Tag: Commodity

May the force be Wagyu.

Posted on by Caitlin Dearden

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…

Posted on by Caitlin Dearden

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?

Posted on by Caitlin Dearden

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.

 

 

Planting and politics

Posted on by Caitlin Dearden

Another relatively quiet week in the grain trade both locally and globally. In the past week, there have been further crop forecasts released, weather woes and political posturing from the Trump administration.

The wheat futures market has been on a downward trend since the start of the month (figure 1), and fell to as low as 398.5¢/bu. Overnight, futures rose around 5.75¢/bu (or A$2.8), it’s not enough to get overly excited about but any rise is better than a fall. The rise can be attributed to a recovery from falls in previous nights over concerns of posturing by Trump (more below), and concerns relating to cold weather. Although there will likely be issues with yield and quality in the US, it is still too early to get a realistic picture of any damage.

The International grain council (IGC) released updates to their projections, there were few surprises. Overall grain supplies are projected at their historic high (2.6bn mt) for 2016/17, and old crop end stocks will largely cancel out lower production in the 2017/18 season. Our view still remains the same that a large supply shock is required to put fire under wheat prices to an excitable level.

At a local level this week has been a short one due to the ANZAC day commemorations, which also traditionally has been a trigger for widespread crop planting around the country. Where it is not too wet to get machinery into the paddocks the country is for the most part in full swing. However, we have seen a sudden dip in basis levels across all port zones (figure 2), with Adelaide now following Port Lincoln into negative basis territory.

This week there were concerns that Trump was ready to scrap the North America free trade agreement (NAFTA), however it was later announced that there would a ‘renegotiation’. Free trade agreements were at the centre of Trumps campaign, with fears that they negatively impacted on American jobs. The removal of NAFTA would be a worry for American grain growers, as trade with Mexico has drastically increased since 1994 when it was enacted (figure 3). The overwhelming majority of imports are from the US but in recent months it is speculated that Mexican buyers have been examining options from the South (Argentina & Brazil).

What does this mean?

The grain trade will be keeping an eye on the weather in Europe and North America, in order to determine whether there are any major concerns.

At a local level, most farmers will be concentrating on getting a crop into the ground and marketing for old and new crop will largely be put to the back of the mind.

On a separate note growers holding old crop grain in silo bags in areas where mice are starting to become a ‘plague’ concern are advised to double check any bags for infestation.

Higher supply after Easter break doesn’t dampen prices

Posted on by Caitlin Dearden


A recovery in slaughter figures as we move away from the shortened Easter and ANZAC weeks noted, but not enough to dampen demand as prices for young, store and heavy cattle lift slightly over the week.

Figure 1 shows the seasonal pattern for East coast slaughter for the week ending 21st April. While the numbers don’t yet represent the shortened ANZAC week it is still clear to see the recovery in supply after the Easter dip. East coast slaughter for the week rising to 109,500 head, a 10% increase from the previous release.

Improved throughput and slaughter unable to weigh too heavily on prices with the Eastern Young Cattle Indicator (EYCI) lifting slightly to close nearly 9¢ higher at 659¢/kg cwt. East coast heavy steers showing a similar lift up 7¢ to 308¢/kg lwt, or 571¢/kg cwt (at a dressing percentage of 54%). Trade steers only managing a marginal increase with a 2¢ gain to 357¢/kg lwt, or 661¢/kg cwt – figure 2.

The week ahead

A forecast for some light rainfall for parts of Queensland and Victoria over the next week shouldn’t be enough to hamper transport so supply of cattle should continue to improve post Easter. Meanwhile, reduced beef cold storage levels for April in the US as they head into their “grilling season” should see the beef export prices supported in the coming weeks and will provide some encouragement to local processors on any price dips. These two factors set the stage for some price consolidation around the 650¢ level for the EYCI in the short term.

Heavy steer spreads to EYCI during a favourable season.

Posted on by Caitlin Dearden

Key points:

  • So far during 2017 heavy steer spreads to the EYCI have been trekking along the lower end of the normal range for East coast cattle.
  • The spread pattern in each state has been roughly mirroring the pattern set by the 2011/12 average pattern, the last time we experienced a favourable season along the East coast.
  • Young cattle are likely to continue to outperform finished lines for the next six months but the discount spread is likely to narrow as we transition into a drier climate into 2018.

During a favourable season optimism runs high among restockers and opportunistic cattle traders supporting demand and prices for store/young cattle. The added buying competition between the three main purchasing groups (restockers, lot feeders and processors) will often see the Eastern Young Cattle Indicator (EYCI) outperform the price patterns for finished lines, as there is really only one buyer type for fat cattle – the processor. This piece will take a look at what can be expected for the spread pattern between heavy steers and the EYCI along the East coast for the next six months.

The most recent favourable season for cattle traders along the East coast occurred during 2011/12, on the back of widespread rainfall that began in 2010. Each figure accompanying this analysis piece displays the spread pattern for heavy steers compared to the EYCI for 2017 for Queensland, NSW and Victoria. Overlaid with the spread pattern for the current season is the average spread pattern for 2011 and 2012, along with the long term spread pattern and the “normal” range (highlighting where the spread has fluctuated for 70% of the time over the last decade).

Interestingly, so far for the 2017 season the spread pattern in all three states has been following a similar trajectory to the 2011/12 average pattern. In addition, each state’s spread pattern for this season is trending close to the lower end of the 70% banding, reflecting that the favourable conditions have supported young cattle prices more than the price for finished cattle. Perhaps somewhat unsurprisingly the state that was hit hardest by the most recent cattle turnoff, Queensland, is experiencing the widest spread between young and finished cattle as the requirement to rebuild the herd is likely to be most evident in that region.

The Queensland heavy steer to EYCI spread normally experiences a trough during Winter and, based off the current pattern, a widening of the discount spread to 20-25% during the middle of the year would not be out of the question. The NSW heavy steer to EYCI spread is likely to remain fairly stable through the middle of the season, ranging between a 7-12% discount for the next six months. The Victorian heavy steer spread normally follows an opposite pattern to Queensland, on account of the different seasonal factors present in the north/south of the country, and is anticipated to reach a peak during Winter near the 3-5% discount level.

What does this mean?

It is likely the spread patterns for each state will continue to trek along the lower end of the 70% band for much of the second half of the year. However, as the confidence level on longer term climate predictions for the 2018 season grows into the later stages of 2017 spreads may begin to return to more normal levels, particularly if the transition from a wetter to drier climate cycle becomes more evident.

Next week we’ll get a handle on supply

Posted on by Caitlin Dearden

It’s hard to know whether the falling lamb slaughter is due to lower supply, or the short weeks taking some production days out.  We’ll hopefully find out next week when we finally get back to full production after three interrupted weeks.

One of the most interesting numbers found this week was MLA’s weekly lamb slaughter for the week ending the 21st of April.  Lamb slaughter came in at just 293,342 head, the lowest level since July last year.  In the week ending the 21st Lamb slaughter fell 5%, and also sat 5% below the Easter levels of 2016.

Despite weaker slaughter levels, lamb prices fell last week, and continued to ease this week, the Eastern States Trade Lamb Indicator falling 22¢ and hitting a four week low of 645¢/kg cwt.  It will be interesting to see if the ESTLI can find some support at 650¢/kg cwt.

There are some forward contracts out there pitched at 650¢ for May and 660¢ for June and July.  This suggests lamb supply might remain tight for some time yet, and we should see the ESTLI bounce over the coming weeks.

Not all lamb prices fell this week, Merino lambs gained 19¢ on the east coast, while light lambs were up 12¢.  Neither quite managed to hit record highs, but are not far off at 611¢ and 673¢/kg cwt for Merino and Light lambs respectively.

Mutton values also eased this week, losing 21¢ for the week on the east coast to sit at 482¢/kg cwt.  Mutton still sits 167¢ above the same time last year, which on a 25kg sheep equates to a very handy $42/head.

The week ahead

It’s unusual for lamb or sheep supply to improve at this time of year, with the only time it has happened being in 2011 when prices started to ease in earnest around this time of year. The difference in the seasons is probably what is going to hold prices this time.  In 2011 supply had been low in the previous spring, something we didn’t see this year, and the autumn break was late.  This saw more lambs come to market, which are likely to be held this year.

 

 

Bit of a mixed bag after the recess

Posted on by Caitlin Dearden

An increase in bales offered this week as the wool market clears out some of the Easter recess build-up of stock took some of the heat out of the medium fibre price action. However, reports that there is limited supply left in store and keen export buyers still sniffing around meant the price correction was limited.

Indeed, most of Wednesdays losses in the finer end were recovered during Thursdays trade to see the 16.5 to 19 micron classes close the week slightly higher in the north and only marginally softer in the south. Microns less than 19 mpg in Fremantle the worst performers in the finer categories, down around 10-15¢.

Medium wool making up the lion’s share of the correction in price across all three selling centres with 19.5 to 23 micron wool posting declines ranging from 10-40¢. Coarse fibres remaining mixed, with price movements on the week fluctuating between gains and losses of less than 5¢.

Just over 52,000 bales were listed for sale this week and the softer prices on Wednesday saw the pass in rate above 20% in the West. However, by the end of Thursdays session prices had stabilised and the pass in rates lowered across all three centres to close the week at 10.8%, with 46,565 bales sold – figure 2.

The week ahead

The anticipated tighter supply reflected in next week’s bales scheduled, with just under 40.800 listed for sale. All three centres are operating with auctions on Wednesday and Thursday and the reduced offering combined with a softening A$ should see demand keep prices firm.

Canola find some strength still waiting for wheat

Posted on by Caitlin Dearden

Another week, and another week of relatively flat prices for wheat.  There was some upside for canola in international markets, which is providing some opportunity.  There has been some talk around regarding CBOT wheat being primed for a spike, and there might be something in it.

Earlier this week we took a look at some of the production data US wheat markets take note of, and there is also some data which shows how traders react.  The CFTC Traders Summary tells us what type of trader holds long or short positions in CBOT wheat.

The most interesting data in the Traders Summary report comes from the Managed Money positions, where they report how many are long and how many are short.  Figure 1 shows the Managed Money short positions have been climbing stronger, and sit close to an 18 month high.  The Net Short, that is the number of short positions minus long positions, also sits close to a high.

This basically means that speculators are punting on wheat prices falling, as they are heavily sold.  While this is the general feeling in the market, it does bring opportunity.  If something does go wrong with production somewhere, there are a lot of sold positions which will need to be bought back in a hurry, which can add impetus to any price rally.

Canola has found some strength in Canada this week as wet weather delays sowing.  The spot ICE contract rallied over $30 to $520/t, while Jan-18 gained $15 to sit at $497/t today.  With the weather forecast not looking favourable for sowing, there could be some more upside for Canola.

The week ahead

With Anzac Day, and rain falling last week, conditions for sowing are almost ideal.  Any grain growers who haven’t started yet will be well and truly underway next week, and old crop selling into delivered markets might slow.  This could see some improvement in local basis, but I’m not sure I’d want to be a seller in 6 weeks’ time when growers look to quit some stocks.

NSW throughput bounce stalls trade lamb rally

Posted on by Caitlin Dearden

A rebound in East coast yardings post the Easter break, particularly out of NSW, sees the Eastern States Trade Lamb Indicator (ESTLI) take a breather this week. The ESTLI posting a 2.9% drop to 667¢/kg cwt. Not so for National Mutton, bucking the trend with a 1.9% gain to 495¢ – dragged higher by gains to Western Australian sheep.

Figure 1 shows the lift in East coast lamb throughput, a 49.8% gain from the figures from the previous week to see over 162,000 head reported at the saleyard. The East coast numbers given a huge lift by the 74.3% rise in lamb yardings seen across NSW – figure 2.

Despite the higher supply, restocker lambs in NSW and Victoria gaining some ground up 10.4% and 6.6%, respectively. NSW restockers now fetching $119 per head, while Victorian restockers are enjoying a $126 per head level. The higher NSW yardings having most impact on Heavy and Trade lambs in that state down 4.2% (641¢/kg) and 1.4% (656¢/kg), correspondingly. The two softest categories of Victorian lamb for the week were Merino, falling 5.2% to 616¢, and Light lambs, down 3.5% to 660¢. Trade lambs the star performer in SA, the only category of sheep in that state to post a gain this week, up 4.2% to 614¢.

The week ahead

Another short week ahead with the ANZAC break and some decent rainfall to much of the sheep regions of the nation (figure 3) should see prices hold, or perhaps firm slightly. As outlined in the sheep/lamb analysis piece this week longer term fundamentals will continue to support any price dips seen in sheep and lamb markets for much of the current season.