“Unrelenting” was the term used to describe the market by AWEX at this week’s wool sales, as fine wool continued to lead the upward movement. Recent terms to describe the wool market have been less flattering or positive, so either we are getting caught up in the hubris of finally seeing good prices, or “this time it’s different”?
Again, fine wool was the outstanding performer but the underpinning of the medium wool price (21 MPG) is providing support and optimism for the ongoing strong market outlook.
With the 21 MPG now 240 cents higher year on year and touching 1500 cents; the bigger story and the key confidence booster is the fine types. 18 MPG is now almost 700 cents above year ago levels; of interest is that in March 2015 the 18 MPG quote ranged between 1440 and 1470, this year the last 3 weeks has seen it move each week upwards, beginning at 1784 (Melbourne) and this week quoted at 1910.
Cardings again were dearer, with all selling centres reporting the Carding indicator comfortably above 1200 cents. The average price for Merino wool is currently boosted by the prices for the lessor lines, all contributing to the best cash flows seem for wool producers for many a year.
There are many in the industry forecasting this market to at least hold these levels, and perhaps also that the tighter supply in the winter will push to some extreme pricing. There is good support for this rationale, supply is tight at all stages of the supply line, with exporters also reporting that they too are now able to make margins on trades as processors step up to purchase. It is of note that although these are long term record prices for growers, it is still below the peaks of 2010 – 11 when the Au$ was at parity. (Fig 1.) This supports the prospect of the market may still have some steam left in it.
This “hand-to-mouth” situation will support demand, and with woolgrowers “cashed up” any minor retracement in the market will result in reduced offerings as growers step back. The tight supply situation may provide a rare opportunity for producers to influence a market in their favour.
The ongoing strong auction is providing good opportunities in the forward market with Riemann trading across a range of maturities from 18.5 to 21 MPG contracts.
The week ahead
While the EMI rallied a further 22 cents this week, in US$ terms it actually fell 3 cents on account of the Au$ down by over 1 cent.
A reduced offering of 43,700 bales is rostered for next week, down 2,200 on this week. In fact, clearance to the trade this week was also 43,700 bales, so a smaller offering along with the renewed positive sentiment should see the market hold or improve next week.
There were rumours this week that there might be some form of ‘Executive Order’ regarding the amount of Ethanol to be produced in the US. Without boring you with the details, the market took the view that Trump was going to increase the demand for ethanol, which means more corn and oilseeds will be required in the US to make it.
The grim weather outlook released last week might add a bit of strength to grain prices. From now on many grower will take the view that grain in store is a good drought hedge, with prices likely to have a lift if the autumn break is late, or worst case, non-existent.
Just as spring price peaks lasted a lot longer in 2016, the autumn price decline appears to be coming early in 2017. While finished cattle prices were relatively steady this week, waning restocker demand appears to be seeing young cattle prices continue easing.
Young cattle still have some way to fall before they are back in line with ‘normal’ discounts to the EYCI. Figure 2 shows that despite the fall in the EYCI, Heavy steers remain at a 15% discount to the EYCI, while Cows are at a 25% discount. Heavy slaughter cattle discounts have narrowed marginally from two and five year lows, but are still a long way from their long term averages.
Frequent readers of Mecardo will not find it surprising that long-term annual average local cattle prices have a strong correlation to annual average US prices. This analysis takes a look at the US cattle cycle patterns since 1920 to get a perspective of what the normal cycle looks like, where we are currently in the cycle and the usual price activity during herd growth and herd decline.
Given the average cycle lasts ten years and the near 50/50 split between herd rebuild to herd decline during the cycle we took a look at annual price percentage changes during the first five years of each cycle (the herd rebuild) and the final five years of each cycle (the herd decline). Figure 2 shows the annual price change pattern for the first five years of the cycle. Interestingly, the data since 1920 demonstrates that the average price gain pattern for the first five years is reasonably smooth and tends toward 0% price movement, yet can fluctuate plus or minus 15% throughout the period. It suggests that there is a reasonably even chance of price gains or falls of a 15% magnitude during the herd rebuild phase of the US cycle – almost like a toss of a coin.
Given where we sit in the current cycle there is the potential for another 2-3 years of further gains to US herd size, albeit at a diminishing rate. Herd decline is expected to start around the end of decade and is likely to see cattle price supported in the US from 2020 onwards.
SA and WA mutton both faring well this week up 11.8% and 13.1%, respectively. NSW and Vic mutton on marginally softer with falls of 0.7% and 2.1%. Figure 2 showing the weekly decline in East coast mutton throughput not as severe as that for East coast lamb, down only 12.2% to just under 80,000 head.
The broad-based demand evident in the higher EMI in both local and US$ terms, gaining 51A¢ and 33US¢, respectively. The EMI not the only indicator to crack $15 this week with the WMI posting a 65A¢ rise, or 44¢ in US$ terms – Figure 1.
Some exporter reports of just not having access to enough wool to sell at the moment really fuelling the surge. A total of 40,626 bales offered this week with 39,461 sold on the red-hot demand kept the pass in rate contained to 2.9% – Figure 2.
The futures market has improved since the start of harvest, but locally that hasn’t transpired into higher prices. In this week’s comment, we look at the direction of the market since the beginning of November, and where the winners and losers have been.
When we look at a local level, at the physical APW1 price (figure 2), the trend across most ports has been for the market to trade in a narrow band and is currently sitting at similar levels to the start of November. The glaring exceptions are Adelaide, Port Lincoln and Geelong which are trading substantially below their start of harvest pricing levels.
All eyes on the weather. Locally the BOM point towards it being drier than normal for the next three months, which will start to zap away some of that beneficial subsoil moisture that has been retained from the wet winter and spring.
Much of NSW and south-east Queensland has received less than 30mm of rain this week and the drier/hotter than normal spell since the start of the year in the north, combined with the much drier than usual March to May rainfall outlook (recently released from the Bureau), seems to have brought forward some supply with Queensland slaughter levels still tracking higher this week weighing on the broader market.
The northern price declines weighing on the Eastern Young Cattle Indicator (EYCI) to see it drift to lows not seen since June 2016 to close the week down 2.4% to 621.75¢/kg cwt – figure 3.
Figure 1 shows the January 2017 five year price rank for a range of broad acre (plus cotton) commodities grown in Australia. The price rank is looked at in Australian dollar terms, as farmers here in Australia see the prices.Basically the news is all good for livestock products (wool and meat) with the exception of crossbred wool (represented here by the 28 MPG). Five year price ranks are all in the top decile, meaning they have traded at lower levels for 90% of more of the past five years. Cotton also is trading in the top decile. At the other end of the scale lie canola, wheat and barley, with canola performing reasonably well by trading at median levels. Wheat and barley are in the bottom decile for the past five years.
The next step is to look at these commodity prices from outside of Australia. In this case we use US dollar five year percentiles and break the commodities into groups. Figure 2 looks at fibres, including wool from Australia and a range of other apparel fibres. The price ranks range from a high top decile performance by the Merino Cardings indicator through to bottom decile performances by cashmere, angora, mohair and crossbred wool. The merino combing indicators perform well (ranging from the sixth to the ninth decile) well above oil and the synthetic fibres. Cotton comes in close to the 21 MPG in the sixth decile. The longer the disparity continues between the high merino rankings and lower rankings for the major fibres, the more likely some demand will shift out of merino (especially the broader side of 19 micron) to alternative fibres.
Figure 3 looks at meat and protein prices from around the world. Salmon is the best performer followed by Australian beef and Australasian sheep meat prices. At the other end of the rankings are range of US beef quotes, along with fishmeal and the FAO pig meat index. The big discrepancy between Australian and US beef price ranks indicates some risk to Australian prices if US prices do not lift.
Just when we thought lamb supply was surely starting to wane, this week saw east coast yardings jump to their second highest level for the year. Figure 1 shows east coast lamb yardings, which were 55% stronger than the same time week last year.
In WA lamb prices defied the larger yardings, rising 18¢ to 576¢/kg cwt. The WATLI is showing an impressive upward trend, and has hit a 2.5 year high (figure 3).