Tag: Articles

A floor has been found

Posted on by Caitlin Dearden

The new key support level of 800¢ has held this week for the Eastern States Trade Lamb Indicator (ESTLI).  Prices steadied in all states, but it was the sucker lambs coming out of NSW which were priced the best.  

After dropping like a stone for five weeks the ESTLI found some support this week, right on the 800¢ mark.  The ESTLI had lost 150¢ over the previous five weeks, which equates to $30/head for a 20kg lamb.

There is plenty of speculation around as to the level at which processors can make money.  They might not be there yet, as lamb supply remains tight, but it is not far away.

In NSW lamb supply doesn’t seem so tight.  Figure 2 shows that at the end of last week (23/8) NSW lamb slaughter had returned to five year average levels, and sits 22.5% above the same time last year.

Prices are better in NSW, with trade lambs at 816¢ versus 748¢ in Victoria.  Much of this could be put down to a larger proportion of sucker lambs in NSW, and more old lambs in Victoria.  But it does seem demand for slaughter lambs is stronger in NSW.

National Mutton prices lost a little ground this week, down 11¢ to finish at 574¢/kg cwt.  Mutton is, however, the only ovine indicator which is stronger than last year’s levels, and a lot stronger, sitting 101¢ above the same week last year.

Low volumes in WA saleyards throw up some interesting moves.  This week restocker lambs in WA were down 128¢ to 481¢/kg cwt, while heavy lambs were up 122¢ to 687¢.  The heavy lamb price looks realistic, but restocker lambs look very cheap. There should be a bounce next week.

What does it mean/next week?:

The short and medium term rain forecasts are depressing.  South West WA is the only area which is expected to enjoy somewhere near normal conditions.  South East SA and South West Vic are forecast for a reasonable September, which should ensure some sort of spring (figure 3).  However October and November have a smaller chance of median rainfall.

For prices the basic take from this is store lambs will get cheaper in the east, in a relative sense, more expensive in the west, while slaughter lambs might be hard to produce after Christmas.

Tit for tariff stripping confidence

Posted on by Caitlin Dearden

There was no sign of confidence in the wool market this week. Rostered bales were withdrawn left right and centre and much of those that made the sale were passed in. With another week of US-China tariff announcements and severe price declines, uncertainty is at an all-time high. 

The Eastern Market Indicator (EMI) fell 122 cents for the week to 1,375 cents. In the last four weeks the EMI has fallen 22% to reach levels not seen since December 2016. The Au$ dropped to US $0.673 at the weeks close. The EMI in US$ terms fell 90 cents to 925 cents (Table 1). A low not seen in over three years in foreign terms.

Fremantle had some catching up to do after a week of no sales. The Western Market Indicator (WMI) lost 182 cents to finish on 1,416 cents.

Auctions saw no sign of any real buyer interest across all types. Despite the magnitude of the falls we have seen over such a short time frame there has been no sense of a base. The timing of the current fall in prices continues to match up the downturn that occurred in 2011.

Most microns suffered losses in the range of 100 to 170 cents. Crossbred wools were the least affected, holding ground with minor falls of 5 cents for 30-32 micron wool and 10 to 30 cents. The Merino Cardings Indicators dropped 90 to 135 cents in the east and a whopping 200 cents, with room for it to fall further still to the 780 to 800 cent range.

A total of 26,420 bales were offered for sale for the week but  34.8% Passed In at auction. This meant just 17,221 bales cleared to the trade. For the season to date we’ve seen 64,408 fewer bales sold than the same period in 2018-19.

The dollar value for the week was only $26.12 million, for a combined value so far this season of $267 million.

The week ahead

It’s a concern when high pass in rates, limited supply and a softer Australian dollar still can’t draw out any significant buyer interest. Another announcement last week of increasing tariffs by the US on Chinese imports appears to have been the overriding driver. Further US-China trade negotiations are scheduled for September and will no doubt impact the confidence of Chinese processors moving forward.

Across the three selling centres, 29,061 bales are rostered for sale next week. 32,641 bales and 35,215 bales are scheduled for the weeks following.

The word in the west

Posted on by Caitlin Dearden

This week I was lucky to get the opportunity to travel to the west coast to talk to producers and stakeholders within the industry. In this week’s comment I’ll cover the big talking points in the west.

It’s a tale of two wheat markets at present, with overseas and local futures diverging from one another. Chicago wheat futures for December are largely unchanged at A$258/mt, however, during the past week we have seen a rise in ASX futures from A$325/mt to A$342/mt.

At the moment Australia is on a knife-edge with the BOM releasing a negative rainfall outlook for the coming weeks. Whilst Victoria and South Australia are in reasonable shape, New South Wales has little hope left and this forecast is the nail in the coffin.

In the west, the crop is not looking anywhere near as good as last year, with canola crops looking in very poor shape. The rainfall over the past day and tomorrow will help provide a boost, but more will be needed by the middle of September – especially if they continue to have record breaking heat.

Last year the east coast relied on Western Australia to meet the domestic demand and it is likely that there may be transshipments again into NNSW/QLD.

Whilst at the Dowerin field day, we had a good chance to find out what was on the minds of the industry:

Agricultural Produce Commission: There is a lot of concern about the introduction of a levy to create a broadacre research fund. This levy is already in place in South Australia through GPSA. At a time when membership of local representative bodies is in decline, this levy has some merits for ensuring grower centric research.

I personally wouldn’t be in favour of this levy, however the fact that it is opt-out means that growers can elect whether they want to contribute.

CBH: There was a lot of discussions related to CBH at the field day. The major talking point from growers was the $43m interest free loan to their joint venture flour mill in Indonesia. There is a lot of concern that this type of deal isn’t in the best interest of grower shareholders.

The trade participants who I spoke to were all talking about the A$200m trading loss which CBH are rumoured to have made this season.  There were many calling for the CBH trading business to be completely separated from the storage and handling business.

WAF-PGA merger: These two organisations have at times had oppositional viewpoints on several topics, but every couple of years the idea of a merger is debated. It would make some logical sense to have a single organization which represents producers, but in reality, I think these organisations are ideologically opposed and a merger will be forever out of reach.

On the topic of WA, the state’s biggest commodity (iron ore) has taken a substantial hit over the past month (figure 2) as a result of trade woes due to US-China tensions. Historically iron ore has been a driver of the AUD, this fall could lead to the continuation of the current weakness against the USD.

Although we all know that commodities go through boom and bust cycles, we are likely to see ore rebound in future – it might even make those Karratha property investments profitable one day.

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What does it mean/next week?:

At present, there are continuing concerns over the east coast crop which will keep interest in the ASX strong as consumers aim to get some cover for the following year.

On the futures front, it is rare to see rises in the market from August onwards, as the bulk of the world’s crop is a certainty. However, this year with concerns that the USDA may have overstated the corn crop and its slow growth could lead to surprises.

Support found at 500¢

Posted on by Caitlin Dearden

Despite rising slaughter rates, and more dry weather, the Eastern Young Cattle Indicator (EYCI) managed to find some support at 500¢.  The demand from export markets remains rampant, with slaughter cattle prices hitting new peaks.

The fall in the EYCI halted this week, with young cattle prices easing 4¢ to stall at 503.75¢/kg cwt.  Some of the heavy fall last week can be put down to stronger supply.  Figure 1 shows a 6% rise in east coast cattle slaughter, and a 5% lift on the same time last year.  The lift in supply was concentrated in Queensland, where a 12% rise for the week carried east coast slaughter higher.

The biggest move we saw in cattle markets this week was the Heavy Steer Indicator in NSW.  Figure 2 shows a 108¢ jump on last week, and 33¢ on a fortnight ago, to hit a three year high of 633¢/kg cwt.  Heavy Steer in NSW have only been more expensive at this time in 2016, and strong export prices are driving the rise.

Figure 3 shows export prices continue to rise, this week thanks to an increase in the US value.  Figure 3 shows how much the lower Aussie dollar has done for export values, and therefore cattle prices.  The 90CL price in US terms is at the top of the three year range, but in our terms it is approaching record values.  This week’s price of 715¢/kg swt is a new four year high, and just 30¢ off an all time record.

What does it mean/next week?:

The latest Bureau of Meteorology (BOM) three month outlook (figure 4), released yesterday, doesn’t hold a lot of joy for cattle producers.  With only parts of WA and Tasmania with a better than 50% change of stronger than median rainfall, it looks like spring might again fail for many.

The forecast doesn’t mean it’s not going to rain, but the chances of good rains are low.  This suggests pressure on young cattle, and support for finished cattle is likely to continue for the rest of the year.

Some thoughts on the removal of the South Australian GM moratorium

Posted on by Caitlin Dearden

The South Australian government after 15 years has finally decided to scrap its moratorium on the cultivation of GM crops. The Mecardo team were instrumental in providing analytics to assist in the decision-making process. In this update, we examine the spread between GM and Non-GM and provide some thoughts for growers considering GM canola in South Australia next year.

We produced an in-depth report in early 2018, ‘Analysis of price premiums under the South Australian GM moratorium’. This report was used by Grain Producers South Australia to lobby for the removal of the GM moratorium and led to further independent reports by Emeritus Professor Kym Anderson.

The summary of our reporting was that there was no evidence of the GM moratorium providing a premium for most farmers in South Australia. In my view farmers should be given the choice to use whatever tools they need to be as productive as possible. The 2020/21 season will be the first-time farmers in South Australia will be able to utilise genetically modified crops.

This makes an opportune time to examine GM spreads around the country. It will come as no surprise, but GM canola trades at a discount to non-GM varieties. What is important is how much of a discount that it trades at.

In Figure 1 & 2, the premium for non-GM is displayed for both Melbourne and Kwinana. This spread is shown on a two-week moving average, with an average for the period displayed. In recent months, the discount in Melbourne has reduced close to parity, whilst Kwinana has seen the opposite with the spread rising to record levels. The premium for non-GM is A$37 in Kwinana and A$35 in Melbourne.

The spread between GM and Non-GM and is quite volatile with a lot of movement within the season. It is therefore worthwhile keeping a strong eye on the spread, however the overall return is far more important in reality.

One factor to understand in the early stages of the introduction will be the volume overall produced. If we look at the overall volumes typically grown to GM varieties (see GM Crops: How has the Australian farmer embraced them?), it typically ranges around 10-15% in NSW & Victoria. I would expect similar levels in South Australia within a few years.

South Australia has produced around 334kmt of Canola since the turn of the decade. If we take the top end of the range, there will be 50kmt of Canola produced. This will be spread on a wide geography from the limestone coast to the Eyre peninsular.

This makes it very difficult in the initial stages to develop a market as there will be difficulty achieving volumes for bulk. It may end up that the Eyre peninsular will end up shipping out individual holds, whilst the eastern parts of the state may end up mainly utilizing container trade or the domestic market in Victoria.

I recommend that farming representative groups (such as GPSA) work closely with industry to ensure an orderly approach to the marketing and logistics of GM canola in South Australia.

What does this mean?

The early stages of the introduction of GM canola will have its ups and downs, however, it is great to see farmers having all the agronomics tools available to them. This will be especially important as new varieties are released such as omega oil canola.

It is important to get some independent advice from your agronomist in order to gain a monetary value of any agronomic benefits (which may not all occur in year 1). This will determine whether the spread between GM and Non-GM is acceptable.

Weekly Wool Forwards for week ending 30th August 2019

Posted on by Caitlin Dearden

While the auction market sings a Tom Petty tune, the interest and activity in forwards is flooding in, with nearly 30 trades this week as growers look to lock in.

In 19 Micron wool, eleven trades were deal this week. For September, trades agreed between 1,655¢ and 1,665¢. November and December saw agreements between 1,640¢ and 1,660¢ while for January and February of next year, trades were dealt at 1,610¢.

In 21 Micron wool, 17 trades were dealt this week. For September, trades agreed at 1,620¢ while for October we saw agreements between 1,620¢ and 1,625¢. November and December saw trades dealt at 1,600¢ while for January 2019, trades agreed at 1,570¢.

In 28 Micron wool, 1 trade was dealt, agreeing at 830¢ for September.

If falls in physical prices continue, we’re likely to see more growers locking in prices with Eddie, but just like the show, we’ll have to wait til after the break to see the results.

Dry spells profit for processors

Posted on by Caitlin Dearden

The updated Mecardo processor margin model shows that meatworks profitability has continued to soften in recent months for beef processing, reducing by 48% from the peaks achieved in May 2019. However, despite the narrowing, margin processor’s bottom line remains in good shape with the annual average margin sitting over five times higher than last season.

This processor margin model is designed to reflect the general trend in meatworks profitability and should be viewed as a reflection of an average industry participant. Due to the diversity in the scale of operations, internal processes, and supply chain differences across the red meat processing industry, individual meat works profitability will vary from the results demonstrated in this article. Furthermore, input data used in the model can be revised post reporting each month as updated data becomes available.

Figure 1 demonstrates the trend in the processor margin on a monthly basis since 2000. Earlier in the season, we saw margins extend outside the upper boundary of the extreme range beyond $220 per head of cattle processed. Ongoing dry conditions across NSW and southern Queensland have kept the cost of cattle entering meatworks relatively subdued while improving offshore beef prices have helped margins expand.

In the last few months, the processor margin has eased toward the top of the 70% range. Based on the historical monthly margin data, this range demonstrates where the margin has fluctuated for 70% of the time since 2000 and gives an indication of the “normal range” that could be expected to be earned by a processor per animal, which is between a $55 loss to a $130 profit.

A look at the seasonal trend in the processor margin shows that average monthly profit levels have eased toward $145 per beast processed in July after peaking at over $280 during May 2019. The annual average margin for 2019 sits at $195 profit, compared to just $36 per head for the 2018 season – Figure 2.

What does this mean?

A comparison to the 2014 season shows the impact a drier than normal spring and summer can have on processor margins as the annual average margin for the year reached $255.

During 2014 the processor margin continued to improve throughout the latter half of the season peaking at over $385 profit per head in November. The drier than average forecast leading into spring issued by the Bureau of Meteorology last week (Figure 3) should continue to support firm processor margins into the second half of this year.

Key points

  • Processor margins have continued to ease in recent months, falling from the May peak over $280 profit per head toward $145 in July.
  • For the 2019 season the annual average margin sits at $195, compared to a $36 profit earned during 2018.
  • During the last significant drought event in 2014 processor margins reached an annual average profit of $255 per animal processed.

Wool market hits the breaks

Posted on by Caitlin Dearden

The severe price dive of last weeks market thankfully eased this week. While Merino categories still experienced declines, producers can take some relief knowing that the “emergency” status seems to have been called off for now.

The Eastern Market Indicator fell 16 cents for the week to 1,497 cents. The Au$ saw nearly no change on the week, sitting at US $0.678 at the weeks close. The EMI in US$ terms fell 11 cents to 1,015 cents (Table 1).

AWEX report that better style wools with good additional measurements attracted strong competition and held their ground. However, lack of demand for lesser style wools dragged the market down. The Crossbred sector provided the only positives, gaining 25 to 40 cents.

26,492 bales were offered at Sydney and Melbourne, with no sales occurring in Fremantle. With the shock factor over, sellers were more accepting of this week’s prices and 16.1% of the offering was passed in. This saw 22,216 bales cleared to the trade. For the season to date we’ve seen 46,628 fewer bales sold than the same period in 2018-19.

The dollar value for the week was $36.99 million, for a combined value so far this season of $241 million.

The week ahead

The mix of market sentiment from brokers hopeful for a bounce to exporters thinking the market can weaken further provides little indication of what we can expect in the coming weeks. Although to look at the market from a technical perspective, prices appear to be at their support levels in foreign buyer terms.

33,046 bales are rostered for sale next week, with sales resuming in Fremantle and a designated superfine sale in Sydney. In the weeks following, 36,025 and 33,766 bales are expected to come to sale.

Tanking time for lambs not for mutton

Posted on by Caitlin Dearden

It is tanking time for lambs, but not so much for sheep. Supply has been improving for both lamb and sheep, but it’s only lamb prices which have been on the wane. WA is a different story, with lamb and sheep values both falling heavily.

The Eastern States Trade Lamb Indicator (ESTLI) fell again this week, but the rate slowed a little. The ESTLI was back at 806¢/kg cwt on Thursday, which while being down 120¢ for the month, and 27¢ year on year, is still a very good price. Figure 1 shows it was only for a short period the ESTLI was higher last year and before that 800¢ seemed fanciful.

Interestingly, restocker lambs are priced 130¢ higher than this time last year, at 830¢ it’s not that much stronger than the ESTLI.

Mutton prices rallied marginally this week (Figure 1), with sheep supply remaining tight and export demand very good. There might just be money in mutton for processors at 600¢, and hence competition remains strong.

Combined sheep and lamb slaughter has been rising with processors coming back online after seasonal maintenance. Figure 2 shows combined sheep and lamb slaughter hasn’t been this low at this time of year since 2011. There is room for another 170,000 head of sheep and lambs to be slaughtered per week. This shows that supply remains very tight.

In WA, lamb and mutton prices continued to ease (Figure 3).  Mutton in the west is now close to 200¢ below the east. On a 20kg cwt sheep this is $40, which is more than enough for WA sheep to start to work their way east.  Further WA mutton price fall should be limited.

Next week?:

The forecast shows more rain for the south of both the east and west, but none for the drought-stricken zones. Demand for store stock is unlikely to improve, but it isn’t likely to impact on finished stock too much.

Lamb prices are looking for a base and 800¢ might be it. If it falls through 800, it is headed for 750¢.  Still a good price for sucker lambs, but starting to fall well below the forward contracts which have recently been on offer.

The market didn’t like the forecast either

Posted on by Caitlin Dearden

Last week we looked at the Bureau of Meteorology (BOM) spring rainfall forecast and it would seem the market looked at it as well.  Young cattle prices took a dive this week, but finished cattle prices maintained their strength.

Figure 1 shows the Eastern Young Cattle Indicator (EYCI) losing 20¢ this week to hit a seven week low of 508.25¢/kg cwt. EYCI yardings were lower, but the tighter supply didn’t seem to matter, with buyers pulling back. A 52¢ fall in prices at the Roma store sale and a 36¢ decline at Wagga were the main contributors to the fall.

No doubt the forecast for a drier than normal spring across almost all of the east coast, has pulled demand back. It’s not quite as weak as this time last year, but it is heading that way.

Finished cattle price, especially Heavy Steers are holding their strength.  Figure 2 shows both Victorian and Queensland Heavy Steer Indicators are close to three year highs.  Beef export values are very strong, and no doubt seeing strong demand for cattle which are ready for slaughter.

Cow prices are not faring so well, as is often the case in dry times. In Victoria, where there has been some rain, Cows are near two year highs.  In Queensland the Cow Indicator is showing the impacts of the dry, although they defied the trend this week, rising to 416¢/kg cwt.

In the West, cattle prices eased, but remain at a premium to their east coast counterparts.  The WYCI fell 24¢ to 559¢/kg cwt, and is obviously being helped along by continued very strong export prices (Figure 3).

Next week?:

Dry weather in August and September is never good for young cattle prices. With hot weather approaching, a lack of rain saps demand and increases supply.  The question is how far finished cattle prices can get ahead of young cattle.  Victorian Heavy Steers were at more than a 100¢ premium to the EYCI this week.  It is hard to see grass finished supplies improving any time soon.