Tag: Articles

Weekly Wool Forwards for week ending 14th June 2019

Posted on by Caitlin Dearden

A very solid week in the forwards market with eleven trades dealt across the most popular MPGs.

Five trades were dealt for 19 micron wool, three for August agreeing at 2,035, 2,050¢ and 2,060¢. The remaining 19 micron trades were for September and agreed at 2,040¢ and 2,050¢.

Four trades were dealt for 21 micron wool. Two of those were for August, agreeing at 2,030¢ and two for October at 1975¢ and 1980¢.

One trade was dealt for 28 micron wool and agreed at 1,080¢ for August.

With auction prices plummeting, the forwards curve in the short term looks steeper than the last month or so. We expect it might change a few times before the market settles again.

Heavy slaughter to see new flock lows

Posted on by Caitlin Dearden
  • MLA have only made minor changes to flock and lamb supply forecasts for the coming years.
  • The 2018 flock was 3 million head higher than the January estimate.
  • Sheep supplies are forecast for fall, but it may not be enough for a flock rebuid.

Meat and Livestock Australia (MLA) released their Industry Projections for sheep last week.  There were a few surprises, notably the steady lamb slaughter forecasts, along with relatively stable flock forecasts for the coming four years.  A higher than expected 2018 sheep flock has been dwindled down with sheep slaughter for the first four months of 2019 25% higher than last year.

While heavy sheep slaughter early this year could be expected to see even lower flock numbers than the January projections, a key alteration has seen things remain relatively steady.  MLA estimated the closing (June 30) 2018 flock in January was 67.73 million head.  The actual number, provided by the Australian Bureau of Statistics, (ABS) was 70.61 million head.

MLA are now forecasting a bigger fall in the flock this year, with the June 30 2019 number coming in at a new low of 65.26 million head (figure 1), down 7.6% on the final 2018 number.  The new forecast for 2019 is 1% higher than the January forecast, so the higher than expected flock at June 2018 has compensated for heavy slaughter thus far in 2019

The projections for lamb slaughter for the coming four years are little changed from January.  Figure 2 shows the 2019 forecast remains the same, while for 2020 and 2021 the forecasts have been cut by 1.5%.  Lamb slaughter is expected to be back near record levels in 2022.

The biggest revision came in the 2019 sheep slaughter forecast, which was increased 6% to 8.5 million head (Figure 3).  Sheep slaughter forecasts for 2020-2022 have been revised 3-5% lower, but this may not be enough.

Last week’s article looked at previous sheep slaughter levels, and where they needed to be for the flock to grow.  Sheep offtake needs to be lower than 10% for the flock to grow.  From a flock low this year of 65.26 million head, sheep slaughter will have to be 6.5 million head, and likely lower for the flock to grow.

What does it mean/next week?:

Even at the supply levels forecast by MLA last week sheep and lamb prices are going to remain very strong for the coming two or three years.  We think supplies could be even lower than MLA are forecasting, especially if the flock is grow by 8 million head over the next four years.

There is likely to be a drag on lamb supplies as well, with more females and merino’s likely to be held to join the flock, which will obviously add plenty of support at the sale yard level. 

 

A breather or an early peak

Posted on by Caitlin Dearden

With lamb and mutton reaching historic price highs, saleyard throughput levels are extending higher too, which is uncharacteristic for this time in the season. The increased volumes have weighed on the market this week to see most categories of lamb and mutton soften.

The Eastern States Trade Lamb indicator (ESTLI) slid 15¢ to close at 873¢/kg cwt and this move was mirrored across national sale yards with all MLA reported lamb categories easing except for Restocker Lamb (Figure 1).

Light lambs took off the most skin, in both ¢/kg and percentage terms, shedding 53¢ or 6.4% to close at 775¢/kg cwt. The National Mutton Indicator (NMI) eased the least with a mere 2¢ decline to finish at 582¢/kg cwt.

A look at east coast lamb yarding levels in recent weeks gives a clue to the price reaction this week. Weekly figures made a new seasonal high at over 225,000 head changing hands, some 36% above the seasonal average for this time in the year. Indeed, the last month has seen average weekly throughput running 21% higher than the five-year trend (Figure 2).

Mutton yarding levels across the east coast lifted too, nearly hitting 85,000 head and sitting well above the normal range for this time in the year. However, compared to earlier in the season remains unable to crack back above the 100,000 head per week threshold.

What does it mean/next week?

As we often say at Mecardo, ample supply now will mean less availability later in the season. This suggests we may not have seen the peak yet for the ESTLI nor NMI, particularly as we are yet to get through the depth of late winter.

Adding to the prospect of a rebound in price in the next week is the 25-50mm of rain forecast for WA, southern SA and Victoria. Not to mention the 5-15mm scheduled for NSW.

Four year high for slaughter but market finding support

Posted on by Caitlin Dearden

Last week we saw a four year high for cattle slaughter, yet this week young cattle prices rallied as supply followed its usual seasonal pattern. There is also some interesting weather on the way, which could help markets on both coasts.

It seems a bit counterintuitive, but figure 1 shows that on average, June is the peak for cattle slaughter for the year. Last week cattle slaughter broke higher than the five year average, and moved 5.5% higher than the same week last year.

The usual trend from here is for cattle slaughter to ease all the way through to October. After the long weekend, we’ll see whether the heavy slaughter can be maintained.

Young cattle yardings, included in the Eastern Young Cattle Indicator (EYCI) in figure 2, are following the usual trend. While being slightly higher this week, EYCI yardings are at the lower end of the annual scale.

Given the heavy slaughter and rise yardings, it was unusual to see the EYCI rally this week, and rally relatively strongly. The EYCI gained 16¢ for the week to hit 487.25¢/kg cwt (Figure 3).

Beef exports values are no doubt helping push slaughter to highs and maybe even propping up the EYCI, as processors bid up for cattle in yards. This week the 90CL Frozen Cow indicator did lose some ground, however, extending the fall to 40¢ in two weeks. While the 660¢/kg swt is well down, it remains 15% above the same time last year and 180¢ above the EYCI itself.

Next week?:

There is rain approaching both east and west coasts next week. In the east it’s patchy, and in the west major cattle areas will get a good rain. The rain in Victoria and SA will see the normal seasonal tightening continue, and prices in the south should find some support.

Over in the west, markets have been tracking sideways, but tighter supply is due to hit, and will be helped by the rain. Processor margins currently look healthy, so a bit of rain might see prices creep higher.

Wool back on the roller coaster

Posted on by Caitlin Dearden

After strong buying activity last week, this week we saw buyers retreat in what was the lowest offering since June last year with Fremantle not selling at all. The market fell back as buyers were cautious about filling orders due to the small offering and lower quality wool. In going over our records of bales sold (back to October 2015), this week and 2 weeks ago are the only times where sales on a weekly basis have been below 20,000 bales.

The Eastern Market Indicator (EMI) gave up 23 cents this week after gaining 54 cents last week and closed at 1,864 cents. The EMI has fallen 4 out of the last 5 weeks, with AWEX reporting it has lost a total of 96 cents since week 44. The Au$ again found some strength lifting almost 0.5 cents to US $0.697 and as a result, the EMI in US$ terms only fell by 7 cents to end the week at 1,299 US cents (Table 1).

An offering of just 21,787 bales came forward, almost 7,000 less than last week (note Fremantle did not sell). Growers again reacted against the easier market. The total pass in rate for the week was 15.5%, well up on last week’s 8.4%. This meant just 18,380 bales were cleared to the trade, 11,300 below the corresponding week last year. In the auction weeks since the winter recess, 1,351,521 bales have been cleared to the trade, 242,721 fewer than the same period last year.

The dollar value for the week was just $35.18 million, for a combined value so far this season of $3.077 billion. A simple calculation of $ value divided by bales sold gives us $1,914 per bale across all types for the week.

Crossbred wools also lost ground after a strong effort last week, losing 5- 10 cents, however the 30 MPG category was quoted slightly stronger. Oddments were cheaper, giving back the gains of last week. Since the Cardings peak of Sep 2018, AWEX report on average across the 3 selling centres Carding Indicators have fallen 571 cents.

The week ahead

Fremantle returns next week however a combined offering of just under 30,000 bales is rostered. The following weeks 19,000 and 31,000 bales are currently forecast.

Supply is always at its low point in Winter, however buyers and processors will be watching closely to see the extent of the supply increase and quality improvement in the Spring.

Wheat price reality check

Posted on by Caitlin Dearden

The three week rally in Chicago wheat futures came to an abrupt halt this week. Despite little relief in terms of the weather in the US, the market turned around and took our new crop prices with it.

The market seemed to realise that even with rain impacting spring plantings in the US, there is still going to be plenty of wheat in the US this year. This, along with a little relief for Russia in the way of rain had CBOT wheat posting a 34¢ fall for the week.

In our terms CBOT has fallen from close to $285/t on Friday, to sit at $268/t last night (Figure 1).  This takes CBOT from sellable, with it representing a local port price over $300/t with a little basis, to a price which is neither here nor there.

ASX Jan-20 wheat has been all over the place. Figure 2 shows it peaking at $360/t last week, with sellers coming out this week and pushing it back down to $326 at yesterday’s close. While ASX has moved with CBOT, basis has still ranged from $75 at the peak, back to $60 yesterday.

The good rains forecast for cropping areas of Victoria, SA, WA and the Riverina (Figure 3) might be encouraging sellers. Maybe not growers, but speculators and the trade might be getting in on the selling.

Old crop bids have largely held their ground, despite the falls in new crop prices. Any grain which is yet to be sold is likely to be held now for the new financial year, and there seems to be no urgency from buyers.

Next week?:

With new crop ASX basis now back at the comfortable level, we’ll be back to following what is happening overseas. There is plenty of uncertainty there, with Swine Fever’s impact on demand being offset by potential lower supplies of corn in the US.

 

A very flat micron price curve

Posted on by Caitlin Dearden
  • The micron price curve from 15 through to 23 micron is extraordinarily flat at present.
  • Change in supply has been the key driver of this move to a flat price curve.
  • Fibre diameter is constantly changing in response to change in seasonal conditions.
  • As fibre diameter changes, so too does the supply of different micron categories and consequently the micron price curve.

Last week the 19 MPG finished 5 cents above the 21 MPG, which is a very small premium.  In the bullish fine wool market of 1999-2001 many in the industry were carried away by the fine wool premiums, confusing a mix of cyclical factors as a permanent change in the prices structure of the greasy wool market. Given the poor performance of fine wool premiums since 2012 (with the exception of 2017) the risk is that the reverse of 1999-2001 could happen. This article takes a look at a key driver of micron premiums and discounts.

In Figure 1 the micron price curve for May 2017 and May 2019 is shown. The price curve is generated by setting the average 19.5 micron price to zero and comparing the other micron prices levels to it. In May 2017, fine merino premiums were high by historical standards, the opposite position to the current greasy wool market. Compared to 2017, the current market premiums for sub-19.5 micron have shrunk to negligible levels while the discounts for 20 to 22.5 micron have also shrunk to minimal levels. This has flattened the micron price curve.

In 1999-2001 a combination of favourable supply (less fine wool), a depressed apparel fibre market (man-made fibre and cotton prices were low for an extended period which dragged medium and broad merino wool to low price levels), a favourable fashion cycle which allowed fine merino wool to avoid low prices and finally a low exchange rate which helped boost the local price resulted in huge micron premiums for fine merino wool.

In the current market the reason for the flat micron price curve looks to be mainly a supply issue. Figure 2 compares the change in the two micron price curves shown in Figure 1 with the change in supply, by micron category, between May 2017 and May 2019. The graph tells the story. Where supply has risen, the micron curve has fallen and where the supply has fallen, the micron curve has risen. When looking into the future, keep in mind the fibre diameter of the merino clip is always moving in response to changing seasonal conditions so the pattern of volume change shown in Figure 2 will change and reverse at some stage. When the supply does change, expect price to react with the micron price curve changing accordingly.

Finally, in Figure 3 the actual micron price curves in cents per kg terms for May 2017 and May 2019 (from 15 to 24 micron) are shown. The price level for 15 to 17 micron has barely changed.  It is the broad merinos (20 to 23 micron) which have changed price levels dramatically, assisted by chronic under-supply since early 2018.

What does this mean?

Merino micron premiums and discounts are probably at their perigee. The fall in the average merino fibre diameter is shrinking, with a reasonable prospect of the fibre diameter starting to increase in the new season which would start to reverse the trends in supply seen during the past 18 months. From this the micron price curve will change once more, with micron premiums and discounts beginning to widen.

Weekly Wool Forwards for week ending 7th June 2019

Posted on by Caitlin Dearden

Another solid week in the forwards market, with 21 micron being the main MPG dealt.  One trade was dealt for 19 micron wool for August and agreed at 2,180¢. Four trades were dealt for 21 micron wool. One of those was for September at 2,080¢ and one for October at 2,050¢. Two trades were agreed for November at 2,050¢ and 2,075¢ respectively.  Two trades were dealt for 28 micron wool and were agreed at 1,100¢ and 1,130¢ for August.

We’ve seen the gap between fine and medium wools tighten in recent weeks, probably due to a higher supply of finer wools as a result of drought. Looking further down the track, if the rains keep falling, we’re likely to see the gap between fine and medium wools broaden again.

Canola finding some upside

Posted on by Caitlin Dearden
  • Soybean prices hit 12 year lows earlier in the month but have recovered some ground.
  • Canola and Rapeseed futures have also rallied, taking new crop Australian prices higher.
  • Current new crop prices look like good selling with plenty of uncertainty in Canola markets.

International oilseed markets have been in the doldrums, with heavy supplies and weakening demand seeing prices hit a 12 year low. There are suggestions that the soybean market might have found a base, with local canola prices to benefit.

The United States Department of Agriculture’s (USDA) production forecast for 2019-20 is a new record. Despite an increase in consumption, ending stocks are expected to increase marginally.

The increase in stocks, along with concerns around the demand from China given trade wars and African Swine Fever, drove soybeans to new lows. In fact, it was only two weeks ago that soybeans hit a 12 year low of 780¢/bu (Figure 1).

In the last two weeks, soybean prices have rebounded, gaining 8%. The wet weather afflicting the spring cropping areas of the US was initially expected to be positive for soybean production. Later planting is better for soybeans than corn. With the wet continuing, support has started to come for soybeans, although it is way behind corn, which hit a one year high yesterday.

Adding to momentum in oilseeds is dry weather in Canada, which is helping ICE Canola move higher.  It has gained $21 in the last fortnight in our terms, moving higher from doldrums, induced by weak soybeans and China’s ban on Canadian Canola.

Our canola values have been held above $500 by strong European Rapeseed values. Figure 2 shows Matif Rapeseed prices are almost back to $600/t and this is having more of an impact on new crop prices than old.

Old crop canola values have found a little strength this week, gaining $10 to hit $560-565/t in southern ports. New crop Canola is $15 above old crop, and importantly, at a $30 discount to Matif.  The Australian discount to Matif generally doesn’t get any narrower unless we have a very small crop, like last year.

Canada’s issues with China see our Canola at an even stronger basis to ICE than last harvest. Australia’s strong basis is likely being helped by demand which has shifted from China, with few other major Canola producers to fill the hole.

What does it mean?:

By most measures, new crop canola prices look pretty good. Obviously, another drought affected crop could see canola rise further before harvest, as basis to Matif rose to $50 last October. There is some downside risk if China changes their view on Canadian imports, and if we get a big local crop.

With political issues clouding normal pricing relationships, it’s even harder than normal to forecast prices, but there is some merit in looking at prices which are at the top of the historical range.

What a difference a month made

Posted on by Caitlin Dearden

What a difference a month made, seven hundred and thirty little hours. The market has turned 180° since this time last month. In this week’s comment, we take a look at what has caused this move.

The market tends to be volatile towards the end of the second quarter of the year (Figure 1), and this year is no exception. At the start of May, the global environment had a bearish undertone. The USDA had forecast a year of ample production with most of the grain growing regions experiencing strong annual growth. This led to a projected production of 777mmt and end stocks of 293mmt, both record levels.

The picture with wheat is likely to change in June when the USDA releases their updated datasets, however not by much. So why is the wheat price globally jumping?

The US has received unprecedented rainfall during May, which has meant that areas forecast for corn are now more suited for trout. In the United States, producers are heavily reliant upon insurance. To comply with the insurance coverage there are set final planting days. If you plant beyond the date coverage is dropped by 1%.

Click below to see maps:

The impact has been dramatic, with corn and wheat prices on CBOT rising 23% (Figure 2). Although wheat production remains favourable the issues with corn have flowed through to wheat.

Agricultural commodities tend to have relationships with one another, as they are ultimately in groups of replaceable products. As an example, soybean and canola can be interchanged (to a certain extent). This is also the case with corn and wheat, which both have a high degree of relatedness.

This relationship can be seen in figure 3, which shows that as the price of either commodity rises the other will follow.

On our podcast, we had a chat with Brett Hosking, chair of Grain Growers. In this conversation, we discussed the opportunities for the grain industry over the next few years and the importation of wheat in Australia.
Click here

What does it mean/next week?:

The market will remain well supported in the coming weeks (and months) the nature of the rainfall events in the US will lead to a very sharp drop in expectations for the corn crop.

There are many who are considering that the rise in corn price will lead to farmers planting later and accepting a lower coverage. However, I don’t see this as likely as logistically it seems implausible for many farmers to be able to plant.

In Australia, expectations are also deteriorating with the outlook for rainfall not promising. Every week without decent rainfall will lead to an increase in basis levels.