Tag: Commodity

Do more mouths equal more money?

Posted on by Caitlin Dearden

Key Points

  • Real prices of wheat have fallen drastically since the 1970’s, whilst population has drastically risen.
  • Farmers around the world have increase production to meet demand, without utilizing more land. The increases have been because of yield improvements.
  • Since the 1970’s the world has produced around 100kg of wheat per person.

It’s a statement heard regularly for the past century, the world is growing and it will need to eat. The logic is that with more mouths, there will be more demand. As demand rises, then prices should follow. However, in grain that doesn’t seem to be the case, why is that?

A couple of weeks ago, I was contemplating the price of wheat versus the rise in global population over the past decades. I ended up with figure 1, this shows the real price of wheat (in 2012 prices) against the world population. It is clear that in real terms prices have fallen substantially, at the same time that the population has risen.

It is logical to assume that demand has increased, as the world grows. However, there must be a reason behind the lack of upward movement in pricing. Let’s take a look at production, and what has occurred in the same period.

In figure 2, global wheat acreage and production is displayed. As we can see acreage, has largely remained within a narrow band. We can however see that production has drastically increased in the same period, if it’s not through land increases, it’s obviously yield.

In figure 3, the population and yield are presented. Since the early 60’s to present yields have drastically increased. The average yields in the 1960s was 1.2mt/ha, this decade it is 3.2mt/ha. An astronomical increase brought about through technology, agronomy and management practices.  When we compare population and yield, they both run in a very tight parallel as can be seen in the linear trendline.

To further demonstrate our ability to produce wheat on a very large scale, the generative capacity per population is shown. This is the amount of wheat available per person, if shared equally on an annual basis. After a strong increase in yields during the 1960s, the world has continued to provide an average of 100kg’s of wheat per person.

Clearly, human society has been able to advance wheat yields to keep in line with population, at an almost step for step change. This has been because of farmers adopting farming practices which enable them to produce larger crops. However, by meeting demand, has this resulted in a constrain in prices?

What does it mean/next week?:

The world population is expected to follow a linear path until it reaches between 9bn by 2050, and as high as 12bn in 2100. The world will be required to produce a global average yield of 4.3mt/ha to maintain a 100kg’s per person productive capacity.

Is this possible? Well there are still vast tracks of land in the world that are still unproductive, which could bump up yields. There is a lot of buzz around agtech, will new precision ag technologies allow for improve production and efficiencies?

Prices do not always equal profitability, as an efficient farmer with low prices will be more profitable than an inefficient farmer with high prices.

The question is, is higher production the best solution for farmers?. Although production increases will help societies prosper through lower malnutrition, will it provide increases in price?

Cardings take the heat

Posted on by Caitlin Dearden

The wool market took a bit of a hit this week with most categories losing ground, with the exception of the very fine end. Cardings were hit particularly hard with the combined average fall for all three centres coming off nearly 200¢.

The higher A$ saw the falls in US $ terms lessened, but the benchmark Eastern Market Indicator (EMI) ended the week off 57¢ to close at 1744¢. The Western Market Indicator (WMI) mirrored the Eastern falls to register a 39¢ decline to 1821¢ – figure 1.

The Southern Carding indicator the worst performer of the three centres off a whopping 230¢ to see it move back under 1300¢. Northern and Western Cardings off 179¢ (1334¢) and 184¢ (1319¢), respectively.

17 micron and finer managed slight gains between 5-15¢ but most of the medium to coarse categories posted losses of a 20-70¢ magnitude. Reports from the auction floor stated that buyers were happy to pay for better prepared, quality lines but anything that was poorly prepared or suspect in quality was reasonably discounted, with buyers showing a willingness to step aside.

Growers reluctant to chase the falling market lower saw the pass in rate lift to 14.3% with 36,430 bales sold from a total offer of 45,525 – figure 2.

The week ahead

Chinese mills likely to begin the wind down in activity as we head toward the New Year festivities there and may mean buyer interest continues to wane in the coming week. A rampaging A$ above 81US¢, thanks to Trumps comments over the weekend unlikely to provide a lifeline for wool prices this week.

Sales are scheduled for Wednesday and Thursday in all three centres with a total of 42,244 bales on offer.

The opposing views of the white house

Posted on by Caitlin Dearden

The week has overall ended up positive for grain producers in Australia. The market has been largely driven by noises from the white house, which seem to have very opposing views on the future of their economy. In this weeks comment, we take a look at the descent of the Chicago futures, and the strong ascent of the Australian dollar.

The futures market has regained some traction in the past week, with Chicago spot futures up 4% since the 19th Jan. There are some concerns about weather in the northern hemisphere, but the increase in futures has largely come from weakness in the US Dollar. In figure 1, the spot Chicago futures are shown in both US¢/bu and A$/mt.

The fall in the US$, and the subsequent rise in A$ has led to the increase in A$ wheat swaps being weaker, albeit still reasonable at 3% week on week.

The US$, has been weakening in the past fortnight due to mixed signals from the US administration. The US secretary of state, had made comments pointing towards a weaker US$ being positive for the economy. This sentiment points to the likelihood of limited interest rate rises in the coming year. However, President Trump provided a conflicting view that the dollar will be stronger, and that was the aim of the government.

In figure 2, the US dollar index (DXY) is plotted. The DXY is an index based on a trade weighted basked of currencies against the US$. In recent weeks, the greenback has declined to it’s lowest point since December 2014.

This weakness has flowed through to the A$, which has gained ground to close above 81¢ (figure 3). The improving value of the A$, contributes to making local export commodities less competitive on the world stage, however in theory imports should be cheaper.

The current rise in the A$ is largely as a result of US weakness, and with the unknowns of the political machinations of the white house, we could be in for a rocky period of time. If the market regains confidence in President Trump’s claims of a stronger dollar, we could see a decline in the A$.

What does it mean/next week?:
The market continues to look towards the northern hemisphere. We are currently experiencing La Nina conditions which can lead to a drier than normal conditions in the US, this is starting to be seen.

We are still a long way from the finish line when it comes to the US crop, but signs are point towards relatively poor conditions, and with low planting figures any issue can be exacerbated.

Will lamb suffer a post Australia Day Hangover?

Posted on by Caitlin Dearden

Despite the issues with slaughter capacity in South Australia it seems that we once again managed to achieve a slaughter spike in the middle week of January.  In some years the weaker demand in early February has led to weaker prices, but last year it was met with weaker supply, and strong prices.

Figure 1 shows what seems quite remarkable under the circumstances.  With 55,000 head of sheep and lamb slaughter capacity taken out by the TFI fire in early January, east coast processors have killed just 1.6% fewer lambs in the week ending the 19th of January.

Prices did fall in that same week, which could be put down to a bit less competition, and perhaps strong over the hooks bookings in response to concerns about slaughter capacity.  Last week we saw steadier prices (figure 2) as fewer lambs were yarded in response to lower prices.

Historically we see a small fall in prices at the end of January, followed by a gentle rally as lamb supply becomes tighter.  Strong spring slaughter would suggest the supply trends should be similar this year, as long as demand holds on.

Mutton prices have suffered in January, and this might be where reduced slaughter capacity is hitting home.  The National Mutton Indicator started the year at 470¢, and has since lost 14% to be sitting back at 400¢/kg cwt, the lowest price since early November.  This could turn around as processors turn back to mutton as domestic lamb demand weakens.

What does it mean/next week?:

The lamb market seems to have found a base at the moment, at prices a little higher than this time last year. Don’t be surprised to see values track sideways from here, with a bit of volatility as the supply of finished lambs fluctuates.

There appears to be more upside for mutton given the dramatic fall it has seen, and what should be tightening supply.  Some rain through NSW would obviously help bolster prices, but it looks like Queensland is going to be the beneficiary this week.

Is it the return of the Wagyu or did the EYCI strike back?

Posted on by Caitlin Dearden

On international Star Wars day last year (May the 4th be with you) the Mecardo team took a look at Wagyu spreads to the Eastern Young Cattle Indicator (EYCI) and a recent subscriber request for a follow up article prompted us to have another look at how the 2017 season played out… and besides we couldn’t resist the chance for another pun in the heading!

Recap on the original “May the force be Wagyu” analysis here.

Figure 1 shows the monthly average price series for F1 Wagyu Steers, along with the monthly average EYCI since mid-2015. A cursory glance at the chart demonstrates that Wagyu prices have declined in line with the general correction in young cattle prices over the 2017 season.

However, a breakdown of the quarterly average price changes for the two series highlights that the main price gains occurred during the third quarter of 2016, with the EYCI up 19.7% and the F1 Wagyu Steer up 14.9% – figure 2. Similarly, the majority of the price correction occurred during the third quarter of 2017 with the EYCI down 13.6%, while Wagyu Steers came off 9.8%. Although, measuring from their respective peaks to troughs on a quarterly basis over the 2016/17 season shows that the EYCI has dropped 18.4% compared to the Wagyu Steer’s decline of 19.9%.

Correlation analysis of Wagyu Steer to EYCI quarterly price changes indicates a fairly strong relationship between the two price series with an R2 observed of 0.8181** – figure 3. Interestingly, as identified by the colour coded markers for each season, much of the 2016 Wagyu quarterly returns performed above the line of best fit, suggesting a relatively good season for Wagyu prices compared to the respective EYCI movements.

In contrast, the 2017 season has seen Wagyu quarterly returns gathering below the line of best fit, indicative of a somewhat poorer season compared to the EYCI quarterly returns. Perhaps the anecdotal reports of growing interest in Wagyu has led to an increase in supply, causing a narrowing of the Wagyu premium during the 2017 season.

What does it mean?:

Analysis of monthly sales volumes for Wagyu doesn’t demonstrate any particular pattern of expansion – figure 4. Although, there appears to have been a slight increase in the quarterly average volumes (black dotted line) during the middle of 2017 it isn’t significant enough to have caused a poorer season for Wagyu over the year. Indeed, for all of the second half of 2017 the quarterly average volumes remained below the long-term average (orange line).

A look at the percentage spread premium of Wagyu Steers to the EYCI over the last few years shows that while the 2017 season was characterised by narrower premiums than in 2016, with the annual average premium coming in at 78% for 2017 compared to 85% for 2016, much of the monthly movement in the premium spread for 2017 was spent within the normal historic range between 75-100%. So, the EYCI strikes back – but only marginally.

Limited wet in North brings forward supply

Posted on by Caitlin Dearden

Weekly supply statistics showed a fairly normal pattern for the start of the season, with East coast figures hovering near to the longer term seasonal averages. Although Queensland and NSW throughput were slightly elevated for this time in the year as the Northern wet season continues to be delayed, weighing on prices.

A fancy animated chart shows the lack of rainfall that has impacted Queensland and NSW producers over the last fortnight, with higher than average weekly cattle throughput figures in these two regions noted as the dry conditions encourage supply.

Indeed, weekly cattle throughput in Queensland is running nearly 30% higher than the five-year average for this time in the season and NSW throughput isn’t far behind, with 11% higher yarding levels.

However, lower than usual throughput in the remaining East coast states has seen the total East coast throughput sit nearer to the average seasonal levels, according to the five-year average pattern, with just over 59,000 head recorded this week – figure 1.

Weekly East coast slaughter volumes remains close to normal, 3% higher than this week in 2016 and 4.5% below the five-year average seasonal pattern – figure 2.

What does it mean/next week?:

The benchmark Eastern Young Cattle Indicator (EYCI) off 3.8% to 531.25¢/kg cwt in a move broadly mirrored by the national sale yard indicators last week. Heavy steers registering a 3.1% drop to 255.2¢/kg lwt. Restocker Steers one of the few categories to score a gain, up 2.2% to close at 334¢/kg lwt.

A bit surprising to see Restocker steers performing so well given the recent lack of Northern rain. Looking to the forecast Central Queensland not expected to get much moisture into the week ahead so don’t expect young cattle prices to rebound too much in the short term.

Charts:

Rainfall animation to be included as first graphic (file saved in Mecardo/charts directory see link)

Wheat and Bitcoin.

Posted on by Caitlin Dearden

The markets have been very quiet over the past week, with little in the way of new information to get the trade excited. Usually in our Friday comments, we would take a look at the past week. This week, I thought I would take a quick review of the past two years.

In figure 1, the Chicago spot wheat futures, converted to A$ has been plotted. The past two years has not been pretty, the average price in this period has been a meagre A$211/mt. The futures price makes up the bulk of our price in Australia, we have a very low floor with which our local premiums can contribute to.

The basis is our premium or discount between the physical and futures market, and typically we compare Australian prices to Chicago futures, but it can be against any other pricing point. Basis is important as it can help substantially to increase the prices that we receive locally.

In figure 2, we can see the basis between APW1 and Chicago futures. As we can see, for the bulk of the past two years levels have been at a premium, with a short period of time where SA has experienced negative levels.

This season we can see that basis levels have been extremely strong since seeding. This is due to the weather risk, and then the realization that the Australian crop was going to end up below average. This basis has helped push up localphysical prices to provide a much stronger return for growers.

What is important to remember is that basis levels are largely driven by supply (or lack of), and if Australia had produced an ample harvest, then our basis levels would have been much lower, in combination with a period of low futures prices.

You would have to be living under a rock, if you hadn’t heard about the stratospheric rise of bitcoin. Although of little analytical benefit, I thought this was quite interesting to look over time at how many tonnes of wheat that you can buy for 1 bitcoin. This is displayed in figure 3, in mid-December a bitcoin could get you 122mt on the Chicago futures market, today it will get you 73mt.

What does it mean/next week?:

The market is likely to be quite dull in the coming weeks. There now seems to be less concern about the northern hemisphere crop, and every week that flows without an issue removes risk.

It sounds bad, but we need a supply issue to our fellow farmers in the north. We can’t rely too heavily on basis to make us profitable.

Bring out your lamb, bring out your sheep..

Posted on by Caitlin Dearden

Producers responded to the robust lamb and sheep prices on offer early in the New Year with some huge throughput figures this week noted across sale yards, particularly in Victoria and NSW. The effect of the added supply weighing on prices across the board.

The benchmark Eastern States Trade Lamb Indicator (ESTLI) softening 7.6% over the week to see it close yesterday at 632¢/kg cwt. Despite the large weekly decline the ESTLI is still sitting 2.7% above where it was this time last season, so its not all bad news for producers.

Most eastern states categories of lamb and mutton followed the ESTLI lower with falls ranging between 5-15%. National Mutton posting a similar magnitude decline to the ESTLI with a 7.8% drop to 424¢. WA Trade Lamb one of the few categories to buck the trend with a 4% lift to 672¢.

Figures 1 and 2 highlight the key reason for the broad correction this week, with both lamb and sheep throughput opening the season in a very strong fashion.

East coast lamb yarding was just shy of 335,000 head, boosted by strong Victorian and NSW throughput, to see it sitting at levels 86% higher than the five-year average for this time in January.  There was a similar story for mutton, with East coast yarding figures knocking on the door of 120,000 head, which reflects a 37% higher yarding level than the five-year average.

What does it mean/next week?:

Its hard to see yardings sustained at these levels into next week so further price pressure is less likely. Much of the rainfall next week is reserved for the far north, well away from sheep and lamb districts, with only 10-15 mm on the cards for parts of NSW, Victoria and WA.

The most recent release of Bureau of Meteorology rainfall forecast for February points to a much wetter WA, SA and Western Victoria/NSW – figure 3. The likelihood of this rainfall being just around the corner could provide some price support to lamb and sheep prices into the end of January.

All the data is in

Posted on by Caitlin Dearden

For the first time in over a month we have the full suite of Meat and Livestock Australia (MLA) data to analyse. Even with all the data, the conclusions look the same. Markets are easing slightly thanks to a lack of moisture and a rising Aussie dollar.

We haven’t seen a quote for the 90CL Frozen Cow export price since mid-December, but the January numbers came in this week. The story for export prices are similar to those for most cattle prices. The 90CL opened the year slightly easier, down 10¢ in our terms before a slight lift this week to 569¢/kg swt.

In US terms, 90CL prices have gained a little ground on weaker supplies out of Australia and New Zealand, thanks to lower slaughter. In our terms prices are weaker, with the Aussie dollar trading well over 79US and thinking about breaking the solid resistance at 80¢.

The eastern and western young cattle indicators are almost in lockstep with the 90CL, but as we outlined in the cattle analysis this week, it was only a year ago that young cattle prices were trading at significant premiums to the 90CL. Widespread rainfall might see somewhat of a repeat, but not at levels of 100¢ which we saw last January.

We went looking for some seasonality in the EYCI to guide us to where the market might be headed. But as figure 2 shows there isn’t much to speak of in the last two years, nor on the five year average. We used to see cattle prices rising from January to March, but this is going to require some rainfall.

The week ahead

With no rain on the forecast, expect prices in general to continue to track sideways or slightly lower. There appears to be little in the way of external factors which are going to see prices rise in the absence of rain.  There is however, mounting evidence in international meat markets pointing towards another year of downward trends, even if we do see a moisture induced late summer rally.

A good chance of rain means what for prices?

Posted on by Caitlin Dearden

A truck driver asked me when we were going to sell some heavy steers that we have wandering around on some still green country. My flippant response was, ‘when it rains in Queensland and the price goes up’. I then thought I’d better do the numbers and make sure this was a better than 50/50 chance of happening.

Cattle prices have been waning early in 2018. Little to no rainfall in some key northern cattle areas since before Christmas, cattle supply has opened up relatively strong, and demand from restockers weak.

The latest Bureau of Meteorology (BOM) shows a good chance of above median rainfall over the next three months. But what does this mean? Another map produced by the BOM is shown in figure 1 which gives more of an idea of how much rain an area might expect in February.

Much of Northern NSW and Queensland have a 50% chance of receiving more than 50mm of rain. Even better, there is a 25% chance of most of Queensland getting 100mm or more. The last time we saw good early year rain was in 2015, and figure 2 shows what that did to heavy steer prices.

The situation is a little different now. Back in early 2015 cattle in Australia were heavily under-priced compared to the export market. At the moment cattle prices are close to fair value relative to export prices.  However, as we saw this time last year, tight supply can see cattle values well above where export prices suggest they should be.

Whether supply will tighten is a tricky one. We know there is a lot of cattle on feed bolstering finished cattle numbers, but many of these cattle would have been drawn from a pool which is normally finished on grass. Figure 3 shows that spring slaughter in 2017 was higher than 2016, but that could have also been catching up from weak autumn slaughter (figure 3).

It’s hard to see cattle slaughter being any weaker than 2017 in the early part of the year, but it doesn’t need to be to see prices rise. East coast slaughter around 130,000-140,000 head per week should be enough to push prices higher.

Key points:

  • The BOM are forecasting a good chance of better than median rainfall in Northern NSW and Queensland from February to April.
  • Historically cattle prices track sideways to higher early in the year, with good rains giving a boost to the upside.
  • Cattle supply is likely to be stronger than 2017 early this year, but prices could still push higher.

What does this mean?

While rain doesn’t limit the number of heavy slaughter cattle which will come to market, it can see the supply of young cattle and cows tighten, which increases demand for cattle which can fill slaughter space. Hence heavy cattle prices can rise with rainfall.

Without significant rainfall, all cattle prices are likely to continue to drift lower, and consistent supply is net with easing restocker demand. This results in processors facing less competition for all cattle, and lower prices.