Tag: Articles

Throughput eases as cattle prices soften

Weekly east coast cattle slaughter draws closer to this seasons peaks and throughput eases as producers respond to lower cattle prices with all national cattle indicators and the Eastern Young Cattle Indicator (EYCI) all registering declines this week.

In contrast to the declining throughput and price movements, weekly East coast slaughter for the period ending 5th May still managing an increase from the previous week’s numbers as processors increase activity post the shortened Easter and ANZAC holiday periods – Figure 1. Weekly cattle slaughter rising 14.5% to just over 125,000 head, not far off the peak slaughter levels experienced during March.

After the spike in throughput along East coast saleyards last week producers respond to the softer price pattern with an 13.5% fall in yardings noted to see 60,332 head change hands. Despite the decline yardings reported this week still the second highest weekly figure so far this season and at the higher end of the normal seasonal range for this time of the year, suggesting that demand remains relatively firm as the price declines haven’t been excessive – figure 2.

Indeed, the Western cattle markets were broadly stable, while only marginal declines cited in the East for young/store cattle. The EYCI down a mere 1.5% on the week to 634¢/kg cwt – figure 3. In national markets, trade steers less than 1% softer (345¢/kg lwt), feeder steers declined 1.8% (342¢/kg lwt), while medium cow shed a mere 2.1% (216¢/kg lwt). The more moderate falls reserved for the heavier end with medium steers leading the charge recording a 5% fall at 292¢/kg lwt, while heavy steers (not so heavy it seems) posting a 2.6% drop to 293¢/kg lwt.

The week ahead

As figure 3 outlines, a firmer 90CL beef export price as the US market demand begins to fire up should lend some support to cattle prices into next week. The 90CL another 2% higher to close at 637.6¢/kg CIF should start to provide some enthusiasm to processors. The 90CL posting a fourth successive week on week gain and has lifted 3.9% since mid-April.

Where are we headed when supply picks up

On Tuesday Mecardo published the semi-regular look at processor margins on slaughtering cows.  The model confirmed that processors are still struggling, with the cost of the cow and processing outstripping the value of the meat and co-products produced.  We thought we take a look at where prices might settle under current beef prices, when supply finally reverts to something towards normal.

The current margin on cows for processors comes in at negative $34 per head.  The margin model is based on a cow weighing 500kgs liveweight, or 260kgs carcase weight.  Basically the loss being worn by processors at the moment equates to 13¢/kg cwt.

Obviously cattle processors are not in the business of breaking-even, they aim to make money.  The processor margin model shows an average profit on cow processing of $50-70 per head for most of the year.  The average margin drops to $0-10 during the tight supply months of July to September.

With break-even just 13¢ away, there is not much prospect of cow prices falling during the tight supply period we are about to enter.  Come October, however, for processors to make the average $50/head margin, cow prices would have to fall 31¢/kg cwt, or 6.5%, to 430¢/kg cwt.

In fact, prices in Queensland are nearly there, sitting at 446¢/kg cwt last week (figure 1).  There is still upside potential for cow prices over the coming months, with the prospect of tight supply sending processor margins toward the $150 losses seen last year.  To reach these deeply negative margins under current beef prices, cows would have to make 520¢/kg cwt.   Last winter and spring cows were making 540¢, so this is not out of the question.

Beef export prices govern all cattle prices, and all cattle prices move together.  We can use projected cow prices to give an idea of heavy steers and young cattle prices.  Figure 2 shows that heavy steers have ranged between a 50 and 100¢ premium to cows over the past three years.  The EYCI has held a premium as strong as 200¢, and as weak as 100¢.

 

Key points:

  • The processor margin model gives us an idea of where cow prices might go under tightening or loosening cattle supply.
  • Cow prices could rally up to 15% during winter, and fall 6% from current levels later in the year.
  • Heavy steer and young cattle prices could range from 15% higher, to 20% lower depending on seasonal conditions.

 

What does this mean?

When you get out to forecasting young cattle prices, the ranges can be quite large.  The EYCI could go as high as its 2016 peak.  However, during dry spring the EYCI premium to cows could be squeezed back to 100¢, which under current beef export prices, would see it as low as 520¢/kg cwt.  This equates to a 20% fall in price, and would represent a two year low.

Obviously the season will in part govern where processor margins sit, and how the young cattle premium reacts.  What we do know is that supply should be stronger this year in the spring and summer, so unless we see a rally in export prices, or a fall in the Aussie dollar, we shouldn’t be budgeting on similar prices to last year from October onwards.

Mutton priced up as lamb

If you told a sheep grower back in November you’d give them 530¢ for lambs in May, they would have considered it.  If you told them you’d give them that for mutton, they’d have laughed at you.  But here we are, with the Victorian Mutton Indicator at 530¢/kg cwt.

Figure 1 shows how sheep and lamb slaughter jumped in the week ending the 5th of May, as processors returned to full weeks.  In terms of total sheep and lamb slaughter, it was actually the biggest week since the second week of March.  Obviously the strong slaughter was helped by heavy supply in saleyards, and subsequent lower prices.

Yardings were again strong this week, but were down around 20% on last week.  The lower yardings saw the Eastern States Trade Lamb Indicator (ESTLI) rally marginally this week, closing Thursday at 641¢/kg cwt.

Mutton yardings were also strong relative to last year, but down on last week.  The National Mutton Indicator (NMI) reacted by gaining 22¢ to hit a new record of 503¢/kg cwt.  This is the first time the NMI has broken 500¢ (figure 2).

Can you believe Mutton in Victoria is averaging 530¢/kg cwt.  Mutton made up to 588¢/kg cwt in the saleyards.  No doubt the good autumn break, good lamb prices, and good wool prices have combined to see growers hold sheep. Demand for sheep from restockers is also strong.

Mutton still hasn’t reached a record relative to lamb prices, figure 3 shows it sits at a 27.5% discount.  Back in 2011, when lamb prices were falling, mutton was at just a 14% discount.

The week ahead

It seems unlikely lamb or sheep supply is going to improve in the short term, with the tap to turn on sometime in August.  What happens from there depends on the season, but we can expect to see price decline fairly rapidly once lambs start to hit the market.

Five Questions with StockCo Australia’s COO Tim Pryor

With generational ties to the land and a degree in Animal science, Tim has lived and breathed agribusiness for all of his working life. Tim has been instrumental in establishing BOQ’s agribusiness team, with a focus on larger, higher quality transactions. In this role Tim has also been responsible for managing BOQ’s funding relationship with StockCo’s Australian business. Tim’s now been appointed as Stockco’s Chief Operating Officer, to continue the growth of Stockco’s business in Australia with specialist focus on enhancing specific distribution channels and targeting new business in the corporate sector.

Welcome to the team Tim!

  1. You’ve had a successful career in agribusiness, how did you get there and what have been some of the highlights?

My passion for rural Australia is a long-dated affair and thanks to my mother’s side of the family who owned sheep stations in far western Queensland. This passion lead me into a University degree at UQ Gatton studying Animal Science. When social and rugby commitments allowed it, my focus at Uni was the study of animal production systems, pastures and rangelands. During uni, I’d been working part time for a rural merchandiser in Toowoomba who was affiliated with Landmark. Unsure where I was headed after completing my degree they offered me a full-time gig, so I ran with it. It was here I first crossed paths with StockCo’s CEO Richard Brimblecombe who at the time was working for Landmark.

I moved across to work directly for Landmark and was lucky to experience some great opportunities travelling right across north and western QLD. I moved into the rural finance division at Landmark. I had found myself doing something I truly enjoyed and was very passionate about – banking farmers and graziers to achieve their financial, business and personal goals.

As the GFC unfolded, I followed Richard across to CBA and relocated to Roma. Banking has moved me around a lot, and given me the opportunity to meet some fantastic people and business operators. This would have to be a highlight for me. It was on one of these moves where I met my wife – better make that a highlight!

I think a large part of any success has been driven by the people I have been fortunate enough to work with. I’ve had great mentors, colleagues and friends that have supported me through what has been both challenging and rewarding times thus far!

 

  1. What role do you see StockCo playing in the agri-finance sector?

StockCo has one purpose – strategic finance solutions for sheep and cattle producers and therefore has a deep understanding of these sectors and their markets. It is with this understanding that StockCo operates in a different manner to traditional financiers or mainstream banks. StockCo becomes an enabler.

This positions StockCo well as the changing tide in capital markets develops. It is becoming more and more prevalent, documented and discussed that the agrifinance sector, and banking in general, is set for change. Ownership models, farming practices, seasonal challenges and technology are forcing people to think differently about how they finance their businesses.

Next generation farmers are proving to be highly productive and successful but often light on capital. StockCo can really assist in this market.

As an agribanker, I have witnessed first-hand instances where StockCo has enabled a grazier to expand their operations by buying the neighbouring property, directing all available capital to the acquisition and/or development, and then utilising StockCo to ramp up livestock numbers immediately to a capacity that creates profitability.

We are witnessing more instances of farmers and graziers choosing to lease instead of own land. A trading bank will then typically struggle to finance these operators working capital or trading accounts. StockCo is a perfect solution in these instances where the grazier is a proven operator.

In the corporate market, StockCo offers a unique off-balance-sheet source of capital that allows a business that is rationing internal sources of capital, to access the capital it needs to fund development or expansion programs on terms that match the business requirements.

  1. What prompted you to make the move from a senior role in one of Australia’s regional banks to StockCo?

This was both a very difficult, but very easy decision for me….. and I’ll try and explain that complete contradiction! BOQ was a fantastic place to work, with great people, and I had been pivotal in the creation of their Agribusiness division over the last 5 years. BOQ has a similar ethos to StockCo in that they are all about their customer. The customer is at the centre of everything you do. It was an exciting and rewarding place which made leaving difficult. However, it is through BOQ that I was introduced to StockCo as BOQ have a wholesale funding facility with StockCo. So I have a very deep insight into every aspect of StockCo and this made the decision easy.

The points I made earlier around StockCo’s sole purpose being cattle and sheep makes it a very niche and nimble operator. Whilst StockCo has robust systems, procedures and policies, it is a business that is not distracted by a myriad of complex business units, systems, products, compliance and regulation. It really is a very focused business. It truly aims at exceeding the expectations of their clients and I am continually surprised at the depth of knowledge and understanding StockCo has of the livestock industry and how this is then applied to assisting livestock producers.

As a throwaway comment, I am also excited about the data associated with the Australian Livestock market that StockCo is capturing as part of their standard operations. As this data pool continues to grow, it has the potential to help both StockCo and other industry bodies refine products and processes to benefit numerous industry participants.

 

  1. What do hope to achieve in your role as Chief Operating Officer for StockCo?

As COO, I have been tasked to assist the executive team, and in particular, Richard as Australian CEO, to keep growing the Australian business. I will be predominantly focused on enhancing a few specific distribution channels and targeting new business in the corporate sector. My role will also focus on assisting the executive team identify strategic opportunities, product enhancement, new productive development and contributing to the funding strategy and funder relationships.

StockCo is a dynamic business run by dynamic people. It will be all hands-on-deck and I am absolutely certain there will be no dull moments!

Personally, I’d like to be able to look back in 5 years’ time and know I’ve been a pivotal part in building a business that is the leader in its field of Livestock Finance across Australia and New Zealand.

  1. StockCo has a rather unique approach to distribution of its products and services. Tell us about StockCo’s approach and the rationale behind it.

StockCo definitely is unique in distribution, which is a large contributor to its success. We enjoy a very strong relationship with our key distribution partners Elders and Ruralco, who provide StockCo with access to some 800 locations right across regional Australia. Having worked both in banking and in rural agency, I can attest to the very entrenched relationship a grazier has with livestock agent. StockCo’s product sits very firmly in the toolkit of the livestock managers and agri-finance managers who work for Elders and Ruralco.

StockCo also enjoys formal distribution agreements with other key large successful private agencies and independent service providers, with an important provider being Sprout Ag.

These firms are preferred by StockCo as they share the ethos of the client being at the centre of everything we collectively do. By aligning ourselves with similar firms, we mutually benefit – their clients receive the market leading StockCo product and StockCo gains access to their network of clients. In leveraging these networks via these established distribution partners, StockCo can access a broad network of skilled and knowledgeable relationship managers on the ground whilst continuing to reinvest in our systems, products and infrastructure to maintain our position as market leader in our field. It would be impossible for StockCo to replicate or achieve such a reach without this alignment.

Learn more about the StockCo team here. 

 

A one & five-year review; what’s up and what’s down?

A tentatively positive start to the week at Wednesday’s auctions, but the small gains made were given back plus a bit extra on Thursday. The EMI closing the week at 1534¢, a fall of 10¢, and the WMI slightly heavier falling by 33¢ to close at 1527¢.

The market opened to solid demand on Wednesday but nervousness crept in on Thursday to see the market in general close below last week’s levels. Eastern prices 5-35¢ softer while the West saw a bit more of a slide, with 15-70¢ falls registered. A reduced offering of bales for sale, just over 38,000 bales came forward this week, however weaker demand saw the pass in rate jump this week to 16.1% with 31,915 bales sold.

With the market entering the winter trading period we thought we would take a retrospective look at the wool market. Figures 2 to 4 show the market movements compared to May 2016 (last year) and also to May 2012 (5 years ago).

Firstly currency; while it has hardly moved over the past 12 months, it is 27 cents or 36% lower than five years ago. This is reflected in the EMI levels; in A$ terms the market is higher compared to both periods, while in US$ terms it is still yet to reach the 2012 level while sitting 21% above last years US$EMI.

Taking a look at the MPG’s, Merino wool reflected in the 21 MPG & finer types is stronger either comparing to 2016 or 2012. Cardings are 10% higher than last year, but a massive 70% above 2012 reflecting the increased demand for double sided fabric.

Compared to last year, in US$ terms (Fig 4) all bar crossbred types are stronger, particularly the finer types with 17 MPG up 50% year on year. The story is a little more mixed when we compare against 2012 prices in US$’s, and while 19 MPG & finer as well as Cardings are now above 2012 levels, 20 & 21 MPG were higher back then. The A$ in 2012 was trading US$1.01 cents and clearly impacting on the buyers.

The good news from this is that while wool grower returns are very good, wool to our customers is not expensive compared to recent history; this is a good thing. In fact, the recent high for 19 MPG in US$ terms was June 2011; the Southern 19 MPG was quoted around 1750, but at that time the A$ was strong at US$1.05 resulting in a US$ 19 MPG price of 1820 – compared to the current US$ price of 1460 which converts to A$19.77 in the market when the current A$ level is applied.

The week ahead

Looking ahead we have three successive weeks of sales with bales on offer below 38,000. Next week 36,343 bales are scheduled and all three centres are in operation on Wednesday and Thursday. Subsequent weeks see 37,680 bales rostered on week 47, dropping to just over 34,000 for week 48.

Kansas: The Phantom Menace

An interesting but frustrating week in the grain trade. At the start of the week newswires and social media were inundated with reports of general grievous damage to Kansas wheat crops caused by the force of snow and frost. In this week’s comment, we look at how the market responded locally and globally, and my views on being cautious in regards to the Kansas wheat tour results.

The background to the issues at the early part of this week are explained in Tuesdays analysis piece “It’s snow joking matter”, but in summary the speculators had a record net short, and the reports pouring out of Kansas spooked the market. The traders who were short, had to buy contracts to close their short positions fuelling a very strong rally.

The rally can be seen in figure 1, which shows the spot market (and forwards) rising around 19¢/bu. The Kansas annual wheat tour also coincided with this week’s events, they performed a major croup tour stopping at 469 paddocks, and came up with a final yield estimate of 46.1 bushels per acre, which is below last year but above the five-year average. This announcement then caused the market to fall due to expectations that the weather events had largely caused little impact.

I would like to point out a few issues with the methodology used in this year’s crop update. Due to the snow event, the crop tour scouts were unable to perform any yield assessments. This therefore meant that the number of fields assessed reduced from 655 to 469 this year.

This yield estimate is therefore based on the fields with the smallest impact by recent weather, and yield/hectare losses will most likely be revised in the coming ten days. This may cause another short rally when the snow-covered fields are estimated, but likely the damage will not be as bad as previously expected.

At a local level (figure 2) we can see that prices have risen during the last week by around $5-10 dependent upon port zone. The local rise has seen the West receive most of the rise in futures, however other port zones have not seen the full rise. The basis levels also received a small rise (figure 3), but a rise which must be tempered by the fact that the previous week had seen a sharp fall in all port zones.

 

What does this mean?

We need to keep a very close eye on the market as it may present selling opportunities over the 1-2 weeks, if (as I expect) the Kansas crop is re-estimated to take into account the snow-covered fields. This may potentially result in speculators with short positions being spooked again. The commitment of trader’s report for this week will be of interest as it will give an indication of whether the funds are still bearish on agricultural commodities or has this week made them reassess.

On Saturday morning (Aus time) the US non-farm payrolls will be released and if the we see the US economy recovering and the likelihood of further rate rises we could see further pressure on the A$. Furthermore, Thursday morning (Aus time) the USDA WASDE report will be released giving us another insight into the supply and demand fundamentals.

It appears there was a bit of a cattle backlog

As the title suggests, after three short weeks growers came to the party this week.  Not only were cattle yardings well up, we had to go searching back through the data to find the last time we saw a yarding this big. Price reacted accordingly, and fell, but not by as much as might be expected.

Figure 1 shows east coast cattle yardings rallied an enormous 87% on last week, and 52% on the last full week of sales.  With yardings this week hitting 69,737 head, we had to go back to the second week in December 2015 to find larger supply.

All states contributed to the larger yardings, with Queensland up 64% while NSW had the largest yarding at just under 30,000 head, up 82%.  The southern states had the largest increases, Victoria yarded 128% more cattle, and SA 240%.

It would be hard for prices to not fall under the weight of such yardings.  However, falls were relatively minor.  The Eastern Young Cattle Indicator (EYCI) fell 15¢ to hit a six week low of 643.75¢/kg cwt.  EYCI yardings were very strong, doubling this week and sitting 9,500 above the same week last year.  Given the increase in supply, we can say demand remains relatively strong.

It was cows, as shown in figure 2, that wore the biggest fall, with 20¢ declines in NSW and Queensland.  Victoria managed to maintain strong prices, still sitting at 487¢/kg cwt.

There were no issues with supply hitting prices in WA, where the Western Young Cattle Indicator rallied 30¢ to 673¢/kg cwt.  Supply tends to only get tighter in WA at this time of year, which should keep prices at the upper end of the range.

The week ahead

Given the influx of cattle this week, we expect things to tighten up pretty quickly next week.  The autumn break has arrived in the south, which will support prices there, but it’s been a bit dry in the north since Debbie did her thing.  This, along with continued strong prices, might have been a factor in the large yardings this week.  June is only four weeks away.  Prices never fall in June, apparently.

May the force be Wagyu.

Key points:

  • The broad price trend for F1 Wagyu steers and heifers mirrors the EYCI movements, with a moderately strong correlation between the two price series present.
  • The average premium spread for F1 Wagyu over EYCI cattle since mid-2015 has been 83%.
  • F1 Wagyu prices have spent most of the time trading 75-95% higher than the EYCI over the last few years.

As it is international Star Wars day (May the fourth be with you) and the Australian Wagyu Association’s conference being held in Albury this week we couldn’t resist both the pun and the focus on Wagyu premiums over comparable young cattle, based off the Eastern Young Cattle Indicator (EYCI) underlying data.

Figure 1 outlines the average monthly price for F1 Wagyu Steer and Heifers** weighing between 200-400kg lwt, according to AuctionsPlus data since July 2015, to comparable young cattle using the average monthly Eastern Young Cattle Indicator (EYCI) level. The price movements show a reasonably similar movement over time between the two series with the Wagyu F1 cattle, understandably, commanding a healthy premium over the EYCI.

While figure 1 shows the broad directional movements of the EYCI mirrored in the Wagyu price pattern an analysis of the correlations between the two price series shows a moderately strong positive relationship displaying an R squared of 0.67 – figure 2 (you can find a handy explanation of the R squared measure here). Essentially, this means that F1 Wagyu prices and the EYCI can be expected to move up and down in unison, more often than not.

An analysis of the percentage spread that has been achieved by F1 Wagyu cattle within the same weight range of EYCI cattle shows an average premium of 83% has been attained since July of 2015 – figure 3. Although the percentage spread can vary at any given time the 70% range between a premium spread of 72%-94% (green band) highlights where the series has fluctuated for 70% of the time. The two red dotted lines between 61% to 104% give an indication of the 95% range (two standard deviations away from the average for the statistically minded reader) and gives an indication of when the spread is nearing historically extreme levels.

**The first cross of a Wagyu full blood 100% bull over another breed is referred to as an F1.

What does this mean?

On average, the F1 Wagyu producer can expect to receive a premium spread between 75-95% above the EYCI most of the time. Recent discussions with Wagyu F1 producers indicated that forward basis agreements had been under negotiation with processors to determine an EYCI plus an agreed percentage spread as a settlement price when cattle were due for delivery. This historical spread analysis will give an idea of what type of premium for F1 Wagyu cattle above the EYCI is within a fair and reasonable range.

The revenge of the fifth…

After yesterday’s excitement of Star Wars Day (May the fourth be with you) it seems fitting for one last headline pun as we end the week on the 5th and highlight a classic example of fundamental economics as supply casts its revenge upon prices in lamb markets, particularly in the West.

As pointed out in last week’s commentary, we needed to wait to see what developed with regard to supply post the Easter and ANZAC shortened periods to get a clearer gauge of the market sentiment at the moment. Clearly the rebound in lamb supply experienced this week has placed a bit of a dampener on price activity, but it may not last.

Figure 1 highlights the lift in east coast lamb yardings as saleyards return to normality this week with a near 100% gain in throughput recorded to see just over 205,000 head of lamb change hands. Interestingly, the post Easter recovery in lamb yarding seen this season still over 25,000 head short of the 2016 peak of around 233,000 head, suggesting that the incentive to retain stock is strong despite the high prices on offer.

A different story in the West though with solid prices enough to draw out supply as the pattern of lamb yarding in WA shows so far this season tracking well above the five-year average pattern and the 2016 trend – figure 2. Prices in the West responding in an anticipated to the 78% jump in lamb yardings on the week, fashion according to the laws of economics, with the WA Trade Lamb Indicator (WATLI) down 7.5% to 596¢/kg cwt. The elevated east coast lamb yardings having an impact on the Eastern States Trade Lamb Indicator (ESTLI) too, albeit to a lesser degree than out West, with a slight fall of 1.7% recorded on the week to see it close yesterday at 634¢/kg cwt.

The week ahead

Despite the rebound in supply noted this week, broadly speaking prices remain fairly robust – certainly for lamb and are even more well supported for mutton. The generally lower levels of throughput and slaughter we have experienced for much of the season continue to underline the tight supply being experienced at the moment and the comfort producers are displaying in holding back supply in the face of good historic price levels bodes well for the coming weeks and months ahead.

As the Mecardo lamb forecast pointed out in articles released late in 2016 the stage is set for an ESTLI of at least 750¢ come late-Winter and may even spike towards 780-800¢ if the A$ can continue to soften, supply remains tight and producers can hold their nerve.

Two firm days trading, is the market poised for another surge?

A solid two days trading as exporters re-entered the market this week to see both the Eastern and Western Market Indicators sitting comfortably above 1500¢. The EMI closing the week at 1544¢, a gain of 43¢, and the WMI slightly firmer at 1560¢, up 52¢.

Reports from the auction floors indicate indent buying by exporters fuelling the rally across most categories of fleece for both trading days as mills continue to operate on a hand to mouth basis. Fine to medium microns up between 40-100¢, while even some categories of coarse fibre enjoyed a lift of 10-25¢.The key question for the short term is whether overseas orders will continue to flow through at these levels and prompt continued exporter buying into the next few weeks.

Historically the 21 micron class has struggled to hold above 1500¢ for any decent length of time but recently this resistance level has continued to be probed – figure 2. Brokers indicate that there is plenty of space in the wool stores at the moment, so supply remains an ongoing issue. This factor, combined with a continuing softening A$, sets the tone for the chance for further upside in the coming weeks. Clearly, as the chart shows in USD terms overseas buyers have paid higher levels for 21-micron wool in the recent past, so there is the capacity for them to still bid local prices higher.

A reduced offering of bales for sale, just over 38,000 and the aggressive demand saw the pass in rate fall this week to 4.5% with 36,567 bales sold – figure 3.

The week ahead

Offerings over the next few weeks continue to decline, with all of the next three sale weeks listing bales offered under 40,000. Week 45 is operating in all trading centres on Wednesday and Thursday and has 39,253 bales listed. Weeks 46 and 47 will see supply tighten further with 36,100 and 37,650 bales offered, respectively.