Tag: Articles

Supply still strong, but a tightening looms.

Posted on by Caitlin Dearden

Yarding figures remain elevated for lamb and sheep despite a recent downturn. Lamb slaughter levels are above average too, while sheep slaughter has returned to levels consistent with the five-year average seasonal trend. Perhaps it is a good omen for producers as we approach Winter that prices continue to firm in the face of strong supply.

As reported in last week’s market comment higher prices for lamb and sheep have failed to encourage more throughout at the sale yard with east coast levels for both categories posting a fall from the week prior (Figure 1).

Average weekly east coast lamb yarding levels for May have been running 20% above the five-year average and sheep yarding levels during May have been trending 35% higher than their long term seasonal average pattern indicating that demand for lamb and sheep remain robust as prices have been steadily moving higher.

Indeed, at the Ballarat sale earlier in the week heavy export lambs set a Victorian record price of $300 per head, which equates to around 785¢/kg cwt. Higher prices have been replicated across the east coast with the Eastern States Trade Lamb Indicator (ESTLI) climbing 3% to close the week at 787¢/kg cwt. East coast mutton unable to hold ground this week, but only eased 4¢ to close at 557¢/kg cwt.

What does it mean/next week?

A glance at the five-year average seasonal trend for lamb/sheep yarding and slaughter show a clear decline in volumes as we head toward Winter, so a tightening of supply is looming.

A weakening Australian dollar, down around 3.5% over the last month and trading below 70US¢, combined with robust offshore demand for Aussie lamb/sheep exports should continue to provide solid price support across ovine markets in the coming weeks.

Have wheat imports impacted Australian prices?

Posted on by Caitlin Dearden

This week sees the first permit for the importation of wheat into Australia since 2007. This has caused a great degree of consternation with producers in the eastern states. But has it had any impact on prices?

The import of wheat into Australia has the potential to cause two issues to grain producers:

1. Biosecurity
There is a concern that the importation of grain could bring foreign diseases or pests which are not currently an issue to Australian producers. There is the potential for large losses to production caused by these pests.

2. Economic
At times there will be the potential to import grain from overseas cheaper than buying domestically, especially in times of drought. Hypothetically the importation of overseas grain would place a ceiling on the domestic price of grain.

At present, the numbers don’t stack up for imports into Australia from any other origins, due to the post-harvest fall in pricing and cheaper options from Western Australia. Nonetheless, this permit approval potentially sets a precedent for future import programs in the event of a drought.

In figure 1, the futures prices for ASX (Jan 2020) and CBOT (Dec 2019) is shown, as we can see prices have risen in both contracts.

The rise in Australia is mirroring the rise in the US, as they struggle to plant their crop due to the recent rains they have experienced. Although prices have risen in Australia, it is not due to the vessel.

The impact of wheat imports of this scale (and time) are negligible from a pricing point of view.

What does it mean/next week?:

The single vessel import permit for Manildra will have limited impact upon the market in its current form. However, if future perpetual permits were issued there is a likelihood of import parity becoming a more realistic issue in times of drought.

In an average year, importation will not be a feasible enterprise for grain consumers.

Asian appetite for mutton holds firm

Posted on by Caitlin Dearden
  • Total mutton trade volumes for April are sitting 21% above the five-year trend.
  • Consignments to Asia are 76% above the April five-year seasonal average level, buoyed by Chinese demand which is running 96% higher than the five-year trend for the January to April period.
  • Mutton price modelling shows that continued growth in Chinese middle-class wealth could negate the impact of increased slaughter in the coming years, keeping mutton prices firm.

Department of Agriculture and Water Resources (DAWR) trade statistics for April were recently released, revealing that the above average flow of mutton product leaving Australia persists. Analysis of the key trade destinations highlights that Asian demand continues to underpin the total mutton consignments. This piece reviews the impact on mutton prices over the next few years if the Asian demand continues to grow in line with an expanding Chinese middle class.

Total mutton exports for April recorded the lowest monthly volume for the current season at 14,675 tonnes swt, a 7% decline on the March figures. Despite the lower trend, mutton exports have remained above the five-year average seasonal pattern during 2019 and the April volumes are comfortably sitting 21% above the five-year average for April (Figure 1).

The 2019 trend for total mutton exports has spent the season in the upper end of the normal range, as identified by the 70% shaded zone. In contrast, mutton exports to Asia have started 2019 incredibly strongly, remaining above the normal range and around 50% higher than the five-year average monthly trend for the January to April period.

It is not uncommon to see Asian mutton demand begin to wane as we head into April. However, this season it has remained firm with 9,640 tonnes shipped, 76% above the five-year April average pattern (Figure 2). Chinese demand for mutton has been a key driver of the elevated Asian volumes. Average monthly flows of Australian mutton to China for the January to April period were 96% above the five-year trend.

An anticipated reduction in mutton slaughter levels to 7.2 million head in 2020 could see average annual mutton prices peaking around 485¢, before an increase in mutton slaughter during the 2021 and 2022 seasons pressures annual average mutton prices back down to the 450¢ region (Figure 3). However, growing Chinese demand for mutton could negate the impact of increased slaughter into the 2021 and 2022 seasons, pushing the annual average mutton price above 500¢.

What does it mean?

Mutton price forecast modelling undertaken by Mecardo highlights a link between the growth in Chinese wealth levels and the increasing consumption of mutton. Figure 3 also demonstrates the forecast price impact upon the Australian mutton price. It assumes an increase of Chinese per capita GDP from $US9,776 in 2018 to $US13,000 by 2022 and annual trade volumes of mutton from Australia to China growing by 25% over the 2019-2022 period.

Weekly Wool Forwards for week ending 18th May 2019

Posted on by Caitlin Dearden

A solid week in the amount of forwards trades this week, especially for crossbreds which were collateral damage in this weeks’ auction market falls. Bets are on to see if prices continue to drop or level out again so it’ll be interesting to see developments in the coming weeks.

For 19 micron wool, one trade was dealt for June and agreed at 2,185¢. In 21 micron, two trades were dealt, one for June at 2,170¢ and one for August at 2,130¢.

In course fibers, four trades were dealt for 28 micron, two in June, agreeing at 1,100¢ & 1,200¢; one for January 2020 at 1,020¢ and one for August 2020 agreed at 1,000¢.

Young cattle demand dries up, again

Posted on by Caitlin Dearden

A fortnight ago we were talking about the Eastern Young Cattle Indicator (EYCI) yo yo going up.  This week the yo yo went down, with young cattle prices falling back towards April lows.  When looking for a culprit, it would seem a return to dry conditions might be to blame.

Figure 1 shows the EYCI only managed to spend one week above last year’s levels, before tanking heavily this week.  The 8% drop took the EYCI back to 460¢/kg cwt.  The fall in young cattle prices was widespread, with the big movers being Inverell, Gunnedah and Scone, which all lost around 70¢.

The biggest yard in the EYCI, the Roma store sale, lost 25¢, falling to 481¢/kg cwt, so it maintains a premium to the EYCI itself.

With yardings relatively steady for the week, it would seem demand was to blame for falling young cattle prices.  Restocker Steer Indicators saw the largest falls, while trade steers also lost some value.  Feeder cattle were largely steady, suggesting demand for heavier young cattle remains strong.

Heavy Steer demand was definitely not on the wane.  Figure 2 shows the NSW Heavy Steer Indicator rallied a further 37¢, moving to 526¢/kg cwt.  In Victoria and NSW Heavy Steers maintained their value, and are now back at close to record premiums to the EYCI.

The dry autumn in WA came to impact markets this week.  The Western Young Cattle Indicator fell 42¢ this week to 505¢/kg cwt, but it remains at a premium to its east coast counterpart.

 The Aussie dollar lost more ground this week, finishing close to 69 US¢, and pushing the 90CL Indicator back up to 689¢/kg swt.  The 90CL is now a full 100¢ above the same time last year.

What does it mean/next week?:

Key cattle areas aren’t going to receive much rain this week.  There will be a bit in south west WA which might help there, and parts of SA will get some more, but it is unlikely to be enough to see young cattle prices rally.  It’s hard to see finished cattle prices falling however, with supply unlikely to improve until the spring.

What happens when you just add water?

Posted on by Caitlin Dearden

Fifty millimeters were tipped out of the gauge this morning in the Western districts of Victoria, where I live. Gladly, the weekly rainfall pattern shows that much of the south east quadrant of the nation have been doing the same with 25-50 mm fall registered in many regions, bringing some support to cattle prices.

Figure 1 highlights the extent of the recent rainfall with large areas of NSW, southern Queensland and eastern Victoria benefiting. It hasn’t stopped raining across the western half of Victoria overnight and the Bureau forecast is for rain to continue here across the weekend.

East coast cattle yarding levels have returned to normal, after the wild swings seen during the April market disruptions and the seasonal five-year trend shows weekly levels tend to contract throughout May/June from 60,000 head to 45,000 head as we head toward winter – Figure 2.

The recent rains are going to encourage tighter supply and we should begin to see the impact on throughput and price in the coming weeks. The Eastern Young Cattle Indicator (EYCI) gained 2.3% on the week to finish 0.25¢ short of 500¢/kg cwt. In the west, young cattle prices eased, yet remain at a premium to the east coast with the WYCI closing the week at 522.75¢ – Figure 3.

The 90CL indicator eased slightly to dip back below 690¢, after holding above here since mid-April. The significant premium of the 90CL to the EYCI allowing plenty of upside to local prices should the rain continue into winter and cattle supply tighten.

Next week

The rainfall forecast for the week ahead shows falls are anticipated across the entire eastern half of the country, although the heaviest falls are reserved for east-central Queensland and western Victoria. NSW, the state most in need, is going to be lucky to get more than 5-10mm. In the western half of the country there is barely a drop on the short-term horizon.

Given the mixed rainfall pattern national cattle prices are more likely to trend sideways over the coming week unless the traditional winter tightening of supply sets in early.

Not raining grass but restockers banking on it

Posted on by Caitlin Dearden

It has been some time since we’ve talked about rainfall driving sheep markets for three weeks in a row. Precipitation has all but completed the autumn break for key sheep areas in Victoria and South East SA. It doesn’t rain grass, but try telling restockers that this week.

In another week of stronger prices, it was restocker lambs which stood out in the ovine complex.  Figure 1 shows the NSW Restocker Lamb Indicator streaking ahead of the Eastern States Trade Lamb Indicator (ESTLI).

The NSW Restocker lamb price has gained over 100¢ in two weeks, and 250¢ in six. For a 16kg cwt lamb this equates to $16 and $40 per head, with prices this week at $136 per head. Figure 1 shows 854¢ is a new record, well above the peak seen in September last year.

Those buying restocker lambs in NSW are literally banking on grass growing. If finished on grass, lambs bought now and sold at better than 800¢ should make a good margin.

Mutton prices set another record this week on the east coast hitting 561¢/kg cwt.  In WA, sheep are not cheap, but at 400¢, they are a long way behind the east. Trade Lambs are not as far behind, the WA indicator at 703¢ (Figure 2), less than 10% behind the ESTLI.

Over the hooks prices moved higher this week in response to rising saleyard values, with NSW leading the charge. The rain in Victoria this week is likely to see southern prices catch up.

 Next week?:

When rising prices don’t draw out more numbers, prices generally keep rising. Last year the rally lasted five months and finished 55% higher than the autumn low. The next leg up might be soon and sharp. Rain in Victoria might encourage holding of lambs for winter premiums, so it might take another 40¢-50¢ higher to draw them out.

Export volumes down but value up

Posted on by Caitlin Dearden

The wool market tracked lower for Merino types this past week however crossbreds bucked the trend and continued to rally.

As for exports, Chris Wilcox, NCWSBA, reports that export volume is down 12% for the season to March, however as a reflection of the strong market export value is up by 3%.

Chinese activity was even more effected, with season to date exports down 17% and export value down by 1%. This could be viewed as a concern; our major customer taking less wool, or it could be viewed as a positive; other markets stepping in to spread the demand.

The Eastern Market Indicator (EMI) eased by 8 cents on the week to close at 1,952 cents. The US$ fell by almost 0.5 cents to US $0.697 and as a result, the EMI in US$ terms fell by 15 cents to end the week at 1,361 US cents (Table 1).

The Western Market Indicator (WMI) after gaining 28 cents last week, gave up 31 cents to 2,062 cents this week.

It was a much reduced offering of 32,801 bales that came forward this week. Growers passed in 12.9% of the offering. The break up was 9% in Sydney, 12.9% in Melbourne while Fremantle sellers passed in 18.1% of bales offered.

This meant 28,576 bales were cleared to the trade, almost 12,000 fewewr than last week. In the auction weeks since the winter recess, 1,263,967 bales have been cleared to the trade, 230,624 fewer than the same period last year. The average shortfall cleared to the trade compared to the same time last year now sits at 6,406 bales per week fewer.

The dollar value for the week was $58.3 million ($82.9 million last week) for a combined value of $2.907 billion so far this season. A simple calculation of $ value divided by bales sold gives us $2,039 per bale across all types for the week.

The only positive moves were for the Crossbreds, gaining another 10/15 cents but mainly confined to the 28 micron and finer. While Cardings in Melbourne & Sydney were largely unchanged, however Fremantle fell 25 cents.

The week ahead

The roster for the next few weeks is beginning to show the threatened decline in supply. Next week just 33,361 bales are rostered for sale with all centres selling on Wednesday and Thursday. The following weeks 30,719 & 33,360 bales are currently forecast.

Do we have a break?

Posted on by Caitlin Dearden

The rain is falling, and prices are being dragged down in sync. In this update we take a look at the impact on ASX pricing and provide a short case study of a producer utilizing the contract to increase their pricing for the 2019/20 harvest.

It’s good to hear the rain on the roof this morning, helping provide some surety to local growers in Victoria. In the past week we have seen beneficial falls in large parts of NSW and Victoria, which although will not guarantee a crop, it does give some breathing room.

In April, domestic consumers, especially buyers, were concerned about the lack of rainfall, and were buying ASX contracts in order to protect from a second year of drought. This caused a spike in prices up to A$340, the rainfall has removed that imperative.

Since just before the rain the market has fallen to A$304, and with today’s falls has a reasonable change of dropping below A$300.

In figure 1, CBOT for Dec’19 is displayed alongside ASX for Jan’20. Prices have fallen considerably for both markets since the 3rd quarter of last year. The positive outlook for the world production and political issues have pressured pricing and low levels are likely to persist.

The Food and Agriculture Organization released updated production forecasts this week, which are generally bearish. They expect world production to increase by 5% to 767mmt, causing ending stocks to rise approximately 10mmt to 27mmt.

We have been warning that the premium between CBOT and ASX would erode if rainfall arrived and the market moves back to an export focus. We proposed in September that taking some futures cover at levels >A$365 had a high likelihood of providing a financial benefit.

I discussed with a grower this week who utilized this strategy. They sold wheat at A$370, believing it to be a strong price historically, especially so far from the point of physical delivery. They have now calculated that if they closed their futures position that approximately A$20p/t will be added to their overall grain price.

This makes a good case for the benefits of utilizing derivatives as part of a wider grain price risk management strategy.

 

What does it mean/next week?:

For many consumers the ASX now provides attractive buying opportunities, however I expect many will have reached the limits of their capacity and risk policies.

The WASDE is released overnight – will it provide any surprises?

The weight of the rain

Posted on by Caitlin Dearden

The market was always going to react when the rain arrived. There are many who started their 2019 marketing strategy in the middle of last year. In this update we take a look at physical pricing and basis for new crop around the country.

At its most basic, wheat prices are based on supply and demand, with supply being the most important part of the equation. When there is a sudden shock to supply such as a drought, prices move sharply upwards. The reverse happens when beneficial rainfall arrives, and we see prices fall. This is due to buyers having more confidence that supplies will be available.

In last weeks market comment (see here) and podcast (see here), I mentioned that ASX had fallen 7%. This is a significant fall, and it is under further pressure today with buyers being reluctant to raise bids.

The ASX is a good barometer of grain prices on the east coast. It is important to remember that there is still a basis element between the futures and physical even though it is Australian based.

We are now at the point of the year where physical new crop bids are easily accessible, therefore many farmers who don’t utilize derivatives will be using physical contracts to reduce price risk.

Figure 1 displays the physical contract price for APW1 multigrade and Figure 2 shows the basis versus December Chicago futures. I have selected a number of ports to give a broad spread of the nations’ wheat growing area.

As we can see, the domestic dominated areas have the highest pricing levels. This is due to concerns related to tight stocks in these areas coming into the new season. All zones have experienced dramatic falls since the middle of April when new crop concerns were at their peak.

The rest of the world has seen wheat prices slump as production in the key northern hemisphere growing areas continues to impress. This has meant that our basis over Chicago futures has come under pressure, albeit remaining at traditionally strong levels in the east.

What does it mean/next week?:

It is still very early in the season and rainfall will be the primary driver for Australian basis over the coming months. If we receive plentiful rains, then basis will fall further. Conversely a dry spell will see basis increase in a flash.