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Thursday, July 24, 2014

This is our pick – restocking heifers

By Augusto Semmelroth  |  Source: MLA's NLRS

Key points

  • All cattle categories to see a major recovery when seasonal conditions improve, but heifers (and cows) likely to have greatest upside.
  • That said, heifers remain one of the worst performing cattle categories this year, which in turn presents real restocking opportunities.
  • Upside potential up to 450¢/kg for store and finished heifers in early 2015, a 50-60% increase from current price levels.

2014-07-23 Cattle Article FIG 1

2014-07-23 Cattle Article FIG 2

2014-07-23 Cattle Article FIG 3

As we’ve said in this week’s webinar and in the article ‘Don’t tell me about the labour, show me the baby!’, cattle markets are due for an unprecedented recovery when seasonal conditions return to normal. Assuming the inevitable efforts to rebuild the herd going forward, we believe heifers will be the top performing cattle category in 2015, along with cows.

Despite the clear bullish pricing signals for cattle markets in 2015, store cattle prices remain very depressed. Not only is supply yet to dwindle, but restocker demand continues to be heavily influenced by the restricted capacity to carry stock coupled with a very uncertain rainfall outlook for spring (ie El Nino risk).

As mentioned in earlier articles and restated by MLA in its recent cattle projections "it’s a matter of when, not if, Australian cattle prices experience a significant increase".  That said, while we believe all types of cattle will see a major price rebound (above 40%), we are also in the view that some categories will benefit more than others from improved seasonal conditions.

And those are young cattle and cows. While the former will see restocker demand surge abruptly, the latter will face a major contraction in supply. However, there is one cattle category that will likely get the best of both worlds, heifers.

Surprisingly, young females remain one of the worst performing cattle categories this year. To put this statement into perspective, figures 2 and 3 show the spread between the Eastern Young Cattle Indicator (EYCI) and young heifers purchased by restockers in southern (Dubbo and south) and northern markets (north of Dubbo).

Last week, southern store heifers were quoted at a 35.5¢ discount to the EYCI at 298¢/kg cwt and well below the average 10¢ discount for this time of the year. In northern cattle markets, the situation is far worse, with the average price of young heifers purchased by restockers now at a 50¢ discount to the EYCI, at 284¢/kg cwt. This is also significantly lower than the long term average discount for this time of the year of 10-15¢.

It’s also worth remembering that the EYCI itself is still tracking at quite depressed levels. That means, heifers look considerably undervalued in a scenario where herd rebuild is top of the agenda of the Aussie cattle industry for 2015.

What does this mean?

There are quite a few reasons to believe females will the best placed cattle category to take advantage of the expected price recovery. That assertion is not only valid for stock bought to be sold to meat works but also for lighter lines to be sold to lot feeders and for breeding stock.

For producers with the financial strength and enough grass/fodder, the current market is providing some great opportunities to restock. Upside potential for heifers going to feedlots in early 2015 could be up to 430-50¢/kg cwt while finished heifers could also reach similar price levels next year.

Assuming heifers can still be found at around 300¢ in the south and 285¢/kg cwt in northern markets, the potential target prices are 50% and 60% higher than current levels, respectively.

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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