Tag: Articles

Fine microns lead the way

Posted on by Caitlin Dearden

Picture1The good news for the wool market continued; again, it was the fine wool that was the stand-out and led the market. Sydney had a designated fine wool sale; this came at the perfect time for NSW fine wool growers resulting in the Merino fleece and skirtings component having an almost total clearance with only 1.6% Passed In, compared to the national PI rate of 6.7%. The EMI was up A$0.15, while in US$ terms it was 9 cents better.
The premium for fine wool continues to grow, in Melbourne 18 MPG is 500 cents over the 21 MPG, while the Sydney catalogue reported a 550-cent premium due to a generally sounder offering.

Picture2The last time 18MPG basis was at this level was July 2011 (Fig 2). Of further note is that in July 2016 (last year) it was quoted in Melbourne at 52 cents. Is that a 900% increase in less than 12 months?
Of the 44,400 bales offered, 41,500 were sold into a market where all but the coarse X Bred types improved on last week’s price levels.
were also good traded levels on Riemann concentrating on the 19 MPG contract with 1700 cents for the winter maturity and 1640 out to September. As one grower noted, “Sales above $2,000 per bale are now available out to December and we have sold plenty below this level in the past 5 years, so hedging a percentage of the next clip makes sense even if we think the market outlook is bullish!”.
This week Mecardo had a look at wool volumes, with the “Some up, some down” article reporting Auction data for merino combing wool showing a continued swing to the broader half of the merino distribution with 21 micron auction volumes up by 34% for the past three months.
Understanding what this observation means to the future for wool was helped when the subsequent article was published looking at how the main competitors to wool were placed regarding price.
The average merino micron price in US dollar terms continues to outperform the major apparel fibres. However, price forecasts for cotton and manmade fibres in 2017 point to their rolling five year ranks easing. It is easy enough to envisage finer micron merino prices continuing to outperform due to lower supply but broader merino categories will have increased supplies coming onto the market which will make continued outperformance difficult.

The week ahead
The combination of a stronger market both in US$ and A$ terms alongside lower Pass-In rates points to a growing demand from processors. This is also fuelled by the expectation of tighter supply for fine wool going forward; all this leads to a strong level of confidence for the near term.
Next week Melbourne is selling over three days with Fremantle and Sydney on Wednesday & Thursday. The strong market has enticed some additional volume to the market with 47,500 bales listed for next week, however forward projections for the following weeks trail off to 43,000 and 40,000.

Southern cattle should start to get (more) expensive

Posted on by Caitlin Dearden

The last week in January, or the first week in February, is usually the time when southern cattle reach their annual price low-point, relative to northern markets and the Eastern Young Cattle Indicator (EYCI).  Recent price movFigure1ements suggest this will again be the case, so what does this mean for pricing over the coming months.

Figure 1 shows that since early January we have seen a sharp correction in the relative prices of young cattle in EYCI saleyards south of Dubbo.  The discount for young cattle in the south has widened from 10¢ in early January, to just move past the 10 year average, and sit at 22¢.

Young cattle prices in yards south of Dubbo haven’t actually changed, but the EYCI has gained 15¢, driven by a 19¢ appreciation in yards north of Dubbo, hence those in the south have become relatively ‘cheap’.  This is despite absolute prices being at record levels of 633¢/kg cwt, for this time of year.

Figure2More interesting is what happens from there with the southern spread to the EYCI.  Over February, March and April, the southern discount becomes a premium, as the supply of grass finished cattle tightens, as grass supply wanes.

In the north the supply of finished cattle starts to improve in January, with the result being a weakening premium to the EYCI, bottoming out in May.

Figure 2 shows that the EYCI generally tracks sideways to slightly higher, in February and March.  With the southern discount to the EYCI narrowing, to a steady or higher EYCI, this suggests we might see 20-30¢/kg cwt upside in southern young cattle prices in the coming month or two.

Picture3It young cattle destined for slaughter, or trade steers and heifers, which are set to benefit the most over the coming months.  Figure 3 shows that young cattle sold to processors improve 8% over the late summer and autumn.  From the current level of 595¢/kg cwt, a narrowing of the discount to parity, would see the price reach 630-640¢/kg cwt.  Prices haven’t been this good since October.

 

Key points:

  • The southern cattle prices discount to the EYCI has fallen to its annual low point for the year.
  • From the start of February southern young cattle prices generally improve 20-30¢ relative to the EYCI.
  • Finished cattle have further to improve than restocker or feeder prices, and prices are unlikely to fall in the short term.

What does this mean?

Seasonality in cattle markets is driven by cattle supply, and the case of the southern discount to the EYCI is no different.  Seasonality in this case is reliable, which suggests that young cattle in general, and trade steers and heifers in particular, are likely to improve in price over the coming month or two.

Whether it’s worth holding cattle to profit from this upside depends on the costs of carrying cattle through, and the direction of the EYCI.

In the north the decreasing premium to the EYCI is usually counteracted by a small improvement in the EYCI itself, and as such there it only the risk of cattle prices falling in general to discourage putting more weight on cattle.

 

Ameri-can and Mexi-can’t

Posted on by Caitlin Dearden

It’s now nearly a week since Trump was sworn in,
and he has been busy signing executive orders. The
market is tentatively watching Trumps actions,
especially when it comes to corn.

One of the first acts which Trump performed was a
freeze on the activities of the Environmental
Protection Agency (EPA). This has caused a high
degree of consternation by climate change proponents
throughout the world. One of the key environmental
policies introduced by the EPA under the Obama
administration was the renewable fuel
standard/biofuel mandate. This required petroleum
producers to blend at least 10% bioethanol with fossil
oil, and there were plans to increase the blend.

This is great news for corn producers in the US, as it
created a relatively inelastic demand for corn to
maintain the blending ratio. It is speculated that
Trump may at the least curtail the biofuel mandate,
which would have a detrimental impact on demand
and therefore price.

In addition, Trump has continued his calls for a wall
between Mexico and the US which unsurprisingly is
increasing tensions between the two nations. The US
and Mexico are strong trade partners when it comes to
corn, with nearly all corn imports in Mexico originating
in the US.

Any issue with trade between the two countries would be
likely to impact corn (and linked feeds), as Mexico is the
2nd largest importer of corn in the world. In recent months,
Mexican buying power has already been eroded, with the
value of the US$ rising against the Peso, since the day of
the election (figure 1).

The biofuel mandate and the deteriorating Mexico-US
relations have impacted the corn market (figure 2) in recent
days, a deteriorating corn price will flow through to other feed
grains such as sorghum and barley.

Trump’s executive orders could be extremely negative to US
corn farmers. It is yet to be seen how far the policies enacted
by the president will marry up with his election speeches, but so
far, he has held up to his word. I would however expect that the
strong farm lobby in the US, where has a high degree of support
will in time make his moves more cautious.

The Week Ahead

Politics will continue to play a part as the market unwinds
Trump’s intentions, however eyes will start to move towards
the progress of the northern hemisphere crop.

It is still too early to form a strong view on the global crop,
but to raise prices substantially we do require a supply shock.

A market within the market

Posted on by Caitlin Dearden

Picture1The response from three wool brokers this week when asked about the wool market was unanimous – it’s extremely good if you have wool 19 micron and finer, its good if you are in the “bread and butter” 20 to 22 micron range, and it’s terrible if you have crossbred types. This reinforces the concept that the wool market is not homogenous, it’s made up of a variety different markets.

There were some proviso’s on the above comment; the increasing number of lots containing higher levels of vegetable matter and burr are starting to be left behind, with buyers preferencing the good “FNF” (free or nearly free) types. This is a normal response as more wool with fault comes forward at this time of the year. The good season with excess growth of grass and burr’s is a factor; we note that it is usually more extreme when wool prices are high.

The general market showed a lift of 10 cents in A$, and with a weaker US$ the EMI lifted 22 cents in US$ terms.

Picture2Fine wool has finally come out of the shadows and remerged to show good premiums over the mainstream types, the concern with the trade now is that this incentive for fine wool producers to continue with this specialty product has come too late for some. The fine wool premium as shown in Fig 2, identifies that the 18 premium over 21 MPG is now at a record not seen since September 2011

This should see the fine wool prices continue to lead the market, supporting the other merino microns (a repayment of recent times when the medium wool supported fine wool prices). The concern about supply of fine and superfine wool is not simply about wool producers having taken breeding decisions based on the disappointing prices of recent times; the terrific season across most wool growing areas means that each flock will test broader this season.

The week ahead

Next week an offering of 45,861 bales at all centres is rostered, its hard to see that there is not more of the same coming with wool producers (except for cross-bred types) happy to take full advantage of a buoyant market.

Buyers take a pause as dry weather outlook released

Posted on by Caitlin Dearden

The Eastern Young Cattle Indicator (EYCI) was FIGURE 1
marginally softer this week as the Australia Day
holiday and a release from the Bureau of Meteorology
(BOM) showing dryer conditions expected for
February through to April gave buyers reason to pause.

Figure 1 highlights the anticipated rainfall outlook
released from BOM which highlights a reduced
likelihood for rainfall to exceed the seasonal averages
for much of the central and south-eastern region of the
nation. The Bureau is also forecasting a hotter than
average minimum and maximum temperature range
for the same areas of the country anticipated to Figure 2
experience the dry spell. The dry and hot forecast
appearing to take some of the “heat” out for the cattle
market this week.

East coast cattle slaughter figures for the week ending
20th January coming in 2.8% higher than for the same
time in 2016 at 112,995 head boosted by Queensland
weekly slaughter figures. Indeed, Queensland was the
only state in the nation to record weekly slaughter
figures above the 2016 levels and above the five-year
average for this time of the year. Despite the boost from
the “Sunshine state” total east coast slaughter is still Figure 3
tracking 8.2% below the five-year average trend – figure 2.

Figure 3 outlines this week’s sideways movement in
EYCI closing just 0.75¢ softer at 651.5¢/kg cwt as
restockers pause to think about the weather implications.
This time last year the MLA released an article looking
at the relationship between movements in the EYCI
over January compared the overall performance over
the season. Interestingly they discovered that 78% of
the time the January performance was mirrored in the
rest of the year’s performance.

The week ahead

The MLA article would seem to suggest that based on this
January’s price movements we are in for a positive price
pattern this year, although not as strong price gains as those
that occurred during 2015 and 2016 – figure 3. As we head
into February eyes will be on the skies, temperature gauges
and the condition of the pasture as this will influence how
aggressive restocker demand will be for cattle and if they
will continue to drive the price direction as much as they
did last season.

Long term mutton prices

Posted on by Caitlin Dearden

Key points:

  • The most recent peak in NSW mutton prices Picture1in deflated terms (current day dollars) occurred during April 2011 at 523¢/kg cwt
  • The long term average deflated NSW mutton price is 239¢ based on data going as far back as 1949
  • Since 1949, NSW mutton prices have spent 70% of the time between 115¢-362¢ and 95% of the time between 0¢-485¢

Last week Mecardo released an article on long term deflated prices for the Eastern States Trade Lamb indicator (ESTLI) and this week we have published a similar analysis focusing on long term mutton prices, looking at NSW mutton prices since 1949.

Click here to read the deflated ESTLI article.Picture2

Figure 1 shows the price pattern for both nominal and deflated average monthly NSW mutton prices going back to 1949. Clearly, the 2016 season was a good one for mutton prices and the 2017 season bodes well with the NSW mutton January average of 394¢/kg cwt just sitting 15.4% shy of the nominal average monthly peak that occurred during April 2011 at 466¢. In deflated terms the current mutton prices are holding up well too with a deflated peak in 2011 at 523¢, not too far away from the current level.

Indeed, figure 2 highlights just how well mutton prices have been in current day dollars with the market sitting well above the long term deflated monthly average of 239¢/kg cwt – (blue dotted line). The green 70% range between 115¢ – 362¢ shows were deflated mutton prices have traded for 70% of the time since 1949 and the red lines show the range that encompasses 95% of the variation in price (0¢-485¢/kg cwt) over the same time frame.

Figure 3 displays the same deflated mutton Picture3price series overlaid with percentile ranges which shows that the current average monthly NSW mutton price has remained in the 80-100th percentile range since April 2016. Unquestionably, mutton prices are holding firm with the January average of 394¢ sitting at the 90th percentile when compared to the deflated price data series since 1949.

What does this mean?

As outlined in the “Mutton hitting the ceiling” article from last week (see link above) there is a case for mutton prices continuing to firm into the 2017 season. While the deflated data suggest we are at reasonably high historic levels there have been times in the past when mutton prices were higher in real terms.

NSW mutton prices wouldn’t be considered to be at extremely high levels until above 485¢ and have reached as high as 523¢ (in current dollar terms) within the last five years, so mutton prices near or slightly above 500¢ this season aren’t out of the question.

 

 

 

Support coming from US export market

Posted on by Caitlin Dearden

Cattle prices edged higher this week, as markets remain in a holding pattern, seemingly across all levels.  Export beef prices have started the year relatively steady, putting a base in the market.  Slaughter cattle are maybe a little too expensive for processors, but tight supply and restocker demand is supporting prices.

Figure2 State Trader Steer Prices

Regular readers will know we often quote the 90CL Frozen Cow indicator as a benchmark for export beef prices.  Historically the 90CL has had a good relationship with cattle prices here, and it is reported weekly, hence we like to use it.

This week the 90CL edged a little higher, hitting 590¢/kg cwt, almost exactly the same level as this time last year (figure 1).  In fact, the 90CL indicator has tracked in a historically narrow range for much of the last 12 months, bouncing between 550 and 600¢/kg swt.  Tight supply out of Australia and New Zealand has been somewhat counteracted by weakening demand from the US.

According to the weekly Steiner report, beef demand in the US has improved recently.  This has been on the back of cheaper domestic beef, and improving margins for retailers, therefore they have been pushing beef in their marketing campaigns.  For us it’s strange to think retail or fast food marketing campaigns could have any impact on cattle prices, but apparently it’s gFigure1 90CL vs EYCIood for us if McDonalds sell more burgers in the US.

Locally it was Queensland where the action was this week.  The Qld trade steer indicator rallied 50¢ to 625¢/kg cwt (figure 2).  The saleyards in Queensland are a full dollar higher than the Over the Hooks quote.

 

The week ahead

Figure 2 shows there is little difference between state trade steer indicators, which is normal for this time of year, as markets move into a holding pattern.  The next major market move is usually lower in autumn, as northern weaner cattle and cull cows hit the market.  How much impact this has this year will depend on rainfall, obviously.

Cattle projections forecasting lower slaughter but demand will drive prices

Posted on by Caitlin Dearden

Meat and Livestock Australia (MLA) have hit the target
with their recent cattle projections, and as such not much
has changed in their January update. It is, however, Figure 1
worthwhile taking a look at what the peak body see is
going to be the supply situation for the coming year
and beyond.

Figure 1 shows MLA’s slaughter and herd projections,
and how slaughter has changed from the October
estimates. The herd is still expected to have bottomed
out last year, at 26.14 million head, a 20 year low.

A relatively quick herd rebuild is expected, on the
back of 20 year low slaughter rates next year. The herdFigure 2
isn’t expected to reach the highs of 2013 in the next five years,
but is expected to move back above 28 million head by 2019.

MLA have made some slight revisions to slaughter
numbers. For 2016 slaughter was down 100,000 head,
and this has been shifted into 2017, lifting the estimate
by 1.4% to 7.1 million head. Further down the track
slaughter estimates have been lifted marginally,
basically due to the herd being slightly larger than previously estimated.

The projections of 8 million head slaughtered in 2020 Figure 3
and 2021 are high relative to historical levels, but remain
well behind the peaks of 2014 and 2015. Obviously MLA’s projections are based on ‘normal’ seasonal conditions, with the growth in the herd driven by current strong prices, and the fact many regions are currently understocked.

Some interesting figures from this week’s projections
comes from the average carcase weights of cattle
slaughtered. Figure 2 shows a jump in slaughter weights
in 2016, from the lows of the drought where heavy female
young cattle slaughter saw weights at 278-279kgs. In 2016
slaughter weights increased 3% to 287kgs per head, and
are expected to start a slow ascent to 291kgs by 2021.

Interestingly the 2016 slaughter weights couldn’t quite
eclipse those seen in 2012, which suggests that the good
season wasn’t enough to see cattle held to heavier weights.
Rather producers took the good money when cattle
were ready.

Key points:

  • MLA have released their updated cattle projections,
    with little change to herd or slaughter forecasts.
  • The cattle herd is expected to have bottomed out in 2016,
    with the slaughter low coming this year.
  • Continued tight cattle supply should ensure prices
    remain relatively strong for the coming year.

What does this mean?

Regular readers will be familiar with figure 3, which plots
the spread between the 90CL export price and the EYCI,
against annual cattle slaughter. The fact that the 2016
point sits well above the trend suggests local demand
was very strong in 2016.

As that restocker demand wanes as the herd grows we
would expect the EYCI’s premium over the 90CL to fall
back to the trend line. This means that even though slaughter
is expected to be lower this year, we may see lower prices as
well, with the current 90CL price, and the historical trend
suggesting the EYCI should average around 600¢ in 2017.

Tight supply maintains the strong prices

Posted on by Caitlin Dearden

Meat and Livestock Australia (MLA) slaughter figures
confirmed that January lamb supply has been tighter
than usual. The result has been very strong summer
lamb prices, at a time when the market has tracked
sideways in recent years.

Figure 1 shows east coast lamb slaughter for the week
ending the 20th of January was well below last year.
The 18% reduction in numbers seems to have been due
to the good spring, which saw many lambs finish early
and hit the market in December, leaving a dearth of
numbers in January.

The result has been the best January lamb prices since
2011, with the Eastern States Trade Lamb Indicator
(ESTLI) managing to spend its third week above 600¢.

The ESTLI did ease slightly this week, but only 2¢ to
finish at 602¢/kg cwt. Mutton values took more of a hit,
losing 12¢ to hit 395¢/kg cwt as supply improved.

The question now for lamb markets is whether they can
maintain the strong levels. The five year average would
suggest they can, but figure 2 shows that in the last two
years February has seen the ESTLI ease. Lower prices in
February are likely due to domestic demand waning after
Australia Day and supply improving as shorn lambs start
to come back to the market.

As always the price trend will depend on how many lambs
are actually out there, and as indicated by survey results,
it could be fewer this year, so lamb prices could find some
solid support in the 560-580¢/kg cwt range.

The Week Ahead

We expect prices to ease over the coming weeks, but not
by much. Lamb producers not likely to be forced to sell in
the short terms, so may hold out for stronger prices if we
see any correction.

Mutton values should recover from this week’s correction,
it’s hard to see more supply coming forward given the feed
situation and the wool price.

 

Reality check has timely lessons

Posted on by Caitlin Dearden

Last week we had wool at all-time highs, and the
usual response is to look forward to see how much
higher it could go. This week the wool market provided
a reality check, prices on the opening day (Tuesday)
were down 20 to 40 cents compared to the close of last week.
It was the mid-point of Merino microns that suffered,
with 19 to 21 MPG feeling the brunt of the retracement
while fine wool was least effected.
The good news was that after the “correction” on
Tuesday, the market was remarkably resilient on
Wednesday; in fact, by the end of the week the 17 & 18
MPG’S had closed above last week’s level in Melbourne.

To retain some perspective; the EMI is still well above
the closing December markets, whether measured in A$
or US$ terms – figure 1.

The trend of improving fine wool premiums continued
this week; the 18 Basis premium over 21 MPG has
doubled since October last year. Fine wool producers
have seen this premium rally from 123 cents this time
last year to now sit at 443. This will provide an incentive
to hold the line with fine wool sheep, although it is
concerning processors how far the micron will broaden
this year given the excellent seasonal conditions currently in play.

Growers response to the easing wool market was to pass-in 13.3% of the offering, or almost 6,000 bales. To break this down a bit more, of the 30,657 bales of Merino fleece and skirtings offered, 3,500 bales or 11.4% were passed-in by brokers. Normally this would be seen
as a “brave” decision when the market is at record levels; the change in supply as well as the very limited wool either in the pipeline or in brokers stores makes this decision a little more understandable.

As we said last week, high prices provide an opportunity in
the wool market to forward sell, this week’s retracement
is a timely reminder that often high prices are the
antidote for high prices.Table 1

This week we have had a lot of feedback about our blog
article, “Let’s make merino great again!”. We are looking
for innovations and ideas we can publicise to showcase the
great things that are happening in the merino/wool industry.

The Week Ahead

The offering of next week is 42,584 bales in all three centres
over two days. Based on the recovery to the Tuesday correction
and the reduced offering we should see the market at least hold.
The test will be if the processors remain buoyant about the
market outlook or were they “spooked” by this week’s roller
coaster and decide to sit back and see how this plays out.
As usual, interesting times for wool.