Month: December 2017

The best time to buy store lambs is….

Last week we looked at some long term trends in lamb and sheep trading enterprises. We identified that lamb trading margins were more reliable, but merino wether trading had the potential to offer very good margins, or on the rare occasion, losses. Price seasonality has a strong impact on trading margins so this week we delve deeper into the data looking for the best buy and sell months.

Our trade scenario is buying a 35kg lamb, holding for two months, and selling at 48kgs. No costs are accounted for, and as such the only variables are the store and trade lamb prices, and how these change over the two month term of the trade.

Figure 1 shows how the gross margins for the lamb trade have behaved over the last two years, and on average. The green shaded area shows the range of results two one standard deviation. The data points are for the sell months, so lamb purchases were made two months earlier.

It would come as no surprise that on average November is the worst month to complete a lamb trade. The average gross margin for lambs bought in September and sold in November is $23/head, with a narrow range of $18-28/head.

The strongest months for trades would also give few surprises. June and July both average around $40/head thanks to strong seasonal price rises from April and May into the winter months. The ranges are wider for winter trades from $28-53/head, however, showing the price movements have less consistency than the spring falls.

This year abnormal seasons, and as such abnormal price trends have seen somewhat of a reversal in gross margins on lamb trades. There wouldn’t be many growers out there who would turn down a lamb trade paying $39/head for lambs sold in November, and those who took the punt have been well rewarded.

We can run the same seasonal analysis for our six month mutton trade, where merino wethers are taken from 50-62kgs, cutting 2kgs of clean 19 micron wool. Figure 2 shows that on average the best results are for wethers shorn and sold from April to July, but there is plenty of variation.

Key points:

  • Gross margins on trading lambs and merino wethers shows strong seasonality.
  • The best margins are on lambs and sheep sold in the winter, but these are also the most expensive to produce.
  • Lamb and merino wethers bought now historically deliver strong margins, if costs can be kept under control.

What does this mean?

Sheep producers are likely to look at these charts and realise that the best gross margins are made at times when it’s hardest to turn off good sheep or lambs. Prices rise during times of shorter supply, due to the fact that grass has been hard to grow. These charts can be used when buying or holding sheep or lambs to quickly and easily assess upside and downside in any proposed trade, before some more in depth analysis is done.

For those looking at buying sheep or lambs, historical seasonality tells us that it’s a pretty good time to do it. Even the lower end of the historical range should provide a profitable trade for lambs and sheep, as long as feed costs are not too high.

Buyers enter the Christmas spirit

The Christmas spirit continued this week in wool sales with buyers bidding strongly from the Tuesday opening, before becoming slightly more subdued on Thursday. This resulted in strong week-on-week increases across the board, with the 32 MPG in Melbourne the only one to miss out.

This pushed the EMI to a new high of 1760 cents, adding 405 cents for the year – an outstanding 29.9% improvement.

Despite a slightly stronger Au$, the market improved 67 US cents for the week underpinning the strong market sentiment. W.A. didn’t miss out either with the WMI lifting 54 cents, closing the year at 1816 cents.

The total value of wool sold in the calendar year surpassed the $3.0 billion mark, this being the first time since 1995 when AWEX records started.

The increases year-on-year are impressive and worth noting, the EMI lifted 30% in Au$, while in US$ it was up 34%. To select a couple of other star performers, the 16.5 MPG rose 48%, 18 MPG plus 35% and the median wool clip 19 MPG was up 29% on the year ago levels.

Cardings have continued to “outperform”, posting a 32% gain for the year to end at almost 1500 cents.

The outlook for 2018 is positive, as brokers report that some wool growers have already shorn and sold wool that would have usually only came to the market in the January to March period. It seems a combination of more frequent shearing patterns and the attraction of higher prices has pulled wool deliveries forward. While the full extent of this is unclear, any reduction will have a tightening effect on supply in the New Year which will keep buyers keen.

The week ahead

The market now takes a 3-week break with sales resuming in the week beginning the 8th of January.

There will be wool growers who have delivered wool to store for sale in the New Year eagerly looking forward to the opening sales.

It is a time for optimism with returns from Merino sheep at levels rarely seen, giving the industry a timely boost that hopefully sees an increase in wool production.

Do they know it’s Christmas?

We are just on the brink of silly season, where the majority of the western world will effectively stop. There will be skeleton staff in most organisations (including Mecardo), and there will likely be little new activity. In this week’s comment, we have a look to see if the market has provided any pre-break cheer and joy.

This week saw the end of trade in the December 2017 CBOT futures contract, and we thought it was worthwhile highlighting the performance of this contract. In figure 1, we can see the price from the start of trading in July 2015 to present. Apart from some northern hemisphere jumps mid-year in both 2016 & 2017 the market has been on a downward tradgetory.

In Australian dollars the December contract closed at $188, $90 below the peak achieved in July 2017. Growers who participated in a swap at this level, will be rewarded with a substantial return due to the swap profit and strong basis levels.

The Australian dollar regained strength this week (figure 2), on the back of stronger than expected jobs data. The Fed reserve also increased rates however have pointed to three rate rises in the coming year, a more gradual increase than expected.

The USDA released their December WASDE, which was as expected. The December report typically offers little in the way of surprises and is largely an adjustment exercise. In reality, if you want an update on the December WASDE, just read about the November one (click here).

The report pointed towards continued high stocks (figure 3), which unless something goes wrong in the northern hemisphere will lead to continued depressed pricing. The USDA interestingly maintained production in Australia at 21.5mmt, which will have to be adjusted in future reports.

So overall, this week there hasn’t been much data to provide joy this Christmas, but all it takes is an issue in the north to get improvements in price.

Next week

An interesting place to keep an eye on is Ukraine, which has very cold weather approaching but with little in the way of snow cover.

A big year ends on a high

The last full week of sheep and lamb sales has seen 2017 finish as it began.  Streaking higher.  This week saw the Eastern States Trade Lamb Indicator (ESTLI) post a six month high, in spite of a record yarding.

There is an old saying in markets. “The best cure for high prices is high prices”. The theory goes that higher prices encourage increases in supply, which in turn sees prices fall. The adage doesn’t seem to apply to lamb markets at the moment.

The record December lamb prices have indeed drawn out more lambs. Figure 1 shows east coast MLA yardings in the week to Tuesday staying strong, at 275,231 head. While down on the record yardings of the previous week, supply remains very strong.

As we keep saying, the strong supply is not having the normal negative impact on lamb prices. This week the ESTLI gained 26¢ to 661¢/kg cwt (figure 2) a six month high. In fact, the ESTLI is now just 26¢ off the all-time high set back in April.

Figure 3 shows part of the reason we have seen rapid price rises at the yards. The rain in NSW has seen tightening direct to works supply, with slaughter lower in the last couple of weeks. Processors have needed to buy up the yards to fill their kills.

The week ahead

A phenomenal year of lamb and sheep prices is almost over. Figure 2 shows that it has been a rare event for the ESTLI to be below 600¢, and this in a year when supply is likely to finish at a similar level to 2016.  In 2016 prices spent just 3 months above 600¢.

The December price rise is not unprecedented, the market rallied at the end of 2014 and moved sideways in early January. This year, with lamb supply having been so strong in the spring, there is the chance that the usual strong January demand might be met with tight supply, and the ESTLI might have a tilt at 700¢.

Waning export values draining the impetus from cattle

It was another poor week for beef export values, and cattle prices reacted accordingly.  As we reach the end of the year attention will turn to weaner sales in Victoria, with the main fundamental which will swing the market being rain in Queensland.

In some way we seem to have seen demand for cattle shift to sheep and lamb markets.  Cattle supply is down, yet prices are weaker.  In sheep and lamb markets, prices are higher, yet supply is stronger.  An interesting conundrum.

Weaker cattle yardings (figure 1) couldn’t provide support to cattle markets this week.  East Coast yardings fell 12% back to a one month low and below the same time last year.

Yet the weaker supply was met with weaker demand.  The EYCI lost 9¢ to 569¢/kg cwt, but it was really only young cattle which weakened.  Trade and Heavy Steers, and Cows all remained relatively steady on a national basis.

If we look at prices relative to this time last year, it is Cow which are performing the best.  The East Coast Medium Cow Indicator is 6% below this time in 2016, while the EYCI and Heavy Steers are both 9% lower.

The Western Young Cattle Indicator was the star performer of the week.  The WYCI gained 39¢ to 591¢/kg cwt.  A solid rise, yet the WYCI was only making up ground lost last week, and remains 10% below the same time last year.

The week ahead

Figure 2 shows the easing 90CL indicator, which now sits around the same level as the EYCI and the WYCI.  Export markets generally ease as we move into the end of the year, but often recover in January.  There is a reasonable chance the export market will provide some support in the New Year.

As mentioned at the start of this article, it’s Queensland and Northern NSW rain which is going to provide the real upside.

A joyous wool market to all

Christmas presents came early for wool sellers this week with a strong “across the board” result in all three selling centres. The strongest evidence of woolgrower satisfaction was the low pass-in rate of just 3.1% nationally.

It was noted in AWEX reports that “buyer interest intensified” to capture market share with only one selling week remaining prior to the Christmas recess.

The benchmark Eastern Market Indicator (EMI) gained 23 cents to close the week at 1699 in Australian dollars (a new record), while despite an easier Au$ level a similar story resulted in a 11 US cent increase. The good news was also evident in the West with the WMI lifting 37 cents closing the week on a strong note.

Main interest focused on well measured wools, and skirtings with low VM content were also keenly sought. However, such was the enthusiasm to secure volume by exporters that the lower spec wools were also carried along and posted similar improvement.

While the prices increased for all MPG’s, it was the 18.5 and broader that stood out. In fact, this week it was the Crossbred and Cardings with the largest price lifts. 28 MPG in Sydney was plus 54 cents, while 30 MPG in Melbourne gained 58 cents, a 10% lift for the week!

Tagging along the good news examples was the W.A. 20 MPG category that showed a lift of 52 cents.

This year has been terrific for anyone selling wool, demand is strong, the Au$ is steady and buyers are finding plenty of orders to account for the weekly offering. Next week we will compare the various wool categories price movements for the year, but for now, wool producers can certainly celebrate a year to remember for the wool market.

The week ahead

The bale offering over the last few weeks has been sizeable, with 49,000 bales again cleared to the trade. Next week is the last sale for 2017 before a three-week recess with 52,300 bales to be offered.

We expect that the Christmas cheer will again be in abundance next week as exporters bid strongly to secure supply. There is a school of thought that the first half of 2018 might provide less volume due to earlier shearing patterns, if this is the case the market is likely to remain solid for some months at least.

The bear necessities.

A tough week in the grain market as the scaleof the global crop continues to bite hard. In this article, we will look at some recent WA forecast releases which paint a bearish tone.

Let’s start with the futures market. In figure 1, we can see the futures market since the beginning of October, and it’s not been particularly pretty. In the past week Chicago spot futures have dropped 5%, or 20.5¢/bu/A$9.6/mt. In Australia, producers have been cushioned from these falls through strong basis levels (thepremium or discount to futures).

The bulk of the fall can be attributed to StatsCan releasing more bearish data which is dragging the market down. The Canadian government forecaster increased well above expectations the size of the wheat crop to just a tick under 30mmt.

On Tuesday ABARES released their December crop estimates (read analysis here), which unsurprisingly pointed towards an overall decline in production year on year, and against a range of averages. Yesterday the respected Grain Industry Association of WA (GIWA) released their December update. The GIWA group utilise a group of industrycommentators and agronomists to develop their estimates of the crop, which is updated monthly compared to ABARES quarterly report.

Western Australia had a poor start to the season, however had a very good finish. In mid-year, the crop in Kwinana and Geraldton was in a very poor condition and it seems like a miracle to see the crop coming to fruition.

The WA crop expected is now expected to reach the following levels:

  • Wheat – 7,375,000mt
  • Barley – 3,399,000mt
  • Canola – 1,770,000mt

In our update on the ABARES numbers, we commented that the WA canola crop had already exceeded forecasts. This is further highlighted by the GIWA forecasts, which are in line with what is happening on the ground. Interestingly, the extent of the development of the canola crop has been a surprise to many including GIWA, with a 33% increase since last months forecasts!

In table 1, we have summarised the wheat, barley and canola to give an indication on the zone by zone basis.

What does this mean?

The USDA will release the December WASDE, this report will further cement the scale of the global crop, but will largely be bereft of any major surprises that the trade has not already factored in.

As we get closer to Christmas, can we expect to see any surprises presents from traders as they pay up to accumulate before the long Christmas break?

Never mind Bitcoin, how’s this trade lamb!

In last weeks comment we mentioned that the rain could provide a short-term boost to lamb prices, and indeed it did. We surmised that the extra moisture could see a pullback in supply with processors fighting it out at the saleyard, although that didn’t appear to be the case, signalling this week’s movement was demand led.

Figure 1 shows the rainfall pattern for the week ending on the 7th of December and despite some areas not receiving the magnitude of rain forecast there was still some ample falls to much of Victoria and NSW. Despite the rain there was no detrimental effect upon supply in these states with Victorian lamb throughput up 19% and NSW lamb yarding up 4% on the week.

The increased throughput having little impact on east coast lamb prices with the ESTLI climbing 3.5% to close yesterday at 635¢/kg cwt.  – figure 2. The WATLI stronger too, posting an 11% increase to 640¢ as lamb throughput there trekked sideways.

Mutton prices firming too on the week across the Eastern states in the face of higher saleyard volumes with the East coast mutton indicator up 3.5% to 487¢. West Australian mutton one of the few categories to see lower week on week throughput, falling 8.6%. The lower supply providing a boost to WA mutton prices – up 8% to 387¢.

The strength of recent lamb and sheep prices no mean feat when you consider how much above the seasonal average the combined east coast throughout levels have been tracking of late – figure 3. Indeed, at sitting just shy of 385,000 head the East coast lamb and sheep yarding is 19% above the five-year average for this time in the season.

The week ahead

Much lighter falls are forecast for this week across the nation with less than 10mm predicted for most of the sheep country. Its unlikely the magnitude of the recent price gains for the ESTLI will continue into next week, even with the seemingly robust demand.

Trade lamb prices in excess of 630¢ are going to continue to encourage producers with capacity to deliver stock to keep coming forward. But as we often say, more supply now can mean less available for later. What this may mean for supply and prices as we head into 2018 is an exciting prospect for producers.

A stagnant cattle market not moved by rain

While lamb and sheep prices have reacted to the rain in Victoria and New South Wales, the heavy falls didn’t make it to Northern NSW and Queensland. As a lot of cattle come out of this area at this time of year, national indicators were stagnant.

Eastern Young Cattle Indicator (EYCI) yardings did fall away from the 7 month highs of last week, but remained relatively strong (figure 1). Seemingly demand was a little weaker. The EYCI tracked sideways, finishing Thursday at 579.25¢/kg cwt, and has now spent 6 weeks around this level.

It’s probably not surprising, but the major mover in cattle markets this week was the Victorian Restocker Indicator (VRI). The VRI rallied 36¢, or 12% to 305¢/kg lwt, but remains well behind it’s Queensland and NSW counterparts, which sit at 359 and 328¢ respectively.

We thought the rain might cause some transport disruptions, and hence stronger prices for slaughter cattle.  But like the EYCI, slaughter cattle values were largely steady, or even lower in some cases. Trade steers seemed to be the hardest hit.

Export beef prices also eased this week, which might explain some of the lower slaughter cattle values.  The 90CL Frozen Cow Indicator fell 17¢ (figure 3), or 2.5% to a 6-week low of 592¢/kg swt on the back of weaker demand from the US. There are also reports New Zealand cattle slaughter is ramping up, which it does seasonally, and increases supplies of lean beef.

The week ahead

With just two weeks to go until the Christmas break, it seems cattle prices are set to track sideways into the end of the year. We won’t have wait long after that for a significant move in cattle prices, as we generally get one over the Christmas break.  A good rain in Queensland can kick prices higher, and dry weather might see prices ease.

Is retail lamb set to rise?

It will come as no surprise that retail lamb prices follow the saleyard and with lamb prices holding their ground into Spring this piece takes a look at what that may mean for the end consumer into the coming season.

Figure 1 highlights the price pattern since 2000 for both retail lamb prices and the Eastern States Trade Lamb Indicator (ESTLI). Progressive seasons from 2013 onwards have seen saleyard lamb prices make successive higher peaks and troughs. Indeed, lamb producers have been enjoying some record results during the period, with the quarterly average ESTLI increasing 98% from 331¢ in quarter four of 2012 to 657¢ as at the second quarter of 2017.

Retail prices have also gained during the 2013-2017 period, although competitive pressures at the supermarket and butcher shop have meant that retail lamb prices have only managed a 19.8% gain from $12.52 in quarter four of 2012 to $15.01 for quarter two of 2017. This has meant the retail mark-up over the saleyard price has narrowed from 278% to 128% over the four-year period.

Figure 2 highlights the narrowing of the mark-up, such that the most recent quarters figures see the mark-up percentage sitting below the normal range and just a fraction above the lowest recorded mark-up since 2000 at 123% during quarter one of 2014.  Indeed, the current mark-up of 128% is 34% below the long-term average mark-up measured since 2000 of 194%. As the grey banding demonstrates the mark-up has fluctuated between 139% and 247% for 70% of the time from 2000 to 2017.

A time series analysis of the percentage movement over the quarter for the ESTLI and retail lamb prices shows that retail lamb price movements lag the saleyard – figure 3. The narrowing of the mark-up between retail lamb and saleyard lamb prices below the normal range suggest that either saleyard prices need to ease or retail prices have to increase in order for the mark-up to get back into the normal range.

What does this mean?

Given the tight supply scenario is going to be maintained into the 2018 season and we have seen an improvement from the unseasonal dry Winter to more average climatic conditions as the 2017 season comes to an end its unlikely that the saleyard lamb prices are going to come under significant pressure.

This suggests that retail lamb prices are set to probe higher in the coming months unless retail competition can keep margins tight – maybe it is time to accept the dinner invitation with Tom Cruise instead of having the lamb roast at home!

Key points:

  • The retail percentage mark-up of retail lamb prices over the ESTLI has narrowed 54% since 2013
  • The most recent quarterly mark-up is sitting at 128%, 34% under the long-term average mark-up and is below the normal range recorded since 2000 between 139% and 247%
  • Forecast supply and climatic conditions into 2018 suggest that a widening of the mark-up is more likely to come from higher retail lamb prices rather than softer saleyard prices