidence of the coming crop and some surety of producing something. Albeit we need to remain level headed as we have seen promising rains in the past with no follow-up.

It’s important to remember that basis levels which have been extremely strong in recent times will cause our ‘premium’ over overseas values to decline. This may be experienced with increased vigour in relation to new crop pricing.

In figure 2, the basis level as a percentage of the overall physical price in Australia. In recent months the overall importance of basis has diminished. As a percentage of the overall price received in Australia, the basis is actually now close to the historical long term average.

What does it mean/next week?:

Next Tuesday the WASDE report will be released by the USDA. The USDA has commented ahead of the report that the Phase 1 trade deal details will not be included as part of this report.

The phase 1 deal was always going to be a tough target for China to achieve. The team of analysts at Mecardo do not believe that China will be able to meet this target, especially in light of continuing economic concerns related to coronavirus.

Flow on effect of virus shakes confidence

Posted on by Caitlin Dearden

Confidence in the wool market took another hit this week as the flow on effect of the Novel Coronavirus has been rearing its head. Local exporters took their cues from foreign importers who are uncertain due to disruptions in mills and trade flows. The opening drop in the market saw sellers withdraw their wool, prompting a nervous recovery due to the extra pressure on the lots remaining.

The Eastern Market Indicator (EMI) fell some 56 cents at market open, the largest daily fall since August last year, but regained around half that ground to close at 1,548 cents at weeks’ end. The AU$ demonstrated a similar downward trend, stabilizing mid-week before dropping again to close at .67 cents. In US terms, the EMI fell 38 cents to 1,043 cents.

The Western Market Indicator (WMI) had a somewhat gentler descent to close at 1,683 cents. Earlier in the week, Mecardo released an article about the historical impacts of pandemics such as the Novel Coronavirus of recent days. Response measures employed by affected nations are proving disruptive to economies and trade flows. For wool, workforces in overseas mills are being impacted, creating uncertainty for importers of Australian wool, which has a flow on effect to the buying confidence of local exporters.

The national offering of 33,700 bales came forward, but the sharp drop in prices collided with firm seller resistance at weeks start, to see the pass in rate climb to 48.8% before settling at 28.8% nationally at market close. Only 24,002 bales were cleared to the trade, the smallest clearance since September last year. The reduction in quantity put extra pressure on the lots remaining, which sparked the recovery demonstrated on the second selling day.

The dollar value for the week was just $36.63 million, seeing a small adjustment to the combined value so far this season, which is now just over $1.251 billion.

The crossbred types saw the same fate as the other MPGs, with prices first dropping before a recovery at the end of the week. Cardings indicators weathered the storm better, still feeling the blow in the north, but scraping to a small rise in the South and West.

The week ahead

The black swan event of the Novel Coronavirus is something no one wants to see and our thoughts go to families of those directly affected. The market effect of the event coming out of the blue has caused more uncertainty in what looked like a stabilizing market.

The offering posted for next week is lower at 35,849 bales and is a designated superfine sale. The following weeks are posted at 43,570 and 37,726 bales.

Premiums return to young cattle

Posted on by Caitlin Dearden

Widespread and significant rainfall in Queensland has seen cattle markets extend their gains this week aided by a rebound in offshore beef export prices. The added buyer enthusiasm for store and younger stock has seen the Eastern Young Cattle Indicator (EYCI) return to a premium to Eastern Heavy Steers for the first time in a while.

Figure 1 highlights the rainfall for the week to 30th January with falls as high as 300mm noted in the far north of Queensland and up to 100mm in south western Queensland. A reasonable chunk of north east NSW benefitting from 25mm to 50mm falls too.

Meat and Livestock Australia’s (MLA) handy summary of cattle market moves shows 20-40¢/kg liveweight price gains on the week for most yearling categories across the east coast. Most medium to heavier stock are lifting too, albeit to a lesser magnitude. Queensland Heavy Steers are bucking the trend somewhat with a 5¢ drop to close at 316.7¢/kg lwt. Although, at this level, they are still the highest priced finished cattle across the country reported on the summary so you could cut them some slack for the slight easing.

A comparison of the EYCI to average east coast Heavy Steer prices shows the improved seasonal conditions have seen young cattle prices return to a premium above finished stock for the first time in more than a year – Figure 2. The EYCI closing 6% higher this week to end just shy of 580¢/kg cwt, while east coast Heavy Steers topping out at 562¢/kg cwt.

It wasn’t just the rain providing support to young cattle prices this week with a resurgent 90CL frozen cow indicator proving that beef export markets in the US can add to the positive sentiment impacting cattle markets locally. The 90CL gaining 8.6% to close at 769.4¢/kg CIF – Figure 3.

Next week

The rainfall forecast for next week shows southern regions getting some reprieve from the dry that their northern counterparts have been enjoying. Large areas of central South Australia can expect 25-50mm, along with western Victoria, Tasmania and north east NSW.

With the summer rain in the south and improved offshore beef, export pricing cattle market should continue to be well supported into the coming week.

Supply falling and demand strengthening

Posted on by Caitlin Dearden

A quick glance at Meat and Livestock Australia’s (MLA) weekly slaughter data suggested both sheep and lamb were following the normal trend.  This was not the case however, with the data lagged a week it was a case of supply tightening before the public holiday-induced decline.

Figure 1 shows the impact the rain started to have in the week ending the 24th January.  Lamb slaughter was down 5% on the previous week, and 9% on year earlier values (figure 1), while sheep were similar to last year, but down 9.5% on the week (figure 2).

Sheep and lamb yardings in the week ending the 24th showed a similar trend, but to a large extent.  Sheep yardings fell close to 30%, and lambs were down nearly 20%.  The rain has at least caused producers to take a wait and see approach.

Those who held to sell this week have been richly rewarded, with all east coast lamb indicators rallying strongly.

Figure 3 shows the Eastern States Trade Lamb Indicator (ESTLI) gained 30¢ this week to hit a three month high of 809¢/kg cwt.  We looked at restocker lambs earlier in the week which had the biggest gains.  Mutton was steady in NSW and lower in Victoria, but gained 66¢ to move above 600¢/kg cwt in SA.

WA values remain well behind the east coast, with the WATLI at 613¢, down 61¢ on the same time last year.  WA Mutton is just 17¢ below this time last year, but at 422¢/kg cwt is way off the east coast equivalent.

Next Week

There is yet more rain to come for some key sheep areas over the coming week, and given this, it is hard to see demand from restockers weakening.  If supply isn’t going to increase, and demand likely to get stronger, it can only mean support for prices.

Pandemics and wool prices

Posted on by Caitlin Dearden

The 2019 Novel Coronavirus (2019-nCoV) is causing ructions in various markets as the Chinese and associated economies are disrupted by the efforts to limit the spread of this new virus. This article takes a look at recent pandemics and their effect on wool prices.

2019-nCoV (2019 Novel Coronavirus) is the third coronavirus of the past two decades. It was preceded by SARS in 2002-2003 and MERS in 2014. In between, there was the H1N1 flu pandemic of 2009-2010.

Figure 1 shows the 19.5 MPG from 1999 to last week with the periods when pandemics were present. On the surface, the price reaction to SARS looks ominous with price falling by 28% in early 2003 (in US dollar terms the fall was 20%). The next two pandemics (H1N1 and MERS) happened when prices were near cyclical lows and did not seem to have any great effect.

SARS (https://www.cdc.gov/sars/ ) was first reported in China in early 2003. It ran to mid-2003 with a mortality of 774 people. It would be fair to say that the current outbreak of 2019-nCoV (also starting in China) is being treated with a far more robust response by the Chinese government. This response, which includes cancelling Lunar New Year festivities, extending the Lunar New Year holiday, locking down large areas and restricting travel, will disrupt the Chinese economy and other economic areas associated with China such as Australian universities which have a high proportion of students from China.

In 2014 MERS (a coronavirus) appeared in the Arabian peninsula, with an ultimate mortality level of 858 people.

In 2009 the H1N1 virus (https://www.cdc.gov/flu/pandemic-resources/2009-h1n1-pandemic.html  ) began in Mexico. In Figure 1 it is associated with a small rise in the 19.5 MPG. The H1N1 virus killed 20 times as many people (verified) as SARS, with estimates of worldwide deaths ranging between 150,000 and 575,000.  H1N1 dwarfed SARS in terms of mortality, but hardly registered in terms of wool price. This seems to confirm the view that it is the response measures (such as is going on in China presently), which impact on wool demand rather than the actual mortality levels.

The exception to the above view is if 2019-nCoV turned out to be another Spanish Flu (1918-1920) https://www.cdc.gov/flu/pandemic-resources/1918-pandemic-h1n1.html where one-third of the world’s population was assessed as being infected with 10% of these people dying. This was the worst pandemic of the 20th century. That is what drives the various health authorities around the world to contain 2019-nCoV as much as possible.

What does this mean?

In cold-blooded terms the economic effect of recent pandemics has not been related to the mortality levels, but rather to the disruption caused by measures designed to limit the spread of the pandemics. The current coronavirus is centred in China which is a critical manufacturing centre for the world economy. Strenuous efforts by China to limit the spread of 2019-nCoV (much more so than for SARS) seem likely to cause some short term disruption to demand for imports such as greasy wool hence reducing demand and price.

Coronavirus – impact on grain?

Posted on by Caitlin Dearden

Coronavirus is spreading around the world at a rate of knots. In the last week, we have been asked about the potential impact on demand for agricultural commodities due to this illness. In this report we look at the question – is coronavirus impacting on demand?

The Coronavirus has spread from Wuhan, China to 18 countries in a very short period of time. This has caused a great deal of consternation around the globe as countries enact quarantine protocols. Does this impact on markets?

I thought it was useful to give a few pieces of disease trivia:

  • Spanish flu (1918-1920) is estimated to have killed up to 100m people or approximately 5% of the population.
  • The black death killed up to 60% of the population of Europe, and it took 200 years to recover the population to pre-outbreak levels.
  • SARS (2002-2003) infected 8098 people with 774 deaths.

As the number of disease cases increases the number of deaths follows. The daily increase in cases has averaged 60% since the outbreak started.

The mortality rate from coronavirus has averaged 2.6%. To put this in perspective 2019 was considered an exceptional influenza season, and the mortality rate was 0.19%.

In figure 1, we have modelled the potential death toll from Coronavirus using an infection rate of 60% per day and a mortality of 2.6%*. This chart shows the actual and the modelled death toll. The model when back tested has closely matched the data originating from China.

If the outbreak continues to follow the trend, then 2000 people will have died by early next week.

In recent days there has been lots of talk about reduced demand due to this outbreak. In figure 2, the grain consumption per capita for China since 1960 is displayed. In this decade the average consumption within the nation (all uses) has averaged 354kg/hd, which is above the global average of 335kg/hd.

At this level, if 10m people were to perish due to coronavirus, demand would drop by 3.9mmt. Global trade flows are more likely to impacted by supply issues, as an example the average production of grain (wheat, barley & sorghum) in Australia this decade was 34mmt, last year we produced 24mmt.

*As the outbreak progresses we are likely to see infection rates and mortality dropping.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

The real drive down in price is most likely due to a risk off attitude, in conjunction with concerns related to the overall economic situation in China.

The real fundamental demand hasn’t at present changed. If we get to the level where deaths cause demand disruption, we will likely have more pressing concerns than the grain price.