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Thursday, August 27, 2015

Depressed EYCI makes finished cattle look overvalued

By Augusto Semmelroth  |  Source: MLA's NLRS, ACU

Key points

  • Trade and heavy steers continue to attract a solid premium to the EYCI.
  • While this may suggest they are overvalued, we believe instead that the EYCI is undervalued.
  • As seasonal conditions continue to improve, and the outlook looks rosier, young cattle markets will likely move another leg higher in the coming months.
  • As such, they remain a great buy despite being at record levels.  

2015-08-27 Cattle Basis - FIG 1

2015-08-27 Cattle Basis - FIG 2

Despite the remarkable performance of cattle markets generally since April, regional and stock-type price disparities are still evident. Given that prices have plateaued in the last couple of weeks, here we have a look at our regular price spread analysis to assess these price relativities and find out where the marketing opportunities lie.

The Eastern Young Cattle Indicator (EYCI) has recovered 34% over the last five months to reach a record of 568.25¢/kg cwt last week. Although extraordinary, these results still paint a myopic picture about the performance of young cattle markets of late. One that infers young and store cattle prices are expensive at the moment.

To refute this assumption, table 1 (below) shows the spread analysis between the EYCI and key state indicators on the east coast. The outcome of this analysis leads us to basically two conclusions: either finished cattle are overpriced in southern markets or the EYCI is still undervalued. Regular readers will know that we prefer to stick with the latter.

While southern slaughter cattle markets are finally benefitting from robust export and processor demand, tightening supplies and a favourable exchange rate, young cattle markets remain curbed by lacklustre restocker demand and adequate supplies. Recent rains are projected to start shifting this trend as confidence is gradually restored.           

That said, heavy steers remain quoted at around a 25-35¢ premium to the EYCI in NSW, SA and Victoria. At these levels, selling finished steers and buying back has never been so attractive. That’s particularly the case given the positive prospects for slaughter cattle markets in the medium to long term on the back of the expected sharp contraction in supplies from late 2015 onwards.

Although southern steers have already made a leap forward, their Queensland counterparts remain heavily discounted to the EYCI. As of last week, the QLD heavy steer indicator was still quoted at a 60¢ discount to the EYCI (figure 1) and around 90¢ below southern markets. This trend is expected to reverse rather quickly later this year and in 2016 under average wet season rainfall conditions. A scenario the BOM is expecting.    

Another interesting trend unfolding in the last couple of months was the strong performance of cow markets as a result of dwindling supplies and a rebound in 90CL export prices. Figure 2 shows VIC cow indicator spread to the EYCI surging from a low of -100¢ in late June to -11¢ before receding to a “fair value” of -55¢ last week.     

Want to

You may be interested in reading our article published today discussing the restocking dilemma - Should I restock my cattle now or wait for later?

What does this mean?

This spread analysis essentially gives us a snapshot of what is cheap, what is expensive and what is priced about right compared to the EYCI. Based on the above numbers, we could infer slaughter steers have overshot and are too expensive at the moment. Yet, we prefer to stick with our view that finished cattle markets are at fair value while the EYCI is undervalued. In other words, store cattle remain a great buy.

As rainfall conditions continue to beat expectations, grain markets have finally started to ease towards international levels while pasture growth is slowly picking up. The impact of a dwindling cost of feeding has not been priced in young cattle markets but will ultimately be the main driver of the EYCI going forward. Under the rainfall outlook for September-November released by the BOM today, this scenario is becoming even clearer.

The spread analysis also points to the potential upside for Queensland markets once the wet season breaks. For heavy steers that could be up to 600¢, or higher, by early next year while cows will easily break the 500¢/kg cwt mark.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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