Tag: Business

Spring in the wool markets step

Posted on by Caitlin Dearden

The wool market has been rather playful of late, appearing to have a spring in its step with a few giddying price highs and corrections. This week’s market was no exception with large movements in red across the board.

The Eastern Market Indicator dropped down 31 cents to 1,525 cents in A$ terms this week (Figure 1).  The market in the west followed a similar path, falling 30 cents out to 1570 cents close (Figure 2). Our dollar is still holding up against the US$, which meant the EMI fared slightly better in US$ terms finishing 22 cents lower on the week at 1221 cents. The A$ traded at 80.5 early and pulled back as the week progressed which was reflected in the market as prices stabilised on the second day of auctions.

The finer fibres of less than 19 micron posted the largest losses for the week. Given that they had been holding ground in comparison to the rest of the market recently, it was only a matter of time before widespread corrections occurred in this category. Losses ranged from 30 to 60 cents and were highest in 18 -19 micron wools.

A total of 42,764 bales were offered for sale this week. However, growers were reluctant to accept any retraction in price, passing in a significant 15.5%. Word from the floor suggested that there was interest from exporters chasing any of the passed in lots after sale hours (Figure 3).

Merino skirtings and crossbred wools also felt a quick early blow in the market before stabilising on day 2. Recovery was slightly better than for Merinos, with losses of 15 to 30 cents for crossbreds and an average of 20 cents on skirtings. Cardings were the only category that managed a positive move by gaining just a few cents on the week.

The week ahead

A total of 43,077 bales are listed for sale next week across the three selling centres. As long as we don’t see any significant global actions affecting the currency and trades, the hinted demand from exporters raises our hopes for a favourable week.

Frost is a pain in the stem

Posted on by Caitlin Dearden

For those into pop culture references, the term ‘Winter is coming’ has been prevalent in recent years. We are officially past winter now, but that hasn’t stopped the frost. Our friends in NSW just can’t seem to get a break this year.

The US were busy celebrating labor day on Monday, well at least those not bracing for (or recovering from) Hurricanes. The market had a strong recovery prior to the holiday, with short sellers taking profits after a continuous decline over the past month (figure 1), however over the past two sessions the market has lost around half of these gains. The market was not helped by the Food and Agriculture Organisation raising its expectations for the global cereals crop to 2.6bmt, which would be the highest on record.

The Australian crop has gone from bad to worse. NSW, which has struggled since seeding with a lack of moisture, has now been impacted by unusually severe frosts. The impact of a likely drop in supply has led prices to follow the theoretical logic of basis perfectly.

In the past week, we have witnessed basis levels increase dramatically (figure 2). In this data set it is most markedly so in Port Kembla, where the crops are likely to be most impacted.  The other zones on the east coast have also risen considerably, and flows are now likely from southern to northern areas.

In figure 3, the basis levels as a percentage of the overall price are plotted. As we can see, there have been considerable rises in all zones. The rise was far more sedate in Kwinana, which has for the past 8 weeks maintained at strong levels, and the bulk of issues in the WA crop have been priced in. The basis levels as a percentage of the price in Kwinana and Port Kembla are now at historically high levels.

 

Next Week/What does this mean?

We have a double whammy on Tuesday. The USDA and ABARES release their crop estimated for September.

There have been a number of issues in Australia, however I expect ABARES to take a relatively conservative approach to any drops in production.

The key will be the USDA report, will there be any surprises? The recent upgrades to the Russian crop will likely give a bearish edge to the report.

OYCI to EYCI spread narrows over August

Posted on by Caitlin Dearden

This weekly comment marks the first in our planned fortnightly Online Young Cattle Indicator (OYCI) updates as well as a general summary of the broader cattle market over the last week. Interestingly, the spread of the OYCI to the EYCI has narrowed over the month of August.

Figure 1 shows the seasonal OYCI pattern with the 10.2% decline over August bringing the indicator to 578.80 ¢/kg cwt as of the start of September. In contrast, the EYCI staged a decline of only 5.2% over the same period with the EYCI closing this week at 541.75¢/kg cwt. Since mid-August the spread of the weekly OYCI over the EYCI has narrowed from 14.9% to 5.6%, as at the start of September.

The EYCI staging only a mild, 2% decline on the week, as the 90CL beef export price continued to trek sideways staging a close of 557¢/kg CIF – figure 2. Young cattle in the West continuing it’s bounce around between 550-600¢ with an 8% gain this week to 595¢/kg cwt.

A 42% surge noted in NSW cattle throughput over the week (figure 3) appearing to put some pressure on Trade Steers there with a 4% drop noted to 308¢/kg lwt, with the continued dry having an impact. Feeder and Heavy Steers in NSW also slightly weaker – down 1.2% (297¢/kg lwt) and 1.3% (274¢/kg lwt), respectively. Feeder Steers in QLD and Victoria also dragging the chain a bit, down 2.4% (298¢/kg lwt) and 4.2% (289¢/kg lwt) between them.

The week ahead

The rainfall forecast for the week ahead a bit of a mirror of the last month with moisture limited to the southern regions. Cattle prices are broadly anticipated to continue to consolidate at current levels with the chance for some gains noted in the South, while the drier Northern regions may still see some further slight declines.

Saleyard buyer types – volume comparison.

Posted on by Caitlin Dearden

Key points:

  • Current average monthly restocker purchases of EYCI cattle at the saleyard are at 5,500 head per week and is sitting 24% below the seasonal weekly average of 7,250 head.
  • Current average monthly lot feeder purchases are at 5,700 head per week and is placed 18% below the seasonal weekly average of 7,000 head.
  • Current average monthly processor purchase volumes are at 2,800 head per week and is 10% above the weekly average of 2,550 head recorded so far this season.

Since the start of Winter there has been a changing dynamic at the saleyard for young cattle purchases. Declines in average volumes have been noted for restockers and lot feeders, on the back of reduced pasture availability and higher feed costs. However, processor purchases have bucked the trend as their margins are stubbornly clinging on to positive territory.

 Analysis of saleyard average weekly volumes from the underlying EYCI data shows that over the last three months both restockers and feed lots have been reducing their buying activity, despite the price of young cattle declining 16% since the start of June. Figure 1 shows the weekly purchase volumes by buyer types averaged over each month since the start of the season. The recent decline in purchases of EYCI style cattle by restockers and lot feeders is clearly evident, with restocker volumes currently 24% below the seasonal average and lot feeders are 18% under. Interestingly, over the same time frame processors have increased their activity at the saleyard, such that current processor volumes are sitting 10% above the seasonal average.

Over the season so far, restocker purchases have been averaging around 7,250 head of EYCI cattle per week. However, average purchases for the last month have reduced to 5,500 head as unseasonal dry conditions, highlighted by the rainfall deciles from June to August (figure 2), sap some of the optimism out of restocker demand.

Similarly, feed lots had been averaging purchase volumes of around 7,000 head per week since the start of the season, but in the last month this has reduced to an average of 5,700 head. A spike in global grain prices saw feeder margins squeezed in early Winter. This was followed by higher basis levels for grain, particularly in the Northern NSW and Southern Queensland regions, as the persistent dry and frost events begin to impact upon expected yields in these areas.  Read more about current feeder margins here.

An updated Mecardo processor margin model (figure 3) shows August remains in the black, with an average per head profit of $17.50 recorded for the month. Indeed, the processor margin has been positive since May and this probably accounts for why the current processor purchase activity of around 2,800 head per week is sitting above the average recorded since the 2,550 head at the start of the season.

What does this mean?

The updated Bureau of Meteorology three-month weather outlook indicates a move to a more neutral condition for much of the country. The BOM expect rainfall to be below average in southwest Australia, above average in parts of southeast Queensland, and has a 50/50 chance of being above or below average elsewhere.

The prospect of higher than average rainfall to parts of southern Queensland and Northern NSW may see a revival in restocker activity here, providing some support to young cattle prices in these areas. Although, it may be too little too late to provide some relief for lot feeders in the form of a narrowing basis, particularly if forecast frosts into September continues to weigh on expected yields in these regions.

No rain but lambs flooding NSW yards

Posted on by Caitlin Dearden

Lamb yardings had a massive jump this week, while the majority was in NSW, Victorian producers also sent plenty of numbers in.  Prices held on this week, but can it continue? 

It was a rather extraordinary week for lamb supply at saleyards.  In NSW lamb prices not only hit a record, but were 28.5% higher than the previous record, at 194,781 head.  Lamb yardings in Victoria more than doubled, pushing East Coast yardings to a 67.5% rise for the week.

East Coast yardings weren’t a record (figure 1), but were at levels normally seen during the early summer lamb flush from Victoria.  East Coast yardings have never been higher at this time of year however.

Interestingly the big yards of Wagga and Dubbo actually saw lower lamb numbers this week.  Forbes and Griffith both had increases of 25-30% with smaller yards contributing a proportion of the increase in numbers.

The impact of the heavy yarding on price was not a depressing as could be expected.  Figure 2 shows the Eastern States Trade Lamb Indicator (ESTLI) falling 12¢ to remain at the very strong level of 613¢/kg cwt.  Unsurprisingly, NSW saw the heaviest price falls, with Restocker, Light and Trade Lambs all losing 4-7%.

Heavy lambs in NSW remained relatively steady, suggesting the stronger yardings were mostly in the lighter categories.  This is not surprising, as most of NSW has seen no rain in the last week, following a drier than normal August across large sheep areas in northern NSW.

The week ahead

It’s hard to see lamb supply maintaining the extraordinary levels of this week, but we don’t expect a fall in yardings to do much to price.  New season lambs are now flowing fairly steadily, with the only question being over the weight of lambs.  This could see heavy and trade lambs hold their ground to an extent, in the face of easing light and restocker lamb prices.

Mirror, mirror on the wall, fine wool and Fremantle take a fall

Posted on by Caitlin Dearden

In a week of “smoke & mirrors”, the market reflected a similar image to last week and absorbed a large offering of wool in all centres with 39,000 bales cleared. It was the finer than 19 MPG this week that disappointed with all other categories posting gains.

The EMI fell only 2 cents in A$ terms to settle at 1,556 cents, while in US$ terms the market improved 12 cents over the week (figure 1). The WMI was 9 cents lower than the previous close of last week.

Merino skirtings started slowly but picked up over the week to finish strongly; it was a similar story for X Bred types while Cardings, including lambs, locks and crutchings, were solid early and stronger by the week’s end.

This week was a pretty good result considering a larger offering and a higher A$ could have pushed the market lower following the last couple of weeks of price corrections. It wasn’t the case however, and growers responded by clearing the large offering and only passing in 5.2%.

In fact, AWEX reported that on Wednesday Melbourne offered the largest merino fleece offering in almost 12 months.

Fremantle struggled on Thursday, with across the board price reductions predominately in the19.5 to 22.5 micron offering, although growers only passed in 5% indicating satisfaction with the market levels.

In the Forward Market, the past couple of weeks have seen growers take up good forward prices out as far as February 2018. This would seem a reasonable approach given the strong current market and the somewhat uncertain global circumstances.

The week ahead

 Through the looking glass into next week, another large offering of 44,281 bales are rostered for sale in all three selling centres (Figure 2). The solid performance this week in the face of a large offering and stronger A$ bodes well for next week.

Dead calm in grain

Posted on by Caitlin Dearden

In nautical terms, ‘Dead Calm’ is completely still sea, with the absence of wind or waves. The grain market could be considered to be in a period of dead calm, with the market waiting for some wind or waves in the form of substantial new data to blow us either way.

The futures market is relatively unchanged week on week (figure 1). The spot contract gained lost strength during the week falling to 400¢, before regaining to 410.25¢ (+0.75¢ w-o-w), whilst the December contract remained pretty much unchanged throughout the week. The reality of the Russian harvest continues to weigh on crops.

At a local level, the central NSW crop seems to be going from bad to worse, after experience moisture deficit over the past three months, they have been hit by particularly bad frosts (see map) with many agronomists fearing a stem frost, however the full impact will not be apparent for another week or so.

In contrast, Victoria seems to be the jewel in the crown and after having covered part of the state in recent days the crop looks to be in almost perfect condition, appearing to be on track for well above average yields.

The basis levels around the country (figure 2) have continued to remain at strong levels due to lack of grower selling. The question remains as to whether these levels will remain when harvest selling pressure arrives. Although, with likely diminishing yields overall in Australia, downside pressure will likely be capped.

 

Next Week/What does this mean?

It may be too early to say, but it seems that the market has found a floor based on current market dynamics.

In two weeks, we will have the September WASDE report released, along with the ABARES report. The question will be whether the trade has priced in any downgrade, or whether any likely downgrades will cause a stir.

Dead cat bounce or finding base

Posted on by Caitlin Dearden

Young cattle prices gained some ground this week, for the first time in some while.  The Eastern Young Cattle Indicator (EYCI) has fallen for 12 weeks without any real break.  This week the break came, with the EYCI gaining 14¢ to move back to 553¢/kg cwt.  Is it a dead cat bounce or a sustainable rally?

Figure 1 shows the bounce in the EYCI, going back to the level of 3 weeks ago.  We can see in figure 2 that EYCI yardings have been low for a couple of weeks in a row, which seems to have been enough to see buyers competing a bit harder and pushing prices higher.

Young cattle weren’t the only category to gain ground.  Heavy steers in Queensland and NSW rallied to 480 and 514¢/kg cwt respectively.  While Heavy Steer prices in Victoria didn’t rise, they in fact fell 17¢, they remain at a premium to northern states, at 522¢/kg cwt.

The 90CL Frozen Cow price has tracked sideways for the fourth week in a row and both the EYCI and Western Young Cattle Indicator (WYCI) have met it at around 555¢.  Figure 3 suggests it’s hard to argue that falling beef export prices aren’t driving the cattle price.

This time last year the 90CL was around 570¢, while the EYCI was at 707¢/kg cwt.  This is a good indication of the extraordinary restocker demand we saw last year, which this year has basically returned to normal, seeing cattle prices match the export price again.

The week ahead

It’s going to rain in southern parts of Victoria and South Australia, but nothing to speak of in the north.  As such we’re not going to see demand pick up for young cattle.  Additionally, the supply of grainfed keeps coming out of the record numbers of cattle on feed, and that’s not going to change in a hurry either.  As long as the export price holds, there is a good chance prices have found a base for now, with the next test coming in October.

What in the hell is the 90CL?

Posted on by Caitlin Dearden

Key points:

  • The term 90CL describes how lean, in chemical percentage terms, a pack of meat is. 90CL refers to meat that is 90% lean red meat and 10% fat.
  • Monthly fluctuations in the 90CL closely follow the price pattern set by US Live Cattle futures.
  • Movements in the A$ can have an impact on how the 90CL fluctuations flow through to added support or pressure on local cattle prices.

At Mecardo we regularly refer to the 90CL frozen cow indicator as a key beef export price benchmark when undertaking analysis of the domestic market prices in relation to overseas markets. This is because a strong long-term correlation exists between indices like the Eastern Young Cattle Indicator (EYCI) and the 90CL. We often get asked to explain what the 90CL actually is and what influences its movement – this will be addressed in this piece.

The abbreviation CL refers to the term chemical lean which measures the amount of lean red meat compared to the amount of fat in a sample of meat, using an approved method chemical analysis. The CL of meat being analysed includes a ratio of meat to fat as a minimum percentage, for example 90CL, where 90% of the pack will be lean red meat and 10% of the pack will be fat. Much of the frozen 90CL product imported into the USA from Australia finds its way into the meat grinding process where the lean 90CL is combined with the 50CL US fat trimmings to make the iconic 75CL American burger meat patty.

Therefore, it should come as no surprise that the influence of the broader US cattle market on the price of the 90CL is fairly strong. Indeed, as highlighted in figure 1, the movement of US Live Cattle futures is closely mirrored by the movement in the 90CL. Analysis of the monthly average price of US Live Cattle to the 90CL since 2001 shows a correlation measure of 0.9139 which suggests that nearly all of the movement in the 90CL can be explained by the fluctuations of the US Live Cattle market.

The 25% gain in US Live Cattle futures experienced since October 2016 had been mirrored in the progress of the 90CL in US$ terms this season – figure 2. In recent months drought effected parts of the American mid-west have seen Live Cattle prices ease 13.4% toward 109US¢/lb, subsequently the 90CL in US$ terms has also eased by a similar proportion, dropping 11.9% to 200US¢/lb.

What does this mean?

Compared to current US Live Cattle levels the 90CL in US terms seems a little overvalued, and the normal annual pattern heading into the remainder of the season shows that the 90CL usually begins to decline beyond the US grilling season peak around July/August.

However, the local price impact of any price decline in the 90CL in US terms will depend upon what is in stall for the A$ for the remainder of the year. As outlined in Table 1, which shows the relevant 90CL in A$ terms for a selection of pricing scenarios, any softening of the A$ will act to support local prices while further appreciation will act as a headwind.

In addition, the relative movement of the A$ can act to offset or exacerbate 90CL fluctuations. For example, the recent decline in the 90CL was exacerbated by an appreciating A$ over the same time frame such that the 90CL in A$ terms declined by a greater magnitude, shedding 14.7% to 559¢/kg – figure 3.

LamSpring has sprung – a leak in WA mutton prices

Posted on by Caitlin Dearden

Another Winter is over and the first day of Spring heralds a drop in WA Mutton prices as supply reacts to the recent buoyant markets over there. The WA Trade lamb indicator (WATLI) off too, closing the gap between itself and its Eastern cousin this week to see only 3¢ difference between them.

Figure 1 highlights the reaction of Western mutton producers this week to the robust prices for sheep and lamb prices being experienced recently, as covered by our earlier analysis piece this week. Indeed, the 63% jump in WA mutton throughput pressuring sheep prices lower to see them shed 7% to close at 409¢/kg cwt, now sitting only 4¢ above East coast mutton prices.

East coast lamb slaughter beginning to decline with figures for the week ending 25th August 4% lower than the previous week, with just over 357,000 head processed. Although, slaughter figures still sitting fairly high compared to previous seasons with the current week tracking 7% above the five-year average for this time of the year – figure 2. Read more about what the higher slaughter levels now may mean for lamb prices as we head further into Spring here.

The high supply not having a great impact on most national categories of lamb this week, with only Merino lamb posting a decline – down 2.3% to 557¢/kg cwt. National Mutton down a similar magnitude, off 1.9% to close at 407¢/kg. All other national lamb indicators posting gains between 1.5% to 5% and this robustness was mirrored in the Eastern States Trade Lamb Indicator (ESTLI) with a gain of 2.4% noted to close at 633¢/kg cwt, just 3¢ shy of the WATLI – figure 3.

The week ahead

Light rainfall forecast for the West and better falls noted for SA and Victoria should keep prices reasonably stable for the week ahead. In addition, with no clear signs yet of the impending spring flush and the stronger than normal supply we have seen for lamb in the last few weeks, means that less may present themselves throughout Spring. This suggests that prices may be kept fairly well supported on any dips.